The Tanzanian cotton industry is suffering from too much competition. While this may seem counterintuitive, the fact remains that productivity and quality have decreased precipitously since liberalization of the industry in the 1990s. In short, excess competition for seed cotton in the local market has made Tanzania uncompetitive on the global market for lint.

Smallholder farmers have limited access to inputs, largely due to rising input prices and the elimination of input subsidies following liberalization. Increased competition for lower stocks of seed cotton pushes up the farm-gate price of seed cotton. Since farmers are not rewarded for quality, they are incentivized to artificially increase the weight of the cotton in order to increase their income, usually by adding sand and water to the cotton prior to marketing. As a result, Tanzania currently has some of the most contaminated cotton in the world.

In an effort to revive the industry and restore quality, the Tanzania Cotton Board – together with the support of the Gatsby Charitable Foundation’s Cotton & Textile Development Programme (CTDP) – chose to promote contract farming as a means to increase access to inputs for farmers, to incentivize quality and to stabilize the supply chains for the ginners. In 2008, TechnoServe, a U.S.-based non-profit organization, was selected to pilot test contract farming in the Mara Region of Tanzania. The pilot included approximately 3,000 smallholder farmers, who were organized into about 60 Farmer Business Groups (FBGs) and linked with five ginners – Olam, S&C, Badugu, Scott Enterprises and Afrisian.

Despite several economic shocks to the industry in the 2008/2009 season, including plummeting commodity prices and skyrocketing oil prices globally as well as a drought in the country, the results were impressive. In a year when the average yield in the country decreased by 7% over the previous year, the farmers in the pilot achieved average yield increases of 18%. Two ginners achieved 90% repayment; however, the average across all ginners involved in the pilot was 77%. The varied results on repayment offers some lessons for ginners on effective management of contract farming.

While it is too soon to call the model a success, the positive results of the pilot signal strong potential for contract farming to have a transformative effect on the industry. The key success factors of the model during the pilot included:

Strong farmer business groups
Commitment from the private sector
Risk-sharing between the government and the private sector

The driver of the model’s current success is the alignment of incentives among farmers and ginneries. Under contract farming, ginners have an incentive to provide inputs on credit in order to increase production, and farmers have an incentive to adhere to the contract terms in order to gain continued access to inputs and to increase sales volumes.

Success of contract farming, however, will ultimately turn on the ability of the government to realize major policy reform in the industry. In order for contract farming to work, the rules of the game have to change. Specifically, the government needs to establish higher barriers to entry in order to reduce the number of buyers but not so high that it quells competition. These barriers should include requirements for ginners to invest in the cotton seed production by providing credit inputs and extension services to farmers.

Moreover, regulations regarding concessions and licensing are needed in order to encourage healthy competition while discouraging free-ridership and rent-seeking behaviour. One potential approach is to introduce a concession procurement system that uses a competitive bidding process to award contracts. To maintain the optimal level of competition, a long-term (e.g. 4 years) concession would be given to 1-3 ginners in each district depending on the proposed area under concession and the number of cotton farmers in that area. Ginners would have to compete for a concession based on a number of criteria, including their proposed plans for provision of inputs on credit, total numbers of farmers under contract, price and past performance. Ginners could lose their concession for non-compliance, and farmers could lose access to future markets for breach of contract.

To encourage the increase in the usage of inputs especially fertilizer and pesticides, ginners should continue the central bulk purchasing through Cotton Development Trust Fund (CDTF) because it gives them adequate bargaining power while dealing with the import market. This central bulk purchasing coupled with current ginners’ logistical capabilities could potentially reduce the cost of inputs. The savings resulting from these efficiencies could reduce the price paid by farmers and thereby minimize the total cost of seed cotton production. The use of small and poorly capitalized agro-dealers in the cotton input supply chain may increase the transaction cost and the price paid by farmers for key cotton growing inputs.

Without clear rules of engagement and meaningful enforcement mechanisms, contract farming has little hope of success when the model is introduced in the heart of the cotton growing region in Mwanza and Shinyanga, where over 90% of the country’s approximately 400,000 cotton farmers are located and ginners and buyers, at times, engage in unfair competition in order to secure supply.

In this case study, we endeavor to analyze and document the success factors and challenges encountered during the pilot phase with the intention of informing the strategy to scale-up contract farming in the cotton industry in the future.

II. Overview of the Tanzanian Cotton Industry

2.1.Production Volume and Area

Cotton is one of the top three most important cash crops in Tanzania in terms of foreign exchange earnings. It is estimated that the cotton subsector employs half a million Tanzanian smallholder farmers. The Western Cotton Growing Area (WCGA), which includes Shyinyanga, Mwanza, Tabora, Mara, Kagera, Singida and Kigoma, accounts for 99% of national production. The Eastern Cotton Growing Area (ECGA) consists of Pwani, Morogoro, Iringa, Tanga, Manyara and Kilimanjaro and contributes less than 1% to the national production. The average land holding is estimated to be 0.91 hectares (2 acres) per farmer and the average seed cotton yield is 562 kg per hectares (228 kilos per acre).^[1]

In the last ten seasons, Shinyanga accounted for 60% of the total seed cotton production in the Tanzania It was followed by Mwanza (25%), Mara (8%), Tabora (4%) and Kagera (2%).

2.2.Brief history of the industry structure

The structure of the cotton industry has gone through various stages from from government-controlled national monopoly to a competitive market with a large number of ginners competing for the purchase of seed cotton. In the last four cotton marketing seasons, an average of 41 ginneries were involved in buying seed cotton in the Western Cotton Growing Area.

Because there is such high competition in the market, virtually no ginnery currently offers pre-harvest services for conventional cotton growing since there is little guarantee that the ginnery could recoup its investment. Ginneries distribute seed and pesticide to the farmers, which are sold on a cash-and-carry basis.

To help cotton farmers procure inputs at an affordable price, different arrangements have been tried in the recent past:

Before the liberalization of Tanzanian commodity markets in 1990s, cotton farming inputs especially pesticides and fertilizers were procured by the cotton board and distributed to farmers on credit through cooperatives societies. After liberalization, this input system was abolished and the production of seed cotton decreased dramatically.

In 2003, cotton stakeholders decided to create a fund that would facilitate farmers’ access to inputs. The fund was later registered as “Cotton Development Trust Fund” or CDTF, which is largely funded through levies on the sale of lint. The fund management was entrusted to a seven-person committee including delegates from cooperative societies; the ginners’ trade association; the Ministry of Agriculture, Food Security and Cooperatives; the Tanzania Cotton Growers’ Association; and the Tanzania Cotton Board.

The responsibilities of the fund included: (1) procurement and distribution of inputs to cotton growers; (2) research activities at Ukiliguru and Ilonga stations; (3) farmers’ education via radio programme, audio-visual equipments, fliers etc.; (4) dissemination of market information to stakeholders; (5) general management of the fund; (6) any other activity that benefits the cotton sub-sector.

CDTF attempted to use the district councils for pesticide distribution but it failed due to poor loan recovery.

The fund introduced a “passbook” system. Cotton buyers stamped the farmers’ passbooks at the time of sale to certify the quantity sold. A fee of Tsh. 15 per kilo was levied by the government to capitalize the CDTF, which would then in turn procure inputs for the next season. During the following planting season, each farmer received pesticides equivalent to the value of the levy collected on his or her sales during the previous cotton marketing season.

Despite its relative success in enabling cotton smallholder farmers to save for pesticides, the passbook system was discontinued in 2008 because of the following reasons:[2]

Given the low yields realized by Tanzanian cotton farmers, Tsh.15 per kilo was not enough to procure the required quantity of pesticides and fertilizer. Only outliers who produced about 1,000 kilograms per acre could afford the needed quantity of pesticides; but, could never be able to get fertilizer.

The lack of efficient control mechanism led to a massive fraud. In many instances, village leaders, farmers and ginners’ agents would collude and present a list of individuals who did not grow cotton and make them entitled to receiving passbooks. The discrepancies between the claimed savings and the produced quantity of seed cotton and the associated levies resulted into unsustainable input saving scheme and blame game between farmers and the industry regulators.

When the weaknesses of the passbook system were revealed, the only option was to sell input to farmers on a cash-and-carry basis. This option reduced the use of inputs to the extent that out of 2 million acre packs of pesticides planned for 2008/2009, only 550,000 acre packs were used, about 27%.

Table 1: Use of pesticides in the last 10 years

Cotton Farming Season	Ordered Pesticides + stock	Pesticides used by farmers	Balance
	Acre packs	Acre packs	Percentage	Acre packs	Percentage
1999/2000	100,000	100,000	100%	–	–
2000/2001	397,381	350,000	88%	47,381	12%
2001/2002	1,124,584	483,584	43%	641,000	57%
2002/2003	1,118,000	600,000	54%	518,000	46%
2003/2004	923,000	900,000	98%	23,000	2%
2004/2005	1,223,000	1,100,000	90%	123,000	10%
2005/2006	1,515,461	1,200,000	79%	315,461	21%
2006/2007	1,415,416	849,416	60%	566,000	40%
2007/2008	1,340,000	1,090,000	81%	250,000	19%
2008/2009	2,050,000	550,000	27%	1,500,000	73%

Source: TCB, 2009

There are complementary approaches to input provision that are emerging; but their efficiency and impact are yet to be established. These approaches include:

Balloon loan system: In 2010, CDTF started to pilot a model that will involve commercial banks in funding agricultural inputs. CDTF is planning to provide a Tsh100 million- guarantee fund for NMB to finance inputs for farmers grouped in five SACCOS in the WCGA. These SACCOS will receive capital from NMB to purchase needed inputs in bulk and distribute to its members according to their needs. Members will pay back the SACCOS at the harvest season in one instalment and the SACCOS will channel the funds to NMB. This pilot will involve 1,465 to 1,823 cotton growers in the WCGA. (Mara Region will not be involved in this scheme in 2010.)
Agro dealers’ scheme: At the beginning of 2009/2010 cotton farming season, the Ministry of Agriculture introduced an agro dealer-based input system in the cotton growing areas. While the intention of the system is to increase the availability of phyto-sanitary products in the farmers’ proximity; it does not solve affordability issues and is not different from a cash-and –carry system discussed above.

2.3.Pricing policy and practice

TCB announces its ‘indicative price’ for seed cotton at the start of each marketing season. Buyers then offer farmers prices that either match or exceed the indicative price depending on the supply and demand in the market place. Given that there are no incentives for quality, competition for seed cotton is based on price alone. This has resulted in a steadily increasing farm-gate price for seed cotton over the past 10 years. (See the graph entitled “Seed Cotton Price Trends 1999-2009” below)

Cotton farmers are also exposed to price shocks and no longer enjoy protection against uncertain price movements as they did before liberalization in the 1990s[3]. The price that is paid to the farmers is determined by the following factors:

Global market price (Cotlook index A)
Floor price set by TCB after negotiation with stakeholders
Level of competition

2.4.Challenges of growing cotton

Cotton is an annual crop that requires a substantial investment in pesticides and fertilizer to achieve profitable yields. Tanzanian cotton farmers face three major constraints that affect the production of seed cotton:

Soil fertility exhaustion especially in the Western Cotton Growing Area
Insects including cotton stainer (dysdercus), Aphids and bollworm
Weeds especially in the Eastern Cotton Growing Area

The solutions to these problems include the application of fertilizer and pesticides as well as labor for weeding (which much happen at least three times during the growing season). The cost of these inputs is often beyond the purchasing power of the average cotton smallholder farmer in Tanzania.

Although the price of seed cotton is exhibiting an upward trend, cotton farmers have been realizing slim margins and sometimes the benefits from cotton farming are less than those from alternative crops (see farmer’s income statements in exhibit 2). Among all other determinants of profitability, productivity and cost of production are those on which farmers can have more direct influence (albeit subject to the volatility of agricultural production due to weather patterns).

III. Background to Contract Farming Pilot Programme

In 2007, Tanzania Gatsby Trust and Tanzania Cotton Board conducted a study to identify issues and opportunities that exist in the Tanzanian cotton and textile industry. The study highlighted low volume and quality of seed cotton and low domestic consumption of lint.

From the findings of this study, it was recommended that contract farming system be considered to transform ginneries into “hubs” in which seed cotton production and marketing efforts would be anchored. In April 2008, contract farming was endorsed by the cotton sub-sector stakeholder meeting with a recommendation to pilot it in Mara, Pwani and Morogoro regions.

3.1.The Definition of Contract Farming

According to FAO, contract farming refers to agricultural production carried out under an agreement between farmers and a buyer that establishes conditions for the production and marketing of a farm product. Three main elements of the “contract consideration”[4] include:

Market access: The grower and buyer agree to terms and condition for the future sale and purchase of a crop.
Input access: In conjunction with the marketing arrangements, the buyer agrees to supply selected inputs, including on occasions land preparation and technical advice.
Management specifications: The grower agrees to follow recommended production methods, inputs regimes, and cultivation and harvesting specifications.

Contract farming enables ginneries to actively engage in seed cotton production process. Through contract farming, ginners provide credit inputs to farmers to increase yields and stabilize their seed cotton supply chain. Key benefits for farmers include access to credit inputs and a guaranteed market.

The success of a contract farming model hinges on the relationship between the farmer and the ginner. Both parties need to honor their commitment to each other on time and in full. That is, buyers must supply the right inputs on schedule and farmers need to “repay” the credit by selling seed cotton back to the ginner and not engage in side-selling. In order to negotiate on a level playing field, farmers need access to information and to enhance their bargaining power on one hand. On the other hand, the ginners, who are incurring most of the risk, need some certainty that they will receive the seed cotton that they have invested in.

IV. Design of Contract Farming Pilot Programme

4.1.Scope and assumptions of contract farming pilot programme

Contract farming is one of the components of a larger programme that was negotiated between the Government of Tanzania and the Gatsby Charitable Foundation in the U.K. represented by its Tanzanian subsidiary, the Tanzania Gatsby Trust. The programme, called the “Cotton & Textile Development Programme (CTDP)”, has the following three objectives:

To increase cotton production from 700,000 bales to 1,500,000 by 2015
To increase productivity from 750kgs per hectare to 1,500kgs per hectare by 2015
To increase the proportion of lint consumed in the domestic textile industry from 30% to 90% by 2015.

A five-fold strategy was designed to guide the implementation and achieve the above-mentioned objectives. The five pillars of this strategy transcend the entire cotton value chain and include:

Introduction of conservation agriculture[5]
Production of high quality cotton seeds
Introduction of contract farming
Promotion of local and external investment in modern spinning mills, weaving and knitting
Building Tanzanian human capital with an emphasis placed on textile engineering

As part of this effort the CTDP designed a pilot programme to test how contract farming could be used to improve yields, quality and economic returns. The pilot was also expected to help identify the factors that would enable the broader adoption of contract farming. While the pilot was expected to provide insight to policy makers, it was not expected to provide conclusive evidence on which to base regulatory reform for the sector.

Through contract farming, smallholder farmers would have access to inputs and extension services provided by the ginners, who would in turn be assured the supply of cotton from these growers. The pilot programme had three specific objectives:

Assist 3,700 cotton growers to increase yield by 20%
Establish contractual relationship between 48 FBGs and at least 4 ginners
Strengthen the capacity of the TCB to facilitate the implementation of contract farming schemes.

4.2.Paradigm shift in farmer-buyer relationship

Prior the introduction of contract farming in Mara, marketing of seed cotton was managed by agents, who collateralize fixed assets to receive capital from ginners to purchase seed cotton directly from the farmers. The agents only interacted with the farmers during marketing season, and therefore did not provide a conduit for information on agronomic practices or for inputs. The government has also been responsible for extension services but is vastly under-resourced to achieve significant outreach. This seed cotton buying arrangement is believed to have contributed to the deterioration of seed quality since liberalization. It has also fostered deep distrust among the growers and processors given that, at times, the agents tamper with weighing scales to receive more cotton than they are paying for and, in retaliation, cotton farmers contaminate cotton with foreign material, including water and sand, to increase the weight of their seed cotton and compensate for any loss resulting from the agents’ doctored scales.

Contract farming is intended to foster a direct relationship between farmer business groups and ginneries or other seed cotton buyers. The model also allows famers to create and capture more value by undertaking bulking and quality management functions which used to be the domain of middlemen.

4.3.Provision of agricultural extension under the pilot

The CTDP used two approaches to improve productivity and quality in the contract farming pilot: direct technical assistance and public-private partnerships.

§ Direct Technical Assistance

The programme implementation team worked directly with farmers to form business groups and provided them with agronomic and business skills training. The team also managed the linkages between farmer business groups and ginners as well as the coordination of all the stakeholders’ involvement in the programme.

§ Public-Private Partnerships

To reduce the cost of the technical assistance to farmer business groups, stakeholders agreed to scale up public –private partnerships (PPPs). A partnership between public and private entities is generally formed for one of the following objectives:

A private sector entity performs a public sector function
A private sector entity uses a public sector property for its own commercial purposes
A hybrid of the above two

Ginners were encouraged to work with district councils to leverage services and the know-how of ward agricultural extension officers. Ginners would support government extension staff by strengthening their ability to reach farmers and the government would continue to pay salaries for these extension staff. This configuration is believed to result in the optimal use of government extension workers and reduce cost that would otherwise be incurred by the ginning companies to hire agronomists.

CTDP worked with Badugu Ginning Company to pilot a public-private partnership in cotton farming. Field staff facilitated negotiations between the ginner and the government officials in Musoma District to define the roles and responsibilities of each partner. As a result the Musoma District Agriculture and Livestock Development Office (DALDO) deployed five extension workers that were trained in group formation, business skills and cotton value chain development. The district paid these extension workers their government salary while Badugu provided them with motorcycles and daily substance allowance. CTDP staff continued to provide these extension staff with mentoring and coaching services.

With this model, Badugu ginning company was able to work with 88 FBGs and invested Tsh 154.4 million in contract farming covering the entire district of Musoma rural. The investment included motorbikes for the five extension officers and their daily subsistence allowances as well as phytosanitary products (fertilizer and pesticides) provided to farmers on credit. It is estimated that 8,000 acres were sown by the FBGs who entered into contract with Badugu.

4.4.Terms of the contract

The CTDP and the Tanzania Cotton Board designed a standard contract that spells out the terms of an agreement between ginning companies and farmer business groups.^[6] In order to ensure input accessibility and seed cotton quality as well as optimal level of price competition, the contract includes clauses that addressed key issues in the farming and marketing of seed cotton, including (1) Guaranteed market for seed cotton; (2) Pricing mechanism; (3) Goods and services to be provided by ginners, and (4) Production requirements.

Guaranteed market

The contract stipulates that the buyer is providing a guaranteed market for the entire seed cotton crop produced by contracting farmer business group during the season under consideration (the contract is valid for one season).

Pricing mechanism

The contract recognizes that the buyer will pay a market price defined as the going rate at the time of marketing. The floor price will still be the indicative price negotiated between TCB, ginners and the cotton growers’ association.

Goods and services to be provided by ginners

The contract requires ginning companies to supply cotton seeds on credit as well as stipulates the type and quantity of fertilizers and agro-chemicals required for the area to be planted by the cotton growers (grouped in Farmer Business Groups). In addition the contract required the buyer to organize and pay for transportation of the seed cotton from the warehouse to the ginnery within 30 days from the start of the buying season as declared by TCB.

Production requirements

The contract clearly spells out what farmer business groups ought to do to achieve the required volumes and quality of seed cotton. Specifically, the contract states that farmers must be grouped into FBGs and those groups must:

Plant the agreed and registered number of acres
Thin, gap fill, weed and spray
Pick and grade
Take all steps deemed necessary to produce, safeguard and harvest all of the seed cotton
Deliver seed cotton to a TCB- approved buying store/warehouse
the buyer will organize and pay for transportation of the seed cotton from the warehouse to the ginnery within 30 days from the start of the buying season as declared by TCB
Allow the buyer or his/her duly appointed agent or nominee, reasonable access to the farm to inspect the said plants and Seed Cotton whenever required to do so
Avoid contamination by appropriately storing the harvested seed cotton, not adding water and/or sand
Ensure that as soon as practicable after harvest the said seed cotton is promptly packaged into wool packs bearing buyer mark or any other distinguishing mark prescribed by the buyer and thereby clearly identifiable from harvest belonging to any other entity or person
Sell all seed cotton grown on the farm to the buyer for the agreed price
Not under any circumstances execute any parallel or the other similar agreement with, nor take inputs on credit from any other distributor, inputs supplier or buyer of seed cotton or any other person whatsoever relating to the production of seed cotton.

4.5.Implementation of the contract farming pilot programme

The programme implementation team consisted of professionals with experience in business, economics, and agronomy. The CTDP had three Business Advisors in the field and a Programme Manager. The pilot entailed seven steps as illustrated below.

Figure 1: 7 Steps of Piloting Contract Farming in the Mara Region

V. Performance of Contract Farming Pilot Programme

5.1 Cotton production

The pilot phase of the cotton productivity and marketing programme was completed at the end of October 2009. During the implementation of this 15-month programme, TechonoServe staff assisted the four ginning companies that participated in contract farming pilot – Badugu, S&C, Olam and Afrisian – in planning and scheduling the provision of credit inputs to cotton growers through 60 FBGs.

In total, farmers participating in the programme planted 5,140 acres of cotton and produced 1,918,764 kgs of seed cotton. Given that 2,433 out of 3,882 farmers who enrolled in the programme managed to plant, we can conclude that the area of cotton planted by an average farmer in the programme is two acres of seed cotton and each farmer had a total production of 789 kilograms.

The yields increased by 25% in Musoma (from 315 kg per acre in 2007/2008 to 394 kg per acre in 2008/2009) and 12% in Bunda (from 339 kg per acre in 2007/2008 to 379 kg per acre in 2008/2009). The baseline for the ECGA was not established because many of the farmers who participated in contract farming had not grown cotton for a long time.

5.2 Cotton Quality

While not initially expected there were indications that the pilot was having an effect on cotton quality. Due to poor quality, Tanzanian cotton has experienced a steady decline in the price it realises in the international markets. The establishment of season long relationships between farmers and ginners contributed to a greater awareness of the importance of quality. In certain villages, farmers restarted the practise of separating and grading cotton, the ginneries reciprocated by paying a premium for higher quality seed cotton. Although not conclusive there are indications that contract farming can contribute to improving quality standards across the sector.

5.3 Cotton marketing

Olam and Afrisian purchased 100% of total production of their FBGs, which means there was no side selling among these groups. Badugu purchased 81% of the total production of its 28 FBGs and S&C purchased 77% of the total production of its 11 FBGs, which suggests that there was some leakage of product to other buyers on both cases.

The total quantity sold ‘on the side’ in the WCGA was 295,400 kg, or 15% of the total FBG production. This loss resulted primarily from a delay in purchasing by Badugu and Olam for about two weeks. During that period, the two ginners had not yet received their working capital loans from CRDB bank. As a result, the farmers sold to other buyers.

To ensure the farmers achieve quality requirements and avoid side selling, the CTDP encouraged participating ginning companies to involve group leaders in seed cotton buying operations. Badugu and, as well as Olam to a lesser extent, involved group leaders in bulking, weighing and paying operations.

5.4 Loan repayment

On average, 80% of the total credit extended to FBGs in the WCGA and ECGA has been repaid: 95 % for Badugu, 90% for Olam, 52% for S&C and 45% for Afrisian. Initially, Olam and S&C were very hesitant about the pilot test. From their perspective, the risks appeared too high relative to the potential rewards. The tipping point came when the Tanzania Cotton Board proposed to the CDTF to provide a 30% first loss guarantee on the value of the inputs provided on credit. The figure of 30% was chosen based on the experience of input suppliers and processors in the region, who indicated that historically losses do not tend to go above 30% on average. This guarantee was the key deciding factor to incentive Olam and S&C to participate. In this way, the involvement of the CDTF was pivotal to the success of the programme overall.

At that point, S&C and Olam diverged in their approaches. Olam quickly mobilized to get contracts in place, while S&C was relatively slower to move. The differing approach is, in part, reflected in the different repayment rates of the two firms.

In short, repayment depended heavily on the following factors:

Farmer profitability
Ginners’ willingness to involve leaders of farmer business groups in seed cotton purchasing operations
Strength and quality of the farmers business group

Figure.2: Loan Recovery Rate

VI. Major Challenges, Determinants for Success and Conclusions

The pilot programme provided an opportunity to refine understanding on how to structure, implement and operate contract farming in Tanzania’s cotton sector. The following is a summary of the challenges, factors for success and broad conclusions.

6.1 Challenges

Uncertainty in the cotton market: contract farming pilot coincided with the global downturn in the financial sector that resulted in a virtual freeze in credit markets. Both ginners and farmers were sceptical to invest in cotton farming as the market outlook was not optimistic

Insufficient rains and food insecurity: The consequences of insufficient rains were felt most intensely in the ECGA where only 202 out of 855 i.e. 24 % of farmers who joined farmer business groups actually planted cotton. The WCGA also had below average rains that lead to food insecurity in Mara region.
Lack of adequate preparation for ginners and farmers: although the decision to pilot contract farming was taken several months before the start of the programme, some key stakeholders (S&C and Olam) were reluctant to fully participate. The lack of information on contract farming prior to the launch of the pilot was the main cause of farmers’ and ginners’ reluctance. Farmer groups that were in existence before the advance of contract farming viewed contract farming as just another project that will provide hand-outs.

Example: When contract farming was introduced in Kyanyari ward of Musoma District, cotton farmers decided to form a business group, which they called Migombani. The Chairman elected to lead the group ran on experience since he used to lead a former cooperative and he was perceived to be “better off” than the other farmers. After the election, programme staff trained the group on leadership, emphasizing the qualities and functions of an effective leader. Immediately following the training, several members of the group voiced concerns about the leadership style of the elected executive committee. They indicated that the leaders were not available for meetings and they had a tendency to distribute inputs to themselves before making sure that other members were served. It emerged that the executive committee was the same one that had presided over the former cooperative, which had gone bankrupt. One week after the training session, the group replaced the executive committee.

Lack of political will: Contract farming was not supported by some political leaders, which led to the loss of 500 farmers who had formed groups to participate in contract farming in Serengeti district. After working for two months with farmers in Serengeti, programme staff were informed that a Member of Parliament visited his constituent in Serengeti and informed farmers that contract farming was against the law and asked them not to participate.
The initial demand for contract farming exceeded the planned level of effort: The initial target contract farming pilot programme was 3,700 farmers grouped in 48 farmer business groups. By January 2009, the total number of farmers who had requested to be included in the pilot programme was 9,312. These farmers had started the process of forming 169 groups: in Musoma (3,542 farmers grouped in 69 groups); Bunda (4,800 farmers grouped in 88 groups) and Bagamoyo (970 farmers grouped in 12 groups).

6.2 Determinants for Success

The commitment of a few lead buyers/ginners is critical to proving that the model could work: Olam and Badugu demonstrated commitment to contract farming by taking a financial risk to participate. Both ginners were early adopters of contract farming and provided inputs on credit to farmers. They also demonstrated flexibility and adopted a collaborative position with the government in order to pilot contract farming. Finally, they both delivered the inputs on time to the farmers and ensured fairness in marketing (e.g. no tampering of the weigh scales was reported, which is otherwise a pervasive practice in the industry), which signalled to the farmers that the ginners could be trusted.

Badugu went one step farther and forged a public-private partnership with the local government and provided necessary inputs e.g. motorcycles and fuel, to the government extensions officers in order to increase their outreach to contracted farmers.

The commitment of these ginners contributed to their high repayment rates (about 90%). Badugu’s repayment would have been higher except for the delay purchasing seed cotton that resulted from a delay in working capital, which caused farmers to sell to Olam.

The counterpoint to these two examples is S&C, which remained reluctant to engage in contract farming throughout the pilot programme. This lack of commitment can be seen in S&C’s repayment rate, which topped out at 52%.

: Based on a recommendation from the ginners, the Tanzania Cotton Board and the CTDP; the Cotton Development Trust Fund (CDTF) agreed to provide a first-loss guarantee of 30% of the value of the inputs provided on credit to the farmers in order to lower the risk to the ginners. This was a game-changing decision. For example, it is unlikely that Olam would have committed itself in the way that it did in the absence of the guarantee.

Allowing farmer groups to add and capture more value increases the quality of seed cotton and helps ginners to recover the loan extended to farmers: Ginners who involved FBG leaders in the purchasing operations paid a commission to the groups that ranged from Tsh. 15 to 30 per kilogram of seed cotton. This was a compensation for their time and value added in terms of bulking and quality assurance. This arrangement led to an enhanced self policing by the group and increased the quality of cotton as farmers had to separate clean from contaminated seed cotton before selling. The timing of commission payment also provided a sort of guarantee to ginners to the extent that FBGs that had not pay back their loan in full gave up the commission to reduce the loan amount owed to the ginner.

The promotion of cotton farming should not be done in isolation. Ideally, cotton growing and food production systems would complement each other: Programme staff in Musoma estimate that about 458 acres of cotton were destroyed in 2008/2009 in favour of maize. Bio-intensive gardening and perma-culture should be considered as risk mitigation strategies in cotton growing areas. This will ensure the availability of export crop and food security cotton growing households.
Initially, the pilot experienced significant delays because many of the key stakeholders had not yet committed themselves to the idea. While a cotton stakeholders’ meeting was held prior to introducing the new system, that meeting later proved insufficient to ensure that everyone was on board. Namely, the ginners seemed not to have fully understood that contract farming would be implemented in the upcoming season.

Moreover, the farmers did not fully understand the contract farming model and, in some areas, were resistant to change. For example, in Serengeti District, farmers expressed concern about contract farming, which led the Member of Parliament from Serengeti to announce that contract farming would not be introduced during the season. Programme and the TCB were forced to accept the MP’s pronouncement.

While it can be costly in terms of time and human and financial resources, making the investment upfront to secure the buy-in of key stakeholders prior to introducing massive structural change to the market is essential.

: During the implementation of contract farming pilot programme, only 7% of the farmer business groups were formed before the programme (in Bunda district). These groups were primarily formed as a rotating savings and credit association but also received inputs on credit from a ginner. Even though these groups existed before the pilot of contract farming, their performance was very dismal because of poor leadership, resistance to change and lack of cohesiveness. The weaknesses of these groups lead to default rates to the ginner as high as 50%, which caused the ginner to be suspicious of contract farming as a viable model. However, these groups were very weak.

The pilot’s groups were registered as business associations with the government, reinforcing the concept of farming as a business. In addition, the groups had a constitution and elected leadership. Finally, the programme provided training on leadership, management and negotiation skills.

FBGs with strong leadership and a high degree of participation in the programme activities produced high quality cotton and negotiated selling/buying terms that were satisfactory to both parties, including group leaders playing a role of buying agents. Peer pressure within the groups also reduced seed cotton contamination practices.

Public-private partnerships are likely required in order to take contract farming to scale: To be able to cover additional farmer groups that had shown interest, programme Business Advisors trained 23 staff members from the ginneries (7 from Badugu, 9 from Olam and 7 from S&C) who could register farmers and organize groups in the geographic areas allocated to them. Later, it was realized that ginnery staff did not have appropriate background in agronomy and farmer organization. Programme staff advised ginners to partner with local governments and leverage agricultural extension human resources at the district and ward level. Badugu Ginning Company seized the opportunity and negotiated with Musoma district authorities. The result of the negotiations was a configuration that amounted to Public-Private Partnerships. Badugu agreed to equip five government extension staff with motorbikes and pay their daily subsistence allowances in exchange for their services to more than 60 additional farmer groups (approximately 3,000 cotton farmers)

In addition to a partnership between ginners and local governments, ginners have accepted to work with lead farmers to increase their outreach to cotton growers in contract farming. This lesson has allowed the programme to develop a less expensive model that will reach approximately 25,000 farmers by the end of 2011.

Find as many ways as possible to bridge the gap between ginners and farmers in order to cement the relationship: The use of PPPs and Lead Farmer models will be complemented by the adoption of ICT tools in managing ginners’ and farmers’ transaction, capacity building efforts and the flow of technical/agronomical information and education.

During the implementation of contract farming pilot programme, the team took the initiative to include mobile technology in its communication tools. In addition to field visits, staff sent messages to those who had mobile phone numbers, reminding them of key activities for each production stages and reinforcing key agricultural concepts for a swift adoption. This SMS – based drip training was also used to send market information to farmers.

The use of this technology increased meeting attendance and energized farmers. Due to the success of this mobile technology, TechnoServe designed a more robust cotton production and marketing information system that will be rolled out in 2009/2010 season. The system is known as PAMBAnet and has the following functionalities:

The key objectives of PAMBAnet are:

To provide training and agronomic information to cotton farmers
To help cotton ginners manage their businesses
To allow the Tanzania Cotton Board and other government representatives to register farmers and monitor industry performance
To enable industry actors to monitor and evaluate the contract-farming model over time

6.3 Conclusions

In spite of the poor growing conditions in the pilot year, contract farming demonstrated that investment in agriculture inputs can increased yield and that a pre-organised contract can secure a ginner’s investment in a cotton production. With a strong understanding of the challenges and the factors for success one can expect favourable results across the rest of the country.

Although it is clear that contract farming can have an excellent impact in Tanzania, its full implementation raises a series of other issues that still need to be resolved. The pilot effectively ring-fenced an area and allowed three large ginneries to operate in a defined space. If contract farming is to be adopted across the country then there will need to be greater consideration given to the licensing of ginneries, their investment requirements, and mechanisms to protect against side-selling; effectively a revised regulatory framework for the sector.

Contract farming has proven a viable vehicle through which to enable greater investment in cotton production and the most likely model through which other innovations, such as improved seed, usage of planters, initiatives to improve quality issues can be introduced into the sector.

Exhibit 1: Profile and P&L for a cotton farmer who participated in the first phase of contract farming

Julius Thomas

Bunda, February 26, 2009

The Local TCB Rep Projects:

Cotton Contract Farming Scheme will Improve Farmers Bottom Line

It is 10.45 a.m. in Karukere village of Namhula ward in Bunda district. It is a sunny day and everyone is a little bit sweating. We are visiting a cotton field and I notice a mixed feeling of joy and worries on the face of one of the farmers of Kiami FBG. I decide to have a private conversation with this young man. His name is Julius Thomas,a husband of one wife and a father of three children. The field we are visiting belongs to him and his cotton looks very good and promising; however it has not rained for a week! This explained his hesitant smile.

Born in 1978, Julius Thomas inherited six acres of land from his father. He continued the tradition and grew cotton. Last season, he planted six acres hoping to increase his monetary revenue. He harvested 2,000 kilos i.e. 333 per acre, and the market price was Tsh. 450. His total revenue amounted to Tsh. 900,000. His expenses including labor totaled Tsh. 200,000 per acre i.e. Tsh.1,200,000 for the six acres. His profit and loss account shows a loss of 300,000. In addition to this loss, his youngest child had malaria last season and had to pay Tsh 35,000 for medical services.

This season, Julius decided to halve the land allocated to cotton because of the last season disappointment. He planted only three acres of cotton and planted maize on the rest of the land. After reaching the decision, TechnoServe introduced contract farming and he was compelled to participate. Thus far, he has had access to enough pesticide on time and on credit and has been given proper agronomic advice and followed the ABCs of cotton growing. If the rain becomes available in a week time, TCB Cotton Inspector and TechnoServe business advisor estimate that the 3 acres he planted will yield a minimum of 2,400 kilos. This will be 400 kilos more than what he harvested on the six acres planted last season.

“ It is becoming clear that this scheme (contract farming[7]) will allow me to work smarter and harvest more with less land”; concluded Julius.

Reported by

Ones Karuho

Julius Thomas’ performance under contract farming scheme

Julius harvested almost the same quantity of seed cotton this season even though he planted 50% of the land he had last season. Below is his income statement:

Income Statement (in Tanzania Shillings
Julius Thomas, Cotton Smallholder Farmer, Bunda
Member of Kiami Farmer Business Group
Contract Ginner: S&C Ginning Company
Farm size: 3 acres, Havested in July 2009
Production: 1,900 kg, price: Tsh.440 per kg

Sales revenue from seed cotton		836,000
Cost o production
Cottonseeds (fuzzy)	10,000
Urea (50kg)	–
Pesticides	37,800
Sprayer	24,000
Land preparation and planting	60,000
Weeding	135,000
Picking	90,000
stalk destruction	9,000
Total cost		365,800
Profit Before Interest and Tax		470,200
Interest on credit inputs	–
Profit before tax		470,200
Tax (0%)	–
Net Profit		470,200

Exhibit 2: Opportunity Cost and the economic value added by contract farming

Farmer: Mashaka Loya, a resident of Maneke village in Tegeruka ward, Musoma. When he does not grow cotton on his one acre, he grows maize. The following three income statements show the profitability of Mr. Loya’s cotton growing business (1) results from contract farming, (2) results before contract farming and (3) a comparison with maize growing business .

Loya’s Cotton Growing Business Results from Contract Farming

Income Statement (in Tanzanian Shillings
Mashaka Loya, Cotton Smallholer Farmer, Musoma
Member of Nyabamura Farmer Business Group
Contract Ginner: Badugu Ginning Company
Farm size: 1 acre; Havested in July 2009
Production: 1,185 kg; Price: Tsh 440 per kg

Sales revenue from seed cotton		521,400
Cost of production
Cottonseeds (fuzzy)	1,600
Urea (50kg)	55,000
Pesticides	29,400
Sprayer	20,000
Land preparation and planting	20,000
Weeding	45,000
Picking	60,000
stalk destruction	5,000
Total cost		236,000
Profit Before Interest and Tax		285,400
Interest on credit inputs	–
Profit before tax		285,400
Tax (0%)	–
Net Profit		285,400

Loya’s Cotton Growing Business Results before Contract Farming

Income Statement (in Tanzanian Shillings
Mashaka Loya, Cotton Smallholer Farmer, Musoma
Member of Nyabamura Farmer Business Group
Contract Ginner: Badugu Ginning Company
Farm size: 1 acre; Havested in July 2006
Production: 423 kg; Price: Tsh 250 per kg

Sales revenue from seed cotton		105,750
Cost of production
Cottonseeds (fuzzy)	2000
Urea (50kg)	0
Pesticides	12,000
Sprayer	4,500
Land preparation and planting	10,000
Weeding	21,000
Picking	15,000
stalk destruction	5,000
Total cost		69,500
Profit Before Interest and Tax		36,250
Interest on credit inputs	0
Profit before tax		36,250
Tax (0%)	0
Net Profit		36,250

Loya’s Maize Growing Business Results

Income statement for an alternative crop: Maize
Income Statement (in Tanzanian Shillings)
Mashaka Loya, Maize Smallholer Farmer, Musoma
Mashaka Loya, Maize Smallholder Farmer, Musoma
Member of Nyabamura Farmer Business Group

Farm size: 1 acre; Havested in FEB 2007
Production: 1,000 kg; Price: Tsh 300 per kg

Sales revenue from Maize		300,000
Cost of production
Purchase seeds(8kgs)	9,200
Urea (3kgs)	3,000
Pesticides (to treat seeds before planting)	4,500
Sprayer	–
Land preparation and planting	30,000
Weeding	15,000
Picking	13,000
Parking	8,000
stalk destruction
Total cost		73,500
Profit Before Interest and Tax		226,500
Interest on credit inputs	–
Profit before tax		226,500
Tax (0%)	–
Net Profit		226,500

Exhibit 3: Ginneries’ Economy of Scope

Excerpt of the interview with the Chairman of Badugu Ginning Company, Ezekiel Mchunga:

TechnoServe Employee: you said that you are committed to working with farmers through contract farming, and yet, you are have to raise more money to buy inputs and wait and hope to recover the money after 8-9 months. Why?

Mr. Mchunga: I am committed because contract farming gives assurances of increasing the supply from farmers in Musoma where my ginnery is located. Sourcing seed cotton in Musoma reduces my transportation cost by 50%. I pay Tsh. 60 per kilo to transport seed cotton from Bariadi while I pay only Tsh.30 per kilo to transport seed cotton from Musoma. Moreover, I cannot make losses because I deal in different products from seed cotton including:

Lint
Cotton Oil
Cotton cake- animal feeds
Husk for industrial or artisanal fire
Cotton Soap

Questions for policymaking consideration:

Would ginners who have oil mills use a technology that is flexible enough to press oil from cotton and other oilseeds?

How could the above described economy of scope be used to enhance food security and at the same time spur increase in seed cotton production?

Exhibit 4: Estimates from TCB Inspectors (Group exercise during the training held in Mwanza on November 2, 2009)

Cost of production, yields and profit for cotton farming under different technologies
Cost Elements	Traditional methods	Improved methods	Conservation Agriculture
Land rent	30000	30000	30000
Farm preparation(slashing, ploughing, minimum tillage)	30000	40000	10000
Herbicide	0	0	40000
Herbicide Application	0	0	3000
Seeds	3000	2000	2000
Manure	0	60000	0
DAP for planting	0	0	48000
TSP for planting	0	0	0
Planting	5000	15000	15000
Weeding ( 3 times)	60000	60000	20000
Urea for side dressing	0	14000	14000
Thinning	10000	10000	10000
Gap feeling	0	5000	5000
Scouting	0	1500	1500
Sprayers	0	20000	20000
Pesticides	12600	8400	8400
Spraying	18000	12000	12000
Picking sacks	0	0	0
Picking	6600	18400	33400
Transport to the collection center	5000	5000	10000
Uprooting and burning(stalk destruction)	15000	15000	15000
Total	195,200	316,300	297,300
Yields	200	853	1500
Price	440	440	440
Sales revenue	88,000	375,320	660,000
Cost of production per acre	195,200	316,300	297,300
Unit cost (Tsh/kg)	976	371	297
Profit/loss per kg	(536)	69	143

Exhibit 5: Standard Contract

Contract Between

Cotton Farmer Business Group and Ginner

Whereas Tanzanian cotton industry stakeholders wish to pilot contract farming scheme in Mara region; Whereas a cotton farmer business group known as…………………………………………..located in ………………….. District……………….. Division……………………Ward……………… Village, hereunder referred to as Seller, and a cotton ginning company know as …………………………………………………………………. address…………………………………………………………… hereunder referred to as Buyer, agree to participate in the pilot contract farming scheme; both parties agree on the following:

1. The Buyer is providing a guaranteed market for the entire seed cotton crop produced during the 08/09 season, estimated to be ……. kg. The seller is to be paid cash upon delivery / collection of the crop.

3. The seller will deliver seed cotton to a TCB- approved buying store/warehouse in ……………………. village and the buyer will organize and pay for transportation of the seed cotton from the warehouse to the ginnery within 30 days from the start of the buying season as declared by TCB

4. Inputs provided as an advance by the Buyer (where applicable) shall be as follows:

	Fertilizer	Seeds	Pesticides
Description & quantity
Date of delivery
Amount charged to seller

The prices at which fertilizers and agro-chemicals will be sold (detailed above) will be announced prior to the planting season.

5. The payment terms of the Seller to the Buyer shall be as follows:

Payment	Due date	Amount	Mode (eg cheque/cash)
Input advance		TSh
At Delivery/Collection		TSh
Total Payable		TSh

6. This agreement will last for one growing season unless the arbitration committee decides otherwise. There is no obligation for either party to renew the agreement

7. The Buyer agrees:

a) To supply on credit the cotton seed, and the type and quantity of fertilizers and agro-chemicals required for the area to be planted by the cotton growers (grouped in Farmer Business Groups)

c) To provide a price at the time of marketing, that reflects the indicative price negotiated between TCB, ginners and the cotton growers’ association (the negotiated price will be announced by TCB whenever it deems appropriate)

d) To charge the Seller input prices as described in part 4 above.

8. The Seller agrees:

a) To plant the agreed and registered number of acres and to thin, gap fill, weed, cultivate, spray, pick, grade and to do all things and take all steps as are deemed necessary to produce, safeguard and harvest all of the said seed cotton.

b) To allow the Buyer or his/her duly appointed agent or nominee, reasonable access to the farm to inspect the said plants and Seed Cotton whenever required to do so.

c) To avoid contamination by appropriately storing the harvested seed cotton, not adding water and/or sand.

d) To ensure that as soon as practicable after harvest the said Seed Cotton is promptly packaged into wool packs bearing buyer mark or any other distinguishing mark prescribed by the buyer and thereby clearly identifiable from harvest belonging to any other entity or person

d) To sell all seed cotton grown on the farm to the Buyer for the agreed price and to not under any circumstances execute any parallel or the other similar agreement with, nor take seed cotton production Inputs on credit from, any other distributor, inputs supplier or buyer of seed cotton or any other person whatsoever relating to the production of seed cotton.

9. Penalties:

If the Seller fails to follow the procedures detailed in this agreement, he/she will have broken the law and appropriate law enforcement agencies will be asked to take action.
The Seller (as a group) is responsible for repayment of the credit given to the defaulting member.
If the Buyer fails to fulfil its commitments as detailed above, the Seller has the right to claim compensation to the 50 % of the value of the crop lost as estimated by the arbitration committee whose composition is described in section 12 of this contract.

10. Severability

If at any time any provision of this Agreement is or becomes invalid or illegal in any respect, such provision shall be deemed to be severed from this Agreement but the validity, legality, and enforceability of the remaining provisions of this Agreement shall not be affected or impaired thereby.

11. Amendment

This document constitutes the whole agreement between the parties and no amendment to this Agreement will be binding unless it is in writing and signed by both parties.

12. Dispute resolution

Any dispute arising from this Agreement shall first be resolved amicably between the parties, and if attempts to solve the dispute through amicable resolution fail, then the dispute shall be referred to arbitration. The Village Executive Officer of the village in which the seller’s farm is located, a TCB representative, and a DALDO representative of the ward in which the seller’s farm is located shall act as an arbitration committee to resolve the dispute.

13. Law Applicable

This agreement shall be governed by the Laws of the United Republic of Tanzania.

14. The parties having freely agreed to the terms (1-14) now indicate their acceptance by signing below:

SIGNED by [Seller signature] _ _ _ _ _ _ _ _ _ _ _ _ [Buyer signature] _ _ _ _ _ _ _ _ _ _

Witnessed by [Seller witness name] _ _ _ _ _ _ _ _ _ [Buyer witness name] _ _ _ _ _ _ _

Signature _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Copies to be provided to:

Buyer, Seller, Village Executive Officer, Local TCB representative and DALDO.

Attachment:

List of members of the cotton farmer business group
Cotton Farmer Business Group constitution or minutes of the meeting held to form the group and elect leaders

[1] Colin Poulton, The cotton sector of Tanzania, March 2009

[2] Interview with Marco Mtunga, TCB Director of Regulatory Services, Dar es Salaam , Feb 9, 2010

[3] Dr. Joe C.B. Kabisa, “The Demand for Price Risk Management, Tanzania Cotton Lint and Seed Board “(paper presented at the EU-Africa Cotton Forum, Session 5, Paris, July 2004)

[4] In contract law, this refers to an inducement given to enter into a contract that is sufficient to render the promise enforceable in the courts.

[5] See exhibit 4 to see the impact of conservation agriculture on cotton farming profitability

[6] See all the contract terms in exhibit

[7] Emphasis added

Research

Kilimo Kwanza

Changing the Way Cotton is Produced and Marketed in Tanzania

Table of Contents

I. Executive Summary