Contract Farming in sugar and other industries

Contract farming by its very nature is a partnership – between farmer and contractor and between contractor and other third parties. One of the best ways to optimise such relationships is to do so across regions within the same continent. For instance, Unitrans Africa provides transport and logistics services for Illovo Sugar estates and to its outgrowers in South Africa, and also at its operations in Malawi, Mozambique, Zambia and Tanzania.

What is the basis for contract farming?

Contract farming is essentially an agreement between farmers and buyers for the production and the supply of agricultural products under pre-agreed conditions, and often at pre-determined prices. Input and supply agreement contracts should theoretically improve the access of the smallholder farmers to resources they would not usually be able to achieve, for example yield-enhancing inputs, credit, information, services, and product markets.

In the context of developing countries, contract farming is viewed as an important innovation for improving the productivity and output of smallholder farmers, providing ancillary services such as marketing, expertise, financing, and best practices.

Why has contract farming become more widespread?

Due to changes in the global agricultural system and support from various organisations,contract farming has expanded in many developing countries. Historically, agriculture production in developing countries has had low productivity compared with non-agricultural production in the same country, or with agricultural production in developed countries. This low agricultural productivity is often attributed to:

  1. limited knowledge about productivity-enhancing production methods
  2. relevant technologies
  3. poor access to highly productive varieties of seed
  4. limited financial resources
  5. low appetite for risk.

Non-price factors involved in the contracts, such as technical assistance, training, and education help farmers to improve their efficiency, productivity, and profitability. Pre-determined pricing means that farmers are eventually able to have more stable incomes. Earning additional income is a primary motivation for farmers to enter contracts, with the secondary impetus of not having to expose themselves to high risk.

All these considerations are assisting the transition of smaller farmers in sub-Saharan Africa from subsistence to market-orientated commercial production.

The sugar industry

The Tanzanian sugar industry is among those sectors where contract farming is practised. Historically, the sugar industry was under the control of the state in that country since the 1970s and 1980s. However, because of inefficiencies in their operations, the sugar milling companies were privatised as part of economic reform in the late 1990s. Mtibwa and Kilombero Sugar are two milling companies that were privatised and now have well developed out-grower (contract) schemes. In both instances out-growers sell their sugarcane to the milling companies on a contract basis.

Looking at sugar producers themselves, Illovo controls about 45% of the South African domestic market with 4 mills in South Africa. It is the largest sugar supplier to the Malawi domestic market, and has a significant footprint in the Zambia sugar market as well as other economies across Southern Africa.

Tongaat is the second most important player, after Illovo Sugar, in the sugar markets of East and Southern Africa. It has four mills in South Africa, two mills in Mozambique, two in Zimbabwe and extensive cane operations in each of these countries as well as Swaziland.

In sugar, Unitrans Africa provides “comprehensive transport and logistics services,” including harvesting, loading and transportation of cane, delivery of bulk and packed sugar, and activities in land preparation and road maintenance.

Historically, Unitrans has been a leading company in the transportation area of the sugar industry within South Africa and expanded into the African sugar operations during the mid-1990’s.

At present, Unitrans Africa sugar operations include:

  • Illovo’s Nchalo and Dwangwa in Malawi;
  • Ubombo in Swaziland;
  • Kilombero in Tanzania; and
  • Long-term contracts in Mozambique at Tongaat’s Xinavane and Mafambisse operations and Illovo’s Maragra, transporting over 2 million tonnes of cane per year.
  • Marromeu Depot that is owned by Companhia de Sena which, in turn, is owned by French company Tereos Internacional SA, the second largest sugar producer in the world.
  • Transportation of organic sugar for Pure Life Organic Foods, also in Mozambique.

Benefits of Contract Farming

Supporters of contract farming view this market arrangement as a means to draw smallholder farmers into growing markets for processed goods and export commodities. They contend that under contract farming, smallholders are able to obtain reliable and improved agricultural services and gain access to reliable markets for their produce. It has also been argued that contract farming helps to introduce appropriate technology and business management skills transfer in the form of record keeping, efficient use of farm resources and better product knowledge.

As the other partner in a contract, buyers can improve their control over crop supply and crop quality standards.

Effectively designed and professionally managed contract farming schemes address numerous sustainable agriculture objectives. These objectives include such considerations as:

  • No need for investment into capital-intensive equipment only used for specific periods during the year;
  • Contractors can provide the equipment and even perform the work at a specific rate per hour or per hectare;
  • Farmers can take advantage of the best agricultural practices such as land preparation, crop spraying, material handling, water management, equipment leasing and harvesting.

In Malawi for example, many farmers are gradually embracing tech-enabled precision agriculture. Using GPS-enabled equipment they can practise controlled traffic in their fields, reducing soil impact issues and are additionally using agricultural drones for geographical surveys, plant health inspections and safer crop spraying.

If farmers are allowed to participate in innovation, they won’t be tempted to reduce food crops in favour of cash crops. Implementation is key in this respect – how farmers perceive contract farming and define their relationship with the various companies differs across cultures, markets, and production systems. In practice, it is logical to argue that contract farming works if its advantages outweigh the disadvantages for both agri-business firms and farmers. In addition, contract farming brings the best outcomes for farmers when they have sufficient bargaining power to negotiate the terms of the contract.

Unitrans is one of the market leaders operating in 10 countries in Southern Africa, providing logistics, leasing of on-farm machinery, storage, transport, and supply-chain management services, mostly in partnership with South African-based companies, including Illovo Sugar, Tongaat Hulett and others.

Testament to Unitrans Africa’s effective involvement in the sugar industry in Africa are awards and praise to all stakeholders involved in the contract operations in several countries:

Recently the Unitrans Africa Tanzania team was awarded first place in the AOSH Agricultural Sector at the 2021 annual Tanzanian Occupation Safety and Health Authority awards ceremony. Gert Britz, COO commented It is testimony to Unitrans Africa’s commitment and dedication to provide safe work places to our people.”

In Zambia, John Kettlewell, Operations Executive commended the Unitrans Team at Nakambala and Zambia Sugar (Illovo Sugar Africa) for a great season. He notes “At Unitrans Africa we are excited and passionate about Accelerating Africa’s Growth and committed to delivering world class agriculture and precision farming solutions across the African Continent.”