NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

African agriculture is poised for a boom. Investors are buying large tracts of land at a growing pace as commodity prices rise and the overall business climate improves in Africa. But will this activity translate into higher rural incomes and a better quality of life for Africa’s hundreds of millions of smallholder farmers?

A number of obstacles stand in the way of these farmers transitioning from subsistence to market-oriented farming – and thus delivering the volume and quality of produce that commercial buyers require. A new joint report from the International Fund for Agricultural Development (IFAD) and TechnoServe highlights the promise and challenges of one way to overcome these obstacles: outgrower schemes.

These systems generally involve a central facility, surrounded by smallholder farmers who produce under contract for a commercial buyer. The farmers are typically provided with technical assistance and inputs such as seeds and fertilizer. The potential products include fruits, vegetables, coffee, cocoa and cotton. The buyers can benefit from a reliable supply of product, while the smallholders can access a reliable market.

“In theory, outgrower schemes offer a promising means for buyers to tap into and benefit from the productive capacity of smallholder farmers,” the report states. “In practice, however, experience has been mixed.”

The report outlines seven aspects that define outgrower models: access to inputs, extension services, use of contracts, farmer grouping, grower management, centralized production/processing and post-harvest logistics. The most successful programs are those that build trust, maintain a transparent and competitive price for farmers and avoid an excessive reliance on credit to purchase inputs. According to a survey of buyers with experience operating outgrower programs:

• Crops intended for specialty markets are best suited to outgrower production.
• Governments need to upgrade infrastructure that supports production and marketing
• Maintaining a constant field presence and paying premium prices are the most effective ways to maintain farmer loyalty.
• Technical extension services are critical in enabling buyers to source the quality and volume of produce they require. The majority indicated a willingness to pay up to 10 percent of the value of the goods sourced from smallholders for effective extension.

Drawing on this survey and other research, the report offers seven key tips for investors evaluating outgrower programs. Buyers face numerous challenges in sourcing from smallholder farmers, and no single model will guarantee success. The report concludes that outgrower schemes – carefully designed, well managed and based on a rigorous understanding of the underlying product economics and market arrangements – can benefit both buyers and small farmers. A successful program depends on cultivating good relationships, transparency and a commitment to share equally the risks and rewards of the market.

Read the full report here.

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