By Dr. N.Yogaratnam
Although the Government of Sri Lanka (GOSL) and the rubber industry are very keen to extend rubber growing to non-traditional rubber growing areas in the Uva, Northern and Eastern Provinces, where land and labour are assumed to be non-limiting factors, there are several constraints to successful implementation of such plans.
The non-traditional rubber growing areas have been focused in many development projects with the aim of uplifting the rural poor but with very little success. The Uva Province is still the poorest with poverty with a Head Count Index1 (HCI) of 27%, while Moneragala and Badulla Districts have HCIs of 33.2% and 23.7% respectively and are ranked as the second and fourth districts based on this index. Many development programmes have failed in the planning process due to insufficient attention on the needs and thoughts of the community.
Out-grower schemes have proved to be successful in other countries. Good examples in rubber are rubber out-grower schemes in Ghana and Ivory Coast.
An out-grower scheme is a contractual partnership between growers or landholders and a company for the production of commercial agricultural products. Out-grower schemes or partnerships vary considerably in the extent to which inputs, costs, risks and benefits are shared between the growers/landholders and companies. Partnerships may be short or long-term (e.g. 30 years) and may offer growers only financial benefits or a wider range of benefits. Also, growers may act individually or as a group in partnership with a company and use private or government land.
Out-grower farming is one of the different governance mechanisms for transactions in agri products chains. The use of contracts (either formal or informal) has become attractive to many agricultural producers worldwide because of benefits such as the assured market and access to support services. It is also a system of interest to buyers who are looking for assured supplies of produce for sale or for processing. Processors are among the most important users of contracts, as they wish to assure full utilization of their plant processing capacity.
A key feature of this farming is that it facilitates backward and forward market linkages that are the cornerstone of market-led, commercial plantation agriculture. Well-managed out-grower farming is considered as an effective approach to help solve many of the market linkage and access problems for smallholders.
The key benefits of such schemes can be summarized as: 1) Improved access to local markets, 2) Assured markets and prices (lower risks) especially for perennial plantation crops, 3) Assured and often higher returns and 4) Enhanced grower access to production inputs, mechanization and transport services and extension advice.
Additional key benefits for contract partners and rural development often include: 1) Assured quality and timeliness in delivery of growers’ products, 2) Improved local infrastructure, such as roads and irrigation facilities and 3) Lower transport costs, as coordinated and larger loads are planned, an especially important feature in the case of more dispersed producers.
There are a few of the models of contract farming that are accepted globally: 1) Centralized model 2) Nucleus Estate model, 3) Multipartite model 4) Informal model and 5) Intermediary model.
The contracting company provides support to the production of the crop by smallholder farmers, purchases the crop from the farmers and then processes, packages and markets the product, thereby tightly controlling its quality. This can be used for crops such as tea and rubber. This may involve a large number of growers. The level of involvement of the contracting company in supporting production may vary.
Nucleus Estate model
This is a variation of the Centralized model. The promoter also owns and manages an estate plantation (usually close to a processing plant) and the estate is often fairly large in order to provide some guarantee of throughput for the plant. It is mainly used for tree crops but can also be for, e.g., fresh vegetables and fruits for export.
The Multipartite model usually involves the government, statutory bodies and private companies jointly participating with the local farmers. The model may have separate organisations responsible for credit provision, production, management, processing and marketing of the produce.
This model is basically run by individual entrepreneurs or small companies who make simple, informal production contracts with farmers on a seasonal basis. The crops usually require only a minimal amount of processing or packaging for resale to the retail trade or local markets. Financial investment is usually minimal. This is perhaps the most speculative of all out-grower models, with a risk of default by both promoter and farmer.
This model has formal subcontracting by companies to intermediaries (collectors, farmer groups, NGOs) and the intermediaries have their own (informal) arrangements with farmers.The main disadvantage in this model is it disconnects the link between company and farmer.
As with any form of contractual relationship, there are potential disadvantages and risks associated with out-grower farming. If the terms of the contract are not respected by one of the contracting parties, then the affected party stands to lose. Common contractual problems include farmer sales to a buyer other than the one to whom the farmer is contracted (side selling or extra-contractual marketing), a company’s refusal to buy products at the agreed prices or the downgrading of produce quality by the buyer.
Side selling by farmers to competing buyers is perhaps the greatest problem constraining the growth of contract farming. Contractors also may default by failing to pay agreed prices or by buying less than the pre-agreed quantities.
Another concern about contract farming arrangements is the potential for buyers to take advantage of farmers. Buying firms, which are invariably more powerful than farmers, may use their bargaining clout to their financial advantage. Indeed, if farmers are not well organised or where there are a few alternative buyers for the crop or it is not easy to change the crop, there is a danger that farmers may have an unfair deal. Tactics sometimes used are changing pre-agreed standards, downgrading crops on delivery so offering lower prices or over-pricing for inputs and transport provided. Strengthening farmer organisations to better access appropriate services such as credit, extension services and market information and improving their contract negotiating skills can redress the potential for exploitation of farmers and poorly formulated contracts and their enforcement.
Despite the typical problems listed above, out-grower arrangements are gaining popularity as they are being used more frequently in agriculture worldwide.
Rubber out-grower scheme in Ghana
The Rubber Out-grower Scheme in Ghana which is being promoted intensively by German Financial Cooperation (FC) and the French development agency AFD helps small farmers to realise their investments. The Ministry of Agriculture arranges a tripartite alliance between the agro-industrial partner GREL, the National Investment Bank NIB and the farmers. NIB provides the farmers with loans refinanced by most of the German FC funds. The money is to be used to purchase and plant rubber. GREL supplies the quality plants and advises the farmers on how to farm and maintain the plantation properly.
Access roads are also built where necessary. Advising the association of small rubber farmers, the mouthpiece of the farmers vis-a-vis GREL and NIB is particularly important. Recognition of the plantations as carbon sinks under the Kyoto Protocol is being sought and even a large farmers’ cooperative could not be able to put in the great effort this takes. At the end of 2006, the framework agreements were signed with GREL and NIB. In the meantime 1,800 families joined the programme. They cultivate a total area of 7,856 hectares. It has been said that one can literally watch the future growing on the fields - a vision beyond tomorrow.
In a few years’ time, when the farmers take the first latex to the collection point, NIB will regard this as only a milestone. The reason is that the loans are financed over a term of 22 years. An exposure of this kind cannot be secured by money alone and this is where a decisive feature comes to bear. Under the agreement mentioned earlier, GREL has also committed itself to purchasing the latex from the farmers. Prices will be in line with the world market and negotiated between the association and GREL. Out-grower arrangements are common in Europe too, for instance in the production of sugar from sugar beets.
Sri Lankan rubber industry should develop its own homegrown models that would be suitable to the local conditions, depending on the socio-economic status of the areas and also based on demand driven approach, if such schemes are to succeed.
A multipartite structure of the out-grower scheme appears to be suitable for the non-traditional areas in Sri Lanka. The GOSL to provide land to Rubber Out Growers Association (ROGA); Rubber Products Manufacturing Agency (RPMA) to provide inputs and technical assistance to ROGA; banks to provide loans to RPMA and ROGA; ROGA to re-pay the loan to bank and either pay the RPMA for the inputs provided or provide raw material at a pre-agreed rate and/or participate in a crop share scheme for their hard work; their crops they may like to process themselves and seek higher prices or sell their crop (latex) at higher prices. For such schemes to succeed, private sector involvement is crucial. Neither public sector nor donor agency arrangements will be effective on the long run.