More about contract growing to raise farm productivity and farmers’ incomes

The previous column advocated broader adoption of contract growing as a way of raising farm productivity and farmers’ incomes. This business model skirts the constraint of small uneconomic-sized farms and effectively links the farmers to the supply chains thereby reducing their market risks. Space limitation did not allow elaboration on the pros and cons of the business model. Following are further clarifications on key issues/concerns:

Exploitation of small farmers by integrators

This is the most often cited drawback about contract growing arrangements. The relationship is so uneven that the integrators can virtually impose their will on the farmers if they so wish, and the latter cannot do much about it. Yes it does happen but the integrators know that it is not in their interest to do so because they will soon run out of growers.

Truth is small farmers are not exactly helpless. If they are oppressed, they can always drop out and grow something else. Or switch to another integrator who will offer more reasonable terms.

In the case of the small tobacco growers in Ilocos, Philip Morris, in addition to the enlightened benevolence of its owners, has no choice but to keep their contract farmers happy because there is stiff competition for land and labor. The industrious Ilocano farmers can always switch to growing garlic, tomato, eggplant, mushroom, sweet corn and other summer vegetables.

I was a loyal Purefoods broiler contract grower for close to 30 years until my farm in Los Baños was overtaken by subdivisions. All those years Purefoods treated me well. A company veterinarian came to visit every other week to make sure the birds were well taken care of. And when typhoons came Purefoods assumed all the risks and waived all penalties. It was in the company’s interest to keep my farm profitable knowing I can always switch to the three other broiler integrators. Competition is key and will keep the integrators honest.

Exclusion of subsistence farmers

Contract growing cannot be a panacea for all the ills of Philippine agriculture. This is a real concern because not all farms are eligible contract growers for various reasons. Government must devise dedicated programs much like the 4Ps of the Department of Social Welfare and Development (DSWD) for the truly marginal farmers.

For sound business reasons there are preconditions in the selection of growers, such as: 1) ecological suitability of the farm for the crop, livestock or fish to be raised, 2) good access with an all-weather road to bring supplies in and transport produce, 3) availability of electricity; clean potable water for poultry and livestock, and ample supply of irrigation water for high-value crops and for fishponds, 4) safe distance from other poultry and livestock farms for biosecurity, 5) reasonable distance from human settlements for public health and environment reasons, and 6) minimum volume of production to justify supervision and logistics costs.

The last stipulation favors the larger farms and effectively discriminates against subsistence farmers. However, the problem of scale can be partially mediated if neighboring farmers organize themselves into production clusters to meet the minimum volume requirements. This is not easy but it can be done with help of the local governments.

Contract growing is not a walk in the park for the integrators

On the other hand, contract growing is not a walk in the park for the integrators. Organizing and supervising hundreds/thousands of farmers is very labor intensive and is not for the fainthearted. So many things can go wrong along the way. The integrators need a lot of patience and understanding to earn the farmers’ trust and compliance.

Nevertheless, it can be a useful complement/supplement to the alternatives of: 1) spot market buying and 2) plantation scale production.

The predominant modality of spot market buying is inefficient and not helpful to the small farmers nor to the integrators/processors themselves particularly in the face of growing regional competition.

Many farm produce are seasonal, leading to oversupply at certain times of the year and undersupply during the rest. Surplus produce are wasted and farm gate prices drop precipitously during periods of glut causing penury to farmers. Processors on the other hand run out of raw materials during the lean months and are forced to slow down rendering them less competitive with regional imports.

These boom and bust cycles of farm production can be moderated by controlled, supervised plantings under contract growing arrangements. The other option, plantation scale farming, is feasible even with agrarian reform through straight farm leases with land owners. However to be financially viable, the leased farms must be in contiguous blocks for ease of field operations and transport and close enough to the processing plants. The large banana and pineapple companies in Mindanao through the years have managed to secure such sizeable areas as their bases operations. Now they are running out of land.

Assembly of farm leases into large contiguous blocks area is tedious, time consuming and increasingly politically sensitive. Thus these large agricultural corporations themselves are increasingly resorting to contract growing to acquire more lands to reduce their capital expenditures and spare themselves of contentious land tenure and labor issues.

Pole vaulting, input diversion and other farmer issues

Farmers are signed on to grow farm produce in the volumes, quality and times of delivery specified in their contracts. Most growers are conscientious and deliver but a few misbehave.

The most frequently encountered problem is pole-vaulting i.e. farmers sell the produce to other buyers when market prices are higher than the contracted price. Actually this bad behavior is conditioned by the fixed year-round buying prices in the contract. Many integrators solved the problem by seasonally adjusting their buying price based on prevailing market prices.

I grow hybrid rice for SL Agritech of Henry Lim in their rice hybrid contract scheme in Laguna, Mindoro and Nueva Ecija. The SL Agritech farm gate palay buying price is not fixed for the year but is seasonally adjusted to 12.00-13.00 per kilo above the local prevailing market price. With this differential pricing policy there is no reason for pole-vaulting.

In addition to the higher buying price of outside buyers, the offending farmers cite the delay of payments to justify their behavior. Indeed for the cash-starved farmers, these delays are unconscionable. This is equivalent to poor farmers extending interest-free and collateral-free loans to the rich integrators. The solution is for the integrators to immediately pay the farmers in full (or at least partially) to meet the farmers’ immediate food and other family needs. With the advent of ATM cards, there is no excuse in further delays.

The other common concern of integrators is the illicit diversion by farmers of inputs supplied by the integrators for other purposes. For this there are no quick solutions except for initial rigid selection of growers and close supervision and monitoring by company technicians. Likewise, prompt termination without exception of offending growers.