This topic looks at one of the strategies used by farmers and small firms in the agribusiness sector to leverage cost, access markets and become competitive in the market. Emphasis was made on the use of contract farming (vertical linkage) and cooperatives (horizontal linkage).

1. Agribusiness Marketing
Linkages in Agricultural
Marketing
Daisy Odunze

2. Linkages
 Whether small or large, farmers in developing
countries face tough challenges. Producers of
traditional commodity crops have experienced a
consistent decrease in prices as world demand has
fallen behind supply capabilities. Meanwhile,
prices for inputs continue to climb.
 For many commodities, most of the value added
is captured by agribusinesses in importing
developed countries.

3. Linkages
 From a development point of view, the goal is
often to push value added activities back
toward the farm gate, so that small, local
players can participate more effectively and
profitably.

4. Linkages
 Linkages have been widely acknowledged as a
means by which small farmers and processors
gain competitive advantage in the market. to be
competitive, there is need for
 Linkages through factor markets (labor,
capital, land)
 Linkages through product markets
 Non-market linkages

5. Linkages
 VERTICAL LINKAGES refer to market and non-
market relationships between firms operating at
different levels of the value chain.
 Small to medium scale agribusinesses may not be
connected to value chains that reach beyond their
local community. Understanding the entire chain and
facilitating the establishment of these linkages are
often among the initial steps needed to provide these
businesses access to more promising market
opportunities.

6. Linkages
 The relationships between buyers and their
suppliers are often indicative of the larger
economic order and closely related to the relative
size and resources of each player. Power is likely
to reside with those who control access to markets
and information about competing suppliers;
understand consumer demand; define grades and
standards; know how to employ specific
technologies or production processes, and possess
the ability to advocate for policy advantages.

7. Linkages
 Strong and dynamic vertical linkages are critical to
the long-term competitiveness of value chains, as
well as to the inclusion of small to medium scale
producers in those networks.
 These linkages are the primary mechanism through
which producers learn about changing market
requirements.
 And it is through vertical linkages, in the form of
contracts and other purchase agreements, that value
chain coordination or governance is established.

8. Linkages
 Vertical linkages ; Contract farming
 Contract farming is a contractual arrangement
between producers and buyers of a farm product.
 In essence, contract farming commits the farmer to
produce a certain commodity at a certain time for an
agreed price and, in return, the contractor undertakes
to buy the commodity, and may provide agricultural
extension and other services to producers in order to
satisfy production requirements in terms of quality
and quantity.

9. Linkages
 The contract can either be oral or written, and will
specify one or more conditions of production and
marketing of an agricultural product.
 Contract farming in Zimbabwe includes schemes
for crops, livestock, timber, and wildlife.

10. Linkages
 A marketing contract is an agreement between a
contractor and a grower that specifies some form
of a price or pricing system and outlet ex ante.
 Production contracts are more extensive forms of
coordination and typically include detailed
production practices, inputs supplied by the
contractor, specifications regarding the quantity
and quality of a commodity and a price or pricing
system.

11. Linkages
 Production contracts may also offer support such as
the provision of credit, technical assistance and/or
transportation. Contractors may be supermarkets,
processors, or hotel, restaurant and institutional
buyers.
 Such supply agreements spread the production and
marketing risk between buyers and producers, capture
economies of scale in bulk purchasing of inputs,
reduce transactions costs, and provide a mechanism
for buyers to source higher quality products.

12. Linkages
 Most buyers typically prefer to contract with
larger producers, since transactions costs are
lower, larger farms are more likely to be able to
make necessary investments, and small farms
usually require more assistance per unit of output.
 But small farms may have cost advantages in
labor-intensive production activities.
 Last, farms’ willingness to learn and attitude may
be more important than size.

13. Linkages
 In a “supplier’s market,” where there is a
substantial gap between the amount of supply
available and the amount demanded, buyers will
work with small suppliers.
 In other cases, buyers may have no choice if small
farms represent most of the supply base or control
most of the land. In addition, contract
enforcement may be more problematic with large
farms.

14. Benefit Description
Market Access Farmers can access markets that were formerly out of reach for them.
Increased Incomes Contract farming promotes production of commodities that are sold for a higher price and may
be grown without significant extra effort.
Reduction in the Risk
of Price Fluctuations
Binding product prices are normally specified in the contract before production, thereby
cushioning both the farmer and the contractor against price fluctuations.
Credit and Financial
Intermediation
Contracting offers opportunities for lending to farmers who would otherwise be ineligible for
credit.
Timely Provision of
Inputs
Contracting enables timely delivery of inputs and products to markets, even in areas that have
poor road networks.
Monitoring and
Labour Incentives
Contract farming is a more efficient way of managing the productivity of labour since efficiency
is directly related to return.
Reduction of
Production Risk
Contract farming allows farmers to significantly reduce their risk in the event of crop failure
because losses are shared by the contracting parties.
Introduction of
Higher-Value Crops
Through contract farming, farmers can start growing new crops that they would otherwise not
produce under conventional farming arrangements.
Improved Collective
Bargaining
Contract farming results in improved awareness of the need for collective efforts for farmers’
common good and promotion of group and farmer association development.
Household Spill-over
Benefits
Household spill-over benefits include improved food security, which results from adoption of
improved husbandry methods.
Improved Access to
Extension
Many contracting companies provide extension advice and other technical assistance that would,
otherwise, not be available to farmers under normal circumstances.
TABLE 10.1: BENEFITS OF CONTRACT FARMING TO THE CONTRACTED FARMERS

15. Benefit Description
Cost
Efficiency
Contract farming allows agro-business firms to improve cost
efficiency and minimise risk by avoiding land purchases and
hiring of labour.
Quality
Consistency
With firms extending production methods and monitoring
farmer practices, product quality consistency is improved.
Facilitation of
Trade
Standard
Requirements
Multinational firms are using contract farming to facilitate the
flow of traceable standard practices and to maintain control
over inputs and production processes.
BENEFITS OF CONTRACT FARMING TO CONTRACTING FIRMS

16. Challenge Description
Contract Enforcement There is currently no legal enforcement of contracts in Zimbabwe, making it easy for both
parties in the agreement to breach some clauses in the contract.
Increased Labour
Burden
Contracting may reduce the burden of labour management for the contractor, but in actual
fact, the burden is transferred to the producers.
Monopsony Control Some buyers pay low prices to desperate farmers as they hold monopoly on the marketing of
a given commodity.
Bias Toward Large
Farms
One criticism that has been levelled against contractors is their bias toward large-scale
producers at the expense of smallholders.
Demand for Top-Level
Managerial Skills
Contract farming requires high-level managerial skills on the part of the contracting firms to
be able to supervise producers.
Increased Risk Contracting firms are required to bear increased risk in contract farming.
CHALLENGES FACING CONTRACT FARMING IN ZIMBABWE

17. Linkages
 Contract farming is not always beneficial to small
producers. Small producers may be excluded; small
producers may become trapped in unfavorable
agreements and be unable to break the contracts; local
markets may narrow as contracted production for
goods demanded internationally squeezes out local
production of staple goods; contract terms may
deteriorate as contracts mature, and contract farming
does not generally provide many opportunities for
small producers to participate in value-added
activities beyond the farmgate.

18. Linkages
 Contract farming depends on either legal or
informal agreements between the contracting
parties. These, in turn, have to be backed up by
appropriate laws and an efficient legal system.
 Government needs to be aware of the implications
of all laws and policy decisions on agribusiness
development, including contract farming. While it
may not be considered a precondition, it is
desirable that governments play an arbitration or
dispute resolution role.

19. Linkages
 HORIZONTAL LINKAGES refer to market and
non-market relationships between firms at the same
level of the chain.
 Development projects can contribute to the formation
and strengthening of horizontal groupings as a way to
increase the market power of small producers. Often
these organizations (such as cooperatives or other
member-based associations) provide a platform for
smallholders to move into value-added processing
activities.

20. Linkages
 When small farmers are grouped together, they
can overcome many of the disadvantages of being
small: lack of economies of scale, poor
negotiating position with buyers and suppliers,
inability to differentiate products, lack of access
to market information and services needed to
upgrade, and limited political clout.

21. Linkages
 Competitive position or market power is
enhanced when producer groups organize
themselves to perform other functions in the value
chain, such as purchase of inputs; post-harvest
packaging and processing; transport, or sales and
marketing. When competently managed, such
initiatives can increase benefits to smallholders by
allowing them access to profits from multiple
levels of the chain.

22. Linkages
 Cooperatives
 A cooperative is a corporation formed to provide
goods and services to members either at cost or as
near to cost as possible. Cooperatives are not
formed to make profits, but to serve the people
who own shares in the organization.
 In the agriculture industry, there are three kinds of
cooperatives: supply (purchasing) cooperatives,
marketing cooperatives, and service cooperatives.

23. Linkages
 The motivation to form co-operatives has three
particular aspects:
 the need for protection against exploitation by
economic forces too strong for the individual to
withstand alone
 the impulse for self-improvement by making the best
use of often scarce resources
 the concern to secure the best possible return from
whatever form of economic activity within which the
individual engages whether as a producer, intermediary
or consumer.

24. Linkages
 Supply (purchasing) cooperatives: these
associations buy supplies, such as feed, seed,
fertilizer, and fuel, in quantity for resale to their
members .
 The big advantage is that by buying in large
quantities, cooperative members are usually able
to save money over what they would have paid
individually. In some cases, a supply cooperative
manufactures its own supplies instead of buying
from another company.

25. Linkages
 Marketing cooperatives: for the most part,
marketing cooperatives assist production
agriculturalists in marketing their agricultural
products by finding buyers who will pay the
highest price.
 Some marketing cooperatives process agricultural
products, such as milk and vegetables, and sell
them directly to consumers and retailers.
Examples of marketing cooperatives are fruit
growers’ cooperatives.

26. Linkages
 Service cooperatives: service cooperatives
provide their members with a specific service,
rather than a product, that members probably
could not afford to obtain individually. Service
cooperatives are not as numerous as marketing
and supply cooperatives, but they provide
valuable services to many farmers. Specific
examples of service-type cooperatives include
farm credit services, banks, rural credit union,
mutual irrigation cooperatives, and artificial
breeding cooperatives.

27. Linkages
 Structure and organization of co-operatives
 Primary co-operatives: A primary co-operative
is one in which the shareholder are individuals;
each of them having an equal share in its control.
 Secondary co-operative: A secondary (or
federal) co-operative is one in which other co-
operatives are the members. Apart from this basic
difference the structure and organization of both
types follow a very similar pattern.

28. Linkages
 Selling arrangements of co-operatives
 Outright purchase: In this case members are paid
for their produce, at prices fixed by the co-operative,
at the time of delivery, and the co-operative takes title
to the produce. The co-operative then resells the
produce at the most advantageous terms it can secure.
Profits made on the transaction will be used first to
meet the operating expenses, any surplus balance
being used or distributed by decision of the General
Meeting.

29. Linkages
 This approach requires the co-operative to have
high levels of funds available.
 The main objection to outright purchase is that the
co-operative carries all of the post harvest risks
including: fall-off in demand, price fluctuation,
reduction of produce value due to down-grading,
deterioration giving rise to loss of quality and so
value, failure of transport arrangements, spoilage,
fire and theft. Some of these can be covered by
insurance but most cannot.

30. Linkages
 Sale on commission: This far simpler, virtually
risk-free, operation leaves the co-operative as the
producers' agent with no legal title to the goods.
All attendant risks therefore remain with the
individual producers. The co-operative collects
produce from members and sells in the most
advantageous markets. It then deducts a
commission at a previously agreed rate from the
sale price. The co-operative meets the cost of its
expenses from its commission income.

31. Linkages
 The main disadvantage of sale-on-commission is
that neither the member nor the co-operative is
able to exploit possible price improvement.
Another is the possible delays in the producer
receiving cash for his crop. No payment will be
made by a co-operative until it has been paid by
the customer.

32. Linkages
 The weakness of co-operatives
 Unfortunately, the potential of co-operatives, and
the extent of their development, has, in many
cases, fallen far short of expectations.
 Realism of objectives
 Conflict between economic and social purposes
 Misuse of co-operatives to pursue political objectives
 Managerial problems

33.  The End