Contract farming risks: A quantitative assessment

Abstract

The objective of this study is to identify the key risks facing each of the stakeholders in the export-focused paprika value chain in Zambia. Although a deterministic cost-benefit analysis indicated that this outgrower scheme would have a very satisfactory net present value (NPV), a Monte Carlo analysis using an integrated financial-economic-stakeholder model identifies a number of risk variables that could make this system unsustainable. The major risks include the variability of the real exchange rate in Zambia; the international price of paprika; and the farm yield rates. This analysis points out that irrigation systems are very important for both stabilising and increasing yields. The analysis also shows the limitations of loan financing for such outgrower arrangements when at the sector level it is difficult or even impossible to mitigate the risks from real exchange rate movements and changes in international commodity prices. This micro-level analysis shows how critical real exchange rate management policies are in achieving sustainability of such exportoriented value chains.

Expanding Perspectives on the Poverty Trap for Smallholder Farmers in Tanzania: The Role of Rural Input Supply Chains

“…In some cases, neither fair trade nor contract farming offer a positive contribution to sustainable development or to the improvement of smallholder livelihoods. Indeed, contract farming may contribute to continued poverty or even poverty trap-generation [53,54], where there is a risk of self-exploitation in the case of contract farming [55].…”