Contracting arrangements in agribusiness procurement practices in South Africa

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Contracting arrangements in agribusiness
procurement practices in South Africa

• JF Kirsten, H Vermeulen K Sartorius

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Presentation structure

• Introduction
• Paper objectives
• Methodology
• Procurement arrangements of SA agribusiness firms
  and the incidence of contract farming (CF)
• Fruit Vegetables Snack food industry Meat
  Poultry Eggs Tobacco Sugar cane Cotton
• Conclusion
• Agricultural contracting in SA
• The potential of including black farmers in
  agribusiness supply chains

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Introduction (1)

• ? Commercialisation of agricultural food
  systems globally
• Industry ? dominated by supermarkets and
  agro-industries
• Implications for farmers?
• ? influence
• Implication for small farmers?
• Market access (volumes, quality/safety standards)
• Impact on the future of small farms in the
  developing world?
• ?Need to find ways to effectively engage
  agribusiness firms (as partners?) in promoting
  market access to small farmers.
• BUT, need to understand
• How do SA agribusiness and processing firms
  source their raw material from farmers?
• Changes in their procurement practices?

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Introduction (2) The South African agro-food
complex

• Input suppliers, production processing
• ?15 contribution to GDP
• High level of industry concentration
• A few large companies dominate SA food processing
• Major grocery stores (6 of total retail stores
  numbers) account for about 70 of SA grocery
  turnover
• Major food sectors in the SA agricultural economy
• Poultry, red meat, fruit, vegetables, eggs and
  sugar cane

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Paper objectives

• To contribute to a better understanding of the
  structures and issues of raw commodity
  procurement in South African agribusiness supply
  chains
• To investigate the
• Extent to which agribusiness are by-passing the
  spot market and utilising contractual
  arrangements to secure raw commodity supplies.
• Nature of contractual arrangements.
• Potential of the South African agribusiness
  sector to help commercialize emerging black
  farmers

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Research methodology

• Case study approach
• Semi-structured survey questionnaire
• Personal interviews
• Quantitative and qualitative data
• Survey components
• Annual volume of commodities procured
• Total Through contracted farmers, emerging
  contracted farmers, own estates, NFPMs, spot
  buying on farms.
• Number of commercial- and small scale contracted
  farmers engaged with.
• Contract type specifications.
• Survey coverage
• Fruit, vegetables, nuts, chillis, herbs/spices,
  beer brewing, sugar cane, grains, eggs, red meat,
  poultry, tobacco, cotton, retailers
• 89 Companies contacted
• 69 Response rate

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Fruit Vegetables (1)

• Procured for processing fresh produce retail
  sales
• Major national marketing channels for fruit and
  vegetables
• Decreasing role of NFPMs 1990/91 to 2003/04 -
  10 volume ?
• Survey coverage

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Fruit Vegetables (2)

• Raw commodity sourcing mechanisms overview
• Spot market purchasing
• Seasonal production or marketing contracts
• Formal long-term supply contracts
• Seasonal handshake contracting
• Own estates
• On-farm purchasing
• Agents
• Other processors
• Imports

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Fruit Vegetables (3) RETAIL

• No contracts issued to farmers
• Issue growing programmes
• Detailed descriptions product (quality),
  packaging, volumes
• Varying details, specifications and degree of
  enforceability between the various retailers
• Selected long-term agreements to ensure
  continuity
• Specific volumes and prices communicated on
  weekly basis

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Fruit Vegetables (2) PROCESSING

• Balance procured through a combination of open
  market, own estates, agents and imports

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Snack food industry

• Procurement options
• Potatoes
• Contractual arrangements - ?80
• (e.g. typically 1 year production contracts)
• Balance open market
• Peanuts
• Agent producing and serving as intermediary by
  contracting farmers for balance of volumes due to
  peanut processors
• Maize
• Co-operatives
• Agent (intermediary) contracting with farmers

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Meat, poultry eggs

• Vertical integration
• Own production
• Medium- and long-term contracts
• Long-term informal supply arrangements with
  selected groups of farmers

Tobacco, sugar cane cotton

• Company estates
• Contracted farmers
• Farmers co-operatives

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Conclusion

• Wide range of institutions employed to procure
  raw commodities
• Spot markets (NFPMs), contracts, own estates,
  agents, imports, on-farm purchasing
• Trends
• ? movement away from open markets (90/91 to 03/04
  NFPM volumes 10 ?)
• Most interesting observations i.t.o. fresh
  produce protein products
• Spot market sales were the norm a few years ago
• Fresh produce retail
• 70 to 100 of volumes ? growing programmes
• Fresh produce for processing
• 78.5 of volume ? CF (4 723 farmers)
• 3.7 of volume ? Black CF (383 farmers)
• Protein products
• Combination of vertical integration, own
  production MT/LT contracts
• Implications for the inclusion of small farmers?