2.1 Definition of out-grower schemes
2.2 Types of arrangements
2.3 Benefits of out-grower schemes
2.4 Issues influencing out-grower schemes
2.5 Success from out-grower schemes
Numerous strategies have developed for trading wood between growers and the processing industry. For example, some companies obtain their supplies through trading intermediaries (ie. market agents) and do not have a direct relationship with growers, while other companies lease land under contract from landholders for growing trees, or contract farmers to grow trees (Mayers 1999). Growers have also developed market strategies, such as establishing co-operatives or employing their own market agents, to improve commercial returns from forestry.
We define an out-grower scheme as a contractual partnership between growers or landholders and a company for the production of commercial forest products. Out-grower schemes or partnerships vary considerably in the extent to which inputs, costs, risks and benefits are shared between growers/landholders and companies. Partnerships may be short or long-term (eg. 40 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 communal land. Out-grower schemes are usually prescribed in formal contracts.
Within this definition out-grower schemes may include joint ventures and contract tree farming. Differences between these arrangements are largely in responsibility for silviculture, resource ownership and control, and the financial remuneration to growers. In conventional out-grower schemes the landholder is contractually responsible for the silviculture and the supply of the product, usually roundwood, to the company at harvest. Under the contract, the company may provide inputs or technical support to the grower, and guarantees a market for the product.
In Australia and New Zealand, out-grower partnerships are usually referred to as joint ventures, with there being three broad types of arrangements - ‘lease’ joint ventures, ‘crop-share’ joint ventures, and ‘market’ joint ventures (Curtis and Race 1998). In New Zealand, joint ventures that share the financial returns following harvest are more common than the ‘lease’ joint ventures common in Australia. ‘Lease’ joint ventures account for about 70% of current plantation expansion of 50-60,000 hectares per year in Australia (Race 2000). Not all industry investors are ‘end-product’ processing companies - some industry investors ‘on-sell’ or simply trade in raw or unprocessed forest products such as woodchips (Curtis and Race 1998).
Generally, forestry out-grower arrangements between growers (or co-operatives) and processors may be characterised as:
Industrial forest companies are often the initiators of out-grower schemes, with schemes allowing the company to access additional, more secure, or perhaps cheaper raw materials (Arnold 1997; Curtis and Race 1998; Mayers 1999; Desmond and Race 2000). However, some companies with out-grower schemes have expressed concern about uncertainty of supply from out-grower schemes, sometimes as a result of government policies or a declining interest by growers (Desmond and Race 2000).
Companies often consider the indirect savings and financial risks incurred through land purchase and the employing large labour teams, as an important benefit (Arnold 1997; Desmond and Race 2000). However, the scattered nature of the resource can increase harvesting costs and this is occasionally an issue for companies (Desmond and Race 2000). Companies can also receive socio-cultural or socio-political benefits by schemes fostering a supportive community for industrial forestry (Desmond and Race 2000).
Growers or landholders receive a range of potential benefits through out-grower partnerships. In Brazil, India and the Philippines some farmers have been able to:
In the schemes surveyed by Desmond and Race (2000) (refer to Table 1), the primary benefit to growers was identified as additional income and, to a lesser extent, diversification and employment. Such schemes have also enabled growers to generate an income from under-utilised land (Mayers 1999; Desmond and Race 2000).
The varying nature of some out-grower partnerships and the benefits they offer is illustrated in the case studies summarised in Table 1. While some companies offer growers a guaranteed market for their products - either at fixed, indexed or market prices - other companies promote partnerships with the additional benefit of a percentage share of the forest produce (eg. timber) at harvest. Other arrangements offer employment, or contribute to community development (eg. funds for school or health facilities) or agricultural improvements (eg. fodder for livestock).
On a world scale, out-grower partnerships can be a mechanism for addressing several important issues for sustainable timber production (Race 1999), which include:
The general assumption that benefits always flow from out-grower schemes should be avoided. Mayers (1999) indicated that growers perceive potential benefits from out-grower schemes when:
Resource security for growers may also exist with long-term leasehold or community ownership as well as with private ownership (Arnold 1997). Sometimes, as has occurred in the Philippines, out-grower schemes may assist some people to establish land ownership or leases, provided they were not the very poor (Higman et al. 1999; Arnold 1997; Kato 1996).
Out-grower partnerships require consideration of how farmers can make use of the gains in wood production, against the loss in agricultural production. The schemes run by Sappi and Mondi pulp and paper companies in South Africa were found to be useful to farmers with other sources of income or where labour did not need to be diverted from existing activities (Arnold 1997). Typically, farmers need a regular alternate source of income to avoid cash flow difficulties between tree harvests so as to avoid dependence on loans. Out-grower arrangements that cause farmers to displace food crops with forestry can jeopardise food security and force households to generate higher incomes to purchase food - all which can expose households to greater socio-economic risk.
Clearly, out-grower partnerships will not suit all forest growers and companies.
Table 1: Summary of selected out-grower schemes in twelve countries surveyed in 1999
|
Company and Out-grower scheme |
Year scheme started |
Primary product/s |
Total area planned (ha) |
Importance of product to company |
Area planted (ha) |
Number of growers |
Typical area planted by growers (ha) |
|
Aracruz Celulose - Brazil: Timber Partner program |
1990 |
pulpwood, sawlogs |
60,000 |
13% supply yr-1 to 17% in future |
20,000 |
1,989 |
10 |
|
Border Timbers - Zimbabwe: Outgrower Scheme |
1996 |
poles |
2,000 |
60% supply yr-1 |
450 |
65 |
3-4 |
|
ITC Bhadrachalam Paperboards Ltd - India: clonal eucalypt
plantation scheme |
1989 |
pulpwood poles |
1,500-2,000 ha yr-1 |
will meet total pulpwood needs |
3,210 |
1,375 |
1.5 |
|
Kolombangara Forest Product - Solomon Islands: Kolombangara
forestry out-grower scheme |
1989 |
sawlogs |
30 ha yr-1 |
not significant yet |
200 |
100 |
1-2 |
|
Melcoffee Sawmill - Vanuatu: MSL Extension Forestry
Scheme |
1996 |
sawlogs |
400-500 |
- |
100 |
50 |
1-2 |
|
Mondi Ltd - South Africa: Khulanathi Scheme |
1994 |
pulpwood |
8,000 |
strategic value |
5,900 |
2,854 |
2 |
|
PS Zimboard - Zimbabwe: Fallscroft Estate Scheme |
1997 |
pulpwood |
60 |
2,100 m3 yr-1 |
40 |
1 |
|
|
PS Zimboard - Zimbabwe: Himalaya Cooperative Scheme |
1999 |
pulpwood |
500 |
- |
nil |
Cooperative (22 people) |
|
|
PS Zimboard - Zimbabwe: Kaerezi Estate Scheme |
1997 |
pulpwood |
1,000 |
60% eucalypt pulpwood |
600 |
1 |
|
|
PS Zimboard - Zimbabwe: Manicaland Development Association
Scheme |
1998 |
pulpwood |
300 |
10,500 m3 year-1 |
100 |
1 |
|
|
PS Zimboard - Zimbabwe: Nyafarm Development Cooperative
Scheme |
1999 |
pulpwood |
300 |
17,000 m3 year-1 |
nil |
Cooperative (20 people) |
|
|
Smurfit Cartón de Columbia - Columbia: Third Part
Reforestation Programs |
1986 |
pulpwood |
undefined |
Maintaining area needed |
3,860 |
56 |
69 |
|
SOPORCEL - Portugal: EMPORSIL Scheme |
1990 |
pulpwood |
30,000 |
10% annual supply |
10,000 |
- |
20-40 |
|
South Africa Wattle Industry - South Africa: Phezu Komkhono
Scheme |
1995 |
wattle bark |
2,000 |
5% of supply |
436 |
430 |
1 |
|
Stora Enso, Inhutani III - West Kalimantan: PT Finnantara
Intiga Scheme |
1994 |
pulpwood |
30,000 |
All fibre for mill |
22,000 |
100 villages |
200 |
|
Swiss Lumber Company - Ghana: Out-grower Scheme |
1991 |
sawlogs |
25 ha year-1 |
Public relations |
150 |
25 |
4-10 |
|
Tasman Forest Industries - New Zealand: Leasehold Maori Land
Scheme |
1993 |
pulpwood |
20,000 |
1/3 of plantation estate |
11,000 |
27 groups |
200 |
Source: Desmond and Race (2000).
2.4.1 Competing land uses
2.4.2 Production methods
2.4.3 Access to financial loans
2.4.4 Competitive markets
2.4.5 Negotiating arrangements
2.4.6 Scope of partnership
2.4.7 Other issues
A concern of forestry out-grower schemes in non-industrialised countries is that tree growing can displace crop and livestock production, thereby reducing the staple food production. In the KwaZulu region of South Africa, land shortage was the main reason many farmers decided not to join the out-grower schemes. Following this response, the companies agreed to focus their schemes on land of low agricultural potential. Although some farmers ultimately planted trees on arable land, displacement of food production in this situation was negligible (Arnold 1997). Some farmers involved in the PICOP out-grower scheme in the Philippines were found to move in and out of tree growing particularly where they had planted trees on land suitable for cropping. After harvesting the trees they obtain a substantial payment to return the land to crop production (Arnold 1997).
In areas with widespread industrial forestry, some concern has arisen over excessive water use by trees, particularly where water is a critical constraint on farming. The Phezu Komkhomo scheme with wattles in South Africa faces this issue (Desmond and Race 2000). However, the issue of forestry reducing the water availability for agriculture at the farm or catchment level can be positive or negative, depending upon natural resource management objectives.
In most out-grower partnerships the company partner recommends, and sometimes controls, production methods to ensure optimal productivity of plantations. However, it has been reported that sometimes the recommendations have been too complex, labour intensive, and costly for growers. As a result, many farmers participating in the PICOP scheme opted to hire contractors to conduct the operations, or modified them (Arnold 1997). In such cases, farmers’ profits were reduced due to the higher production costs or when modified schedules were followed, farmers’ level of production was reduced (Kato 1996). For example, some farmers had minimised the level of maintenance, relied on natural regeneration rather than purchasing seedlings, and planted trees in woodlots at one time rather than staggered times of planting. However, such changes to recommended practices usually have productivity tradeoffs - either in lower yields or inferior quality. In turn, this will affect the financial returns to growers and could be expected to alter the profitability of out-grower schemes for growers and/or companies.
Providing growers with sound technical advice on forestry practices is advantageous to companies, as it is likely to produce the quality and yields required. The provision of appropriate extension and technical support to growers can be important for the success of out-grower schemes. Mayers (1999) noted some of the more successful schemes have established nurseries to provide growers with high quality seedlings.
In the KwaZulu out-grower schemes in South Africa, farmers’ involvement in production varied. Farmers had the option to allow the company to manage the operations or hire contractors to carry out the work - yet this sometimes resulted in poor production (Arnold 1997). Based on observations of other schemes, Arnold (1997) believed that farmers should be closely involved in production operations themselves and rely less heavily on the company and contractors to improve productivity and increase the profitability of schemes.
The availability of financial loans is often important for growers’ participation in out-grower schemes. They usually cover the costs of establishment and early maintenance of plantations, but may also bridge finances until the trees are sold. However, loans may not always be necessary and can be an additional risk in long-term forestry ventures. The availability of credit from partner companies may lead some farmers to employ labour unnecessarily, as was observed in the KwaZulu schemes, reducing the profits from tree growing (Arnold 1997). Consequently, it was suggested that the company offering out-grower schemes to farmers should not be a source of loans for participants.
Arnold (1997) reported that while some farmers were willing to participate in the PICOP schemes, they were ineligible for, or unwilling to pursue loans due to the difficult administrative procedures. A lack of loans has been a problem in the Solomon Islands and very high interest rates a grower concern in Zimbabwe (Desmond and Race 2000). Also, defaulting on loans was reported as a concern for Border Timbers in Zimbabwe and the South African Wattle Growers’ Union (Desmond and Race 2000).
Where competitive markets for forest products occur, out-grower schemes are more likely to provide fair prices to both partners (Race 1999). In some out-grower schemes the processing company may guarantee a market, yet growers can sell to another buyer offering a better price - with competitive markets causing some uncertainty in demand/supply.
To avoid loss of supplies from out-grower schemes to other buyers, typically a company will choose to match the current market price and develop a positive relationship with growers. The development of positive relations may involve meeting farmers information needs, providing greater market share of the profits, or it may involve providing broader agricultural and community benefits. However, the determination of prices may lead to disputes and a loss of supply security (Desmond and Race 2000). In response to a decline in supply security from out-grower schemes, some companies have reduced their dependence on out-growers by developing alternative strategies for obtaining wood requirements (Arnold 1997; Curtis and Race 1998). Furthermore, some companies have completely withdrawn their out-grower schemes due to supply insecurity (Shingi 1997).
Fluctuating markets can also reduce the security for growers in schemes - particularly during times when companies may be unable to fulfil their contractual commitment to purchase. Examples have been reported where processing companies have reduced its purchases from out-growers when demand has decreased or supply requirements have changed (Arnold 1997; Curtis and Race 1998; Mayers 1999).
However, where competitive markets are lacking, companies tend to be uninterested in initiating out-grower schemes, as in the Australian experience (Curtis and Race 1998). Even where out-grower schemes occur, uncompetitive markets will make it difficult to calculate prices on which to base negotiations. Curtis and Race (1998) suggested that a fundamental task of forestry development, and farm forestry in particular, would be to encourage competitive markets at a local scale to develop. They identify some scope for developing long-term supply arrangements that allow costs and prices to be reviewed at regular intervals as a means of encouraging equitable out-grower arrangements. They also indicated that investment by government might be needed to improve access (eg. increase market information, transport infrastructure) to more competitive markets.
Variability in the market place is largely inherent in the commercial forestry sector. Both companies and growers are susceptible to periods of market instability over the contract period if insufficient financial flexibility has been incorporated into partnership arrangements. However, poor forecasting of changes in market demand on the part of companies and growers has also resulted in failure of partnerships, particularly in the pulp and paper industry (Mayers 1999).
Generally, the out-grower schemes offered by forest companies are limited. Some companies believe offering flexible arrangements, such as involving individual negotiations with numerous growers, can be too time consuming and expensive to manage (Curtis and Race 1998). However, companies were more willing to negotiate with those growers in close proximity to mills, or with a desirable wood supply. Where supplies from small-scale growers are less valuable for companies, growers typically have to accept or reject the schemes offered. In these circumstances, unequal partnerships can develop and limit opportunities for landholders to participate in tree growing (Arnold 1997; Mayers 1999). Even where forestry companies are willing to negotiate with growers, the companies’ greater knowledge of markets and the general inexperience of growers can often place growers in a poor negotiating position (Race 2000).
To enhance growers’ capacity to negotiate more balanced and equitable partnerships, growers could benefit from employing a third party or join a cooperative to negotiate on their behalf (Arnold 1997; Curtis and Race 1998; Mayers 1999). In regions where poor market structures occur, small-scale growers’ best opportunity to negotiate with companies might be prior to tree establishment. At this time, farmers have greater negotiating power and have the opportunity to redirect their household resources to other investments (Race and Curtis 1999). Growers who gain experience and proficiency in negotiating with forestry companies may have less need for the services of a third party and in such cases, out-grower arrangements are most likely to be balanced (Mayers 1999).
Typically, out-grower schemes offer technical support to growers to facilitate the production of the optimal volume and quality of wood (Arnold 1997; Shingi 1997; Curtis and Race 1998; Vuokko and Otsamo 1998). However, the most successful schemes offer growers broad arrangements which provide technical support and advice needed by growers to overcome a range of socio-economic and environmental issues (Curtis and Race 1998; Mayers 1999), or which assist communities in achieving wider socio-economic aims (Mayers 1999). For example, the scheme operated by ENSO and Inhutani in Indonesia provides a range of community benefits to participating villages, including improved infrastructure, genetically-improved rubber trees for private plantations, support for agricultural development, and employment opportunities (Vuokko and Otsamo 1998).
Although Mayers (1999) noted that out-grower schemes with community groups often present greater challenges for companies, such as helping communities in complex strategies to build their social capacity to resolve internal disputes when they arise. In one out-grower scheme with a village community in West Kalimantan, Indonesia, although the company needed to overcome initial uncertainty by local people about the forestry venture, the uptake of the scheme by villagers has led to broad support for the company’s interests (Vuokko and Otsamo 1998).
Some companies consider external issues have the potential to threaten the viability of schemes, or hinder planning and investment. These included concerns about the unpredictable direction of natural resource management policies, conflict with environmental organisations and unstable local economies for business.
Environmental or ecological risks are sometimes of concern. Damage to plantations caused by fires, insects, animals or disease was a concern of Smurfit Cartón de Columbia in Columbia and Border Timbers in Zimbabwe (Desmond and Race 2000). Growers in three schemes operating in Zimbabwe have needed to replant due to damage from fire, insects and vermin. These ecological risks were identified as the biggest problem for these schemes as the growers carried the production risk and rely on high-interest loans (Desmond and Race 2000). Growers participating in the Smurfit Cartón de Columbia scheme have expressed concerns that forestry may reduce the productive potential of their land and subsequently diminish their good relations with neighbouring landholders (Desmond and Race 2000).
2.5.1 Ingredients for success
Respondents to a questionnaire by Desmond and Race (2000) who surveyed 17 schemes (summarised in Table 1) reported that some out-grower schemes had been successful in:
For example, reports about the scheme operated by Mondi in South Africa emphasised the contribution to building self-reliance of participating communities (Desmond and Race 2000). Beyond the benefits for growers, the scheme provided employment for local people to transport the timber from the supply depots to the mill. Also, the Swiss Lumber Company reported it had had won several ‘best practice’ awards for its management of the out-grower scheme.
With Mondi in South Africa the combination of optimal growing conditions, close proximity of plantations to the mill, and good prices for wood, allowed growers to make a good return on their investment (Desmond and Race 2000). As such, many landholders perceived forestry to be a better investment than agriculture. Individual growers tended to receive greater benefits from the scheme as compared to community groups, due to their greater attention to their management practices to ensure high quality timber was produced. The South African Wattle Growers’ Union has also found that individual ownership has a positive correlation with successful out-grower schemes.
