The Agribusiness Sector and its Support Institutions
Kenya has had a successful agricultural sector development since the early 50’s. However it was not until mid 1960’s, immediately after independence, that heavy interventions were injected in the agricultural sector. Policies covered every sphere of agriculture such as production, marketing, research, credit extension and price controls. Policies advocated the promotion of cooperatives and farmer based companies as well as promoting agro-industries for processing of agricultural products. In the 1970s an import substitution policy was instrumental in the development of agribusiness firms, especially those that could play an important role of import substitution. In the late 1970s and early 1980s, the government introduced an export diversification and expansion program to broaden the country’s export base and enhance the drive towards industrialization. The Industrial and Commercial Development Corporation (ICDC) and the Development Finance Company of Kenya (DFCK) were major sources of loan capital and equity finance. By the 1990’s the agro-processing sector employed about 10 percent of Kenya’s workforce and contributed about 31 percent to GDP.
Farm-agribusiness linkages in dairy, cereals, traditional cash crops and horticulture have in the past been influenced by government policies towards agriculture. These policies include the general as well as the more sub-sector specific policies that have in the past been targeted towards the development of sub-sectors of special interest to the government, often through commodity specific marketing agencies.
In the dairy sub-sector, the policy effectively prohibited development of private sector based processing companies. This policy was implemented through the Kenya Dairy Board (KDB), whose major function still remains as that of regulating the industry by controlling private sector entry into dairy processing and marketing. Through these policies, the Kenya Cooperative Creameries (KCC) emerged as the main dairy processing and marketing body in Kenya and dairy cooperative societies as focal points for small-holder milk collection were established. A few of these cooperative societies later developed into dairy processing organizations. This policy changed in 1993 when private sector involvement in dairy processing was allowed, while the licensing role in the hands of the KDB was retained. The implementation of this policy also coincided with the collapse of the KCC, thereby providing a viable opportunity for private sector entry and development. By 2000, the number of registered private processing plants in Kenya was about 40, with a total employment of about 4 500.
The development of the small holder tea saw the deliberate support through the Kenya Tea Development Authority (KTDA). The authority was a parastatal apex body under which were a number of tea factories that were jointly owned by tea farmers and the KTDA. The liberalization policies between 1995-8 have resulted in the establishment of a Kenya Tea Development Agency (KTDAg), which is more farmer-inclined; and the total ownership of the 46 tea factory companies by tea farmers.
Rice is the second major cereal after maize, and has largely developed as an irrigation crop though little amounts are produced under rain-fed conditions. As a way of promoting rice growing under irrigation, a National Irrigation Board (NIB) was established as a parastatal, to develop irrigation schemes, and process paddy into rice; and market the commodity on behalf of farmers. The sub-sector as a whole was heavily protected by the policy of quantitative import controls to restrict imports. By 2000 the Mwea irrigation scheme had a total membership of 3 381 farmers producing about 31 900 tonnes of rice from about 6 052 acres. This is about 40 percent of the total domestic requirements and about 80 percent of domestic rice production in the country. Liberalization in the sub-sector in 1993 has witnessed several changes in both marketing and milling of rice with implications on production of rice in the Mwea irrigation scheme.
Horticultural development in Kenya has been characterized by less presence of government, despite the existence of the Horticultural Crops Development Authority (HCDA), and a department within the Ministry of Agriculture (MoA) in charge of horticulture. The HCDA is mainly a regulatory one, but also provides market information and extension services to the sub-sector. Private sector based institutions such as the Fresh Produce Exporters’ Association of Kenya (FPEAK), the Export Promotion Council (EPC) have played a great role in ensuring that the sector grows. However, a cloud of uncertainty surrounds the sub-sector due to a decision by the government to regulate it, and also establish a central auction centre in Nairobi.
A major lobby group in the entire agricultural sector has been the Kenya National Farmers Union (KNFU), whose original mandate was the promotion of large-scale farmers’ interests in the country. In the last two decades the role of the union in spearheading farmers’ welfare has reduced greatly, due to lack of focus. Its role in a liberalized market environment has become murkier in the last ten years.
Case Studies
This chapter describes four existing farmer- agribusiness relationships that have shaped the development of the selected sub-sectors in agriculture in Kenya. The nature of the farm-agribusiness linkages range from a heavy presence of the government arm to an extreme lack of government interference. These relationships are discussed below.
Horticultural Exports- Homegrown Company Ltd.
The horticultural sub-sector in Kenya is perhaps the most rapidly expanding sub-sector in agriculture with export horticulture particularly excelling. The sub-sector was until 1966 a slow growing one, producing for the domestic market, except for only two companies that were involved in horticultural exports. The potential for the development of the sub-sector saw the establishment of the HCDA in 1967 to spearhead this nascent sub-sector. In 1968 fresh horticultural exports were only about 1 476 tonnes, but by 1999, the sub-sector exported 103 260 tonnes, reflecting an average annual growth rate of more than 15 percent. The total number of small-holder farmers engaged in export horticulture, and hence linked to agribusiness exporters are approximately 20 000.
Unlike other sub-sectors in agriculture, the horticultural sub-sector has developed in an environment of less government interference. The sub-sector is characterized by relatively easy entry conditions for agribusiness enterprises, easy access to production land, a good linkage mechanism for technological transfer and a forward marketing linkage that ties most of the sectors outputs to the European marketing system. Major stakeholders in this sub-sector are the Horticultural Department of the Ministry of Agriculture and Rural Development. This department is responsible for the overall policy direction as well as general oversight of the industry in terms of export quality control, horticultural extension, controls of export and imports of live plants. The Horticultural Crops Development Authority (HCDA) plays the more active role development of the sector including extension on behalf of government, provision of information and technology dissemination. The Kenya Agricultural Research Institute (KARI) undertakes horticultural research and technology development. Other stakeholders in the horticultural sector include the Fresh Produce Exporters’ Association of Kenya (FPEAK), Kenya Export Development Support (KEDS) Program, and the Kenya External Trade Authority (KETA).
Homegrown Company Ltd is success story of production and export of packaged horticulture produce from Kenya. The company ventured into Kenya in 1982 and focused on the processing and export of vegetables to the UK market. The business strategy has been the production and packaging of produce at source so that it can be exported ready for the market outlet without further packaging abroad. In order to ensure the desired quality, and supply of fresh produce, it was important for Homegrown to enter into partnership with local farmers to complement its own production. Through this partnership the company is able to source about 25 percent of total requirements and in some cases such as French Beans, 100 percent of the total requirement from contracted farmers.
Linking arrangements
All farmers supplying to the Homegrown Company Ltd must have a supply contract. The contract is explicit in terms of the commodity to be supplied, the period of supply, the desired quality and quantity to be supplied. This implies that farmers on contract are able to work out their production schedules and put in place the necessary inputs to meet the contract quantities and quality. By implication also farmers agree to follow the recommended crop husbandry so as to maintain the required quality.
This contractual arrangement was initiated by the company as a strategy towards achieving optimal resource use in the export of fresh produce from Kenya. Through this strategy the company has its own nucleus of farm production units to meet a certain level of its requirements, and a network of farmers contracted to provide the balance.
Contracts entered with farmers for the supply of various types of fresh farm produce explicitly indicate the price as well as other quality dimensions that are important for delivery of the desired produce. These prices are however market driven and fluctuate from season to season
Benefits and constraints
By entering into a supply contract, farmers enjoy the benefits of an assured market for their farm produce; while at the same time benefiting from the fact that their farming activity risk is minimized by the certainty with which their production decisions are made. Farmers enjoy an assured price for the various grades of farm produce that they deliver to the contracting company.
Due to the relative involvement of the contractor in the production process farmers are supplied with the latest farming technology, such as the latest crop varieties and crop husbandry techniques. This has particularly been notable in the production of garden peas. The provision of technical extension by the contractor has played a key role in ensuring that farmers are able to optimize their production in terms of quality and quantity.
Homegrown Company Ltd also supplies fertilizers, and agro-chemicals on credit to those farmers who need material credit, so that they can be able to produce the expected quantities and qualities without exerting themselves. This is also in recognition of the fact that the credit market in Kenya is highly biased against agricultural production.
Farmers are in the long run able to appreciate the fact that farming on contract basis is a business. This orientation towards treating farming as a business is probably the greatest innovation that could change the structure of agricultural production in the future.
The company is in a business that requires strict adherence to delivery schedules, quality, minimum chemical tolerance limits, non-fluctuations in supply. Contracting puts the company in a situation where it is able to have a fairly good assurance of the above critical production variables and is therefore able to conduct forward planning of her activities with a high degree of certainty. The major market outlet for the company’s product is in the European Union. This is a very sensitive market for agricultural products; hence an exporter must have total control of the agricultural production system so as to meet the stringent quality and minimum chemical residue requirements set for the market.
Since farmers are on contract to supply farm produce, any matters of conflict or misunderstanding are usually handled administratively. However should a farmer feel extremely disadvantaged using this process for redress then they have the option of using the district agricultural committee to lodge any complaints. In the very extreme of circumstances farmers are also free to result to legal redress, however this option is hardly utilized. Usually farmers will prefer to minimize chances of misunderstandings during the beginning of the season when new contracts are being signed.
Farmers feel disadvantaged in the business, as they are not quite sure about the relationship between the local price and the price of the export product. Some farmers feel that the market price offered by the company was low compared to the prices for the final product, hence the need for a better framework of price determination.
The major constraint faced by the Homegrown Company is ensuring that farmers follow recommended technical instructions so as to produce the required quality and quantity of the commodity. This is particularly important and critical as well in those commodities for which the company is wholly supplied by contracted farmers.
By contracting for supply of raw materials, the company benefits from not having to commit resources to actual production, but being able to ensure compliance to the necessary production requirements through an effective extension system.
Mwea Rice Irrigation Scheme
The traditional food crop production sub-sector has for a long time been dominated by parastatal enterprises with wide range of controls over the production and marketing of the commodities. Part of this existential reality could be explained by the desire by policy makers to ensure that food security concerns are taken care of, especially the desire to ensure that the urban population was well supplied with food at politically acceptable prices. The Mwea Irrigation Scheme (MIS) is the largest rice irrigation scheme in Kenya, producing about 80 percent of all rice produced in the country. This scheme was established in 1955 and was replicated from other British irrigation systems elsewhere. To date the irrigation scheme has 3 400 tenant farmers.
Linking arrangements
Irrigated rice production in Kenya has at the apex an agency, the National Irrigation Board (NIB), which is a parastatal organization responsible for coordination of irrigation schemes for rice and other crops in the country. This coordination includes undertaking feasibility studies in conjunction with the relevant departments in the relevant government ministries to establish the economic and social viability of any irrigation scheme in the country, and marketing of rice from the schemes.
The Mwea Irrigation Scheme was established in 1955 as part of the government policy on food self-sufficiency, while at the same time providing the rural population with an economic means of survival. The government, in collaboration with the British government established the MIS along typical irrigation models started by the British government in India. Later on the Japanese Government though JICA, became the main supporter of the scheme, providing irrigation infrastructure development, including construction and maintenance of the irrigation canals, tractors for land preparation, and canal maintenance. JICA also provided the initial rice technology as well as extension personnel. The management of the irrigation scheme was put under the NIB, established in 1966 as a parastatal under the ministry of Agriculture, to coordinate the development of irrigation schemes in the country.
For purposes of rice milling, the Mwea Rice Mill was established as a joint venture between the National Irrigation Board (55 percent) and the Mwea Farmers Multipurpose Cooperative Society Ltd. (45 percent). The latter is a cooperative established by farmers to deal with non-rice farming matters, particularly the granting of development loans to members. Rice farmers, as registered tenants on public land are expected to abide by the rules set by the NIB for rice production. Such rules include that fact that no other crop or animal production activity is allowed on the irrigation plots.
As a public organization mandated to develop and manage irrigation schemes, the NIB is the financing and development arm of government through which donor assistance is provided to the farming communities indirectly. In the case of the Mwea Irrigation Scheme, the NIB has a contractual agreement with farmers for the provision of a number of services and material credit for the smooth production of rice. This relationship is however on of tenant- landlord type since farmers have no rights to the land they farm. The production contract is renewed every year so as to incorporate changing economic conditions.
All contractual agreements are determined by the NIB. Farmers do not contribute to the determination of prices, though cases where this has on few occasions, benefited farmers have been reported, particularly on fertilizers where the NIB price was lower than the local market price. In the case of rice paddy the pricing was determined by the government as an in-factory price. At the consumer level the price of rice was also regulated and administered to eliminate chances of black marketing.
At the beginning of every crop season, farmers sign contracts with the NIB indicating the kind and level of services to be provided to them on credit. These services include, fertilizers, seed rice, tractor services for ploughing of their plots of land. At the beginning of the planting season water is provided, also on credit as well as the required extension services. However, the NIB does not extend direct financial credit to farmers. Instead a cooperative society, the Mwea Farmers Multipurpose Cooperative Society (MFMCS), established and managed by the farmers themselves has played a crucial role of availing credit to member farmers for other uses.
Constraints
The nature of the relationship between farmers as tenants on one hand and the NIB on the other hand has been described as one of receiver and recipient, where the former have minimal role to play in the relationship. Mwea rice farmers under this arrangement have little say regarding the pricing structure adopted by the NIB for water use, material inputs, and the final farm gate prices for paddy rice.
Due to the long delay between delivery of crop and final payment of net proceeds, farmers have always retained a higher than the allowed amount of paddy for sale to the parallel markets so as to meet their immediate needs. The latter has evolved into an elaborate marketing network involving a chain of middlemen with trading linkages to major outlet stores in major towns.
The major constraint rice farmers face gravitates around the inability to play a more decisive role on issues pertaining to rice production and marketing. Farmers content that they should play a bigger role at the decision making level within the NIB, so that they can influence policies pertaining to pricing and marketing. Since farmers own 45 percent of the rice milling enterprise, through their cooperative society; this does not translate to a significant role within the NIB itself.
Despite the existence of a written contract between farmers and the NIB, the latter does not have the full legal mandate to institute any action on a farmer in the case of breach of contract. Any conflicts can only be resolved by arbitration by the ministry in charge of agriculture. Also, the pricing of services cannot be adjusted at short notice to reflect changing economic and international conditions, impairing the Board’s ability to adjust to changing environment so as to compete effectively in the market place.
In 1993, price and marketing controls were removed and farmers are now faced with alternative market channels for rice. By 2001 it was estimated that there were 200 rice mills operating within the immediate environs of the MIS. Contractual obligations by farmers to the NIB were likely to be compromised, as farmers diverted rice paddy to private mills. Faced with this non-delivery NIB stood to lose all credit advanced to farmers unless there was a way of enforcing the contractual obligation.
Brookside Dairies -Milk Processor
The Brookside Dairies Ltd was established in 1993, just around the beginning of the post-liberalization era, with an initial processing capacity of 5000 liters of milk per day. The main plant is located close to Nairobi, surrounded by a number of dairy farms. By 2001 the firm has been able to increase its processing capacity to 200,000 liters per day to become the leading milk processing firm in Kenya, commanding about 40 percent of urban market for processed milk. The milk is supplied by over 15,000 farmers scattered in several areas of central and the rift valley.
Linking arrangements
Relationship with Farmers: Milk farmers are organized and registered as suppliers through a formal supply contract, which among other things indicates how much milk a farmer delivers to the company each day. This is important to the processing company as a planning tool as well as a major factor in determining capacity utilization this also helps plan the most optimal utilization of transport fleet. Farmers are normally grouped into collection centres, which play a dual purpose of raw milk collection as well as a service facility where farmers collect their materials from. At the delivery centre raw milk is entered into a farmers account after it has been tested for quality. The firm then collects the raw milk from these centres for transportation to the processing plant.
Since the dairy industry has been liberalized, the forces of supply and demand in the market place essentially determine raw milk prices. However the real determinants of the price are in this case the milk processing companies. Their price determination behavior is normally dictated by the supply conditions as well as the degree of competition for raw milk in the market place since the demand for processed milk is only slightly price elastic. Prices offered to farmers are reviewed at various times and are communicated to the producers.
The following services are offered to farmers on credit and recovered through milk deliveries:
The major constraint faced by the company is one of ensuring the farmers will comply to the contractual agreement especially delivery of milk during the dry season, and what should be done to farmers in cases of failure to comply. The company has opted for dialogue as its option for resolving problems. However this uncertainty can be critical to operations, when demand for raw mild outstrips supply.
Smallholder Tea - The Kapkatet tea processing factory
Kapkatet Tea Factory is one of the 46 factory companies operating under the Kenya Tea Development Agency (KTDA) umbrella and is one of the relatively new factories, established in 1992, as part of KTDAs strategy of coping with increased production of green leaf. The factory is wholly owned by small-holder tea farmers. However, the management of all factories is undertaken by the KTDA and aims at harmonizing factory operations, while allowing farmers to spend their energies on tea farming. The factory started with an initial farmer population of 3 000 planting tea on about 1 100 acres. By 2001 the number of farmers had grown to 5 266 and area under tea had increased to 4 000 acres.
Linking arrangements
Relationship between factory and farmers: A tea farmer is expected to have one share in the processing factory as well as in KTDA. This allows the farmer to deliver tea, participate in elections and to benefit from any services the factory may offer.
Tea is an internationally traded commodity whose prices are determined by world market conditions, but the channel of money flow from auction time to final payments to farmers takes about three months. The mode of payments to farmers therefore includes a monthly average per unit price fixed for the entire year; a half-yearly bonus and a final bonus at the end of the year. The average price ensures that farmers have a monthly payment to meet their regular needs, while the bonus payments are expected to reflect the world price trends net of processing, marketing and other overhead costs.
Benefits and constraints
By participating in a vertical ownership of both, the factory company that processes green tea, and the KTDA, farmers benefit mainly from profit sharing in tea processing while being able to concentrate on farming activities. Other benefits include the availability of fertilizer on credit. The fertilizer is sourced internationally by the KTDA and sold on credit to the tea farmers through the factory company, on the understanding that it will be used in tea production only. Tea deliveries to the factory also act as security for loans. Farmers are entitled to 2 kg of made tea every month at a reduced price for domestic consumption. Extension services are offered as well as quality control of harvested tea leaves. Tea transportation from the collection centres to the factory for processing is normally offered.
The factory on the other hand has an assured supply of the raw material from member farmers and is able to plan its processing schedules at minimal risk of farmers diverting their produce to other factories. Cases of farmers diverting green tea to other processors occur but are not significant, because the alternative prices offered by these markets are way below what the factory offers.
The dual role as farmers and owners of the factory-company means that farmers are duty bound to support the factory to ensure success. The factory has an elaborate system of farmer representation at all levels. At the tea collection centres, matters pertaining to tea picking and extension are discussed and resolved. At the factory level, farmers constitute the factory management board where all issues pertaining to tea and farmers are discussed. Any conflicts between farmers and factory management, which cannot be resolved at the factory level, are usually referred to the KTDA.
Tea farmers operate in a business environment where they are not in the know as regards tea prices. They therefore are not in a position to ascertain whether or not the apex body in charge of marketing of tea is unfairly treating them. Farmers feel constrained by the method of a fixed average monthly payment for their tea, and would prefer a situation where payments are more frequent, and also bear direct relationship with auction prices.
The ability of farmers to maintain high quality standards is a major constraint that the factory faces. The factory still faces the challenge of educating farmers on the long procedures associated with international commodity marketing, hence the need for average payments. Fertilizer pilferage still occurs amongst farmers, thereby affecting tea quality and output. The factory remains powerless in the face of these malpractices.
Factors Contributing to Success
Linkages in farm- agribusiness are a common feature of agricultural production, marketing and processing. This linkage could be vertically linked as in the case of tea and irrigated rice or a loose pure supply contract as in the case of export vegetables or dairy processing. The farm-agribusiness is a chain linkage relationship between producers on one hand and processors on the other hand for mutual business success. Experiences from a number of such linkages in Kenya however indicate different degrees of success among these participants. Some of the critical factors responsible for farm-agribusiness success are described below.
The Role of the Initiator
In any successful agribusiness, the role played by the initiator of the linkage is important. In the above case studies, all the linkages were initiated by either the agribusiness company itself or the government agency responsible for development of a given commodity. The initiator was usually the organization with the greatest single stake in the economic activity. Where profits to the single initiating entity was essential, then the initiator played a greater role in developing a farm-agribusiness relationship that would be profitable while at the same time providing farmers with the necessary incentives to produce. Where the initiator is a private agribusiness enterprise the development of the linkage is usually faster and more farmer-inclined in terms of service delivery to them in order to tie them to given production, delivery and quality schedules.
The Role of the Government
A successful agribusiness should operate within a favourable and conducive environment where policies are clearly indicated, and the respective roles of the major actors are well delineated. In the above four cases linkages in the horticultural sector have a longer life span of progressive growth, owing to the fact that the role of government in this sub-sector has been more regulatory and indirect, using lobby organizations. Where government involvement was heavy through direct participation as the sponsor of the agribusiness linkage, such as in irrigated rice production, growth has tended to be slow and less dynamic. This is probably due to the very nature of government inclination towards efficiency in production and distribution, as well as the amalgamation of different objectives in a given enterprise. These objectives could be social equity, food self-sufficiency and the generation of income for a given constituency of the population. In the face of liberalization and the changing world economic order, farm-agribusiness linkages with heavy government control are unlikely to fare well. This means that governments have to be sensitive to changing economic climates and reduce their presence to policy and regulatory work.
The Role of Farmers and Farmers’ Organizations
Farmer organizations in the four agribusiness cases above have taken the shape of cooperatives, except in tea where farmers are both owners of the agribusiness companies and have a parallel cooperative to serve other functions not handled by the company. This development is a common feature in the Kenyan business enterprises where workers will establish a SACCO to handle their need for credit, which is normally not catered for in the traditional credit market. These farmers’ cooperative societies have however played an instrumental role in articulating the need to take farmers interests and development aspirations into account. For example the farmer cooperative in the Mwea irrigation scheme has been at the forefront in ensuring, that farmers’ activities and operational climate change to incorporate global, regional and national policy changes. The same scenario applies to farmers in the tea sub-sector where farmers have systematically argued for total ownership of the tea factories, in tandem with national policies for the management of farmer-based agribusiness enterprises.
The Nature of the Product
The nature of the product is an important variable in the determination of the farm-agribusiness linkage. Where the product is highly perishable, and therefore requires careful handling, then the farmer and agro-processing firm must work very closely to synchronize production, transportation and processing so as to minimize losses at the different stages, including the production stage. This means that both all actors in the system will collaborate, and evolve mutually beneficial arrangements for the overall success of the business. This is clear from the involvement of the agribusiness firm in production matters such as the provision of material credit, extension services, and the establishment of produce collection centres. Where a product is not highly perishable sensitivity towards important aspects of the product supply and marketing may not given the necessary importance. This is the case in rice production and marketing, where farmers can afford to keep the harvested paddy rice in their stores for some time, should they feel that the contractor is unfairly treating them. The other three commodities are quite sensitive to delays either at the farm, or during transportation, hence the linkage in these commodities must be always aware of the precarious nature of the product.
The Nature of the Market
The nature of the market influences the farmer- agribusiness linkages to the extent to which the market exerts its influence on product quality. For example the market for fresh vegetables in the European countries is quite sensitive to various quality dimensions. This means that any successful farmer-agribusiness linkage must be equally conscious of quality as well as other requirements dictated by the market. Production for this market type must therefore be a collaborative effort between the two parties. On the other hand where the market is not very sensitive to quality issues such as in rice, farmers are less inclined towards production based on quality, since crop variety, as well as the milling process determines the latter.
The spatial location of the market imposes unique considerations between the farmer, as the source of raw material and the agribusiness firm, as the main processor. These considerations include the ability of farmers to keep to tight production and delivery schedules, quality, and quantities. This implies evolving a farmer relationship mechanism where they see themselves as a constituent part of the agribusiness production chain, playing a critical role. This is the case in the production of tea and fresh vegetables for the export market.
The Competition
Where competition in the market is stiff, the nature of the farmer-agribusiness linkage will usually evolve to internalize possible market threats from competitors. Competition is usually at both the supply of the raw material and in the sale of the final product. When farmers have a large latitude with regard to who they could sell their raw product to, then the linkage has to be strong and mutually beneficial; and must involve farmers in developing the linkage terms, as specified in the supply contracts, so as to avoid non-compliance. Similarly, where the final product market is very competitive, the agribusiness enterprise has to evolve modalities and strategies for growth and maintenance of its market share. Such a strategy must take due care of the raw material supply source. This is the case with the sale of processed milk, whose competition also implies competition for raw milk from farmers.
The Role of Lobby Groups
Agricultural sector lobby groups are to be found in some of the sub-sectors where agribusiness presence is central to the success of the sector, and where common interests among the agribusiness firms is such that they need an independent organization to act on their behalf on matters of policy. From the four case studies, sub-sectors where lobby groups exist have shown faster growth and overall stability.
Conclusions and Recommendations
Farmer- agribusiness linkages have an important role to play both in the development of small-holder commercial agriculture and in the development of domestic capacity for increased value added for agricultural produce through processing. The linkage of production with processing helps stabilize commodity markets, by minimizing risks associated with prices and market outlets, since farmers are able to have a priori information about producer prices, while agribusiness firms are also able to determine their production schedules based on sure supplies at definite prices. This implies that they can be able to enter into forward delivery contracts with greater certainty.
Farmer-agribusiness linkages have also evolved as alternative sources of agricultural credit to small-holder agricultural producers. The fact that the existing credit markets are biased towards agriculture in general and small-holders in particular, due to their stringent requirements and high interests, offers more reason for the promotion of these linkage mechanisms as alternative ways of assessing credit. The availability of material credit by the agribusiness firm is one of the most attractive incentives farmers consider before entering into any form of linkage.
Farmers operate in a dynamic environment where new technologies are continuously being developed and therefore have to be made available to them at least cost. Farmer-agribusiness linkages have an in-built extension component as part of the relationship. This is an important feature serving both parties positively as it ensures that farmers are producing quality and types required by the market. In the case of internationally traded commodities, this ensures that farmers’ production systems comply with international specifications. In situations where the technologies for production are patented, this ensures that there is no illegal transfer of material to non- contracted members.
Vertical integration is an important strategy for agricultural development and expansion of industrial processing capacity. This however works best where the initiator of the linkage is willing to evolve this type of relationship. In situations where the government was the initiator, playing the role of processor, vertical integration involving farmers’ part or total ownership in the processing and marketing of final product. The vertical integration must be well crafted to ensure that farmers’ limitations in business management do not influence the operations of the firm. This arrangement requires independence within an interdependent system of production.
Within most farmer- agribusiness linkages, a farmer cooperative society, will usually be found. While their original justification has its roots in the social aspects of farmers as individuals, their role is often important in helping farmers. However their ability to develop further is often limited by the policy and rules governing their operations. There is potential to play increasing, but changes will be required concerning their operational modalities as well as their decision making systems. Farmer based associations and lobby groups interested in furthering farm-agribusiness linkages should be strengthened and encouraged to develop a framework of collaboration and coordination of their activities so that they are focused and inclusive. These groups have in some sub-sectors such as horticulture, been instrumental in ensuring that better policy environment is maintained. They also need to be encouraged to be focused and to avoid involvement in non-farm-agribusiness linkage matters.
