What’s More Efficient for Farmers: Contract Farming or Cooperatives?
Imagine you’re a smallholder farmer. Your two-hectare or less plot is your source of livelihood and your family’s inheritance. You face a critical choice: tie your farm income to a corporation through a strict contract or join hands with your neighbors in a cooperative. Which path is not only more efficient but also builds a more sustainable future?
This article analyzes the trade-offs and benefits of agricultural cooperatives (Agcos) and contract farming models, with their real contributions to achieving specific SDGs. In addition, we explore how the cooperative movement in Ghana has influenced sustainable rural development in Cocoa growing communities.
Dynamics of Cooperation Among Smallholder Farmers
Smallholder farming is characterized by small land holdings, reliance on family for labor and diversified seasonal food production. Most smallholder farmers cultivate less than 2 hectares and are highly resource constrained, with limited access to market and credit opportunities[1]. Regardless of the legal forms of businesses under which smallholder farmers can operate, addressing these unique challenges remains essential to attain economic efficiency. In this regard, smallholder farmers within communities with strong social cohesion attain economies of scale by pooling resources together, aligning production goals, collaborating in decision making and accessing available opportunities in groups[2]. This inherent characteristic of social cohesion naturally leads to the consideration of cooperative models of transactions.
According to the International Cooperative Alliance (ICA), a cooperative is “an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled enterprise.”
Cooperatives operate on the principle of people working together to achieve common goals. Ownership is typically defined by each member having an equal stake in the business. Regardless of the amount of capital each member contributes, ownership is equal among all participating members.
Control is another factor which affects the dynamics of decision making in every enterprise. In a cooperative, members participate in decision-making processes on a one-member, one-vote basis, ensuring that all voices are considered in a democratic manner.
Members of a cooperative actively participate in the economic activities of the enterprise. It is very common for members to contribute towards the capital of the cooperative and enjoy direct benefits such as profit sharing and incentives from the services and resources of the cooperative[3]. Through this, members remain directly involved in the success and sustainability of the cooperative.
The cooperative business model has been instrumental in the development of the agricultural industry in many countries. Through this model, farmers pool resources, enhance market penetration, manage risk and attain economies of scale, which drives growth and improves the livelihood of individual farmers.
The Efficiency of Agcos in Contrast to Contract Farming Models
Agricultural cooperatives are classified into several types based on their functions which include supply, marketing and service orientation. Marketing cooperatives focus on accessing large markets by pooling farmers’ harvests for large volumes and negotiating better prices[4]. Other types of Agcos focus on providing services such as transportation, input purchasing, storage and financial services on favorable terms.
Despite all these mutual benefits, inefficiencies in Agcos can make other forms of businesses such as investor-owned businesses and non-profit organizations more attractive. The democratic and inclusive nature of cooperatives makes it difficult to exclude members who do not fully participate in the economic and social activities of Agcos. Certain behaviors such as slow decision making, side selling farm produce, inactive participation in decision making and indirect benefits without ascribing to cooperative membership become prevalent [5]. An alternative strategy deployed by Investor-owned companies to curb the identified challenges to attain economics of scale and to maintain the efficiency of smallholder agriculture is contract farming.
Contract farming is an agreement between farmers and firms for the production and supply of agricultural products. The agreement establishes a relationship between both parties with predefined responsibilities and incentives such as quality and quantity of production, access to subsidized inputs and guaranteed pricing.
Other distinct investor-owned business forms that indulge in contract farming include large agribusiness and multinational corporations often controlled through the equity of its shareholders. These corporations typically provide farmers with inputs such as seeds, fertilizers, and technical assistance in exchange for a guaranteed purchase of a predefined quality and quantity of produce.
Like Agcos, the contract farming approach provides benefits such as smallholders’ reduced risk of fluctuating market prices, improved production efficiency and resources for production [6]. However, in certain situations, the Agcos approach is more efficient in attaining sustainable development. This includes a high likelihood that smallholder farmers are exploited under contract farming as contracts mostly favor the interest of firms[7]. Another disadvantage is the overdependence on buying firms that might not necessarily offer better purchasing terms. The democratic nature of Agcos gives members the opportunity to address disputes over quality standards or pricing, which is absent under most farming contracts.
To this end, contract farming provides no additional social benefits as there are little to no spillover effects on smallholder agricultural communities. This is evident in the findings of Meemken and Bellemare [8] which proved that beyond improved incomes of farmers and employment stimulation, there is little to no spillover effect of contract farming on communal welfare.
The relative efficiency between Agcos and contract farming models for smallholder efficiency depends heavily on the specific contexts explained above. In certain situations, contract farming might offer better market access and technical support because of strong monitoring and control systems, while in others, Agcos might be more effective at empowering smallholder farmers and promoting sustainable societal development.
Advancing SDGs Through the Participation of Women in Agcos
Beyond adequate calorie intake, proper nutrition and zero hunger, the Sustainable Development Goals seek to enhance the socio-economic resilience of smallholder farmers. Within this complex framework of the 17 SDGs, Agcos play a pivotal role in addressing the challenges of poverty, inequality and socio-economic development.
Besides direct investment, Agcos primarily intervene in empowering women in agriculture which is a core component of gender equality (SDG 5) and reduced inequalities (SDG 10). Through Agcos, women have equal access to membership and control over resources like land and credit, resulting in increased productivity and food security [9][10]. This intervention alone extends to reduce hunger (SDG 2) and promotes good health and nutrition (SDG 3), as literature proves the positive impact of empowered women on household nutrition.
Strategic investment in infrastructure and services maximizes the impact of cooperatives in socio-economic development. Storage facilities, processing equipment, market information systems, and direct market linkages create sustainable off farm incomes for farming households who are members of cooperatives. The outcome of investment in cooperatives has positive outcomes across multiple SDGs and increases economic participation across all industries.
The Kuapa Kokoo Story
Kuapa Kokoo is an example of a successful cooperative in Ghana. Established in 1993 to market cocoa, Kuapa Kokoo currently co-owns Divine Chocolate Company in the UK which sells chocolate products on the international market and attained fair trade certification in 1995. With a growing membership of 87,907 as at 2013, of which 32% are women, members are predominantly smallholder farmers highly reliant on cocoa income.
The cooperative provides a stable market for cocoa, offering members premium prices under Fairtrade agreements. Though Kuapa Kokoo faces competition from larger licensed cocoa buying companies, which threatens their market share and profitability, members enjoy better income stability and investment in farm productivity [11][12].
The co-operative has improved the livelihoods of its members and community through projects such as the construction of day-care centres, purchase of mobile cinema vans fors farmers’ education programs and mobile health services among many others. Kuapa Koko has also enjoyed significant external support such as grants and technical assistance.
Conclusion
So, which model is truly efficient? The answer depends on how we define “efficiency.”
Although agricultural cooperatives can pool resources, achieve economies of scale, and empower smallholder farmers, the quality of control and decision-making that contract farming offers can yield much desired efficiency under varying conditions.
In contrast, contract farming provides structured market access and resources but lacks the social spillover that Agcos offers. The evidence suggests that Agcos can be more efficient in fostering inclusive, sustainable development in rural communities.