Investing in smallholder farming: Six outgrower schemes that are getting it right

Published on

May 10, 2017

In Africa, where agricultural production remains far below potential, companies are working with smallholder farmers to raise crop yields, open up new market opportunities, and strengthen rural economies. In a new case study, AgDevCo’s Smallholder Development Unit features six examples of outgrower schemes that are delivering results.

By Cecilia Blaustein, Victoria Crisp, and Sandi Roberts 

[Download the full case study here]

Smallholder farmers are important players in the agricultural system, especially in sub-Saharan Africa where they provide up to 80 percent of the food supply. However, smallholder production tends to be unprofitable and reach low yields due to small plot sizes, a lack of access to finance, and weak links to markets.

Over the years, agricultural companies in the traditional cash crop sectors, such as cotton and tobacco, have developed smallholder outgrower schemes to source raw materials. These outgrower schemes allow companies to provide agricultural inputs to farmers, sometimes with training, and then buy the production at the end of the season under some form of contractual arrangement.

More recently, outgrower schemes have been developed – often with donor support – in a wider range of value chains including food crops, livestock, and natural products. Buyers are usually local companies rather than multinationals. However, these schemes have not always been sustainable for a variety of reasons – such as the failure to establish trust between buyers and farmers, or flaws in the business model.

What does it take to succeed?

A new case study by AgDevCo’s Smallholder Development Unit, “Smallholder Outgrower Schemes: Principles of Success”, showcases six schemes that are getting it right. From Mozambique to Zimbabwe, they represent a cross-section of value chains, from high-value horticulture (bananas) to commodity crops (maize and sugarcane), small livestock (broilers), and seed (flowers). They demonstrate how well-designed outgrower schemes can deliver lasting benefits for local companies and smallholder farming communities.

The case study describes the six schemes and asks:

  • “What does it take for both companies and smallholder farmers to reap the benefits of an outgrower scheme?”; and
  • “What are the challenges of these partnerships?”

We identified nine principles of success. While a “cookie-cutter” approach is not recommended, understanding these principles can help inform the design of new outgrower schemes and maximize their chances of being sustainable.

  1. A market-driven approach: Providing smallholder farmers with access to consistent and reliable markets drives economic activity in rural areas. Many outgrower schemes are launched as corporate social responsibility (CSR) initiatives, donor-driven projects, or commercial efforts to enter rural markets. However, those meeting a strong market demand have the best chance of success.
  2. Input support: Providing appropriate agricultural inputs to smallholder farmers on credit overcomes an important barrier of high initial cost outlay. Even when farmers understand the value of adding fertilizer or using high-yielding hybrid seeds, the upfront costs are often too high for farmers to invest in these good agricultural practices. Input support varies from one scheme to another depending on the value chain and smallholder commitment.
  3. Commercial and financial viability:  Both the commercial partner and smallholder farmer need to make a profit. For smallholder farmers, particularly those struggling to meet basic expenses, a better price or immediate payment in cash can be a temptation to go outside their contract to sell some (or all) of their harvest to an individual trader or other buying company. Some companies offer price incentives to secure their supply, minimize side selling, and build customer loyalty.
  4. Long-term sustainability and scaling up: Outgrower schemes need to be environmentally sustainable and economically viable. Conservation agriculture (reduced or zero tillage, mulching, crop rotation, and responsible use of chemicals) makes a big difference, and scaling up these schemes to profitability may mean pursuing value-added products and marketing opportunities outside the country.
  5. Creating an enabling environment: Building networks of diverse and influential local stakeholders provides valuable logistical support, with traditional community leaders often providing an avenue for arbitration and helpful historical information on households in the area. Opening markets to smallholder farmers also helps to stimulate rural economies, providing business opportunities for local agro dealers, input and irrigation suppliers, and microfinance institutions.
  6. Farmer selection: Selecting suitable farmers to participate is critical to the success of an outgrower scheme. The choice is often left to local leaders and government extension services, with local NGOs and input suppliers also participating, but extreme care needs to be taken to avoid nepotism and political pressure in the selection process.
  7. Farmer training: Effective farmer training is at the core of a sustainable outgrower scheme, not only farming practices and business skills, but also social, health, and family issues. This training begins with the supervisors, extension officers, and farmers’ club chairs who oversee the schemes, and it is important to visit growers on their farms or plots to provide hands-on, one-on-one training and problem solving.
  8. Management tools: Close monitoring of production practices and innovative new technologies, such as biometric data and GIS, can help management make better decisions more quickly. Across all six outgrower schemes, technology was often difficult to embrace. However, when used well, it could help farmers establish a credit history through mobile payments, receive real-time alerts on weather events or pest outbreaks, and gain insight into commodity price updates which can affect a farmer’s ability to pay back input loans.
  9. Risk mitigation: All of the outgrower schemes received a notable amount of initial grant funding from donors. Judicious use of these funds during the early stages minimizes risk, as it takes time to find a model that is economically viable and benefits the company and farmers alike. Schemes are more successful when costs are shared and the company has a greater stake in the deal. Building in time for this transition period creates a stronger foundation and improves the viability of a fully sustainable outgrower scheme.

For more information read the full case study here.  

AgDevCo, in collaboration with the MasterCard Foundation, has launched the Smallholder Development Unit (SDU), a five-year program currently implemented in seven African countries: Zambia, Mozambique, Malawi, Tanzania, Uganda, Ghana, and Senegal. The SDU works with rural agricultural enterprises to develop equitable outgrower schemes that will boost productivity and incomes for 490,000 smallholder farmers.

With financial backing from UKAid, AgDevCo invests debt and equity into early and growth stage agricultural enterprises in Africa to create jobs, improve food security and boost rural prosperity.

About the Author(s)

Learning Lab Partner

AgDevCo is a specialist agriculture impact investor that has established a Smallholder Development Unit (SDU) with support from the MasterCard Foundation (MCF). The SDU will work with rural agricultural enterprises to develop equitable outgrower schemes in eight African countries. Activities will include providing training and better quality inputs for farmers, implement mobile technology solutions, and brokering long term purchase contracts. The SDU aims to develop 25 “outgrower schemes” over 5 years that will improve the livelihoods of up to half a million farmers.

Press release: AgDevCo and The MasterCard Foundation partnership

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