High transaction costs in the agribusiness sector and restricted market access by smallholders have had adverse consequences on profitability and competitiveness in the sector in Nigeria. The linkage between agribusiness firms and farmers is one of the institutional mechanisms that can serve as remedy if properly articulated and operated effectively. This study therefore, seeks to (i) examine the nature of institutional linkages between small-scale farmers and firms in the Nigerian agribusiness sector, (ii) analyse the impact of the institutional linkages and (iii) determine the factors influencing the performance of the contractual relationships. Adopting a multiple case study approach the study covers five commodities: cotton, ginger, soybean, rice and tobacco. In each case, contract farming develops in response to the critical resource constraints faced by farmers, the need to raise product quality and address the technical difficulty associated with crop production, the business specialty and reputation of the contractors and the requirements of the export market.
It is found that contract farming in respect of the commodities is basically resource-providing and market specification in nature while operationally it is characterized by centralized and multi-partite models. The major benefits of contract farming to farmers are improvement in productivity and profitability, assured market at prevailing prices, better product quality and enhanced access to fixed assets. By and large, the observed institutional linkages are supportive of pro-poor growth. The farmers experience higher profitability than what is possible among non-contract farmers; and this is a major driver towards improved welfare. On the part of participating firms, the linkage has resulted in sustainable supply of raw materials of higher quality, better international market access and less complicated marketing chain. Nonetheless, there are a number of constraints on the performance of the contract farming system including high cost of transportation, anti-competitive practices of the middlemen especially in the case of ginger, product adulteration (in the case of cotton), inadequate supply of modern inputs and poor culture of loan repayment among farmers.
To improve the situation there is need to involve ethnic group leaders and traditional rulers in resolving lingering conflicts, introduce training and capacity building incentives into the contract farming schemes to enhance productivity, product quality and loan repayment. Moreover, the government should sensitize and enlighten farmers on the use of weights and measures in agribusiness to ensure standardization and avoid cheating and adulteration of products; and the entire system must be guided by appropriate legislative framework. Such legislation should encourage agribusiness firms to initiate new contracts in various parts of the country, provide support to smallholders to make them operate profitably through payment of fair prices and ensure that the firms do not abuse their market power.
Discussion Paper Series, Research Programme Consortium for Improving Institutions for Pro-Poor Growth, Manchester, UK, No. 37, 114 pp.
Formal-Informal Institutional Linkages in the Nigerian Agribusiness sector and implications for pro-poor growth