At a restaurant in Kigali the other night, the long table next to mine was filled with 14 loud Americans. I heard snippets of their conversation: an anecdote about slaughtering animals, some business talk, stories from back home. I finally realized that they were there with Tyson Foods Inc., one of the largest industrial meat corporations. They were discussing, among other things, efforts “to ramp up their customer base.”
What is an American meat company doing in Rwanda? I didn’t ask them, but it’s easy to guess. Industrial meat production – “Big Meat” – in the US has benefited immensely from, among other things, a tightly concentrated market (Tyson helped pioneer vertical integration in the meat industry) and huge consumer demand. But only so much growth can occur in any given market, and so the past five years have seen a marked increase in Big Meat’s expansion into developing countries. In 2008, Don Tyson explained his company’s plans to expand the American model of industrial meat production to the Global South. So far, Tyson has moved aggressively into some of the biggest developing markets, including Brazil, India, and China. Why wouldn’t they be working to expand in Rwanda as well?
Exporting the American industrial meat model could cause severe problems for developing country farmers. (And let’s not even get into the fact that industrial meat production can be environmentally destructive and problematic for human health, as well as, of course, problematic for the animals.) Since Tyson is one of the largest poultry companies, let’s look at chicken farming as an example. The industry is based on contract farming: poultry companies sign contracts with farmers, under which the companies agree to pay a set price for chickens supplied by the company but raised by the farmers. At the risk of being controversial, contract farming can be highly unfair to farmers.
I say controversial because international institutions and development agencies have consistently touted contract farming as a “win-win” for consumers, firms, and farmers. I’m highly skeptical of things described as “win-win,” because they so often fall apart on closer examination. In my opinion, contract farming is no different. (Of course, I’m not the only person saying this; back in 2008, GRAIN was calling it a form of bonded labor.)
In theory, yes, contract farming could be a win-win solution. It provides farmers with access to reliable markets: for example, they know someone is going to buy the chickens they’re raising. There are other benefits as well. In the case of poultry farming, companies supply the chicks and give a guaranteed price, which theoretically means that the company will shoulder more of the market risk. As for the companies, they generally benefit from the reliable supply of animals (or crops) of a consistent quality. They get control without having to worry about labor problems or being constrained by fixed assets (like expensive chicken houses).
In practice, however, the negatives often outweigh the positives. At some level, this is just obvious if you carefully re-read the above paragraph. Contract farming is supposed to shift the market risk from farmers to companies. But it’s also supposed to shift constraints of fixed assets from companies to farmers – essentially meaning that companies can expand or contract production more easily by, you got it, adding or cutting contracts with farmers. In a boom time, this won’t be a problem, but in tight economic periods, something’s gotta give. Often, that something comes from the farmers’ side.
For farmers, one major issue is contract farming’s potential to trap farmers in cycles of debt. The reasons are many, but this often arises when contract farmers must borrow money to invest in agricultural production, but then are unable to earn enough money to cover their debts. A perfect example of this is what happened in the United States in 2009: a “chicken housing crisis” (so-called by the Wall Street Journal) led to devastation and bankruptcy. The cause? Pilgrim’s Pride Corp. had terminated contracts with at least 300 farms, describing the move as “a legal, necessary step to reduce costs amid volatile commodity markets and depressed chicken prices.” But many American poultry contract farmers owe hundreds of thousands of dollars in mortgages for their chicken houses, which can cost more than $200,000 each. When the contracts were terminated, they had no chickens and no prospects, left with essentially worthless chicken homes.
Of course, there are ways to improve contract-farming arrangements so that farmers are better protected. Most of these revolve around the negotiation and implementation of the contracts themselves. Best practices include the following:
- Contract farming should be approached as a commercial decision rather than a development strategy, because if it’s not economically viable, firms are going to renege when under financial stress.
- During the contract drafting stage, farmers or their representatives should be meaningfully involved. Afterwards, farmers must be provided with a copy of their contract. If farmers are illiterate, a supporting group (NGO, farmers’ association, etc.) should review the contract.
- Substantively, contracts should clearly detail the pricing mechanisms that will be used, quality specifications, provision of inputs, insurance, and dispute resolution mechanisms that can be used.
- Governments should provide an enabling environment that includes a strong legal system, key infrastructure, and enforcement of proper working conditions.
Best practices can go a long way toward protecting both farmers and companies in contract-farming arrangements, but they are not foolproof. I’m assuming, for example, that most of those best practices were followed in Pilgrim’s contracts with American farmers, yet these practices didn’t prevent the chicken housing crisis or the severe debt that it catalyzed. The stakes are even higher for small-scale farmers in developing countries. Farmers of Rwanda, take note.