Participation of smallholder farmers in Zambia's dairy value chain through interlocked contractual arrangements and its impact on household income

Abstract

This thesis examines factors influencing smallholder dairy farmers’ participation in interlocked contractual arrangements, the nature and level of participation, the role of interlocked contractual arrangements in promoting smallholder farmers’ participation in markets and the impact of participation on household income. The study seeks to contribute to the ongoing debate about the prospects of these arrangements in enhancing smallholder farmers’ access to restructured and liberalised agrifood markets and whether they truly benefit from participating. The study was carried out in 2014 in the milk shed areas of three districts of Zambia where interlocked contractual arrangements were present. Key informant interviews and focus group discussions were used to collect data from representatives from two financial institutions, four milk collection centres and three milk-processing firms. Semi-structured questionnaires were used to collect data from 266 households engaged in dairy farming. A multi-stage sampling design was used to select these households. Data analysis employed descriptive statistics and econometric regression models. Detailed analysis was carried out by employing measures of dispersion and central tendency, as well as data normality tests. The double-hurdle model was used to identify determinants of smallholder farmers’ participation in interlocked contractual arrangements, while propensity score matching was used to assess the impact of participation on household income. Determinants of smallholder farmers’ decision to sell milk through interlocked contractual arrangements include ownership of improved breed animals, milk price, access to dairy marketing information, income from other sources and landholding size. While most of these factors also affected the proportion of milk sold, the following were important as well: household head education level, cattle-rearing culture, relative supplier’s dependency on buyer and existence of trust in the exchange relationship. Factors adversely affecting farmers’ participation include high stock feed cost, poor breeding programmes, low milk prices, a long time lag for contract review, low participation of women and youths and inadequate involvement in decision-making and transparency in grading. Results further show that ownership of a milk-processing plant and membership to a dairy cooperative enhance smallholder farmers’ involvement in value chain activities but not in key business decision-making. Interlocked contractual arrangements have enhanced smallholder farmers’ participation in the mainstream dairy value chain and access to resources and services, through reduction of information asymmetry and related costs and risks. They have achieved this through the concurrent use of contracts, transaction-specific investments, trust and relational norms. Support from development agencies and public and private sectors is also critical in addressing the multiple market and institutional failures that prevent smallholder farmers from participating in markets. Although results show that smallholder farmers are not excluded from participating in interlocked contractual arrangements, the intensity of their participation is low. Meanwhile, processors are willing to collaborate more with smallholder farmers because of their low side-selling risk. Whereas interlocked contractual arrangements offer prospects to enhance access to financial services and stock feed, much more needs to be done to increase the number of participating farmers. Results also reveal that participation in interlocked contractual arrangements enhances milk revenue but not household income. While interlocked contractual arrangements enhance smallholder farmers’ access to markets, they are not a panacea for addressing the high rural poverty rates. Thus, reorientation from overemphasis on contract farming to a mix of other strategies, such as livelihood diversification.