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The Status of Contract Farming in Malawi
May 2005
Ian Kumwenda and Mathews Madola


Introduction

Following independence the Malawi government followed interventionist economic policies with government both regulating markets and actively intervening in markets through parastatals. The only legal body through which smallholder farmers sold and bought their farm produce and inputs was through the Agricultural Development and Marketing Cooperation (ADMARC). ADMARC guaranteed a market for the entire smallholder farm produce. Government was also the main provider of agricultural extension services and agricultural credit through the Ministry of Agriculture. Extension was mainly based on the transfer of technology approach, whereby information and training were disseminated through supply driven programme while agricultural credit was subsidized through the Smallholder Agricultural Credit Administration.

Since the early 1980s, Malawi has been pursuing market liberalisation policies. Market liberalisation entailed allowing the private sector to participate in input and out marketing of smallholder produce. However, the participation of the private sector in the input and produce trading through the market liberalization policy implemented has had mixed results. While prices received by farmers have been more competitive than before, the high cost of factor inputs after removal of subsidies has made several crops and livestock enterprises less attractive relative to tobacco. Restructuring of ADMARC, which was followed by closure of markets in remote areas created a vacuum, which private traders could not fill due to problems of liquidity, access and transportation to such places resulting in food security problems and a decline in household income (in real terms) (Nthara, 2004).

These economic reforms also have had a major impact on government extension, agricultural credit which in turn has negatively affected the performance of smallholder agricultural production. The reform process, which required government to undertake cutbacks in expenditure including funding to the Ministry of Agriculture greatly, affected the government provision of extension services. The commercialization of credit has resulted in high interest rates pushing out many smallholder farmers out of the credit market.

Market liberalization raises a number of issues from a poverty alleviation standpoint. It is clear that the changes that have been happened because of the economic reforms have not benefited the majority of the smallholder farmers. There is a risk that smallholder farmers will continue to be marginalized and be left out of lucrative domestic and international markets. Contract farming, which is the focus of this paper, can bring potential benefits to smallholder farmers by providing access to new markets, inputs and extension services. Although it should be considered only as one institutional option among others, contract farming is seen as offering potential in that respect.

Although the need to encourage private sector participation in smallholder agriculture has been recognized very little has been done to promote institutions like contract farming in Malawi. In this study, an attempt is made to understand policy, institutional and regulatory issues that need to be addressed in order to promote contract farming in Malawi. In addition, despite commitments expressed by the private business sector to develop such mechanisms, in reality they seem to be reluctant to do so, particularly regarding the small-scale farming sector: hence, there is a need to investigate what the constraints are and what appropriate policy responses could be.

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