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Enhancing Groundnut Quality Through Contract Farming

Introduction

Groundnuts are the most common cash crop in Senegal and form the main source of income for the majority of the country’s smallholder farmers. A 2017 World Bank report found that 27 percent of all Senegalese households grew groundnuts; this number rose to 52 percent of households in extreme poverty. Despite groundnuts’ prevalence in Senegal, however, many producers remain in poverty and struggle to access the more lucrative groundnut export markets that could help improve their incomes and wellbeing. A new IFPRI study, sponsored by the CGIAR Research Program on Policies, Institutions and Markets (PIM) and presented at a recent webinar from PIM and the Food Security Portal, examines how an innovative contract farming scheme that bundles several interventions together can help Senegalese producers gain access to regional and global markets.

 

One of the main constraints to Senegalese groundnuts in global export markets are these markets’ strict quality standards. Groundnuts are susceptible to contamination by aflatoxin, a potentially deadly toxin produced by certain fungi. As a result, many international markets test and regulate imported groundnuts carefully to prevent the consumption of nuts with dangerously high levels of aflatoxin.

 

Meeting these quality standards requires producers in Senegal and other producing countries to change their production practices and adopt new technologies to enhance the quality of their groundnuts. However, several important market failures make it extremely difficult for many Senegalese producers to do so, according to Tanguy Bernard, one of the study’s lead researchers. These include failures in credit markets, insurance markets, information markets, and labor markets.

contract farming

Research has shown that contract farming schemes aimed at addressing any one of these failures have shown positive results but only on a small scale. This raised the question for the research team: what if a contract farming scheme addressed multiple market failures simultaneously through bundling interventions?

 

To help answer this question, the research team established an experiment consisting of a randomized control trial that looked at farmers’ willingness to invest in Aflasafe, a cost-effective aflatoxin bio-control technology. The sample consisted of 396 farmers across 40 villages and tested a new contractual offer that bundled credit to help farmers purchase Aflasafe, training and extension services to help farmers learn to use the technology, and a guaranteed price premium for groundnuts that were low in aflatoxin.

 

Farmers in 20 villages were offered the new contract bundle (the treatment group), while farmers in the other half of the study villages formed the control group. Both groups were provided information regarding aflatoxin risk and the effectiveness of Aflasafe, and all farmers in the study had the opportunity to purchase the technology. The treatment group, however, were provided credit to purchase Aflasafe, while farmers in the control group had to pay upfront in cash. Similarly, both groups received video demonstrations of Aflasafe application, but treatment group farmers were also guaranteed to receive live field demonstrations. Finally, treatment group farmers were guaranteed to be paid a premium of 40 CFA (over the cooperative's normal price) per kilogram of groundnuts that met the European Union’s quality standard. Control group farmers were told that buyers were interested in paying a higher price, without any mention of a guarantee or a specific premium.

 

Three outcomes

The study looked at three outcomes: whether farmers adopted the new technology, whether the groundnuts produced using Aflasafe met EU standards, and whether farmers fulfilled their contract by selling groundnuts to their cooperative for export.

 

Adoption of Aflasafe was substantially higher in the treatment group, particularly among more risk-averse farmers. In fact, the uptake of the new technology through the bundled contract scheme was much higher than that found in existing studies that utilized a non-bundled scheme.

 

More than 30 percent of farmers in the control group produced groundnuts that were above the EU limits for aflatoxin contamination. This reiterates the fact that aflatoxin contamination poses a significant barrier to entry into international markets for Senegalese producers. Overall, the treatment group only saw a 12 percentage point improvement in groundnut quality. However, in geographical areas where aflatoxin risk is higher, treatment group farmers produced groundnuts that were 44 percentage points (138%) more likely to meet EU standards. This last finding suggests that bundled contract schemes would be particularly effective in higher risk areas.

 

Finally, the contract bundle also had a positive effect on farmers’ contract fulfillment, increasing the likelihood that treatment group farmers would sell any groundnuts to their cooperative. This finding was especially true for new farmers and lead farmers, as well as for individuals who exhibited high levels of reciprocity.

 

Summary

Overall, the study’s findings seem to suggest that contract farming schemes that bundle multiple interventions have the potential to enhance quality and increase farmers’ access to lucrative markets. Further research is needed to determine which part of the contract was most important and whether a less expensive contract bundle involving fewer elements would have similar effects. In addition, future studies could look at whether contract bundles aimed at increasing exportable groundnuts could also impact the quality of groundnuts sold locally.