Contract Farming its Promises and its Risks: A Quantitative Analysis

The objective of this study is to pinpoint the key opportunities and risks facing each of the stakeholders in export-focused contract farming value chain in Zambia. Although a deterministic cost–benefit analysis indicated that this outgrower schemes would have a highly acceptable net present value (NPV), a Monte Carlo analysis using an integrated financial–economic–stakeholder model detects numerous risk variables that could make this system unsustainable. Some fundamental risks include the unpredictability of the real exchange rate, the global price of the commodity and the farm yield rates. This analysis points out that irrigation systems are very important for both stabilizing yields and increasing them. The analysis also shows the limitations of loan financing for such outgrower arrangements when at the sector level it is difficult or even impossible to mitigate the risks from real exchange rate and international commodity price movements. This micro-level analysis demonstrates how crucial real exchange rate management strategies are in accomplishing permanent viability in export-oriented agriculture value chains. Keywords: Contract Farming, Monte Carlo Simulation, Outgrower Scheme, Smallholder Farmers, Stakeholders, Sustainability, Risks, Poverty Alleviation.