Contract farming and access to formal credit in South Africa: A case of small-scale sugarcane growers in the Felixton Mill area of KwaZulu-Natal

Sugarcane farming is one of the most important agricultural enterprises in South Africa and most of the people working in the agricultural sector are employed in the sugar industry. Sugarcane farmers and sugar mills contribute significantly to the economic survival of rural communities and towns where sugarcane is grown, in terms of employment opportunities. However, in the rural areas of KwaZulu-Natal, smallholder sugarcane farmers are faced with a serious problem of low productivity, partially caused by lack of access to formal credit. Formal financial institutions do not adequately provide credit to smallholder farmers, since they are considered to be noncreditworthy and lack the required collateral. In the agricultural sector, one of the alternatives in solving the problem of inability to access formal credit is contract farming. vi Therefore, the main purpose of the study was to investigate the role of contract farming in improving access to formal credit for small-scale sugarcane farmers in the Felixton mill area in the KwaZulu-Natal province. The specific objectives were to (a) determine the status of access to formal credit for smallholder sugarcane farmers; (b) identify factors that determine smallholder sugarcane farmers’ access to credit from formal financial institutions; (c) identify factors that may lead sugarcane farmers to participate in contractual agreements; and (d) determine whether participating in contracts promotes access to formal credit for smallholder sugarcane farmers. In total, 220 small-scale sugarcane farmers were sampled for the survey, using a proportional stratified random sampling procedure. In analysing the data, both descriptive analysis and an econometric model were used in the study. The data were analysed using Statistical Package for Social Sciences software (SPSS 20.0). Two logistic regression models were estimated. One was estimated to identify the factors and characteristics that influence access to formal credit for smallholder farmers. The other was estimated to identify the different factors that influence smallholder sugarcane growers to participate in contractual arrangements with other value chain players. The results of the study indicate that most of the small-scale farmers in Felixton were credit constrained, as only 19% of the farmers had access to credit from formal credit sources. A majority of the farmers (94%) engaged in contractual agreements with other actors in the value chain. The results of the logit model revealed that engagement in contractual agreements by small-scale sugarcane farmers was statistically and positively influenced by farmers’ age, gender and whether or not they had received training in sugarcane production. Engaging in contract farming was also statistically, but negatively, influenced by access to the market and access to formal credit. On the other hand, access to formal credit by smallholder sugarcane farmers was statistically and vii positively influenced by the farmer’s experience in using credit from formal sources, the age of the farmer, the farmer’s level of education and access to off-farm income. Access to formal credit had a statistically significant negative influence on a farmer’s involvement in contractual agreements. This means that a farmer who is credit-unconstrained has a lower likelihood of engaging in contracts than a farmer who is credit-constrained. However, participating in contract farming has a statistically non-significant effect on access to formal credit. The implication is that engaging in contracts with other players in the value chain does not enhance access to credit from formal credit sources.