Contract farming and access to formal credit in South Africa: A case of small scale sugarcane growers in the Felixton Mill area of KwaZulu-
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Date
2023
Authors
Sifundza, Sandile Bongani
Journal Title
Journal ISSN
Volume Title
Publisher
African Economic Research Consortium
Abstract
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 non creditworthy 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. 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.