African Journal of
Agricultural Research

  • Abbreviation: Afr. J. Agric. Res.
  • Language: English
  • ISSN: 1991-637X
  • DOI: 10.5897/AJAR
  • Start Year: 2006
  • Published Articles: 6669


Malt barley commercialization through contract farming scheme: A systematic review of experiences and prospects in Ethiopia

Addisu Bezabeh Ali
  • Addisu Bezabeh Ali
  • Department of Rural Development and Agricultural Extension, Haramaya University, P. O. Box 138, Dire Dawa, Ethiopia.
  • Google Scholar

  •  Received: 22 February 2018
  •  Accepted: 17 April 2018
  •  Published: 31 December 2018


In Ethiopia, smallholder commercialization and integration into the market has been one of the policy directions. Though Ethiopia managed to raise economic growth recently, there is languished pace of agricultural commercialization. This study investigates malt barley commercialization process through contract farming scheme, and its experience, effect and prospects in Ethiopia. A systematic review system was employed. Now contract farming is evolving in Ethiopia, while the motives for promoting contract farming may vary by actor, this study focuses on the role of contract farming scheme in malt barley commercialization. Foreign investors took up the beer companies and upgraded their working capacity leading malt demand by 83%. Malt barley contract farming scheme was introduced by Heineken brewery to ensure local sourcing of malt. Recently, Heineken managed sourcing malt barley from 10,200 contracted farmers in Arsi Zone and later on, Diago and Dashen breweries joined malt barley contract farming. Current malt demand is 50,000 ton while local sources cover only 50% of it. Contracted famers gained a 10% high price advantage than the non-contracted counterparts. Given barley gene pool resources and favorable production agroecology, booming beer industries and growing malt demand imply malt barley production prospect is promising and attractive. However, the innovative firm-farmer integrations need to curb the following challenges: side selling, late payment, limited access to improved varieties, weak capacity of cooperatives and unions in discharging proactive intermediary roles. Therefore, public agencies and private partners need to work towards scaling out and up malt barley innovations and commercialization to realize sourcing all required raw materials from local sources.

Key words: Malt barely, commercialization, contract farming, economic growth, Ethiopia.



Commercialization of smallholder agriculture is widely considered as one of the most effective means of dealing with poverty in developing countries like Ethiopia. Existing literatures document evidences that ascertain commercialized farms contribute significantly to the livelihoods of  rural  households  in  sub-Saharan  African countries and elsewhere (Muriithi and Matz, 2014). Commercialization aim is attained by altering subsistence level of production to highly market-oriented level (Barrett et al., 2012). However, studies suggest that agricultural commercialization is a complex modes of implementation. The perception that commercialization of smallholders to

help in reduction of poverty at the household level is supported by the literature (Bellemare, 2012; Maertens et al., 2012). Commercialization of high-value export crops and income have been found to be positively associated with African cases of Madagascar, Senegal and Kenya (Maertens et al., 2012). Still, the relationship between commercialization and welfare of smallholder household are not fully understood and the findings are not always in agreement with each other (Maertens et al., 2012), which is possibly due to the difficulty in identifying the causal relationship empirically.

Several factors affect commercialization of agriculture; moreover, commercialization pathways play crucial role. Recently, contract farming and outgrowers schemes are being presented as a route through which farmers can engage in agribusiness and commercial agriculture (Sitko and Jayne, 2014; Smalley, 2013). In this regard, in Ethiopia, there were a couple of attempted models of commercialization such as Economic Growth Corridors and large scale commercial farm initiatives with limited success stories. Ethiopia is pursuing strategies, plans and programs anticipating agricultural transformation by employing mechanisms for instance agricultural commercialization clusters, contract farming and outgrowers schemes on selected commodities as agribusiness incubation approaches in the potential areas of the country (ATA, 2016). On basis of systematic review of published and unpublished recent literatures on various commercialization models in the country, this paper attempted to critically investigate malt barley commercialization process, experience and prospects through contract farming scheme in Ethiopia. Accordingly, in this study, the following objectives were pursued to: assess smallholder commercialization schemes employed and progresses in Ethiopia; examine the role of malt barley contract farming scheme in commercializing malt barley through firm-farmer integration, and identify effects and prospects of malt barley contract farming scheme and cast light for further study and documentation.


Transaction cost economics (TCE) assumes that market actors suffer from bounded rationality and are opportunistic (self-interested with guile); they can deceive, lie, cheat and steal (Prowse, 2012).

Consequently, participation in a market entails costs before the transaction is  concluded  and  are  incurred  in finding the right partner, negotiating terms, and finding other information about the exchange. Costs are also incurred after the transaction for monitoring of performance and covering losses; these costs are referred as ex ante and ex post transaction costs, respectively.

Transaction costs are influenced by the characteristics of the transaction, product and environment within which transactions occur (Bhattarai et al., 2013). These are asset specificity, frequency and uncertainty as the three most important characteristics of transactions that alter the cost of engaging in an exchange. An agribusiness firm incurs very high transaction costs when engaged in informal markets in developing countries where quantity, quality and regularity in delivery are unpredictable due to high levels of environmental and behavioral risk (Da Silva and Rankin, 2013). These uncertainties discourage investment in assets required to add value to products. The seasonality and perishability of agricultural products also increases the complexity of transacting, particularly when markets require specific quality standards and credence attributes in products. Complexity increases transaction costs by increasing the uncertainty of supply, by increasing information and monitoring costs, by increasing the need for assets that have little value in alternative uses, and by increasing the cost of renegotiating incomplete contracts ex post (Bhattarai et al., 2013).

At the same time, smallholders face high transaction costs when selling their products in thinly traded informal markets where reliable information is scarce and marketing costs are high due to poor physical and legal infrastructures. They also face high transaction costs in their efforts to procure inputs. The recent proliferation of mandatory food safety and quality standards to meet customer requirements in global markets has added to the high unit transaction, compliance and marketing costs confronting individual farmers who trade small quantities (Da Silva and Rankin, 2013). Under these conditions, firms and farmers have an incentive to engage in relational contracts to bulk up volumes traded and to reduce the uncertainty that increases transaction costs and diminishes investment in value-adding assets (Prowse, 2012).

Debates on the role of contract farming in rural development

In an extensive review of the political economy of contract farming in Africa, Oya (2012) positions contract farming as a site of ideological contestation in debates on the development of capitalism in rural areas. For Oya (2012), discussions on contract farming cannot be separated from broader debates about the role of small farmers in development. He argues that so called neo-populist  writers  view  contract  farming  as  “one  of   the preferred institutional devices to make the smallholder path to development viable in contemporary developing countries in the context of globalization. This politically popular view has permeated into World Bank policies that, as noted above, strive to find a place for (entrepreneurial) smallholders in corporate agriculture without challenging the corporate global agri-food system. But here lies the crux: it is apparent that in many cases, contract farming schemes have only been sustainable under conditions of monopsony power, where a company is the only buyer for many small farmers with scarce alternative livelihood and income generating options (Oya, 2012).

There is, therefore, a contradiction between neo-liberalism’s commitment to free markets as the best path to small farmer welfare on the one hand, and contract farming as an institutional innovation that may only work for agribusinesses under conditions of less or no market competition (Oya, 2012). Oya’s contribution also tackles the role of contract farming in agrarian transitions, however he criticizes Little (1994) for their over-deterministic view of the inevitability of contract farming relations expanding under globalization. Oya (2012) argues that there is no evidence of a distinct ‘contract farming path’ in agrarian transition, and instead suggests that “contract farming may contribute to processes of social differentiation and capitalist development already under way, in conjunction with several other forces, specific to time and place”. This points to an important argument of the agrarian political economy literature: that the benefits of contract farming will likely accrue to those farmers with higher levels of pre-existing resources or capital, particularly those with access to off-farm income sources (Zhang, 2012).

In a review of contract farming in China, Zhang (2012) argued that understandings of the interactions between small farmers and contract farming must be placed in the context of local political economy, including access to alternative options for different social groups. While quantitative studies in China, focusing on the microeconomic effects of contract farming, have found evidence of positive income effects, Zhang (2012) argued that such findings lead to oversimplified understandings of contract farming as ‘pro-poor’. Instead, when analyzed within broader patterns of agrarian change, contract farming in China loses much of its appeal for small farmers, and is better understood as an activity of last resort for households who have watched state support in agriculture erode over the past three decades. 

Empirical studies on contract farming

Existing studies on contract farming comprise mainly qualitative and quantitative studies implying variable effects. Under this study, the quantitative studies explored.  Among  the   quantitative   studies,   Bellemare (2012) study in Madagascar found that contract farming had a significant positive impact on total household income, net household income, income net of contract farming, income per adult equivalent and household income from livestock. Bolwig et al., (2009) also found that a contract farming arrangement with certified organic coffee farmers in Uganda increased gross revenue and net profit from coffee. Narayanan (2014) compared the CF profits of four commodities with profits from alternative markets using cross-sectional survey data in India’s Punjab state. She found variable impacts of contract farming not only across schemes (with different crops and firms) but also between farmers within a particular scheme. Miyata et al., (2009) argued that profit from the contracted crop would tend to overstate the impact of contract farming arrangement on household wellbeing as the contract farming arrangement might draw labour and other resources from the household’s other income generating enterprises. Instead, they used total household income per capita as their indicator of impact and found that contract farming arrangements with green onion and apple growers in China had positive impacts on per capita household income.

However, a study in India by Singh (2002) suggested that the positive early impact of contract farming on households and the local economy (through higher farm employment) could be short-lived due to unsustainable promotional prices and subsidies from firms, and the erosion of benefits when perceived power imbalances discouraged continued participation. Michelson et al., (2012) studied contract farming arrangements between supermarkets and vegetable and fruit growers in Nicaragua using historical data spanning eight years and concluded that the CFAs did not benefit small farmers. They found that farmers contracted by domestic supermarkets were receiving the same mean prices paid by traditional markets. While international supermarkets provided insurance against volatile prices, farmers were paid disproportionately low mean prices. However, the same contract farming arrangements were credited with increasing annual household income and investment in productive assets as compared to non-participants in the area (Michelson, 2013). No evidence of positive impact was found on investment in consumer durables or on the land holdings of participating farmers.

Masakure and Henson (2005) identified four groups of incentives or benefits of contract farming arrangements as perceived by contract farmers in Zimbabwe’s high value vegetable export sector. The first group, labelled ‘market certainty’ included guaranteed markets, minimum prices and the provision of inputs and transport. The second group labelled ‘indirect benefits’, included skills that could be applied to other crops and the use of contract farming arrangements as a stepping stone to other projects. The third group related to higher incomes, and the fourth to intangible benefits such as prestige. Higher incomes and related benefits from participation  in contract farming arrangements  have been attributed to higher yields from greater use of specialized inputs and technical support, higher quality products and better access to premium markets (Bolwig et al., 2009; Miyata et al., 2009).

Savings from low transaction costs arising from guaranteed input and output markets, clearer quality criteria and transparent measurements of volume and quality were also identified as a source of these benefits (Bolwig et al., 2009; Narayanan, 2014). Most studies on the impact of contract farming on participant households provide complementary information on factors affecting participation. In Western Kenya, it was found that the average size of farms contracted to supply a large sugar company had decreased over time (Casaburi et al., 2014). This suggests that farmers with relatively smaller farms were able to join and were not forced out of the contract farming arrangement once its processes had been honed. In China, Miyata et al. (2009) found that participation in a number of apple and onion contract farming arrangements was influenced by labour availability, distance from village heads and possession of agricultural equipment. Resource endowments and agriculture’s share of household income were important determinants of participation in Uganda’s SIPI certified organic coffee contract farming arrangement (Bolwig et al., 2009). In India, participation in vegetable contracts was found to be biased in favour of larger farmers and farmers that achieved higher yields (Narayanan, 2014; Singh, 2002). Gender, age, agricultural experience, participation in cooperatives, land endowments, working capital, number of days that farmers do not work for cultural reasons, level of entrepreneurial and business skills, and attitude towards risk were significant determinants of participation in Madagascar CFAs (Bellemare, 2012). On the inclusiveness of CFAs, Barrett et al. (2012) commented that very few farmer, household or farm characteristics have been found to consistently affect participation in contract farming arrangements. Ruth et al. (2017) disclosed that contract farming arrangement and outgrower farming are employed as models of commercialization alternative to large scale farms that displace stallholder farmers from their areas farms.


Market shares of barley in Africa are concentrated in three countries- Morocco, Ethiopia and Algeria- accounting for 87% of the total barley production in the continent. Despite being one of the top three barley producing countries, Ethiopia’s barley value chain appears to have substantial potential for improvements and, given growing local demand, harnessing this potential will have a lasting impact on improving the well-being  of  smallholder  farmers.  Ethiopia  is   the   second largest producer of barley in Africa next to Morocco, accounting for about 26% of the total barley production in the continent (FAO, 2014). In 2013/14, about 4.5 million smallholder farmers grew barley on more than 1 million meher hectares of land (CSA, 2014) that covers 92 to 95% of production when the smaller belg rains support the remaining 5 to 8% of the annual production (Tefera, 2012). For the cultivation of barley, well-drained soils are favorable in comparison with other crops, they can handle higher levels of soil salinity. CSA (2014) also specified that each farmer cultivates barley on 0.23 hectares land. The total production has been increasing steadily over the past decade- it has increased from 1.1 million metric tons in 2003/4 to 1.9 million tons in 2013/14, which is equivalent to an annualized growth rate of 6% per year. The growth in production appears to have been driven largely by yield growth, as yield growth (about 5%) is far larger than the area growth of 1% during the same period. However, the barley sub-sector continually falls far behind other major cereals. The average annual production of barley over the last decade is estimated at 1.5 million tons, which is less than half of other major cereals. In terms of volume, the share of barley in total cereal production has dropped from 12% in 2003/4 to only 9% in 2013/14. Similarly, of the total land allocated to major cereals, the share of barley has declined from 13% in 2003/04 to only 10% in 2013/14.

At aggregate level, barley yields in Ethiopia are greater than that of the continent-wide average, its average yields are significantly behind Kenya and South Africa and far behind much of the developed world (FAO, 2014). During the past decade, barley yields in Ethiopia have averaged 1.43 tons, which is less than half of barley yields in both Kenya (3.26 tons/ha) and South Africa (2.93 tons/ha). In high-performing countries of the developed world such as France, Germany and the Netherlands, average barley yield is over 6 tons per hectare. Thus, despite recent growth in the sub-sector, barley yields in Ethiopia remain significantly lower than global and regional averages.

The current productivity level presents both opportunities and challenges. There are reasons to be optimistic because the average yield in 2014 (1.87 tons/ha) was far below the yield achieved (4 ton/ha) in research station trials (CSA, 2014). Increasing yield to 3 tons per hectare (Kenya has achieved higher rates) can result in a host of benefits to the country. Such an increase in yield can potentially make the country a net exporter, improve farmers’ income, generate local employment, and reduce pressure (over mining of soil nutrients) on the land. The second reason to be optimistic is that Ethiopia exhibits large spatial variations in barley yields. For instance, in the 2013/2014 meher season, average barley yields in Oromia were 2.17 t/ha, which is 16% higher than the national average and much higher than the yields in other regions in the country. Spatial yield and  productivity  variability is  believed  to  emanate from the fact that barley farmers in Ethiopia have not fully adopted modern inputs like fertilizer and modern seeds that help boost production (CSA, 2014).

Barley marketing systems

Rashid et al., (2015) reports that until recently, barley has only a small amounts of marketed surplus (commercialization) implying that the barley sub-sector was largely subsistence in nature. Statistics from the CSA reinforce this position showing that home consumption (≈ 64%) and seed use (≈ 20%) account for more than 80% of total barley production in the country (CSA, 2014) less than 20%.

Given the current state of the market fundamentals, that is, infrastructure, institutions and information actors perform an important market function, namely product aggregation. Majority of these traders are also smallholders who conduct commodity trade as a secondary business. Therefore, the surpluses generated through trading ultimately contribute to improving well-being and food security. Despite huge public emphasis on farmers’ organizations, it was found that cooperatives appear to play a minimal role in the barley value chain. Less than half a percentage of marketed barley passes through cooperatives, which has little influence on the cooperatives revenues. In 2014, 230,000 tons of barley was marketed; and only 920 tons were marketed through a cooperative, majority of which was malt barley. Assuming a margin of 10% and a unit price of 10,000 Birr per ton, cooperatives made about 920,000 Birr or 46,000 US dollars, which is miniscule given the size of the market (Rashid et al., 2015). In related issues focusing on malt barley, it was found that cooperatives marketed 6% of the surplus (Alemu et al., 2014).


Despite the rich barley germplasms and second production capacity of the country in Africa, breweries in Ethiopia used to import more than half of their malt barley requirements (Nick, 2014; Tarekegn, 2016). Recently, following the expansion of breweries in the country, malt processing factory, breweries, farmer organizations, research organizations, etc., had been working jointly to engage barley producers in malt barley production (Nick, 2014; Rashid et al., 2015; Tarekegn, 2016). As a result, between 2003/04 and 2013/14, the number of smallholders growing barley increased from 3.5 million to 4.5 million; yields increased from 1.17 to 1.87 metric tons per hectare; and total production grew from 1.0 in 2005 to about 1.9 million tons in 2014 (CSA, 2014). However, Ethiopia produces mostly food barley, with its share estimated to be 90% (Alemu et  al.,  2014),  and  remains significantly deficient in malt barley (Table 1).



As a result of the discrepancy in food and malt barley, Ethiopia has generated a surplus of food barley, but the net import bill for malt barley jumped from 240.000 US dollars in 1997 to 40 million US dollars in 2014. Another reason to encourage contract farming in the malt barley sector is therefore to substitute imported barley and save foreign currency (Kifle, 2016), as it is estimated that if the trend of importing barley continues, Ethiopia’s malt barley import bill will be around 420 million US dollar by 2025 (Rashid et al., 2015). In Ethiopia, demand for malt barley increased due to establishments of new beer industries by foreign breweries, privatization and upgrading of old breweries and country’s increase in beer consumption (Molla, 2016). Under the control of the Privatization and Public Enterprises Supervisory Agency (PPESA) all these state-owned breweries have been privatized during the period of 1998-2011. While Brasseries et Glacières Internationales (BGI) acquired St. George’s brewery, Heineken became the second foreign brewery owner as it acquired both the Harar and Bedele breweries. The British company Diageo Plc currently owns the Meta Abo brewery.

Currently, Ethiopia has experienced one of the fastest increases of beer consumption in recent years, with consumption rates steadily rising from 15 to 20% every year since 2011 (Molla, 2016). Growing evidence suggests that the demand for malt barley has accelerated this fast due to an increase in income. Households switch from domestically brewed beverages such as Tella and Areki, which are based on sorghum, maize and other grains, to bottled beer which is based on barley (ATA, 2016; Molla, 2016). Despite the increase in demand, the barley sector continually falls far behind other major cereals, both in terms of cereal production and total land allocation. In addition, barley has experienced the least yield growth as compared to the other top cereals (Rashid et al., 2015). There are also several bottlenecks which are specific to the malt barley value chain. First, there is a huge gap between demand and allocation. Currently, the demand is 270.000 metric tons of which only 42.000 metric tons can be allocated. The gap can be attributed to lack of malting capacities of the two malt factories. Secondly, only 4% of the farmers received good barley seeds in 2013. This access rate is the lowest among all cereals.

Heineken developed a program of local sourcing to assure a long‐term and reliable supply of agricultural material needed for its breweries across Africa. Currently, Heineken sources 45.8% locally, but the beer company’s aim is to source 60% of the agricultural raw material from African farmers by 2020. Local sourcing is a key component of Heineken’s strategy of partnering for growth in Africa which involves financially empowering farmers and their communities in which the company operates. According to Heineken, local sourcing also ‘’makes   good   business   sense   [as]   we   reduce   our exposure to vulnerabilities of the market (long delivery lead times and volatile prices), shorten the supply chain and reduce transportation, which of course lowers our costs and carbon footprint’’ (Levy, 2014). Additionally, Heineken wants to promote private sector approaches that are environmentally friendly, socially just and economically sustainable (Heineken, 2013).

Heineken’s local sourcing approach in Ethiopia is implemented by means of the CREATE project. In 2013, Heineken signed a Memorandum of Understanding for a 4‐year malt barley programme together with the Dutch ministry of Foreign Trade and Development Cooperation, the NGO EUCORD and two Ethiopian Government institutes which are the Agricultural Transformation Agency and the Ethiopian Institute of Agricultural Research (Heineken, 2013). Heineken and the Dutch ministry committed to invest 2.72  million US dollars to increase food security, improve the livelihoods of 20.000 smallholder farmers and reduce reliance on imports by developing local barley production and connecting farmers to Heineken’s supply chain in Ethiopia (Levy, 2014). The so called CREATE programme runs from 2013 to 2017 and the main reasons why it was set up were the high demand for an adequate supply of good‐quality malted barley and to substitute 20,000 MT of imported barley by locally produced barley. The latter reason in specific is important since the Ethiopian government wants to substitute imported barley to save foreign currency (Kifle, 2016). According to Heineken, the project further aims to expand the value of the malt barley business for the region and develop the end‐to‐end process of growing malt barley in Ethiopia by means of improving access to markets, seeds, pesticides, credits (contract farming schemes) and market information; providing agricultural trainings; establishing long‐term partnerships between producer groups, intermediaries and agro‐processors; and establishing marketing groups, such as seed‐producing cooperatives and nucleus farmers.

Later on, besides Heineken, Assela Malt Factory (AMF), Diageo and Dashen breweries had been engaged in contract farming to ensure supply of malt barley from different areas (Alemu et al., 2015). AMF and Heineken had contract arrangements both with unions and also with primary cooperatives, whereas Diageo was engaged only with cooperative unions. The performance of the contracts in terms of the proportion of actual supply from the amount agreed up on indicates AMF has better performance with unions where it managed to receive about 97% of the quantity stated in the agreement, whereas Diageo received about 52% and Heineken received about 38% of the volume under the agreement with the unions (Alemu et al., 2015). On the other hand, the quantity supplied by the primary cooperatives was only about 46% for AMF and about 49% for Heineken of the quantity stated in the agreement.

Now sourcing malt barley from domestic production is 55%. Moreover, the malt cultivation practice has been adopted across the major potential areas of the country. That is, a percentage of malt contribution in region basis is: 70% Oromia, while about 30% is obtained from Amhara and the other regions in the country (Holtland, 2017). Nowadays, a great number of farmers are participating in malt barley production, which implies farmers are shifting their production decision from production to own consumption to targeting markets which is the essence of smallholder agricultural commercialization through contract farming arrangements and this study seeks to investigate smallholder agricultural commercialization undertaken through malt barley contract farming schemes as case study to draw conclusion and forward implication for scaling up or scaling out the schemes further.

Contract farming scheme as mechanism of smallholder commercialization

Harnessing Africa’s agricultural potential to make Africa’s farmers more productive, efficient, entrepreneurial and well-off   generally   lies   in   the    commercialization    of agriculture along business models (Diwan et al., 2013). There is a long history of attempts to encourage commercial agriculture across much of sub-Saharan Africa. But commercial farming has taken different forms– varying in scale as well as in institutional arrangements, labour regimes, and livelihood outcomes with fluctuating political significance in different places and times (Ruth et al., 2017). Past efforts in the colonial period have included the establishment of private estates and contract farming (Collier and Dercon, 2014) and in the period of immediate post-independence developmentalism also state-owned and managed estates. Outgrower arrangements, too, are a model that has been encouraged across diverse crops- cocoa, cotton, tobacco, sugarcane, coffee and tea, as a means of integrating smallholder family farmers into commercial, and often transnational, value chains (Oya, 2012; Baglioni, 2015).

There is a growing body of recent empirical literature, based on case-studies from around the world that documents contract farming has been taken as model for smallholder commercialization. However, most of this evidence comes from high-value supply chains, mostly fruits, vegetables and products from animal origin destined for export markets or supermarket retail in urban high-value market segments (Barrett et al., 2012; Diwan et al., 2013; Ruth et al., 2017). Also, there is very few evidence on potential roles contract farming schemes play in commercialization process of smallholders farmers in general malt barley contract farmers in particular in Ethiopia. In recent years, contract farming and outgrower schemes have received renewed attention, prompted by concerns about the negative impacts of large-scale land acquisitions through purchases or leases by largely foreign agribusinesses (Oya, 2012). These schemes are often presented as a route through which smallholder farmers can engage with agribusiness and commercial agriculture, and are now increasingly viewed as alternatives to large-scale land acquisitions (Matenga and Hichaambwa, 2017). Yet as recent research has shown whether agricultural investments and initiatives generate quality employment, sustained monetary income, enhanced and diversified rural livelihoods, and more vibrant local economies, depends on farming models and local conditions that underpin their unfolding, including land relations and labour regimes (Ruth et al., 2017).


Diverse actors from public, private, civil society and NGOs take part in the malt barley value chain development. The main activities of the key actors including AMF, Heineken, Diageo, FOs, farmers, research organizations, and traders  concisely  presented under this section.

Assela Malt Factory (AMF)

AMF is a state firm with a monopoly in producing malt (Alemu et al., 2015). AMF performs a double role: toll malting on contract and malting its own supply of barley, which it sources from smallholders (Holtland, 2017). It is the sole buyer of malt barley, as well as the sole supplier of malt to brewers. It sets the prices for both barley grains and malt. AMF has been forced to import Danish malt barley in the last two years as local supply met respectively 75 and 55% of their total demand in the 2012/2013 and 2013/2014 cropping seasons (Kulumsa Agricultural Research Center (KARC, 2013). In order to get more control on the supply of malt barley the AMF has started a new strategy by contracting smallholder farmers. The AMF has signed for 2014/2015 contracts with four cooperative unions; including Galema (Bekoj’i), Raya Kejewa (Kofele) and Uta Wayu (Kore). The contract with the Galema cooperative union covers a production area of 1,600 hectares. In total, 2,000 hectares have been contracted. The AMF provides a 7% premium price on top of the market price. As part of the contract, the AMF provides contracted smallholder farmers with DAP fertilizer on credit. Besides fertilizer, the AMF is also interested in distribution of improved seeds on credit. However, the AMF noted not to be able to get access to improved seed and therefore the contracted smallholders farmers make use of own malt barley seeds.


The CREATE project designed by Dutch brewing company Heineken to bring the supply of local malt barley on European quality standard level and create a reliable supply chain (Nick, 2014). The sourcing strategy of Heineken is focused on different entities in order to be able to include different types of smallholder farmers. The diversified sourcing strategy includes focus on nucleus farmers, Hundee malt barley producer and supplier cooperatives, multipurpose primary cooperatives, informal groups and even commercial/state farms. Important elements of the contracts with the different entities involved in smallholder farming include delivery of improved seeds on credit, provision of a 5% premium price on top of the market price (Assela, Shashemene and Kofele) and different payment modalities. Heineken has developed new improved malt barley cultivars: Grace and Traveler. Based on farming pilots, especially Traveler resulted in improved productivity levels. Traveler is therefore now being multiplied to be able to guarantee supply to all contracted smallholder farmers in the 2014/2015 cropping season. For this season, Heineken supplied, based on agro-ecology and  availability,  Holker and Traveler improved malt barley seeds. Due to lack of sufficient seed, contracted smallholder farmers in particular West-Arsi did not receive initial promised Sabini improved malt barley seed (KARC, 2013). Payment modalities are an important element of the contracts as Heineken considers it as an important tool for giving room for speculation to smallholder farmers. The contract offers the following three payment modalities: (1) 100% payment on the day of delivery based on the latest market price. (2) 80% payment on the day of delivery and the remaining 20% based on the market price of February 15. Smallholder farmers will receive the remaining 20% plus the increase or decrease due to market changes. (3) 80% payment on the day of delivery and the remaining 20% based on the market price of April 9. Smallholder farmers will receive the remaining 20% plus the increase or decrease due to market changes. This option is only open for deliveries after February 15. All three payment modalities are based on a market price including a 5% premium. Market prices will be determined based on a market assessment of a committee consisting of representatives from both Heineken and the contracted supplier. Nick (2014) and Holtland (2017) report the above payment modalities as suitable both for firm-farmer. Alemu et al. (2015) reported contradicting idea that farmers engage in side selling due to late payment settlement.


Diageo launched in 2012/2013, their new malt barley sourcing strategy in the form of a pilot in cooperation with the Melka Awash cooperative union (Sebeta) (Holtland, 2017). Since 2013/2014, this project has been expanded to Arsi and West-Arsi. In total, 6,000 farmers (3,000 hectares) have been contracted from five cooperative unions. The goal of Diageo is to realize a productivity of 28 quintal/hectare. NGO Technoserve plays a facilitating role in this project by providing, among others, accounting/bookkeeping, marketing, and good governance trainings to multipurpose primary cooperatives. In addition, Technoserve provides agronomic trainings to smallholder farmers focused on soil, disease and post-harvest practices.

According to Alemu et al. (2015), the contracts by Diageo comprise of a full package, which include providing improved seed (Holker), DAP/NPS fertilizer, urea fertilizer, fungicides, pesticides, and herbicides. In addition, the package comprises crop insurance for input expenses coverage. All these inputs are provided on credit basis to the smallholder farmers. Diageo faced this year, however, problems of the ability to supply improved seed. Since no improved malt barley seed has being supplied by the OSE, Diageo was forced to use certified-2 (C2) seed. This seed is a leftover from last year of the ESE. Because of unclean seed, Diageo will expect lower quality of supplied  grain.  Besides  the  obliged  package,  

Diageo is also offering the possibilities to smallholder farmers to use optional elements as mechanization rent, soil testing and crop insurance for output. Sandra (2016) identified that Diageo has four grading standards depending on variety purity, moisture content, color, grain size, 1000 grain seed weight and protein content and associated payment mechanisms. Based on the grade level farmers get a premium of 20, 15, 10 or 5% on top of the market price. The market price is being determined by a commission consisting of the woreda agricultural office, woreda cooperative promotion agency, cooperative union, Technoserve and Diageo. The price is being determined by taking into account the prices of the AMF, Addis Ababa market and local markets (Holtland, 2017), while Nick (2014) and Alemu et al. (2015) also emphasized that the brewery company Diageo also works closely with multipurpose primary cooperatives.

Collectors and traders operations

Based on a barley value chain study conducted by the Rashid et al. (2015), traders can be divided into different levels based on their characteristics and operations. Local traders (nucleus farmers) are smallholder farmers that have a trading function. Collectors are local traders that collect malt barley grain from surrounding smallholder farmers directly after harvesting. By purchasing for relative low prices, local traders are able to speculate on the market, while they store supply at their own household. In addition to local traders, KARC identified small traders. These traders commonly have a trade license but not a warehouse. Their operations can be characterized by same day procurement from mallholder farmers as well as marketing to larger traders during market days. During these market days, they trade on average in 2-5 quintal of malt barley grain. Small traders can use their own financing and weighing balance for procurement of malt barley grain but may also work as commission agents for larger traders. Commission agents are commonly accused of cheating with the weighing balance (Nick, 2014). There are also, larger traders that collect from small traders, local traders, and commission agents and afterwards store up to 1,000 quintal in their own warehouse (Watabaji, 2016). After storage, malt barley is being supplied by the larger trader directly to the malt factories or other processors. Large traders are known for their strong ability to identify quality levels of malt barley. They are commonly accused of blending low with high quality grains as they are aware of the Assela Malt Factory quality standards (KARC, 2013).

Seed multiplication cooperatives

Several primary cooperatives and unions in Ethiopia undertake seed production contract farming with farmers (Alemu and Bishaw, 2016). In Arsi  and  West-Arsi zones,  several seed multiplication cooperatives are available. For instance, in the Lemu Bilbilo woreda, 11 seed multiplication cooperatives are located. Malt barley contract farming required ensuring access and use of improved varieties, as a result, the Heineken and Diago contracted seed multiplication with farmers (Heineken, 2013). The objective of these cooperatives is focused on seed production by multiplying basic seed in Certified-1 seed. The seed multiplication cooperatives are working on a contract farming basis as they receive foundation seed from companies and supervised by seed regulatory bodies (Alemu et al., 2015). Cooperative members sign for acceptance of foundation seed supply and consequently commit themselves to deliver after harvesting. Recently, the seed multiplication cooperatives have also started to sign direct contracts with private entities, for example, Heineken. The seed multiplication cooperatives set their market prices with a committee comprising of representatives of the cooperative, agricultural office, cooperative promotion agency and the ESE. A premium price of 15% on top of the market price is being provided to members for their supply.

Multipurpose primary cooperatives or unions

There is a renewed interest from donors, governments and researcher institutions in producer organizations as an institutional vehicle to improve smallholder agricultural performance, particularly through improved market participation (Fisher and Qaim, 2012). Ample evidences have been documented on the fact that membership to such organizations is considered to increase the level of technology adoption, yield, market participation and economic benefit to farmers as well as promote their general welfare (Delelegne et al., 2016). Since recent years, more and more multipurpose primary cooperatives are being encouraged by cooperative unions and the government to start output marketing activities (Abate et al., 2013). In a broad sense, there are two different marketing modalities applied in the form of a commission-based model and a 50/50 risk profit sharing model. These different models have in particular implications on market price determination, revenue models and responsibilities. Several multipurpose primary cooperatives and cooperative unions such as Galema and Raya Kejewa unions are engaged in contract agreement with Diageo, Heineken and/or the AMF for facilitation of input and output market (Alemu et al., 2015). The unions have several primary cooperatives and farmers under themselves as recipients and supplier of different inputs and malt barley as output with predefined volume and desired quality standards.


Smallholder farmers are motivated to  be  linked  to  agro-industries because this reduces market uncertainty and provides higher income and better access to inputs, knowledge and services (USAID, 2012). Accordingly, in 2014/15 cropping season, Heineken contracted 10,200 farmers. In total, 23,000 farmers are involved in contract farming schemes; about half of all market-oriented malt barley producers are in Arsi and Bale zones (Holtland, 2017). Diageo has contracts with 6,100 farmers.


Intensification of crop production and productivity, poverty alleviation and realizing food security depends on access and use of improved technologies like improved varieties. Enhancing firm-farmer profit margin also determined by size of yield obtained each acreage. Frequently, the average yield of major crops in general and malt barley in particular is lower than that of the other major producers in Africa (CSA, 2014). Two new game changer malt barley varieties with the potential to triple average yield in Ethiopia have been released by the Holetta Agricultural Research Center as a result of decades of research collaboration with the International Center for Agricultural Research in the Dry Areas (ICARDA). The two varieties, HB1963 and HB1964, can yield up to 6 tons per hectare (t/ha) as opposed to the average yield of 2 t/ha in Ethiopia (Figure 1).



Effects of malt barley contract farming scheme

As Oya (2012) noted, there is scarce evidence of how significant contract farming will be for future livelihood trajectories, and how contract farming may shape future patterns of differentiation and agrarian change in the Global South. There is little or no information on effects of participation in malt barley contract farming scheme or the commercialization of malt barley in Ethiopia. These questions are particularly relevant for the Ethiopian context, where contract farming driven agricultural commercialization is both a relatively new phenomenon and a focus of rural development policy.

Studies on potential effects of malt barley contract farming scheme in Ethiopia (Nick, 2014; Alemu et al., 2015; Samuel, 2016; Sandra, 2016; Holtland, 2017) reported that the firm-farm contract arrangement has among others, the following advantages to partners in the business.

Enhancing of input access and reliable output market with increased income for farmers  

At least, three kinds of inputs are considered critical in the studied contract farming schemes: improved seeds, extension services and credit (Alemu et al., 2015). Until recently, farmers depend on local varieties of Holker  and Sabini for 30 and 35 qt/ha yield capacity, respectively. In 2016, game-changers two varieties, HB1963 and HB1964, yielded up to 6 tonnes per hectare (t/ha) as opposed to the average yield of 2 t/ha released. The varieties also offer excellent malting quality, making them attractive buys for the malting and brewery industry, thus allowing smallholders to use the new malt barley as a cash crop and generate income from it. In addition, Heineken has developed new improved malt barley cultivars: Grace and Traveler. Based on farming pilots, especially Traveler resulted in improved productivity levels. Traveler is therefore now being multiplied to be able to guarantee supply to all contracted smallholder farmers in the 2014/2015 cropping season. The new varieties introduced enhance options of available varieties with better productivity capacity to raise producers’ income through yield gain than local varieties (ICARDA, 2016).

As Alemu (2015) revealed, the main services contracted farmers benefit are related to agricultural extension, credit and cooperative based input provisions. In terms of access to general extension service, there was no statistically significant difference in terms of access to extension service among farmers with different market behavior and almost all cooperative member farmers reported that they meet development agents to get any extension advices.  Similarly, 96.7 and 91.7% of the respondents had got extension advice on malt barley production and marketing, respectively.

With regard to income, Holtland  (2017)  analyzed  cost of malt barley, wheat and pea production computing cost incurred for purchase of new or local varieties, fertilizers, herbicides and fungicides.  He observed that revenue for malt barley is higher than wheat and pea production. Furthermore, the introduction of two improved new varieties allowed farmers to get 10 qt/ha yield than the local, with an average yield of 45 and 50 qt/ha, while the maximum for local varieties is 30 and 35 qt/ha for Holker and Sabini, respectively. The yield gain gives an additional income of over 10,000 ETB/ha.


In the 2014/15 season, Heineken collected 6,471 tons of malt barley, of which 5,184 tons came from smallholders in this contract farming scheme (Holtland, 2017). This is respectively 14 and 11% of all the malt barley marketed in Arsi and Bale. It was 94% of the target, and the quality of the produce was better than in previous years. The firm delivered the malt barley to AMF, which processed it for a malting fee. The commissioned malt was still considered as part of the quota that the firm is entitled to, based on its market share.

Commercialization of malt barley and import substitution

Traditionally, barley farmers used to consume 50% of the malt barley they plant. Recently, as Nick (2014) reports, barley farmers become market oriented, they prefer to produce malt barley primarily as cash crop, where 61.3% of the harvested malt barley is being commercialized on the market, while 29.5% is being used for household consumption. When we focus on utilization levels at regional level, important differences arise. Smallholder farmers from the multipurpose primary cooperatives under the Galema union in Bekoj’i (Arsi) commercialize 82.3% of their harvest while this is 47% by the smallholder farmers around Kofele. Farmers in West-Arsi focus more on wheat for commercialization purposes as respectively 73.9 and 39.1% is being sold in the market by farmers of respectively, Wamagne and Burka Misooma multipurpose primary cooperatives.

Given the active engagement of public, private, NGOs, FOs in malt barley value chain development and scaling out of malt barley production in wider areas, commercialization of malt barley also moves forward. For instance, there is high intensification of malt barley production in Arsi and West Arsi zones, which together produce about 70% of the country’s marketed malt barley; some 40,000 smallholders produce over 50,000 tons annually (concept and practice book author referenced ). On average, they grow half a hectare of malt barley with a yield of 27 qt/ha. They sell half of their production; the rest is for home consumption. Similarly, Amare et al. (2016) reported that as a kind of wider scaling out campaign, 46,000 farmers provided with improved malt barley varieties and the Regional Agriculture Office financed the associated costs. Farmers in Amhara region are expected to supply the malt barley to Gondar Malt Factory which is part of the Dashen Breweries in Ethiopia. There is growing body of documentation on indicators of commercialization, for instance, Steven and Sam (2016), Getaw and Atle (2015) and Poulton (2017) concludeed that the status of commercialization of a given commodity can be measured and explained by marketed surplus and area allocated to marketable commodity. By the same token, malt barley is being commercialized fast in Ethiopia as well.

Between 2003 and 2012, beer consumption grew by 15 to 20% annually, and this growth is forecast to continue for several years (Amare et al., 2016). That is driving the contract farming scheme to source local malt barley supply to fast growing beer industry in Ethiopia. When several state-owned breweries were privatized in 2010, international brewers were eager to enter the attractive Ethiopian market. Brewers doubled their capacity between 2013 and 2016 (Molla, 2016).   Currently, there are 6 breweries with total capacity of about 10 million hectolitres per annum. This requires well over one hundred thousand tons of malt barley per year. All efforts of firm-farm partnership until recently enabled sourcing 30% of the total malt barley requirement while the rest is covered by importation (Alemu et al., 2015).  This  implies that given the suitable malt barley production potential in Ethiopia, important coordinated works are expected towards the intensification of malt barley production needed in the future to fully exploit growing demands for malt market and realize import substitution from domestic source enhancing farmer income saving foreign currency requirement at large.


There is a rapidly growing body of literature that documents positive effects of contract farming schemes on sub-Saharan Africa, for instance income growth, increased farm productivity, creation of employment opportunities, female empowerment and poverty reduction (Getaw and Atle, 2015). However, neither contract farming schemes nor commercialization of smallholder agriculture can be frictionless processes; which implies cannot be panacea for all sorts of agricultural production systems. Likewise, along the operation of malt barley contract farming arrangement or malt barley commercialization, the following challenges have been identified.

Alemu et al. (2015) reported some of the challenges in malt barley contract farming in Arsi and West Arsi. In general, there is a positive trend in actors’ behavior to follow their operations as per contract agreement; however, farmers mention delayed payment. The main challenges faced by SHA in promoting contractual arrangement between unions and AMF was highly linked with the limited competition in the market as lack of alternative market outlet, that is, there is perceptions of AMF as exercising monopsony market power (Holtland, 2017). While AMF stressed the challenges of under volume supply and poor grain quality, importantly, Alemu et al. (2015) related the drivers of the challenges to the following key issues:

1. Unclear relation between unions and their respective member cooperatives

2. Unclear relationship between primary cooperatives and their respective member farmers

3. Systematic engagement of local traders

4. Lack of independent quality assessors for price setting

5. Need for technical backstopping and its cost implication

6. The need to involve wider stakeholders to implement contract arrangements (seed enterprises, extension offices, trade and market development offices, seed laboratories, etc)

Alemu et al. (2015) and Watabaji (2016) revealed the performance of the contracts in terms of the proportion of actual supply from the amount agreed upon indicating that AMF has  better  performance  with  unions  where  it managed to receive about 97% of the quantity stated in the agreement, while Diageo received about 52% and Heineken received about 38% of the volume under the agreement with the unions. On the other hand, the quantity supplied by the primary cooperatives was only about 46% for AMF and about 49% for Heineken of the quantity stated in the agreement. This really indicates the relatively huge gap between the volumes stated in the agreement and actually supplied, which is a very good indicator of the challenges in contract enforcement linked with side selling activities of member cooperatives for the unions and member farmers for the primary cooperatives.

Malt barley contract farming is a new phenomenon to Ethiopia. Scaling out and up the innovations towards new potential areas and other commodities depend on a number of factors including physical, socioeconomic and policy factors. Scaling-out and scaling-up of contract farming are important for both the firm and farmers. For breweries and AMF, scaling-out as well as scaling-up are important to procure all required volumes of malt barley from local sources to utilize its processing capacity, infrastructure and manpower. Scaling-out and scaling-up however have their own advantages and disadvantages. Scaling-out spreads supply risk, while scaling-up may increase it. For farmers, scaling-out offers market opportunities to new entrants, while scaling-up enables existing contract farmers to augment their income.

The malt barley contract farming scheme now covers about hundred thousand farmers in several villages and districts mainly in Oromia and evolving in Amhara regions. AMF, major brewers Diageo and Heineken are seeking to boost local barley production with the eventual aim to source domestically 100 and 60% of raw materials respectively, by two years (ATA, 2016). Firm farm integration potential not exhaustively utilized as local sourcing is only 55% successful. Scaling out such endeavors towards other high value commodities demands strict food safety and quality standards, traceability issues and requirements that are not well adopted by majority of farmers in Ethiopia.

Accordingly, there is clear prospects of malt barley subsector development in Ethiopia. Clusters of malt barley production under laid out in Oromia and Amhara Regions. For instance in Oromia region, the cluster envisions generating annual revenues of 81 million US dollars by 2020, through domestic sales of malt barley grain, malt and beer in the country (ATA, 2016). Import substitution of malt barley products are estimated at 43 million US dollars, with 50% processing happening within the cluster and 50% through contractual agreements with processors in Addis Ababa and surrounding cities.

Increasing farmers’ use of improved inputs is therefore critical to this endeavor, with targets set at an increase of nearly 400% within five years. This is expected to contribute to increases of 24% in the average yield per hectare and 165% in the amount of marketed barley. Ultimately, this will lead  to  a  growth  in total  revenue  of over 450%. To realize the full potential of the cluster, priority interventions already under implementation include building agro-processing capacity; ensuring steady supply of farming inputs; and strengthening the contract farming framework and enforcement mechanisms for agreements between farmers and malting factories.






The study investigated emerging trends of contract farming scheme to be adopted as one of the potential pathways for smallholder commercialization in the country. Common indicators of commercialization such as market orientation, participation in both inputs and outputs, expansion of cultivation areas, and adoption of technologies (varieties, fertilizer, etc.,) are observed along malt barley contract farming scheme. Following beer companies privatization and enhanced working capacity, and malt demand increased by 83%. As result, malt barley contract farming scheme introduced by Heineken/chord to ensure local sourcing of malt barley by integrating large number of farmers to the value chain.

The malt barley contract farming scheme observed as driver of smallholder commercialization showcase of firm-farmer integration and agricultural transformation in the country. This is due to the fact that contract farming is an emerging institutional innovation in Ethiopia linking farmers to reliable market, open access to inputs, technology and advisory services that lead to improved productivity, production and income. Specifically, malt barley contract farming scheme is an innovative platform harboring public private partnership, the malting industry managed to secure 55% of the requirement from local sources. Contracted farmers take a 10% higher price for malt barley than non-contracted food barley producer counterparts due to high yielding varieties productivity advantage from same parcel of land, similarly malt factories are integrated and benefiting from processing local raw material.

Studies on recent progress of malt barley contract farming scheme in Ethiopia report the following finding. The findings include: thousands of farmers are contracted to Heinken, Diago and Dashen breweries and Asella and Dashen malt factories; farmers positively responding to malt barley market signals, farmers are motivated to profit maximization, areas under malt barley cultivation growing, considerable areas are specializing in malt production using emerging comparative advantages. These phenomena occurring in the malt barley value chain leads to make certain important conclusions in terms of the smallholders’ market orientation, participation both in input and output markets and growing income imply that malt barley is commercialized to considerable level.

However, there are still some challenges in the organization and operation of the contract farming schemes;  along  fulfilling  malt  barley  requirement  from local sources. Astonishingly, the impact of farm-farmer business integration reported to be very high for farmers while the impact on the firm is high but at high costs. That benefit imbalance was reported from the firm side that local malt barley production cost is higher than importing costs. Sustaining the success of malt barley firm-farmer business scheme, depends on strengthening performances of the interfaces of the intermediaries such as primary cooperatives, unions, microfinance institutions, research institutes, agricultural offices, donors and facilitator projects operating between farmers and the firm. It was observed that primary cooperative, unions, etc, perform at different capacity, some at remarkable level while others fail to perform desired role accordingly.

Policy implications

The following implications are in particular of interest to upstream and downstream stakeholders including public actors in charge of enabling smallholder commercialization process, breweries, malting industries, primary cooperatives, cooperative unions and NGOs and farmers.

Raise awareness level of farmers about contract farming scheme   

The majority of the multipurpose primary cooperatives are unexperienced in marketing activities. Awareness among members about the possibilities and potential benefits to supply to the multipurpose primary cooperative is relatively low. Training should, therefore, be provided to members concerning marketing operations and the potential of receiving dividends in the case of increased marketing activities. Capacitate farmers to exercise their proper market choice, and once their market contract made with malting industry actors maintaining trusted relationship, will be the basis of sustainable relationship.

Enhancing the capacity of farmer organizations (primary cooperatives and unions)

Farmers organization, that is, the cooperatives and unions are playing pivotal role in firm farmer linkage. The cooperatives and unions are existing in different level of capacity. Some deploy competent staff and logistics, and office arrangements while others do not. Thus, upgrading working capacity of farmers’ organization is the basis of bargaining power of farmers and sustainable partnership. Monitoring, evaluation and learning; and auditing and accountable systems need to be established.

Improving price setting and payment modalities

One  of  the  challenges  posed  by  farmers  is  delay   of payment time, the other challenge posed by firm’s side is side selling. As price variability and payment lag give rise to side selling, proper time of price settlement is required from the firm, breweries and malting industry accordingly.

Exercising appropriate incentive and sanction system

In contract relationship, either one or both fail to fulfill contracted agreement. In order to encourage those trusted actor and discourage those who default, they need to be properly treated by formulating formal legal systems.

Developing comparative advantage

Commercialization can be enhanced through further specialization as per the natural agro-climate niche of malt barley production. Thus, the commercialization scheme should focus on increasing the volume of production (productivity) in general and the level of surplus production in particular. This implies the need to intensify the current extension and market support programs with programs that can expand households’ production frontier by enhancing access and options of modern inputs and technologies to allow farmers gain by raising productivity yield per unit of land while firms are able to source raw material at fair real price in win-win relationship both for producers and firms in sustainable manner.



The author has not declared any conflict of interests.



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