A new institutional economic analysis of small farmer contracts and relations in the sugar supply chains in

This paper suggests that a new approach is required to link smallholders with agribusiness in developing countries. This approach combines the use of the new institutional economics, a case study methodology and the lessons of history, to develop some suggestions for the design of a viable and sustainable contract farming model. A case study methodology in the Southern African sugar industry is used to test the research questions. The results confirm that the transaction characteristics of a grower-processor supply chain influence the level of managed co-ordination and that smallholder farmers generate incremental transaction cost. The results also suggest that contracting can act as an institution to overcome the barriers of entry to the sugar industry by smallholder farmers, however certain measures need to be taken to ensure contract enforcement and to reduce transaction cost. These include establishment and maintenance of trust between the growers and the processing firms.