This dissertation investigates the hypotheses that high transaction costs contribute to relatively low participation rates in livestock leasing in South Africa; and that specific contractual characteristics contribute to minimising total transaction costs of livestock leasing contracts in South African commercial agriculture. Many emerging livestock farming businesses may value the option of leasing-in livestock. Likewise, many established livestock farming businesses are currently undergoing expansion (especially dairy farms) and may also value the option of leasing-in livestock. A reduction in transaction costs and an improvement in efficiency of the livestock lease market could prove beneficial for emerging/expanding livestock farms. Likewise, investors, who anticipate competitive rates of return from investments in livestock, may value the option of owning and leasing-out livestock to suitable farm businesses. Transaction costs in livestock rental contracts include costs of information about contracts, costs of monitoring and enforcing contracts, costs of finding party members to contract with, the costs of risk of an agreement being terminated due to exogenous factors such as land claims, the risk of incomplete contracts and the costs of risk bought about by adverse selection and moral hazard. The magnitude of transaction costs incurred by participants of a livestock leasing contract are a function of how costs and risks are shared between the lessee and lessor, the inclusion of specific contractual clauses, the type of leasing contract, the relationship between party members and additional contractual characteristics. A census postal survey of two populations of livestock farmers, namely members of the Jersey Breeders' Societies of South Africa, was conducted during April and May 2007 to collect data on farmers' perceptions of and their participation in livestock rental contracting agreements. Elicited data was analysed using a multinomial discriminant analysis to identify factors that discriminate between non-participants of the livestock leasing market, lessees of livestock and lessors of livestock. Ordinary least squares regression was used to identify preferred characteristics of livestock lease contracts. Results of the first analysis suggest that a livestock leasing market does exist in South Africa; however, the market is characterised by high transaction costs. Non-participation in livestock leasing markets amongst survey respondents is partially attributable to the high perceived costs of obtaining market information and establishing and enforcing livestock lease agreements. Findings of the second analysis show that survey respondents, on average, showed a preference for formal agreements, leasing commercial animals for shorter periods and keeping detailed inventories. It is concluded that providing livestock farmers with information about important characteristics of successful livestock lease agreements may reduce transaction costs, and thus reduce market inefficiency in the market. / Thesis (M.Sc.)-University of KwaZulu-Natal, Pietermaritzburg, 2007.

Thesis (MBA (Business Management))--University of Stellenbosch, 2007. / AFRIKAANSE OPSOMMING: Grondhervorming en dit wat daarmee gepaard gaan, is een van die hoekstene van die normalisering van ons samelewing en is sedert 1994 deel van die transformasieproses. Die huidige regering gaan uit van die oortuiging dat blywende vrede nie verkry kan word sonder dat dié ongelykhede reggestel word nie. Is daar ‘n antwoord op Suid-Afrika se ongelyke grondbesit, en kan kontrakboerdery 'n rol speel in die oorbrugging van die probleme? Een van die belangrikste aspekte van die regstelling van die ongeregtighede van die verlede, is die uitwissing van armoede, en in hierdie verband is Landbou 'n belangrike rolspeler. Ten einde armoede te bestry en werk te skep, moet die toekomstige generasie bemagtig word deur eienaarskap te versprei. Die Wet op Inheemse Grond van 1913, die Inheemse Trust- en Grondwet van 1936, en die Groepsgebiedewet van 1950 het swart Suid-Afrikaners die geleentheid ontneem om plaaseenhede te besit en te bedryf in die blanke gebiede van Suid- Afrika wat, soos ons almal weet, verreweg die grootste gedeelte van die land asook die meer produktiewe boerderygrond uitgemaak het. Die grondhervormingsproses streef om die erfenis van hierdie wette ongedaan te maak. Sedert die Suid-Afrikaanse grondhervormingsprogram in 1994 van stapel gestuur is, heers daar groot debat oor die beleid, implementeringstrategieë en die impak van sodanige pogings op landbougrond, die lewens van die bevoordeeldes, en die Suid-Afrikaanse ekonomie. Met die toename in skaal en kompleksiteit van grondhervorming het dit al hoe moeiliker vir die Regering geword om die proses te monitor en te evalueer. Dit is nou alombekend dat, behalwe vir kwantitatiewe aanwysings, daar baie leemtes bestaan in die inligting oor grondhervorming. In die lig van die veranderende aard van wêreld-landbou- en voedselmarkte en die voortspruitende behoefte vir vertikale integrasie van die voedselverskaffingskettings, het hierdie werkstuk ten doel om die rol van kontrakboerdery as 'n instelling te ondersoek, ten einde die voortgesette deelname te verseker van kleinboere in ontwikkelende lande in die markte vir hoëwaarde produkte. Die klem val spesifiek op die Suid-Afrikaanse omstandighede vir grondhervorming. Die werkstuk bespreek die teoretiese rasionaal van kontrakboerdery, en illustreer hoe dié vorm van boerdery aangewend kan word om markmislukkings en a-simmetriese informasieprobleme te oorkom. / ENGLISH ABSTRACT: Land reform and associated matters are some of the cornerstones of the normalizing of our society and have been part of the transformation process since 1994. The present regime is of the conviction that lasting peace cannot be achieved without such unequalities being addressed. Is there an answer to unequal ownership of land in South Africa, and can contract farming play a role in bridging these problems? One of the most important aspects of the unrighteousness of the past, is poverty and in its eradication, agriculture is an important role player. In order to combat poverty and create jobs, the future generation must be empowered by ownership of the economy. The Indigenous Land Act of 1913, The Indigenous Trust and Land Act of 1936, and the Group Areas Act of 1950 deprived Black South Africans of the opportunity to own and run farming units within the white areas of South Africa that, as we all know, formed by far the largest part of the land as well as the more productive farming land. The land reformation process strives to annul the legacy of those laws. Since the South African land reform program was started in 1994, a heated debate has raged about the policy, implementation stategies, and impact of such efforts on agricultural land, the lives of the beneficiaries, and the South African economy. With the increase in scale and complexity of land reform, it became more and more difficult for the regime to monitor and evaluate the process. It is now common knowledge that, except for qualitative indications, many shortcomings are apparent in the information on land reform. In light of the changing nature of world agricultural and food markets and the subsequent need for vertical integration of the food-supply chains, this study aims at investigating the role of contract farming as an institution, in order to ensure the continued participation of small farmers in developing countries in the markets for high-value products. The emphasis falls specifically on the South African conditions for land reform. This study describes the theoretical rationale of contract farming, and illustrates how this form of farming can be applied to overcome market fiascos and assimmetrical information problems.

The Ezemvelo Farmers’ Organisation (EFO) is a certified organic smallholder group in KwaZulu-Natal province (South Africa) that exists as an institution to improve smallholder access to niche markets by reducing unit production and transaction costs. The study is motivated by the need to understand drivers of collective action, prevalence of internal group free-riding, and the impact of contract terms on contract performance. These three theoretical concepts are pertinent in understanding organisational and institutional issues affecting the performance of smallholder organic farming groups and in formulating policies to promote the performance of such groups. The study relies on the theoretical foundations of collective action, free-riding and contracts found within the realm of New Institutional Economics (NIE). These theories, though separate, are in fact related in certain respects. Collective action in smallholder groups, apart from being a function of a plethora of socio-economic factors, including transaction costs, could be constrained by free-riding within the group, which in turn could be influenced by flawed contractual arrangements. This study of collective action focuses on 200 farmers drawn from a sample survey of 49 non-EFO members, and a census survey of 103 partially certified and 48 fully certified EFO members. A ‘collective action’ model investigates the impact of perceived benefits and savings on production and transaction costs attributed to collective action by drawing comparisons between EFO members and non-members using a multinomial logit model. The study of free-riding uses data from 151 members of the EFO to construct an index of free-riding within the group using principal components analysis (PCA). A ‘contract model’, which also focuses on EFO members only, attempts to measure the impact of verbal contract provisions on contract performance in addition to evaluating the determinants of preferred contract terms using a combination of PCA, Ordinary Least Squares (OLS) regression, and logit models. Results indicate that continued participation in EFO is not influenced by the age or gender of the farmer, but positively influenced by growth in the net benefits of participation, and negatively by an increase in the size of the household’s cropland or on-farm earnings. With respect to production and transaction costs, the results suggest that EFO has reduced fully certified members’ concerns that crops would be damaged by livestock or constrained by inadequate technical information. However, this is not the case for other problems such as price uncertainty in conventional markets, a lack of affordable operating inputs, a lack of affordable transport, and a lack of communications infrastructure. The index of free-riding behaviour constructed using principal components analysis suggests that free-riding poses a serious threat to EFO’s collective marketing efforts. Ordinary Least Squares regression analysis of the index scores shows that members who are male, poorly educated, partially certified, aware of loopholes in the grading system, and who do not trust the buyer are more likely to free-ride. Benefits accruing to EFO members are limited and there is substantial confusion among members about the terms of EFO’s verbal contract with the pack house that purchases their organic produce. Ordinary Least Squares regression analysis of the impact that perceived contractual terms have on quantities delivered to the pack house yielded interesting findings. Perceptions that delivery calls are made by the buyer, that grading procedures are flawed and that prices are not jointly established were found to reduce quantities delivered to the pack house, after controlling for differences in farm and farmer characteristics. Logit models estimated to identify the determinants of preferred contract clauses indicate that farmers with higher levels of formal education and farm income, and lower levels of experience, favour a written contract over a verbal contract. Similarly, farmers with higher levels of formal education and lower levels of family farm labour favour a contract denominated by area rather than weight. It is concluded that EFO should recruit households that rely on farming for income and which are land constrained. EFO is more likely to survive if it continues to secure fully subsidised information, transport, fencing, and certification services for its members, and if it improves the benefits of participating by synchronising harvest and delivery dates, negotiating price discounts for organic inputs, and by maintaining an office with telephone, fax and postal services. In the longer-term, EFO should address institutionalised free-riding by issuing tradable ownership rights. In the short-term, EFO must engage with the pack house (buyer) to remove flaws in the grading process that conceal the origin of low quality produce. Transparent and mediated negotiations leading to an incentive compliant contract with the buyer may also help to build trust and reduce free-riding within EFO. It is also recommended that the terms of EFO’s contract with the pack house should be revised so that; (a) delivery calls can be made by either the pack house or by EFO during specified periods and with reasonable notice, and (b) grading procedures are fully transparent and ensure traceability so that losses caused by poor quality can be internalised to members who deliver inferior produce. In addition, it is important that prices be negotiated at the beginning of each season and that the contractual parties have recourse to pre-agreed facilitators and an arbitrator to resolve disputes on price and quality. A written contract is recommended to support these more complex terms, with the proviso that the contract is explained to current and prospective members, and that growers are fully informed of their rights and obligations. / Thesis (Ph.D.)-University of KwaZulu-Natal, Pietermaritzburg, 2008.