African economies are increasingly confronted with changing food and commodity markets, due to globalisation, economic liberalisation and urbanisation. Subsequently, consumer preferences change. This poses new opportunities but also challenges to small-scale producers, traders and processors along agricultural value chains. The value chain is increasingly seen as an important development framework, with contract farming being viewed as an instrument for improving value chain performance by reducing transaction costs and risks and by building trust in vertical cooperation. This paper uses the case study of the potato value chain in Kenya to examine these assumptions. It is shown that contract farming can be used to reduce transaction costs and risks, and to improve the organisation and governance of value chains by creating stable business relationships. Nevertheless, it is constrained by a number of market and institutional failures.