Contract farming: opportunity cost and trade‐offs

An important literature has established that participation in contract farming leads to higher incomes and has a number of other beneficial effects on the welfare of participating households. Yet no one has looked at the opportunity cost of and the various trade‐offs involved in participating in contract farming. I look at the relationship between participation in contract farming and income from (i) livestock, (ii) labor markets, (iii) nonfarm businesses, and (iv) agricultural sources other than livestock and contract farming and (v) unearned income. Using data from Madagascar, I find that participation in contract farming is associated with a 79% decrease in how much income per capita the average household derives from labor markets and a 47% decrease in how much income per capita it derives from nonfarm businesses, but also with a 51% increase in how much income per capita the average household derives from agricultural sources other than livestock and contract farming, possibly due to technological spillovers. Thus, even though contract farming has been shown to improve welfare in multiple ways in this context, it looks as though those gains come at the cost of an “agricultural involution” on the part of participating households, who seem to turn away from non‐agricultural activities. This has important implications for structural transformation narratives.     

Participation in contract farming and farm performance: Insights from cashew farmers in Ghana

The global demand for cashew nuts continues to increase steadily. However, many African countries face difficulties in marketing and adding value to the product. Using recent survey data of 391 cashew farmers in Ghana, this paper contributes to the growing evidence on the significance of contract farming (CF) in improving the welfare of rural households in developing countries. Specifically, the paper analyzes the factors that influence cashew farmers’ decisions to participate in CF, and the impact of participation on farmers’ performance. We employ a recently developed switching regression model with endogenous explanatory variables and endogenous switching to control for selection bias caused by observable and unobservable factors. The empirical results show that participation in CF significantly increases labor productivity and price margins, as well as cashew yields, and net revenues. A disaggregated analysis of the sample into farm size categories reveals that small‐sized cashew farms tend to benefit more through CF, compared to medium‐ and large‐sized farms.     

Vertical coordination and farm performance: evidence from the catfish sector in Vietnam

Using an original dataset from the Vietnamese catfish sector, I analyze the impact of vertical coordination options, namely, contract farming and vertical integration, on farm performance, which is measured in terms of yields and revenue per hectare. The effects of vertical coordination are estimated using a maximum simulated likelihood estimator and a two‐stage least square regression with instrumental variables to account for endogenous farm and household characteristics and selection on unobservable characteristics. The results show that vertically integrated farms have substantially higher yields and revenue per hectare than nonintegrated farms. The levels of gains that can be attributed to integration are large and consistent under different estimation procedures, and there is no difference between nonintegrated and contract farms in terms of farm performance.     

Contract farming and smallholder incentives to produce high quality: experimental evidence from the Vietnamese dairy sector

In emerging markets for high‐value food products in developing countries, processing companies search for efficient ways to source raw material of high quality. One widely embraced approach is contract farming. But relatively little is known about the appropriate design of financial incentives in a small farm context. We use the example of the Vietnamese dairy sector to analyze the effectiveness of existing contracts between a processor and smallholder farmers in terms of incentivizing the production of high quality milk. A framed field experiment is conducted to evaluate the impact of two incentive instruments, a price penalty for low quality and a bonus for consistent high quality milk, on farmers’ investment in quality‐improving inputs. Statistical analysis suggests that the penalty drives farmers into higher input use, resulting in better output quality. The bonus payment generates even higher quality milk. We also find that input choice levels depend on farmers’ socio‐economic characteristics such as wealth, while individual risk preferences seem to be less important. Implications for the design of contracts with smallholders are discussed.     

Agricultural technology and child labor: evidence from India

Child labor continues to be a major problem in developing countries, particularly in agricultural countries. The latest ILO global report points out that nine out of every ten child laborers is involved in the agricultural sector. The focus of this article is on the rural sector in India, a country where child labor continues to be prevalent. A number of factors have been found to significantly influence the extent of child labor. This article will focus on the type of technology utilized in the agricultural sector. Technology is divided into two types: biochemical and mechanical. The empirical results indicate that biochemical technology has both positive and negative effects on child labor. However, mechanical technology is found to have a statistically significant and negative impact on child labor.     

Horticulture,livelihoods, and urban transition in Africa: evidence from South‐West Cameroon

This article documents change in periurban horticulture using repeat surveys in 1995 and 2004 of about 300 households around Muea, Cameroon. Real household incomes increased by 14%, with a large shift from farm to nonfarm income. Within agriculture, activity shifted from staple crops to horticulture, both for sale and in home consumption. In 1995, there were large remittances from farmers involved in periurban horticulture to their village of origin; in 2004 remittances continued and horticultural farmers were also heavily involved in informal financial associations. Periurban horticulture is disproportionately practiced by women and older workers, and plays an important and growing role in African livelihoods.     

Rural nonfarm income and its impact on agriculture: evidence from Albania

Using data from the 2005 Albania Living Standards Measurement Study (ALSMS05) survey, this article analyzes the overall impact of household nonfarm income-generating activities (RIGA) on agricultural expenditures as well as technical efficiency of rural farm households. We also differentiate the impact for subsistence and commercial farmers, who are in the top 25% of the distribution of value of annual agricultural sales. Our results show that on the whole, Albanian rural households utilize their nonfarm earnings not to invest in time-saving, efficiency-increasing technologies, but to move out of crop production. We derive similar findings when we try to estimate the same relation separately for commercial and subsistence farmers. However, for commercial farmers, we find a positive impact of household nonfarm earnings on livestock expenditures.     

The impact of water conservation and intensification technologies: empirical evidence for rice farmers in Ghana

This study employs the propensity score matching model to examine the impact of the adoption of water conservation and intensification technologies on farm output and income among small-scale lowland rice farmers in the Northern Region of Ghana. The matching was conducted based on the Mahalanobis distance combined with the propensity score. Balancing tests by checking the mean standardized absolute bias in the matched sample were conducted as well as a sensitivity analysis was conducted to check for hidden bias due to unobservable selection. The empirical results show a positive and significant impact of the adoption of bunds technology on input demand as well as a positive but insignificant impact on output supply and net returns. Adopters of the dibbling technology were found to have higher output supply, whereas no statistically significant difference was found between the incomes of adopters and nonadopters of dibbling seed method. The results, however, reveal a positive and significant effect on output and net returns when the dibbling method is combined with intensified weeding. The estimates were found to be relatively insensitive to hidden bias.     

Impact of training on the intensification of rice farming: evidence from rainfed areas in Tanzania

Agricultural development is indispensable for poverty reduction and food security in sub‐Saharan Africa (SSA). This study investigates the impact of rice production training in a modified version of the System of Rice Intensification (SRI) on the performance of small‐scale rice farmers in a rainfed area of Tanzania. Utilizing the plot level variation, we employ propensity score matching (PSM) to assess the impact of training on technology adoption, productivity, and profitability. We also estimate a difference‐in‐differences model with plot fixed effects using recall panel data covering the periods before and after training. We found that trainees achieved an average paddy yield of 4.7 tons per hectare and rice profit of 191.5 USD per hectare on the plots where new technologies were adopted, which is higher by about 1.3–1.8 tons and 119–137 USD per hectare than on the other plots. Our study suggests the high potential of transforming favorable rainfed rice growing areas in SSA so as to achieve a rice Green Revolution through training in modern input use and improved agronomic practices.     

Spillovers from high-value agriculture for exports on land use in developing countries: evidence from Madagascar

High-value agriculture for exports is increasingly important in developing countries. In a case study of contract farming for exports of vegetables from Madagascar, strong spillover effects of these trade opportunities on land use are found to exist. Using a matched plot sampling design, the productivity of rice—the main domestically consumed staple—is shown to be two-thirds higher on fields that were contracted during the off-season for the production of vegetables. This increase in yields is linked to an increase of soil fertility due to the application of fertilizer and compost, which farmers did not use prior to the contracts. Although agricultural output goes up significantly, labor productivity stays the same, suggesting that there is greater labor absorption on existing land and the diffusion of this type of technology at a larger scale throughout Madagascar would be expected to substantially decrease incentives to deforest by increasing wages and to boost productivity of existing lands relative to newly deforested ones.     

Agricultural production and children's diets: evidence from rural Ethiopia

We study the relationship between pre‐school children's food consumption and household agricultural production. Using a large household survey from rural Ethiopia, we find that increasing household production diversity leads to considerable improvements in children's dietary diversity. However, we also document how this nonseparability of consumption and production does not hold for households that have access to food markets. These findings imply that nutrition‐sensitive agricultural interventions that push for market integration are likely to be more effective in reducing under‐nutrition than those promoting production diversity.     

Analysis of a supply-control program under uncertainty and imperfect competition: Chinese cabbage in Taiwan

Researchers have often attributed the farm–wholesale price spread, after adjusting for marketing costs, as compensation for marketing firms' risk bearing. However, price spreads in excess of marketing costs can also be due to marketing firms' exercise of market power. In settings where both imperfect competition and marketer risk aversion are plausible, a modeling framework must be sufficiently general to accommodate both types of behavior. This article develops and estimates such a model in the context of fresh produce marketing and develops the implications for analysis of supply‐control programs. The model is applied to the production and marketing of Chinese cabbage in Taiwan and specifically to the analysis of supply‐control programs implemented in this industry by the Taiwanese government. The empirical results provide little support for the hypothesis that marketing firms exhibit risk averse behavior, but they do show that marketing firms exercise oligopsony power in procurement of the product from farmers, and that this power is positively related to the quantity supplied in each market period. This provides a heretofore unexplored impetus for supply controls intended to raise producer incomes. However, such controls are also rendered less effective by imperfect competition because marketing firms capture part of the benefits from supply reduction.     

Potential and limitation of an organic fertilizer‐based development strategy: evidence from Tamil Nadu,India, from 1993 to 2003

This article explores the potential and limitations for using farmyard manure (FYM) to improve paddy and upland cereals productivity under various soil conditions in Tamil Nadu, India. Using household‐level fixed effects, estimated yield functions from 1993 to 2003 confirm that FYM application directly increases crop productivity in upland cereals, but not in paddy rice. Complementary effects through an increase in the marginal product of inorganic fertilizer is observed for both paddy and upland cereals, especially where inherent soil fertility is low. Farmers’ FYM use is responsive to changes in the price of FYM, but transport costs limit price transmission across space. Dairy sector development thus improves crop productivity, but only in the small area around the animals which limits the spread of FYM‐based development strategy.     

Willingness to contract versus opportunity to contract: a case study in Kenya's French bean export market

We characterize systematic differences in willingness and opportunity to contract for farmers in and out of the French bean supply market in Kenya. We find that the factors associated with being a low cost producer do not always align with the factors correlated with opportunity to contract. We also find that farmers in and out of the market differ on average in the premiums they place on buyer reliability, which suggests that imperfect contract enforcement could impact participation in French bean contracting.     

Capital market imperfections in economic transition: empirical evidence from Ukrainian agriculture

This article investigates the link between financing and investment in Ukrainian agriculture during economic transition. The main contribution of the study is to provide empirical evidence for the coexistence of financial constraints and soft budget constraints (SBCs). This is of particular importance because credit constraints and SBCs have completely different economic effects. The lack of differentiation between these forms of capital market imperfections yields overlapping effects of financing on investment and may therefore cause a misinterpretation of econometric results. Our empirical analyses are based on an econometric estimation of the Euler investment equations for 529 large farms from three Ukrainian regions between 2001 and 2005. The results confirm that financial variables significantly influence farms' investment, providing empirical evidence of an imperfect capital market in Ukrainian agriculture. It turns out that credit constraints in the Ukrainian agricultural sector are more important than SBCs. We show that the estimated level of financial constraints for profitable farms with access to loans is higher if both types of capital market imperfections are appropriately distinguished.     

Whither the pin factory? Modern food supply chains and specialization in India

What is the relationship between smallholder participation in modern food supply chains and their degree of economic specialization? We investigate this research question by looking at whether there is a systematic relationship between whether a household grows crops for a supermarket chain—participation in the supermarket channel—and how concentrated among fewer crops are that household's total landholdings and its output. Using longitudinal data from India, we find that there is no relationship between whether a household participates in the supermarket channel and that household's Herfindahl–Hirschman index for land, but there is a robust statistically significant and negative relationship between whether a household participates in the supermarket channel and that household's Herfindahl–Hirschman index for output. These findings hold true at both the extensive margin (i.e., when considering whether a household participates in the supermarket channel) and the intensive margin (i.e., when considering how much of a household's marketed output is sold through the supermarket chain). This suggests that instead of fostering a greater degree of specialization, participation in modern food supply chains might lead to greater diversification.     

Quality control in nonstaple food markets: evidence from India

Using original survey data collected on growers, traders, processors, markets, and village communities, we will compare the situation in four states: Tamil Nadu, Uttar Pradesh, Maharashtra, and Orissa. We examine the way that information about crop attributes is conveyed (or not) along the value chain. We find that little information circulates about unobservable crop characteristics. Growers receive a price premium when they dry, grade, and pack their produce, but we find no evidence that information about crop salubrity or agricultural practices circulates through the value chain or that growers are encouraged to follow specific agricultural practices for quality purposes. Market infrastructure is deficient regarding sanitation, with few public toilets, inadequate drainage, and no coordinated pest control.