As You Sow, So Shall You Reap: The Welfare Impacts of Contract Farming

Bellemare, Marc F. (2010): As You Sow, So Shall You Reap: The Welfare Impacts of Contract Farming.

Abstract

What is the impact of participation in commodity chains on producer welfare? Contract farming – wherein a processing firm delegates its production of agricultural commodities to growers – is often viewed as a means of increasing grower welfare in developing countries. Because the nonrandom participation of growers in contract farming has so far not been dealt with convincingly, whether participation in contract farming increases welfare is up for debate. This paper uses the results of a contingent valuation experiment to estimate willingness to pay to enter contract farming, which is then used to control for actual participation in contract farming. Using data from Madagascar, results indicate that contract farming entails a 12- to 18-percent increase in income; a 16-percent decrease in income volatility; a two-month decrease in the duration of the hungry season; and a 30-percent increase in the likelihood that a household receives a formal loan.

• Item Type: MPRA Paper
• Language: English
• Keywords: Contract Farming, Welfare, Grower-Processor Contracts, Outgrower Schemes
• Subjects: L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L23 - Organization of Production; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O13 - Agriculture ; Natural Resources ; Energy ; Environment ; Other Primary Products; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L24 - Contracting Out ; Joint Ventures ; Technology Licensing; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q1 - Agriculture > Q12 - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O14 - Industrialization ; Manufacturing and Service Industries ; Choice of Technology

References

Ackerberg, Daniel A., and Maristella Botticini (2002), “Endogenous Matching and the Empirical Determinants of Contract Form,” Journal of Political Economy 110(3): 564-591.

Arrow, Kenneth, Robert Solow, Paul R. Portney, Edward E. Leamer, Roy Radner, and Howard Schuman (1993), “Report of the NOAA Panel on Contingent Valuation,” Federal Register 58: 4601-4614.

Bijman, Jos (2008), “Contract Farming in Developing Countries: An Overview,” Working Paper, Wageningen University.

Cameron, Trudy Ann, and Michelle D. James (1987), “Efficient Estimation Methods for Close-Ended Contingent Valuation Surveys,” Review of Economics and Statistics 69(2): 269-276.

Chen, M. Keith (2008), “Rationalization and Cognitive Dissonance: Do Choices Affect or Reflect Preferences?,” Working Paper, Cowles Foundation.

Deaton, Angus (1997), The Analysis of Household Surveys, Washington, DC: World Bank Publications.

Dehejia, Rajeev H., and Sadek Wahba (2002), “Propensity Score Matching Methods for Nonexperimental Causal Studies,” Review of Economics and Statistics 84(1): 151-161.

Dercon, Stefan (2005), “Risk, Poverty, and Vulnerability in Africa,” Journal of African Economies 14(4): 483-488.

Foster, Andrew D., and Mark R. Rosenzweig (2010), “Microeconomics of Technology Adoption,” Working Paper, Yale University.

Grosh, Barbara (1994), “Contract Farming in Africa: An Application of the New Institutional Economics,” Journal of African Economies 3(2): 231-261.

Institute for Agriculture and Trade Promotion (2010), “Complaints of Contract Farm Abuses Increasing,” http://www.agobservatory.org/agribusiness_records.cfm?nID=241 accessed on February 24, 2010.

International Monetary Fund (2009), World Economic Outlook Database, http://www.imf.org/external/pubs/ft/weo/2009/02/weodata/index.aspx accessed on November 18, 2009.

Laskawy, Tom (2009), “Will Whole Foods’ New Mobile Slaughterhouse Squeeze Small Farmers?,” http://www.grist.org/article/2009-11-20-Whole-Foods-chicken-farms/ accessed on February 25, 2010.

Ligon, Ethan, and Laura Schechter (2003), “Measuring Vulnerability,” Economic Journal 113(486): C95-C102.

List, John A., Sally Sadoff, and Mathis Wagner (2010), “So You Want to Run an Experiment, Now What? Some Simple Rules of Thumb for Optimal Experimental Design,” NBER Working Paper.

Maertens, Miet (2009), “Horticulture Exports, Agro-Industrialization, and Farm—Nonfarm Linkages with the Smallholder Farm Sector: Evidence from Senegal,” Agricultural Economics 40(2): 219-229.

Maertens, Miet, and Johan F.M. Swinnen (2009), “Trade, Standards, and Poverty: Evidence from Senegal,” World Development 37(1): 161-178.

McMichael, Philip (2009), “A Food Regime Analysis of the ‘World Food Crisis’,” Agriculture and Human Values 26(4): 281-295.

Minot, Nicholas (1986), “Contract Farming and Its Effect on Small Farmers in Less Developed Countries,” Working Paper, Michigan State University.

Minten, Bart, Lalaina Randrianarison, and Johan F.M. Swinnen (2009), “Global Retail Chains and Poor Farmers: Evidence from Madagascar,” World Development 37(11): 1728-1741.

Mitchell, Robert C., and Richard T. Carson (1989), Using Surveys to Value Public Goods: The Contingent Valuation Method, Washington, DC: Resources for the Future.

Miyata, Sachiko, Nicholas Minot, and Dinghuan Hu (2009), “Impact of Contract Farming on Income: Linking Small Farmers, Packets, and Supermarkets in China,” World Development 37(11): 1728-1741.

Porter, Gina, and Kevin Phillips-Howard (1997), “Comparing Contracts: An Evaluation of Contract Farming Schemes in Africa,” World Development 25(2): 227-238.

Rao, Elizabeth J.O., and Matin Qaim (2010), “Supermarkets, Farm Household Income, and Poverty: Insights from Kenya,” Working Paper, University of Göttingen.

Reardon, Thomas, and Julio Berdegué (2002), “The Rapid Rise of Supermarkets in Latin America: Challenges and Opportunities for Development,” Development Policy Review 20(4): 371-388.

Reardon, Thomas, C. Peter Timmer, Christopher B. Barrett, and Julio Berdegué (2003), “The Rise of Supermarkets in Africa, Asia, and Latin America,” American Journal of Agricultural Economics 85(5): 1140-1146.

Reardon, Thomas, and C. Peter Timmer (2005), “Transformation of Markets for Agricultural Output in Developing Countries Since 1950: How Has Thinking Changed?,” in Robert E. Evenson, Prabhu Pingali, and T. Paul Schultz, eds., Handbook of Agricultural Economics 3: Agricultural Development: Farmers, Farm Production, and Farm Markets, Amsterdam: Elsevier.

Ruud, Jørgen (1960), Taboo: A Study of Malagasy Customs and Beliefs, Antananarivo: Printy Loterana and Oslo: Oslo University Press.

Simmons, Phil, Paul Winters, and Ian Patrick (2005), “An analysis of contract farming in East Java, Bali, and Lombok, Indonesia,” Agricultural Economics 33(s3): 513-525.

Stifel, David C., Marcel Fafchamps, and Bart Minten (2008), “Taboos, Agriculture, and Productivity,” Working Paper, Lafayette College.

Stifel, David S., Felix Forster, and Christopher B. Barrett (2010), “The Evolution of Groupwise Poverty in Madagascar, 1999-2005,” Journal of African Economies forthcoming.

USDA (2009), “Trade Data Show Value, Variety, and Sources of US Food Imports,” http://www.ers.usda.gov/AmberWaves/September09/DataFeature/ accessed on February 26, 2010.

Vossler, Christian A., and Joe Kerkvliet (2003), “A Criterion Validity Test of the Contingent Valuation Method: Comparing Hypothetical and Actual Voting Behavior for a Public Referendum,” Journal of Environmental Economics and Management 45(3): 631-649.

Warning, Matthew and Nigel Key (2002), “The Social Performance and Distributional Consequences of Contract Farming: An Equilibrium Analysis of the Arachide de bouche Program in Senegal,” World Development 30(2): 255-263.

Watts, Michael J. (1994), “Life under Contract: Contract Farming, Agrarian Restructuring, and Flexible Accumulation,” in Peter D. Little and Michael J. Watts, Living under Contract: Contract Farming and Agrarian Transformation in Sub-Saharan Africa, Madison, WI: University of Wisconsin Press.

Wooldridge, Jeffrey M. (2002), Econometric Analysis of Cross Section and Panel Data, Cambridge, MA: MIT Press.