Conclusions

The results of the empirical analysis lend credence to the contention that contract farming can be an effective institutional mechanism to reduce transaction costs faced by small-scale, poor rice farmers and hence increase profitability and reduce rural poverty. Our results show that for the sample contract rice farmers are more profitable than non-contract farmers by a significant margin. This is also true for each of the two regions in the sample. This profitability gap holds for alternative definitions of profitability and for all scales of operation. In terms of scale of operation there is no evidence that contract farming is biased against small farmers and profits per unit of land decline with farm size, being highest for farms below 5 rai. Counterfactual simulations suggest this is not due to selection bias with the more profitable farms shifting to contracting arrangements.

There is significant profit inefficiency among the sample rice farmers in Thailand. Overall, rice farmers in Thailand could increase their profit by more than 30%. Again overall the efficiency losses are greater for non-contract farms, although there is only a significant difference in the Northeast region, where land is significantly more degraded than in the North. Counterfactual simulations indicate that only in the Northeast would shifting to contract farming raise efficiency amongst non-contract farms. Farm size seems to have little impact on profit efficiency, although contract farms below 5 rai show higher efficiency than larger farmers.

The major factor driving these results appears to be the higher prices received by contract farmers (rather than by higher yields for example). These higher prices are in turn due to the fact that contract farmers (particularly the NGO-based fair trade network operation in the Northeast) are growing high quality organic rice that commands a premium price. As noted above, the analysis does not allow us to disentangle the effects of contracting arrangements from the use of organic farming technology. However as a group the wellestablished (‘certified’) organic farmers show considerably higher profitability than other contract farmers in the Northeast. In the North, where organic practices are less strictly enforced in the sample farms, there seems no significant difference between the profitability of the permanent, transition and initial organic groups, even though the latter two continue to use some chemicals and pesticides. All organic groups in both regions show a significantly higher profitability than non-contract, conventional farmers when we measure profits by deducting non-cash costs (‘profits over total variable costs’).

With respect to the development of organic farming, the results from the present study show a distinctive development path in the different parts of the country. In Northeast Thailand where farmers have converted from conventional chemical to organic farming on degraded land, profitability initially is relatively low (although still higher than that in similar, non-contract conventional farms) and increases with the number of years of organic operation. In other words, during the transition years, profits are low and as ecosystems restore themselves, the farms become more profitable and profit efficient. In Northern Thailand, on the other hand, where new marginal land was brought into organic production, this pattern of increasing profit and profit efficiency over the years is not found, although profits are higher than on conventional farms. Since farms in the Northern region are on less degraded land than are farms in the Northeast, initial and transitional profitability from partial organic agriculture is much higher in the North than in the Northeast and conventional rice farming also generates considerably higher profitability there than in the Northeast. These profitability figures simply reflect the market price value of rice output and if the definition of benefits were widened to include the potential environmental (avoidance of pollution from agro-chemicals leaching) and health benefits (farmers not exposed to pesticides) of organic farming the economic returns to organic farming are likely to be even greater.

This analysis suggests that a combination of contract and organic farming has been effective in enhancing the profitability and to some extent the efficiency of small-scale rice farmers in Thailand. Particularly in the case of provinces in Northeast Thailand where a majority of the poor resides and where the green revolution has not been effective in addressing poverty, and has worsened ecosystems, contract farming of organic rice is shown to be effective means of raising incomes and by implication addressing rural poverty. There are lessons here for Lao PDR and Cambodia.

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