Contract farming and organic agriculture

In recent years, consumer concerns surrounding food safety have led to an increase in demand for organic products. The global market for organic products has been growing steadily not only in Europe and North America but in Asian countries such as Japan and it is estimated that it will continue to be the fastest growing sector in agriculture. Not surprisingly, organic food production has increased all over the globe, with much of the increase occurring in developing countries where farmers are being attracted by export benefits and substantial price premiums.

This increase in demand has come with a greater insistence on verifiable evidence of food product quality. This in turn has led to more stringent certification requirements and an influx of food traceability systems. Since chemical residues on food are not generally visible and conducting bio-chemical tests are costly and impractical, in order to guarantee the quality of products while minimizing transaction costs, certification systems and traceability systems have developed to provide information on products for consumers, notably in developed countries.

For export agents in developing countries, the ability to fulfill the traceability or certification requirements will determine their success in the export market for agricultural products, in particular, high value products such as organic products. Since such products have to meet strict quality requirements that are typically difficult to meet in spot markets, firms are utilizing contract farming to gain better control of inputs, achieve more uniform product attributes, and to reduce the cost of measuring quality, grading, and sorting of products.

Due to higher management costs of a food traceability system and the requirement for organic farming to be grown in areas free from chemicals, export firms are likely to engage farmers in marginal areas, where the cost of labor is lower and where use of agrochemicals is minimal. For farmers, contract farming provides access to information and markets. For purchasers, contract farming provides control over inputs throughout all stages of production and processing, making it easier to implement traceability systems. For the government, contract farming facilitates the production of high value agro-products that are consistent with international standards for food safety and traceability.

Beyond issues of establishing the requisite certification standards and traceability systems to promote exports, there are broader benefits from promoting contract farming for organic agriculture for poverty reduction. Over the years, it has become increasingly clear to farmers, non-governmental organizations (NGOs), governments and international development agencies alike that the conventional practice of farming under the banner of the ‘Green Revolution’ has by-passed the poor in marginal areas while benefited the richer farmers in fertile areas. There is also increasing evidence that high-external-input agriculture is unsustainable. The unsustainable nature of conventional agriculture is manifesting itself in terms of stagnant or declining yields, increasing ecological degradation, and worsening rural socio-economic conditions. Increasingly, countries have started to look at organic agriculture as a means of reversing these negative effects.

The foregoing discussion illustrates the potential for contract farming to provide benefits that meet multiple policy objectives. But while the benefits of implementing contract farming may be diverse, and while different stakeholders stand to gain from these benefits, persuading farmers to take part in such an arrangement is still largely a matter of financial incentives. In contract farming, one of the principal motives for smallholders consent is the promise of a steady and increased income incurred from the sale of their crops. To establish the benefits of contract farming providing empirical evidence is crucial. We address this below using data from small farms in Thailand.

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