Introduction

Among the poor in Asia a very high proportion are subsistence farmers living on low-value traditional crops. Traditionally, development in the agricultural sector put emphasis on increasing productivity using external inputs with insufficient attention other aspects, in particular to market linkages. This strategy has resulted in mixed poverty outcomes. In countries such as Lao PDR and Cambodia where poverty is a pervasive problem governments and donors are in search of an alternative strategy to develop the rural sector.

With globalization, market liberalization, and the development of rural infrastructure, new market opportunities for high-value crops and livestock production are opening up. However, for the rural poor to take advantage of new market opportunities, backward and forward market linkages must be put in place. These linkages include provision of information on what to grow, rural credit, farming inputs, agricultural extension advice, and help in product accreditation. Putting in place the necessary agri-services for a massive number of small farms and un-organized farmers will require considerable resources from governments. Successes in the provision of public sector agri-services are rare and failures have been numerous. In recent years, a strategy involving private sector has been looked upon as an alternative.

In the provinces of Cambodia and Lao PDR, bordering Thailand and the People’s Republic of China, contract farming has emerged in response to lack of markets in an environment of high risk and high costs. Under contract farming, the purchaser (agri-business firm or trader) provides farmers with inputs, credit, technical advice and market services. In return, farmers produce a certain quantity and quality of crop or livestock, and sell them exclusively to the purchaser. Such arrangements allow farmers to have access to an array of agricultural services, which they would otherwise not have access to.

The emergence of contract farming as an institution for facilitating market exchange is not a recent phenomenon. For decades, contract farming has been used as a supply chain governance strategy in response to market and institutional failures that characterize the agricultural sector in different stages of development. While contract farming itself has been around for a long time, its importance as a tool for transforming subsistence to commercial farmers and thus contributing to poverty reduction has only been reviewed in recent years.

Internationally, in response to changes in consumer preference within developed countries, multinational food corporations are engaging in contract farming in developing countries, mainly to ensure year-round supply of particular product ranges to specific markets and to take advantage of lower production costs It appears that through globalization, this type of contract farming could possibly transfer a production base to developing countries such as Lao PDR and Cambodia where conditions are conducive for growing non-traditional export crops, and where labor and land costs are lower. If managed well, this trend offers promising opportunities for the rural poor in these countries to gain from globalization. Contract farming would provide the rural poor in these areas with access to a vastly growing export market and hence opportunities to improve their income.

In the neighboring country of Thailand where the stage of agriculture development is more advanced and where contract farming has been widely adopted, there may be important lessons to be learnt for Lao, PDR and Cambodia. Due to the growing demand of organic rice in developed countries, in 2003, the Ministry of Agriculture and Agriculture Cooperatives of Thailand commissioned a study to investigate the potential of developing organic rice in Thailand for export. The study included a farm household survey covering 445 contract and non-contract rice farming in five provinces in the North and Northeastern regions of Thailand. The farms covered in the dataset share many characteristics with the rural sector in Lao PDR and Cambodia, where the vast majority are smallholder farms in marginal areas, with excess labor and little or almost no access to agricultural extension services. This data is examined here using econometric analysis to evaluate the profitability and profit efficiency of rice contract farming, as compared with rice non-contract farming, in Thailand.

We first examine the benefits of contract farming, particularly when it is promoted for organic agriculture. We then briefly discuss our methodology in measuring efficiency and also review relevant profit frontier studies on farming in developing countries. We next describe the survey data used in this study, before presenting our results from the profitability and efficiency analysis. A concluding section summarizes our main findings.

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