Summary

Contract farming can provide stable market access, credits, extension services, infrastructure and other benefits to promote agricultural development. However, contract farming also has drawbacks such as limiting farmers' flexibility in choosing farming practices, increasing risks, and reducing farmers' bargaining power. In the process of establishing and implementing contracts the challenges of asymmetric information and coordination failures between farmers and the contractor are also faced.

Based on the data provided by a survey of Cambodian rice farmers, we use different approaches (including simple mean comparisons, p-score comparisons, and switching regression comparisons) to examine the impact of contract farming on farmers' performance.

We first use the simple mean test to compare the average performance of contract, formercontract, and never-contract farmers. The results show that compared to never-contract farmers, contract and former-contract farmers have larger family sizes and farm sizes. Their household heads are older, more educated, and less likely to be female. They are richer farmers with more assets like plows, pumps, bikes, motorbikes, livestock and TVs and higher monthly expenditure per person. Their credits are mainly from MFI and seed credit comes from Angkor Kasekam Roongroeung Co Ltd (AKR) and they rely less on informal sector lenders i.e. moneylenders and family members or relatives. They have more income from non-rice crops. They have larger rice fields and use a higher percentage of their rice fields for commercial operations. With respect to commercial operations, they have higher rice prices and revenues, a higher percentage of non-cash costs in total production costs because of the use of more family labor; and they spend less on chemical fertilizer, compost, and irrigation.

The simple mean comparisons show that compared to former-contract farmers, contract farmers have larger family sizes and farm sizes and younger household heads. They rely more on seed credits but less on fertilizer credits and credits from family members or relatives. Their farms are further away from the market. They have larger rice fields and use a higher percentage of their rice fields for commercial operations. With respect to commercial operations, they have higher rice prices but lower revenues because of lower yields; they spend more labor cost producing the same amount of rice mainly because of their higher non-cash costs from the use of family labor; and they use less exchanged labor (in percentage terms) than former-contract farmers.

Finally, the simple mean comparisons show that contract farmers have higher average profits as well as cash profits than never-contract farmers; and they have higher average profits but lower average cash profits than former-contract farmers. However, none of these differences are statistically significant at 10%.

Although the simple mean comparisons show that contract farmers have higher average profits than non-contract farmers, we cannot use this result to conclude that contract farming improves profitability, because contract farmers' higher profit may not be due to contract farming but could be caused by farmers' selection bias.

To account for selection bias, we use p-score comparisons to examine the impacts of contract farming on farmers' performance. The results show that contract farmers have higher average rice prices, revenues as well as cash profits, than never-contract farmers in their entire operations including both commercial rice farming and rice farming for selfconsumption. The p-score comparisons show that contract farmers have lower average profit (i.e., cash profit minus non-cash costs) than never-contract farmers, which is mainly due to their use of more family labor. Note that we use the cost of hired labor to estimate the shadow value of family labor, which may overestimate contract farmers' non-cash labor costs. In addition, cash profit is a better measure of the total value-added obtained by farmers' from their farming activities.

As there are only very few never-contract farmers reporting their commercial activities, we are unable to use the p-score approach to compare the performance of contract and nevercontract farmers in commercial operations. Fortunately, we are able to do so for contract and former-contract farmers. The p-score comparisons show that although contract farmers have higher rice prices than former-contract farmers in commercial operations, they nevertheless have lower revenues because of lower yields. The results also show that in commercial operations contract farmers have lower profits as well as cash profits than former-contract farmers, but the differences are not statistically significant. Thus, former-contract farmers' profitability does not appear to be affected by their choices of not joining the contract. This result shows that contract farming may be a useful experience to help farmers develop into independent commercial farmers.

As p-score comparison cannot correct hidden bias, we use a selection model (i.e., the endogenous switching regression) to further refine the comparison. The switching regression comparisons also allow us to examine each type of farmers' benefits from contract farming and compare their farming performance with and without the contract. The results show that on average the sample farmers would increase their profits by joining the contract, but the impacts are different for each group: The sample contract farmers appear to be able to improve their profits significantly by joining the contract, while the sample former-contract farmers appear to have lower profits under contract farming. The sample never-contract farmers would have slightly higher profits under contract farming, but the difference is not statistically significant.

The results from switching regression comparison also show that under contract farming, the sample contract farmers would have higher average profits than the sample former- and never-contract farmers, but their average profits without contract would be similar to the sample never-contract farmers' and lower than the sample former-contract farmers'.

The switching regression also identifies factors affecting farmers' choices regarding joining the contract. The results show that farmers with larger family size, with younger and more educated household heads, with less asset value, and farmers with farm location closer to the highway are more likely to join the contract.

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Comment(s)

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1. Anthony M. Zola
   (posted 02 July 2008 / 12:54:22 AM)
   
   This is an excellent contribution to the current debate about contract farming in mainland Southeast Asia.
   
   I have conducted research for the ADB, much less sophisticated than this study, and had similar results. Smallholder farmers were better off if they were engaged in contract farming than when they sold daily labor to local concessions / nucleus estates.
   
   My congratulations to the research team. It is not an easy topic on which to conduct research.
   
   Anthony Zola
   Bangkok, Thailand
   & Vientiane, Lao PDR