Effectiveness of Contract Farming Schemes: Success and Failure

Contract farming projects have had mixed results. Here we present several cases with farmers' responses in the secondary stage of contract farming and the attitudes of growers in Northern Thailand. Several studies in the 1990s reported that most contract farming schemes had failed, with forestry, cashew nuts and oil palm cited as examples (Baumann 2000; Falvey 2002; Glover 1992). The first two crops were introduced to farmers who had the least resources in the dry land of the Northeast, while oil palm became a rubber crop alternative in the South. In some cases, early successes in contract forestry (eucalyptus in dry land) were not sustained (Baumann 2000). However, a global rise in pulp prices attracted large corporations (e.g., CP, Kaset Roong Ruang, Shell, and Siam Cement Group) and at least 15 Japanese and Taiwanese joint ventures.

Monopolistic conditions have been favorable for contract farming (Glover 1992), whereas competitive environments have not been conducive to contract farming. However, one exception is vegetable contract farming in Northern Thailand, which has developed within the relatively competitive environment of input markets. Thai farmers are able to acquire input, credit, and buyers on the open market (Baumann 2000; Wiboonpongse et al. 2007; Wiboonpongse and Sriboonchitta 2007). In the case of cashew nuts, the Agricultural Land Reform Office, BAAC, and a private firm program was less successful. This program aimed to cover 175,000 rai (28,000 ha) in 1990, expand to 300,000 rai, and include more than 31,000 farm households. At first the project exceeded its target but was halted by a rapid spread of pests. Poor feasibility analysis and an absence of region-specific research had bearing on the failure, and there were risks that disproportionately affected smallholders (Falvey 2002). Research on productivity improvement and cost reduction is necessary.

There are also successful cases. Overall, contract farming in Thailand has been implemented and managed differently from other countries, with very strong intervention and promotion under the 4-sector Plan as well as Mekong sub-regional economic cooperation. Agribusiness has received substantial incentives and promotion. Since Thailand is agroexporting country, agribusiness has dominated policy-making. This has resulted in better overall agricultural growth and development effects through the shift to high value crops (Burch 1996; Benziger 1996 cited by Singh, 2004).

In the western region, sugar cane, baby corn and asparagus, and broiler and hog contracts have proven successful. With baby corn, contracts were made between village middlemen and farmers, with middlemen providing farmers with seed, fertilizer, loans, and tractor services. Contracts were made between middlemen and farmers but not middlemen and companies and involved guaranteed minimum prices and additional prices when the prevailing market price increased. In the case of asparagus, the main condition of the contract is to guarantee a fixed price for the whole year for various grades. This is the same model as that used by potato contractors in Chiang Mai and is a successful example of private-government-farmer cooperation (Naritoom 2000).

Thailand is the world's second largest producer of Black Tiger shrimp. During the 5th and 6th National Development Plans, multinational firms like Cargill were encouraged to invest in smallholders financed by the BAAC and other banks. Apparently, returns to smallholders were substantial. However, there is need to assess risk due to accumulated disease and social impact concerning mangrove deforestation. Small growers preferred operating under contract farming to risk taking in a volatile market. They even rejected a cooperative approach after the experience of poor market prices due to inadequate quality control (Falvey 2002).

In the Northeast, the success of exports depends on the provision of irrigation water. Production can be extended during the wet season, and the introduction of dry season crops and non-traditional crops of high marketability, supported by technical advice under a contract farming scheme, has been effective, as in the case of tomatoes supported by BAAC. The expansion of tomato contracting in this region was accompanied by disputes about spoilage, factory shutdowns, and other problems, but they were resolved through mutual-benefit contracts. The case highlights the viability of the government-agribusinesssmallholder relationship as a result of government investment in necessary infrastructure including physical, service, and coordination support (Poapongsakorn et al. 1995 cited by Falvey, 2002).

In the North, contract farming has been successful in such crops as soybean, baby corn, sweet corn, potatoes, tomatoes and eggplant, as well as vegetable and maize seed. The number of vegetable processing firms increased from 34 (1988) to 61 (1994), and to 78 in 2002. Statistics show that more farmers were entering contract farming beginning the early 1990s due to various driving forces. Potato contracts received the most development: production in Chiang Mai increased from 600 ha in 1983 to 1,927 ha. In 1994, and to 3,638 ha and 4,386 ha in the 2002–2003 and 2007–2008 crop years. Contract production has been expanded to six provinces in the North and another three provinces in the Northeast.

Total production in Thailand in 2002–2003 and 2007–2008 reached 6,750 ha and 7,980 ha of harvested area, and 86,700 tons and 125,700 tons, respectively, for total output.

Farmers contracted companies through their groups. In the first stage of the contract, district agricultural extension officers had an active role in coordination and extension in the San Sai district, the first site of commercial potato production in Thailand. The government has promoted such farmer organization in contract farming to better position farmers when they deal with companies and for credit collateral and technical assistance from firms and universities. However, the successful role of the officers in San Sai with well-irrigated land is not replicable in the adjacent district (Mae Rim) due to the local physical and socio-economic environment. Today, farmers in San Sai have turned to selling their potatoes to middlemen who gather, produce and deliver to the companies. While the middlemen have contracts with firms, individual farmers prefer taking risks for higher selling prices. The companies have adopted the contract approach to new farmers in other areas.

Success and failure in contract farming is case by case. According to a CP executive, factors responsible for poor performance in a contract system include personnel factors and uncontrollable factors such as weather. Public policy and support also play significant roles. Success stories are derived from a “win-win” situation where all key determinants are integrated properly: production technology pre-and post-harvest, technology transfer (by the government or private sector), trust building, pricing policy, financial support and human resource development for both farmers and firms (Poonpiriyasup 2007).

In contract hybrid corn production in the Greater Mekong Sub-region/ACMECS countries, the CP reported that Thai growers average yield was second (6.25 ton/ha) after the PRC (6.75 ton/ha). However, Poonpiriyasup (2007) revealed that Thai growers enjoyed the highest rate of return on investment (ROI) at 94% whereas the PRC's ROI was 56%. Contract growers in other countries (Viet Nam, Cambodia, Lao People's Democratic Republic, and Myanmar) earned an ROI of 72%, 85%, and 87%, respectively.

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