Pricing

Prices paid for contracted crops are usually lower than market prices. Singh (2004) reveals that most farmers try to sell their produce at market for a better price instead of factories where farmers must comply to specified conditions. This phenomenon was a common problem for inexperienced factories and is likely to happen anywhere that contract farming emerges.

The problem was solved successfully using various tactics. For crops demanded by both processing firms and fresh food markets—e.g., tomatoes—firms allowed 20% of the crop to be sold in the open fresh food market, then during peak season, when prices declined, factories purchased large volumes of high quality produce at contracted prices. The economic rationale is the trade-off between risk and return to farmers and stable prices for raw materials.

Prices companies pay to farmers are partly dependent on quality, which is an additional incentive for farmers to deliver high quality products. For example, for grade A eggplants, farmers receive 5 baht/kg, but the price drops sharply to 1 baht/kg for grade B. The quality difference is only the appearance of the skin, even though the other attributes are the same. Crop quality consistency and standards are often the most crucial factors in a contract. However, Baumann (2000) stated that it is easy for a company to manipulate prices when the market is competitive and prices are volatile.

Price stability is essential if firms are to continue projects with their growers and growers are to maintain income stability. This is especially true in the early stages of contract framing. Both companies and governments try to counter market volatility and find ways to stabilize prices for growers. A prescriptive formula is helpful for sharing costs and benefits between growers and processors. Without acceptable and stable prices or credit provision, projects in less developed areas can fail, as exemplified in several cases in Thailand during the 1980s.

Many farmers have voluntarily opted for chemical-free and organic production for health concerns. However most small tangerine growers in Northern Thailand experienced low yields and undesirable appearances, and thus low prices. In contrast to the findings of Wiboonpongse et al. (2006), contract organic (Jasmine) rice farmers in Payao Province enjoyed high yields and prices 30% higher than ordinary Jasmine rice. Setboonsarng et al. (2007) reported significantly higher profits per unit of land and higher prices for contract farmers in the initial stage of organic production after one to two years of starting than noncontract (for conventional rice in Northeastern and Northern Thailand).

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