Empirical Studies On Contract Farming
The Asian Development Bank Institute (ADBI) in Tokyo conducted a series of case studies in selected Asian countries on contract farming to empirically assess the benefits, and conditions wherein benefits arise, particularly on small and marginal farmers. The studies used propensity score matching methodology (PSM) and an endogenous switching regression to evaluate the profitability of contract and non-contract rice farms. In the case of Lao PDR, the results of contract farming on small farm incomes revealed that contract farmers earn significantly higher profits than non-contract farmers, and that contracts tended to provide the greatest increase in income to farmers with below-average performance. This private-sector-led mechanism provided investments and facilitated the transition of subsistence farmers to commercial agriculture, offering promising potential in reducing rural poverty with limited market development.
Another study done in Cambodia on rice contract farming for export assessed the impact of contract farming on farmers’ performance. The results using simple mean comparison, PSM and switching regression comparison showed that farmers with larger family sizes, younger and more educated household heads, and less asset value were more likely to join the contract. The study showed that contract farming of non-certified organic rice had a positive impact on farmers’ profitability. However, farmers living near a highway left the contract early without lowering profitability as they intensified their farming systems to produce for the less chemical-conscious market. This indicated that contract farming helped subsistence farmers develop into independent commercial farmers. As farmers in remote areas tend to stay under contract, contract farming offers a private-sector led model to improve incomes of the poorest marginal farmers although public sector support is needed to lower the transaction costs of working with these remote farmers.
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