Dr. Renhber, Prof. Dr. Erika & Wick, Charles. (2019). Contract Farming in Practice: An Overview.

Impersonal and open-market transactions between actors in traditional agro-food systems based on
price signals are replaced by rather controlled impersonal vertical coordination such as contract farming,
because of the changes in market structure, consumer preferences and attitudes, technological
improvements, and food safety issues. Recent sophisticated ideas like environmentally sound,
sustainable agriculture, standards and regulations related to environment and health care are among
the forces behind the fast growing of contractual relationship. Contract farming displays great variety in
practice. The form it takes, attitudes and approaches of the partners are affected mainly by availability
of other alternatives and the political, economic, and social structures at the local and national level,
along with the specifications of the product. When evaluating contract farming applications and their
outcomes in practice, it will be more illustrative to consider contractual arrangements in two main types
as private contract arrangements and contract farming schemes. While the aims and the structure are
almost similar, there are some important differences in detail. There are national and regional
differences that have to be considered in related analysis and evaluations.

Even though contractual relationship of the advanced agro-food system has many advantages, it also
has inherent and implementation problems. The main problem is the weak position of the farmers in the
contractual arrangements both in developed and developing world that is called as bargaining problem.

Contract farming is not a panacea to solve all related problems of agricultural production and marketing
systems. However, this way of coordination could be evaluated as a way of providing easier access
production inputs and product market for the small-scale farmers. Contract farming also contributes to
the development of a sound food industry. It might also be seen as a way toward or as a part of rural
development and can be promoted to improve agricultural performance, especially in the Third World
Countries. Contractual relationships are not only a distinctive feature of highly industrialized agro-food
systems, but also a way of establishing an industrialized and developed structure. But, to obtain the
advantages of contract farming, the necessary measures must be taken to trade off those
disadvantages, such as the exploitation of small farmers and natural resources by domestic and foreign
corporations and multinationals.
Overview of Smallholder Contract Farming in Developing Countries Phil Simmons Graduate School of
Agricultural and Resource Economics University of New England, Armidale, Australia, 2351 (2018)

An agribusiness firm’s choice to expand activities through contract farming rather than plantations,
buying directly from open markets or other means reflects differences in transaction costs found in
different types of procurement systems. Smallholders may enter contracts to reduce transaction costs of
accessing new markets, borrowing, managing risk, acquiring information or increasing employment
opportunities. The success of contracts reflects both the contracting environment and management
practices. The contracting environment includes the strength of markets for contracted output,
government macro policies, technical sophistication in production and attenuation of land ownership
while important management elements are farm groups, selection of participants for contracts,
managing contract default and conflict resolution. Direct benefits from contracting accrue to
smallholders from improved access to markets, improved technology, better management of risk and
opportunities for employment of family members. Indirect benefits occur from empowerment of
women and increased commercial acumen on the part of smallholders. Contract farming has the
potential to improve the welfare of smallholders however it is not a sufficient condition for such
improvement. Smaller farmers can be excluded from contracts because of selection bias by agribusiness
firms awarding contracts to larger farms, be adversely affected by the second-round effects of contracts
on incomes and prices and suffer from narrowing of markets that lie outside of contracts. Institutional
developments that might ameliorate this type of exclusion are anti-trust legislation, policies to directly
improve the contracting environment, policies to address specific problems smallholders face in
entering contracts and participation by NGOs in contract facilitation.
Contract farming in developing countries: an overview1 Jos Bijman Wageningen University
Department of Business Administration Hollandseweg 1 6706 KN Wageningen The Netherlands
[email protected] (May 2008)

This paper presents a review of the literature on contract farming (CF), focussing on recent empirical
research on the economic impact of CF. The paper starts with an explanation of the phenomenon of CF,
providing definitions, typologies, models and objectives. Using a Transaction Costs Economics
framework, the paper explains for which products and market CF seems most suitable. The empirical
literature on CF is assessed by answering three questions: Why do smallholders engage in CF? Are
smallholders included in or excluded from CF arrangements? What impact does CF have on smallholder
income and rural development? Finally, the paper identifies the conditions under which smallholders
are most likely to benefit from CF schemes.
Chang, Ching-Cheng & Chen, Chi-Chung & Chin, Min-Ching & Tseng, Wei-Chun. (2006). Is Contract
Farming More Profitable and Efficient Than Non-Contract Farming-A Survey Study of Rice Farms In
Taiwan. American Agricultural Economics Association (New Name 2008: Agricultural and Applied
Economics Association), 2006 Annual meeting, July 23-26, Long Beach, CA.

Trade liberalization and globalization has modernized the food retail sector in Taiwan, affecting
consumers, producers and trade patterns. These changes have placed significant pressures on farmers
and processors including more stringent quality control and product varieties. The government has
launched a rice production-marketing contract program in 2005 to assist rice farmers and the agro-
business sector to work together as partners. The minimum scale for each contract is 50 hectares of
adjacent rice paddies with 50 participants including rice farmers, seedling providers, millers and
marketing agents. In order to evaluate the outcome of this program, a survey is conducted in the
summer of 2005 after the first (spring) crop is harvested. Information of price and value of output and
major variable and fixed inputs are collected along with characteristics of the farmers and farms. The
survey results show that the average revenue of a contract farm is about 11 percent higher than an
average non-contract farm. The per hectare cost of production in a contract farm is about 13 percent
lower and as a result the average profit margin under contract is more than 50 percent above those
without contract. A swtiching regression profit frontier model is adopted to further investigate their
efficiency performance. The result indicates that an average contract farms is 20 percent more efficient
than an average non-contract farm in a comparable operating environment. The result also suggests
that although contract farming has potential to improve the profit of smallholders, it is not a sufficient
condition for such improvement.
Huang, Mei-Ying & Huang, Cliff & Fu, Tsu-tan. (2002). Cultivation Arrangements and the Cost Efficiency
of Rice Farming in Taiwan. Journal of Productivity Analysis. 18. 223-239. 10.1023/A:1020686610802.

In this paper, a switching regression model is developed to analyze farmers' choice behavior and cost
efficiency in field plowing arrangement in Taiwan. We find that the decision on the choice of plowing
arrangement is determined by a cost comparison between self-plowing and hired-service, and other
non-cost considerations, such as the availability of family labor and machinery, education level, non-
farm income, age, and regional effects. Across a spectrum of farmer characteristics, empirical results
indicate a potentially substantial cost-savings by hiring service for field plowing than by self-plowing.
Self-plowing farmers also subject to a significant level of cost inefficiency.
Fujiki, Hiroshi. (1999). The Structure of Rice Production in Japan and Taiwan. Economic development
and cultural change. 47. 387-400. 10.1086/452406.

This article analyzes the failure of Japan's agricultural policy by comparing it with Taiwan's agricultural
policy. More specifically, the article focuses on a comparison between rice production costs in Taiwan
and those in the Non-Hokkaido region of Japan. There are many similarities between Taiwanese rice
production and rice production in the Non-Hokkaido region of Japan: farm-size distribution, variety of
rice produced, and degree of mechanization. It is well known that the average cost of Japanese rice
production decreases with farm size, as Y. Hayami and T. Kawagoe, for example, have shown, while
Taiwan's rice production costs remain almost constant with respect to the scale of operation, as
confirmed by Y. Kuroda. In this article I argue that the differences in government policies to induce the
transition from a labor-intensive to a machine-intensive technique of rice production in these two
similar economies are among the major reasons why there is such a difference in the cost structure of
production. The Taiwanese government encourages contract farming and has succeeded in separating
the landowner and the tiller. The Japanese government, on the other hand, has encouraged large-scale
tenant farming since 1970, particularly since 1980, but has not been able to achieve this objective as a
result of inconsistent policies to restrain the separation of landowner and tiller. Given the unsatisfactory
results of Japan's agricultural policy, which has focused on large-scale tenancy farming, the introduction
of efficient contract farming would be a beneficial policy option for Japanese rice production in the Non-
Hokkaido region. The organization of this article is as follows: Section II shows some statistical evidence
that justifies my assertion that while the Japanese and Taiwanese economies have many similarities, it is
due to Japan's inefficient use of machinery that Japan's rice production costs are higher than those of
Taiwan. Section III reports the results of quantitative analysis, and Section IV concludes the article with
some policy implications.
Impact of Participation in Contract Farming on Smallholder Farmers’ Income and Food Security in
Rural Benin: PSM and LATE Parameter Combined, Odountan Ambaliou Olounlade , Gu-Cheng Li ,
Sènakpon E. Haroll Kokoye , François Vihôdé Dossouhoui , Kuassi Auxence Aristide Akpa , Dessalegn
Anshiso and Gauthier Biaou Received: 16 December 2019; Accepted: 13 January 2020; Published: 26
January 2020 Sustainability 2020, 12, 901; doi:10.3390/su12030901

Investigated in this work is the impact of contract farming participation on smallholder farmers’ income
and food security in rice crop production in Northern Benin using 400 randomly selected rice farmer
households. Unlike previous studies, we corrected for both observed and unobserved biases by
combining propensity score matching (PSM) and the local average treatment effect parameter (LATE).
The results showed significant negative consequences of partaking in rice contract farming. We found
evidence of significant negative effects on rice production income at a 1% level. The more the rice
farmers join in contract farming, the lower the farm income became. Decreased food consumption was
also a result of contract farming participation for potential participants by a score of 60.64, placing their
households at the food security status level of poor food consumption because the quantity and
nutritional quality of the food consumed were inadequate. Contract farming is, therefore, not a
reasonable policy instrument that can help farmers increase their income and improve their food
security level in the Alibori Department, Benin if farmers do not diversify their crops. The necessary
resources and economic environment are not yet in place to allow contract farming to take full
advantage of its potential benefits. To prevent the wasting of scarce public resources, expanding
contract farming would not be appropriate in marginal areas with markets and other infrastructure.
Additional measures are needed for contract farming to be profitable for contracting actors and to
ensure sustainability and the large-scale participation of farmers.
The effectiveness of contract farming for raising income of smallholder farmers in low‐ and middle‐
income countries: a systematic review , Giel Ton , Sam Desiere  , Wytse Vellema , Sophia Weituschat  ,
Marijke D'Haese , First published:12 December 2017 , https://doi.org/10.4073/csr.2017.13

This Campbell systematic review examines the impact of contract farming on income and food security
of smallholder farmers in low‐ and middle‐income countries. The review summarises findings from 75
reports, of which 22 (covering 26 contract farming interventions) were used for meta‐analysis

Contract farming may substantially increase farmer income with an average effect in the range of 23 to
54 per cent. There is upward bias in the estimate because of survivor bias in individual studies (no data
on farmers who drop out of schemes) and in the body of evidence (no studies on contract farming
arrangements that collapsed in their initial years), and publication bias in the literature (under‐reporting
of insignificant outcomes). Therefore, some caution is needed in interpreting the findings.

For farmers to give up their autonomy in marketing and prevent side‐selling, substantial income gains
need to be offered. This is especially so for annual crops and when firms have contracts directly with
farmers rather than through a cooperative.

Poorer farmers are not usually part of contract farming schemes. In 61% of the cases, contract farmers
had significantly larger landholdings or more assets than the average farmers in the region.