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Is contract farming a risk management instrument for Chinese farmers?: Evidence from a survey of vegetable farmers in Shandong

  • H. Holly Wang
  • Yanping Zhang
  • Laping Wu

Purpose – The purpose of this paper is to investigate contract farming in China, using vegetable production as a case. Specifically, the authors analyze farmers' contract decisions for different types of contracts, their contract compliance behaviors, and their profitability affected by the contracts both analytically and empirically. Design/methodology/approach – The authors assume growers with alternative risk preferences make the contract decisions to maximize their expected utilities, under exogenous market price risks and contract terms determined by the processor or wholesaler. Both fixed price and floating price contracts are analyzed. Two surveys of 185 and 85 farm households, respectively, are obtained in Shandong province in 2010, and econometric analyses with both Logit and least square regressions are conducted. Findings – The results indicate that the determining factors for contract farming are related to farmers' risk attitude, gender, yield, farm size and labor availability. However, contrary to the common belief that contracts are a risk management tool for risk averse farmers, the risk lovers tend to use contract farming instead of risk averters. Female household heads and farms with more labors tend not to use contracts, but larger farms with more acreage are more likely to contract. These suggest Chinese farmers' primary motivation of contracting is not market price risk management, but rather seeking better offers and marketing transaction cost reduction. Originality/value – The authors believe that this is the first econometric study to analyze contract farming allowing different types of contracts in China. The scenarios include cases without contracts, with fixed price contracts, and with floating price contracts, where the contract price changes to reflect the market price, a very unique yet popular situation in China. Each of the cases is also considered under the situation whether default is possible.

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Article provided by Emerald Group Publishing in its journal China Agricultural Economic Review.

Volume (Year): 3 (2011)
Issue (Month): 4 (November)
Pages: 489-505

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Handle: RePEc:eme:caerpp:v:3:y:2011:i:4:p:489-505
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  1. Gray, Allan W. & Boehlje, Michael, 2005. "Risk Sharing and Transactions Costs in Producer-Processor Supply Chains," Choices, Agricultural and Applied Economics Association, vol. 20(4).
  2. Miyata, Sachiko & Minot, Nicholas & Hu, Dinghuan, 2007. "Impact of contract farming on income: Linking small farmers, packers, and supermarket in China," IFPRI discussion papers 742, International Food Policy Research Institute (IFPRI).
  3. Rehber, Erkan, 1998. "Vertical Integration In Agriculture And Contract Farming," Working Papers 25991, Regional Research Project NE-165 Private Strategies, Public Policies, and Food System Performance.
  4. Rehber, Erkan, 2000. "Vertical Coordination In The Agro-Food Industry And Contract Farming: A Comparative Study Of Turkey And The Usa," Research Reports 25225, University of Connecticut, Food Marketing Policy Center.
  5. Meyer, Jack, 1987. "Two-moment Decision Models and Expected Utility Maximization," American Economic Review, American Economic Association, vol. 77(3), pages 421-30, June.
  6. Sartwelle, James D., III & O'Brien, Daniel M. & Tierney, William I., Jr. & Eggers, Tim, 2000. "The Effect Of Personal And Farm Characteristics Upon Grain Marketing Practices," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 32(01), April.
  7. Rachael E. Goodhue, 2000. "Broiler Production Contracts as a Multi-Agent Problem: Common Risk, Incentives and Heterogeneity," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(3), pages 606-622.
  8. Lajili, Kaouthar & Barry, Peter J. & Sonka, Steven T. & Mahoney, Joseph T., 1997. "Farmers' Preferences For Crop Contracts," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 22(02), December.
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