Is contract farming a risk management instrument for Chinese farmers?
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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Volume (Year): 3 (2011)
Issue (Month): 4 (November)
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