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

Author

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  • H. Holly Wang
  • Yanping Zhang
  • Laping Wu

Abstract

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.

Suggested Citation

  • H. Holly Wang & Yanping Zhang & Laping Wu, 2011. "Is contract farming a risk management instrument for Chinese farmers?: Evidence from a survey of vegetable farmers in Shandong," China Agricultural Economic Review, Emerald Group Publishing, vol. 3(4), pages 489-505, November.
  • Handle: RePEc:eme:caerpp:v:3:y:2011:i:4:p:489-505
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    References listed on IDEAS

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    1. 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.
    2. 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.
    3. Miyata, Sachiko & Minot, Nicholas & Hu, Dinghuan, 2009. "Impact of Contract Farming on Income: Linking Small Farmers, Packers, and Supermarkets in China," World Development, Elsevier, vol. 37(11), pages 1781-1790, November.
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    5. 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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    7. 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.
    8. 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).
    9. Sartwelle, James & O'Brien, Daniel & Tierney, William & Eggers, Tim, 2000. "The Effect of Personal and Farm Characteristics upon Grain Marketing Practices," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 32(01), pages 95-111, April.
    10. Meyer, Jack, 1987. "Two-moment Decision Models and Expected Utility Maximization," American Economic Review, American Economic Association, vol. 77(3), pages 421-430, June.
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    Citations

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    Cited by:

    1. Minot, Nicholas & Sawyer, Bradley, 2016. "Contract farming in developing countries: Theory, practice, and policy implications," IFPRI book chapters,in: Innovation for inclusive value-chain development: Successes and challenges, chapter 4, pages 127-158 International Food Policy Research Institute (IFPRI).
    2. Kumar, Anjani & Roy, Devesh & Tripathi, Gaurav & Joshi, Pramod Kumar & Adhikari, Rajendra Prasad, 2016. "Contracting by small farmers in commodities with export potential: Assessing farm profits of lentil growers in Nepal:," IFPRI discussion papers 1533, International Food Policy Research Institute (IFPRI).
    3. Briones, Roehlano M., 2015. "Small Farmers in High-Value Chains: Binding or Relaxing Constraints to Inclusive Growth?," World Development, Elsevier, vol. 72(C), pages 43-52.
    4. Kumar, Anjani & Roy, Devesh & Trapathi, Gaurav & Joshi, Pramod Kumar & Adhikari, Rajendra Prasad, 2016. "Can contract farming increase farmers’ income and enhance adoption of food safety practices?: Evidence from remote areas of Nepal:," IFPRI discussion papers 1524, International Food Policy Research Institute (IFPRI).
    5. Kumar, Anjani & Roy, Devesh & Joshi, Pramod K. & Tripathi, Gaurav & Adhikari, Rajendra P., 2016. "Impact of Contract Farming on Profits and Yield of Smallholder Farms in Nepal: An Evidence from Lentil Cultivation," 2016 Annual Meeting, July 31-August 2, 2016, Boston, Massachusetts 235848, Agricultural and Applied Economics Association.
    6. Nicholas Minot & Loraine Ronchi, 2014. "Contract Farming," World Bank Other Operational Studies 24249, The World Bank.
    7. Abebe, Gumataw K. & Bijman, Jos & Kemp, Ron & Omta, Onno & Tsegaye, Admasu, 2013. "Contract farming configuration: Smallholders’ preferences for contract design attributes," Food Policy, Elsevier, vol. 40(C), pages 14-24.
    8. Kumar, Anjani & Roy, Devesh & Tripathi, Gaurav & Joshi, Pramod Kumar & Adhikari, Rajendra Prasad, 2016. "Contracting by small farmers in commodities with export potential: Assessing farm profits of lentil growers in Nepal:," IFPRI discussion papers 1533, International Food Policy Research Institute (IFPRI).

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