Is Contract Farming More Profitable and Efficient Than Non-Contract Farming-A Survey Study of Rice Farms In Taiwan

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.