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Overview of Smallholder Contract Farming in Developing Countries

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  • Phil Simmons

Abstract

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.

Suggested Citation

  • Phil Simmons, 2002. "Overview of Smallholder Contract Farming in Developing Countries," Working Papers 02-04, Agricultural and Development Economics Division of the Food and Agriculture Organization of the United Nations (FAO - ESA).
  • Handle: RePEc:fao:wpaper:0204
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:wdevel:v:98:y:2017:i:c:p:430-446 is not listed on IDEAS
    2. Swati Dhingra, 2016. "Piggy-Back Exporting, Intermediation, and the Distributional Gains from Trade in Agricultural Markets," 2016 Meeting Papers 712, Society for Economic Dynamics.
    3. Oscar J. Cacho & Graham R. Marshall & Mary Milne, 2003. "Smallholder Agroforestry Projects: Potential for carbon sequestration and poverty alleviation," Working Papers 03-06, Agricultural and Development Economics Division of the Food and Agriculture Organization of the United Nations (FAO - ESA).
    4. Xolile Mamba, Tangetile, 2016. "The role of contracts in improving access to credit in the smallholder livestock sector of Swaziland," Research Theses 243472, Collaborative Masters Program in Agricultural and Applied Economics.
    5. Gow, Hamish & Shanoyan, Aleksan & Cocks, Jack, 2009. "Farmers’ Choices Among Alternative Dairy Marketing Channels in Armenia: Can Appropriately Designed ODA Substitute for FDI?," Journal of Rural Cooperation, Hebrew University, Center for Agricultural Economic Research, vol. 37(1).
    6. repec:hal:journl:dumas-00802135 is not listed on IDEAS
    7. Gow, Hamish & Shanoyan, Aleksan, 2010. "Is the facilitation of sustainable market access achievable? Design and implementationlessons from Armenia," IAMO Forum 2010: Institutions in Transition – Challenges for New Modes of Governance 52704, Leibniz Institute of Agricultural Development in Central and Eastern Europe (IAMO).
    8. World Bank, 2007. "Zambia : Smallholder Agricultural Commercialization Strategy," World Bank Other Operational Studies 8039, The World Bank.
    9. Kiprotich Sigei, Geoffrey, 2014. "Determinants of Market Participation Among Small-Scale Pineapple Farmers in Kericho County, Kenya," Research Theses 243452, Collaborative Masters Program in Agricultural and Applied Economics.
    10. Sigei, Geoffrey & Bett, Hillary & Kibet, Lawrence, 2014. "Determinants of Market Participation among Small-scale Pineapple Farmers in Kericho County, Kenya," MPRA Paper 56149, University Library of Munich, Germany.
    11. Rola-Rubzen, Maria Fay & Hardaker, J. Brian, 2006. "Improving Market Access for Smallholders: Challenges and Opportunities," 2006 Conference (50th), February 8-10, 2006, Sydney, Australia 139894, Australian Agricultural and Resource Economics Society.
    12. Cocks, Jack & Gow, Hamish R. & Westgren, Randall E., 2005. "Public Facilitation of Small Farmer Access to International Food Marketing Channels: An Empirical Analysis of the USDA Market Assistance Program in Armenia," 2005 Annual meeting, July 24-27, Providence, RI 19295, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    13. Curtiss, Jarmila, 2012. "Determinants of Financial Capital Use: Review of theories and implications for rural businesses," Working Papers 122846, Factor Markets, Centre for European Policy Studies.
    14. Bolwig, Simon & Gibbon, Peter & Jones, Sam, 2009. "The Economics of Smallholder Organic Contract Farming in Tropical Africa," World Development, Elsevier, vol. 37(6), pages 1094-1104, June.
    15. Curtiss, Jarmila, 2012. "Determinants of Financial Capital Use: Review of theories and implications for rural businesses," Factor Markets Working Papers 123, Centre for European Policy Studies.

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