Contract Farming
Contract Farming: What is In for Smallholder
Farmers in Developing Countries?
As every self-respecting
economics major knows by the time he graduates, whether a country benefits from
international trade depends in theory on whether that country specializes in
its comparative advantage for example, whether it can specialize in the
production of goods or services for which it has a lower opportunity cost. The
production of agricultural goods is the comparative advantage of most
developing nations, it follows again, in theory that those nations should
specialize in agriculture.
But exactly what does it mean to specialize in
agriculture? For many developing nations, whose agricultural sectors are
portrayed by relatively primitive production technology, specializing in
agriculture necessarily means modernizing their agricultural sector, a move
away from a situation wherein many smallholder farmers each produce several
crops, mainly for their subsistence and utilizing a relatively primitive
technology, toward a situation where few large producers each produce 1 or 2
crops for the market using modern technology. However in order for developing
nations to tap in their comparative advantage by modernizing their agricultural
sector, it is necessary for smallholder farmers to actually want to participate
in contract farming.
So what’re numerous reasons why those
smallholders may want to participate in contract farming? And in light of
latest evidence, do numerous reasons actually drive participation in contract
farming? What’s In for Me? Grosh was the first to lay out numerous reasons why,
in principle, smallholder farmers in developing nations may want to give up the
apparent freedom to produce crops for themselves and their families or for
selling at market in favour of producing crops often different ones for others
inside the context of extremely regimented contracts.
Potential Benefits to
Contracting – 1. Risk and Uncertainty: Producing crops outside of a contract
farming arrangement and for sale at market frequently implies that a farmer is
unsure of the price he’ll receive once he gets to market.
This is especially so in developing nations,
where such price risk and uncertainty is frequently more essential than in
developed country, which may cause serious welfare losses. For instance,
because of credit rationing due to imperfect information, a smallholder farmer
might not be capable to secure a loan which would allow him to make the
required investments to adopt a brand-new production technology. Extension
Services: The public provision of extension services is frequently lacking in
developing nations and, as part of contract farming agreements, processors
frequently provide their very own private extension services. Those private
extension services are usually more trusted by farmers than are public
extension services. Bellemare found that yields are positively and
significantly correlated to the number of such private extension’s visits to
the farmer by a technical assistant working for the processor.
