Contract Farming: What is In for Smallholder Farmers in Developing Countries?

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.