Socio Economic Factors of Contract Farming: A Logistic Analysis

Abstract

According to studies from Lajili et al. (1997), Rehber (2000), Sartwelle et al. (2000) and Key (2003), a farmer’s discrete choice to join contract farming scheme or not it is influenced by the household’s characteristics, operational features, socio-economic characteristics, market attributes of product and underlying agreement condition. Zhu found in a study of contract arrangement in China, that farmers’ decisions to enter into contract with their sponsors were influenced by Economic influence, distance from the target market, specialization and commercialization of the production. In a study of contract farming in transitional economies of Eastern Europe,  Swinnen (2005), found that the most important factors which is more  influenced farmers to enter into contracts or not, in order of importance were; guaranteed product sales, avoidance of price uncertainty, higher price offers, profitability, pre-payment offer input supply and technical assistance and some form of credit.

In a detailed study of contract farming in poultry, chilly, Potato, banana, Wheat, Rice, maize, fruits and vegetables in Bali ,south Africa, India, America and Lombok province of Indonesia, it was revealed that factors that the important considerations and motivating factors for farmers were the increasing the productivity of crops, and getting better Income & Price and less uncertainty; past experience in working with Contracting firm and agribusiness; education levels credit constraints and strong borrowing histories. The contracts were more appealing to less well-capitalization smallholders who were well educated, were credit constrained but who had strong borrowing histories (Patrick, 2004)[1].

The main objective of this paper is to analyze the main socio-economic factors that motivate smallholder farmers to engage in contract farming mechanism or not.

[1] Patrick I. (2003). Contract farming in Indonesia: Smallholders and agribusiness working together.