Contract Farming & Cost of Funding: Evidence from Madurase Solar Salt Small Businesses

Abstract

This study aimed to estimate the indirect expenses borne by tenant farmers due to credits they receive in community salt farming operations managed through contract farming systems in Pamekasan Regency. Credits constitute a crucial aspect of tenant farmers’ rights within the community salt farming contract farming framework. This study employed a comparative analysis of the cost of funds based on the adopted contract farming models, specifically the two-way and three-way contract farming structures. Moreover, it investigated the correlation between the cultivated salt field’s size and the magnitude of the cost of funds endured by tenant farmers. The results of the analysis reveal that the average costs of funds borne by tenant farmers are notably high, ranging from 5.24% to 6.71% per month. Surprisingly, these figures exceed the loan interest rates offered by two formal financial institutions: BRI and Bank JATIM. Another significant finding is the positive correlation between the size of cultivated salt fields and the magnitude of the cost of funds borne by tenant farmers. Lastly, there is a clear positive relationship between the credit amount received and the corresponding cost of funds endured by tenant farmers. The substantial costs of funds shouldered by tenant farmers involved in the community salt farming, operated through contract farming systems in Pamekasan Regency, signify inefficiencies within the contract farming structure. It is expected that the government can aid these tenant farmers by disbursing subsidized credits through collaborations with relevant ministries and local formal financial institutions.