Impact of Contract Farming on Farmers’ Income in the Food Value Chain: A Theoretical Analysis and Empirical Study in Vietnam

Viet Hoang

doi:10.3390/agriculture11080797

Abstract

This study empirically analyzes the influence of contract farming on income and farming difficulties in Vietnam by using the econometric models and theoretically identifying the affecting mechanism of contract farming on income, sustainability, and welfare by using the qualitative method. The empirical results show that contract farming insignificantly impacts farms’ income while it can facilitate farming activities and decrease difficulties. The factors of education—head, gender of head, type of crop, and technology may affect farmers’ income. The impacting mechanism of contract farming on income, sustainability, and welfare is theoretically proposed as follows: Contract farming initially impacts the intermediate factors such as cooperative, market access, knowledge and skill, product quality, technology, and support. These factors then affect capacity, linkage, quality, and certification which can enhance farmers’ competitiveness. In the long term, stronger competitiveness, higher price, increasing productivity, and lower cost may significantly improve income, sustainability, and welfare. In general, contract farming may have positive impacts on income, sustainability, and welfare in the medium term and long term. In the short term, the result is not significant due to the similar or lower price comparing with the spot market price, growing production cost, decreasing productivity, and weak contract performance. The findings may help policymakers decide how to expand contract farming and its benefits. Economic scholars can test and compare both quantitative and qualitative findings in other contexts.

Highlights

The main concerns of agricultural economists and policymakers are poverty reduction, farmers’ income and welfare increase, fairness improvement, and sustainable development in the global food value chain
The results show that farmers obtain various benefits from participation in contract farming such as reducing production costs; increasing yields, prices, profits, and income; improving product quality; expanding production and business; developing farm technologies and management practices; enhancing access to information sources and market, and linking small farmers to the global and advanced supply chains [32,33,34,35,36,37]
Propensity score matching (PSM) is employed to compare the performance of the contract and non-contract farmers by accounting for observable factors when (i) there is no instrument variable associated with contract participation and that instrument variable is independent of income; (ii) the data does not fit with the strict condition of the distribution function of the joint error term associated with participation and income equation in Heckman selection-correction model [33,34]

Summary

Introduction

The main concerns of agricultural economists and policymakers are poverty reduction, farmers’ income and welfare increase, fairness improvement, and sustainable development in the global food value chain. Food consumption markets growingly come to a high-value product, food diversity, quality and safety standards, stable supply, and sustainable certifications under the conditions of income growth, globalization, health concerns, lower trade barriers, and technology development [1,2,3]. Contract farming is an intermediary form of vertical coordination in agricultural production. It has been an increasingly popular institutional measure to ensure the quality and quantity of inputs for processors, exporters, distributors, and supermarkets [4,5]. Contract farming would be more likely to emerge when market failure appears while uncertainty and commodity specificity are high, such as in the trade of products that are perishable and difficult to store and transport [6,7]

Methods

Results

Conclusion