The Sustainability of Contract Farming with Specialized Suppliers to Modern Retailers: Insights from Vegetable Marketing in Indonesia

Shinya Ikeda,Ronnie S Natawidjaja

doi:10.3390/agriculture12030380

Abstract

Specialized suppliers to supermarkets in rural Java showed that smallholder farmers could engage in contract farming with the rise of retail modernization. This paper examines whether they have sustained contract farming with the recent decline of modernized stores. Our field survey, based on cases reported by the World Bank in 2006, provides the following findings: (1) Some suppliers failed to sustain contract farming due to growers’ hold-up problems; (2) The suppliers could prevent contract breaching by either undertaking contract-specific investments to train growers or provide inputs. Moreover, they selected growers based on their social reputation to avoid contract breaching; (3) We found that farmers in breach of contract farming on the modern channel begin to arrange farmers’ groups by themselves and return to the traditional channel as a new type of intermediaries. This indicates an evolution of the traditional marketing channel with the supermarket revolution.

Highlights

Contract farming with modern retailers is expected to be a key tool for smallholders to participate in value-adding activities and escape poverty in developing countries [1–4]
While contract farming schemes might not prevail in Indonesia, this follow-up case study indicates the potential for traditional channels evolving with supermarkets
This paper investigates whether modern agricultural practices/technologies, i.e., the contract farming scheme, have been sustained among the SS and growers as a follow-up survey of World Bank [25]

Summary

Introduction

Contract farming with modern retailers is expected to be a key tool for smallholders to participate in value-adding activities and escape poverty in developing countries [1–4]. As counterparts of the smallholders in contract farming, supermarkets arrange the contract farming scheme to provide advanced technologies (high-quality seeds and fertilizers and appropriate farming techniques) to smallholder farmers who can participate in the value chains and obtain higher wealth than selling to traditional markets. The smallholders under market failures tend to fail at contract farming due to the lack of legal enforcement of contracts observed in developing countries [10–12]. To solve such a coordination problem among farmers and supermarkets, the importance of forming producer organizations or marketing cooperatives including smallholders is well recognized [9,13,14]. Supermarkets could expect that the producer organizations reduce transaction costs incurred by assembling the commodities from a large number of smallholders; the role of producer organizations could guarantee a minimum quantity of commodities in contracts [9,13,16]

Objectives

Methods

Results

Discussion

Conclusion