Ruml, Anette

English

Agri-food systems in developing countries are undergoing a rapid transformation, characterized by modernizing supply chains and the rising importance of highervalue products. Participation of smallholder farmers in the emerging modern and high-value marketing channels is considered a crucial contributor for rural development and poverty alleviation. However, market access for smallholders tends to be limited due to multiple market failures, while farm production is often associated with high risks and uncertainties. This leads to an under-investment of smallholders in proﬁtable high-value crops, new technologies, and production inputs. Contract farming has emerged as an institutional response to market failures, with the potential to reduce risks and uncertainties, increase smallholder investments in more proﬁtable crops, inputs and technologies, and thus contribute to higher productivity and income.
In the existing literature, various studies analyzed the eﬀects of contract farming on farm production and household welfare. Recent review articles showed that the results are mixed, which may be due to diﬀerences in contract types. A major diﬀerence exists between simple marketing contracts that only oﬀer a secure sales market, and resource-providing contracts that additionally provide inputs and other technical services through in-kind credits. Marketing contracts and resource-providing contracts address diﬀerent constraints and thus can have diﬀerent eﬀects on the farmers’ market access, risk, investment, and production behavior, but a comparison of eﬀects across contract types has rarely been performed. The few existing studies ﬁnd only minor diﬀerences in eﬀects across contract types, potentially due to the relatively low investments required in the production of the particular crops investigated, mainly low-value annual staple foods.
The main contribution of this dissertation is a comparison of the eﬀects of marketing contracts and resource-providing contracts in a perennial plantation crop sector with high investment requirements. Such a capital-intensive crop sector is more suited to investigate diﬀerences in contract types. Smallholder farmers face ﬁnancial constraints for the adoption of high-value crops, and the establishment and maintenance of larger plantations. These ﬁnancial constraints are directly addressed by resource-providing contracts. It thus has to be tested whether a marketing contract suﬃciently incentivizes and enables farmers to increase production investments, or if a resource-providing contract is more suited in such a setting. To the best of
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our knowledge there is no prior evidence on the eﬀects of marketing contracts and resource-providing contracts in such a capital-intensive high-value crop sector.
We perform the analysis with data from the Ghanaian oil palm sector. Oil palm is one example of a capital-intensive high-value crop that has recently gained in importance among smallholders in diﬀerent parts of the world. The increasing demand for vegetable oils worldwide has led to changes in the marketing channels for oil palm producers, also in West Africa, where palm oil was traditionally produced mainly for home consumption. In this setting, oil palm continues to gain in importance, and new contract farming schemes are being implemented to meet the rising demand.
The dissertation includes four papers, which are based on a farm household survey conducted in 2018. The survey includes oil palm producers with marketing contracts, with resource-providing contracts, and without any contracts. Beyond contributing to the existing literature through the contract comparison in a capitalintensive high-value crop sector, each of the four papers contributes in diﬀerent ways, as explained below.
The ﬁrst paper investigates the eﬀects of marketing contracts and resourceproviding contracts on farmers’ input use, productivity, and longer-term cropping decisions. The objective is to analyze whether producing oil palm under contract has an eﬀect on these dimensions, and whether the eﬀects of resource-providing contracts diﬀer from those of simple marketing contracts. The analysis sets itself apart from the available literature by providing evidence on long-term changes in land use, and by disaggregating the analysis by small-, medium-, and large-scale farmers to better understand distributional implications. The results show that the eﬀects strongly diﬀer across contract types. The marketing contract is insuﬃcient in overcoming farmers’ constraints and has no signiﬁcant eﬀect on almost all of the outcome variables. In contrast, the resource-providing contract has positive eﬀects on production investments, yields, degrees of specialization and scale of production. Moreover, the farm size disaggregation suggests that investment constraints are particularly severe for small-scale farmers, who beneﬁt most from the resource-providing contract.
The second paper analyzes the eﬀects of both contracts on agricultural labor use, household labor allocation, and employment. Contract farming is commonly expected to increase labor use and to create employment opportunities, due to an intensiﬁed production and additional labor requirements under contract. This is consistent with the empirical ﬁndings of a few available studies. The objective of this paper is to illustrate that the existing ﬁndings from previous studies cannot be generalized, as contracts can sometimes also lead to the adoption of labor-saving procedures and technologies. To identify whose employment opportunities are affected, we disaggregate the analysis by gender and age. The ﬁndings suggest that agricultural labor use is signiﬁcantly reduced under contract, which leads to a reallocation of farm household labor towards oﬀ-farm employment, but not to a reduction
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of hired labor use. Moreover, we ﬁnd heterogeneous eﬀects for male, female, child, and youth labor. Interestingly, these labor use eﬀects do not diﬀer much by contract type.
The third paper analyzes the eﬀects of both contracts on total farm household income and income by source. The objective of this paper is to examine the contract induced changes in household welfare in monetary terms, and to identify the mechanisms through which each contract leads to changes in household income. A disaggregation by income source allows for the identiﬁcation of the underlying mechanisms and spillover eﬀects, which were largely neglected in the existing literature. We ﬁnd that both contracts lead to large positive eﬀects on total household income in a similar magnitude, yet through diﬀerent mechanisms. Farmers under the marketing contract use the increase in oil palm proﬁts to transition out of agricultural production and into oﬀ-farm employment. Farmers under the resource-providing contract have a stronger dependency on income from oil palm, which is considerably more proﬁtable under the contract.
The results of the ﬁrst, second, and third paper illustrate that the resourceproviding contract overcomes smallholders’ investment and market access constraints and leads to a substantial increase in productivity and income, on average. Yet, additional questions on farmers’ preferences and perceptions included in the survey reveal that most farmers actually regret their decision to participate in the contract scheme and would prefer to exit if they could. Thus, the fourth paper discusses problems and constraints of contract farming, as well as the farmers’ complaints and concerns to provide additional insights on farmer satisfaction. The objective is to contribute to the limited understanding of farmer satisfaction and dropout behavior, which has not received much attention in the literature. We illustrate the importance of incomplete information and contract understanding among farmers. We also show that farmers mistrust the buying company due to lack of contract transparency, discuss potential determinants, and suggest directions for future research.
Overall, our ﬁndings illustrate that the eﬀects of contract farming strongly depend on the type of contract. We identify sizeable diﬀerences in the eﬀects between marketing contracts and resource-providing contracts, which illustrates that not all contracts are useful in every situation. Moreover, the mechanisms of the eﬀects can vary greatly across types of contracts, which should not be ignored when designing contract farming policies and when estimating resulting eﬀects

Georg-August-University Göttingen

The Effects of Marketing Contracts and Resource-providing Contracts: Comparisons in the Small Farm Sector in Ghana

https://ediss.uni-goettingen.de/bitstream/21.11130/00-1735-0000-0005-1458-2/1/Dissertation%20Anette%20Ruml.pdf

The Effects of Marketing Contracts and Resource-providing Contracts: Comparisons in the Small Farm Sector in Ghana

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Georg-August-University Göttingen