Rce Contract Farmng n Camboda: Empowerng Farmers to Move Beyond the Contract Toward Independence Junnng Ca Luyna Ung Sununtar Setboonsarng PngSun Leung June 2008 ADB Insttute Dscusson Paper No. 109
Junnng Ca s an assstant professor at the Central Unversty of Fnance and Economcs n Bejng, People s Republc of Chna. Luyna Ung s a researcher at the Supreme Natonal Economc Councl of Camboda. Sununtar Setboonsarng s a senor research fellow at the Asan Development Bank Insttute (ADBI). PngSun Leung was a vstng fellow at the Asan Development Bank Insttute from December 2005 to August 2006. He s also a professor of molecular boscences and boengneerng at the Unversty of Hawa at Manoa, Honolulu, US. The vews expressed n ths paper are the vews of the authors and do not necessarly reflect the vews or polces of ADBI, the Asan Development Bank (ADB), ts Board of Drectors, or the governments they represent. ADBI does not guarantee the accuracy of the data ncluded n ths paper and accepts no responsblty for any consequences of ther use. Termnology used may not necessarly be consstent wth ADB offcal terms. ADBI s dscusson papers reflect ntal deas on a topc, and are posted onlne for dscusson. ADBI encourages readers to post ther comments on the man page for each dscusson paper (gven n the ctaton below). Some dscusson papers may develop nto research papers or other forms of publcaton. Ths dscusson paper s part of an ADBI research project on contract farmng and market facltaton for the rural poor. The project wll produce a book, tentatvely ttled Makng Globalzaton Work for the Poor and the Envronment: Contract Farmng and Organcs. Suggested ctaton: Ca, Junnng, Luyna Ung, Sununtar Setboonsarng, and PngSun Leung. 2008. Rce Contract Farmng n Camboda: Empowerng Farmers to Move Beyond the Contract Toward Independence. ADBI Dscusson Paper 109. Tokyo: Asan Development Bank Insttute. Avalable: http://www.adb.org/dscussonpaper/2008/06/05/2582.rce.contract.farmng.camboda/ Asan Development Bank Insttute Kasumgasek Buldng 8F 3-2-5 Kasumgasek, Chyoda-ku Tokyo 100-6008, Japan Tel: +81-3-3593-5500 Fax: +81-3-3593-5571 URL: www.adb.org E-mal: nfo@adb.org 2008 Asan Development Bank Insttute
Abstract From the farmer s perspectve, contract farmng provdes stable market access, credts, extenson servces, nfrastructure and other benefts, but has drawbacks such as lmtng the flexblty of farmng and marketng. Based on a survey of rce contract farmng for export n Camboda, ths paper uses smple mean comparson, propensty score matchng comparson, and swtchng regresson comparson to assess the mpact of contract farmng on farmers performance. Farmers wth larger famly szes, younger and more educated household heads, less asset value, and those wth farm locatons closer to the hghway are more lkely to jon the contract. The results provde evdence that contract farmng of non-certfed organc rce has a postve mpact on farmers proftablty. They also suggest that progressve farmers lvng near the hghway tend to jon the contract frst, but leave contract farmng early, whle farmers n more remote areas reman under contract. It appears that the sample former-contract farmers proftablty dd not declne after leavng contract farmng as they further ntensfed ther farmng systems to produce for the less chemcal conscous market. Thus, contract farmng may be nvolved n the process of helpng subsstence farmers develop nto ndependent commercal farmers. Ths study provdes emprcal evdence that contract farmng of safe food n remote areas where land s less contamnated could be an effectve prvate-sector led poverty reducton strategy. However, snce contract farmng n ths case s not nclusve of the poorest farmers, publc sector support s requred to lower the transacton costs of workng wth them. JEL Classfcaton: D02, Q12, R32
Contents I. Introducton 1 II. Objectves 1 III. Contract Farmng: Pros and Cons 1 IV. Contract Rce Farmng n Camboda 2 V. Houeshold Characterstcs 4 A. Famly Sze and Farm Sze 5 B. Household Head Characterstcs 5 C. Household Economc Condtons 5 D. Credt 5 E. Incomes 6 F. Geographcal Poston 6 VI. Farmng Characterstcs 7 A. Rce Felds (hectares) 7 B. Rce Prce (rel per kg of rce) 8 C. Revenue (rels per hectare) 8 D. Yeld (klos of rce per hectare of land) 8 E. Cost (rels per hectare or rels per kg of rce producton) 8 F. Proftablty (rels per hectare) 9 G. Labor Structure 9 H. Materal and Operatng Costs 10 VII. Propensty Score Matchng Analyss 13 A. Contract Farmers vs. Never-Contract Farmers (Entre Operatons) 14 B. Contract Farmers vs. Former-Contract Farmers (Commercal Operatons) 16 C. Contract Farmers vs. Former-Contract Farmers (Entre Operatons) 17 VIII. Swtchng Regresson 18 A. Methodology 18 B. Indcators for Premums of Jonng the Contract 19 C. Indcators for Farmers Relatve Performance Wth and Wthout the Contract 20 D. Comparson of Contract Farmers and Non-Contract Farmers Proftablty n Commercal Rce Farmng 21 IX. Summary 24 X. Conclusons and Recommendatons 26 References 27
I. INTRODUCTION In spte of accelerated expanson n other sectors such as ndustry and servces snce 1993, agrculture remans the backbone of the Cambodan economy. The sector employed more than 70% of Camboda s labor force n 2004 and accounted for more than 30% of the country s GDP. Rce farmng s the major agrcultural actvty n Camboda, accountng for nearly one thrd of the country s total agrcultural value added. However, due to neffcent farmng technques and lmted rrgaton networks, the yeld level of rce farmng n Camboda s well below that of ts neghbours. Gven the current low yelds and the large remanng uncultvated area, there s sgnfcant scope for rce farmng development n Camboda. Camboda s endowed wth natural resources and weather condtons that favour rce farmng, but ts comparatve advantage n rce farmng has yet to be exploted. The country s rce producton s manly for self-suffcency, and commercal rce exports are stll at an early stage. Lmted market access and underdeveloped agrcultural nfrastructure are two major bottlenecks constranng rce farmng development n Camboda. Whle the Cambodan government can help ease these constrants through extenson servces and publc nvestments, contract farmng s an nsttutonal arrangement n the prvate sector that may eventually help to overcome some of the constrants. For smallholder farmers n transton economes, market access s especally mportant because t means ther producton s not lmted by ther own consumpton or the local market. The access to broader markets va contract farmng allows smallholder farmers to explot ther comparatve advantages n natural resources, envronment, and other areas. For example, when farmers produce for local consumpton, t may not be an advantage that they have clean sol as a result of the less ntensve use of chemcals because local consumers may be ndfferent to the organc features of farm products. However, when farmers produce for nternatonal markets where consumers wth hgher ncome levels are wllng to pay premums for organc products, havng clean sol becomes a comparatve advantage. Rce contract farmng n Camboda has been mplemented by Angkor Kasekam Roongroeung Co Ltd (AKR). Ths company has been ntroducng large-scale contract farmng arrangements of non-certfed organc rce snce 2001 and the accumulatve number of farmers who have joned the contract s reportedly over 32,000 households. A survey has been conducted to compare contract and non-contract rce farmers n terms of ther farmng practces, economc condtons and socal characterstcs. Data obtaned usng ths survey allows us to assess the mpacts of contract farmng on rce farmers performance n Camboda. II. OBJECTIVES The man objectve of ths study s to assess the mpact of contract farmng on farmers performance n the context of Camboda. Based on the survey data, ths paper s ntended to: 1) provde a comprehensve comparson between contract rce farmng and non-contract rce farmng; 2) dentfy factors that affect Cambodan rce farmers decsons to jon the contract; and 3) assess rce farmers performance wth and wthout the contract. III. CONTRACT FARMING: PROS AND CONS Contract farmng s an nsttutonal arrangement wdely adopted n agrcultural producton (see Roy, 1963; Glover and Kusterer, 1990; and Glover and Ghee, 1992). Contract farmng represents an agreement between farmers and contractors (mostly processng and/or
marketng frms) for the producton and supply of agrcultural products. Under contract farmng, farmers usually agree to delver specfc commodtes n predetermned quanttes and to meet predetermned qualty standards, whle contractors agree to provde producton support (e.g., supply of nput and provson of technologes) and accept products at predetermned prces (Eaton and Shepherd, 2001). Contract farmng s benefcal to farmers because t opens up otherwse unavalable markets (especally to smallholder farmers), provdng materals, technologcal and fnancal support, and reducng farmers costs and the rsks nvolved n sellng products. It also benefts contractors by allowng them to establsh close relatonshps wth farmers and by reducng uncertantes n purchases through predetermned tmng, prces, and qualty standards (see Glover, 1984; Key and Runsten, 1999; Sngh, 2002; and Setboonsarng, 2008). Whle contract farmng s a conceptually sound nsttutonal arrangement, lack of flexblty s one of ts man labltes, and coordnaton problems are faced durng ts mplementaton (see Glover and Kusterer, 1990; and Lttle and Watts, 1994). As contract farmers are often requred to grow new crops or adopt unfamlar farmng technques, they tend to encounter greater producton rsks (Key and Runsten, 1999). They are also lkely to face greater credt rsks because of excessve advances, whch tend to jeopardze the sustanablty of ther operatons n the long run (see Glover, 1984; and Glover and Kusterer, 1990). Supports from contractors can help reduce these rsks. However, overdependence on a contractor not only makes farmers less adaptve and hence more vulnerable to economc shocks, but also tends to reduce ther barganng power n contract negotatons (see Key and Runsten, 1999; and MacDonald et al., 2004). Contract farmng may also be based aganst poor farmers n remote areas whle favorng better-off farmers wth extensve land who are lvng n areas wth good nfrastructure (Setboonsarng, 2008). Contract enforcement s another major ssue. Farmers may breach the contract by dvertng nputs suppled on credt to other purposes or sellng outsde the contract for hgher prces, whle contractors may breach the contract (e.g. wth unfar qualty standards, low qualty nputs, poor techncal assstance, ncomplete purchases, delayed payments, etc.) because of neffcent management or marketng problems (see Glover, 1984, 1987; and Sngh, 2002). IV. CONTRACT RICE FARMING IN CAMBODIA The largest contract rce farmng operaton n Camboda s organzed by Angkor Kasekam Roonroeung Co Ltd (AKR), a prvate Cambodan frm establshed n 1999. Its man busness s to export non-certfed organc Neang Mals (an aromatc Cambodan rce varety ntroduced by AKR) to the nternatonal market 1. AKR has nvested about US$8 mllon n a hgh-tech rce mll that has a processng capacty of up to 10 tons per hour or up to 30,000 tons per year. In 2005, the company worked wth farmers n four provnces (Kandal, Kampong Speu, Takeo, and Kampot), whch were selected based on ther deal agronomc condtons for the cultvaton of the Neang Mals organc rce. At the start of the contract farmng operaton, only about 100 farmers joned the contract because of a lack of trust n AKR s contract arrangement as well as the company s low mllng capacty. Subsequently, the total number of contracted households reached 27,346 n 2003 and 32,005 n 2004. More than 80% of the contract farmers are located n a provnce 1 Neang Mals, a varety smlar to Tha aromatc rce, Hom Mal, s relatvely non-responsve to chemcal fertlzers, so t s approprate for organc producton. However, due to the hgh cost of certfcaton, AKR opted to encourage farmers to produce non-certfed organc rce, a product of whch stll commands a hgh prce n the nternatonal market. 2
(Kampong Speu) near the AKR headquarters where the condton of the agrculture nfrastructure s generally good. AKR s experence shows that contract farmng was generally successful n Kampong Speu provnce and n some nearby areas n Takeo provnce. Feld observatons ndcate that the dstance from the operatng stes to the AKR headquarters s not a factor determnng the success of contract farmng. Rather, most of the successful cases were farmers n former forestland and land close to mountans where rce can be produced at hgher qualty and yeld. On the other hand, farmers that are close to AKR (and therefore close to man roads) and have more market experence tend to have hgher levels of defaultng on the contracts. Ths latter group of farmers s made up of the former contract farmers of the survey. AKR s nvolved n every stage of rce producton and marketng. Its roles nclude: 1) dentfyng areas sutable for growng fragrant paddy; 2) establshng farmer assocatons based on exstng commune structures and brngng these under ts management; 3) usng these assocatons to recrut farmers; 4) delverng mproved seeds and techncal advce to contract farmers; 5) montorng and solvng producton problems; 6) collectng and purchasng rce output at AKR s gate; 7) sortng mlled and packaged paddy nto dfferent types; and 8) exportng rce to nternatonal markets, ncludng Europe, Australa and Hong Kong. Snce all steps of producton and processng are well coordnated, AKR shortens the supply chan under contract farmng and thus lowers transacton costs for rce export, relatve to the normal supply chan. Accordng to AKR s contract arrangement, the company dstrbutes Neang Mals seeds n credt durng July and buys back the output from October to January of the followng year. Ths arrangement requres farmers to repay the credt seeds and transport the harvested paddy to the company s rce mlls. The amount of seeds that farmers need to return, the mnmum guaranteed prce, and the penaltes for contract defaults, are explctly stated n the contracts. However, whle contract farmers agree to obey AKR s qualty control mechansms, condtons related to producton methods are not clearly specfed n the contracts. The contracts also do not clearly state AKR s labltes f t does not buy contracted rce at the predetermned prces. The contracts state that AKR s oblgated to buy rce from farmers at the mnmum prce wthout clearly specfyng the terms of purchase n detal. In practce, AKR often uses techncal reasons to reject or lower the prces of rce that farmers have transported to the frm. AKR establshes commune assocatons to help enforce contracts. Each commune assocaton conssts of a head, a deputy and the vllage head. The head and deputy are traned by the frm to understand the basc techncal aspects of organc farmng and the farmng of Neang Mals. Each assocaton routnely observes the progress of ts members and reports to the AKR management. The progress report ncludes every stage of producton from plowng, transplantng, water management, and harvestng. Each assocaton also provdes basc techncal advce to ts members, advses them not to use chemcal fertlzers, and helps them grow other crops after the harvestng season. The assocatons also help members develop mxed or ntegrated agrculture (e.g., growng vegetables and rasng lvestock) to ncrease ncomes and reduce poverty. Commune assocatons report to AKR any ssues related to the producton process such as drought, flood, dsease, nsect and other sgnfcant ssues that affect producton. The frm channels ts polces through the assocatons and provdes extenson servces va ts agents. At present, these assocatons are tghtly controlled by the frm and have lttle barganng power. However, they have a promsng future and could develop nto ndependent organzatons representng the nterests of the communty. AKR assocatons appear to be a good model for communty-based agrcultural development. They provde the bass and experences for the future development of farmers assocatons n Camboda where farmers are predomnantly smallholders. 3
V. HOUESHOLD CHARACTERISTICS The survey was conducted n 2005 n 615 households, consstng of 178 contract farmers, 220 former-contract farmers, and 217 never-contract farmers. Table 1 presents the sample farmers basc characterstcs. Table 1: Farmers Characterstcs Varables Contract a Former Contract a Never Contract a No. of famly members 6.19a 5.56b 5.41b No. of famly members older than 14 4.21a 3.93a 3.56b Percentage of females n famly (%) 52a 51a 54a Total land (ha) 1.71a 1.30b 1.03c Own land (ha) 1.68a 1.27b 1.00c Rented land (ha) 0.021a 0.011a 0.006a Percentage of own land (%) 98.5a 96.9a 97.9a Percentage of land for rce (%) 96.7b 98.1ab 99.4a Age of household head 45.25b 47.64a 44.62c Educaton of household head (years) 2.83a 2.70a 2.41b Gender of household head (male=1; female=0) 0.86a 0.83a 0.73b No. of TVs 0.74a 0.78a 0.61b No. of tractors 0.028a 0.009a 0.023a No. of plows 0.96a 0.93a 0.80b No. of threshes 0.006a 0.009a 0.004a No. of pumps 0.17a 0.16a 0.08b No. of bkes 1.21a 1.10ab 0.99b No. of motorbkes 0.50a 0.56a 0.37b Value of lvestock (mllons of rel) 3.51a 3.36a 2.51b Monthly consumpton expendture per person (1000 rel) 27a 23b 23b Percentage of home-grown n consumpton expendture 23a 22a 22a Credt total (1000 rel) 274a 348a 289a Percentage of credt from moneylenders (%) 3.7b 3.7b 11a Percentage of credt from MFI (%) 27b 44a 37ab Percentage of seed credt (%) 44a 11b 1.4c Percentage of fertlzer credt (%) 7.8b 13a 12a Percentage of credt from famly (%) 17c 26b 36a Income per adult from non-rce sources (1000 rel) 333b 566a 553a Income per adult from other crops (1000 rel) 52a 36ab 27b Income per adult from off-farm actvtes (1000 rel) 280b 530a 526a Rato of off-farm ncome n non-rce ncome (%) 76b 80b 88a Rato of handcraft n off-farm ncome (%) 9a 9a 13a Rato of wage n off-farm ncome (%) 30a 19b 33a Rato of remttance n off-farm ncome (%) 22a 24a 19a Rato of other actvtes n off-farm ncome (%) 39b 48a 34b Dstance to farm-to-market road (km) 6.35a 5.28b 6.28a Dstance to hghway (km) 10.37a 9.95a 9.99a a. The three columns represent the average value of each group for the varables. The letters (a, b, or c) followng each number ndcate the sgnfcance of the dfferences across the three groups under par-wse mean comparsons. The sgnfcance level s 10%. For each varable under comparson, numbers wth the same letter are not sgnfcantly dfferent; numbers wth letter a are sgnfcantly greater than numbers wth letter b or c; numbers wth letter b are sgnfcantly greater than numbers wth letter c. 4
A. Famly Sze and Farm Sze On average, contract farmers have larger famles and more land (Table 1). The average famly sze for contract farmers s 6.19 persons (4.21 adults) per household, greater than former-contract farmers 5.56 persons (3.93 adults) and never-contract farmers 5.41 persons (3.56 adults). On average, a contract farmng household controls 1.71 hectares of land (1.68 hectares of own land), greater than former-contract farmers 1.30 hectares (1.27 hectares of own land) and never-contract farmers 1.03 hectares (1.00 hectare of own land). The relatvely large famly and land sze may reflect the scale requrements for contract farmng. As farmers usually need to splt ther land for commercal and self-consumpton operatons due to taste preferences n the tradtonal rce varetes, farmers wth small areas of land tend to have nsuffcent land for plantng AKR varetes. Accordng to many plot experments conducted by AKR, farmers should own at least one hectare of land so as to be effcent under the contract. Thus, the company stpulated that farmers should own at least one hectare of land to be elgble to jon the contract. However, AKR also allows farmers wth good reputatons but wth small areas of land to jon ther land together to meet the mnmum requrement of one hectare per sngle contract. The requrement on mnmal land sze also came from the experence that small farmers are more lkely to break the contract as the costs of breachng t tend to be relatvely low for them. Dealng wth farmers wth larger areas of land can help AKR reduce transacton costs. Because larger areas of land requre more labor, a larger famly sze tends to be an advantage for contract farmng. B. Household Head Characterstcs On average, contract and former-contract farmers household heads are older, more educated, and less lkely to be female (Table 1). Farmers who are older, more educated and male tend to have large areas of land. Moreover, they usually have better access to frsthand nformaton and hence are n a better poston to make decsons. Farmers n other groups usually follow the decsons of farmers n successful groups. Socal connectons and nteractons are key factors affectng farmers contract choces. C. Household Economc Condtons On average, never-contract farmers exst n relatvely poor economc condtons. They own less land, and fewer TVs, plows, pumps, bkes, motorbkes, and lvestock than contract or former-contract farmers. They also have lower monthly expendture per household adult member (Table 1). Poor economc condtons may be a factor hnderng farmers from jonng the contract because they tend to produce rce for subsstence. In addton, poor economc condtons usually concde wth smaller land areas. Also, poor people are less relable when t comes to honorng the contract because the costs of breachng the contract are relatvely low for them. D. Credt Although the three types of farmer do not dffer sgnfcantly n ther total credts, the sources of ther credts are qute dfferent (Table 1). As farmers under the contract are requred to plant seeds provded by AKR, the average rato of seed credt to ther total credt (44%) s much hgher than n former or never-contract farmers (Table 1). Accordng to the farmers beng surveyed, the avalablty of seed credts under the contract s one of the major factors affectng farmers decsons to jon the contract, especally as the nterest rates on seed credt are relatvely much hgher. Whle former-contract farmers are stll able to receve 11 percent of ther total credts from seed credts, a very small percentage (1.4%) of never-contract farmers total credts come 5
from seed credts (Table 1). As AKR s not a seed company, t only makes the seed avalable for farmers under the contract. Former-contract farmers usually keep seeds for ther own use. When they face a seed shortage, they may ether borrow seeds from each other or from farmers under the contract. Both former-contract farmers and never-contract farmers obtaned ther credts manly through mcro-fnance nsttutons (MFI) (44% and 37% respectvely). Never-contract farmers obtaned a hgher percentage of ther credts from moneylenders and famly members or relatves (Table 1). Snce AKR dscourages farmers from usng chemcal fertlzers and pestcdes, contract farmers appear to receve less credt (n percentage terms) on fertlzers than former- and never-contract farmers (Table 1). E. Incomes On average, contract farmers have less ncome from non-rce sources (333,000 rel) than former-contract farmers (566,000 rel) and never-contract farmers (553,000 rel). Ths manly reflects contract farmers relatvely lower off-farm ncomes compared wth the other two types of farmers (Table 1). Contract farmers on average have more ncome from other crops than never-contract farmers because AKR provdes extenson servces on the ntegrated farmng system and encourages farmers to grow other crops after the harvestng season. These ncome patterns ndcate that contract farmers are more rce- (or agrculture-) orented than former-contract and never-contract farmers. The three types of farmers have smlar compostons of off-farm ncomes, except that former-contract farmers have a relatvely small percentage of off-farm ncomes from wages, but more from other actvtes. Most of the former-contract farmers lve close to the market and they tend to engage n tradng actvtes rather than wage employment. It s common for them to be merchants, traders, mcro-busnesses, mcro rce mllers, government offcals, etc. F. Geographcal Poston On average, former-contract farmers are closer to the market than contract farmers. Ths may be a factor affectng ther decsons not to contnue stayng n the contract. After a few years of AKR s operaton, Neang Mal seeds became avalable n the local market n the four provnces where AKR s operatng. Moreover, a market for Neang Mal rce also emerged as local traders purchased t to sell n Vetnam. Snce farmers have the opton of usng ther own seeds or purchasng Neang Mal seeds to produce AKR varetes to sell to traders nstead of jonng the contract, farmers wegh the costs and benefts based on ther crcumstances. Therefore, farmers closer to the market may be able to obtan more nformaton and hence ther decsons tend to be dfferent. In the case here, a possblty s that former contract farmers may realze that they would be able to do better by themselves and hence choose not to jon the contract. Durng the survey year, the demand for rce was very strong as the neghborng Vetnamese trader came to purchase rce n Camboda makng the rce prce n the open market very compettve. Thus, the mnmum prce offered by AKR was not very attractve; and farmers expected to earn more profts from operatng wth ther own seeds and usng more fertlzer to ncrease the yeld to sell n the open market. In addton, farmers near the market may fnd t easer to take advantage of the prce fluctuatons n the market. Market nformaton and trend are crucal for farmers to help them decde on strateges to sell ther output. As the supply after harvestng s fxed, rce prces depend on demand and storage capactes and facltes and hence tend to be hghly fluctuated after the harvest season. Therefore, people close to the market have better access to market nformaton and hence are able to sell ther outputs at better tmes. 6
VI. FARMING CHARACTERISTICS The sample farmers plant rce for both commercal purposes and self-consumpton. Due to taste preference, farmers generally plant tradtonal varetes on the consumpton plots. In the followng we compare the three types of farmers' producton characterstcs n ther commercal operatons, whch are presented n Table 2. Table 2 also presents the farmers entre operatons (ncludng farmng for own consumpton). Table 2: Farm Producton: Revenue, Cost and Proft Varables Contract a Former Contract a Never Contract a Commercal operaton Plant area (ha) 0.76a 0.37b 0.08c Percentage of plant area harvested (%) 46b 59a 70a Revenue (1000 rel/ha) 722b 920a 684ab Rce prce (rel/kg) 747a 684b 645b Yeld (kg/ha) 947b 1343a 1059ab Cost (1000 rel/ha) 1493a 1803a 1661a Cost (rel per kg of rce producton) 3238a 3023a 2823a Rato of cash n cost (%) 34b 38b 46a Rato of labor cost n total cost (%) 79a 78a 71b Proft per area of land (1000 rel/ha) 2-771a -882a -977a Cash proft per area of land (1000 rel/ha) 2 213a 332a -30a Entre operaton Total plant area 1.64a 1.26b 1.02c Percentage of land for commercal rce 46a 27b 5.4c Percentage of plant area harvested (%) 46b 55a 50ab Revenue (1000 rel/ha) 600b 720a 610ab Rce prce (rel/kg) 632a 604b 570c Yeld (kg/ha) 920b 1210a 1121ab Cost (1000 rel/ha) 1355ab 1616a 1291b Cost (rel per kg of rce producton) 4175a 2555b 2394b Rato of cash n cost (%) 37b 41a 42a Rato of labor cost n total cost (%) 77a 75ab 74b Proft per area of land (1000 rel/ha) 2-755a -896a -681a Cash proft per area of land (1000 rel/ha) 2 129a 135a 79a Note: a. The three columns represent the average value of each group for the varables. The letters (a, b, or c) followng each number ndcate the sgnfcance of the dfferences across the three groups under par-wse mean comparsons. The sgnfcance level s 10%. For each varable under comparson, numbers wth the same letter are not sgnfcantly dfferent; numbers wth letter a are sgnfcantly greater than numbers wth letter b or c; numbers wth letter b are sgnfcantly greater than numbers wth letter c. 2.Proft s equal to revenue mnus total cost ncludng both cash and non-cash costs. Major non-cash costs nclude famly labor and homemade manure. Cash proft s equal to revenue mnus cash costs only. A. Rce Felds (hectares) On average, contract farmers have larger rce felds and use a hgher percentage of ther rce felds for commercal purposes (Table 2). An average contract farmer controls 1.71 hectares of land (ncludng both own and rented land) and uses 1.64 hectares of the land for rce farmng, 46% of whch s used to plant commercal rce. An average former-contract farmer 7
controls 1.30 hectares of land and uses 1.26 hectares of the land for rce farmng, 26% of whch s used to plant commercal rce. An average never-contract farmer controls 1.03 hectares of land and uses 1.02 hectares of the land for rce farmng, 5.4% of whch s used to plant commercal rce (Table 2). The low percentage of commercal rce felds for nevercontract farmers ndcates that most of them are subsstence farmers. On average, contract farmers have a lower harvest rato (46%) than former-contract farmers (55%) for the entre operaton. The dfference s even greater n commercal felds (Table 2). B. Rce Prce (rel per kg of rce) Compared to former- and never-contract farmers, contract farmers enjoy sgnfcant prce premums n ther commercal operatons. On average, contract farmers can sell ther commercal rce at 747 rel per kg, hgher than former-contract farmers 684 rel per kg and never-contract farmers 645 rel per kg (Table 2). Hgh rce prce s a major factor attractng farmers to jon the contract, whch not only subjects them to strct qualty standards but also constrans ther freedom n farmng actvtes such as the use of seeds and chemcals. Former-contract farmers average commercal rce prce s not sgnfcantly dfferent from that of never-contract farmers. C. Revenue (rels per hectare) As contract farmers can sell ther rce at hgher prces, one may expect that they would have hgher revenues, whch nevertheless turns out not to be the case. On average, contract farmers revenue (per hectare) from commercal operatons s 722,000 rel, whch s lower than former-contact farmers 920,000 rel but not sgnfcantly dfferent from never-contract farmers 684,000 rel. D. Yeld (klos of rce per hectare of land) The reason that contract farmers prce premums do not gve them hgher revenues s because of ther relatvely low yelds. Contract farmers average yeld n the commercal feld s 947kg per hectare, whch s lower than former-contract farmers 1,343kg but not sgnfcantly dfferent from never-contract farmers 1,059kg (Table 2). Ths may ndcate that the organc practce recommended by AKR for contract farmers dd not lead to lowerng yeld from tradtonal practce. The yeld dfferences between contract and former-contract farmers ndcate that nflexblty n farmng practces may be a factor motvatng farmers to abandon the contract. That s, farmers would choose to abandon the contract f the freedom to farm more ntensvely could compensate for the lost prce premums and f there was a market for ther rce. E. Cost (rels per hectare or rels per kg of rce producton) On average, contract farmers spend 1,493,000 rel on one hectare of commercal rce operaton, whch appears lower than former-contract farmers 1,803,000 rel and nevercontract farmers 1,661,000 rel. However, the dfferences are not statstcally sgnfcant (Table 2). For commercal operatons, the average rato of contract farmers cash costs to ther total costs s 34%, whch s not sgnfcantly dfferent from former-contract farmers 38%, but lower than never-contract farmers 46% (Table 2). For commercal operatons, the average rato of contract farmers labor costs to ther total costs s 79%, whch s not sgnfcantly dfferent from former-contract farmers 78 % but hgher than never-contract farmers 71% (Table 2). 8
F. Proftablty (rels per hectare) The average proft (cash and non-cash nputs ncluded) for contract farmers n commercal operatons s -711,000 rel per hectare, whch appears hgher than former-contract farmers - 882,000 rel and never-contract farmers -977,000 rel. But the dfferences are not statstcally sgnfcant (Table 2). Whle contract farmers average total proft s negatve, ther average cash proft s 213,000 rel per hectare, whch reflects the fact that most of ther costs (66%) are non-cash costs (manly famly labor). Former-contract farmers 332,000 rel of cash proft appears hgher than that of contract farmers, but the dfference s not statstcally sgnfcant (Table 2). There are only 27 never-contract farmers reportng actvtes n commercal rce farmng; and ther average cash proft s only -30,000 rel (Table 2). G. Labor Structure On average, contract farmers spend 1,250,000 rel on labor costs (266,000 rel n cash) on one hectare of commercal operaton, lower than former-contract farmers 1,522,000 rel (308,000 rel n cash) and never-contract farmers 1,308,000 rel (361,000 rel n cash), but the dfferences are not statstcally sgnfcant (Table 3). On average, contract farmers spend 2,695 rel on labor costs to produce one kg of rce n ther commercal operatons, hgher than former-contract farmers 2,237 rel and nevercontract farmers 2,261 rel, but the dfferences are not statstcally sgnfcant (Table 3). On average, the three types of farmers are not sgnfcantly dfferent n ther commercal operatons wth respect to the rato of famly labor n total labor, the rato of hred labor n total labor, or the rato of females n total labor. However, contract farmers use a relatvely lower percentage of exchanged labor n ther commercal operatons (Table 3). 9
Table 3: Labor Cost Varables Contract a Former Contract a Never Contract a Commercal operaton Labor cost (1000 rel/ha) 1250a 1522a 1308a Labor cost (rel per kg of rce producton) 2695a 2237a 2261a Cash labor cost (1000 rel/ha) 266a 308a 361a Cash labor cost (rel per kg of rce producton) 409a 409a 500a Rato of famly labor n total labor (%) 86a 86a 83a Rato of hred labor n total labor (%) 9.6a 7.9a 11a Rato of exchanged labor n total labor (%) 4.3b 6.3a 6ab Rato of females n total labor (%) 48a 47a 53a Entre operaton Labor cost (1000 rel/ha) 1106ab 1305a 1017b Labor cost (rel/kg) 3424a 1847b 1991b Cash labor cost (1000 rel/ha) 222a 274a 257a Cash labor cost (rel/kg) 143a 144a 180a Non-cash labor cost (1000 rel/ha) 884ab 1031a 760b Non-cash labor cost (rel/kg) 711a 580a 581a Rato of famly labor n total labor (%) 85a 82ab 80b Rato of hred labor n total labor (%) 7.7b 12a 12a Rato of exchanged labor n total labor (%) 10a 9.5a 10a Rato of females n total labor (%) 49b 48b 52a a. The three columns represent the average value of each group for the varables. The letters (a, b, or c) followng each number ndcate the sgnfcance of the dfferences across the three groups under par-wse mean comparsons. The sgnfcance level s 10%. For each varable under comparson, numbers wth the same letter are not sgnfcantly dfferent; numbers wth letter a are sgnfcantly greater than numbers wth letter b or c; numbers wth letter b are sgnfcantly greater than numbers wth letter c. H. Materal and Operatng Costs On average, contract farmers spend 242,000 rel on materal costs (ncludng transportaton costs) per hectare of commercal feld, lower than former-contract farmers 280,000 rel and never-contract farmers 353,000 rel, but the dfferences are not statstcally sgnfcant (Table 4). On average, contract farmers use 543 rel of materal costs to produce one kg of rce, lower than former-contract farmers 786 rel and never-contract farmers 561 rel, but the dfferences are not statstcally sgnfcant (Table 4). 10
Table 4: Materal and Operatng Cost Structure Varables Contract a Former Contract a Never Contract a Commercal operaton Materal cost (1000 rel/ha) 242a 280a 353a Materal cost (rel per kg of rce producton) 543a 786a 561a Seed cost (1000 rel/ha) 52b 74a 53b Seed cost (rel per kg of rce producton) 135a 153a 109a Seed prce (rel/kg) 693a 664a 685a Chemcal fertlzer cost (1000 rel/ha) 59b 70b 110a Chemcal fertlzer cost (rel per kg of rce producton) 180ab 90b 224a Chemcal fertlzer prce (rel/kg) 1153a 1154a 1153a Compost cost (1000 rel/ha) 66b 64b 103a Compost cost (rel per kg of rce producton) 126a 285a 133a Compost prce (rel/cart) 5311a 4460b 6130a Pestcde cost (1000 rel/ha) 1.21a 0.61a 0.68a Pestcde cost (rel per kg of rce producton) 4.04a 0.43b 0.28ab Irrgaton cost (1000 rel/ha) 16b 34ab 42a Irrgaton cost (rel per kg of rce producton) 22a 133a 36a Rental machne cost (1000 rel/ha) 50a 42a 44a Rental machne cost (rel per kg of rce producton) 73a 124a 58a Transportaton cost (rel per kg of rce) 44a 8.1ab 5.3b Entre operaton Materal cost (1000 rel/ha) 248b 311a 274ab Materal cost (rel/kg) 751a 547a 564a Seed cost (1000 rel/ha) 48b 63a 48b Seed cost (rel per kg of rce producton) 42a 42a 40a Seed prce (rel/kg) 622a 615a 598a Chemcal fertlzer cost (1000 rel/ha) 86b 126a 109ab Chemcal fertlzer cost (rel per kg of rce producton) 70a 79a 81a Chemcal fertlzer prce (rel/kg) 1237ab 1167b 1481a Compost cost (1000 rel/ha) 58b 70a 74a Compost cost (rel per kg of rce producton) 36b 56a 62a Compost prce (rel/cart) 5586a 5262a 6724a Pestcde cost (1000 rel/ha) 0.75a 0.74a 0.88a Pestcde cost (rel per kg of rce producton) 0.48a 0.79a 0.31a Irrgaton cost (1000 rel/ha) 15a 24a 13a Irrgaton cost (rel per kg of rce producton) 6.6a 10.5a 9.7a Rental machne cost (1000 rel/ha) 33a 36a 37a Rental machne cost (rel per kg of rce producton) 18a 19a 34a a. The three columns represent the average value of each group for the varables. The letters (a, b, or c) followng each number ndcate the sgnfcance of the dfferences across the three groups under par-wse mean comparsons. The sgnfcance level s 10%. For each varable under comparson, numbers wth the same letter are not sgnfcantly dfferent; numbers wth letter a are sgnfcantly greater than numbers wth letter b or c; numbers wth letter b are sgnfcantly greater than numbers wth letter c. 11
1. Seed On average, contract farmers spend 52,000 rel on seeds for one hectare of commercal operaton, whch s lower than former-contract farmers 74,000 rel but not sgnfcantly dfferent from never-contract farmers 53,000 rel (Table 4). On average, the three types of farmers do not dffer sgnfcantly n ther seed costs n terms of per kg of rce producton. Ther seed prces are also not sgnfcantly dfferent (Table 4). 2. Chemcal Fertlzer Wth respect to commercal operatons, the average chemcal fertlzer costs per hectare for contract farmers and former-contract farmers (59,000 rel and 70,000 rel respectvely) are sgnfcantly lower than for never-contract farmers (110,000 rel) (Table 4). It s noted that whle AKR recommends that contract farmers do not use chemcal fertlzer, t s not strct n ts montorng system. There s a lack of clarty on what s consdered organc practce as defned by AKR. Durng feld vsts, farmers explaned that they used chemcal fertlzers only durng land preparaton but not durng the cultvaton perod, so they consdered that they were complyng wth AKR s requrements. On average, former-contract farmers spend 90 rel of chemcal fertlzers n producng one kg of rce, lower than contract farmers 180 rel and never-contract farmers 224 rel (Table 4). As AKR promotes sol mprovement technques to farmers under the contract, ths factor may have contrbuted to former-contract farmers relatvely hgh effcency n the use of chemcal fertlzer (n terms of cost per kg of rce producton). In contrast, never-contract farmers rce felds have a relatvely low effcency n the use of chemcal fertlzer as sol mprovement technques were never extended to them. Hence, they usually need to use more chemcal fertlzers to produce a gven amount of rce. There s no sgnfcant dfference n the prces of chemcal fertlzer encountered by the three types of farmer (Table 4). 3. Compost On average, contract farmers use 66,000 rel of compost on one hectare of commercal feld, whch s smlar to former-contract farmers 64,000 rel but lower than never-contract farmers 103,000 rel (Table 4). In general, the requrement for compost declnes as sol structure mproves after a few years of organc practce. Nevertheless, t s not clear n ths sample whether lower use of compost among contract and former-contract farmers s due to a better qualty of land or a lack of avalable compost. It s nterestng also to note that the prce of compost s sgnfcantly hgher for never-contract farmers (6,130 rel per cart compared to 5,311 rel per cart for contract farmers and 4,460 rel per cart for former-contract farmers). Ths may be due to the fact that never-contract farmers have a sgnfcantly lower number of lvestock and hence have to rely on purchased manure (Table 1). To what extent the promoton of the use of compost by AKR resulted n rasng awareness among other groups of farmers about the mportance of usng compost would be an nterestng topc for further nvestgaton. 4. Pestcdes All three types of farmer have very low pestcde costs for one hectare of commercal operaton, whch are not statstcally dfferent (Table 4). It should be noted that the pestcdes used by contract farmers could be bologcal pestcdes because AKR extended technologes for makng bologcal pestcdes usng herbal extract to farmers under contract. Unfortunately, the questonnare dd not dstngush between bologcal and chemcal pestcdes. 12
5. Irrgaton Contract farmers average rrgaton cost for commercal operatons s 16,000 rel per hectare, lower than former-contract farmers 34,000 rel per hectare (not statstcally sgnfcant) and never-contract farmers 42,000 rel (Table 4). Ths ndcates that contract farmers may have a better water supply and/or they have better agrcultural land. 6. Machnery Contract farmers average machnery cost of 50,000 rel per hectare appears hgher than former-contract farmers 42,000 rel and never-contract farmers 44,000 rel, but the dfferences are not statstcally sgnfcant (Table 4). Ther machnery costs n terms of per kg of rce producton are also not statstcally sgnfcant (Table 4). 7. Transportaton Contract farmers average transportaton cost (per klo of rce producton) s 44 rel, hgher than former-contract farmers average 8.1 rel (not statstcally sgnfcant) and never-contract farmers average 5.3 rel. VII. PROPENSITY SCORE MATCHING ANALYSIS As the above comparsons do not control for farmers characterstc dfferences, the mean dfferences n farmng performance between contract and non-contract farmers may be caused by farmers characterstcs rather than ther contract or non-contract states. In the followng we use the propensty score matchng (p-score) method (Becker and Ichno, 2002) to conduct a more refned comparson by controllng for farmers characterstc dfferences. The frst step of the p-score approach s to estmate farmers propensty scores based on ther basc characterstcs (.e., characterstcs that are not affected by the choce of contract). The propensty score of each farmer measures hs/her tendency to jon the contract. The magntude of a propensty score s between 0 and 1; the larger the score, the more lkely the farmer would be to jon the contract. After farmers propensty scores are estmated, the second step s to dvde farmers nto groups. Farmers n each group have smlar propensty scores. In addton, each group should be balanced n the sense that the basc characterstcs of the farmers n t are not sgnfcantly dfferent. After the balanced groups are formed, we can compare dfferent types of farmers n each group. As such comparsons control for farmers characterstc dfferences, the performance dfferences between contract and non-contract farmers are more lkely to be caused by contract farmng rather than by farmers basc characterstcs. The above p-score comparson method s usually called stratfcaton comparson n that the two groups under comparson are stratfed nto one-to-one matchng sub-groups for comparson. Besdes the stratfcaton comparson, another comparson method called the nearest neghbor comparson s to compare each contract farmer to the non-contract farmer wth the most smlar p-score (Becker and Ichno, 2002). In ths paper we use the stratfcaton comparson as the man approach and the nearestneghbor comparson as an addtonal approach to enhance the robustness of the comparsons. For example, f both comparson approaches ndcate that contract farmers have hgher profts than never-contract farmers, and the dfferences are statstcally sgnfcant, we would have the confdence to conclude that contract farmng tends to mprove proftablty. If both approaches ndcate that contract farmers have hgher profts, and the dfference s statstcally sgnfcant under one approach but not under the other, the concluson that contract farmng mproves proftablty would stll be sound but less robust 13
than n the frst stuaton. The most troublesome stuaton would be where one approach ndcates that contract farmers have sgnfcantly hgher profts whle the other approach ndcates the exact opposte. Fortunately, we do not encounter such stuatons n ths study. We nclude the followng varables n the p-score estmaton: 1) the sze of own land; 2) the value of producton assets; 3) the value of consumpton assets; 4) the age of the household head; 5) the gender of the household head; 6) the educatonal level of the household head; 7) the number of adult famly members; 8) the female rato n the famly; 9) the dstance from the farm to the market; 10) the dstance from the farm to the hghway; 11) a dummy varable dentfyng provnce 2; 12) a dummy varable dentfyng provnce 3; and 13) a dummy varable dentfyng provnce 4. We use the p-score approach to conduct three comparsons. One s to compare contract farmers and never-contract farmers performance n ther entre operatons (ncludng both commercal and self-consumpton operatons); another s to compare contract farmers and former-contract farmers performance n ther entre operatons; and the last one s to compare contract farmers and former-contract farmers performance n ther commercal operatons. A. Contract Farmers vs. Never-Contract Farmers (Entre Operatons) Table 5 shows the results of the p-score comparson of contract farmers and never-contract farmers performance n ther entre operatons. Snce contract farmers (as the treatment group) are compared to dfferent never-contract farmers (as the control group) under the stratfcaton approach and the nearest-neghbor approach, the results based on the two approaches may not be consstent. As mentoned above, we use the nearest-neghbor comparsons to examne the robustness of the results from the stratfcaton comparsons. The deal stuaton would have been to compare the commercal operatons of contract and never-contract farmers. Unfortunately, as never-contract farmers have very lmted areas for commercal purposes, there are only 27 never-contract farmers reportng ther commercal operatons (compared to 170 contract farmers), whch makes the p-score comparsons hghly mbalanced and unnformatve. Therefore, we use the p-score approach to compare contract and never-contract farmers performance n ther entre operatons only. It should be noted that snce the szes of consumpton felds operated by contract farmers dffer wdely, the combned mpacts may dlute the fndngs on the mpact of commercalzaton. 14
Table 5: P-score Comparson of Contract and Never-Contract Farmers (Entre Operatons) Varables Dfference (Stratfcaton) Dfference (Nearest Neghbor) No. of observatons (contract vs. never-contract) 178 vs. 197 178 vs. 63 Rce prce (rel/kg) 26 17 t-rato 1.231 0.766 Revenue (1000rel/ha) 158 183 t-rato 2.649 2.978 Yeld (kg/ha) 159 194 t-rato 1.411 1.761 Cost (1000 rel/ha) 392 302 t-rato 3.617 1.940 Cost (rel per kg of rce producton) 1,777 1,195 t-rato 1.968 0.972 Cash cost (1000 rel/ha) 29 37 t-rato 0.444 0.318 Cash cost (rel per kg of rce producton) 417 245 t-rato 0.933 0.589 Proft (1000 rel/ha) -244-119 t-rato 1.964 1.501 Cash proft (1000 rel/ha) 129 146 t-rato 2.002 1.884 Both the stratfcaton and nearest-neghbor comparsons ndcate that contract farmers have a hgher average rce prce than never-contract farmers n ther entre operatons, but the dfference s not statstcally sgnfcant under ether approach. Both the stratfcaton and nearest-neghbor comparsons ndcate that contract farmers have hgher average revenue than never-contract farmers n ther entre operatons; and the dfference s statstcally sgnfcant under both approaches. Both the stratfcaton and nearest-neghbor comparsons ndcate that contract farmers have a hgher average yeld than never-contract farmers n ther entre operatons; the dfference s sgnfcant under the nearest-neghbor comparson but not under the stratfcaton comparson. Both the stratfcaton and nearest-neghbor comparsons ndcate that contract farmers have a hgher average cost n terms of per hectare of rce feld than nevercontract farmers n ther entre operatons; and the dfference s statstcally sgnfcant under both approaches. Both comparsons ndcate that contract farmers also have a hgher average cost n terms of per kg of rce producton than never-contract farmers n ther entre operatons; and the dfference s statstcally sgnfcant under the stratfcaton approach but not under the nearest-neghbor approach. 15
Both the stratfcaton and nearest-neghbor comparsons ndcate that compared to never-contract farmers, contract farmers have a hgher average cash cost n terms of per hectare or per klo of rce producton n ther entre operatons, but the dfference s not statstcally sgnfcant under ether approach. Both the stratfcaton and nearest-neghbor comparsons ndcate that contract farmers have a lower average proft than never-contract farmers n ther entre operatons. The dfference s statstcally sgnfcant under the stratfcaton approach but not under the nearest-neghbor approach. Both the stratfcaton and nearest-neghbor comparsons ndcate that contract farmers have a hgher average cash proft than never-contract farmers n ther entre operatons; and the dfference s statstcally sgnfcant under both approaches. B. Contract Farmers vs. Former-Contract Farmers (Commercal Operatons) Table 6 shows the results of the p-score comparson of contract farmers and former-contract farmers performance n ther commercal operatons. Table 6: P-score Comparson of Contract and Former-Contract Farmers (Commercal Operatons) Varables Dfference (Stratfcaton) Dfference (Nearest Neghbor) No. of observatons (contract vs. former contract) 178 vs. 191 178 vs. 58 Rce prce (rel/kg) 63 64 t-rato 4.052 3.748 Revenue (1000 rel/ha) -377-976 t-rato 1.316 2.235 Yeld (kg/ha) -651-1,487 t-rato 1.917 2.349 Cost (1000 rel/ha) -329-788 t-rato 1.021 1.357 Cost (rel per kg of rce producton) 932 1,328 t-rato 1.317 1.836 Cash cost (1000 rel/ha) -65-300 t-rato 0.557 1.605 Cash cost (rel per kg of rce producton) 114 250 t-rato 0.565 1.032 Proft (1000 rel/ha) -48-188 t-rato 0.243 0.740 Cash proft (1000rel/ha) -312-676 t-rato 1.466 2.205 16