Recipient Organization
UNIV OF MINNESOTA
(N/A)
ST PAUL,MN 55108
Performing Department
Applied Economics
Non Technical Summary
With rising incomes and falling trade barriers over the past 60 years, consumers throughout the industrialized world have increasingly come to value food diversity and food availability. This may explain why the average US supermarket offers several varieties of tomatoes at any given time, for example, or why it commonly sells summer crops such as strawberries in the middle of winter. Similarly, with rising incomes throughout the developing world, supermarkets are playing a role of increasing importance in providing developing-country consumers with a more stable supply of a greater number of agricultural commodities.Rather than relying on commodities purchased at the farm gate or on spot markets, however, supermarkets rely on complex supply chains in which commodities are produced under contract in order to ensure that they have access to a stable supply of commodities that satisfy specific quality requirements (Reardon et al., 2003). Consequently, contract farming - the economic institution wherein a processing firm and a grower enter a contract in which the firm delegates the production of agricultural commodities to the grower - is playing an increasingly important role in developing countries.Moreover, the institution of contract farming is expected to play an even more important role in developing countries in the future. Indeed, although industrialized countries remain the top sources of US food imports, "the greatest growth [of US food imports] between 1998 and 2007 was among imports from the developing countries" (USDA, 2009). With the advent and growing popularity of Fair Trade commodities in industrialized countries over the last decade, industrialized-country consumers have been increasingly linked to developing-country producers; Fair Trade commodities can now be purchased from Whole Foods in the US, Tesco in the UK, Loblaws in Canada, and Carrefour in France and elsewhere. In India, for example, Nestlé's biggest milk processing facility in the Punjab contracts with over 140,000 agricultural households (McMichael, 2009). And if the US experience offers any guidance as to what the future has in store for developing countries, 36 percent of the crops and livestock produced in the US are produced under contract, with estimates ranging from 21 percent for cattle to almost 90 percent for poultry (IATP, 2010).Having established for my last MAES proposal that participation in contract farming (i) improves the food security of participating households by reducing the duration of the hungry season they endure (Bellemare and Novak, 2016), (ii) can serve as a partial insurance mechanism for participating households by decreasing the variability of their income when fixed-price contracts are signed (Bellemare, Lee, and Novak, 2017), and (ii) does not significantly reduce exposure to health shocks, I propose to continue this line of investigation by looking at three new questions.
Animal Health Component
100%
Research Effort Categories
Basic
0%
Applied
100%
Developmental
0%
Goals / Objectives
For this research project, I propose to use both data that I collected in Madagascar in 2008 as well as the World Bank's publicly available LSMS-ISA data to look at least three questions related to participation in contract farming and agricultural value chains:Specialization: One fundamental question that this literature poses is whether the move away from subsistence agriculture and toward commercial agriculture allows smallholder farmers to specialize. Many subsistence farmers grow a little bit of everything in order to ensure their household's food security via dietary diversity. Are crops grown for commercial purposes added on to that diversity of crops, or do farmers specialize instead? I will answer this question using both my data from Madagascar as well as the relevant LSMS-ISA datasets.Spillovers: In a recent review of the literature on contract farming, Otsuka et al. (2016) explain that economists do not yet know whether participating in contract farming and agricultural value chains has any spillovers on participating households' other sources of income. In my Madagascar data, income is disaggregated in four categories, other than income from contract farming: (i) income from livestock, (ii) income from agricultural sources other than contract farming or livestock, (iii) income from labor market participation, and (iv) income from nonfarm enterprises.Environmental Effects: In Bellemare, Lee, and Novak (2017), we found that participating in contract farming can serve as a form of partial insurance for participating households. Given that, one might expect those (presumably) risk-averse households to produce more at the margin given that part of their risk has been insured, which would lead to more depleted soils. Using LSMS-ISA data, I will look at whether participation in agricultural value chains leads to more environmental degradation.
Project Methods
Part of the data used for this project were collected between July and December 2008 for a study of contract farming commissioned by the Economic Development Board of Madagascar (EDBM) on behalf of the World Bank. Six regions were visited by the survey team. Within each region, the two communes with the highest density of contract farming were retained, as this information was available in the commune census data. Finally, within each of the 12 communes, 50 households were selected at random from a list of households who participated in contract farming, and 50 households were selected at random from a list of households who did not participate in contract farming. For each household, data were collected at the household, plot, crop, and, when applicable, contract levels. The data thus consist of about 1200 households, half of which are participants in contract farming. These will be analyzed using a combination of observational (i.e., survey) data and experimental data obtained from respondents during the survey, in an effort to generate knowledge about causal relationships. The experimental procedure used here relies on a contingent valuation experiment in which each respondent's marginal utility (i.e., valuation) from participating in a (hypothetical) contract farming agreement was elicited, which allows controlling for a number of issues which would normally plague the identification of causal relationships in this (and other) contexts.The remainder of the data used in this project are form the World Bank's Living Standards Measurement Surveys--Integrated Surveys of Agriculture (LSMS-ISA) data sets, which cover eight countries in sub-Saharan Africa. Here, the data report whether households sell to an agricultural value chain rather than collect detailed information on participation in contract farming, but the upside is that the fact that there are LSMS-ISA data sets for eight countries makes for greater external validity.Preliminary results, which look at spillovers, indicate that participation in contract farming has positive spillovers on agricultural income other than contract farming, but negative spillovers on non-agricultural sources of income (i.e., income from labor-market participation and income from non-farm enterprises). Thus, it looks as though participation in contract farming makes participating households better farmers, but it also looks as though it causes a certain agricultural involution.Most households in the data are extremely poor by American standards and, for those households, contract farming provides a means of transitioning from subsistence agriculture to a more industrialized form of agriculture, and from growing small quantities of many different crops to large quantities of one or two crops. In other words, contract farming is the first step in the development of modern agricultural value chains, which can serve as a lever for economic development in sub-Saharan African countries like Madagascar.