Contractual relationships can be efficient when spot market transactions are plagued by information asymmetries or high transaction costs while full vertical integration might not lead to a correct alignment of incentives between shareholders, managers, and workers and implies high governance costs.
Contract farming entails reciprocal obligations between an agribusiness and farmers regarding input provision, quantity and quality deliverables, extension and technical recommendations, as well as price and other remuneration issues. It enables agribusiness to control and monitor farmers’ input use, which leads to key savings on monitoring and information costs, while farmers receive risk coverage and production incentives. The two specific elements of rural African economies which make a key difference lie in market incompleteness (most farmers do not have access to input, credit, and some output markets) and contract enforcement failures (contracts need to be self-enforcing). In turn, this means that contract design would substantially differ in African agriculture, as well as welfare distribution issues.
We will be the first to adopt a normative approach to better understand the influence of local factors on contractual design, which in turn will determine outcomes of contract farming. This will notably differ from the existing literature which has adopted a more positive stance by only focusing on the welfare effects of contract farming.
We aim to characterize the optimal design of contract farming arrangements contingently on the presence of market and contract enforcement failures, and the endogenous matching of farms, firms, and contracts. Those propositions will be empirically tested by using structural econometric approaches on existing data on contracts from firms and farmers, and by designing innovative fieldwork (launching a micro agribusiness) in Sénégal, Ghana, and Zambia. Farmers and village will be randomly and repeatedly assigned heterogeneous contractual terms while information on non-participants will also be collected (control group). The funding we are seeking here mostly concerns travel expenses on the field and the costs of the experimental set-up to enact contracting trials.
The team will be composed of international experts in the field from UC Berkeley, Switzerland (NADEL and Geneva), MSU, Wisconsin, IFPRI Ghana and Sénégal, World Bank, and Warwick, with good connections with local research institutes and stakeholders from the agribusiness industry in Africa.
The work will be conducted in Paris and Geneva for conceptual research and data analysis. Regular visits and fieldwork will take place in Sénégal, Ghana, and Zambia (Tanzania might be an option).
Project outcome and impact of result
Our results, identification of local and more general determinants of contract farming, will enable us to assess the role of contract farming as a potential factor of economic resilience and poverty reduction in Africa. We expect first to characterize the enabling environment for contracts to emerge and be sustained, looking at how local stakeholders cope with local constraints. Then, we will be in the position to assess its effects on income growth, agricultural development, and poverty reduction. The performance and capacities of local farmers’ groups, the market structure and transaction costs of rural economies are expected to be significant components. But more complex processes and factors will also need to be explored, such as the role of local institutions, social structures, and characteristics of product markets.
Our normative study will thus have significant policy implications in terms of public governance of the agricultural sector and its effects on private stakeholders’ incentives. The scope of regulation will be explored, as well as other policy scenarios (and investments in rural infrastructures) so as to improve the efficiency of contracts and agricultural value chains.
This work will thus be relevant in the current policy debate about the role of agriculture on development, and the recent emphasis on building African’s agriculture competitiveness, value-chain development and agro-industrialization. Given the concentration of UN-related organizations (and other NGOs involved in development and international cooperation based in Geneva, the main results of our research would find relevant policy outlets for their dissemination. We will also seek to participate in several policy workshops and conferences held in Geneva. Dissemination will also proceed through several workshops in Africa and elsewhere in Europe, a book for development practitioners, and several research papers to be submitted in top-field economic journals. Several videos and field reports will also be collected during fieldwork.
This project also aims to bridge scientific connections with African academic and statistical institutes, and professional connections with local stakeholders of the agri-food sectors and policymakers. As a policy-oriented research project, we seek to have stakeholders involved in the following of the research as well as in the dissemination of our results. We thus plan to deliver our results to the stakeholders with whom we will work. Finally, we expect that our field experiment could serve as a basis of a contract farming model to be scaled-up in the near future. Therefore, some effort will be devoted to convert the field experiment into a viable business that could better inform policymakers.
Research associate, IFPRI, University of Neuchatel, UNDP, FAO
IFPRI, University of Neuchatel, UNDP, FAO