Post on 06-Aug-2015
04/15/2023 Abel-Bunda
ANALYSIS OF THE TOBACCO CONTRACTUAL ARRANGEMENT AND ITS IMPACT ON SMALLHOLDER
FARMERS
Evidence from Alliance One Burley Tobacco Contract
04/15/2023 Abel-Bunda
Outline of the Presentation
• Introduction• Methodology• Results and Discussion• Conclusions and policy implication
04/15/2023 Abel-Bunda
Background Information
• Single largest export commodity of the country– Share in total export earnings of 53% in 2006 and
peaks of over 65% in the mid-1990s (Negri and Porto 2008).
• Tobacco sector liberalized gradually to break the structural barriers
• In 1996, the Special Crops Act repealed and opened up the production of burley tobacco (Diagne & Zeller, 2001)
04/15/2023 Abel-Bunda
Background Information
• Smallholder farmers’ participation in agriculture value chain or supply in Malawi is low
• SHFs face multifaceted challenges• Contract farming, out grower scheme
cooperatives important to increased SHFs participation in value chain (GoM, 2011). – Overcome missing markets, minimise income and
price risk, to improve utilisation of machinery. – Contract-Auction marketing ratio of 80:20
04/15/2023 Abel-Bunda
Expected Benefits of CF
• Help reduce and share price or income risk, reduce transaction costs (Masakure and Henson 2005; MacDonald, et al. 2004).
• Transfer of technology (Glover, 1984); access to credit and use contract as collateral (Glover, 1987)
• Improved efficiency and quality leaf
04/15/2023 Abel-Bunda
Justification & Statement of the Problem
• Tobacco facing challenges – leaf pricing fluctuations, declining global demand
due to emerging strict global regulatory regimes, global oversupply
– Incomes affected• Policy discussions and deliberations on IPS• Research says CF improves incomes and helps
reduce TCs (Abebe et al. 2013)• Does it?
04/15/2023 Abel-Bunda
Objectives
• To analyse the performance of contractual arrangement of smallholder burley tobacco farmers
• To determine the impact of tobacco contract farming on smallholder income
04/15/2023 Abel-Bunda
Methodology
• Survey data from 211 CFs and 109 non-contract in KU• TCE and TE-impact model• TCs
– screening costs, monitoring, negotiating costs, signing contract, controlling contract compliance, switching costs in case of premature termination of the contract, and all cost opportunities (Bijman 2008)
• TEM uses the participation probit model to calculate the IMR and includes this ratio as a regressor in the income model (Miyata, Minot, & Hu, 2009)
04/15/2023 Abel-Bunda
Percentage of Reasons for Participating in Contract Farming
Access to extension services
Reduce production costs
Access to loan
Better price
Guaranteed market
Easy access to inputs
0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0
3.0
4.5
19.2
19.5
20.1
33.8
Percentage of response
04/15/2023 Abel-Bunda
Examples of Transactions Costs
AOI Contract Famers Bank
Provision of inputs and technical support, screen farmers (missing input market)
Group selection and monitoring, contract enforcement, joint liability
Information asymmetry about cost of the loan
Provide incentives to enforce contract
Moral hazard- side-selling, divert inputs
Credit provision (missing financial market)
Delayed tobacco collection
Strategic loan default
04/15/2023 Abel-Bunda
Performance of Contract Farming
Contract Non-contractCollateral Required SometimesTobacco rejection Low HighAccess to price information High LowDisagreement on price Low HighNumber of days to bale tobacco Fewer MoreNumber of days to transfer tobacco Fewer MoreMonitoring of tobacco sales High LowMissing bales in transit Low/None HighNumber of days it takes to receive payment Fewer More
04/15/2023 Abel-Bunda
Transaction days: Does it say anything?
Type of Farmer Time in Days
Non-contract 15.45 13.76 15.6 44.81
From day finished baling to collection day
From satellite to
marketAt auction Total time
Contract 9.27 9.1 5.99 24.36
04/15/2023 Abel-Bunda
Impact of Contract Farming
Maximum Likelihood
Estimation Two-step
Variable Coef. Robust SE P>z Coef. SE P>z
Outcome equation
Dependent variable: log net tobacco income
Age of the farmer 0.0083 0.03 0.78 0.0097 0.03 0.75
Age squared -0.0001 0.00 0.65 -0.0001 0.00 0.64
Education dummy 1 -0.0547 0.12 0.66 -0.0543 0.13 0.67
Education dummy 2 0.0321 0.17 0.85 0.0385 0.27 0.89
Household size -0.0516 0.16 0.75 -0.0494 0.17 0.78Land size 0.1503 0.04 0.00*** 0.1519 0.04 0.00***
Transportation -0.0838 0.07 0.25 -0.0861 0.07 0.24
Monitoring dummy 0.2171 0.13 0.10* 0.2194 0.12 0.08*Contract dummy 0.4660 0.17 0.01*** 0.4327 0.17 0.01***Constant 12.491 0.78 0.00*** 12.4826 0.75 0.00***
Abel-Bunda
Impact of Contract FarmingSelection equation
Dependent variable: Contract dummy
Extension visit 1.0506 0.15 0.00*** 1.0436 0.11 0.00***
Age of the farmer -0.0208 0.01 0.03** -0.0201 0.01 0.04**
Education dummy 1 -0.2296 0.25 0.35 -0.2404 0.25 0.34
Education dummy 2 0.7142 0.52 0.17 0.7455 0.70 0.28
Gender of farmer -0.7147 0.25 0.00*** -0.7110 0.35 0.04**
Land size 0.2631 0.09 0.00*** 0.2443 0.08 0.00***
Monthly income -0.0027 0.11 0.98 -0.0221 0.10 0.83
Distance to auction -0.6865 0.21 0.00*** -0.7993 0.24 0.00***
Constant 3.3627 1.48 0.02** 4.0177 1.55 0.01***ath(rho) -0.3387 0.14 0.01
Hazard
lambda -0.2736 0.13 0.04**
04/15/2023
04/15/2023 Abel-Bunda
Impact of Contract Farming
rho -0.3263 0.12 -0.2855
sigma 0.9600 0.05 0.9584
lambda -0.3132 0.12
Wald test of independent equation
Chi-square (1) 5.98
Prob > Chi-square 0.014Log
pseudolikelihood -528.41
Wald Chi-square 56.23 70.59
Prob > Chi-square 0.00 0.00
N 320 320
04/15/2023 Abel-Bunda
Contract & Non-Contract Prices
0.5
11
.5K
ern
el D
ensi
ty
1 2 3 4Burley Tobacco Price (USD/kg)
Price for non-contract farmers Price for contract farmers
Non-contract farmers <U$2.00/kg skewed to the left of 2
Contract farmers skewed to the right of 2>U$ 2.00/kg
04/15/2023 Abel-Bunda
Perceived Impact of CF on Income for past 2 years
Increased significantly
Increased Decreased Decreased significantly
Remained constant
0
10
20
30
40
50
60
70
80
close
04/15/2023 Abel-Bunda
Conclusion & Policy Implication
• Failure to abide by the contract terms contribute poor performance of contract farming
• CF reduces transaction costs, improves farmers access to extension services
• Land is a critical resource to integration of farmers• CF has positive impact on net tobacco income of
SH burley farmers• Consider investing in information sharing between
buyers