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Is contract farming a risk management instrument for Chinese farmers?

Author

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  • H. Holly Wang
  • Yanping Zhang
  • Laping Wu

Abstract

Purpose - The purpose of this paper is to investigate contract farming in China, using vegetable production as a case. Specifically, the authors analyze farmers' contract decisions for different types of contracts, their contract compliance behaviors, and their profitability affected by the contracts both analytically and empirically. Design/methodology/approach - The authors assume growers with alternative risk preferences make the contract decisions to maximize their expected utilities, under exogenous market price risks and contract terms determined by the processor or wholesaler. Both fixed price and floating price contracts are analyzed. Two surveys of 185 and 85 farm households, respectively, are obtained in Shandong province in 2010, and econometric analyses with both Logit and least square regressions are conducted. Findings - The results indicate that the determining factors for contract farming are related to farmers' risk attitude, gender, yield, farm size and labor availability. However, contrary to the common belief that contracts are a risk management tool for risk averse farmers, the risk lovers tend to use contract farming instead of risk averters. Female household heads and farms with more labors tend not to use contracts, but larger farms with more acreage are more likely to contract. These suggest Chinese farmers' primary motivation of contracting is not market price risk management, but rather seeking better offers and marketing transaction cost reduction. Originality/value - The authors believe that this is the first econometric study to analyze contract farming allowing different types of contracts in China. The scenarios include cases without contracts, with fixed price contracts, and with floating price contracts, where the contract price changes to reflect the market price, a very unique yet popular situation in China. Each of the cases is also considered under the situation whether default is possible.

Suggested Citation

  • H. Holly Wang & Yanping Zhang & Laping Wu, 2011. "Is contract farming a risk management instrument for Chinese farmers?," China Agricultural Economic Review, Emerald Group Publishing Limited, vol. 3(4), pages 489-505, November.
    • Handle: RePEc:eme:caerpp:v:3:y:2011:i:4:p:489-505
    DOI: 10.1108/17561371111192347
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    References listed on IDEAS

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    Cited by:

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    4. Briones, Roehlano M., 2015. "Small Farmers in High-Value Chains: Binding or Relaxing Constraints to Inclusive Growth?," World Development, Elsevier, vol. 72(C), pages 43-52.
    5. Mishra, Ashok K. & Kumar, Anjani & Joshi, Pramod K. & D'Souza, Alwin & Tripathi, Gaurav, 2018. "How can organic rice be a boon to smallholders? Evidence from contract farming in India," Food Policy, Elsevier, vol. 75(C), pages 147-157.
    6. Nicholas Minot & Loraine Ronchi, 2014. "Contract Farming," World Bank Publications - Reports 24249, The World Bank Group.
    7. Bellemare, Marc F. & Bloem, Jeffrey R., 2018. "Does contract farming improve welfare? A review," World Development, Elsevier, vol. 112(C), pages 259-271.
    8. Kumar, Anjani & Roy, Devesh & Joshi, Pramod K. & Tripathi, Gaurav & Adhikari, Rajendra P., 2016. "Impact of Contract Farming on Profits and Yield of Smallholder Farms in Nepal: An Evidence from Lentil Cultivation," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235848, Agricultural and Applied Economics Association.
    9. Minot, Nicholas & Sawyer, Bradley, 2016. "Contract farming in developing countries: Theory, practice, and policy implications," IFPRI book chapters, in: Devaux, André & Torero, Maximo & Donovan, Jason & Horton, Douglas E. (ed.), Innovation for inclusive value-chain development: Successes and challenges, chapter 4, pages 127-158, International Food Policy Research Institute (IFPRI).
    10. Lin Li & Hongdong Guo & Jos Bijman & Nico Heerink, 2018. "The influence of uncertainty on the choice of business relationships: The case of vegetable farmers in China," Agribusiness, John Wiley & Sons, Ltd., vol. 34(3), pages 597-615, June.
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    12. Kuhn, L. & Hou, L. & Chen, X. & Huang, J., 2018. "Agricultural machinery for cleaner air An analysis of the effectiveness of three policy measures for reducing residue burning in Northern China," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 277374, International Association of Agricultural Economists.
    13. Maspaitella, Marcus & Garnevska, Elena & Siddique, Muhammad I. & Shadbolt, Nicola, 2018. "Towards high value markets: a case study of smallholder vegetable farmers in Indonesia," International Food and Agribusiness Management Review, International Food and Agribusiness Management Association, vol. 21(1).
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    15. Feike, Til & Khor, Ling Yee & Mamitimin, Yusuyunjiang & Ha, Nan & Li, Lin & Abdusalih, Nurbay & Xiao, Haifeng & Doluschitz, Reiner, 2017. "Determinants of cotton farmers’ irrigation water management in arid Northwestern China," Agricultural Water Management, Elsevier, vol. 187(C), pages 1-10.
    16. Viet Hoang, 2021. "Impact of Contract Farming on Farmers’ Income in the Food Value Chain: A Theoretical Analysis and Empirical Study in Vietnam," Agriculture, MDPI, vol. 11(8), pages 1-16, August.
    17. Abebe, Gumataw K. & Bijman, Jos & Kemp, Ron & Omta, Onno & Tsegaye, Admasu, 2013. "Contract farming configuration: Smallholders’ preferences for contract design attributes," Food Policy, Elsevier, vol. 40(C), pages 14-24.
    18. Kumar, A. & Mishra, A. & Joshi, P. & D'Souza, A., 2018. "Impact of Contract Farming and Risk Preference on Food Security: The Case of Organic Basmati Rice Smallholders," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 277008, International Association of Agricultural Economists.
    19. Tripathi, G. & Kumar, A. & Roy, D. & Joshi, P., 2018. "Profits from participation in contract farming: Evidence from cultivators of onion, okra and pomegranate in Maharashtra, India," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 277106, International Association of Agricultural Economists.

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