Does contract farming improve productivity and income of farmers? A review of theory and evidence

The share of agriculture in the gross domestic product of (GDP) in many countries has been declining. Yet agriculture still plays an important role in many developing country economies as the sector is a source of employment for an estimated 60 to 70 percent of the population in most developing countries. Most agricultural production in developing countries is associated with low productivity and poor income due to high dependence on subsistence farming with minimal technology as well as poor access to markets. Contract farming is believed to improve productivity and income because it facilitates coordination between farmers and other actors in terms of production, processing and marketing of agricultural products. The effect of contract farming on income and productivity has been a subject of increasing research but most of the available information is aggregated and there is lack of detail analysis on the mechanisms of the effects. We conducted a systematic literature review of contract farming studies using keyword search strategy Econlit, Scopus and Science Direct search engines. The keywords “contract”, “farming”, “contract farming” were used in combination with the words “income”, “productivity”, “quantitative”, “qualitative”, “agriculture”, “aquaculture”, “developing”, “developed” and “country”. Initially a selection criteria for the potential studies were defined and used by the authors separately to select and rank 20 studies by importance. In the second round, the authors were provided with their own rankings as well as with the results of the first round for others. A revision of ranking was requested. Based on this approach a shortlist of 23 studies emerged; 11 on the impact of contract farming on productivity and 12 were on the effects of contract farming on income of producers. We conduct an in depth analyses of the selected studies and present evidence on the effect of contract farming on farmer productivity and income. Almost all the selected studies analyzing the impact of contract farming on income argue that farmers’ on contract farming schemes experienced some increase in their income.