Does Contract Farming Improve Smallholder Farmers Income? The Case of Avocado Farming in Kenya

Contract farming is seen by its proponents as a tool for creating new market opportunities as well as for providing credit and training, leading to increased incomes of smallholder farmers. Critics, however, argue that contract farming encourages unequal bargaining relationships with agribusiness firms and is likely to pass risks to farmers, thus favouring large scale farmers at the expense of smallholders. Another school of thought contends that the effect of contract farming on the livelihoods of smallholder farmers is context specific and depends on the enterprise in question. Yet, there is a dearth of empirical evidence from such studies in Sub-Saharan Africa. We use data collected in 2012 from 100 smallholder avocado farmers in Kandara district in Kenya, obtained using multistage sampling technique, to examine the effect of contract farming on household income. Because of lack of pre-treatment data and the possibility of selection bias due to observable characteristics, we use propensity score matching technique to construct controls for the treatment group. The results indicate that contract farming has a positive and significant effect on avocado income. However, further analysis reveals that contract farming does not have any significant effect on the total household income of smallholder avocado farmers. Instead, support services such as interlinked credit and provision of information should be taken into consideration in contract farming because of their potential benefits for smallholders.