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Contract Farming Risks: A Monte Carlo Assessment

Author

Listed:
  • Glenn P. Jenkins

    (Department of Economics, Queen's University, Canada, Eastern Mediterranean University, Mersin 10, Turkey)

  • Chun-Yan Kuo

    (Arkins M. Kabungo Eastern Mediterranean University, Famagusta, Mersin 10, Turkey)

Abstract

The objective of this study is to identify the key risks facing each of the stakeholders in the export-focused paprika value chain in Zambia. Although a deterministic cost–benefit analysis indicated that this outgrower scheme would have a very satisfactory net present value (NPV), a Monte Carlo analysis using an integrated financial–economic–stakeholder model identifies a number of risk variables that could make this system unsustainable. The major risks include the variability of the real exchange rate in Zambia, the international price of paprika and the farm yield rates. This analysis points out that irrigation systems are very important for both stabilizing yields and increasing them. The analysis also shows the limitations of loan financing for such outgrower arrangements when at the sector level it is difficult or even impossible to mitigate the risks from real exchange rate movements and movements of international commodity prices. This micro-level analysis shows how critical real exchange rate management policies are in achieving sustainability of such export-oriented value chains.

Suggested Citation

  • Glenn P. Jenkins & Chun-Yan Kuo, 2013. "Contract Farming Risks: A Monte Carlo Assessment," Development Discussion Papers 2013-07, JDI Executive Programs.
    • Handle: RePEc:qed:dpaper:231
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    References listed on IDEAS

    as
    1. World Bank, 2012. "World Development Indicators 2012," World Bank Publications - Books, The World Bank Group, number 6014.
    2. Orden, David, 2010. "Recent Macroeconomic Dynamics and Agriculture in Historical Perspective," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 42(3), pages 1-10, August.
    3. Deininger, Klaus & Olinto, Pedro, 2000. "Why liberalization alone has not improved agricultural productivity in Zambia : the role of asset ownership and working capital constraints," Policy Research Working Paper Series 2302, The World Bank.
    4. C. A. Hidalgo & B. Klinger & A. -L. Barabasi & R. Hausmann, 2007. "The Product Space Conditions the Development of Nations," Papers 0708.2090, arXiv.org.
    5. Philip Gray & Timothy Irwin, 2003. "Exchange Rate Risk : Reviewing the Record for Private Infrastructure Contracts," World Bank Publications - Reports 11294, The World Bank Group.
    6. World Bank, 2010. "World Development Indicators 2010," World Bank Publications - Books, The World Bank Group, number 4373.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Bellemare, Marc F. & Bloem, Jeffrey R., 2018. "Does contract farming improve welfare? A review," World Development, Elsevier, vol. 112(C), pages 259-271.

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    More about this item

    Keywords

    Monte Carlo simulation; outgrower scheme; paprika ; smallholder farmers; ; sustainability;
    All these keywords.

    JEL classification:

    • Q17 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agriculture in International Trade
    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets
    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods

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