Farm in Thailand.

The Effects of Smallholder Participation in Agricultural Value Chains: Evidence from the Developing World

Principal Investigator

Marc Bellemare

Department and College

Department of Applied Economics in the College of Food, Agricultural and Natural Resource Sciences

Project Number

 MIN-14-167

Funding Type

Hatch

Project Start and End Date

October 19, 2017-September 30, 2022

Project Summary

With rising incomes and falling trade barriers over the past 60 years, consumers throughout the industrialized world have increasingly come to value food diversity and food availability. This may explain why the average US supermarket offers several varieties of tomatoes at any given time, for example, or why it commonly sells summer crops such as strawberries in the middle of winter. Similarly, with rising incomes throughout the developing world, supermarkets are playing a role of increasing importance in providing developing-country consumers with a more stable supply of a greater number of agricultural commodities.

Rather than relying on commodities purchased at the farm gate or on spot markets, however, supermarkets rely on complex supply chains in which commodities are produced under contract in order to ensure that they have access to a stable supply of commodities that satisfy specific quality requirements (Reardon et al., 2003). Consequently, contract farming - the economic institution wherein a processing firm and a grower enter a contract in which the firm delegates the production of agricultural commodities to the grower - is playing an increasingly important role in developing countries.

Moreover, the institution of contract farming is expected to play an even more important role in developing countries in the future. Indeed, although industrialized countries remain the top sources of US food imports, "the greatest growth [of US food imports] between 1998 and 2007 was among imports from the developing countries" (USDA, 2009). With the advent and growing popularity of Fair Trade commodities in industrialized countries over the last decade, industrialized-country consumers have been increasingly linked to developing-country producers; Fair Trade commodities can now be purchased from Whole Foods in the US, Tesco in the UK, Loblaws in Canada, and Carrefour in France and elsewhere. In India, for example, Nestlé's biggest milk processing facility in the Punjab contracts with over 140,000 agricultural households (McMichael, 2009). And if the US experience offers any guidance as to what the future has in store for developing countries, 36 percent of the crops and livestock produced in the US are produced under contract, with estimates ranging from 21 percent for cattle to almost 90 percent for poultry (IATP, 2010).

Having established for my last MAES proposal that participation in contract farming (i) improves the food security of participating households by reducing the duration of the hungry season they endure (Bellemare and Novak, 2016), (ii) can serve as a partial insurance mechanism for participating households by decreasing the variability of their income when fixed-price contracts are signed (Bellemare, Lee, and Novak, 2017), and (ii) does not significantly reduce exposure to health shocks, I propose to continue this line of investigation by looking at three new questions.