The Heterogeneous welfare impacts of participation in contract farming schemes: Evidence from Southern India

Abstract

Assessing the extent of welfare gains from participation in contract farming arrangements is important to be able to make a case for promoting contract farming as a way for smallholders to capitalize on the opportunities offered by modern supply chains. At the same time, empirical accounts of contract farming schemes in developing countries not only suggest high mortality rates but also show that many schemes have high farmer exit or attrition rates, indicating that farmer experiences might be variable. This paper demonstrates the heterogeneity of welfare impacts of contract farming participation by estimating an endogenous switching model using survey data for 474 farmers in four commodity sectors, gherkins, papaya marigold and broiler. The study shows that net welfare gains vary widely both across contract commodities and across farmers within a commodity sector. While contracting in papaya and broiler are associated with improvements in net pro t per month for those participating and potential improvements of 47% and 123% for current non-participants, the impacts for gherkins and marigold are more ambiguous. The standard deviation of point estimates of treatment effects is quite large indicating variability in welfare gains from contracting to different farmers even within the same commodity sectors. It is therefore important to recognize that notwithstanding the sign of average treatment effects, contract farming arrangements have diverse impacts on income for individual farmers.