LINKING SMALL FARMERS TO MODERN MARKETS: THE ROLE OF CONTRACT FARMING
PHILIPPINE AGRICULTURE is largely a smallholder-based system as a result of population growth and decades of land reform. The challenge for rural poverty reduction schemes and programs is to boost incomes of small farmers and farm workers. For growing economies, agricultural development entails diversification into highvalue activities (WB 2009). Such activities are best seen in the context of value chains that can link farmers to modern markets. A value chain refers to a set of linked economic activities that successively increase value added produced along the chain. A supply chain is an organized value chain where a key player coordinates supply and demand. Supply chains typically arise for products to be exported or sold in modern retail outlets (e.g., supermarkets), where quality and volume requirements are paramount (Reardon et al. 2001). In agriculture, coordination of supply and demand is typically arranged under a contract farming scheme.
While it makes sense to posit that the buyer should benefit from such a scheme, is it also true that small farmers benefit? Borras and Franco (2010, p. 520) deny that such win-win scenarios are the norm; rather, contract farming results in “processes and outcomes that mainly favors the transnational companies”. In contrast, other researchers have found that contract farming does benefit farmers (Minot 2007); Costales et al. (2007), for instance, estimate that profits of poultry contract growers are 44 percent higher than those of noncontract growers.
Other factors, however, may account for the observed difference, such as farmer characteristics, area characteristics, etc. This Policy Note summarizes a study (Briones 2014) that seeks to assess the impact of contract farming on small farmers in the Philippines using evidence-based methods. Specifically, the study aims to characterize contract farming for a major value chain in Philippine agriculture, determine the impact of contract farming on the farm incomes of smallholders, and assess the degree to which participation in contract farming is biased toward farmers with larger endowments.
THE TOBACCO INDUSTRY: A CASE STUDY
The tobacco industry in the Philippines is a useful test case, as tobacco is a cash crop with a high-value chain where harvest is intended for export or as a finished product in the domestic market. Tobacco farming is done mostly by small farmers. Their harvests are sold either to exporters or manufacturers under contract schemes or directly to traditional tobacco traders, who in turn supply the same exporters and manufacturers directly or through intermediaries.
Tobacco is mostly planted in the Ilocos region. In 2011, the tobacco industry output at the farm level was valued at US$ 91 million (FAO 2014), while tobacco exports reached US$ 331 million (BAS-PSA 2014). There were about 54,000 tobacco farmers cultivating 37,000 hectares of tobacco farms (NTA 2014) in 2013. The output of the industry grew 6 percent annually from 2000 to 2011. Moreover, growth in tobacco exports has been 22.9 percent over the same period.