Chicago Conference Zhu

Contract Farming in China: Supply China or Ball and Chain?  By Hongdong Guo, Robert W. Jolly, Jianhua Zhu : 

Contract Farming in China: Supply China or Ball and Chain? By Hongdong Guo, Robert W. Jolly, Jianhua Zhu Presented at IAMA Symposium in Chicago, June 25-26, 2005

Current Status of Chinese Farmers: : 

Current Status of Chinese Farmers:

Challenges for Chinese Government: 

Challenges for Chinese Government

A few definitions ….: 

A few definitions …. Agricultural Industrialization Initiated in 1994 Emphasized vertical coordination of agricultural value chains Viewed as an element of rural development strategy “Dragon Head” Firms Input, food processing, marketing firms Selected by government Hierarchy from national, provincial, municipal to county Firms are encouraged to create a supply or value chain with farmers As incentive they receive credit and tax benefits

Agricultural Contracting – in brief: 

Agricultural Contracting – in brief Developed economy Improved coordination of supply chain More precise incentive structure Developing or transition economy Wire around market imperfections (input, credit, product) Provide access to technology, human capital, markets Downsides Serfdom, latifundia Holdup problem

Research objectives: 

Research objectives Explore perceptions of contract farming among Farmers Contractors (Dragon head firms) Emphasize Reconnaissance of contracting processes in use Contract performance Benefits and obstacles

Survey Data: 

Survey Data Farmer-level across 13 provinces and 47 counties 1036 valid surveys among 1820 returned copies Firm-level a preliminary try in the national range failed focus on 116 dragon-head firms in Zhejiang province

Slide8: 

Table 2.1 Regional Distribution of Farmers Investigated in Survey Table 2.1 Regional Distribution of Farmers Investigated in Survey

 Contract Status of Surveyed Farm Households : 

Contract Status of Surveyed Farm Households

Farmer’s Incentives to join contract farming : 

Farmer’s Incentives to join contract farming

Organizational Types Contracting with Farmers : 

Organizational Types Contracting with Farmers

Table 3.11 Perceived Benefits For Farmers From Contracting Farming: 

Table 3.11 Perceived Benefits For Farmers From Contracting Farming

Logistic Analysis on Factors that Encourage Farmers to Engage in Contract Farming : 

Logistic Analysis on Factors that Encourage Farmers to Engage in Contract Farming Logit Model: Maximum Likelihood Estimation: log-likelihood function Explanatory Variables

Results and Discussions: 

Results and Discussions The model indicates that farmer’s education level and risk attitude have no significant impact on the choice probabilities. Specialization and commercialization in production are positively and significantly related to a farmer’s acceptance of a contract. Distance of the target market has a significant positive impact on contract choice. Government support accounts for another important factor that drives farmers to engage in contracts.

Main Incentives to Sign Contracts : 

Main Incentives to Sign Contracts

Organizational Chains Connecting Farms and Firms : 

Organizational Chains Connecting Farms and Firms Firms contract with farmers directly (firm + farm) Firms contract with farmers via Middlemen (firm +middlemen farm) Firms contract with farmers via Cooperatives (firm + cooperative+ farm) Firms contract with farmers via Local Authority (firm + local authority+ farm) Other type of chains

Table 3.16 Farm Size and Organizational Chain : 

Table 3.16 Farm Size and Organizational Chain

Contract Specifications: 

Contract Specifications Extensive negotiation between contractors and contractees Delivery price Payment method Contract period

Table 3.19 Rank of Firms and Price Specification : 

Table 3.19 Rank of Firms and Price Specification Note : National, Provincial, Municipal and County Dragon-head Firms are evaluated and named by central, provincial, municipal and county level government respectively.

Firm’s Decision to Contract with Farmers: 

Firm’s Decision to Contract with Farmers Adopt Logit model Explanatory variables Results: 1. The rank of firms has a significant and positive effect on the use of contracts. 2. Characteristics of processed goods have a certain positive effect on the dependent variable 3. Price fluctuation in the target market has a significantly negative effect on firm’s decision.

Empirical Analysis on Contract Performance: 

Empirical Analysis on Contract Performance Overall performance performance ratio: well-exercised contracts/total number of contracts benchmark: 75 percent 72 firms out of 100 with contracts reach the benchmark Contract violation and farm size small farm size corresponds to high contract violation

Slide26: 

Results: 1. The different types of contract chains do not appear to significantly affect the contract performance. 2. We cannot find evidence to support the hypothesis that contract types significantly influence contract performance. 3. The use of price floor has a significant and positive effect on contract performance.

Observations: 

Observations Only 20 percent of surveyed farm households were involved in contract farming Almost all households without contracts would accept them if offered Contractees: key advantages are price stability and market access Contractors: key advantages are raw material quality and supply reliability

Observations: 

Observations Firm + Farm is the most common contractual link (and preferred by contractors) Firm + Cooperative + Farm is the preferred link by surveyed farmers Contact compliance appears low Contract performance is enhanced by Farm size Commercial orientation Floor price provisions Production contracts Performance standards

Unanswered questions: 

Unanswered questions Has the encouragement of contract farming Improved supply chain efficiency? Resulted in increased farm incomes?