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Project Duration: Objectives of project

Maximo Torero, Ruth Vargas Hill, Angelino Viceisza, Samson Dejene Aredo, Maribel Elias

January 2008- July 2011

The inability of many poor, rural farmers to enter the market may be due to small farmers‘ inability to commit to a contract. At the time of sale, if market prices are higher than contracted prices, farmers may renege and sell their products in the open market. This project proposes three innovative contract structures to open markets to small farmers of high-value crops in Vietnam, Tanzania, and Peru. These contract structures are implemented in a field setting in these countries and have been applied in several rural communities selected through a typology of micro-regions that will serve as a scaling-up device for the project results. The proposed research will show which contract structures work under what conditions and will measure improvements to overall farmer welfare (income and poverty levels). We expect the results from the implemented contracts to be applicable to contract farming in other developing countries as well.

Research Approach

The research project is interdisciplinary and combines quantitative and qualitative research tools. Contracts are tested both in the laboratory and in the field to improve small farmers‘ welfare. The research procedure involves the following steps: (1) A typology of micro-regions is implemented in each of the countries under study, and micro-regions with very high or high market accessibility (to avoid the constraint of road access), high levels of smallholders, high poverty levels, and similar agroecological conditions are selected; (2) the strategic game that is the basis for our experimental contract is designed; (3) experimental designs are implemented and three contracting mechanisms are tested first in a controlled laboratory setting to see which mechanism works best before running the more costly field experiments; (4) once the mechanisms are ready to be tested in the field, we work with local extension agencies in each of the countries to offer actual contracts to farmers growing high-value products. This allows us to observe and analyze the impact of these contracts on the behavior and welfare of small farmers through detailed quantitative and qualitative household surveys; (5) finally, we diffuse our results and design a scaling-up strategy based on our initial typology from which the areas of intervention were selected. A close interaction with stakeholders through workshops and advisory councils guides the entire research process to ensure its relevance. Finally, at each of the study locations, the legal enforcement realities for contracts by small farmers are assessed, as contract opportunities may be affected by that context.

Progress, Research Results, and Major Research Findings in 2010

This project is in its final stage. We have implemented new contract designs with private companies in each country (a mango producer in Peru and milk processors in Vietnam and Tanzania). Our experimental contract design included credit from the local credit union backed by the firm (in Peru), a price incentive for an increase in production of first-quality produce (in Peru and Vietnam), a loyalty bonus for continuously providing milk to the collection centers (in Tanzania), and a third party lab testing to verify the quality of the milk and testing behavior of the firm (in Vietnam). The contract design worked. Farmers in our treatment group in Peru received more inputs or financial assistance from the mango firm, and increases in price incentives increased the quality of the produce and the loyalty of the farmers to the contracting company in Peru and Vietnam. In all cases, the contract designs improved farmer retention. Farmers who received the treatment contracts (credit and price incentives for better quality) sold a greater proportion of their production to the firm. Farmers who received the loyalty bonus in Tanzania were more consistent in their delivery of milk to the company, although when the dry season became very severe, this effect became more muted. Finally, in Vietnam, there was an improvement in the quality of milk collected and also an increase in the level of trust in the lab test.

Plans for 2011

We expect to finalize all our interventions by June 2011. During this period of time, we will focus on the following activities: (a) Artefactual Field Experiments. We will conduct experiments with the same set of farmers to test a market for contracts. We will conduct pilot experiments to help design a market for contracts that we might implement in future seasons; (b) Design New Contracts and Markets. Using the results from the 2009-2010 agricultural season and the experiments we implemented, we will design new contracts to be implemented by the firm in the 2011 season. The data analysis will tell us what type of farmers selected into the various contracts we designed for the 2009-2010 agricultural seasons and how well the contracts worked. Using that information and the other contract designs we originally proposed (i.e. tied products and joint liability), we will design new contracts; (c) finally, we will look for new products and companies to implement new contracts.We will continue to try to identify additional companies and products with which we can implement our new contract designs. Specifically, for our contract trading market design, it would be ideal if we could find a market where, in addition to multiple farmers, we have multiple companies.

2010 Internal Program Review-Markets, Trade and Institutions Division

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