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ANALYSIS OF THE TOBACCO CONTRACTUAL ARRANGEMENT AND ITS IMPACT ON SMALLHOLDER

FARMERS

Evidence from Alliance One Burley Tobacco Contract

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Outline of the Presentation

• Introduction• Methodology• Results and Discussion• Conclusions and policy implication

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INTRODUCTION

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Background Information

• Single largest export commodity of the country– Share in total export earnings of 53% in 2006 and

peaks of over 65% in the mid-1990s (Negri and Porto 2008).

• Tobacco sector liberalized gradually to break the structural barriers

• In 1996, the Special Crops Act repealed and opened up the production of burley tobacco (Diagne & Zeller, 2001)

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Background Information

• Smallholder farmers’ participation in agriculture value chain or supply in Malawi is low

• SHFs face multifaceted challenges• Contract farming, out grower scheme

cooperatives important to increased SHFs participation in value chain (GoM, 2011). – Overcome missing markets, minimise income and

price risk, to improve utilisation of machinery. – Contract-Auction marketing ratio of 80:20

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Expected Benefits of CF

• Help reduce and share price or income risk, reduce transaction costs (Masakure and Henson 2005; MacDonald, et al. 2004).

• Transfer of technology (Glover, 1984); access to credit and use contract as collateral (Glover, 1987)

• Improved efficiency and quality leaf

04/15/2023 Abel K. Shaba – LUANAR MSc. Student

Alliance One Contract

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Justification & Statement of the Problem

• Tobacco facing challenges – leaf pricing fluctuations, declining global demand

due to emerging strict global regulatory regimes, global oversupply

– Incomes affected• Policy discussions and deliberations on IPS• Research says CF improves incomes and helps

reduce TCs (Abebe et al. 2013)• Does it?

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Objectives

• To analyse the performance of contractual arrangement of smallholder burley tobacco farmers

• To determine the impact of tobacco contract farming on smallholder income

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Hypotheses

• CF minimise TCs• CF improves farmers tobacco income

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METHODOLOGY

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Methodology

• Survey data from 211 CFs and 109 non-contract in KU• TCE and TE-impact model• TCs

– screening costs, monitoring, negotiating costs, signing contract, controlling contract compliance, switching costs in case of premature termination of the contract, and all cost opportunities (Bijman 2008)

• TEM uses the participation probit model to calculate the IMR and includes this ratio as a regressor in the income model (Miyata, Minot, & Hu, 2009)

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RESULTS & DISCUSSION

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Percentage of Reasons for Participating in Contract Farming

Access to extension services

Reduce production costs

Access to loan

Better price

Guaranteed market

Easy access to inputs

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0

3.0

4.5

19.2

19.5

20.1

33.8

Percentage of response

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Examples of Transactions Costs

AOI Contract Famers Bank

Provision of inputs and technical support, screen farmers (missing input market)

Group selection and monitoring, contract enforcement, joint liability

Information asymmetry about cost of the loan

Provide incentives to enforce contract

Moral hazard- side-selling, divert inputs

Credit provision (missing financial market)

Delayed tobacco collection

Strategic loan default

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Performance of Contract Farming

Contract Non-contractCollateral Required SometimesTobacco rejection Low HighAccess to price information High LowDisagreement on price Low HighNumber of days to bale tobacco Fewer MoreNumber of days to transfer tobacco Fewer MoreMonitoring of tobacco sales High LowMissing bales in transit Low/None HighNumber of days it takes to receive payment Fewer More

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Transaction days: Does it say anything?

Type of Farmer Time in Days

Non-contract 15.45 13.76 15.6 44.81

From day finished baling to collection day

From satellite to

marketAt auction Total time

Contract 9.27 9.1 5.99 24.36

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Impact of Contract Farming

Maximum Likelihood

Estimation Two-step

Variable Coef. Robust SE P>z Coef. SE P>z

Outcome equation

Dependent variable: log net tobacco income

Age of the farmer 0.0083 0.03 0.78 0.0097 0.03 0.75

Age squared -0.0001 0.00 0.65 -0.0001 0.00 0.64

Education dummy 1 -0.0547 0.12 0.66 -0.0543 0.13 0.67

Education dummy 2 0.0321 0.17 0.85 0.0385 0.27 0.89

Household size -0.0516 0.16 0.75 -0.0494 0.17 0.78Land size 0.1503 0.04 0.00*** 0.1519 0.04 0.00***

Transportation -0.0838 0.07 0.25 -0.0861 0.07 0.24

Monitoring dummy 0.2171 0.13 0.10* 0.2194 0.12 0.08*Contract dummy 0.4660 0.17 0.01*** 0.4327 0.17 0.01***Constant 12.491 0.78 0.00*** 12.4826 0.75 0.00***

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Impact of Contract FarmingSelection equation

Dependent variable: Contract dummy

Extension visit 1.0506 0.15 0.00*** 1.0436 0.11 0.00***

Age of the farmer -0.0208 0.01 0.03** -0.0201 0.01 0.04**

Education dummy 1 -0.2296 0.25 0.35 -0.2404 0.25 0.34

Education dummy 2 0.7142 0.52 0.17 0.7455 0.70 0.28

Gender of farmer -0.7147 0.25 0.00*** -0.7110 0.35 0.04**

Land size 0.2631 0.09 0.00*** 0.2443 0.08 0.00***

Monthly income -0.0027 0.11 0.98 -0.0221 0.10 0.83

Distance to auction -0.6865 0.21 0.00*** -0.7993 0.24 0.00***

Constant 3.3627 1.48 0.02** 4.0177 1.55 0.01***ath(rho) -0.3387 0.14 0.01

Hazard

lambda -0.2736 0.13 0.04**

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Impact of Contract Farming

rho -0.3263 0.12 -0.2855

sigma 0.9600 0.05 0.9584

lambda -0.3132 0.12

Wald test of independent equation

Chi-square (1) 5.98

Prob > Chi-square 0.014Log

pseudolikelihood -528.41

Wald Chi-square 56.23 70.59

Prob > Chi-square 0.00 0.00

N 320 320

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Contract & Non-Contract Prices

0.5

11

.5K

ern

el D

ensi

ty

1 2 3 4Burley Tobacco Price (USD/kg)

Price for non-contract farmers Price for contract farmers

Non-contract farmers <U$2.00/kg skewed to the left of 2

Contract farmers skewed to the right of 2>U$ 2.00/kg

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Perceived Impact of CF on Income for past 2 years

Increased significantly

Increased Decreased Decreased significantly

Remained constant

0

10

20

30

40

50

60

70

80

close

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CONCLUSIONS AND POLICY IMPLICATION

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Conclusion & Policy Implication

• Failure to abide by the contract terms contribute poor performance of contract farming

• CF reduces transaction costs, improves farmers access to extension services

• Land is a critical resource to integration of farmers• CF has positive impact on net tobacco income of

SH burley farmers• Consider investing in information sharing between

buyers

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THE END

THANK YOU