New evidence regarding the effects of contract farming on agricultural labor use

Abstract

Contractual agreements between smallholder farmers and agribusiness companies have gained in importance in many developing countries. While productivity and income effects of contracting in the small farm sector were analyzed in many previous studies, labor market and employment effects are not yet well understood. This is an important research gap, especially against the background of continued population growth and structural transformation. Here, we investigate the effects of two types of contractual agreements between large international processing companies and smallholder farmers on agricultural labor use, household labor allocation, and hired labor demand in Ghana's palm oil sector. We use cross‐sectional survey data and a willingness‐to‐pay approach to control for unobserved heterogeneity between farmers with and without contracts. We find that agricultural labor intensity is substantially reduced through the contracts, because contracting in Ghana is associated with the adoption of labor‐saving procedures and technologies. Simple marketing contracts lead to reallocation of the saved household labor to off‐farm employment, whereas resource‐providing contracts lead to a stronger reallocation of labor within the farming enterprise. Household labor is more affected by labor savings than hired labor.

Effects of contract farming on diets and nutrition in Ghana

“…Hence, the labor time saved per acre of oil palm is reallocated on the farm itself. In contrast, the marketing contract does not involve any financial or technical support, so households are less able to further invest in their farming business and rather spend the female labor time saved for off‐farm economic activities (Ruml & Qaim, 2020; Ruml & Qaim, 2021).…”

“…Important to note is that the companies buy the entire oil palm fruit bunches directly after harvest, without any on‐farm processing. This is different from traditional spot‐market transactions, where farmers either sell buckets of individual fruits or milled palm oil, both of which requiring much more labor for post‐harvest handling than simply selling the entire fruit bunches (Ruml & Qaim, 2021).…”

Personalized digital extension services and agricultural performance: Evidence from smallholder farmers in India

“…As explained, our WTP variable is likely correlated with relevant unobserved characteristics, so that including WTP can reduce issues of unobserved heterogeneity. This approach has become popular in recent impact studies, especially in situations where valid instruments are hard to identify [ 50 , 58 ].…”

Contract farming, contract design and smallholder livelihoods*

“…Post-harvest handling (picking of the fruits, manual palm oil processing) is required to sell to artisanal processing mills or local consumers. The contracting companies purchase the produce in the form of whole fruit bunches, which leads to substantial labour savings and thus relaxes the households' labour constraints (Ruml & Qaim, 2021). However, smallholders lack access to the capital required for the establishment of new oil palm plantations, including investments in high-quality planting material, labour, fertiliser and other types of inputs (Ministry of Food & Agriculture, 2011).…”

“…Bellemare (2018) used data for more than 12 cash and food crops in Madagascar, showing that farmers under contract had higher income from the contracted crop but lower income from other sources, because producing the crop under contract required more labour and thus reduced farmers' participation in off-farm activities. We analyse such spillovers in a context in which contract farming leads to substantial reductions in agricultural labour requirements, as on-farm post-harvest handling is no longer required (Ruml & Qaim, 2021). Thus, depending on individual opportunities, which seem to differ by contract type, other income sources may gain in importance.…”