assement of contract farming failure to small scale

7/30/2019 Assement of Contract Farming Failure to Small Scale

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Assessment of informal contract farming practice among smallholders based on incentives

and risks; Case of cage tilapia aquaculture sector in Mahasarakham (Chi River Basin)

Abstract

In response to failure of spot market1, contract farming practice was emerged to serve

demand of consumers in high value added items that involved economic applications that

enterprise seek for partnership to reduce transaction cost and reduce market uncertainty.

However, the success of the practice result in win-win situation with risk sharing management

between both parties, farmers also benefit from income stability and skill improvement from

participating in contract farming with firms with certain degree of bargaining power. By

introducing quality standards on contract items, firms can assure that growers are able to meet

the standards by providing them with technical assistance and welfare along with other services

such as logistic arrangement, medication and compensation. Thailand has adopted contract

farming practice in response to rapid change of global market trend through National Economic

and Social Development Plan, the Ministry of Agriculture and the Ministry of Commerce are

main drivers in the process in introducing the practice to farmers. Interpretation of legal terms

and welfare provisions differentiate contract farming forms practice by farmers varied from

scales and products based on production management, market specification and resource

provision.

1

The spot market is defined as a market where commodities are sold for cash and deliveredimmediately or over a short period of time. The price is the primary determinant of the transaction

and typically reflects the real time situation, although products typically need to meet minimal

quality expectations. Given that the cost of storage is effectively higher than the expected price in

the future the spot prices typically reflect current supply and demand, not future price movements.

Depending on the position of a firm in the chain, three possibilities of vertical integration exists.

Backward vertical integration, the firm integrates with input suppliers. Forward vertical

integration, the firm integrates with a further processing firm or a distributor of their products.

Balanced vertical integration, the firm integrates with subsidiaries that both supply them withinputs and distribute their outputs. (Vavra, 2009)


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Within aquaculture sector, farmers and firms trade off through the form of input

provision credits, most of them required roles of middlemen as the link between firms and

farmers to operate informal contract. Contract farming actors play important roles in motivating

smallholders to participate in contract farming by promoting access to market, credit, input

provision, welfare and risk sharing in open market.

Introductory

1) JustificationContract farming has been promoted to assure stable income provided for small holders

in particular by supplying firms with raw material according to conditions attached to contract

made between two parties based on quality and price principles as stated by Asian Development

Bank. In Thailand, the Ministry of Agriculture stated that the model has been focused on small

holders to increase their capacity through technical advice and credit provided by the government

officials (Dr. Kittikhun, 2008). With the application of contract farming, the companies and

farmers have to share risks equally, while farmers receive guaranteed prices as well as increase of

income according to prevailing prices at the market. In addition, the farmers are able to access to

food provision and credit from firms, while the government are bounded to assure agricultural

improvement through infrastructure development. In theory, the contract farming is regarded

as the most effective approach for small holders to benefit from stable income; however

this required financial support from providers such as government and firms. Thus, the

concern derived from unequal bargaining power between firms and small holders that

leads to exploitation as stated by Sriboonchitta Contract farming carries both a positive

and negative image. It has been viewed as means of contractors exploitation of small

growers as well as a means for agricultural development in abroad sense. Most of the

farmers still rely on above mentioned institutions in order to obtain partnership with


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enterprise as required in the agreement, since they do not have enough means to engage

in contract farming. Therefore, the farmers face major challenge in seeking for credit

from the banks to assure their contractor status within limited available capital means,

which discourage farmers to adopt formal contract farming. Despite the fact that the

effort of government official providing assistance for farmers have been acknowledged as

mentioned by Sribonchitta, they have been criticized over the lack of background

knowledge as stated by Falvey Poor feasibility analysis and an absence of regionally-

specific research have bearing on failure, and it introduced risks which unfairly accrued

small holders (Falvey in Angkasith, 2000; 368). As a result, the failures lead to the loss

in income of contract from their incapability to meet quality standards within indicated

time and quantity. On the contrary, the success of application would encourage farmers to

expand their plantation as well as improve quality of productions as a shift from domestic

consumption to export scale. Nevertheless, the small holders also need certain degree of

bargaining power and alternatives of firms to reduce exploitation. Although, the

government agencies started to provide credit for farmers through Bank of Agriculture

and Agricultural Cooperatives with low interests that meet farmer capacities to pay off

their debts (Sriboonchitta, 2008). Also, the small holders should acknowledge their rights

and strength their capacity to meet standards of firms and sharing risks with firms along

with compensation provided in case of income loss.

Hypothesis

Contract farming practice has been introduced to smallholders, which regarded firms as

input provider and services that provide access to welfare and input provision along with

services and information. This later contributes to income stability and risk reduction among


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smallholders, although this has been highly criticized over roles of firms regarding overprice

of input provision and poor service provision as expresses by Singh the contract were

biased and enforced strictly, firms provided poor extension service, over priced their

services, passed on the risk to the producers, offered low prices of produce, favored large

farmers, did not provide compensation for natural calamity loss and did not explain the

pricing method (Singh, 2002).

I) Motivations of informal contract farmersThe study will be looking at informal producers gaining benefits to stabilize

income from market uncertainty from access to welfare and provision including

services and information. This will include experiences of smallholders facing

higher degree of difficulty from unwritten contracts due to the absence from

technical advices and technology provided by firms, since they trade through

middlemen or dealers not directly through the companies.

II) Government interventionState involvement play important roles in risk reduction by assuring access and

benefits for smallholders along with service and technical assistance provision

(Nondh, 2008). In contrast, this could create barriers in independent relations

between firms and farmers including inference of public disaster relief (Hess,

2004). Thus, the dissertation will testify informal smallholders on how they lose

their opportunities to improve their skills in order to sustain their income and

practice.

III) Risk redistributionthrough middlemen


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The approach has been adopted by firm through middlemen that create barrier to

formalize technical assistance and welfare including services provided by

middlemen instead of firms (DSilva, 2009). In fact, two parties fulfill their

commitment under formal contract will lead to direct and indirect benefit gained

that contributing to reliability according to win-win situation under private-led

integrated agricultural development (Sriboonchitta, 2008).

Research Questions

To discover objections of the study, the approaches will be conducted base on three main actors that will

develop results from different perspectives contributing to motivations of contract farmers that related to

their specific roles and responsibilities.

Overall key research question

Since, contract farming has been adopted widely among smallholders in developing countries,

thus the study will examine motivations that attract farmers to enter contract farming such as welfare, risk

management and income opportunities. This will be conducted on three key actors who play important

roles in promoting small growers to participate in contract farming, which are government agencies, firms

and middlemen. Therefore, the research question will be formulated as what are contributing factors

that motivated smallholders to participate in informal contract farming . Besides, the variables will be

evaluated as a consequences of their participation through following instruments; government

interventions, middlemen risk sharing and preferences of firms.

I) Governance

General research question: protection


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- What kinds of welfare provided by the government agencies in order to encourage smallholdersto participate in contract farming?

Specific research question:

- How the government provide financial support and technical support for smallholders ? asmentioned in following points below;

- credit

-technical advice

-infrastructure and irrigation

-

What roles that government agencies take up to increase bargaining power and reduce risks for

farmers? as mentioned in following points below;

-providing alternative

-assuring availability of market

-being a negotiator between firms and farmers

- What kinds of legal interventions government agencies adopted to provide protection forgrowers? as mentioned in following points below;

-enforcing regulations on compensation on firms

-preventing firms from raising standards

-preventing delay of payment

II) Farmers

General research question: motivations

- What kinds of direct and indirect benefits farmers could gain from engaging in contract farming?Specific research question:


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- What kinds of welfare smallholders expect to gain from adopting contract farming practice? ? asmentioned in following points below;

-credit

-input provision ( food, vaccination)

-technical assistance (machinery, skill improvement)

- Why small growers want to practice contract farming?-access to market

-access to financial support

-reducing uncertainty of market

-sharing risk

-stabilising income

- What are challenges in practicing contract farming? as mentioned in following points below;-unable to access to information

-unaware of conditions indicated in contract

-fail to meet standards indicated by firms

-inadequate welfare provided by firms

-lack of legal protection enforced by government agencies

III) Firms

General research question: provider

- What are requirements that smallholders need to fulfill in order to trade off with firms?Specific research question:

- What kinds of provisions firms provided for small growers? as mentioned in following pointsbelow;


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-food

-vaccination

-credit

-machinery/equipment

- What are the benefits in trading off with small holders? as mentioned in following points below;

-substitute volume of large scale production in response to increase of demand

-flexibility of contract

-gaining government support

- How firms respond to unfulfilled commitment caused by farmers? as mentioned in followingpoints below;

-suspending contract

-denying payment

-suspending provision

- What are the challenges firms have to face during contract terms? as mentioned in followingpoints below;

-small holders fail to comply with indicated quantity or quality standards

-unable to supply goods within the schedule

-utilising input provision on non-contract goods or sell them

-Smallholders selling contract goods to another company

Methodology

The study will be conducted to discover motivations of smallholders entering informal contract

farming through several approaches to apply on different actors in order to provide views from target


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group as well as related parties such as firms and government officials. Since, the aquaculture becomes

the most popular form of contract farming, the number was raised to 514,051 farms in 2008. There are

35,653 in Chaiyaphum Province alone or 6.9 % out of the total fresh water aquaculture. By focusing on a

group study of farmers in Mahasarakham, the result will shown through the number of smallholders and

amount of aquaculture goods produced to supply firms in Chi River. In 2005, the number of smallholders

was around 308, they earned from supplying fish that have been bred in 4,111 creels in Mahasarakham

Province. There are 242 farmers who have signed contracts with Charleon Polkphan Company, which the

two stage random sampling will be selected in districts with high concentration of smallholders engaging

in informal contract farming. This will be focused on two districts, which are Khantralawichai District

and Kosumpisai District. Approximately, the numbers of sampling groups will be up to 40 that consisted

of 30 farmers, 5 experts and 5 firms respectively.

Mainly, descriptive analysis and qualitative analysis will be key approaches to gather accurate

information from different actors. The first approach will provide overall picture of small holders

engaging in aquaculture within the area of study, which will combine with the finding of second approach

from in-dept interview that will be taken into account as a content analysis to summarise common

patterns of contributing factors that attract farmers to participate in contract farming. By applying analytic

comparison, the study will display similarity and differences of challenges that farmers encounter based

on expert opinions. Also, the approach will expand further reasons behind such similarities and

differences found in the study.

The primary data collection will be conducted through indept interview with key informants who

are well experienced in the field such as the director of smallholder organisation or the head of

smallholder groups including agricultural experts from the Ministry of Agriculture and firms. With a

descriptive approach, this will allow target groups to explain contributing factors that attract small

growers to participate in informal contract farming. Also, the study will include general observation based

on relations between actors to present objective views. Secondary data collection will be carried out


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through questionnaire, which will be divided into two parts to that related to individual information of

target groups such as level of income, contract farming experience, household labour, and types of

welfare received such as input provisions, services and compensation. The second part will be designed in

form of The Likert Scale that developed by Thurstone in 1929, the application aim to measure satisfaction

from participating in informal contract to compare expected result and actual result after adopted the

practices to examine expected results and actual outcomes (Likert, 1992). This formula will reveal

relations between farmers and firms in terms of challenges and success that correlated to benefits and loss

of farmers. Each section will contain favorable and unfavorable questions that ranked from 1 to 5, which

will allow target group to rate from agree to disagree contributing to summated rating scales, which will

reflect their relations and willingness to comply with agreement due to treatment and welfare provided.

Limitations

- the key informants have mentioned about the issues that have not included in hypothesis

therefore it is necessary to interview key informants are able to respond to such issue particularly

in terms of environmental impacts on informal contract farmers.

- due to environmental problem in the area, some of sample groups have voided the contracts and

engaged in other occupations as well as relocating themselves out of the area, which created

difficulties to get their responses

- interpretation of the term contract farming itself among different actors create barriers in

perceiving their views on the subject particularly government agencies recognition of informal

farmers

II ) Literature Review

Contract farming has become a common agricultural practice to encourage small and

large scale farmers to stabilise their incomes based on terms and conditions indicated in an

agreement made with enterprises. With close management on coordination among


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production, processing and distribution activities that is essential as a part of intensity of

contractual arrangement presenting in 3 categories varied from complexity of the

arrangement, which are market provision, resource provision and management

specification. Aqualculture sector operated under management specification in which

smallholders have to produce contract goods from input provisions provided by firms

along with ceasing arrangement. (what does this part of the sentence mean?). The changes

occurred within supply chains (what changes, which supply chains?) to reduce transaction costs

(such as?) caused by several factors such as competition, consumer demands, global market

trend and government policies. (too many different points, each of which needs explaining)

(Bijman, 2008;1). Competition among transactional cooperation leads to reduction of transaction

cost and creating high value added items. Mainly, rich consumers are a major factor contributed

to the change in global market, since they have economic power to purchase high quality

products that resulted in technology transfer and inventory to equip smallholder with skills.

Therefore, contract farming becomes the practice that serve the shift, since they could have

positive impacts on reduction of transaction cost, and high value added items within supply

chain. By applying risk management programme, this could redistribute risks among contract

farming actors, which result in sustainable practices that benefit smallholders and firms

(Swinene, 2009). The author of Rich Consumer and Poor Producer Swinen also adds that

contract for quality production with local suppliers in developing of inputs, credit, technology,

management advice etc.This coincided with local study on contract farming in Thailand

regarding motivation of contract farmers conducted by Sriboonchitta, she claims that reasons for

participating in contract farming emerged from provision of input on credit rated as the forth


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main reason that motivated farmers. However, the most common reason that attracted farmers

are market certainty and income stability according to Sriboonchitta,

Contributing factors to the shift of contract farming

In response to the shift from domestic consumption to export sales as a part of market

liberalisation by producing high value food including the change in trade due to high market

competition and growth in demand (what change?) (Simmons, 2002;2). The relations between

farmers and enterprises have been changed, since companies apply price strategy or quality

strategy based on labour force, use of land, and desirable production environments

(Sriboonchitta, 2007, pg.7) (how?)Combining with the trends of consumption caused by the

growth in demands of fresh and processed production (of what?)and expansion of supermarkets

in the international market that increase level of competition among products that need to be

processed within short period of time (FAO, 2005). In fact, the principles of contract farming

have been constructed to share risks between contractors and farmers with welfare and

transactioncost

riskmanagement

Consumerdemands

global markettrend (valueadded items)

supply chain


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information provided by enterprises, but this involves informal incentive arrangement as a

part of cost effective means of managing performance combine with input control (Glover,

1984;1145) aligning with 3 above mentioned economic principles; transaction cost, supply

chain and risk management. (what does that mean?) Although, risk management required

multiple collaboration among different actors that still lacking in contract farming practice

in Thailand (Nondh, 2009) Therefore, informal contract farming arrangement (what?) raises the

concern over exploitation of smallholders from adopting the practice. , As stated by DSilva

these transformations, and the government responses thertof, are creating challenges and

opportunities for producers, processors, wholesalers, retailers and other supply chain actors.

Small farmers in particular are perceived to be especially vulnerable to changes (DSilva,

2009;330), since they have to meet requirements that place them in vulnerable positions due to

imbalance of bargaining power with firms along with the lack of access to information and

technology including inadequate government intervention, and (meaning?)absence of regulation

on roles of middlemen (Siamwalla, 1992).

Therefore, the study will also address nature of contract farming with welfare provided

by firms in forms of input provision such as medication, and compensation (meaning?) attached

including requirements that prohibit farmer from purchasing input in open market and deliver

agreed quantity through logistic arrangement by firms(such as?). Also, this will examine

motivations of smallholders to engage in informal contract farming in comparison to formal

contract farming to illustrate advantages and challenges farmers faced through expected

outcomes in relation to existing evidence. Since, most of the studies have not distinguished

features of contracts between unwritten contract (informal) and written contract (informal

contract) in relations to benefit and disadvantages. Although, the two different forms of contract


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farming create different impacts on smallholders, formal contract farming concentrated on high

value added production with close monitoring on quality standards by firms, they also gain

access to input provisions provided by firms along with welfare including legal intervention from

government agencies (Setboonsarg, 2006). On a contrary, informal farming required middleman

participation as credit providers and technical assistant to bridge the gap between firms and

farmers without legal protection serve both parties to comply with terms and conditions that lead

to exploitation of smallholders and abuse of contract (Siamwalla, 1992) (what are the differences

between informal and formal contracts? Since firms are major instrument in opening market for

smallholders in most of the studies (Simmons,2002;9), thedisseration will address preferences of

firms to trade with large scale farmers to display capacities required for farmers to engage

with firms and exploitation by firms (unclear) as stated by Sigh the contract were biased and

enforced strictly, firms provided poor extension service, over-priced their services, passed on the

risk to the producers, offered low prices of produce, favoured larger farmers, delayed payment,

did not provide compensation for natural calamity loss and did explain the pricing method

(Sigh, 2005;2). The roles of middlemen will be demonstrated as credit providers in forms of

input provisions(of what?) for small producers due to their significant influence over enterprises

and government in informal contract farming (Siamwalla, 1992; 108). Apart from that, the

support given by the government will be looking at in order to see their contributions to farmer

participation in contract farming along with reducing exploitation of farmers with limitation in

applying risk management programme (unclear) in applying such protection on informal

contract farmers (DSilva, 2005).


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I) Nature of contract farming (to see how suitable each model is to attract smallholders to

participate in contract farming)

Contract farming has been defined based on three main elements, which are market

specification, management providing contract and resource providing contract. The density of

contractual management have been defined according through complexity of relationships

between smallholders and firms in terms of quality standards, delivery channel, logistic

arrangement, and restriction on the use of input provision.(what do these three things mean?).

Terms and conditions indicated in informal and formal contracts are varied in terms of credit and

input provision, actors and information. Most of the studies characterised contract farming into

two main types as follows; informal (unwritten form) and formal contracts(unwritten contract))

(is that not the other way around?) as stated by Sriboonchitta the informal model, which is not

as complex, may involve just a few market agents without a written contract

(Sriboonchitta;2008;4). Although, they have been broken down into sub- categories (such

as?)containing different features of farmer scales and types of production in each category to

determine requirements in order to meet standards through participation of firms and farmers

such as pre-agreed price, quality, quantity, and time. Thus, it is vital to define types of contract

farming to examine welfare (2meaning?) along with terms of conditions attached in the

agreement to see how each model restricts or encourages smallholders to participate in contract

farming. Generally, there are types of contracts, as presented by FAO, which are centralized

model, nucleus estate model, multipartite model, informal model, and intermediary model. Thus,

the study will emphasis on two main models that smallholders engage in, which are informal

model and intermediary model.

2Welfare; medication, logistic arrangement, services provided


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Why talk about all the models above, if your focus is on informal contracts with

smallholders?Informal model has been widely adopted by farmers cultivating seasonal vegetable

and fruits that require less advanced technology without technical input. However, the model

include developers represent firm through restricted input provision and information including

services (who are they?), they play important roles asproviders for farmers in terms which the

study conduted by FAO(what study?) revealed developers abandoning farmers in vegetable

plantation (FAO, 2001;53). Mostly, the smallholders participate in this model through

intermediaries, they deduct their interest from payment particularly in livestock business as

stated by Glover (1984) that similar to input provision credit in the area study of cage

tilapia in Thailand that dealers perform as credit providers for informal contract farmers

relevance?. The two categories of contract farming operate through third party or middlemen to

provide input provision, welfare, information and other services. Thus, there is no legal

obligation regulate smallholders and middlemen in informal contract to comply with terms and

conditions.

Mainly, there are major two models that have been widely practiced in Thailand, which

are the informal and intermediary models that required research conducted by government

officials to bridge the gaps between firms and farmers and legal protection on informal

smallholders along with regulation on middlemen (why?) apart from that firms (who are they?)

tend to loe their control over production and over prices paid to farmers by middlemen. As

stated by DSilva in Thailand, large felid processing companies and fresh vegetable

entrepreneurs purchase crops from individual collectors or from farmer committees, who have

their own informal arrangements with farmers(DSilva, 2009;330). On the contrary, the

informal model has been recognised by FAO, it is more common to be undertaken by individual


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entrepreneurs or small companies rather than large companies (FAO,2001). However, the

different sizes of contractors have an impact on bargaining power between farmers and firms

especially in terms of credit provision as mentioned by Simmons A large firm diversity may

also have advantages over moneylenders in management of risk because of the size and diversity

of its loan portfolio (Simmons,2009; 10). As a result, the imbalance of power and size of

companies could lead to exploitation of farmers through credit lenders in informal contract

provided by middlemen, since risk redistribution share between firms and middlemen

result in lack of information and technical support among smallholders.(unclear) What is

the relevance of the quotes?

As a result, smallholders in Thailand adopt intermediaries and informal models rather

than centralized and nucleus estate due to their capacity, which leaves them in vulnerable

position. Since both of the models(what is the difference between them?) are highly associated

with great risks in extra contractual marketing and sponsor loses control of production and

quality including price paid to farmers (FAO;2001;43) (why/how?). Since, the complexity of

relationships between firms and middlemen leads to the loss of control in quality of product ,

technical assistance and adequate information for smallholders without close monitoring by

firms. In next section, the paper will explore motivations of smallholders engaging in informal

contract farming in relations to risks and advantages that they often encounter.

Farmers motivations

Smallholders have been motivated by several benefits from financial stability and risk

reduction from market uncertainty through access to market and welfare such as technology,

logistic arrangement, information, risk sharing and input provision (Too abstract. Explain or give


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examples). Since most of the high value product require start up cost after new crops were

introduced along with information to maintain amount of yield, while the companies could

reduce transaction cost (how?) from trading with small growers (Simmons;2009;9). This has also

been mentioned by Masakure (2005). He claims that the contributing factors consisted of

efficacy of input and output market, related transaction costs, access to land and water supply

including provision of agricultural services (unclear). For example, the Ministry of Agriculture

of Thailand provides training for farmers and their local staff in terms of contract arrangement

and concept(?) along with multiple market outlets (Wiboonpongse,2005;364). Since the informal

contract farmers have been excluded from technical advice provided by firms (ibid,2005;367).

With a support from government agency, small holders received an offer on credit provided by

firms, since the government promotes smallholders to participate in contract farming by

providing access to credit at concessional rates for companies through financial institutions.

Although, the Bank of Agriculture and Agricultural Cooperatives (BAAC) offers credits with

high interest rates for groups of farmers that meet its basic technical standards that results in slow

progress due to various factors taken by the agency such as experience of farmers, land title and

repayment capacity (such as?). As a result, some of applicants failed to meet their standards. As

mentioned by Sigh the BAAC takes many factors into consideration when reviewing loan

applications, and some farmers who have wanted to join the project have failed to pass the

banks scrutiny(Singh,2005;4).

Besides, logistic support(such as?)provided by firms in forms of collecting and delivering

services attract producers to enter contract farming, which is limited by spotmarkets due to high

competition and failure to meet quota system. This includes distance between spot market and

fields, since smallholders in rural area lack of means to transport product to market as well as


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maintaining quality of product that degradable over time (Setboonsarg, 2008) .(unclear).

Significantly, most of the studies address transportation as one of contributing factors that attract

farmers to participate in contract farming, since the distance between farm and market creates

difficulty for them to deliver the production as stated by Masakure (2005). Farmers face high

risk from cultivating non-traditional crops, since they are prone to perishable and highly

uncertain amount of yield harvested (Bijman,2008).

Disadvantages and Advantages in entering contract farming

Numerous studies have mentioned about the practice of contract farming adopted to

reduce market uncertainty that leads to risk sharing and access to technology and other inputs

including services at lower cost (Masakure;2005;1723). The outcome of successful practice does

not only reveal through distribution of benefit, but it also leads to risk distribution between firms

and growers that allows income redistribution from firms to farmers as well as expand economic

scale from long run profits of firms (Glover;1987;446). Since, contract farming require certain

period of time to sustain practice and result in win-win situation between firms and farmers. At

the beginning, farmers have to invest in infrastructure and fixed cost to gain credit, while

repayment rate will later make up to expense, however they also have to encounter natural risks

and external risks (Nondh, 2008). On the other hand, firms have to bear economic risks in terms

of market prices and failure in supplying agreed amount of product to meet demands due to

seasonal factor and poor management (Setboonsarng, 2008). Although, technical support and

welfare provide by firms can create reliability between both parties along with skill improvement

of smallholders that result in loss prevention in the long run. Unclear. How/why? Nonetheless,

the failures of contract farming practice revealed from the studies often caused by manipulation

of quality standard and coordination placed by firms as a part of close monitoring to assure


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quality of contract goods (Glover;1987) Unclear. Meanwhile, the evaluation of contract farming

has been measured through sustaining contract based on viability and distributional effects of the

contract mainly based on income stability and extension of contract terms (Simmons; 2009;12).

How are those measured?

Most of common challenges emerged during the delivery process such as rejection of

delivery production, delaying payment beyond agreed period along with discounting of payment,

returning of goods by raising standards, and reduction of agreed prices (Singh,2005;6). The

problems are caused by several factors such as lack of technology and information, weak

regulations and enforcement, bargaining power (Sriboonchitta;2008). Since, smallholders have

not been equipped with adequate information and technology along with welfare to assure

quality of contract products under informal contract farming. Also, legal gaps allowed firms to

adjust conditions and terms after agreement being made verbally, while smallholders could not

bargain with firms due to the fear of losing their asset to financial institutions and contract

extension (Sumeth, 2007). How/why?

In Thailand, most of the farmers experience failure from unable to sustain that required high

technology application (meaning what?) contract farming practice particularly in forestry,

cashew nuts and oil palm business that caused by unfavorable market conditions such as market

price and high input provision prices including less alternative of companies (meaning?) without

support in creating competitive environments as stated by Sriboonchitta (2008). Alike, the study

carried out by Singh regarding unsustainable income generated by contract farmers, he claims

that there are significant numbers of contract farmers who have been indebted and suffer from

burden after adopted such practice (Singh, 2005). Causes of indebted farmers have been referred

to disagreement among government agenciesat the policy making level and implementations


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carry out for smallholders including commitment of agribusiness companies in terms of legal

enforcement due to recognition of informal contract farmers (Nondh, 2008) (unclear) On the

contrary, Baumann states in his work that the failure of contract farming model in Thailand

caused by high competitive market. According to his work on outgrower schemes under contract

farming system, he points out the problem on grower and firms engage with multiple business

partners and products and non-agricultural income sources (unclear). With a combination of two

factors, high competition has resulted in high transaction cost, while misuse of input provision on

non-contract items have been found as the most common constraint among smallholders due to

high cost of feeds in comparison to market price.

Despite quasi-monopsony3

condition determine restriction on input provisions, this works

against the nature of contract farming to provide farmers with inputs for contract crops along

with specification of asset, but the case study displays misused of contract input on non-contract

crops instead (Baumann,2000;40). This reflects the research conducted by Gaewkamsern on

contract farming market system 2005on the success of contract farming in Mahasarakham

Province focused on fishery sector, which presents high level of satisfaction of farmers who earn

extra sources of income apart from contracts. Although, the study need to examine the use of

contract input that indirectly contribute to non-contract production in order to testify the above

mentioned argument. Apart from that, the lack of quasi-monopsonistic conditions has been

mentioned in most of the studies, since farmers are able to obtain inputs, credit, and buyers in

open market rather than utilize contracted inputs. Thus, the disadvantage has claimed to derive

from distrust between firms, while some argue that this caused by unfavorable conditions of

market in given area with limited alternatives for farmers with higher contract input provision

3Quasi Monosopony conditions; dominant power of certain firms in market offer less alternative for smallholder


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price than open marketThe roles of middlemen have been presented differently, since they play a

major role in informal contract farming model in Thailand as input providers for farmers such as

credit, fertilizer, technology, and food provision (Siamwalla, 1992). According to the analysis of

Sriboonchitta on the subject, the numbers of successful cases of contract farming involved

participation of middlemen particularly in high value added items that required technical

assistance and close monitoring services to meet agreed standards in the following items(?);

sugar cane, baby corn, asparagus, broiler, and hogs. However, this has not included contract

between middlemen and firms, middlemen provide farmers with seeds, loans, and tractor

services (Sriboonchitta, 2008;368). Likewise, the view of Baumann on quotaman(?) , they

represents firm conditions and terms offer to smallholders to supply certain amount of contract

product under timeframe, which was marked as the most effective approach linking between

contractors and growers in response to fast market. In Thailand, quotaman has been implied to

dealers who also own contract assets supplying firms with their own production as well as

collecting contract products from informal farmers to meet agreed amount and distribute the rest

to spot markets (Gaewkhamsern, 2005). This stressed the form of informal contract farming with

access provided throughdirect contacts without formality by middlemen as well as sharing risks

apart from firms and farmers as mentions by Baumann companies can diversify their sources of

supply and rely on several quotamen to spread their risks. Quotamen are also able to judge a

grower creditworthiness and their margins are not cut by tax(Baumann,2000;40). On the other

hand, the concern over the roles of middlemen has been raised by Siamwalla on smallholder

dependent on middlemen and high expense on marketing costs, she states that a more efficient

system could be theoretically achieved by eliminating some middlemen, allowing the others to

expand their optimal sizes and thus cutting down marketing cost (Siamwalla, 1992). This has


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been addressed through their roles as credit providers, which has been adopted after they became

input providers. The writer believes that they exploit farmers through high rate interests

deducting from payment of services including dominant role in providing access to machinery

due to high profit gained. This results in poor technical advice provided by middlemen along

with inadequate information and technology acquired to improve necessary skills of farmers that

requires risk assessment to provide access for farmersAs states in the study on contract farming

and governance structure by Mr. Nondh, he expresses that dealers roles in terms of dedicated

assets and preference of government agencies to promote contract farming through middlemen at

the primary stage of contract farming practice required skills and background of local dealers to

provide assets for smallholders in order to attract them such as cage construction, loans and feeds

(Nondh, 2008).Why?Even though, they tend to be the only link between firms and farmers and

take up provider roles in informal contract farming formula. You need tio explain this quotaman

system more clearly and how it is different from other informal contract arrangements.

Compensation

Domestically, regulations of contract farming imposed between farmers and companies

are similar to universal practices, although the compensations have been clarified in specific

responses to force majeure referred to natural calamity, crop failure, factory closure, labour strike

including other unforeseen reasons on either side. The rights of both parties have been defined

according to service and payment conditions that need to be served for smallholders to supply

enterprises in a timely manner with the indicated amount of production. However, the exception

has been made in cases of compensation that need to be provided for farmers related to defaults

caused by firms. This excluded default caused by environment conditions as shown in the study

on contract farming in the area of aquaculture sector presents by Sumeth, quality of water in Chi


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River basin has been polluted by external factors such as agricultural activities and household

activities in the area, this led to the mortality of fish without compensation being paid by firms

therefore farmers have to bear fixed cost without anything in return (Sumeth, 2005). Firms are

entitled to penalize contractors due to failure caused by another party as addressed by

Wangsuwattana in his study on legal protection for contract farmers, he indicates that ambiguous

legal status of informal contract farmers has been recognized as employees instead of farmers,

this required them to comply with agreed quality standards under informal contract described

farmers as employees, they need to fulfill commitments given more power to firms to dictate

specification of input and amount of payment according to levels of accomplishment, thus if

employees fail to meet quality of standards then employers(firms) are entitled to end contract or

deprive compensation (Wangsuwattana, 2007, pg.13). . Meanwhile, the farmers are allowed to

ask for compensation from the firms when they fully comply with conditions indicated in the

agreements, but the companies fail to buy the agreed quantity. The farmers will be compensated

at the specific rate only, they will not gain full recovery paid by firms as presented by

Department of Internal Trade if buyer does not buy agreed quantity fully, the buyer to

compensate seller at the specific rate.(Singh, 2005; 7). However, the Internal Trade Department

was assigned to be responsible to formal contract farmers only through negotiating roles to

enforce regulations on firms that exclude informal contract farmers to receive compensation

(DIT, 2008). The writer Singh also claims that unfair regulations caused by close link between

firms and government at policy making level (Singh, 2005). Consequently, the loophole of legal

protection still remain in conditions indicated in contracts that should forbid unfair treatments

such as the absence in timeframe enforce on compensation caused by nature calamity, rejection

of contracted goods, raising standards of production, and delay of payment. Likewise, the study


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conducted by Delforge regarding absence in legal enforcement on compensation over the loss of

contract production caused by external factors during the bird flu crisis in Thailand in 2004,

some farmers under contract with CP did not receive any chicks for more than 6 months,

without receiving any compensation or even any explanation for this long delay(Delforge,

2007, pg. 6)Since, most of the conditions have given more power to companies rather than to

farmers that placed them in vulnerable conditions from being exploited. This whole section is

unclear as well.

Company preferences

Selection of contract farming partners undertake by firms and farmers, which depends on sizes

and incentives of both actors, which firms take several factors into account such as previous farming

experience of smallholders, farm size, fertility of farms and community considerations

(Simmons,2009;15). Preferably, the selected partners have common characters such as operating with

lower unit costs and less risk exposure to reduce transaction cost and easy maintenance of product.

However, this has been criticised by Singh regarding bias of companies towards smallholders due to the

lack of capacity and credit availability particularly foreign companies as states by Singh Another

concern is that because companies tend to prefer to work with medium and large- scale growers,

smallholders will be marginalized, exacerbating rural inequality (Singh, 2002,6). Although, there is a

study conducted on firm preferences to deal with small growers in given areas where limited number of

resources provided firms with less alternatives and local authority promotion to trade with smallholders.

This depends on advantage features of small farmers such as predominance number of farmers in the area

and availability of supplies and lower cost of production (Glover ,1984;1147).

Preference of firms over larger scale farmers has been addressed by Segura related to transaction

costs instead of production cost, which defined as the cost of using market and administrative costs that

related to the exchange of goods and services such as information cost and negotiation costs. He states


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that It is also argued that firms tend to contract larger farmers or can be tempted to offer different types

of contracts to different types of farmers (Segura,2005;. In fact, there are existed evidences shown in

the study o contract farming and global cooperation presents that companies tend to trade with

smallholders, however the poorest are often excluded from partnership with firms due to non access to

land or small plot of land ownership( Setboonsarg, 2008). From a different perspective, large

agribusinesses face similar challenges from being contractors agribusiness have also reportedly

encountered some contractual problems with dealing with some smallholders farmers that could led to

the exclusion of the latter from contract farming (Elepu, 2006;4). However, there are 3 contractual

forms that farmers engaged in with different scale of farmers, which are written contracts, verbal

contracts and independent (Segura, 2006) therefore contractual problems found in contractual

enforcement laws that aligned in verbal contracts due to absence in legal consequences.

As a result, the preference of large firms has been reflected by the nature market-particularly spot

market that allow them to trade with large call farmers through formal contract that allowed them to seek

for opportunities to expand their activities in high value food (Setboonsarg, 2008). This often required

less transaction costs to meet criteria due to better capacity in producing large volume, since the firms

have to face uncertainty of quantity and price such as finding market and costumers, negotiating, singing

a contract, controlling contact compliance, switching cost from termination of contract, and any forms of

opportunities losses (DSilva, 2005). At this point, companies tend to trade off with large scale farmers

due to less transaction cost, better capacity of large scale farmers as well as farming background, which

discourage farmers from entering contract farming. It seems to me that all you are saying here is that there

is a bias in favor of larger farmers, for a number of reasons. This section also needs to be presented more

simply and clearly.

Government interventions


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Thai Government interventions become a main focus of the studies on regulating prices, issues

quotas and monitor the operations of the operations of companies, which they have been criticised over

the roles in increasing bargaining power for farmers to equip them with welfare and skills (FAO, 2000).

With the establishment of the amendment of National Development Plan, this has addressed flexibility of

agreement to adjust the terms and conditions as necessary, which still result in fixed terms and conditions

indicated by companies as mentions by Wiboonpoongse (2005). Since, the contract farming should work

in favour of both parties equally in terms of sharing risk, while the farmers should also benefit from

guaranteed prices as well as prevailing prices in the market. Nevertheless, the responsible agency has

regulated ineffective mechanism on companies as shown in the study on the role of the state that there is a

slow progress on enforcing standard contract farming agreement for companies and farmers that have

been applied on two companies only in 2002 (Singh, 2009). Thus, the issue of bargaining power has been

addressed that correlated to alternatives for farmers to sign agreements with various number of firms

existed in the areas where competition is high as presents by Glover the availability of alternatives is

one of the most important preconditions for a contract farming situation that benefits small farmers

(Glover,1987;446). Therefore, the government could intervene through assuring numbers of traders

present in given area instead to increase bargaining power of farmers and pricing of production as states

by Abbott (1982) .Particularly, the level of competition among firms have a great impact on income

rate among smallholders in some areas where monopoly trade dominates the market; the

smallholders have less alternatives to trade with that leaving with no choice, but to accept offers

being made by firms. Similarly, the case study in Thailand conducted by Singh displayed

oversupply problem in San Sai District where new companies invested in the areas without

support from the government as mentions by Singh the agricultural problem was defined as

one of oversupply of some commodities and implicitly that were profitable opportunities in the

other areas (Singh, 2009;8).Therefore, government agencies are responsible to regulate amount

of supply produce by smallholders to prevent oversupply problems in certain area with price


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insurance that could distribute oversupply products from rejection of contract goods in other area

(DIT, 2009) Not clear what you are saying here.

The government officials have been criticised in inferring in reducing roles of middlemen as

providers in contract farming with smallholders as stated by Siamwalla (1992).Since, the small holders

tend to adopt the practice through middlemen instead of firms especially in the area study of quaculute

sector, they provide input provision, welfare and services such as r feeds, fish juvenile, medication,

logistic arrangement, and cease service (Gaewkhamsern, 2005). Meanwhile, farmers would not receive

adequate technical advice and compensation from them therefore the government officials become

important actor in assisting growers (Sumeth, 2010). Some authors have argued that government agencies

in Thailand assist companies in terms of fund provider rather than attempt to strengthen farmer capacity,

since they could make fair system for farmers through nature of contract and marketing or collective

selling to companies (Singh,2009). On the other hand, the author of document published by the World

Bank on climate change and risk management, he notes that government intervention could lead to less

independency of financial institutions and taking roles of public relief sectors (Hess, 2001). As a result,

government agency roles should be undergone in forms of mediator and technical assistance providers to

create capacity of farmers as well as protecting the rights and fairness for both parties (Professor

Jittaladdakorn, 2008).

Summary (contribution to research)

There are a number of studies indicating favorable conditions that motivate farmers to

enter contract farming due to welfare provided such as credit, seeds, fertilizer, transportation,

technology, and technical advice. In addition, most of the authors define direct and indirect

benefits that farmers gain from adopting informal contract farming as mentioned by Simmons on

his overview of contract farming in developing countries such as access to technology, market,

household labour, risk management, and skill improvement (Simmons, 2002). Although, the


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studies in Thailand have not included woman empowerment from entering contract farming

except the study done by Abbott (new reference?) on large number of women involved in

dressing and packing plants in poultry business, this issue was raised by the other related studies

conducted in other developing countries such as Zimbabwe, Kenya, Malaysia, Ghana, and Ivory

Coast. Therefore, the research will examine existing welfare provided for farmers that contribute

to farmer participation in informal contracts, since the role of providers involved numbers of

actors such as firms, middlemen, and government. Particularly, a major role of middlemen that

links between firms and smallholders in informal contract farming, they become credit and

welfare providers as highlighted by Siamwalla in her work Farmers and Middlemen: Aspects of

Agricultural Marketing in Thailand. Since, a majority of writers on related subject have not

shared any critique view towards middlemen; they perceive middlemen as positive force in terms

of providers. Thus, the evaluation will emphasize on satisfaction of smallholders gained from

trading through middlemen in order to compare between expected benefits and existing evidence

that attract farmers to engage in informal contract farming that will be compared with welfare

provided by firms for formal contract farmers to see different degree of benefits acquired by

informal contract farmers If this is going to be your focus, it should be stated in the introduction

and you should then also restructure your literature review to reflect that. For example, you

might have one part focusing on the benefits provided by formal contract (small?) farmers and

another part focusing on the benefits provided by informal contract small farmers (by the way

you have not defined what a small farmer is yet) . However, you would need to be clear about

why you want to do that. In other words, how would that help to answer you key research

question/s?.


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Making fair system for smallholders has been addressed as a concern of most of the

authors especially Singh, Baumann, Glover, and Siamwalla. Since, most of farmers have not

been fully protected from exploitation from imbalance of bargaining power and contractual

problems due to unfair regulations such as raising production standards by firms, compensation

in natural calamity, and delay of payment. Since, there is no significant number of studies shown

loopholes of regulations particularly legal status of farmers indicated in contractual arrangement

adopted by informal contract farmers (Wangsuwattana, 2007) Apart from the study on the role

of state by Singh that stresses the urge to modify contract farming regulation if contract

farming is nothing but a flexible production system prevalent in industry applied to farm

production, then it is only logical to extend such legal provisions, with necessary modifications

to farming contracts (Singh, 2005;13). His study has helped to understand the importance of

regulations to promote smallholders participating in the practice through comparison studies in

Japan and Uganda, which referred to better protections enforced on large parent firms on

forbidden acts such as refusal of production, delay of payment, discounting of payment,

returning of contract items, advance purchase by subcontractor forced by firms (Singh, 2005).

Especially, the country often faces yearly natural calamity that caused the loss of farmers

income as mentions by Sriboonchitta, the study would be looking at gaps indicated in contract

farming regulation such as no specific timeframe to compensate smallholders and rejection of

entire amount of production due to failure to meet quality and quantity standards. Similarly, the

study conducted by Nondh on hybrid governance of food supply chain in the high-risk

environment, he presents external risks face by smallholders in aquaculture from poor quality of

water and lack of government collaboration. Thus, the further information will be examined

motivations or favorable conditions of contract farming and disadvantages of practices that


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reflect expected outcomes based on informal contract farmers perceptions. In accordance with

relevant points addressed in this chapter, contract farming actors play important roles in

motivating farmers namely firms, middlemen and firms. They have been displayed in most of the

studies as welfare providers, provision providers, legal assistance providers and technical

assistance providers. Existed evidence presented in this section will contribute to evaluation of

roles and responsibility of contract farming actors in response to adequate knowledge and

information receive by smallholders that result in success and failure in adopting contract

farming practices.

Theoretical Framework

Contract farming has been emerged in response to three main economic principles related to the change in

the nature of market and demands at the global market that leads to reduction of transaction cost and

improvement of chain supply including application of risk management. They are highly involved with

marketing relationships as mentions by Webster regarding hybrid organization that created a structure to

channel goods through marketing arrangements based on reduction of transaction cost, distribution of

information along the loop (Cadilhon, 2006).

Websters range of marketing relationships (1992)

Spot Market Hybrid forms Hierarchy

I)Transaction Cost;

IndepedentTransactions

RepeatedTansactions

long-termRelationships

Buyer-sellter

Partnerships

StrategicAlliances

Network

OrganisationsVertical

Integration


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This has been highly involved with internal structure of large firms that associated with several factors

such as institutional environment and governance arrangement within the organization. Mainly, this has

been explained through diversity contractual arrangement to trade off that taking the form of hybrid

orgranisation. Contract farming was emerged as a response to reduce transaction cost particularly in the

con text of contractual relationships. In response to failure of market, most of the authors refer to

institutions that govern human interaction in relation to economic operation, which leads to the

establishment of new institutions to reduce cost of resource allocation. As a consequence, contract

farming becomes a major element in minimizing any cost that incur from transaction process through

different forms of governance structure. Comprised with three contributing factors as states by Simmon

(2002), transaction cost operates from bounded rationality with different degree of information between

contracting actors. The next one is opportunism featured in one or another party taking advantage from

imbalance bargaining power. Lastly, asset specificity created risk on smallholders in investing in

provision and machinery including knowledge to produce contract goods (Catelo, 2005). Thus, contract

farming could introduce vertical integration by applying restricted quality standard of input provision that

reduce measuring cost and supervision cost in grading products. As a result, transaction cost reduction in

spot market has been implemented through contract farming as states by Macdonald parties will rely on

contracts when the transactions costs of using contracts fall below the costs using spot market

(Macdonald, 2004, pg. 33). This implied to perfect competitive situation where lowest production

combined with transaction cost allowed institution to grow that influence by four different factors; types

of institutions, asset specificity, uncertainty and externality. Since, uncertainty and asset specification lead

to high transaction cost, which cover administrative and supervising cost incur during the process. Thus,

firms prefer to operate on externality principle to adopt vertical coordination in order to avoid negative

externalities imposed by other market actors (Birthal, 2005). Within spot markets, the practice need to be

developed to bridge the gaps of market failure and absent information to serve demands of consumers

combining with vertical integration, the practice has been adopted by government agencies as a supply

chain strategy (Swinen, 2009).


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I) Supply chainThe theory refers to integration of logistic management to assure the supply will be delivered to

customers that involved loop flow of materials including finished goods and transaction (Gattona,1960).

Also, the information have to be taken into account as well, which the author also addresses that the cost

of making information available within supply chain has been decreased, while the business cost has been

increased consistently such as facilities and inventory. By providing information, facilities enabled

logistic activity to operate that highlighted the importance of technology development that could imply to

contract farming management. Since, the quality standards of contract farming have been dictated by

firms to assure that technology will allow farmers to produce contract goods according to their standards.

This has introduced high value added items that required higher quality requirements by offering

smallholders with skill improvement through technology transfer (Swinen, 2009). According to the study

on small holder dairy product in India, the author Mr.Birthal emphasizes the importance of vertical

coordination of food supply chain that contributes to diversification. Since, smallholders benefit from

reduction of price risk with access to markets along with reduction of transaction cost. Production

efficiency derive from input provision provided in forms of credit that covered information, and extension

services. However, he states that informal arrangement in contract farming among smallholders who

could not afford technology through contractors to collect products on commission basis, they are able to

provide credits only that exclude smallholders from obtaining input and services including information as

claims by Birthal In the absence of competition, credit-linked supply chains are often exploitative of the

producers.(Birthal, 2009, pg. 9). Alike, the local study on smallholders in Thailand regarding roles of

middlemen as credit providers and collector, they tend to lower the price than prevailing market price

(Gaewkhamsen, 2005). Nonetheless, the study conducted by Cadilton, he highlights the commitment of

parties involved in supply chain between buyers and sellers along with partnership particularly firms

willingness to maintain relationship that could imply to partnership in contract farming between firms and

farmers to comply with conditions and terms agreed in contracts. The success of the application result in


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satisfaction in the need of consumers that required joint planning based on adequate information and trust

that contribute to mutual benefits served common goals of both parties. Since, farmer participation has

been addressed in most of the studies that could be taken into account in joint planning, however there is a

boundary due to imbalance of bargaining power and legal status that subjected them to perform as partner

of stakeholders (Sriboonchitta, 2008). Innovation emerged as a key to success of supply chain, since it

create value of products that serve the needs of consumers as states by Cadillhon (2006). Nevertheless,

DSilva expresses concern over imbalance power within supply chain where smallholders are placed in

vulnerable situation, since firms take up coordination role dictate terms and conditions in the transaction

process (DSilva, 2005). The information made available at spot market allowed supply chain to

coordinate that lead to market price stability. Thus, buyers and sellers could agree to purchase product at

reliable rate based on accurate information such as cost and value, quantity, and regional price differences

including market price. Although, spot market tend to fail without accurate market price due to the change

in demand of consumer particularly price and attributes of products do no coincide therefore contracting

and vertical integration becomes an alternative in response to the failure. One feature that drive spot

market and contracting system is market competition that limited number of competitors could lead to

monopsonic trade between number of farmers and single buyers, however by introducing risk sharing

approach as a part of contract farming practice mainly to prevent farmers from price fluctuation and

unqualified production (Macdonald, 2004).

Risk Management

Risks in agricultural field have been defined by Fleisher (1990) through societal concern that

caused by effects and costs of risks and its management along with agricultural producer concern over

viability. He also highlights the vital role of governance in response to the change occur within the sector

that contribute to success in meeting their objectives. Mainly, risk caused by uncertainty of market

combined with lack of information perceive by individual investors, which highly associate with risk in

investing their saving. Therefore, risk operate based on loss and gain principle, which interpret by


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different actors as downside risk that present negative impact when actor lose benefit from risk, while the

opposite party gain from the same risk occur in the market. As a consequence, policy makers have to

design an implementation based on effect of risk that create burden, which has been referred by Mr.

Nondh regarding environmental risk that should be taken into account by local authorities as well as

economic risks. Initially, risk sharing mechanism is one the main instrument that drive contract farming

process between firms and producers particularly in high price volatility, since contract farming could

shift risk from smallholders to processor. Birthal mentions in his study in broiler industry about the

change in temperature that cause high mortality rate, which smallholders reduce risk by 88 % from

participating in contract farming (Birthal, 2005, pg. 32). Meanwhile, this affect fish in cage tilapia

differently, since environmental impact have not been included in risk management particularly

smallholder have to bear the damage cost from poor quality of water, climate change, contamination of

toxic substance, natural calamity, and disease as shown below.

Environmental risks


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(Nondh, 2008, pg. 85)

According to Mister Nohdh, he conducted the study of cage tilapia culture contract farming, the

type of risks have been classified risks into 2 main categories, which are natural risks and risks from

industries. They create impact on number of fish and habitats differently during the peak of the hot season

with less impact from industries, however he also addresses a contradiction of production cycle and

suitable fish fry period. Since, smallholders have to comply with timeframe indicated by dealer to deliver

fish stock despite poor conditions of water. Overall, environment risk has been marked as 11% loss to

their total income, which smallholder face significant impact from the loss as stresses by Mr.Nodnh

More than 95%of contract farmers stated that they always have to bear all the financial losses by

themselves without any support or compensation from the other parties (Nondh, 2005, pg. 87).

Therefore, application of risk management has been promoted in response to weather conditions by

introducing traditional risk management that has been widely criticized over costly expense and

ineffectiveness due to product price fall as supply outstrips demand during the peak of drought or

flooding seasons. Since, natural calamities always affect farmers in the area equally or risk pool that

regarded as joint affected. Similarly, smallholders practice fish production in cage tilapia experience the

loss at large from raising fish in open environment. As a result, one of the author of weather risk

management for agriculture in association with World Bank, Hess points out that asymmetric information

perceive by insurance companies or credit institution assuming farmers have insight risk information and

being unconsidered on reducing risks. He urges that insurance coverage should be applied to reduce risks,

although credit institutions should raise rate, invest in monitoring mechanisms, enforcing collateral as

precondition in exchange of loan (Hess, 2001). Besides, he emphasizes on difficulties of local insurers to

standardize their coverage that limited by regional diversification. Currently, the Thai government

encourages credit institutions to provide loan for contract farmers with collateral implication through

Bank of Agriculture and Agriculture Cooperative (BAAC) that aligned with firm (Sriboonchitta, 2008).

As a consequence, risk management strategy become one of the main motivations that attract farmers to


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participate in contract farming in terms of financial risk reduction as states by Macdonald on contract

farmers survey each group rated reduced price risk as an important contract motivation for producers .

(Macdonald, 2004,). Although, there is still little evidence contribute to aquaculture, most of the studies

conducted on livestock poultry and hog production that adopt marketing pools among groups of

smallholders through intermediary contractors trade off on agreed price and quantity. However, there are

gaps remain in this application due to yield risk and oversupply that lead to failure to market all

production and unmet pool commitment. Apart from that aquaculture also associated with high input

price risk, since the amount of expense on input provision incur in feed costs, even though the writer

claims that farmers could apply risk management through revenue insurance, using commodity futures

markets, accumulating and depleting liquid assets and borrowing (Macdonald, 2005). Also,

diversification of products has been brought up as a part of income risk reduction by redistributing

variation of commodities or income sources. Alike, most of target group that will be examined in further

studies, they engage in other agricultural fields as well as contract farming. In addition, government

intervention has been presented as an important actor by mitigating risk through price stabilization,

subsidized fish price insurance, and drought relief (Hess, 2001). In spite of government intervention, Hess

expresses his concern over excessive risk that deprive dependency from public disaster relief (Hess,

2001). The World Bank promotes weather risk transfer into international market through the form of

insurance contract that underlined credit risk and well-documented data of weather through financial

intermediaries retail risk protection. By linking to credit and regulatory risk, the role of state bank has

became credit lender, while credit risk applied to risk mitigation stated that both parties are committed to

pay as weather risk providers whether default caused by macro problem or counterparty. Nevertheless,

the context of new weather risk management compounded with high economic structure based on solid

evidence on country background, which serve large international organizations and companies rather than

local scale application.


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Combining 3 economic principles and main actors

Motivation assessment approach

The approach required information on contributing factors that provide incentive for farmers to

make a decision in participating in contract. Motivation assessment is useful in measuring motivations of

farmers and change in performance or behaviors. This has been commonly applied in related studies in

agricultural fields after new practices have been introduced, some authors has applied this application to

measure outcome of practices such as Analysis of Factors Influencing Motivation of Villagers'

Participation in Activities of Social Forestry, Motivations for organic farming among farmers

from Malopolska Province, Poland. By providing favourable conditions, farmers could rank from

0-5 points to express from undesirable conditions to most favourable conditions based on market

certainty, risk sharing and access to provision including credit. Also, this assessment can

illustrate disadvantages of informal contract farming in comparison to expected outcomes and

identify further improvement in practice through technical assistance, and legal protection. By

identifying actors in each choice of activity, this allowed sampling group to indicate responsible

Contract farming inaquaculture

Transaction cost

-Firms; input provisionsas quality control

Supply chain

-Middlemen; logisticarrangement, ceaseprocess, input provision

provider

Risk management

-Government;intervention, technicalassistance, legal

protection, priceinsurance


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parties to solutions and measurement their performance. As a result, farmers could respond to

contributing factors and main drivers that attract them to adopt the practices in comparison to

disadvantages of informal contract farming that different from expected outcome that reflect

their motivations.

Incentive of farmers

Smallholders

Risks Benefits


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Conceptual Background

In Thailand, there are four sectors engaging in contract farming practices comprise with

80 enterprises including 10 trading unions and farmer unions. Furthermore, the government

agencies carried out the implementation under formal contract farming to promote income

stability among farmers. For instance, there are 80 companies run their business through contract

farming such as Chaloen Polkphan, Batagro, Savev, Thaneeyama Siam and Bangkok

Agricultural Industry Ltd. Most of the unions were formed by daily producers such as Chiang

Mai daily product union, and Mahasarakam daily product union (Ministry of Commerce, 2010).

At a smaller scale, the government agencies are supporting regional organization and product

under their control such a centre of rice plantation, and tobacco office. Apart from this, there are

independent agencies operated under this principle such as Mae La Noi Royal Project and

Thailand Orchid Plantation (Setboonsarng, 2008). Mainly, the categories of contract farming

products divided into three groups, which are weed productions, livestock, and seafood products.

The first type is weed productions in total of 37 items as follows; jasmine rice, corn, livestock

food supply, peanut, baby corn, sweet corn, string bean, paprika, cucumber, chilly, okra,

cabbage, potato, passion fruit, tomato, eggplant, lettuce, pumpkin, melon, carrot, longan, mango,

rose apple, orange, pomelo, tamarind, banana, and orchid. Secondly, the livestock productions

consisted of 6 items, which as chicken, egg, pig, and cow. Lastly, the fishery business contained

7 kinds of products such as Oreochromis niloticus, Cichlidae, Cyprinidae, cat fish, Channidae, tiger

prawn, and shrimp. In total, the contract farming area covered approximately 500,000 square meters

(Ministry of Agriculture, 2009). Basically, the contract has to certain principles that have been taken into

account such as market conditions, forecast including social and physical milieu.


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On the contrary, contract farming in aquaculture sector has been practiced recently in informal

contract farming field particularly fish raising in cage culture that derived from Cambodia. Most of the

sector located in Nakornsawarn Province due to high rate production and low maintenance with high

return rate from raising freshwater fish. Cage culture has been widely adopted and construct under low

capital cost in opened environment as mentioned in the following geographic features; lakes, large

reservoirs, farm ponds, river, cooling water, discharge canals, estuaries and coastal embayment (Nondh,

2008). In Mahasarakham Province, the most common fish have been commoditized in this sector is

Tilapia originated from in Cichidae family raising by 308 households approximately 4,111 cages, since

they inherent feature that adapt to tough environment condition (Ministry of Agriculture, 2009). This has

been located in Chi River Basin that runs through 3 main provinces in Northeastern Region of Thailand

cover 49,477 km2. where local population generate their income through small scale rice farming along

with raising cattle (Nondh, 2008). With high technology application in rice production, farmers suffer

from high debt on land tenant and unaffordable technology to produce rice therefore contract farming was

emerged to ease their burden as extra income generation. However, Tilapia are prone to parasite and other

diseases that cause by poor quality of water due to high density beyond capacity of cages, producers have

to take several factors into account to prevent the loss such as flow of river, fish fry period, quality of

input provision, and releasing period of juvenile fish (Geawkhamsean, 2005).

Releasing Formula (fish/square metre) = expected amount (kg./one square meter)

Size of fish (determine by market )

Assumption made without mortality rate

(Geawkhamsean, 2005)

Investment and return


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Approximately, total cost of tilapia cage culture has been calculated among smallholders in

contract farming per cage/stock rated at 331,504.22 Baht comprised with variable cost 327,440.66 Baht or

98.77% of total cost, meanwhile fixed cost summed up to 4,063.56 Baht or 1.23% of total cost (Ministry

of Agriculture). As a result, the study conducted by the Ministry of Agriculture has shown that variable

costs are higher than fixed cost due to high food provision cost that weighted 77%, while juvenile fish

cost 10% along with labour force 5 %. Therefore, the total cost in raising fish stock is up to 331,504.22

Baht and smallholders gain 368,166.20 Baht in return or 36,661.98 Baht. (Please see table 4 in appendix).

Marketing and form of contract

Logistic arrangement of Tilapia production has been organized by middlemen in the area in different

volumes, which small scale dealers concentrate on other business as well as delivering fish stock, while

middlemen supplying large volume of tilapia own large cage tilapia business themselves that able to

supply other dealers as well as selling them at the markets (Nondh, 2008). Smallholders will received

collecting services from middlemen or contractors that later redistribute to retailer shops selling directly

to consumers at the markets, some of smallholders also deliver them to retailer shops themselves and the

rest of products deliver to retailers in further distance mainly in the south of Mahasarakham to supply

restaurants (Gaewkhamsen, 2005).

Supply chain


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(Source; Gaewkhamsern, 2005, pg.31)

Form of relationship between input providers and producers

Smallholders and dealers have to fulfill their com

assement of contract farming failure to small scale

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