Impact of contract farming on farmers’ income in the food value chain: A theoretical analysis and empirical study in Vietnam.

Introduction: In the context of the primary concerns of the agricultural economics research community and policymakers focused on poverty reduction, increasing farmers' income and welfare, as well as improving equity and sustainability in the global food value chain, contract farming has emerged as an important strategic tool. Not only does it enhance quality and productivity, but contracts also serve as a means to ensure stable supply and sustainable certification. These contracts alleviate difficulties related to inputs and markets by providing inputs to farmers and purchasing their output. In other words, by signing a contract with agricultural enterprises, farmers can reduce risks associated with input quality, supply shortages, price drops, and product surpluses.

The research results from "Modern Short Food Supply Chain, Good Agricultural Practices, and Sustainability: A Conceptual Framework and Case Study in Vietnam" by Dr. Viet Hoang, published in the Agronomy Journal in 2021, indicate the benefits achieved in the short vegetable supply chain in Vietnam.

The study shows that contract farming has a positive impact on income, sustainability, and welfare in the medium to long term, although its effect on farmers' income in the short term is not significant. The determining factors include:

• Selling Price:The contract price can be fixed or determined at the time of delivery. A fixed price may be slightly higher than the current market price but can also be lower than the spot market price at delivery. However, spot prices in Vietnam can fluctuate significantly and frequently. In many cases, spot market prices are much higher than contract prices, causing farmers to lose out on potential profits. When fixed prices are significantly higher than spot prices at delivery, companies may breach contracts with minimal compensation. If the contract price is open-ended, farmers and businesses typically use the market price at delivery for transactions. Thus, uncertain contracts can lead to increased selling prices.
• Production Costs: Contract farming requires farmers to follow certain good practices and achieve higher quality certification. This may force farmers to invest more in machinery and equipment, use better quality inputs, employ more labor, and eliminate low-quality outputs. As a result, contract farming can increase agricultural production costs and reduce farmers' income.
• Farming Productivity: In practice, the crop yields of contracted farmers may even be lower than those without contracts. This is primarily because contracted farmers must adhere to specific processes and good practice standards to obtain quality certification and meet buyer requirements (e.g., Viet GAP, Global GAP, and Organic). These requirements may prohibit farmers from using certain chemical fertilizers and pesticides, particularly chemical growth stimulants that can harm humans and the environment. Additionally, land use efficiency and productivity ratios for contracted farmers are also lower. Furthermore, contracted farmers must meet higher standards for product quality and ripeness. Consequently, contract farming can lead to reduced crop yields.
• Contract Implementation: Another reason why contract farming has a negligible impact on income is that contract implementation is still weak in Vietnam. Specifically, the level of commitment and trust in cultivation contracts remains relatively low. Contracts can be breached by either party if the benefits of breaking them significantly outweigh those of fulfilling them. For example, when spot market prices are much lower than contract prices, companies may stop purchasing products from contracted farmers to buy from the spot market for lower prices, and vice versa. This can be explained as follows: First, common forms of contract farming in Vietnam are oral contracts, public agreements or memorandums of understanding. The terms and obligations in these contracts are not clearly defined or stringent. Second, penalties for contract violations are relatively weak and ineffective. Third, Vietnam's legal system is generally not efficient or fair. Fourth, commitment and trust in transactions and business relationships in Vietnam are still relatively low.

Discussion: Although contract farming presents challenges, the research also indicates that it can create positive impacts in the medium to long term. The mechanism through which agricultural contracts affect income, sustainability, and welfare is proposed as follows: Agricultural contracts initially influence intermediary factors such as cooperatives, market access, knowledge and skills development, product quality improvement, technology adoption, and support services. Subsequently, these factors affect capacity building, connectivity, quality assurance and certification processes that can enhance farmers' competitiveness. In the long run, improved competitiveness leads to higher prices, increased productivity, and lower costs that can significantly enhance income levels as well as sustainability and welfare.

Conclusion: Overall, contract farming has a positive impact on income levels, sustainability measures, and welfare in both medium-term and long-term scenarios. These findings play a crucial role in supporting policymakers and farmers in their decisions regarding participation in contract farming initiatives.

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Hoang, V. (2021). Impact of contract farming on farmers’ income in the food value chain: A theoretical analysis and empirical study in Vietnam. Agriculture, 11(8), 797. https://doi.org/10.3390/agriculture11080797