Institutions and Infrastructure for Market Development

Contracting Out of Poverty

Some Experimental Approaches

Poor, rural farmers are often left out of the market. They may not be able to compete with larger farmers who can provide firms with consistent quantities of high-quality products. These barriers to entry for small farms may be due to the fact that they cannot exploit economies-of-scale in production, but also to their inability of a small farmer to commit to a contract. At the time of sale, if market prices are higher than contracted prices, farmers may renege and sell in the open market. We propose three innovative contract structures to solve this problem and open markets to small farmers of high-value crops in Vietnam, Tanzania and Peru. Our innovation is that we have developed contracts that will be tested in the field in these three countries, which is ideal because of the diverse geography, potential for contract farming with agricultural products, and the on-site technical support we will receive to implement the contract structures. The contracts will be implemented in several rural communities selected through a typology of micro regions that will serve as a scaling up device of the results of the project. The proposed research will show which contract structures work under what conditions and will measure improvements to overall farmer welfare (income and poverty levels). We expect the results from the implemented contracts to be applicable to contract farming in other developing countries as well.

This ultimate goal of the project is to help design new institutional mechanisms providing smallholders access to dynamic markets through efficient contract farming arrangements and improving the welfare of the poor.