Presented by Abel Shaba Presented at 2015 ECAMA Research Symposium Malawi Institute of Management, 4-5 June

1. ANALYSIS OF THE TOBACCO CONTRACTUAL
ARRANGEMENT AND ITS IMPACT ON SMALLHOLDER
FARMERS
Evidence from Alliance One Burley Tobacco Contract
7/13/2015 Abel-Bunda

2. Outline of the Presentation
• Introduction
• Methodology
• Results and Discussion
• Conclusions and policy implication
7/13/2015 Abel-Bunda

3. 7/13/2015 Abel-Bunda
INTRODUCTION

4. Background Information
• Single largest export commodity of the country
– Share in total export earnings of 53% in 2006 and
peaks of over 65% in the mid-1990s (Negri and
Porto 2008).
• Tobacco sector liberalized gradually to break
the structural barriers
• In 1996, the Special Crops Act repealed and
opened up the production of burley tobacco
(Diagne & Zeller, 2001)
7/13/2015 Abel-Bunda

5. Background Information
• Smallholder farmers’ participation in
agriculture value chain or supply in Malawi is
low
• SHFs face multifaceted challenges
• Contract farming, out grower scheme
cooperatives important to increased SHFs
participation in value chain (GoM, 2011).
– Overcome missing markets, minimise income and
price risk, to improve utilisation of machinery.
– Contract-Auction marketing ratio of 80:20
7/13/2015 Abel-Bunda

6. Expected Benefits of CF
• Help reduce and share price or income risk,
reduce transaction costs (Masakure and
Henson 2005; MacDonald, et al. 2004).
• Transfer of technology (Glover, 1984); access to
credit and use contract as collateral (Glover,
1987)
• Improved efficiency and quality leaf
7/13/2015 Abel-Bunda

7. Alliance One Contract
7/13/2015 Abel K. Shaba – LUANAR MSc. Student

8. Justification & Statement of the Problem
• Tobacco facing challenges
– leaf pricing fluctuations, declining global demand
due to emerging strict global regulatory regimes,
global oversupply
– Incomes affected
• Policy discussions and deliberations on IPS
• Research says CF improves incomes and helps
reduce TCs (Abebe et al. 2013)
• Does it?
7/13/2015 Abel-Bunda

9. Objectives
• To analyse the performance of contractual
arrangement of smallholder burley tobacco
farmers
• To determine the impact of tobacco contract
farming on smallholder income
7/13/2015 Abel-Bunda

10. Hypotheses
• CF minimise TCs
• CF improves farmers tobacco income
7/13/2015 Abel-Bunda

11. 7/13/2015 Abel-Bunda
METHODOLOGY

12. Methodology
• Survey data from 211 CFs and 109 non-contract in
KU
• TCE and TE-impact model
• TCs
– screening costs, monitoring, negotiating costs, signing
contract, controlling contract compliance, switching
costs in case of premature termination of the contract,
and all cost opportunities (Bijman 2008)
• TEM uses the participation probit model to
calculate the IMR and includes this ratio as a
regressor in the income model (Miyata, Minot, &
Hu, 2009)
7/13/2015 Abel-Bunda

13. 7/13/2015 Abel-Bunda
RESULTS & DISCUSSION

14. Percentage of Reasons for Participating in
Contract Farming
7/13/2015 Abel-Bunda
3.0
4.5
19.2
19.5
20.1
33.8
0.0 10.0 20.0 30.0 40.0
Access to extension
services
Reduce production costs
Access to loan
Better price
Guaranteed market
Easy access to inputs
Percentage of response

15. Examples of Transactions Costs
AOI Contract Famers Bank
Provision of inputs
and technical
support, screen
farmers (missing
input market)
Group selection and
monitoring, contract
enforcement, joint
liability
Information
asymmetry about
cost of the loan
Provide incentives to
enforce contract
Moral hazard- side-
selling, divert inputs
Credit provision
(missing financial
market)
Delayed tobacco
collection
Strategic loan
default
7/13/2015 Abel-Bunda

16. Performance of Contract Farming
Contract Non-contract
Collateral Required Sometimes
Tobacco rejection Low High
Access to price information High Low
Disagreement on price Low High
Number of days to bale tobacco Fewer More
Number of days to transfer tobacco Fewer More
Monitoring of tobacco sales High Low
Missing bales in transit Low/None High
Number of days it takes to receive
payment Fewer More
7/13/2015 Abel-Bunda

17. Transaction days: Does it say anything?
7/13/2015 Abel-Bunda
Type of
Farmer Time in Days
Non-
contract
15.45 13.76 15.6 44.81
From day
finished baling
to collection
day
From
satellite to
market
At auction Total time
Contract 9.27 9.1 5.99 24.36

18. Impact of Contract Farming
Maximum Likelihood
Estimation Two-step
Variable Coef. Robust SE P>z Coef. SE P>z
Outcome equation
Dependent variable: log net tobacco income
Age of the farmer 0.0083 0.03 0.78 0.0097 0.03 0.75
Age squared -0.0001 0.00 0.65 -0.0001 0.00 0.64
Education dummy 1 -0.0547 0.12 0.66 -0.0543 0.13 0.67
Education dummy 2 0.0321 0.17 0.85 0.0385 0.27 0.89
Household size -0.0516 0.16 0.75 -0.0494 0.17 0.78
Land size 0.1503 0.04 0.00*** 0.1519 0.04 0.00***
Transportation -0.0838 0.07 0.25 -0.0861 0.07 0.24
Monitoring dummy 0.2171 0.13 0.10* 0.2194 0.12 0.08*
Contract dummy 0.4660 0.17 0.01*** 0.4327 0.17 0.01***
Constant 12.491 0.78 0.00*** 12.4826 0.75 0.00***
7/13/2015 Abel-Bunda

19. Impact of Contract Farming
Selection equation
Dependent variable: Contract dummy
Extension visit 1.0506 0.15 0.00*** 1.0436 0.11 0.00***
Age of the farmer -0.0208 0.01 0.03** -0.0201 0.01 0.04**
Education dummy 1 -0.2296 0.25 0.35 -0.2404 0.25 0.34
Education dummy 2 0.7142 0.52 0.17 0.7455 0.70 0.28
Gender of farmer -0.7147 0.25 0.00*** -0.7110 0.35 0.04**
Land size 0.2631 0.09 0.00*** 0.2443 0.08 0.00***
Monthly income -0.0027 0.11 0.98 -0.0221 0.10 0.83
Distance to auction -0.6865 0.21 0.00*** -0.7993 0.24 0.00***
Constant 3.3627 1.48 0.02** 4.0177 1.55 0.01***
ath(rho) -0.3387 0.14 0.01
Hazard
lambda -0.2736 0.13 0.04**
7/13/2015 Abel-Bunda

20. Impact of Contract Farming
rho -0.3263 0.12 -0.2855
sigma 0.9600 0.05 0.9584
lambda -0.3132 0.12
Wald test of independent equation
Chi-square (1) 5.98
Prob > Chi-square 0.014
Log
pseudolikelihood -528.41
Wald Chi-square 56.23 70.59
Prob > Chi-square 0.00 0.00
N 320 320
7/13/2015 Abel-Bunda

21. Contract & Non-Contract Prices
7/13/2015 Abel-Bunda
0
.5
1
1.5
1 2 3 4
Burley Tobacco Price (USD/kg)
Price for non-contract farmers Price for contract farmers
Non-contract farmers <U$2.00/kg
skewed to the left of 2
Contract farmers skewed to the right
of 2>U$ 2.00/kg

22. Perceived Impact of CF on Income for
past 2 years
7/13/2015 Abel-Bunda
2.88
19.23
41.35
17.31 19.2318.66
29.19
33.97
8.61 9.57
0
10
20
30
40
50
60
70
80
Increased
significantly
Increased Decreased Decreased
significantly
Remained
constant
Non-contract Contract

23. 7/13/2015 Abel-Bunda
CONCLUSIONS AND POLICY IMPLICATION

24. Conclusion & Policy Implication
• Failure to abide by the contract terms contribute
poor performance of contract farming
• CF reduces transaction costs, improves farmers
access to extension services
• Land is a critical resource to integration of farmers
• CF has positive impact on net tobacco income of
SH burley farmers
• Consider investing in information sharing between
buyers
7/13/2015 Abel-Bunda

25. 7/13/2015 Abel-Bunda
THE END
THANK YOU