Description

       In Asia, vertical coordination between food processing enterprises and farms such as contract farming is spreading in response to the expansion of the vegetable, fruit, and livestock sectors due to continuous economic development and increased public awareness of food safety issues. In contract farming schemes, foreign firms tend to instruct farmers in good farming practices, and this momentum is accelerated by the arrival of foreign supermarkets in big cities.
　　To test whether vertical coordination has a positive influence on farmers, in 2004 we conducted a cross-country statistical analysis to test the value addition linkage from the food processing industry to the agricultural sector, and a field survey on farm incomes which compared the relative productivity between contract farmers and non-contract farmers in Shandong Province, China. In the survey, contract farmers were classified into two types: those who had contracts with firms with predominantly foreign capital holdings and those who had contracts with firms whose capital was held mainly by local firms, for the commodities of shallots, apples, and chickens.
　　The results of a regression analysis of the factors affecting differences in agricultural value addition per agricultural worker across countries showed the value addition in the food processing industry per agricultural worker to be significant as well as other variables, such as the share of fruits and vegetables in farmland, farmland area per agricultural worker, and the irrigation ratio. This implies that the development of the food processing industry and the shift in agricultural production toward fruits and vegetables contributes to increased farm incomes.
　　In addition to this statistical analysis, our field survey in China gave evidence that a) contract farmers are provided with advanced technology as well as discounted chemicals and fertilizers, b) contract farmers, especially those who have contracts with firms with predominantly foreign capital holdings, show higher labor and land productivity (Fig. 1), c) the labor productivity of farmers who are producing apples is higher than the wage rate in Shandong Province and Shanghai City (Fig. 1), and d) the average farm size is less than one ha for each farm type, and participation in contract farming did not correlate with farm size or the academic record of the farm head. It thus appears that there is no entry barrier to contract farming for small farmers.
　　This study’s results suggest that inviting foreign enterprises to the food processing sector and promoting vertical firm-farm coordination effectively enhance farm income in rural areas of developing countries.

Figure, table

1.  

   

   Fig. 1. Comparison of labor and land productivity by type of farm.
   Note Farm types:
   CFF: Contract farmers who have contracts with firms with predominantly foreign capital holdings;
   CFL: Contract farmers who have contracts with firms with predominantly local capital holdings;
   NCF: Non-contract farmers.

2.