Contract Farming and Other Market Institutions as Mechanisms for Integrating Smallholder Livestock Producers

Contract Farming and Other Market Institutions as Mechanisms for Integrating Smallholder Livestock Producers in the Growth and Development of the Livestock Sector in Developing Countries

PPLPI Working Paper 45 by Maria Angeles O. Catelo, Achilles C. Costales

FAO Pro-Poor Livestock Policy Initiative, December 2008

Executive Summary

The active and sustainable participation of smallholder livestock producers in the rapid growth and development of the livestock sector in the international arena is seen as bringing about a potential pathway for rural income growth and poverty alleviation in developing countries. However, the route by which these smallholders can get truly involved and take advantage of opportunities in the growing livestock markets is not too clear as there exists a host of barriers to their participation that smallholders, on their own, find difficult to overcome.

Over time, structural transformation in the agricultural sector of developing countries has seen the emergence and spread of contract farming in the production and marketing of agricultural products, in general and of livestock products in particular.

The main objective of this literature review is to determine the extent to which contract farming and its variants enable smallholder livestock producers to gain market access, and explore other market institutions for more effectively integrating smallholders into the growth and development of the livestock sector in developing countries.

Section 1 of this paper expounds on the rationale and underlying theoretical framework for the emergence of contract farming with focus on the transaction cost economics approach. Section 2 reviews the literature on the general applications of contract farming and the transaction cost economics framework in agricultural commodities. The main drivers of structural change in agriculture are traced and linked to supply chains and the formation of alternative governance mechanisms that include contract farming. In Section 3, we highlight the trends and typologies of contracts in developing countries. Particular attention is given to case studies on contract farming in livestock in selected countries of India, Thailand, Vietnam and the Philippines. The livestock products discussed include dairy (milk), poultry and pigs. Section 4 gives an assessment of the efficiency and effectiveness of contract farming and its variants as an institutional mechanism for enhancing smallholder producers' access to markets and services for their products, their competitiveness, and their capacity to earn income. Section 5 concludes and proposes areas that need further investigation.

Available for download at http://www.fao.org/ag/againfo/programmes/en/pplpi/docarc/wp45.pdf