The impact of contract farming on income: a case study of northern Laos

Abstract

The purposes of this study are: (1) to explore the relevant factors that affect a household’ decision making with regard to entering into contract farming; and (2) to analyze the impact of contract farming on income per adult equivalent. The sample consisted of 1,198 observations in the northern provinces of Laos People’s Democratic Republic, namely Bokeo, Luangnamtha, and Phongsaly, during 2009 to 2013, based on secondary data obtained from the Northern Rural Infrastructure Development Sector Project (NRI). Key factors that influence household farmers to participate in contract farming were properly evaluated by the random effects of logit and probit models whereas, the fixed effects model were used for evaluating the impact of contract farming on farm income per adult equivalent.

The results of these analyses showed that the following factors have a significant positive relationship with the rate of participation of households in contract farming: Tibet-China households, a smaller share of irrigated land, a larger farm size, and being a shorter distance between the provincial office and the village office. In contrast, households residing in Bokeo and Luangnamtha provinces result in a decrease in the probability of participating in contract farming.

The study reaffirms that, on average, contract farmers earned higher income per adult equivalent compared to non-contract farmers. The higher education attained by the head of household, a larger share of irrigated land, a larger farm size, the household had access to electricity, and Bokeo households had positively affected farm income per adult equivalent.

Therefore, the results from this study reaffirmed that the Lao government can support households to participate in contract farming by targeting groups where households are a part of the Tibet-China group, have a smaller share of irrigated land and larger farm size, and reside in the Phongsaly province. Specifically, the government should have provincial officers distribute information about contract farming to these groups to raise awareness and increase the rate of participation in contract farming. Doing this may directly help alleviate some of the problems associated with poverty in three provinces in northern Laos.