Perceived Risks and Impacts of Vegetables Contract Farming on Production Efficiency and Household Income in the Central Rift Valley of Ethiopia

Contract farming has become a main pillar of the strategy to promote agricultural development in Ethiopia. Hence, this study aims at analyzing perceived risks, determinants of contract enforcement mechanisms and impacts of vegetables contract farming on production efficiency and income, using data collected from 423 smallholder vegetable producing households from four districts of East Shewa zone, central rift valley of Ethiopia. The study combines both quantitative and qualitative data obtained from desk review, an in-depth interview and focus group discussions. Descriptive statistics and econometric models were employed for data analysis. Results show that contract farming has benefits such as price certainty, access to technical support and agricultural inputs, improved social networks, access to credit, improved yields, higher and smooth income and improved food security. On the other hand, disadvantages of contract farming are vulnerability of small-scale farmers to food insecurity, fear of default and dispute, indebtedness, lack of transparency in price setting and exploitation by the buyer. Using principal components analysis, multiple sources of risks were identified. The Seemingly Unrelated Regression model result indicates that marital status, membership in iddir and equb, livestock ownership, landholding, fertilizer, credit, and training are the significant factors determining risk perceptions. Moreover, the tetrachoric correlation result shows that perceived risks and participation in contract farming are interdependent. Impacts of participation in contract farming on production efficiency and household’s income were also explored using propensity score matching method. To this end, a Cobb-Douglass stochastic frontier production and cost functions were estimated to predict TE, AE, and EE scores. The empirical results show that contract farming has a positive and significant impact on income of households and efficiency of tomato production. Contract farming increased income and economic efficiency of tomato production by 32% and 11.1%, respectively. However, participation in contract farming has insignificant impact on efficiency of green beans production. This indicates that promotion of contract farming for farm households should be based on conditions and type of vegetables grown. In order to examine factors affecting enforceability of contract to prevent breaches, trivariate probit xvi regression model was estimated. Results show that age, marital status, extension contact, terms of payment, distance to trader, frequency of transaction, membership of cooperatives, assets owned and non/off farm income were significant factors affecting choices of contract enforcements. Given the vegetable production opportunities available in the study area, it is important to address the challenges of producers to benefit from market opportunities and increase their incomes. Moreover, special attention should be given to vegetables contract farming schemes in the study area, so that smallholder households can fully benefit from improvement in production efficiency and income.