Ripe for contracts? Avocado contract farming in Kenya

Philipp Kollenda

May 19, 2022 (last updated: May 18 2022)

Spring Meeting of Young Economist 2022

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Two third of the world population live on less than $10 a day.

780 million people live in extreme poverty on less than $1.90 a day.

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26 percent of the world population was affected by moderate or severe food insecurity in 2019.

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86 percent of agricultural producers are smallholder farmers.

Can smallholder farmers access global agricultural value chains through contract farming?Do they receive higher prices, earn more income and improve food security?5

Can smallholder farmers access global agricultural value chains through contract farming?

Research design / Intervention:
Study the adoption of contract farming induced by an external (non-random) intervention that established farmer organisations and matched them with avocado-exporters.
Our identifying variation is that some farmers now live closer to a farmer organization - more likely to adopt.

Data:
Panel data (2015, 2017) from 702 Kenian households that own avocado trees and sell to brokers or exporters.
Transaction-level data (for avocados) and information on household demographics, consumption, agricultural and non-agricultural assets, production and income.
Four categories of outcomes: farmer's behavior (output) and production, marketing and welfare (impact)

Methodology:
(Non-randomized) Treatment is adoption of contract farming at endline versus no participation.
Address selection into treatment with doubly-robust difference-in-differences and match based on (quasi-random) change in distance to nearest farmer organization.

Results:
Contract farming increases likelihood that farmers sell to exporters, are trained and certified.
Significant and meaningful increase in prices and knowledge, evidence for higher income and lower food security.

Contract farming has many benefits over spot market transactions.

Spot market, the status quo

👎 No coordination among farmers or with downstream value chain actors.
👎 Take-it or leave-it offers. No traceability, little attention to harvest timing or crop quality.
👎 Need stable relations for certification, training, input provision, no access to credit.
👍 Immediate payment, greater flexibility, lower transport cost, no membership fees.

Contract farming has many benefits over spot market transactions.

Spot market, the status quo

Group-based contract farming

👍 Contract farming affects welfare through prices, quantities and (opportunity) costs. $u_{i} = f (y_{i}^{a v o}, y_{i}^{- a v o}) y_{i} = p * q_{i} - c_{i}$

Empirical studies positive about contract farming92% of studies estimate a positive effect on productivity, and
75% estimate a positive effect on income (Wang, Wang, Delgado 2014; Bellemare, Bloom 2018).
Previous studies also find positive effects on food security, subjective well-being, household assets.
but usually based on cross-sectional data and challenging identification.Notable exception: Arouna, Michler, Lokossou (2021) find positive effects on welfare and productivity for rice production in Benin. 💪
8

Aminou Arouna, Jeffrey Michler and Jourdain Lokossou

OutlineMotivation and big picture
Our model of contract farming
Intervention and data
Methodology
Results

9

A program to strengthen exports from Kenya to EU

Mid 2015: Agricultural officers select 10 4 villages and establish farmer groups.
End 2015: Each group matches with one avocado exporter and 113 farmers who join groups included in our sample.
End 2015: We sample two comparison groups: 244 farmers with existing contracts and 345 farmers in comparable (non-targeted) villages.
2015 - 2017: Farmers do what they do. Groups (may) receive training and certification.
Mid 2017: Endline data, including avocado transactions from 3 harvest seasons.

Lots of data!

Household head answered modules on: Household composition | Productive and non-productive assets | Agricultural production and marketing

And specifically on: Avocado transactions | Farmer organization (membership and quality) | Training and certification

List of control variables.

OutlineMotivation and big picture
Our model of contract farming
Intervention and data
Methodology
Results

12

Estimating average treatment effects on the treated via doubly-robust difference-in-differences

We compare 124 farmers who adopt contract farming between the baseline and the endline with 292 farmers that sell avocado, but never under contract.

We thus exclude farmers that have a contract at baseline (always-treated and disadopters).
How does adoption and never-treated relate to the initial classifications? Take a look!

Farmers select into contract farming, but the intervention makes it more likely for some farmers to join.

Estimating average treatment effects on the treated via doubly-robust difference-in-differences

We compare 124 farmers who adopt contract farming between the baseline and the endline with 292 farmers that sell avocado, but never under contract.

We thus exclude farmers that have a contract at baseline (always-treated and disadopters).
How does adoption and never-treated relate to the initial classifications? Take a look!

Farmers select into contract farming, but the intervention makes it more likely for some farmers to join.

Zhao, Sant'Anna 2020 propose an identification framework that combines difference-in-differences with inverse probability weighting to get doubly-robust¹ estimates.

$\hat{A T T} = E_{n} [({\hat{w}}_{1} (D) - {\hat{w}}_{0} (D, X; {\hat{γ}}^{i p t})) (Δ Y - X^{'} {\hat{β}}_{0, Δ}^{w l s})]$

1: doubly-robust = consistent if one of the two models is correctly specified.

Parallel trends?

No significant difference in the number of planted trees in the years before the treatment.

Balance on observables?

Re-weighted sample is significantly more balanced.

OutlineMotivation and big picture
Our model of contract farming
Intervention and data
Methodology
Results

16

Recall our main questions

Part 1:

Does the adoption of contract farming lead to selling to exporters, training and certification?

Part 2:

How does the adoption of contract farming change farmers' production, marketing and welfare outcomes?

Part 1: YES! (Table)

Contract farming significantly increases the likelihood that farmers sell to exporters, are recently trained and certified.

The intervention works, in the sense that it delivers the three immediate changes to farmer behaviour and outcomes: selling to exporters, training and certfification.

Adopters are 50 percentage points more likely to sell any hass avocado to a company. We excluded farmers with contracts at baseline, so at baseline almost no-one in this sample sells avocados to a company (2.5 percent).
- Farmers don't sell everything to the company, but go from basically 0 to selling more or less half of their avocado to the exporters.
- The effect is largest for Hass avocado, which is the variety that exporters mostly demand.
They receive the GAP certification and training, although if we take this as compliance, the fact that 50 percent of the farmers are trained between baseline and endline is not incredibly high.
- At baseline, training rate is 18.6 percent in treatment group, so it almost triples.
No significant shift in the type of avocado they sell. But we would not expect that (yet).

Part 2: yes

Contract farming improves prices and knowledge on agricultural practices. Some evidence for more trees, shift to hired labor, higher income(s) and increased food insecurity.

Next, we look at the actual production, marketing and welfare outcomes.

For production choices we find that contract farmers
- grow more hass trees (up 214%),
- shift to hired labor and
- know more about good agricultural practices (up 13%).
For marketing outcomes we find that contract farmers
- receive 1.18 KSh higher prices (up 37%). Recall that they do not sell all avocados to the companies. The results fits our qualitative knowledge that prices by companies are about 3 KSh higher.
- higher income, no change in quality or quantity.
For welfare outcomes we find
- no significant effects, but higher income overall (69%!) and increased food insecurity are notable (and in the case of food insecurity worrying).

In conclusion:

Our results mainly confirm earlier empirical results on benefits of contract farming, but, arguably, with better identification through panel data.

The intervention delivered on the three main outputs: selling to exporters, training and certification.
Contract farmers get better prices, know more about good agricultural practices and plant more hass avocado trees.

In conclusion:

Our results mainly confirm earlier empirical results on benefits of contract farming, but, arguably, with better identification through panel data.

The intervention delivered on the three main outputs: selling to exporters, training and certification.
Contract farmers get better prices, know more about good agricultural practices and plant more hass avocado trees.
Sales of the local variety decrease with no increase in sales of hass variety (yet): important to support farmers through the transition to higher yielding varieties.
Using panel data matters.
Today: contract farming. But, which part of contract farming matters?

Thank you very much!

Avo

Happy to receive your comments at p.kollenda@vu.nl

Thank you very much!

Happy to receive your comments at p.kollenda@vu.nl

The intervention (2015 - 2017)

Back to main text

Some targeted farmers do not adopt contract farming while some untargeted farmers do.

Back to study design or back to methodology

Farmers who adopted contracts own more trees, are older, more educated and have higher income at baseline.

The outcome and selection model control for the baseline values of:

Household composition
Assets and Land Ownership
Agricultural Production
Access to Banking and Finance

Back to main text

Farmers close to the four newly established farmer organizations are significantly more likely to adopt contract farming.

Statistical models

Large sample
Small sample

Intercept
-2.31*
-1.72

(0.97)
(1.16)

Distance Reduction
-0.48**
-0.38*

(0.16)
(0.18)

Distance Dummy
1.52***
1.20**

(0.31)
(0.37)

Covariates
Yes
Yes

Num. obs.
416
259

***p < 0.001; **p < 0.01; *p < 0.05

26

Farmers close to the four newly established farmer organizations are significantly more likely to adopt contract farming.

Statistical models
	Large sample	Small sample
Intercept	-2.31^*	-1.72
	(0.97)	(1.16)
Distance Reduction	-0.48^**	-0.38^*
	(0.16)	(0.18)
Distance Dummy	1.52^***	1.20^**
	(0.31)	(0.37)
Covariates	Yes	Yes
Num. obs.	416	259
^*p < 0.001; ^p < 0.01; ^*p < 0.05

And predicted propensity scores for contract farming adoption have sufficient overlap.

Back to methodology

The trend in the control group is the counterfactual for the treatment group.

Identifying assumptions:

Parallel trends
Conditional on observables (Heckman, Ichimura, Todd 1997: Outcome regression)

Back to methodology

Households in the control group who - based on observables - are as likely to be treated, are the counterfactual for the treatment group.

Identifying assumptions:

Treatment assignment is random conditional on the propensity score.

Back to methodology

Part 1: YES!

Contract farming significantly increases the likelihood that farmers sell to exporters, are recently trained and certified.

Fraction Hass of total sales

0.05

[-0.03, 0.13]

395 (119)

0.47

Fraction Fuerte of total sales

-0.03

[-0.09, 0.04]

395 (119)

0.45

Fraction avocado sold to company

0.41**

[0.32, 0.49]

395 (119)

0.02

Fraction Hass sold to company

0.49**

[0.38, 0.6]

259 (95)

0.03

Fraction Fuerte sold to company

0.25**

[0.16, 0.35]

273 (86)

0.02

Sold (any avo) to company

0.51**

[0.41, 0.61]

395 (119)

0.03

Sold Hass avocado to company

0.51**

[0.4, 0.63]

259 (95)

0.03

Sold Fuerte avocado to company

0.27**

[0.16, 0.37]

273 (86)

0.02

Received GAP certification

0.73**

[0.65, 0.8]

416 (124)

Received training

0.5**

[0.37, 0.62]

416 (124)

0.19

Back to results

Benefits of contract farming are driven by hass variety, farmers shift away from local varieties.

Back to conclusion

Which part of contract farming matters?31

Which part of contract farming matters?

Farmers that adopt selling to exporters:

get 2.60 KSh more per Hass unit.
double their income from Hass avocado sales.
But decrease total income 🤔

Which part of contract farming matters?

Farmers that adopt selling to exporters:

get 2.60 KSh more per Hass unit.
double their income from Hass avocado sales.
But decrease total income 🤔

Farmers that adopt certification or training:

plant 2.65 more hass trees (sign. for certification)
have higher knowledge scores (around 10%-15%)
and slightly higher prices (0.90-1.17KSh).

Back to conclusion

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