IFPRI Discussion Paper 01787

December 2018

Impact of Contract Farming on Profits of Smallholders

Evidence from Cultivation of Onion, Okra, and Pomegranate in India

Anjani Kumar

Gaurav Tripathi

Devesh Roy

P. K. Joshi

Bhushana Karandikar

South Asia Regional Office

INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
The International Food Policy Research Institute (IFPRI), established in 1975, provides research-
based policy solutions to sustainably reduce poverty and end hunger and malnutrition. IFPRI’s
strategic research aims to foster a climate-resilient and sustainable food supply; promote healthy diets
and nutrition for all; build inclusive and efficient markets, trade systems, and food industries;
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food policy research and in delivering holistic support for country-led development. IFPRI
collaborates with partners around the world.

AUTHORS
Anjani Kumar ([email protected]) is a research fellow in the South Asia Regional Office of
the International Food Policy Research Institute (IFPRI), New Delhi, India.

Gaurav Tripathi ([email protected]) is a senior research analyst in the South Asia Regional Office
of IFPRI, New Delhi, India.

Devesh Roy ([email protected]) is a senior research fellow in the Agriculture for Nutrition and Health
(A4NH) Division of IFPRI, New Delhi, India.

P. K. Joshi ([email protected]) is director of the South Asia Regional Office of IFPRI, New Delhi,
India.

Bhushana Karandikar ([email protected]) is an independent research collaborator and

development consultant, Pune, India.

Notices

1
IFPRI Discussion Papers contain preliminary material and research results and are circulated in order to stimulate discussion
and critical comment. They have not been subject to a formal external review via IFPRI’s Publications Review Committee. Any
opinions stated herein are those of the author(s) and are not necessarily representative of or endorsed by IFPRI.

2
The boundaries and names shown and the designations used on the map(s) herein do not imply official endorsement or
acceptance by the International Food Policy Research Institute (IFPRI) or its partners and contributors.

3
Copyright remains with the authors. The authors are free to proceed, without further IFPRI permission, to publish this paper,
or any revised version of it, in outlets such as journals, books, and other publications.
 Contents

Abstract .................................................................................................................................. v

Acknowledgements ............................................................................................................... vi

Abbreviations .......................................................................................................................vii

1. Introduction ..................................................................................................................... 1

2. The Commodities and Their Contexts ............................................................................ 3

3. Methodology ................................................................................................................... 6

4. Results and Discussions ................................................................................................ 11

5. Conclusion .................................................................................................................... 25

Appendix: Supplementary Tables ........................................................................................ 26

REFERENCES .................................................................................................................... 33

iii
 Tables

Table 4.1 Household characteristics of farmers .....................................................................14

Table 4.2 Economics of onion, okra and pomegranate cultivation for contract and
independent farmers in India ..................................................................................................18

Table 4.3 Determinants for farmers’ participation in CF for onion, okra and pomegranate
cultivators ...............................................................................................................................20

Table 4.4 Impact of CF on profits for onion, okra and pomegranate cultivators in India......22

Table 4.5 Impact of CF on profits for onion, okra and pomegranate cultivators in India:
Outcomes of the nearest-neighbour matching and bootstrap standard errors (kernel-
based matching) ......................................................................................................................24

Table A.1 The economics of cultivation of onion by sample contract and independent
farmers in India (Rs per ha) ....................................................................................................26

Table A.2 Composition of cost of cultivation of onion in India (%) .....................................28

Table A.3 Hausman test for endogeneity in the profit equation for onion, okra and
pomegranate ...........................................................................................................................29

Table A.4 Sargan test for over-identification of instrumental variables in the 2SLS
regression................................................................................................................................30

Table A.5 List of variables involved in satisfying the balancing property and common
support of the propensity score ..............................................................................................31

Table A.6 Household characteristics of surveyed farmers taking together the onion, okra
and pomegranate cultivators ...................................................................................................32

iv
 ABSTRACT

This paper attempts to quantify the benefits of contract farming (CF) on farmers’ income and
investigates the determinants of participation in CF. This is based on a survey of 1,331 farmers from
Maharashtra State in India engaged in onion, okra and pomegranate cultivation. The study, using 2-
Stage Least Squares method and propensity score matching approach, reveals that CF ensures higher
returns for smallholders to the tune of Rs 14.5 per kilogram over independent farmers. Access to
institutional credit, extension services, farm size, personal ownership of transport and migration
significantly affected farmers’ participation in CF. The empirical evidence of the benefits of CF for
high-value export commodities should encourage government policies to promote and scale up the
use of CF in India.

Keywords: Contract farming, Onion, Okra, Pomegranate, Income, India

v
 ACKNOWLEDGEMENTS

We are grateful to the United States Agency for International Development (USAID) and Indian
Council of Agricultural Research (ICAR) for extending financial support to conduct this study. Our
special thanks are due to Jain Farm Fresh Foods Limited, Kay Bee Exports, and Sangola Dalimb
Kharedi Vikri Sangh, for their heartfelt cooperation in interviewing farmers. Last but not the least,
we express our sincere thanks to all the farmers who provided the needed information for
accomplishment of this study.

This work was undertaken as part of the CGIAR Research Program on Policies, Institutions,
and Markets (PIM) led by the International Food Policy Research Institute (IFPRI).

vi
 ABBREVIATIONS

2SLS Two-Stage Least Squares

ATE Average Treatment Effect
ATT Average Treatment Effect on Treated
CF Contract Farming
CIA Conditional Independence Assumption
FAO Food and Agriculture Organization of the United Nations
FAOSTAT Food and Agriculture Organization Corporate Statistical Database
FYM Farm Yard Manure
GoI Government of India
ha Hectare
HH Household
IFPRI International Food Policy Research Institute
MSE Mean Squared Error
MTID Markets, Trade and Institutions Division
OBC Other Backward Caste
OLS Ordinary Least Squares
PSM Propensity Score Matching
q Quintal
SATT Sample Average Treatment effect for the Treated
SC Scheduled Cast
SE Standard Error
ST Scheduled Tribes
USAID United States Agency for International Development

vii
 1. INTRODUCTION

Contract farming (CF) has played a key role in promoting the modernization and

commercialization of agriculture worldwide. It is well established in developed countries and

in recent years has received considerable attention in developing countries (Wong,

Darachanthara, and Soukkhamthat 2014).

CF has come up as a key component in the process of agricultural transformation that

facilitates direct firm-to-farm linkages. CF may help farmers overcome the high transaction

costs of marketing their produce. It provides farmers with opportunity for nonspot transactions,

which are useful when transaction costs are high or markets fail. Markets fail because of factors

such as imperfections in credit markets, poor economies of scale in transportation and

marketing, asymmetric information about market prices and lack of capacity for smallholders

to absorb risk. Further, spot markets are less able to efficiently solve quality and food safety

issues, mainly owing to the asymmetric information in these markets. A number of studies have

shown that CF can increase agricultural productivity, profitability and farmers’ income, and

reduce food insecurity; see, for instance, Maertens and Swinnen (2009), Bellemare (2012),

Wang et al. (2014), Bellemare and Novak (2016) and Kumar et al. (2016). Even though CF has

significant potential benefits for both the contractors and the contracted, particularly for critical

quality and safety issues, its role and possible impacts in developing countries are still

controversial. One contentious issue is the threat that smallholders may be excluded from CF

arrangements, particularly if higher transaction costs (along with more stringent quality and

safety demands) prevent small and marginal farmers from participating in CF (Pingali 2006).

India has gone through significant rural transformations and institutional changes that

have shaped today’s agricultural sector and agricultural policies. According to Chand (2005),

CF’s benefits to smallholders, who represent about 80 per cent of the rural population, include

access to credit, inputs and extension services. Another benefit is the links that CF can create

1
between input markets and providers and the international markets by organizing the

production of high-value food crops. The evidence of CF’s impact in the Indian context has

been mixed. For instance, Dev and Rao (2005); Nagaraj et al. (2008); Kumar and Kumar

(2008); Ramaswami, Birthal and Joshi (2006); Tripathi, Singh and Singh (2005); Birthal, Joshi

and Gulati (2005); Kalamkar (2012); Kumar (2006); and Dileep, Grover and Rai (2002) all

found that contract producers earned profits almost three times higher than those of

independent producers, owing to the former’s higher yields and assured output prices.

However, Singh (2002) and Opondo (2000) found negative impact of CF on the environment,

farmer welfare and the power structure between contractors and farmers.

This study is aimed at identifying the factors that motivate farmers’ participation in CF

in an overwhelmingly smallholder-dominated context. It also assesses the impact on farmers’

economic welfare. In doing so, it contributes to the ongoing debate on CF in India. This is

especially important as the Government of India has developed a new model law to promote

CF domestically.

The paper is organized as follows. Section 2 describes the production of onion, okra

and pomegranate in India and presents the details of the survey data. Section 3 deals with the

methodological approach. Section 4 presents and discusses the estimation results, and Section

5 concludes and provides some policy implications.

2
 2. THE COMMODITIES AND THEIR CONTEXTS

Owing to its diverse agro-climatic conditions that favour cultivation of a variety of crops, India

is a leading global producer of fruits and vegetables. It is the world’s largest okra producer (5.5

million tonnes) with a share of 62 per cent of global production (8.9 million tonnes) during

2016. India is also the second-largest producer of dry onion (19.4 million tonnes) with 21 per

cent of global production (93.2 million tonnes) (FAO 2017). Further, India is the world’s

largest producer of pomegranate (2.3 million tonnes) (GoI 2017a, GoI 2017b). Among India’s

states, Maharashtra is the leading state in the production of onion (6.5 million tonnes) and

pomegranate (1.5 million tonnes), as well as a major producer of okra (0.12 million tonnes) in

2016 (GoI 2017a). Maharashtra accounted for 31 per cent of onion, 64 per cent of pomegranate

and 2 per cent of okra production in India in 2016.

The study is based on survey data from 1,131 farmers covering three commodities:

onion, okra and pomegranate. The survey was conducted in Maharashtra during March–April

2016. The list of contracting farmers for the year of the survey was obtained from one

contracting firm (hereafter, the sample firm) for each commodity. We collected data on various

farm and farmer characteristics, including cropping patterns, cultivation economics, marketing

channels, good agricultural practices, assets and social networks.

The survey for onion was conducted in Nashik and Jalgaon districts, located in the

Khandesh and Northern Maharashtra regions of Maharashtra. Farmers in the Jalgaon district

had formal contracts to produce and supply white onions for Jain Farm Fresh Foods Limited.

Contract onion farmers were from the Shirsoli, Vadali, Pasardi, Dhanora, Panchak, Nashirabad

and Mhaswad villages in Jalgaon district. The independent farmers were selected from the

Nashik district, adjacent to the Jalgaon district. Nashik is the largest onion-producing district

in Maharashtra, contributing more than 25 per cent of state onion production. Jalgaon and

Nashik are located in the same agro-climatic zone (Western Maharashtra Scarcity Zone). We

3
surveyed 105 contract onion growers (a majority of the total contract farmers) and 478

independent onion growers. To select independent farmers, we randomly identified three

blocks from the Nashik district: Nifad, Sinnur and Baglan. The sample size for Nifad, Sinnur

and Baglan was 139, 163 and 176, respectively. Then, we selected five villages from each

block. Finally, we chose sample households in proportion to the village population for detailed

investigation. Jain Farm Fresh Foods Limited is a subsidiary of the parent company Jain

Irrigation Systems Limited. The firm has been contracting onion growers for around 15 years

in Maharashtra. The contracts are formal and annually renewable. On an average, the surveyed

contract farmers have been in contract for last 6 years with the firm. The firm targets

international market and exports processed white onion powder to the US.

We surveyed a sample of 141 okra farmers, which included 84 contract and 57

independent farmers. Kay Bee Exports, an exporting company of fresh fruits and vegetables,

had contracts with okra farmers in Baramati block of Pune district and Faltan block of Satara

district. The firm’s purchase price for okra was dynamic, based on changes in its export market

price on a weekly to fortnightly basis. The company supplies its own inputs such as pesticides,

insecticides and bio-fertilizers to the farmers, without any additional cost, to ensure minimum

residual levels in okra for its exports to Europe. We surveyed most of the contract okra farmers

from eight villages in sample districts. The independent farmers were surveyed randomly from

the Solapur, Pune and Satara districts in the Western Maharashtra region. As relatively fewer

independent farmers grow okra, we could survey only 57 farmers from the Solapur, Pune and

Satara districts, scattered over 21 villages in three districts. The contracting firm Kay Bee

Exports, established in 1989, has annually renewable formal contracts with farmers. The

surveyed farmers have been in contract with the firm for an average of around 4 years. The

firm’s purchase price for okra is dynamic and depending on changes in export market price.

4
 The survey for pomegranate was conducted in Solapur, a leading pomegranate-

producing district. A sample of 407 pomegranate farmers were surveyed, comprising 130

contract and 277 independent growers, from 18 villages in the Pandharpur, Malshiras and

Sangola blocks of Solapur district. We surveyed contract farmers from the Pandharpur,

Malshiras and Sangola blocks, as most contract pomegranate farmers are located in these

blocks. Sangola Pomegranate Purchasing and Selling Union (Sangola Dalimb Kharedi Vikri

Sangh), a cooperative established in 1992, purchases the produce from its members and sells it

to various agencies, primarily traders in Pune and other markets in India. Independent farmers

were chosen randomly from the same blocks and villages from where contract farmers were

surveyed (Pandharpur, Malshiras and Sangola).

5
 3. METHODOLOGY

We worked out descriptive statistics to understand the characteristics of sample households.

We carried out a partial budget analysis to estimate the costs and returns for both contract and

independent farmers for each commodity. A farmer’s profit is calculated as the difference

between revenue generated and cost incurred in onion, okra and pomegranate cultivation. We

performed econometric analysis to identify the factors that motivate farmers’ participation in

CF and to assess the impacts of CF on farmers’ profitability, a proxy for farmers’ economic

welfare.

These two aspects of CF have been examined extensively in the empirical literature.

Various studies determine the probability of a farmer’s decision to contract as the first step in

a two-step econometric process to analyse the impact of CF on farmers’ welfare (for example,

Katchova and Miranda 2004; Simmons, Winters and Patrick 2005; Miyata, Minot and Hu 2009;

Wang, Zhang and Wu 2011; Bellemare 2012; Gupta and Roy 2012; Ito, Bao and Sun 2012).

Many other studies, by contrast, focus only on the decision to participate in CF (Birthal, Joshi,

and Gulati 2005; Guo, Jolly, and Zhu 2005; Masakure and Henson 2005; Zhu and Wang 2007;

Fischer and Qaim 2012; Kumar, Shinoj and Shivjee 2013).

We employed a 2-Stage Least Squares (2SLS) model with instrumental variables to

examine the impact of factors associated with a farmer’s willingness to opt for CF (in the first

stage of regression) and to assess the impact of participation in CF on farmers’ profitability (in

the second stage of regression). The equation for the 2SLS regression is

𝜋𝜋𝑖𝑖 = 𝛼𝛼 + 𝛿𝛿𝑑𝑑𝑖𝑖 + 𝛾𝛾𝑋𝑋𝑖𝑖 + 𝜀𝜀𝑖𝑖 (1)

where, 𝜋𝜋𝑖𝑖 is the net profit per kilogram (kg) for a farm household that cultivates onion, okra or

pomegranate, 𝑑𝑑𝑖𝑖 is a dummy variable that equals 1 if a farmer is under contract and 0 if not

under contract, 𝑋𝑋𝑖𝑖 is a vector of farmer characteristics and 𝜀𝜀𝑖𝑖 is the error-term.

6
 We chose various socio-demographic and economic characteristics that can influence

farmers’ decision to participate in CF. These characteristics included age, education, gender of

household head, social caste group, family size, farm size, farming experience, migration,

primary occupation and access to institutional credit. In the first stage of 2SLS regression, the

dependent variable was a binary variable (farmer’s participation in CF = 1, otherwise = 0), and

the independent variables were a mix of qualitative and quantitative factors, representing

various farmer characteristics. We prefer to use the Linear Probability Model in stage one of

the 2SLS process than other approaches like Probit model. We follow Angrist 2000 who

observes that 2SLS estimates using a linear probability model are consistent vis-à-vis other

approaches, thereby underscoring the use of a linear first-stage to be safe. The use of

instrumental variable in the 2SLS model takes care of unobserved factors and helps in getting

more realistic impact of treatment variable (participation in contract) on profits.

An estimation of equation (1) using ordinary least squares (OLS) regression may give

biased results, as a farmer’s decision to participate in CF is not random. Farmers either are

selected for a contract by the contractor or choose to participate in CF. Hence, different

observed and unobserved factors could guide farmers’ entry into CF. Thus, the variable

representing a farmer’s participation in CF (di) can be endogenous, and thus correlate with the

error-term εi. The use of an OLS regression for determining the contribution of CF to farmers’

welfare may produce biased estimates.

We used the 2SLS model with instrumental variables to address the unobserved factors

and thereby minimise the bias in estimating the impact of CF on a farmer’s profit. An ideal

instrumental variable should not correlate with the dependent variable in equation (1). It

should, however, correlate with di, the variable representing CF participation. It should not be

a variable from the vector of a farmer’s characteristics, Xi.

7
 Accordingly, we attempted to find suitable instrumental variables for the profit equation

of onion, okra and pomegranate. We identified a specification comprising several instrumental

variables: (1) ‘information about contracting facility received by farmer from an institutional

source’ (yes = 1, 0 otherwise), (2) ‘distance of bank from farmer’s home’, (3) ‘averse to

financial risk in investment’ (yes = 1, 0 otherwise), (4) ‘risk of limited marketing channels’

(yes = 1, 0 otherwise), and (5) ‘risk of poor roads’ (yes = 1, 0 otherwise). If a farmer receives

information about a contract facility from an institutional source, then the farmer’s decision to

join a farming contract will be influenced. The distance between the farmer’s home and

institutional facilities such as banks also influences CF participation. Frequent visit to

institutions like banks provides farmers with an opportunity to interact with farmers from

various locations, including the farmers engaged in contract farming. The networking effect is

likely to prompt such farmers for joining contract farming. Farmers residing near to the banks

are expected to visit banks more frequently. Further, proximity to banks may help in facilitating

contractual obligations of farmers. A farmer who is risk-averse or who perceives particular

production, sale, or delivery risks is more likely to participate in CF. For instance, farmers who

are concerned about the risks of limited marketing channels or poor roads are more likely to

join CF in order to reduce these risks. Although these instrumental variables are strongly related

with di, they are not systematically related with the dependent variable—profit—in

equation (1). We conducted the OLS and 2SLS regressions with product-fixed effect.

We conducted a Hausman test for endogeneity for the profit equation of onion, okra

and pomegranate (Table A.3). Because the Hausman test indicated endogeneity, the 2SLS

result should be preferred over OLS.

We then assessed the validity of instruments (when more than one instrumental variable

is used) using the Sargan test for over-identification (Table A.4). The two instruments are valid

8
if the Sargan test outcome is statistically insignificant, and invalid if the outcome is significant.

The Sargan test was statistically insignificant, and so the instrumental variables are valid.

We also used propensity score matching (PSM) method to gauge the impact of CF on

unit profit. The matching approach helps find a large group of control households that are

similar to the treatment households in all relevant pre-treatment characteristics X. Then, the

differences between the outcomes of the control group and of the treatment group can be

attributed to the treatment. Since conditioning on all relevant covariates is limited in the case

of a high-dimensional vector X, Rosenbaum and Rubin (1983) suggest the use of balancing

scores b(X), that is, functions of the relevant observed covariants X such that the conditional

distribution of X given b(X) is independent of assignment into treatment, also known as the

conditional independence assumption (CIA). One possible balancing score is the propensity

score; that is, the probability of participating in a treatment given observed characteristics X.

The matching procedures based on this balancing score are known as PSM. PSM also will be

helpful in checking the robustness of the results based on OLS and independent variables.

Besides CIA, a second assumption of matching requires that treatment observations

have comparison observations “nearby” in the propensity score distribution. This common

support or overlap condition ensures that persons with the same X values have a positive

probability of being both control and treatment households (Heckman, LaLonde and Smith

1999). The common support thus represents the area where there are enough of both control

and treatment observations. The common support region allows effective comparisons of

outcomes between the treatment and control groups.

Assuming that the CIA holds and that there is overlap between both groups, the average

treatment effect can then be estimated. Ideally, we wanted to estimate ∆ = 𝑌𝑌𝑡𝑡1 − 𝑌𝑌𝑡𝑡0 , which is

the difference of the outcome variable of interest at time t between two groups, denoted by the

superscripts 1 and 0. However, we were unable to estimate Δ in this way because a household

9
cannot be in the treatment and the control groups simultaneously. Therefore, we measured the

average treatment effect (ATE) given the observable data, and estimated the ATE on the treated

households (ATT) given a vector household characteristic, X (Birol et al., 2011):

𝐴𝐴𝐴𝐴𝐴𝐴 = 𝐸𝐸(∆|𝑋𝑋, 𝑇𝑇 = 1) = 𝐸𝐸(𝑌𝑌𝑡𝑡1 − 𝑌𝑌𝑡𝑡0 |𝑋𝑋, 𝑇𝑇 = 1) = 𝐸𝐸(𝑌𝑌𝑡𝑡1 |𝑋𝑋, 𝑇𝑇 = 1) − 𝐸𝐸(𝑌𝑌𝑡𝑡0 |𝑋𝑋, 𝑇𝑇 = 0) (2)

To estimate the potential effects of participating in a contract, propensity scores are

used to match households with similar observable characteristics. PSM entails forming

matched sets of treated and untreated subjects that share similar propensity score values

(Rosenbaum and Rubin, 1983, 1985). PSM allows one to estimate the ATT (Imbens 2004). We

used nearest-neighbour matching to select best control matches for each subject in treatment

group. We matched one, three and five control subjects to each treated subject using nearest-

neighbour matching, along with kernel-based matching with bootstrap standard errors.

10
 4. RESULTS AND DISCUSSIONS

Characteristics of contract and independent onion, okra and pomegranate farmers

Table 4.1 presents the average values of key household characteristics for farmers of each of

the three commodities i.e. onion, okra and pomegranate. The average age of farmers ranged

from 44 years to 47 years. Ninety-seven per cent of the households surveyed were headed by

males. The caste 1 structure of households differed across commodities. Around 47 per cent of

onion growers belonged to the Other Backward Castes (OBCs), 38 per cent were from the

general class and the remaining 15 per cent were Scheduled Castes (SCs) and Scheduled Tribes

(STs). More than 75 per cent of okra growers were from the general class, while 18 per cent

were OBCs and 6 per cent were SCs or STs. Fifty-six per cent of pomegranate farmers were

from the general class, 33 per cent were OBCs and 12 per cent were SCs or STs. The farmers’

average years of education ranged from 8.4 years (pomegranate growers) to 9.9 years (okra

cultivators), while the average years of education of the highest-educated person in each

farming family was around 12 years. Around 99 per cent of onion, okra and pomegranate

farmers had farming as their main occupation. The average length of farming experience

ranged from 19 years for pomegranate farmers to 21 years for onion farmers. The average

family size for onion, okra and pomegranate farmers was around six persons. Average

dependency ratio ranged between 0.5 and 0.6 for cultivators across crop types. The average

farm size was 1.7 hectares (ha) for onion growers, 1.9 ha for okra growers and 2.2 ha for

pomegranate growers. About half of onion (52 per cent) and okra (49 per cent) farmers and

68 per cent of pomegranate farmers had access to institutional credit. One-third of the sample

1
In India, the socio-economically most unprivileged caste groups relate to schedule caste and
schedule tribe. Then, besides the schedule caste and schedule tribe, other caste groups that are
socio-economically less privileged have been identified by the Government of India as other
backward castes (OBC). The schedule caste, schedule tribe and OBCs receive reservation quota
in education and government employment. The open category is known as the general class
comprising of socio-economically privileged castes.

11
farmers were members of a cooperative. The percentage of farmers with their own means of

personal transport was 73 per cent of onion growers, 67 per cent of okra growers and 51 per

cent of pomegranate cultivators.

Some characteristics were significantly different between contract and independent

farmers. For example, contract and non-contract onion farmers differed in terms of social caste,

education, operational holding size, access to institutional credit, cooperative membership,

crop insurance purchase, number of annual visits by private extension officials and own means

of personal transport. The contract and independent okra growers differed in terms of family

size, access to institutional credit and own means of personal transport. The contract and

noncontract pomegranate growers differed in terms of highest education in family, farming

experience, operational holding size, access to institutional credit, number of annual visits by

private extension officials and own means of personal transport. Among contract onion

growers, 81 per cent belonged to OBCs and 17 per cent were from general castes, but only

2 per cent were from SCs or STs. By contrast, 40 per cent of independent onion farmers were

from OBCs, 43 per cent belonged to general castes and more than 17 per cent farmers

represented SCs and STs. The average years of education of contract onion farmers (11 years)

was higher than that of independent farmers (9 years). Contract onion farmers had higher

average highest education in family (12.6 years) than independent farmers (11.5 years).

Operational holding size was much higher among contract onion farmers (3.1 ha) than

noncontract onion farmers (1.3 ha). Access to institutional credit was significantly higher for

contract onion growers (72 per cent) than independent onion growers (47 per cent). More than

half of the surveyed contract onion farmers belonged to a cooperative or organisation,

compared with about a quarter of the independent farmers. Twenty-four per cent of contract

onion growers had crop insurance, whereas only 1.5 per cent of independent onion growers

insured their crops. Contract onion farmers received an average of six yearly visits from private

12
extension officials; independent onion farmers received only one visit. Regarding personal

ownership of transport, 64 per cent of contract onion growers had their own means of transport

compared with to 75 per cent of independent onion farmers.

Other differences were observed in the different groups of okra and pomegranate

producers. In the case of okra, the contract farmers had a smaller average family size (5.6) than

independent growers (6.8). However, access to institutional credit was lower for contract okra

farmers (37 per cent) than independent farmers (67 per cent). In the case of pomegranate,

contract farmers had higher average highest education in family (12.1 years) than independent

farmers (11.3 years). Contract pomegranate farmers also had a longer average farming

experience (22 years) compared with independent farmers (18 years). The operational holding

size for contract pomegranate farmers (2.7 ha) was higher than that for noncontract

pomegranate farmers (2.0 ha). Access to institutional credit was significantly higher for

contract pomegranate growers (87 per cent) than for independent growers (59 per cent). Private

extension officials visited contract pomegranate farmers three times per year and independent

farmers twice per year. Regarding personal ownership of transport, 65 per cent of contract

pomegranate growers had their own means of transport compared with 44 per cent of

independent farmers. Table A.6 provides the average figure for household characteristics of

onion, okra and pomegranate taken together by appending observations of the three

commodities.

13
Table 4.1 Household characteristics of farmers
Household characteristics All Contract Independent Difference t-Test value
Onion
Age of household (HH) head (years) 47.1 46.4 47.2 −0.9 0.6886
Gender of HH head (%) (male=1,
99.8 100.0 99.8 0.2 0.4684
otherwise=0)
Social caste (%)
5.0 0.0 6.1 −6.1
Scheduled Caste
9.4 1.9 11.1 −9.2 ***
Scheduled Tribe
OBC 47.3 81.0 40.0 41.0 (Pr = 0.000)

General 38.3 17.1 42.9 −25.7

Education of HH head (years) 9.4 11.0 9.0 2.0*** 5.7437

Education of highest educated person in
11.7 12.6 11.5 1.1*** 3.0150
HH (years)
% farmers with farming as main
99.5 100.0 99.4 0.6 0.8129
occupation
Experience in farming (years) 21.0 21.7 20.9 0.9 0.7291
Household size 5.8 6.0 5.8 0.2 0.6771
Dependency ratio 0.62 0.56 0.64 0.07 0.7610
Operational land (ha) 1.7 3.1 1.3 1.8*** 7.2397
Access to institutional credit (%) 51.6 72.4 47.1 25.3*** 4.7826
Membership of cooperative or other
31.2 54.3 26.2 28.1*** 5.7835
organisation (%)
Crop insurance (%) 5.5 23.8 1.5 22.3*** 9.8111
No. of yearly visits by private extension
1.8 5.9 0.9 5.0*** 12.4177
officials
Own means of personal transport (%) 73.2 63.8 75.3 11.5** 2.4191
Okra
Age of HH head (years) 43.9 44.1 43.6 0.5 0.2522
Gender of HH head (%) (Male=1,
97.9 97.6 98.2 −0.6 0.2513
otherwise=0)
Social caste (%)
2.4 10.5 −8.1
Scheduled Caste 5.7
OBC 19.0 17.5 1.5
18.4 Pr = 0.122
General 78.6 71.9 6.6
75.9
Education of HH head (years) 9.9 10.2 9.5 0.7 1.1364
Education of highest educated person in
12.6 12.6 12.4 0.2 0.4566
HH (years)
% farmers with farming as main
99.3 100.0 98.2 1.8 1.2160
occupation
Experience in farming (years) 19.4 19.4 19.5 −0.1 0.0345
Household size 6.1 5.6 6.8 −1.2** 2.3505
Dependency ratio 0.53 0.48 0.59 −0.1 0.8809

14
 Household characteristics All Contract Independent Difference t-Test value
Operational land (ha) 1.9 1.8 2.0 −0.3 0.7887
Access to institutional credit (%) 48.9 36.9 66.7 −29.8*** 3.6019
Membership of cooperative or other
27.0 29.8 22.8 7.0 0.9096
organisation (%)
No. of yearly visits by private extension
1.2 1.0 1.5 −0.5 1.1348
officials
Own means of personal transport (%) 67.4 78.6 50.9 27.7*** 3.5710
Pomegranate
Age of HH head (years) 43.9 45.0 43.5 1.5 1.1832
Gender of HH head (%) (Male=1,
98.8 100.0 98.2 1.8 1.5421
otherwise=0)
Social caste (%)
6.9 11.2 −4.3
Scheduled Caste 9.8
0.8 2.2 −1.4
Scheduled Tribe 1.7
Pr = 0.393
OBC 33.9 32.5 1.4
32.9
General 58.5 54.2 4.3
55.5
Education of HH head (years) 8.4 8.7 8.2 0.5 0.9837
Education of highest educated person in
11.5 12.1 11.3 0.9** 2.2239
HH (years)
% farmers with farming as main
98.8 98.5 98.9 −0.4 0.3880
occupation
Experience in farming (years) 19.3 21.6 18.3 3.4*** 2.9953
Household size 5.8 6.0 5.6 0.4 1.4244
Dependency ratio 0.52 0.53 0.52 0.01 0.0520
Operational land (ha) 2.2 2.7 2.0 0.8*** 2.8985
Access to institutional credit (%) 67.6 86.9 58.5 28.4*** 5.9438
Membership of cooperative or other
31.9 100.0 0.0 100.0 –
organisation (%)
No. of yearly visits by private extension
2.3 3.1 1.9 1.2*** 6.5214
officials
Own means of personal transport (%) 50.6 65.4 43.7 21.7*** 4.1591
Source: Field survey (2016).
Notes: ***, ** and * represent 1 per cent, 5 per cent and 10 per cent significance, respectively.

15
Table 4.2 presents data on yield, production cost, output prices and profits of both contract and

independent onion, okra and pomegranate farming households. The average onion yield was

higher for contract growers (239.3 quintals per hectare [q/ha]) than for noncontract producers

(187.4 q/ha), and differed significantly at the 1 per cent level. Additionally, the average price

realised by onion contract farmers (Rs 753/q) was significantly higher than that received by

noncontract farmers (Rs 598/q). Moreover, the cost of onion cultivation was significantly lower

for contract farmers (Rs 515/q) than for noncontract farmers (Rs 762/q). The higher yields,

better prices and lower production costs achieved by contract farmers made onion cultivation

more profitable. Further, the open-market prices for onions had crashed in 2016 owing to

increased production, and so the independent onion growers incurred a loss of Rs 164/q. The

contract farmers were protected from these price fluctuations because of their contract-fixed

prices and earned a profit of Rs 238/q. In case of okra, contract farmers produced a significantly

higher yield than that of independent farmers. However, okra prices and production costs for

contract farmers were lower than that of independent farmers. The independent farmers

received higher open-market prices for okra, compared with the fixed prices received by

contract farmers. Nevertheless, contract okra farmers received subsidies for their input costs,

particularly for plant protection material and bio-fertilizers, which contributed to their lower

production costs (Rs 1,469/q). The contract okra farmers therefore earned significantly higher

profits (Rs 1,231/q) because of their lower production costs and higher yields. In case of

pomegranate, the contract and independent farmers did not differ significantly in yield, price,

cost or profit. Table A.1 depicts various components of the cost of cultivation. Table A.2 gives

percentage distribution of the components in total cost of cultivation. Several studies have

reported substantial positive impact on gross margins, crop income or total household income

of contract farmers in developing countries; these include studies on Kenya (Wainaina, Okello

and Nzuma 2012), India (Singh 2002; Birthal, Joshi and Gulati 2005; Tripathi, Singh and Singh

16
2005; Ramaswami, Birthal and Joshi 2006; Kalamkar 2012), Senegal (Warning and Key 2002),

Laos (Leung, Sethboonsarng and Stefan 2008), Madagascar (Bellemare 2012), Nicaragua

(Michelson 2013), China (Zhu 2007; Miyata, Minot and Hu 2009; Xu and Wang 2009) and

Indonesia (Simmons, Winters and Patrick 2005).

17
Table 4.2 Economics of onion, okra and pomegranate cultivation for contract and independent
farmers in India

Economics of cultivation All Contract Independent Difference

Onion
Yield (q/ha) 196.7 239.3 187.4 51.9***
(76.7) (74.8) (73.9)

Price (Rs/q) 625.9 752.6 598.0 154.6***

(196.3) (405.5) (82.7)

Production cost (Rs/q) 717.7 514.7 762.2 −247.6***

(339.5) (197.0) (348.0)

Profit (Rs/q) −91.8 237.9 −164.2 402.2***

(394.3) (381.8) (358.8)
Okra
Yield (q/ha) 180.8 200.6 151.5 49.1***
(71.9) (68.3) (67.6)

Price (Rs/q) 2,871.6 2,700.0 3,124.6 −424.6***

(359.6) (0.0) (462.6)

Production cost (Rs/q) 2,028.4 1,469.4 2,852.2 −1,382.9***

(1,153.3) (775.7) (1,128.5)

Profit (Rs/q) 843.2 1,230.6 272.3 958.3***

(1,022.5) (775.7) (1,079.3)
Pomegranate
Yield (q/ha) 98.3 95.9 99.3 −3.4
(35.9) (41.9) (32.8)

Price (Rs/q) 5,137.3 5,225.4 5,096.0 129.4

(965.2) (926.4) (981.8)

Production cost (Rs/q) 3,908.6 3,840.1 3,940.7 −100.6

(2,220.9) (2,044.8) (2,301.8)

Profit (Rs/q) 1,228.8 1385.3 1,155.3 230.0

(2,327.9) (2,322.3) (2,331.2)
Source: Field survey (2016).
Notes: ***, ** and * represent 1 per cent, 5 per cent and 10 per cent significance, respectively.
Figures in brackets represent standard deviation.

18
Determinants for farmers’ participation in CF

Table 4.3 presents the results of the first stage of 2SLS regression (equation 1) that exhibits the

determinants of farmers’ participation in CF for onion, okra and pomegranate. The variables

farm size, access to institutional credit, number of visits by government extension officials,

number of visits by private extension officials, and own personal transport, had significant

positive relation with CF participation. By contrast, migration of household members had

negative impact on CF participation, because migration may hamper activities related to the

contractual arrangements. In addition, okra and pomegranate farmers were more likely than

onion growers to participate in CF.

19
Table 4.3 Determinants for farmers’ participation in CF for onion, okra and pomegranate
cultivators
Dependent variable: Participation in contract farming (yes=1/no=0)
Variable Coefficient S.E.
Socio-demographic variables
ln(Age of HH head) (years) −0.142 (0.919)
Square of ln(Age of HH head) 0.0233 (0.126)
Gender of HH head (Male=1, 0 otherwise) 0.0810 (0.0890)
Caste
OBC (Yes=1, 0 otherwise) 0.0203 (0.0337)
General (Yes=1, 0 otherwise) 0.0291 (0.0258)
ln(Years of education of HH head) −0.0394 (0.0663)
Square of ln(Years of education of the HH head) 0.0163 (0.0208)
ln(Number of economically active family members) 0.00652 (0.0175)
Migration (Yes=1, 0 otherwise) −0.109*** (0.0401)
Ln(Operational land) (Ha) 0.0364** (0.0168)
Own personal transport (Yes=1, 0 otherwise) 0.0847** (0.0428)
Economic variables
Main occupation (Farming=1, Other=0) −0.00184 (0.125)
Access to institutional credit (Yes=1, 0 otherwise) 0.0742*** (0.0219)
ln(Number of visits by government extension officials) 0.0650** (0.0304)
ln(Number of visits by private extension officials) 0.0338** (0.0160)
ln(Number of visits by farmer for extension officials) −0.00332 (0.0168)
Product Fixed Effect (Okra) 0.903*** (0.0421)
Product Fixed Effect (Pomegranate) 1.180*** (0.0741)
Instrumental variables
Information about contract facility received from an institutional
0.0499 (0.0325)
source (Yes=1, 0 otherwise)
Distance to bank from home (kilometre) −0.00355* (0.00190)
Averse to financial risk in investment (Yes=1, 0 otherwise) 0.0588*** (0.0175)
Risk of limited marketing channels (Yes=1, 0 otherwise) 0.0910** (0.0437)
Risk of poor roads (Yes=1, 0 otherwise) 0.0709* (0.0418)
Constant −0.0340 (1.579)
No. of observations 1,131
R-squared 0.628
Root MSE 0.2777
District Fixed Effect Yes
Source: Authors’ analysis based on field survey (2016).
Notes: Standard errors in parentheses; ***, ** and * represent 1 per cent, 5 per cent and 10 per cent
significance, respectively. Standard errors are clustered at the district level.

20
Impact of contract farming on farmers’ profit

Table 4.4 exhibits the results of the impact of CF on profits made by onion, okra and

pomegranate cultivators. It gives the outcomes of the second stage of 2SLS regression along

with OLS regression. Unlike OLS regression, the 2SLS regression takes care of the unobserved

factors in regression and gives the true impact of CF on farmers’ profit. The instrumental

variables used in the 2SLS model were (1) ‘information about contracting facility received by

farmer from an institutional source’ (yes=1, 0 otherwise), (2) ‘distance of bank from farmer’s

home’, (3) ‘averse to financial risk in investment’ (yes=1, 0 otherwise), (4) ‘risk of limited

marketing channels’ (yes=1, 0 otherwise), and (5) ‘risk of poor roads’ (yes=1, 0 otherwise).

The instrumental variables were tested for their validity using the Sargan test (Table A.4) and

found to be valid. The Hausman test for endogeneity shows endogeneity in the profit equation

(Table A.3). This means that estimates of 2SLS regression should be preferred over that of

OLS regression. The results in table 4 show that CF had a significant positive impact on the

profits of onion, okra and pomegranate growers. Participation in CF enhanced farmers’ profit

by Rs 14.5/kg. Migration had a negative impact on the profits. However, the product fixed

effect did not indicate significant difference in the unit profits of okra and pomegranate with

respect to onion.

21
Table 4.4 Impact of CF on profits for onion, okra and pomegranate cultivators in India
Dependent variable: Unit profit in production of onion, okra and pomegranate (Rs/kg)
Variable OLS 2SLS 2nd stage
Coefficient
Coefficient S.E. S.E.

Contract Farming (Yes = 1, 0 otherwise) 1.938*** (0.360) 14.54** (5.106)

Socio-demographic variables
ln(Age of HH head) (years) −49.42 (30.56) −47.83 (26.90)
Square of ln(Age of HH head) 6.759 (4.128) 6.484 (3.600)
Gender of HH head (Male=1, 0 otherwise) −2.692 (3.207) −3.752 (4.470)
Caste
OBC (Yes=1, 0 otherwise) −1.829 (1.974) −2.238 (2.277)
General (Yes=1, 0 otherwise) −0.950 (1.433) −1.436 (1.743)
ln(Years of education of HH head) −0.211 (1.435) 0.174 (1.464)
Square of ln(Years of education of HH
0.863 (0.829) 0.692 (0.764)
head)
ln(Number of economically active family
0.831 (1.202) 0.731 (1.178)
members)
Migration (Yes=1, 0 otherwise) −7.859* (3.080) −6.458* (2.505)
Ln(Operational land) (Ha) 0.188 (0.494) −0.292 (0.808)
Own personal transport (Yes=1, 0
−2.953* (1.247) −4.010 (1.984)
otherwise)
Economic variables
Main occupation (Farming=1, Other=0) 6.268 (3.225) 6.393 (3.028)
Access to institutional credit (Yes=1, 0
0.130 (0.493) −0.741 (0.763)
otherwise)
ln(No. of visits by government extension
0.718 (1.131) −0.187 (0.507)
officials)
ln(No. of visits by private extension
1.503 (0.836) 1.139 (0.686)
officials)
ln(Number of visits by farmer for
−2.118 (1.602) −2.199 (1.574)
extension officials)
Product Fixed Effect (Okra) 13.77*** (0.428) 2.179 (4.879)
Product Fixed Effect (Pomegranate) 24.78*** (0.433) 9.563 (6.387)
Constant 83.97 (56.37) 84.81 (52.44)
No. of observations 1,131 1,131
R-squared 0.212 0.164
Root MSE 14.296 14.728
District Fixed Effect Yes Yes
Source: Authors’ analysis based on field survey (2016).
Notes: Standard errors in parentheses; ***, ** and * represent 1 per cent, 5 per cent and 10 per cent
significance, respectively. Standard errors are clustered at the district level.

22
Robustness for profitability

We use the PSM method to evaluate the impact of CF on unit profit for onion, okra and

pomegranate cultivators in India (Table 4.5). Table A.5 gives the variables involved in

satisfying the balancing property and common support of the propensity score. Table 5 gives

the outcomes of the nearest-neighbour matching estimation with analytical standard errors, as

in Abadie and Imbens (2006), and kernel-based matching with bootstrap standard errors. For

both okra and onion farmers, the unit profit for contract farmers was significantly higher than

that for independent farmers. However, CF did not appear to have had a profit impact on

pomegranate growers. The profit for onion contract farmers was more than that for independent

farmers in the range of Rs 3.7/kg (nearest-neighbour matching with number of matches = 5) to

Rs 4.4/kg (nearest-neighbour matching with number of matches = 1). In the case of okra

growers, the contract farmers earned higher profit than the independent farmers, ranging from

Rs 8.3/kg (kernel-based matching) to Rs 10.0/kg (nearest-neighbour matching with number of

matches = 5). Further, when observations pertaining to onion, okra and pomegranate are taken

together, contract farmers received higher returns with regard to independent farmers in the

range of Rs 4.0/kg (kernel-based matching) to Rs 6.7/kg (nearest neighbour-matching with

number of matches = 1). Thus, the results validate the outcomes of the 2SLS regression that

contract farmers earn significantly higher profit than independent farmers do.

23
Table 4.5 Impact of CF on profits for onion, okra and pomegranate cultivators in India:
Outcomes of the nearest-neighbour matching and bootstrap standard errors (kernel-based
matching)
Number of matches (m) Variable Unit profit in production (Rs/kg)

Onion Okra Pomegranate All three

4.360*** 9.292*** 2.915 6.704***

m=1 SATT
(0.864) (2.152) (4.511) (1.911)

3.791*** 9.710*** 2.595 5.602***

m=3 SATT
(0.617) (2.032) (3.521) (1.414)

3.659*** 9.992*** 2.079 5.722***

m=5 SATT
(0.553) (1.891) (3.031) (1.307)

Observations 583 141 407 1,131

Bootstrap standard errors 3.978*** −2.304 4.020***

8.259**
(kernel-based matching) (0.716) (3.597) (1.469)
(3.257)
Observations 579 135 402 1,131

Source: Authors’ analysis based on field survey (2016).

Standard errors in parentheses; *** p<0.01, ** p<0.05, * p<0.1, m=1, 3 and 5 indicating 1, 3 and 5
neighbours, respectively.

24
 5. CONCLUSION

This study is based on 2016 survey data of farm households cultivating onion, okra and

pomegranate in India. It assesses the drivers for participation in CF and estimates the impact

of CF on profits for growers of these commodities. Our results show that access to institutional

credit, extension facility official visits, personal ownership of transport and farm size have a

positive effect on farmers’ participation in CF, whereas migration has a negative impact.

Conditional on participation, the contract farmers were able to earn significantly higher profits

in their onion, okra and pomegranate cultivation. CF also played an important role in

connecting smallholders to high-end international markets. However, our study shows

heterogeneity in the impact of CF. The higher CF profits for onion and okra stemmed mainly

from higher yields and lower production costs, whereas CF did not realize higher yield or profit

for pomegranate growers. In the case of pomegranate farmers, the motivation for CF may come

from a desire to share the risks of cultivation. These findings have several important policy

implications. The benefits of CF are product- and contract-specific, and therefore policymakers

should design appropriate strategies and mechanisms to promote CF in several agricultural

commodities, especially in high-value crops, without considering it to be a one-size-fits-all

solution for agricultural production.

25
 APPENDIX: SUPPLEMENTARY TABLES

Table A.1 The economics of cultivation of onion by sample contract and independent farmers in India (Rs per ha)
Onion Okra Pomegranate
Particulars of cost of cultivation
Contract Independent Difference Contract Independent Difference Contract Independent Difference
Labour 25,076 20,970 4,106*** 99,707 116,404 −16,697 53,543 58,961 −5,417
(15,607) (12,225) (59,339) (80,800) (34,861) (56,581)

Inputs:
Seed 12,552 22,580 −10,028*** 24,926 22,167 2,579* 25,024 28,801 −3,776**
(3,966) (12,452) (8,563) (8,865) (8,452) (17,832)

Fertilizers 15,058 13,166 1,892* 28,818 56,123 −27,304*** 48,213 55,572 −7,358**
(10,504) (9,990) (25,623) (28,815) (34,302) (35,301)

Irrigation 31,676 29,094 2,581 63,844 73,220 −9,376 101,872 130,370 −28,498*
(25,038) (21,549) (44,699) 65,579 (100,507) (173,275)

Farm Yard Manure (FYM) 6,268 11,263 −4,994*** 17,372 18,143 −1,941 19,862 21,485 −1,623
(7,986) (12,046) (17,852) (12,706) (18,455) (14,703)

Pesticides 9,648 13,714 −4,065*** 1,486 51,744 −50,258*** 39,693 42,345 −2,651
(11,568) (11,104) (7,825) (52,581) (33,545) (37,085)

Other costs 0 16 −16 6,195 4,413 1,781 0 45 −45

(0) (288) (15,833) (10,448) (0) (415)

26
 Onion Okra Pomegranate
Particulars of cost of cultivation
Contract Independent Difference Contract Independent Difference Contract Independent Difference

Rent for bullock pair / machinery 8,570 12,126 −3,555*** 17,919 19,825 −1,906 19,289 11,843 7,446***
(7,281) (11,097) (11,829) (20,557) (15,927) (10,066)

Marketing costs 9,053 9,543 −490 1,691 27,181 −25,489*** 19,448 20,872 −1,423
(5,252) (7,771) (9,674) (26,511) (12,422) (12,924)

Total cost of cultivation 117,901 132,472 −14,571** 261,959 389,220 −127,262*** 333,066 375,020 −41,954*
(49,808) (61,689) (116,246) (171,796) (164,060) (236,247)
Source: Field survey (2016).
Notes: ***, ** and * represent 1 per cent, 5 per cent and 10 per cent significance, respectively. Figures in brackets represent standard deviation.

27
Table A.2 Composition of cost of cultivation of onion in India (%)
% share in total cost of cultivation

Head of Costs Onion Okra Pomegranate

Contract Independent Contract Independent Contract Independent

Labour costs

Land preparation 0.37 1.01 0.55 1.69 1.24 1.10

Sowing 2.18 1.93 1.12 2.67 2.10 2.10

Irrigation 1.01 0.93 0.87 5.05 2.42 2.72

Weeding 6.29 3.43 5.98 3.34 2.69 2.14

Spraying 1.39 2.38 1.94 9.90 3.76 4.42

Harvesting 10.70 6.57 27.11 6.06 2.37 1.82

Input costs

Seed 11.30 18.34 9.91 6.01 7.86 9.22

Fertilizers 13.46 10.71 10.15 15.20 14.90 15.69

Irrigation 25.81 19.79 25.77 18.97 31.64 31.98

FYM 5.07 8.74 6.54 4.68 5.73 6.38

Pesticides 7.34 10.03 0.65 13.01 11.21 11.89

Costs for hiring
bullocks and 7.43 9.04 6.47 5.33 6.19 3.31
equipment
Other costs 0.00 0.01 2.39 1.10 2.03 1.33

Marketing costs

Labour 0.74 0.79 0.35 3.72 1.11 1.26

Transport and
6.92 6.29 0.19 3.28 4.74 4.62
others
Source: Field survey (2016).

28
Table A.3 Hausman test for endogeneity in the profit equation for onion, okra and pomegranate
Dependent variable: Unit profit in production of onion, okra and pomegranate (Rs/kg)
Independent Variables: (1) Information on
contract facility received from institutional
source; (2) Distance of bank from home;
(3) Averse to financial risk in investment;
Variable (4) Risk of limited marketing channels;
(5) Risk of poor roads
Coefficient S.E.

Contract Farming (Yes = 1, 0 otherwise) 5.075** (1.421)

Socio-demographic variables
ln(Age of HH head) (Years) −49.25 (30.17)
Square of ln(Age of HH head) 6.737 (4.074)
Gender of HH head (Male=1, 0 otherwise) −2.636 (3.073)
Caste
OBC (Yes=1, 0 otherwise) −1.922 (1.926)
General (Yes=1, 0 otherwise) −0.994 (1.377)
ln(Years of education of HH head) −0.323 (1.405)
Square of ln(Years of education of HH head) 0.893 (0.818)
ln(Number of economically active family
0.776 (1.142)
members)
Migration (Yes=1, 0 otherwise) −7.849* (3.010)
ln(Operational land) (Ha) 0.159 (0.494)
Own personal transport (Yes=1, 0 otherwise) −2.912* (1.300)
Economic variables
Main occupation (Farming=1, Other=0) 6.437 (3.350)
Access to institutional credit (Yes=1, 0 otherwise) 0.114 (0.462)
ln(Number of visits by government extension
0.724 (1.128)
officials)
ln(Number of visits by private extension officials) 1.510 (0.821)
ln(Number of visits by farmer for extension
−2.176 (1.553)
officials)
Product Fixed Effect (Okra) 13.73*** (0.420)
Product Fixed Effect (Pomegranate) 24.68*** (0.469)
Ehat −3.305* (1.268)
Constant 82.68 (55.68)
No. of observations 1,131
R-squared 0.213
Root MSE 14.298
District Fixed Effect Yes
Source: Authors’ analysis based on field survey (2016).
Notes: Standard errors in parentheses; ***, ** and * represent 1 per cent, 5 per cent and 10 per cent
significance, respectively. Standard errors are clustered at the district level.

29
Table A.4 Sargan test for over-identification of instrumental variables in the 2SLS regression

Dependent variable: Profit (Rs/kg)

Instrumental variables: (1) Information on contract facility received from institutional source; (2) Distance

of bank from home; (3) Averse to financial risk in investment; (4) Risk of limited marketing channels;

(5) Risk of poor roads

Tests of overidentifying restrictions:

Sargan (score) chi2(4) = 5.64388 (p = 0.2274)

Basmann chi2(4) = 5.53677 (p = 0.2365)

Source: Authors’ analysis based on field survey (2016).

30
Table A.5 List of variables involved in satisfying the balancing property and common support of the
propensity score

Contract Farming
Socio-demographic variables
ln(Age of the HH head) (Years)
Square Ln(Age of the HH head)
Gender of HH head (Male=1, 0 otherwise)
Social caste
ln(Years of education of the HH head)
Square Ln(Years of education of the HH head)
ln(Number of economically active family members)
Migration
ln(Operational land)
Own personal transport
Economic variables
Main occupation
Access to institutional credit
ln(Number of visits by government extension officials)
ln(Number of visits by private extension officials)
ln(Number of visits by farmer for extension official)

Source: Field survey (2016).

31
Table A.6 Household characteristics of surveyed farmers taking together the onion, okra and
pomegranate cultivators
t-Test
Household characteristics All Contract Independent Difference
value
Age of household (HH) head (years) 45.6 45.2 45.7 -0.5 0.6422
Gender of HH head (%) (male=1,
99.2 99.4 99.2 0.2 0.4001
otherwise=0)
Social caste (%)
6.8 3.4 8.1 -4.7
Scheduled Caste
***
5.5 0.9 7.3 -6.3
Scheduled Tribe
(Pr =
OBC 38.5 45.5 35.8 9.6
0.000)
General 49.2 50.2 48.8 1.4

Education of HH head (years) 9.1 9.8 8.8 1.1*** 4.2517

Education of highest educated person in HH
11.7 12.6 11.6 1.0*** 3.7881
(years)
% farmers with farming as main occupation 99.2 99.4 99.1 0.2 0.4001
Experience in farming (years) 20.2 20.7 20.1 0.6 0.6885
Household size 5.8 5.8 5.8 -0.0 0.0420
Dependency ratio 0.6 0.5 0.6 -0.6 0.8524
Operational land (ha) 1.9 2.5 1.8 0.8*** 4.0526
Access to institutional credit (%) 57.0 69.0 52.3 16.6*** 5.1371
% of farmers having cooperative membership 30.9 43.4 28.5 14.9*** 4.0800
Annual visits by government extension
1.7 2.1 1.6 0.6*** 3.2765
officials (number)
Annual visits by private extension officials
1.9 3.7 1.5 2.1*** 8.3289
(number)
Annual visits by farmers to extension officials
1.9 4.1 1.5 2.6*** 8.2155
(number)
Own means of personal transport (%) 64.4 68.3 62.8 5.5* 1.7485
Number of economically active family
1.7 1.7 1.7 -0.0 0.0018
members
% of households having migration (%) 4.9 3.5 5.4 -1.9 1.3863
Source: Field survey (2016).
Notes: ***, ** and * represent 1 per cent, 5 per cent and 10 per cent significance, respectively.

32
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