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Assessment of informal contract farming practice among smallholders based on incentives and risks; Case of cage tilapia aquaculture sector in Mahasarakham (Chi River Basin) Abstract In response to failure of spot market1, contract farming practice was emerged to serve demand of consumers in high value added items that involved economic applications that enterprise seek for partnership to reduce transaction cost and reduce market uncertainty. However, the success of the practice result in win-win situation with risk sharing management between both parties, farmers also benefit from income stability and skill improvement from participating in contract farming with firms with certain degree of bargaining power. By introducing quality standards on contract items, firms can assure that growers are able to meet the standards by providing them with technical assistance and welfare along with other services such as logistic arrangement, medication and compensation. Thailand has adopted contract farming practice in response to rapid change of global market trend through National Economic and Social Development Plan, the Ministry of Agriculture and the Ministry of Commerce are main drivers in the process in introducing the practice to farmers. Interpretation of legal terms and welfare provisions differentiate contract farming forms practice by farmers varied from scales and products based on production management, market specification and resource provision.
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The spot market is defined as a market where commodities are sold for cash and delivered immediately or over a short period of time. The price is the primary determinant of the transaction and typically reflects the real time situation, although products typically need to meet minimal quality expectations. Given that the cost of storage is effectively higher than the expected price in the future the spot prices typically reflect current supply and demand, not future price movements. Depending on the position of a firm in the chain, three possibilities of vertical integration exists. Backward vertical integration, the firm integrates with input suppliers. Forward vertical integration, the firm integrates with a further processing firm or a distributor of their products. Balanced vertical integration, the firm integrates with subsidiaries that both supply them with inputs and distribute their outputs. (Vavra, 2009)

Within aquaculture sector, farmers and firms trade off through the form of input provision credits, most of them required roles of middlemen as the link between firms and farmers to operate informal contract. Contract farming actors play important roles in motivating smallholders to participate in contract farming by promoting access to market, credit, input provision, welfare and risk sharing in open market. Introductory 1) Justification
Contract farming has been promoted to assure stable income provided for small holders in particular by supplying firms with raw material according to conditions attached to contract made between two parties based on quality and price principles as stated by Asian Development Bank. In Thailand, the Ministry of Agriculture stated that the model has been focused on small holders to increase their capacity through technical advice and credit provided by the government officials (Dr. Kittikhun, 2008). With the application of contract farming, the companies and farmers have to share risks equally, while farmers receive guaranteed prices as well as increase of income according to prevailing prices at the market. In addition, the farmers are able to access to food provision and credit from firms, while the government are bounded to assure agricultural improvement through infrastructure development. In theory, the contract farming is regarded

as the most effective approach for small holders to benefit from stable income; however this required financial support from providers such as government and firms. Thus, the concern derived from unequal bargaining power between firms and small holders that leads to exploitation as stated by Sriboonchitta Contract farming carries both a positive and negative image. It has been viewed as means of contractors exploitation of small growers as well as a means for agricultural development in abroad sense. Most of the farmers still rely on above mentioned institutions in order to obtain partnership with

enterprise as required in the agreement, since they do not have enough means to engage in contract farming. Therefore, the farmers face major challenge in seeking for credit from the banks to assure their contractor status within limited available capital means, which discourage farmers to adopt formal contract farming. Despite the fact that the effort of government official providing assistance for farmers have been acknowledged as mentioned by Sribonchitta, they have been criticized over the lack of background knowledge as stated by Falvey Poor feasibility analysis and an absence of regionallyspecific research have bearing on failure, and it introduced risks which unfairly accrued small holders (Falvey in Angkasith, 2000; 368). As a result, the failures lead to the loss in income of contract from their incapability to meet quality standards within indicated time and quantity. On the contrary, the success of application would encourage farmers to expand their plantation as well as improve quality of productions as a shift from domestic consumption to export scale. Nevertheless, the small holders also need certain degree of bargaining power and alternatives of firms to reduce exploitation. Although, the government agencies started to provide credit for farmers through Bank of Agriculture and Agricultural Cooperatives with low interests that meet farmer capacities to pay off their debts (Sriboonchitta, 2008). Also, the small holders should acknowledge their rights and strength their capacity to meet standards of firms and sharing risks with firms along with compensation provided in case of income loss. Hypothesis Contract farming practice has been introduced to smallholders, which regarded firms as input provider and services that provide access to welfare and input provision along with services and information. This later contributes to income stability and risk reduction among

smallholders, although this has been highly criticized over roles of firms regarding overprice of input provision and poor service provision as expresses by Singh the contract were biased and enforced strictly, firms provided poor extension service, over priced their services, passed on the risk to the producers, offered low prices of produce, favored large farmers, did not provide compensation for natural calamity loss and did not explain the pricing method (Singh, 2002). I) Motivations of informal contract farmers The study will be looking at informal producers gaining benefits to stabilize income from market uncertainty from access to welfare and provision including services and information. This will include experiences of smallholders facing higher degree of difficulty from unwritten contracts due to the absence from technical advices and technology provided by firms, since they trade through middlemen or dealers not directly through the companies. II) Government intervention State involvement play important roles in risk reduction by assuring access and benefits for smallholders along with service and technical assistance provision (Nondh, 2008). In contrast, this could create barriers in independent relations between firms and farmers including inference of public disaster relief (Hess, 2004). Thus, the dissertation will testify informal smallholders on how they lose their opportunities to improve their skills in order to sustain their income and practice.
III)

Risk redistribution through middlemen

The approach has been adopted by firm through middlemen that create barrier to formalize technical assistance and welfare including services provided by middlemen instead of firms (DSilva, 2009). In fact, two parties fulfill their commitment under formal contract will lead to direct and indirect benefit gained that contributing to reliability according to win-win situation under private-led integrated agricultural development (Sriboonchitta, 2008).

Research Questions To discover objections of the study, the approaches will be conducted base on three main actors that will develop results from different perspectives contributing to motivations of contract farmers that related to their specific roles and responsibilities. Overall key research question Since, contract farming has been adopted widely among smallholders in developing countries, thus the study will examine motivations that attract farmers to enter contract farming such as welfare, risk management and income opportunities. This will be conducted on three key actors who play important roles in promoting small growers to participate in contract farming, which are government agencies, firms and middlemen. Therefore, the research question will be formulated as what are contributing factors that motivated smallholders to participate in informal contract farming. Besides, the variables will be evaluated as a consequences of their participation through following instruments; government interventions, middlemen risk sharing and preferences of firms. I) Governance General research question: protection

6 What kinds of welfare provided by the government agencies in order to encourage smallholders to participate in contract farming? Specific research question: How the government provide financial support and technical support for smallholders ? as mentioned in following points below; - credit -technical advice -infrastructure and irrigation What roles that government agencies take up to increase bargaining power and reduce risks for farmers? as mentioned in following points below; -providing alternative -assuring availability of market -being a negotiator between firms and farmers What kinds of legal interventions government agencies adopted to provide protection for growers? as mentioned in following points below; -enforcing regulations on compensation on firms -preventing firms from raising standards -preventing delay of payment II) Farmers General research question: motivations What kinds of direct and indirect benefits farmers could gain from engaging in contract farming?

Specific research question:

7 What kinds of welfare smallholders expect to gain from adopting contract farming practice? ? as mentioned in following points below; -credit -input provision ( food, vaccination) -technical assistance (machinery, skill improvement) Why small growers want to practice contract farming? -access to market -access to financial support -reducing uncertainty of market -sharing risk -stabilising income What are challenges in practicing contract farming? as mentioned in following points below; -unable to access to information -unaware of conditions indicated in contract -fail to meet standards indicated by firms -inadequate welfare provided by firms -lack of legal protection enforced by government agencies III) Firms General research question: provider What are requirements that smallholders need to fulfill in order to trade off with firms?

Specific research question: What kinds of provisions firms provided for small growers? as mentioned in following points below;

8 -food -vaccination -credit -machinery/equipment What are the benefits in trading off with small holders? as mentioned in following points below; -substitute volume of large scale production in response to increase of demand -flexibility of contract -gaining government support How firms respond to unfulfilled commitment caused by farmers? as mentioned in following points below; -suspending contract -denying payment -suspending provision What are the challenges firms have to face during contract terms? as mentioned in following points below; -small holders fail to comply with indicated quantity or quality standards -unable to supply goods within the schedule -utilising input provision on non-contract goods or sell them -Smallholders selling contract goods to another company Methodology The study will be conducted to discover motivations of smallholders entering informal contract farming through several approaches to apply on different actors in order to provide views from target

9 group as well as related parties such as firms and government officials. Since, the aquaculture becomes the most popular form of contract farming, the number was raised to 514,051 farms in 2008. There are 35,653 in Chaiyaphum Province alone or 6.9 % out of the total fresh water aquaculture. By focusing on a group study of farmers in Mahasarakham, the result will shown through the number of smallholders and amount of aquaculture goods produced to supply firms in Chi River. In 2005, the number of smallholders was around 308, they earned from supplying fish that have been bred in 4,111 creels in Mahasarakham Province. There are 242 farmers who have signed contracts with Charleon Polkphan Company, which the two stage random sampling will be selected in districts with high concentration of smallholders engaging in informal contract farming. This will be focused on two districts, which are Khantralawichai District and Kosumpisai District. Approximately, the numbers of sampling groups will be up to 40 that consisted of 30 farmers, 5 experts and 5 firms respectively. Mainly, descriptive analysis and qualitative analysis will be key approaches to gather accurate information from different actors. The first approach will provide overall picture of small holders engaging in aquaculture within the area of study, which will combine with the finding of second approach from in-dept interview that will be taken into account as a content analysis to summarise common patterns of contributing factors that attract farmers to participate in contract farming. By applying analytic comparison, the study will display similarity and differences of challenges that farmers encounter based on expert opinions. Also, the approach will expand further reasons behind such similarities and differences found in the study. The primary data collection will be conducted through indept interview with key informants who are well experienced in the field such as the director of smallholder organisation or the head of smallholder groups including agricultural experts from the Ministry of Agriculture and firms. With a descriptive approach, this will allow target groups to explain contributing factors that attract small growers to participate in informal contract farming. Also, the study will include general observation based on relations between actors to present objective views. Secondary data collection will be carried out

10 through questionnaire, which will be divided into two parts to that related to individual information of target groups such as level of income, contract farming experience, household labour, and types of welfare received such as input provisions, services and compensation. The second part will be designed in form of The Likert Scale that developed by Thurstone in 1929, the application aim to measure satisfaction from participating in informal contract to compare expected result and actual result after adopted the practices to examine expected results and actual outcomes (Likert, 1992). This formula will reveal relations between farmers and firms in terms of challenges and success that correlated to benefits and loss of farmers. Each section will contain favorable and unfavorable questions that ranked from 1 to 5, which will allow target group to rate from agree to disagree contributing to summated rating scales, which will reflect their relations and willingness to comply with agreement due to treatment and welfare provided. Limitations - the key informants have mentioned about the issues that have not included in hypothesis therefore it is necessary to interview key informants are able to respond to such issue particularly in terms of environmental impacts on informal contract farmers. - due to environmental problem in the area, some of sample groups have voided the contracts and engaged in other occupations as well as relocating themselves out of the area, which created difficulties to get their responses - interpretation of the term contract farming itself among different actors create barriers in perceiving their views on the subject particularly government agencies recognition of informal farmers

II ) Literature Review Contract farming has become a common agricultural practice to encourage small and large scale farmers to stabilise their incomes based on terms and conditions indicated in an agreement made with enterprises. With close management on coordination among

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production, processing and distribution activities that is essential as a part of intensity of contractual arrangement presenting in 3 categories varied from complexity of the arrangement, which are market provision, resource provision and management specification. Aqualculture sector operated under management specification in which smallholders have to produce contract goods from input provisions provided by firms along with ceasing arrangement. (what does this part of the sentence mean?). The changes occurred within supply chains (what changes, which supply chains?) to reduce transaction costs (such as?) caused by several factors such as competition, consumer demands, global market trend and government policies. (too many different points, each of which needs explaining) (Bijman, 2008;1). Competition among transactional cooperation leads to reduction of transaction cost and creating high value added items. Mainly, rich consumers are a major factor contributed to the change in global market, since they have economic power to purchase high quality products that resulted in technology transfer and inventory to equip smallholder with skills. Therefore, contract farming becomes the practice that serve the shift, since they could have positive impacts on reduction of transaction cost, and high value added items within supply chain. By applying risk management programme, this could redistribute risks among contract farming actors, which result in sustainable practices that benefit smallholders and firms (Swinene, 2009). The author of Rich Consumer and Poor Producer Swinen also adds that contract for quality production with local suppliers in developing of inputs, credit, technology, management advice etc.This coincided with local study on contract farming in Thailand regarding motivation of contract farmers conducted by Sriboonchitta, she claims that reasons for participating in contract farming emerged from provision of input on credit rated as the forth

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main reason that motivated farmers. However, the most common reason that attracted farmers are market certainty and income stability according to Sriboonchitta, Contributing factors to the shift of contract farming

transaction cost

supply chain

risk management

global market trend (value added items)

Consumer demands

In response to the shift from domestic consumption to export sales as a part of market liberalisation by producing high value food including the change in trade due to high market competition and growth in demand (what change?) (Simmons, 2002;2). The relations between farmers and enterprises have been changed, since companies apply price strategy or quality strategy based on labour force, use of land, and desirable production environments (Sriboonchitta, 2007, pg.7) (how?)Combining with the trends of consumption caused by the growth in demands of fresh and processed production (of what?)and expansion of supermarkets in the international market that increase level of competition among products that need to be processed within short period of time (FAO, 2005). In fact, the principles of contract farming have been constructed to share risks between contractors and farmers with welfare and

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information provided by enterprises, but this involves informal incentive arrangement as a part of cost effective means of managing performance combine with input control (Glover, 1984;1145) aligning with 3 above mentioned economic principles; transaction cost, supply chain and risk management. (what does that mean?) Although, risk management required multiple collaboration among different actors that still lacking in contract farming practice in Thailand (Nondh, 2009) Therefore, informal contract farming arrangement (what?) raises the concern over exploitation of smallholders from adopting the practice. , As stated by DSilva these transformations, and the government responses thertof, are creating challenges and opportunities for producers, processors, wholesalers, retailers and other supply chain actors. Small farmers in particular are perceived to be especially vulnerable to changes (DSilva, 2009;330), since they have to meet requirements that place them in vulnerable positions due to imbalance of bargaining power with firms along with the lack of access to information and technology including inadequate government intervention, and (meaning?)absence of regulation on roles of middlemen (Siamwalla, 1992). Therefore, the study will also address nature of contract farming with welfare provided by firms in forms of input provision such as medication, and compensation (meaning?) attached including requirements that prohibit farmer from purchasing input in open market and deliver agreed quantity through logistic arrangement by firms(such as?). Also, this will examine motivations of smallholders to engage in informal contract farming in comparison to formal contract farming to illustrate advantages and challenges farmers faced through expected outcomes in relation to existing evidence. Since, most of the studies have not distinguished features of contracts between unwritten contract (informal) and written contract (informal contract) in relations to benefit and disadvantages. Although, the two different forms of contract

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farming create different impacts on smallholders, formal contract farming concentrated on high value added production with close monitoring on quality standards by firms, they also gain access to input provisions provided by firms along with welfare including legal intervention from government agencies (Setboonsarg, 2006). On a contrary, informal farming required middleman participation as credit providers and technical assistant to bridge the gap between firms and farmers without legal protection serve both parties to comply with terms and conditions that lead to exploitation of smallholders and abuse of contract (Siamwalla, 1992) (what are the differences between informal and formal contracts? Since firms are major instrument in opening market for smallholders in most of the studies (Simmons,2002;9), thedisseration will address preferences of firms to trade with large scale farmers to display capacities required for farmers to engage with firms and exploitation by firms (unclear) as stated by Sigh the contract were biased and enforced strictly, firms provided poor extension service, over-priced their services, passed on the risk to the producers, offered low prices of produce, favoured larger farmers, delayed payment, did not provide compensation for natural calamity loss and did explain the pricing method (Sigh, 2005;2). The roles of middlemen will be demonstrated as credit providers in forms of input provisions(of what?) for small producers due to their significant influence over enterprises and government in informal contract farming (Siamwalla, 1992; 108). Apart from that, the support given by the government will be looking at in order to see their contributions to farmer participation in contract farming along with reducing exploitation of farmers with limitation in applying risk management programme (unclear) in applying such protection on informal contract farmers (DSilva, 2005).

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I) Nature of contract farming (to see how suitable each model is to attract smallholders to participate in contract farming) Contract farming has been defined based on three main elements, which are market specification, management providing contract and resource providing contract. The density of contractual management have been defined according through complexity of relationships between smallholders and firms in terms of quality standards, delivery channel, logistic arrangement, and restriction on the use of input provision.(what do these three things mean?). Terms and conditions indicated in informal and formal contracts are varied in terms of credit and input provision, actors and information. Most of the studies characterised contract farming into two main types as follows; informal (unwritten form) and formal contracts(unwritten contract)) (is that not the other way around?) as stated by Sriboonchitta the informal model, which is not as complex, may involve just a few market agents without a written contract (Sriboonchitta;2008;4). Although, they have been broken down into sub- categories (such as?)containing different features of farmer scales and types of production in each category to determine requirements in order to meet standards through participation of firms and farmers such as pre-agreed price, quality, quantity, and time. Thus, it is vital to define types of contract farming to examine welfare (2meaning?) along with terms of conditions attached in the agreement to see how each model restricts or encourages smallholders to participate in contract farming. Generally, there are types of contracts, as presented by FAO, which are centralized model, nucleus estate model, multipartite model, informal model, and intermediary model. Thus, the study will emphasis on two main models that smallholders engage in, which are informal model and intermediary model.

Welfare; medication, logistic arrangement, services provided

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Why talk about all the models above, if your focus is on informal contracts with smallholders?Informal model has been widely adopted by farmers cultivating seasonal vegetable and fruits that require less advanced technology without technical input. However, the model include developers represent firm through restricted input provision and information including services (who are they?), they play important roles asproviders for farmers in terms which the study conduted by FAO(what study?) revealed developers abandoning farmers in vegetable plantation (FAO, 2001;53). Mostly, the smallholders participate in this model through intermediaries, they deduct their interest from payment particularly in livestock business as stated by Glover (1984) that similar to input provision credit in the area study of cage tilapia in Thailand that dealers perform as credit providers for informal contract farmers relevance?. The two categories of contract farming operate through third party or middlemen to provide input provision, welfare, information and other services. Thus, there is no legal obligation regulate smallholders and middlemen in informal contract to comply with terms and conditions. Mainly, there are major two models that have been widely practiced in Thailand, which are the informal and intermediary models that required research conducted by government officials to bridge the gaps between firms and farmers and legal protection on informal smallholders along with regulation on middlemen (why?) apart from that firms (who are they?) tend to loe their control over production and over prices paid to farmers by middlemen. As stated by DSilva in Thailand, large felid processing companies and fresh vegetable entrepreneurs purchase crops from individual collectors or from farmer committees, who have their own informal arrangements with farmers(DSilva, 2009;330). On the contrary, the informal model has been recognised by FAO, it is more common to be undertaken by individual

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entrepreneurs or small companies rather than large companies (FAO,2001). However, the different sizes of contractors have an impact on bargaining power between farmers and firms especially in terms of credit provision as mentioned by Simmons A large firm diversity may also have advantages over moneylenders in management of risk because of the size and diversity of its loan portfolio (Simmons,2009; 10). As a result, the imbalance of power and size of companies could lead to exploitation of farmers through credit lenders in informal contract provided by middlemen, since risk redistribution share between firms and middlemen result in lack of information and technical support among smallholders.(unclear) What is the relevance of the quotes? As a result, smallholders in Thailand adopt intermediaries and informal models rather than centralized and nucleus estate due to their capacity, which leaves them in vulnerable position. Since both of the models(what is the difference between them?) are highly associated with great risks in extra contractual marketing and sponsor loses control of production and quality including price paid to farmers (FAO;2001;43) (why/how?). Since, the complexity of relationships between firms and middlemen leads to the loss of control in quality of product , technical assistance and adequate information for smallholders without close monitoring by firms. In next section, the paper will explore motivations of smallholders engaging in informal contract farming in relations to risks and advantages that they often encounter. Farmers motivations Smallholders have been motivated by several benefits from financial stability and risk reduction from market uncertainty through access to market and welfare such as technology, logistic arrangement, information, risk sharing and input provision (Too abstract. Explain or give

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examples). Since most of the high value product require start up cost after new crops were introduced along with information to maintain amount of yield, while the companies could reduce transaction cost (how?) from trading with small growers (Simmons;2009;9). This has also been mentioned by Masakure (2005). He claims that the contributing factors consisted of efficacy of input and output market, related transaction costs, access to land and water supply including provision of agricultural services (unclear). For example, the Ministry of Agriculture of Thailand provides training for farmers and their local staff in terms of contract arrangement and concept(?) along with multiple market outlets (Wiboonpongse,2005;364). Since the informal contract farmers have been excluded from technical advice provided by firms (ibid,2005;367). With a support from government agency, small holders received an offer on credit provided by firms, since the government promotes smallholders to participate in contract farming by providing access to credit at concessional rates for companies through financial institutions. Although, the Bank of Agriculture and Agricultural Cooperatives (BAAC) offers credits with high interest rates for groups of farmers that meet its basic technical standards that results in slow progress due to various factors taken by the agency such as experience of farmers, land title and repayment capacity (such as?). As a result, some of applicants failed to meet their standards. As mentioned by Sigh the BAAC takes many factors into consideration when reviewing loan applications, and some farmers who have wanted to join the project have failed to pass the banks scrutiny (Singh,2005;4). Besides, logistic support(such as?)provided by firms in forms of collecting and delivering services attract producers to enter contract farming, which is limited by spotmarkets due to high competition and failure to meet quota system. This includes distance between spot market and fields, since smallholders in rural area lack of means to transport product to market as well as

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maintaining quality of product that degradable over time (Setboonsarg, 2008) .(unclear). Significantly, most of the studies address transportation as one of contributing factors that attract farmers to participate in contract farming, since the distance between farm and market creates difficulty for them to deliver the production as stated by Masakure (2005). Farmers face high risk from cultivating non-traditional crops, since they are prone to perishable and highly uncertain amount of yield harvested (Bijman,2008). Disadvantages and Advantages in entering contract farming Numerous studies have mentioned about the practice of contract farming adopted to reduce market uncertainty that leads to risk sharing and access to technology and other inputs including services at lower cost (Masakure;2005;1723). The outcome of successful practice does not only reveal through distribution of benefit, but it also leads to risk distribution between firms and growers that allows income redistribution from firms to farmers as well as expand economic scale from long run profits of firms (Glover;1987;446). Since, contract farming require certain period of time to sustain practice and result in win-win situation between firms and farmers. At the beginning, farmers have to invest in infrastructure and fixed cost to gain credit, while repayment rate will later make up to expense, however they also have to encounter natural risks and external risks (Nondh, 2008). On the other hand, firms have to bear economic risks in terms of market prices and failure in supplying agreed amount of product to meet demands due to seasonal factor and poor management (Setboonsarng, 2008). Although, technical support and welfare provide by firms can create reliability between both parties along with skill improvement of smallholders that result in loss prevention in the long run. Unclear. How/why? Nonetheless, the failures of contract farming practice revealed from the studies often caused by manipulation of quality standard and coordination placed by firms as a part of close monitoring to assure

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quality of contract goods (Glover;1987) Unclear. Meanwhile, the evaluation of contract farming has been measured through sustaining contract based on viability and distributional effects of the contract mainly based on income stability and extension of contract terms (Simmons; 2009;12). How are those measured? Most of common challenges emerged during the delivery process such as rejection of delivery production, delaying payment beyond agreed period along with discounting of payment, returning of goods by raising standards, and reduction of agreed prices (Singh,2005;6). The problems are caused by several factors such as lack of technology and information, weak regulations and enforcement, bargaining power (Sriboonchitta;2008). Since, smallholders have not been equipped with adequate information and technology along with welfare to assure quality of contract products under informal contract farming. Also, legal gaps allowed firms to adjust conditions and terms after agreement being made verbally, while smallholders could not bargain with firms due to the fear of losing their asset to financial institutions and contract extension (Sumeth, 2007). How/why? In Thailand, most of the farmers experience failure from unable to sustain that required high technology application (meaning what?) contract farming practice particularly in forestry, cashew nuts and oil palm business that caused by unfavorable market conditions such as market price and high input provision prices including less alternative of companies (meaning?) without support in creating competitive environments as stated by Sriboonchitta (2008). Alike, the study carried out by Singh regarding unsustainable income generated by contract farmers, he claims that there are significant numbers of contract farmers who have been indebted and suffer from burden after adopted such practice (Singh, 2005). Causes of indebted farmers have been referred to disagreement among government agenciesat the policy making level and implementations

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carry out for smallholders including commitment of agribusiness companies in terms of legal enforcement due to recognition of informal contract farmers (Nondh, 2008) (unclear) On the contrary, Baumann states in his work that the failure of contract farming model in Thailand caused by high competitive market. According to his work on outgrower schemes under contract farming system, he points out the problem on grower and firms engage with multiple business partners and products and non-agricultural income sources (unclear). With a combination of two factors, high competition has resulted in high transaction cost, while misuse of input provision on non-contract items have been found as the most common constraint among smallholders due to high cost of feeds in comparison to market price. Despite quasi-monopsony3 condition determine restriction on input provisions, this works against the nature of contract farming to provide farmers with inputs for contract crops along with specification of asset, but the case study displays misused of contract input on non-contract crops instead (Baumann,2000;40). This reflects the research conducted by Gaewkamsern on contract farming market system 2005on the success of contract farming in Mahasarakham Province focused on fishery sector, which presents high level of satisfaction of farmers who earn extra sources of income apart from contracts. Although, the study need to examine the use of contract input that indirectly contribute to non-contract production in order to testify the above mentioned argument. Apart from that, the lack of quasi-monopsonistic conditions has been mentioned in most of the studies, since farmers are able to obtain inputs, credit, and buyers in open market rather than utilize contracted inputs. Thus, the disadvantage has claimed to derive from distrust between firms, while some argue that this caused by unfavorable conditions of market in given area with limited alternatives for farmers with higher contract input provision

Quasi Monosopony conditions; dominant power of certain firms in market offer less alternative for smallholder

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price than open marketThe roles of middlemen have been presented differently, since they play a major role in informal contract farming model in Thailand as input providers for farmers such as credit, fertilizer, technology, and food provision (Siamwalla, 1992). According to the analysis of Sriboonchitta on the subject, the numbers of successful cases of contract farming involved participation of middlemen particularly in high value added items that required technical assistance and close monitoring services to meet agreed standards in the following items(?); sugar cane, baby corn, asparagus, broiler, and hogs. However, this has not included contract between middlemen and firms, middlemen provide farmers with seeds, loans, and tractor services (Sriboonchitta, 2008;368). Likewise, the view of Baumann on quotaman(?) , they represents firm conditions and terms offer to smallholders to supply certain amount of contract product under timeframe, which was marked as the most effective approach linking between contractors and growers in response to fast market. In Thailand, quotaman has been implied to dealers who also own contract assets supplying firms with their own production as well as collecting contract products from informal farmers to meet agreed amount and distribute the rest to spot markets (Gaewkhamsern, 2005). This stressed the form of informal contract farming with access provided throughdirect contacts without formality by middlemen as well as sharing risks apart from firms and farmers as mentions by Baumann companies can diversify their sources of supply and rely on several quotamen to spread their risks. Quotamen are also able to judge a grower creditworthiness and their margins are not cut by tax(Baumann,2000;40). On the other hand, the concern over the roles of middlemen has been raised by Siamwalla on smallholder dependent on middlemen and high expense on marketing costs, she states that a more efficient system could be theoretically achieved by eliminating some middlemen, allowing the others to expand their optimal sizes and thus cutting down marketing cost (Siamwalla, 1992). This has

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been addressed through their roles as credit providers, which has been adopted after they became input providers. The writer believes that they exploit farmers through high rate interests deducting from payment of services including dominant role in providing access to machinery due to high profit gained. This results in poor technical advice provided by middlemen along with inadequate information and technology acquired to improve necessary skills of farmers that requires risk assessment to provide access for farmersAs states in the study on contract farming and governance structure by Mr. Nondh, he expresses that dealers roles in terms of dedicated assets and preference of government agencies to promote contract farming through middlemen at the primary stage of contract farming practice required skills and background of local dealers to provide assets for smallholders in order to attract them such as cage construction, loans and feeds (Nondh, 2008).Why?Even though, they tend to be the only link between firms and farmers and take up provider roles in informal contract farming formula. You need tio explain this quotaman system more clearly and how it is different from other informal contract arrangements. Compensation Domestically, regulations of contract farming imposed between farmers and companies are similar to universal practices, although the compensations have been clarified in specific responses to force majeure referred to natural calamity, crop failure, factory closure, labour strike including other unforeseen reasons on either side. The rights of both parties have been defined according to service and payment conditions that need to be served for smallholders to supply enterprises in a timely manner with the indicated amount of production. However, the exception has been made in cases of compensation that need to be provided for farmers related to defaults caused by firms. This excluded default caused by environment conditions as shown in the study on contract farming in the area of aquaculture sector presents by Sumeth, quality of water in Chi

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River basin has been polluted by external factors such as agricultural activities and household activities in the area, this led to the mortality of fish without compensation being paid by firms therefore farmers have to bear fixed cost without anything in return (Sumeth, 2005). Firms are entitled to penalize contractors due to failure caused by another party as addressed by Wangsuwattana in his study on legal protection for contract farmers, he indicates that ambiguous legal status of informal contract farmers has been recognized as employees instead of farmers, this required them to comply with agreed quality standards under informal contract described farmers as employees, they need to fulfill commitments given more power to firms to dictate specification of input and amount of payment according to levels of accomplishment, thus if employees fail to meet quality of standards then employers(firms) are entitled to end contract or deprive compensation (Wangsuwattana, 2007, pg.13). . Meanwhile, the farmers are allowed to ask for compensation from the firms when they fully comply with conditions indicated in the agreements, but the companies fail to buy the agreed quantity. The farmers will be compensated at the specific rate only, they will not gain full recovery paid by firms as presented by Department of Internal Trade if buyer does not buy agreed quantity fully, the buyer to compensate seller at the specific rate.(Singh, 2005; 7). However, the Internal Trade Department was assigned to be responsible to formal contract farmers only through negotiating roles to enforce regulations on firms that exclude informal contract farmers to receive compensation (DIT, 2008). The writer Singh also claims that unfair regulations caused by close link between firms and government at policy making level (Singh, 2005). Consequently, the loophole of legal protection still remain in conditions indicated in contracts that should forbid unfair treatments such as the absence in timeframe enforce on compensation caused by nature calamity, rejection of contracted goods, raising standards of production, and delay of payment. Likewise, the study

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conducted by Delforge regarding absence in legal enforcement on compensation over the loss of contract production caused by external factors during the bird flu crisis in Thailand in 2004, some farmers under contract with CP did not receive any chicks for more than 6 months, without receiving any compensation or even any explanation for this long delay(Delforge, 2007, pg. 6)Since, most of the conditions have given more power to companies rather than to farmers that placed them in vulnerable conditions from being exploited. This whole section is unclear as well. Company preferences
Selection of contract farming partners undertake by firms and farmers, which depends on sizes and incentives of both actors, which firms take several factors into account such as previous farming experience of smallholders, farm size, fertility of farms and community considerations

(Simmons,2009;15). Preferably, the selected partners have common characters such as operating with lower unit costs and less risk exposure to reduce transaction cost and easy maintenance of product. However, this has been criticised by Singh regarding bias of companies towards smallholders due to the lack of capacity and credit availability particularly foreign companies as states by Singh Another concern is that because companies tend to prefer to work with medium and large- scale growers, smallholders will be marginalized, exacerbating rural inequality (Singh, 2002,6). Although, there is a study conducted on firm preferences to deal with small growers in given areas where limited number of resources provided firms with less alternatives and local authority promotion to trade with smallholders. This depends on advantage features of small farmers such as predominance number of farmers in the area and availability of supplies and lower cost of production (Glover ,1984;1147). Preference of firms over larger scale farmers has been addressed by Segura related to transaction costs instead of production cost, which defined as the cost of using market and administrative costs that related to the exchange of goods and services such as information cost and negotiation costs. He states

26 that It is also argued that firms tend to contract larger farmers or can be tempted to offer different types of contracts to different types of farmers (Segura,2005;. In fact, there are existed evidences shown in the study o contract farming and global cooperation presents that companies tend to trade with smallholders, however the poorest are often excluded from partnership with firms due to non access to land or small plot of land ownership( Setboonsarg, 2008). From a different perspective, large

agribusinesses face similar challenges from being contractors agribusiness have also reportedly encountered some contractual problems with dealing with some smallholders farmers that could led to the exclusion of the latter from contract farming (Elepu, 2006;4). However, there are 3 contractual forms that farmers engaged in with different scale of farmers, which are written contracts, verbal contracts and independent (Segura, 2006) therefore contractual problems found in contractual enforcement laws that aligned in verbal contracts due to absence in legal consequences. As a result, the preference of large firms has been reflected by the nature market-particularly spot

market that allow them to trade with large call farmers through formal contract that allowed them to seek
for opportunities to expand their activities in high value food (Setboonsarg, 2008). This often required less transaction costs to meet criteria due to better capacity in producing large volume, since the firms have to face uncertainty of quantity and price such as finding market and costumers, negotiating, singing a contract, controlling contact compliance, switching cost from termination of contract, and any forms of opportunities losses (DSilva, 2005). At this point, companies tend to trade off with large scale farmers due to less transaction cost, better capacity of large scale farmers as well as farming background, which discourage farmers from entering contract farming. It seems to me that all you are saying here is that there is a bias in favor of larger farmers, for a number of reasons. This section also needs to be presented more simply and clearly. Government interventions

27 Thai Government interventions become a main focus of the studies on regulating prices, issues quotas and monitor the operations of the operations of companies, which they have been criticised over the roles in increasing bargaining power for farmers to equip them with welfare and skills (FAO, 2000). With the establishment of the amendment of National Development Plan, this has addressed flexibility of agreement to adjust the terms and conditions as necessary, which still result in fixed terms and conditions indicated by companies as mentions by Wiboonpoongse (2005). Since, the contract farming should work in favour of both parties equally in terms of sharing risk, while the farmers should also benefit from guaranteed prices as well as prevailing prices in the market. Nevertheless, the responsible agency has regulated ineffective mechanism on companies as shown in the study on the role of the state that there is a slow progress on enforcing standard contract farming agreement for companies and farmers that have been applied on two companies only in 2002 (Singh, 2009). Thus, the issue of bargaining power has been addressed that correlated to alternatives for farmers to sign agreements with various number of firms existed in the areas where competition is high as presents by Glover the availability of alternatives is one of the most important preconditions for a contract farming situation that benefits small farmers (Glover,1987;446). Therefore, the government could intervene through assuring numbers of traders present in given area instead to increase bargaining power of farmers and pricing of production as states by Abbott (1982) .Particularly, the level of competition among firms have a great impact on income

rate among smallholders in some areas where monopoly trade dominates the market; the smallholders have less alternatives to trade with that leaving with no choice, but to accept offers being made by firms. Similarly, the case study in Thailand conducted by Singh displayed oversupply problem in San Sai District where new companies invested in the areas without support from the government as mentions by Singh the agricultural problem was defined as one of oversupply of some commodities and implicitly that were profitable opportunities in the other areas (Singh, 2009;8).Therefore, government agencies are responsible to regulate amount of supply produce by smallholders to prevent oversupply problems in certain area with price

28

insurance that could distribute oversupply products from rejection of contract goods in other area (DIT, 2009) Not clear what you are saying here.
The government officials have been criticised in inferring in reducing roles of middlemen as providers in contract farming with smallholders as stated by Siamwalla (1992).Since, the small holders tend to adopt the practice through middlemen instead of firms especially in the area study of quaculute sector, they provide input provision, welfare and services such as r feeds, fish juvenile, medication, logistic arrangement, and cease service (Gaewkhamsern, 2005). Meanwhile, farmers would not receive adequate technical advice and compensation from them therefore the government officials become important actor in assisting growers (Sumeth, 2010). Some authors have argued that government agencies in Thailand assist companies in terms of fund provider rather than attempt to strengthen farmer capacity, since they could make fair system for farmers through nature of contract and marketing or collective selling to companies (Singh,2009). On the other hand, the author of document published by the World Bank on climate change and risk management, he notes that government intervention could lead to less independency of financial institutions and taking roles of public relief sectors (Hess, 2001). As a result, government agency roles should be undergone in forms of mediator and technical assistance providers to create capacity of farmers as well as protecting the rights and fairness for both parties (Professor Jittaladdakorn, 2008).

Summary (contribution to research) There are a number of studies indicating favorable conditions that motivate farmers to enter contract farming due to welfare provided such as credit, seeds, fertilizer, transportation, technology, and technical advice. In addition, most of the authors define direct and indirect benefits that farmers gain from adopting informal contract farming as mentioned by Simmons on his overview of contract farming in developing countries such as access to technology, market, household labour, risk management, and skill improvement (Simmons, 2002). Although, the

29

studies in Thailand have not included woman empowerment from entering contract farming except the study done by Abbott (new reference?) on large number of women involved in dressing and packing plants in poultry business, this issue was raised by the other related studies conducted in other developing countries such as Zimbabwe, Kenya, Malaysia, Ghana, and Ivory Coast. Therefore, the research will examine existing welfare provided for farmers that contribute to farmer participation in informal contracts, since the role of providers involved numbers of actors such as firms, middlemen, and government. Particularly, a major role of middlemen that links between firms and smallholders in informal contract farming, they become credit and welfare providers as highlighted by Siamwalla in her work Farmers and Middlemen: Aspects of Agricultural Marketing in Thailand. Since, a majority of writers on related subject have not shared any critique view towards middlemen; they perceive middlemen as positive force in terms of providers. Thus, the evaluation will emphasize on satisfaction of smallholders gained from trading through middlemen in order to compare between expected benefits and existing evidence that attract farmers to engage in informal contract farming that will be compared with welfare provided by firms for formal contract farmers to see different degree of benefits acquired by informal contract farmers If this is going to be your focus, it should be stated in the introduction and you should then also restructure your literature review to reflect that. For example, you might have one part focusing on the benefits provided by formal contract (small?) farmers and another part focusing on the benefits provided by informal contract small farmers (by the way you have not defined what a small farmer is yet) . However, you would need to be clear about why you want to do that. In other words, how would that help to answer you key research question/s?.

30

Making fair system for smallholders has been addressed as a concern of most of the authors especially Singh, Baumann, Glover, and Siamwalla. Since, most of farmers have not been fully protected from exploitation from imbalance of bargaining power and contractual problems due to unfair regulations such as raising production standards by firms, compensation in natural calamity, and delay of payment. Since, there is no significant number of studies shown loopholes of regulations particularly legal status of farmers indicated in contractual arrangement adopted by informal contract farmers (Wangsuwattana, 2007) Apart from the study on the role of state by Singh that stresses the urge to modify contract farming regulation if contract farming is nothing but a flexible production system prevalent in industry applied to farm production, then it is only logical to extend such legal provisions, with necessary modifications to farming contracts (Singh, 2005;13). His study has helped to understand the importance of regulations to promote smallholders participating in the practice through comparison studies in Japan and Uganda, which referred to better protections enforced on large parent firms on forbidden acts such as refusal of production, delay of payment, discounting of payment, returning of contract items, advance purchase by subcontractor forced by firms (Singh, 2005). Especially, the country often faces yearly natural calamity that caused the loss of farmers income as mentions by Sriboonchitta, the study would be looking at gaps indicated in contract farming regulation such as no specific timeframe to compensate smallholders and rejection of entire amount of production due to failure to meet quality and quantity standards. Similarly, the study conducted by Nondh on hybrid governance of food supply chain in the high-risk environment, he presents external risks face by smallholders in aquaculture from poor quality of water and lack of government collaboration. Thus, the further information will be examined motivations or favorable conditions of contract farming and disadvantages of practices that

31

reflect expected outcomes based on informal contract farmers perceptions. In accordance with relevant points addressed in this chapter, contract farming actors play important roles in motivating farmers namely firms, middlemen and firms. They have been displayed in most of the studies as welfare providers, provision providers, legal assistance providers and technical assistance providers. Existed evidence presented in this section will contribute to evaluation of roles and responsibility of contract farming actors in response to adequate knowledge and information receive by smallholders that result in success and failure in adopting contract farming practices.
Theoretical Framework Contract farming has been emerged in response to three main economic principles related to the change in the nature of market and demands at the global market that leads to reduction of transaction cost and improvement of chain supply including application of risk management. They are highly involved with marketing relationships as mentions by Webster regarding hybrid organization that created a structure to channel goods through marketing arrangements based on reduction of transaction cost, distribution of information along the loop (Cadilhon, 2006). Websters range of marketing relationships (1992)

Indepedent Transactions

Repeated Tansactions

long-term Relationships

Buyer-sellter Partnerships

Strategic Alliances

Network Organisations

Vertical Integration

Spot Market I)Transaction Cost;

Hybrid forms

Hierarchy

32 This has been highly involved with internal structure of large firms that associated with several factors such as institutional environment and governance arrangement within the organization. Mainly, this has been explained through diversity contractual arrangement to trade off that taking the form of hybrid orgranisation. Contract farming was emerged as a response to reduce transaction cost particularly in the con text of contractual relationships. In response to failure of market, most of the authors refer to institutions that govern human interaction in relation to economic operation, which leads to the establishment of new institutions to reduce cost of resource allocation. As a consequence, contract farming becomes a major element in minimizing any cost that incur from transaction process through different forms of governance structure. Comprised with three contributing factors as states by Simmon (2002), transaction cost operates from bounded rationality with different degree of information between contracting actors. The next one is opportunism featured in one or another party taking advantage from imbalance bargaining power. Lastly, asset specificity created risk on smallholders in investing in provision and machinery including knowledge to produce contract goods (Catelo, 2005). Thus, contract farming could introduce vertical integration by applying restricted quality standard of input provision that reduce measuring cost and supervision cost in grading products. As a result, transaction cost reduction in spot market has been implemented through contract farming as states by Macdonald parties will rely on contracts when the transactions costs of using contracts fall below the costs using spot market (Macdonald, 2004, pg. 33). This implied to perfect competitive situation where lowest production combined with transaction cost allowed institution to grow that influence by four different factors; types of institutions, asset specificity, uncertainty and externality. Since, uncertainty and asset specification lead to high transaction cost, which cover administrative and supervising cost incur during the process. Thus, firms prefer to operate on externality principle to adopt vertical coordination in order to avoid negative externalities imposed by other market actors (Birthal, 2005). Within spot markets, the practice need to be developed to bridge the gaps of market failure and absent information to serve demands of consumers combining with vertical integration, the practice has been adopted by government agencies as a supply chain strategy (Swinen, 2009).

33 I) Supply chain

The theory refers to integration of logistic management to assure the supply will be delivered to customers that involved loop flow of materials including finished goods and transaction (Gattona,1960). Also, the information have to be taken into account as well, which the author also addresses that the cost of making information available within supply chain has been decreased, while the business cost has been increased consistently such as facilities and inventory. By providing information, facilities enabled logistic activity to operate that highlighted the importance of technology development that could imply to contract farming management. Since, the quality standards of contract farming have been dictated by firms to assure that technology will allow farmers to produce contract goods according to their standards. This has introduced high value added items that required higher quality requirements by offering smallholders with skill improvement through technology transfer (Swinen, 2009). According to the study on small holder dairy product in India, the author Mr.Birthal emphasizes the importance of vertical coordination of food supply chain that contributes to diversification. Since, smallholders benefit from reduction of price risk with access to markets along with reduction of transaction cost. Production efficiency derive from input provision provided in forms of credit that covered information, and extension services. However, he states that informal arrangement in contract farming among smallholders who could not afford technology through contractors to collect products on commission basis, they are able to provide credits only that exclude smallholders from obtaining input and services including information as claims by Birthal In the absence of competition, credit-linked supply chains are often exploitative of the producers.(Birthal, 2009, pg. 9). Alike, the local study on smallholders in Thailand regarding roles of middlemen as credit providers and collector, they tend to lower the price than prevailing market price (Gaewkhamsen, 2005). Nonetheless, the study conducted by Cadilton, he highlights the commitment of parties involved in supply chain between buyers and sellers along with partnership particularly firms willingness to maintain relationship that could imply to partnership in contract farming between firms and farmers to comply with conditions and terms agreed in contracts. The success of the application result in

34 satisfaction in the need of consumers that required joint planning based on adequate information and trust that contribute to mutual benefits served common goals of both parties. Since, farmer participation has been addressed in most of the studies that could be taken into account in joint planning, however there is a boundary due to imbalance of bargaining power and legal status that subjected them to perform as partner of stakeholders (Sriboonchitta, 2008). Innovation emerged as a key to success of supply chain, since it create value of products that serve the needs of consumers as states by Cadillhon (2006). Nevertheless, DSilva expresses concern over imbalance power within supply chain where smallholders are placed in vulnerable situation, since firms take up coordination role dictate terms and conditions in the transaction process (DSilva, 2005). The information made available at spot market allowed supply chain to coordinate that lead to market price stability. Thus, buyers and sellers could agree to purchase product at reliable rate based on accurate information such as cost and value, quantity, and regional price differences including market price. Although, spot market tend to fail without accurate market price due to the change in demand of consumer particularly price and attributes of products do no coincide therefore contracting and vertical integration becomes an alternative in response to the failure. One feature that drive spot market and contracting system is market competition that limited number of competitors could lead to monopsonic trade between number of farmers and single buyers, however by introducing risk sharing approach as a part of contract farming practice mainly to prevent farmers from price fluctuation and unqualified production (Macdonald, 2004). Risk Management Risks in agricultural field have been defined by Fleisher (1990) through societal concern that caused by effects and costs of risks and its management along with agricultural producer concern over viability. He also highlights the vital role of governance in response to the change occur within the sector that contribute to success in meeting their objectives. Mainly, risk caused by uncertainty of market combined with lack of information perceive by individual investors, which highly associate with risk in investing their saving. Therefore, risk operate based on loss and gain principle, which interpret by

35 different actors as downside risk that present negative impact when actor lose benefit from risk, while the opposite party gain from the same risk occur in the market. As a consequence, policy makers have to design an implementation based on effect of risk that create burden, which has been referred by Mr. Nondh regarding environmental risk that should be taken into account by local authorities as well as economic risks. Initially, risk sharing mechanism is one the main instrument that drive contract farming process between firms and producers particularly in high price volatility, since contract farming could shift risk from smallholders to processor. Birthal mentions in his study in broiler industry about the change in temperature that cause high mortality rate, which smallholders reduce risk by 88 % from participating in contract farming (Birthal, 2005, pg. 32). Meanwhile, this affect fish in cage tilapia differently, since environmental impact have not been included in risk management particularly smallholder have to bear the damage cost from poor quality of water, climate change, contamination of toxic substance, natural calamity, and disease as shown below. Environmental risks

36 (Nondh, 2008, pg. 85) According to Mister Nohdh, he conducted the study of cage tilapia culture contract farming, the type of risks have been classified risks into 2 main categories, which are natural risks and risks from industries. They create impact on number of fish and habitats differently during the peak of the hot season with less impact from industries, however he also addresses a contradiction of production cycle and suitable fish fry period. Since, smallholders have to comply with timeframe indicated by dealer to deliver fish stock despite poor conditions of water. Overall, environment risk has been marked as 11% loss to their total income, which smallholder face significant impact from the loss as stresses by Mr.Nodnh More than 95%of contract farmers stated that they always have to bear all the financial losses by themselves without any support or compensation from the other parties (Nondh, 2005, pg. 87). Therefore, application of risk management has been promoted in response to weather conditions by introducing traditional risk management that has been widely criticized over costly expense and ineffectiveness due to product price fall as supply outstrips demand during the peak of drought or flooding seasons. Since, natural calamities always affect farmers in the area equally or risk pool that regarded as joint affected. Similarly, smallholders practice fish production in cage tilapia experience the loss at large from raising fish in open environment. As a result, one of the author of weather risk management for agriculture in association with World Bank, Hess points out that asymmetric information perceive by insurance companies or credit institution assuming farmers have insight risk information and being unconsidered on reducing risks. He urges that insurance coverage should be applied to reduce risks, although credit institutions should raise rate, invest in monitoring mechanisms, enforcing collateral as precondition in exchange of loan (Hess, 2001). Besides, he emphasizes on difficulties of local insurers to standardize their coverage that limited by regional diversification. Currently, the Thai government encourages credit institutions to provide loan for contract farmers with collateral implication through Bank of Agriculture and Agriculture Cooperative (BAAC) that aligned with firm (Sriboonchitta, 2008). As a consequence, risk management strategy become one of the main motivations that attract farmers to

37 participate in contract farming in terms of financial risk reduction as states by Macdonald on contract farmers survey each group rated reduced price risk as an important contract motivation for producers. (Macdonald, 2004,). Although, there is still little evidence contribute to aquaculture, most of the studies conducted on livestock poultry and hog production that adopt marketing pools among groups of

smallholders through intermediary contractors trade off on agreed price and quantity. However, there are gaps remain in this application due to yield risk and oversupply that lead to failure to market all production and unmet pool commitment. Apart from that aquaculture also associated with high input price risk, since the amount of expense on input provision incur in feed costs, even though the writer claims that farmers could apply risk management through revenue insurance, using commodity futures markets, accumulating and depleting liquid assets and borrowing (Macdonald, 2005). Also, diversification of products has been brought up as a part of income risk reduction by redistributing variation of commodities or income sources. Alike, most of target group that will be examined in further studies, they engage in other agricultural fields as well as contract farming. In addition, government intervention has been presented as an important actor by mitigating risk through price stabilization, subsidized fish price insurance, and drought relief (Hess, 2001). In spite of government intervention, Hess expresses his concern over excessive risk that deprive dependency from public disaster relief (Hess, 2001). The World Bank promotes weather risk transfer into international market through the form of insurance contract that underlined credit risk and well-documented data of weather through financial intermediaries retail risk protection. By linking to credit and regulatory risk, the role of state bank has became credit lender, while credit risk applied to risk mitigation stated that both parties are committed to pay as weather risk providers whether default caused by macro problem or counterparty. Nevertheless, the context of new weather risk management compounded with high economic structure based on solid evidence on country background, which serve large international organizations and companies rather than local scale application.

38 Combining 3 economic principles and main actors

Contract farming in aquaculture

Supply chain

Risk management -Government; intervention, technical assistance, legal protection, price insurance

Transaction cost
-Firms; input provisions as quality control

-Middlemen; logistic arrangement, cease process, input provision provider

Motivation assessment approach The approach required information on contributing factors that provide incentive for farmers to make a decision in participating in contract. Motivation assessment is useful in measuring motivations of farmers and change in performance or behaviors. This has been commonly applied in related studies in agricultural fields after new practices have been introduced, some authors has applied this application to measure outcome of practices such as Analysis of Factors Influencing Motivation of Villagers'

Participation in Activities of Social Forestry, Motivations for organic farming among farmers from Malopolska Province, Poland. By providing favourable conditions, farmers could rank from 0-5 points to express from undesirable conditions to most favourable conditions based on market certainty, risk sharing and access to provision including credit. Also, this assessment can illustrate disadvantages of informal contract farming in comparison to expected outcomes and identify further improvement in practice through technical assistance, and legal protection. By identifying actors in each choice of activity, this allowed sampling group to indicate responsible

39

parties to solutions and measurement their performance. As a result, farmers could respond to contributing factors and main drivers that attract them to adopt the practices in comparison to disadvantages of informal contract farming that different from expected outcome that reflect their motivations. Incentive of farmers

Risks

Benefits

Smallholders

40

Conceptual Background In Thailand, there are four sectors engaging in contract farming practices comprise with 80 enterprises including 10 trading unions and farmer unions. Furthermore, the government agencies carried out the implementation under formal contract farming to promote income stability among farmers. For instance, there are 80 companies run their business through contract farming such as Chaloen Polkphan, Batagro, Savev, Thaneeyama Siam and Bangkok Agricultural Industry Ltd. Most of the unions were formed by daily producers such as Chiang Mai daily product union, and Mahasarakam daily product union (Ministry of Commerce, 2010). At a smaller scale, the government agencies are supporting regional organization and product under their control such a centre of rice plantation, and tobacco office. Apart from this, there are independent agencies operated under this principle such as Mae La Noi Royal Project and Thailand Orchid Plantation (Setboonsarng, 2008). Mainly, the categories of contract farming products divided into three groups, which are weed productions, livestock, and seafood products. The first type is weed productions in total of 37 items as follows; jasmine rice, corn, livestock food supply, peanut, baby corn, sweet corn, string bean, paprika, cucumber, chilly, okra, cabbage, potato, passion fruit, tomato, eggplant, lettuce, pumpkin, melon, carrot, longan, mango, rose apple, orange, pomelo, tamarind, banana, and orchid. Secondly, the livestock productions consisted of 6 items, which as chicken, egg, pig, and cow. Lastly, the fishery business contained 7 kinds of products such as Oreochromis niloticus, Cichlidae, Cyprinidae, cat fish, Channidae, tiger
prawn, and shrimp. In total, the contract farming area covered approximately 500,000 square meters (Ministry of Agriculture, 2009). Basically, the contract has to certain principles that have been taken into account such as market conditions, forecast including social and physical milieu.

41 On the contrary, contract farming in aquaculture sector has been practiced recently in informal contract farming field particularly fish raising in cage culture that derived from Cambodia. Most of the sector located in Nakornsawarn Province due to high rate production and low maintenance with high return rate from raising freshwater fish. Cage culture has been widely adopted and construct under low capital cost in opened environment as mentioned in the following geographic features; lakes, large reservoirs, farm ponds, river, cooling water, discharge canals, estuaries and coastal embayment (Nondh, 2008). In Mahasarakham Province, the most common fish have been commoditized in this sector is Tilapia originated from in Cichidae family raising by 308 households approximately 4,111 cages, since they inherent feature that adapt to tough environment condition (Ministry of Agriculture, 2009). This has been located in Chi River Basin that runs through 3 main provinces in Northeastern Region of Thailand cover 49,477 km2. where local population generate their income through small scale rice farming along with raising cattle (Nondh, 2008). With high technology application in rice production, farmers suffer from high debt on land tenant and unaffordable technology to produce rice therefore contract farming was emerged to ease their burden as extra income generation. However, Tilapia are prone to parasite and other diseases that cause by poor quality of water due to high density beyond capacity of cages, producers have to take several factors into account to prevent the loss such as flow of river, fish fry period, quality of input provision, and releasing period of juvenile fish (Geawkhamsean, 2005). Releasing Formula (fish/square metre) = expected amount (kg./one square meter) Size of fish (determine by market ) Assumption made without mortality rate (Geawkhamsean, 2005) Investment and return

42 Approximately, total cost of tilapia cage culture has been calculated among smallholders in contract farming per cage/stock rated at 331,504.22 Baht comprised with variable cost 327,440.66 Baht or 98.77% of total cost, meanwhile fixed cost summed up to 4,063.56 Baht or 1.23% of total cost (Ministry of Agriculture). As a result, the study conducted by the Ministry of Agriculture has shown that variable costs are higher than fixed cost due to high food provision cost that weighted 77%, while juvenile fish cost 10% along with labour force 5 %. Therefore, the total cost in raising fish stock is up to 331,504.22 Baht and smallholders gain 368,166.20 Baht in return or 36,661.98 Baht. (Please see table 4 in appendix). Marketing and form of contract Logistic arrangement of Tilapia production has been organized by middlemen in the area in different volumes, which small scale dealers concentrate on other business as well as delivering fish stock, while middlemen supplying large volume of tilapia own large cage tilapia business themselves that able to supply other dealers as well as selling them at the markets (Nondh, 2008). Smallholders will received collecting services from middlemen or contractors that later redistribute to retailer shops selling directly to consumers at the markets, some of smallholders also deliver them to retailer shops themselves and the rest of products deliver to retailers in further distance mainly in the south of Mahasarakham to supply restaurants (Gaewkhamsen, 2005). Supply chain

43

Producers 100% Consumers 25% Dealers 21% Retailers 21% Retailers Dealers 9% Dealers 9% Restaurants Retailers 45% Consumers 45%

21%
Consumers 21%

9%
Consumers 9%

(Source; Gaewkhamsern, 2005, pg.31) Form of relationship between input providers and producers Smallholders and dealers have to fulfill their commitments through the form of credit input provision, while engaging in cage tilapia aquaculture. In the study area, most of smallholders receive input provision through local store, they invest their own capital to raise fish stock initially in order to gain credit provision from local store (Sumeth, 2007). Thus, they obtain credit from informal credit institutions, while trading with firms that provide credit in form of capital only prohibit smallholders to use money for input provision along with restriction on raising fish juvenile received from firms in order to obtain credits (Wangsuwattana, 2007). As a

44

consequence, the aim of contract farming in form of credit provision is applied to transfer ownership of product through restricted input provision rather than meeting standard of fish size (7 kg./ 1 fish). Since, smallholders are not bounded to sell fish stock to firms, although smallholders who subjected to loan payment to supply agreed size of fish stock to local stores, they are obligated to sell their products to dealers. At this stage, they classed as producers to fulfill commitment with firms through restrict input provision along with agreed quality and quantity of products that differs from trading contract. Governance mechanism (McDonald, 2006) Forms of contract practices and types of commodities are correlated to each other that require coordination along vertical supply chain. This has been found in most of contract farming forms in United States and Europe that has been adopted in Thailand. The last one in the bottom vertical integration has been developed in aquaculture that created impact on legal status of farmers recognized as employees with dominant power of firms in determining input provision price and timely manner to complete fish rising cycle. Form of governance Brief description Control of production Spot markets Commodities are sold for cash and delivered immediately. Price is the primary determinant of the transaction. Refer to sales conditions. Contain estimates of the production under Farm operator controls assets and production decisions in agricultural enterprise. Farm operator receives price for farm output, negotiated at time of sale just prior to delivery. Farm operator receives a price for farm output, Payments to farmer

Marketing contracts

Farm operator controls assets and production decisions in

45

the contract and of delivery times and quantities.

agricultural enterprise. negotiated before or during production of agricultural commodity.

Production Contracts

Refer to sales and production specifications. Producer agrees to deliver a product produced in a manner set forth in the agreement. Refers to the production control. Price as a determinant is replaced by internal decisions.

Contractor exercises control over some production decisions or farm enterprise assets.

Farm operator is paid a fee for farming services rendered in the production of the commodity.

Vertical integration

Single firm controls assets and production decisions in adjacent farming and processing stages.

Farm operatormanager is compensated for skills and time like other employees.

(Vavra, 2009, pg.6)

46 Result and analysis Capital cost as the invisible trap that distort extra income (access to income generation) Under contract farming, the capital cost to build infrastructure has been addressed, since smallholders enter contract by using their own asset to ensure credit from the bank to invest in shelters and equipment. Importantly, it could be said that farmers enter contract farming to gain access to credit from banks, since contract farming has been promoted by government through encouraging banks to grant loan for smallholders under contract farming. Without a support from firm, they have been motivated by opportunities to earn extra income apart from existed plantation. Therefore, they take a risk in getting loan from banks that result in high return at the first stock as well as high interest rate that they also have to pay off. Particularly, the legal status of smallholders restricted them to be a producer instead of farmer that leads to high taxation required. The amount of income and taxation have been discussed in this matter, which result in unfair system due to inadequate information on legal status binding smallholders to pay tax at the rate that impede with high income. This requires long period of time to generate income to pay off capital cost let alone gaining profit from contract farming. This matched most of the studies claim that the success of contract farming could not be measured in short term, since the practice needs to be adopted in the long run in order to reveal skill improvement of smallholders and benefit related parties. Approximately, the average level of income earning from stock takes 10 years to pay off capital cost, which smallholders have to redistribute their expense from other sources of non contract products as states by Mr. Vorapol who is a chairman of Pig Breeding Industry in the North East of Thailand Most of small holders are not aware of capital cost and maintenance cost when signing contract with firm that they could not earn enough to pay off their debt to the bank, once the loss caused by outbreak of disease and natural calamity despite extra income earn that motivated them to engage in contract farming in the first place(appendix). Trust based system of contract farming (access to market)

47 During the contract procedure, terms and conditions indicated in contracts have been dictated by firms, the operation runs on trust base that leads to negligence in details. As stated by the chairman of Pig Breeding Industry Most of smallholders tend to sign contracts without going through every detail, since the brokers are their neighbor or friends therefore they are not aware of their legal status and conditions of contract. At this point, informal contract farming operates based on trust system that motivates smallholders to participate in the practices. However, the decision being made without adequate information could be counted as illegitimate; thus this requires government intervention becomes another important element as negotiator to assure fair terms and conditions have been adopted by smallholders. On the other hand, the government agencies argue that they can provide technical assistance and information along with legal protection for formal contract farmers as long as they produce goods according to criteria and being documented by the Ministry of Commerce. This includes negotiating roles that the staff of Ministry of Commerce play a part as a witness indicated in contracts. Shortcut to firm preference and logistic arrangement (access to transportation) Roles of middlemen have been addressed as a filter and risk redistribution of firms, since they are able to select smallholders who have potential to participate in contract farming. Specifically, the explanation to risk redistribution has been focused on combination of trust based system that brokers are familiar with farmers therefore firms reduce risks in trading off with incompetent smallholders through their experiences as filter. Thus, the critique of firm preference to partner with large scale farmers could be referred to other kinds of contract goods through direct relationship established between firms and farmers without middlemen. However, middlemen create their own standards in the amount of supply despite the criteria of firms, they are more flexible in choosing farmers as states by one of respondent Ms.Noi I was lucky to find a middleman who is willing to trade with me, since I tried to sell fish stock to other middlemen in the market, but they hardly take anything less than 200 fish per stock. Although, this could create a problem among new informal contract farmers who just start adopting the practices, they might not have capacity to produce agreed amount set up by firms. Particularly, the most important

48 process required assistance from firms to cease fish stock as indicated in contract. Since, the small holders are not allowed to cease fish stock by themselves; the process has to be carried out by brokers and firms to avoid any damage during the process as a part of logistic arrangement. At this point, small holders regarded logistic arrangement as obligation dictated by firms rather than welfare that they motivated them to enter contract farming. The respondent stresses that she is not concerned with logistic arrangement I acknowledged that my neighbors who received welfare in logistic arrangement, but I am more concerned with no access to market, since I still have to drive to town to sell my fish stock . Thus, the result has revealed that farmers have not regarded logistic arrangement and transportation as the main element that drive them to adopt the practices. Also, the amounts of contract goods have been accumulated by middlemen to deliver certain quantity restricted by firms. Collateral deal for capital cost (access to credit) A majority of respondents have claimed that there are several factors that counted as motivations particularly access to market and credit. Since, most of financial institutions provide credit for smallholders who ask for credits to invest in contract farming such as Bank of Agriculture and Agricultural Cooperatives as a part of government promotion. Under this circumstance, informal contract farming adopted among farmers in aquaculture sector has been encouraged through input provision credits that deduct from total income rather than in forms of capital. However, the capital cost to build cage tilapia required budget from the banks alike the other kinds of contract farming therefore smallholders seek for loans by offering their land as asset to ensure the banks. Leaving farmers to face high risk from burden that caused by interest rate and payment of input provision payment. In fact, the access to credit allowed them to invest in start up cost, but the loss has to be taken into account as well as the gain. Linking with rationale of contract farming criteria, informal contract farmers still need to have access to land in order to gain access to credit. Uncertainty of market could be avoided by entering contract farming to assure that smallholders could stabilize their income as long as they comply with conditions and terms indicated by firms.

49 The loss revealed absence in welfare (access to input provision) Contract farming provide welfare for smallholders to assure that they produce qualified products with the use of input provision. However, the study presented the absence in providing medication for fish stock, since smallholder trade off with firm through middleman without technical assistance such as training and access to information. Therefore, they rely on traditional way to treat their fish when the loss occur with large volume of fish, which leads to greater loss than secure the remained fish. Entering informal contract farming could imply to securing input provision to farmers to reduce the loss as well as meeting the standards set up by firms. According to the study, the respondent has not acknowledged her rights to welfare and input provision, since the interview taken place during the loss of fish stock. As a matter of fact, the success of contract farming is highly associated with experience, however the loss occur from the lack of knowledge and support should not result in burden on smallholders struggling to find treatment to stop the loss of fish. Also, this requires capacity building from government and middlemen to prevent any loss in the future during contract term. Apart from that the contract goods have not been produced from contract input provision, which place smallholders in vulnerable situation due to uncertainty of market price. Even though, contract farming has been developed to reduce risk for smallholders to avoid uncertainty of market price. The fact that contract farming operates on loss and gain principles therefore welfare should provide insurance to prevent the loss such as medication and treatment. As a consequence, this becomes one of the motivations that has been raised once the loss occurred after adopting the practice apart from access to input provision. Since, the price of food provision tend to be higher than market price without access to information, smallholders are not aware of this till they engage in contract farming through the form of credit provision. On the contrary, medical welfare has been urged, since it required specific background to investigate causes of death from firms and government in order to provide treatments for fish stock. Environment Cost as risk redistribution not only risk distribution (reducing risks)

50 Aquaculture contract farming has relied heavily on physical conditions of Chi River, which contribute to higher risks for smallholders in this sector than the other sectors, since there is no insurance on quality of river in relation to any loss caused by polluted water by factories or chemical use in plantation including drought season. Offering input provision and information could reduce risk to some degree, but the loss still taking place from environment conditions without any risk distribution between brokers and smallholders. In 2009, the failure of aquaculture sector in Chi River led to great loss among smallholders from drought; some of them have to abandon contracts and became indebt from loan payment and provision credit. There was an attempt to establish environment committee in the area, however they encounter problem with additional expense that has not been prioritized as a part of budget. Also, the principle of supply chain created barrier for government to intervene, since they operates to serve as risk sharing mechanism and coordinate between firms and smallholders as states by Mr.Nondh It is difficult for government to intervene, since they are a part of food supply chain . Despite the nature of informal contract farming, setting up a committee in response to poor quality of river should be the highest priority to take up by government agency, the study present the reverse roles of government, since they are not a part of supply chain from their absence in coordinating between firms and farmers. Nonetheless, middlemen become sorts of credit in forms of input provisions as well as risk redistribution between firms and farmers in upside risk of firms under this circumstance instead of government. Albeit, they have not taken part in redistributing risks between smallholders and firms on downside risk of smallholders in case they loss fish stock from polluted water.

Sampling group result A majority of target group have been participated in contract farming approximately 1-5 years experience. Beforehand, they used to rely on rice farming only and have been motivated by their neighbors around 40% that entered contract farming through company staff introducing their products to breed fish such as juvenile fish, fish stock, food provision, medication, and

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supplement. By introducing contract farming practices, the companies motivate farmers to participate from profit making within short period of time. This includes access to market along with logistic management that attracted most of smallholders to become trading partners. With support from providers, most of the smallholders received provisions deducting payment from income. Particularly, the credit availability has been regarded as the most crucial factor that contribute to smallholder participation, although they could gain credit from Bank for Agriculture and Agricultural Cooperatives (BAAC) through their asset such as property. The main reason that driven them to participate in this is to gain extra income apart from none contract products, however they own small plots of land approximately around 150 square metre or 10 cages per households. In total, they generate 33,892 Bath, which normally take 4 months to produce agreed quantity in order to supply 2 sets per year. Mostly, the number of smallholders engaging in informal contract farming is in the form of informal contract around 80 %, while there are more than half of respondents who satisfied with the outcome of contract farming due to extra income gained. In general, the total capital cost is around 331,504.2 Baht, while variable cost is approximately 327,440.66 Baht. The highest fixed cost concentrated on food provision around 77% from total fixed cost 4,063 Baht. Nevertheless, the motivations of farmers are varied from numbers of occupations such as contract farmers, multiple crop growers, and void farmers. The most common feature among target groups are those who engaging in more than one occupation around 16 out of 30 samples. The first type is mono contract farmers who engaging in aquaculture, they have been motivated by higher income generation from decent market price of products with credit provided by firms as a start up cost. Alike, the farmers who associating with none contract products as well as contract good producer, they claim that they could gain income from stable price of fish, since they already have access to resources along

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with operation material. On the other hand, the farmers who are unwilling to continue contract farming, they have been attracted by the rise of income and better livelihood of neighbors. Transition of independent farmers to contract farmers

Firm - seek for potential contract partner

Smallholders -complete cage construction -use contract input provision -comply with fish raising cycle

Dealers -monitor input provision use - cease - transport contract product

Dealer -represent firms -seek for potential small holders

Independent loaner -Provide credit for farmers to build infrastructure

Firm -receive agreed quantiy and quality contract items -payment through dealers

Smallholders -adoopt the practice (written/unwritten forms)

Dealers - provide input provision for smallholders and technical assistance

Dealers -payment to smallholders -provide input provision for next fish stock

Based on the study, the target group express their concern over dominant position of firms in indicating conditions and terms of contracts without their participation. Importantly, they urge that government intervention is the most important instruments to create fair system particularly in terms of guaranteed prices of contract products whether informal or formal contracts. On the other hand, the result of relationships between firms and farmers has presented negative view towards dominant power, which caused unfair contract system associated with unstable prices dictated by firms such as input provisions. Some of target group invest their own saving in capital cost, while there number of smallholders gain credit from brokers as well as retailer shops without clear conditions on interests that have been deducted from total income. Thus, local retailer shops and brokers become providers for smallholders instead of companies

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supervising over the use of input provisions includes disseminating knowledge and information on fish breeding for farmers. However, firms still have control over input provisions in terms of operation and selling them in market, while local retailer shops providing farmers with fish and food provisions through the forms of credit that bind farmers to sell food from them only, since the other retailer shops and brokers could not buy their goods subjected them from having bargaining power. Also, retailer shops regulated input provision prices and access to market, while brokers determine ceased product timeframe. At this stage, smallholders express their opinion towards the roles of firms and local stores, since they have total control over price and dictating size of fish. Despite the logistic arrangement, smallholders have to pay for delivery service charge and do not have access to actual fixed costs of input provisions. As a result, they have mentioned about inadequate knowledge and information receive from firms and brokers that often lead to the lack of bargaining power such as information on quality of products and quality testing. Besides, smallholders also add risks sharing that firms have not participated in environmental cost, since they lack of knowledge in maintain quality of water. The death of products have created heavily debt on farmers especially those who rely on gaining income from selling fish alone, since they have wasted their investment in input provision and capital cost that resulted in loss caused by polluted water from factory and overgrown of fish in the river. This always occurs when the market price of fish is high, which farmers want to gain higher income therefore they put juvenile fish in cages beyond the capacity of cage and water. Combining with poor quality of water, most of farmers lose their income from the death of fish after they have invested in input provision without compensation being paid. The only group of samples entered contract farming through local stores, they tend to respond negatively to the practices, which differs from the other two groups that participated in

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contract farming through company staff and middlemen. As a consequence, the void farmers prefer to end their contracts, which they claim that the lack of information and technical assistance provided by local stores. Most of the farmers who want to end the contract stress that their products got rejected by firms due to low quality of products below firms standards. Thus, the aspect of contract farming regarding skill improvement and capacity building of farmers has been impeded as most of the sample groups have not regarded this as the main reason that drive them to participate in contract farming. Also, the outcome of void farmers has stated the importance of technical assistance provided by firms and government that contributed to failure of practices. The most common problems found among sample groups are as follows; the lack of bargaining power, risk sharing, and compensation. Since, the terms of conditions of contracts have been dictated by firms without hearing their voices despite the form of contract that have not been written officially to ensure their legal rights. From their point of view, the mechanism of contract farming purely operates based on trust system that company staff and middlemen are familiar with smallholders before they enter contract farming. Therefore, they are reluctant to obtain necessary information about their rights and access to information on input provision. Mostly, they signed contracts without considering through all detail indicated in contracts, which leaving them struggling with no compensation in case of unqualified products and loss from environmental damage in the river. Since, the contract has not covered risk sharing and right to compensation related to conditions of water. Since, the application contract farming has involved with market mechanisms, smallholder have to adopt discounting tactics to attract brokers by lowering and offering extra

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amount of products in order to obtain services under informal contract arrangement. This is contradict to price insurance indicated in contract farming principle. Table ; farmer motivation, benefits, disadvantages Informal mono contract farmers Motivations Earning extra income High fish stock price Firms provide access to credit to raise fish stock Introducing by neighbors and middlemen Personal interest in raising fish Informal multi contract farmers Motivations Earning extra income Stable price fish stock Access to high quality of fresh water within the area Equipped with capacity to raise fish stock Stable financial status Encouraging by firms with credit provision Increase in livelihood of neighbors Harvesting season ended Transition Motivations Earning extra income Increase in livelihood of neighbor Void contract farmers

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1.Contact firms by themselves Transition 1.Direct contact from firms 2.Personal interest to invest in contract farming 3.Contract through middlemen Transition 1.Offers being made by firms 2.Personal interest to invest in contract farming 3.Contract through middlemen 2.Contract through vocational training groups 3.Contract through middlemen and dealers Terms and conditions Smallholders are restricted to purchase input provision from Terms and conditions -Smallholders are restricted to purchase input provision from firms (fish food, juvenile fish) paying half as a deposit and paying the rest after contract goods sold Contributing factors to successful practices 1.Quality of water and physical conditions of river 2.Minimum price insurance 2. Reliability of contract firms 3.firms taking responsibility of knowledge dissemination Terms and conditions 1.Smallholders are restricted to use input provision provided by firms and sell contract goods to firms 2.Firms are allowed to visit the site at their convenience Contributing factors to successful practices 1.Honesty firms (fish food, juvenile fish) paying half as a deposit and paying the rest after contract goods sold Contributing factors to successful practices 1.Price insurance and price guarantee based on speculation 2. Government agencies providing assistance in terms

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without exploiting smallholders along with concerning about livelihood of smallholders 3.Concerned government agency launch price insurance to assure decent income of farmers

and sharing risks in any loss with farmers 4.physical conditions particularly quality of water

on contract farming practices and raising fish in tilapia 3.Firms sharing risks with smallholders in case of loss from natural calamity and poor quality of water 4.Farmer union 5.Promoting environment

4.Serving smallholders with welfare and labour protection

friendly fish raising practices Impact of contract farming 1.In debt from the death of fish stock

Impact of contract farming 1.Increase of income level Impact of contract farming 2.Satisfaction from 1.Increase income level participating in contract farming Benefits Benefits 1.Household consumption 1. Household consumption stock instead of seeking for 2.Extra income generated apart from existed occupations Firms guarantee access to market by arranging transportation to cease fish Benefits

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2.Securing income generation from predominant rice plantation

2.Smallholders are able to speculate income by adopting this practice

access to market themselves Disadvantages 1.lack of bargaining power that exposing smallholders to

Disadvantages 1.High input provision price particularly fish food 2.Firms have absolute control in dictating terms and conditions due to the lack of bargaining power of smallholders 3. Smallholders facing risks from unstable price and natural calamity

Disadvantages 1.Intensive care in raising fish regarded as time consuming activity 2.Firms dictated conditions and terms due to the lack of bargaining power of smallholders 3. Smallholders facing unfair price of contract goods 4.Smallholders have to bear the cost of loss without any assistance from concerned parties Direction of contract

unfair conditions and terms 2. Smallholders have to bear burden created from high input provision price 3.Smallholder face high risks from unqualified contract goods that leads to firms rejection

Direction of contract farming 1.Aplying risk management between firms and

Direction of contract

farming

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farming 1.Establishing fair system without any forms of exploitation on smallholders 2.Multi collaboration among concerned parties 3.Setting up price agreement and stabilizing agreed price 4.Standardising fish ceasing process 5.Applying price insurance on input provision and fish stock 6.Firms taking part in risk sharing

1. Establishing fair system without any forms of exploitation on smallholders 2.Firms taking part in risk sharing 3.Formalising conditions and terms under written form of contracts 4.Establishing farmer union to increase bargaining power and coordinating with concerned parties

smallholders 2.Formalising price of input provision by setting up standard price through smallholders participation 3.Government agency taking part as negotiator in contract farming procedure 4.Concerned parties engage in multi collaboration in tackling problems 5.Providing knowledge on systematic fish raising based on capacity of river in relation to intensity of fish stock 6.Establishing farmer union such as woman self help group to promote extra income generation project

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Analysis Government intervention and motivation Most of relevant government agencies have not shared similar objectives that contribute to sustainable practices of contract farming. Since, the process of contract farming required collaboration among different parties such as Ministry of Agriculture, Ministry of Commerce, Ministry of Labour, Ministry of Natural Resources and Environment and Land Department. The result shown through in dept interviews regarding definition and objectives of each concerned agency, which presents that they interpret informal and formal contract farming differently. For instance, the Ministry of Commerce provide technical and legal assistance to formal contract farming by arranging farmers and firms to sign contract along with being witness as a part of contract procedure. This has not covered informal contract farming, even though their main objective is to increase stable income for farmers along with skills that contribute to none contract goods, which could refer to informal contract goods. According to the standards, the conditions of goods that match criteria of the Ministry of Commerce are products that need to be processed or commoditized within certain period of time to maintain their best conditions such as vegetables, dairy products, tobacco, palm oil, rubber, Basmati rice, beef and fruits. Therefore, the other agricultural products have not met their criteria, which place informal farmers in vulnerable situation, since the formal contract assure right to compensation and government assistance in terms of delay payment and technical services. Meanwhile, the main objective of Ministry of Agriculture and Ministry of Labour share common ground in protecting informal labour right, since most of informal contract farmers fall into the category that subject them from welfare and protection. Currently, they have been collaborated on reducing fixed cost of input provision along with accounting skills to assure that smallholders could manage their spending and

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investment in response to uncertainty of good cease. For example, the two agencies try to improvise guideline on producing food, which they face difficulties in applying the practice due to conditions of contracts indicated that smallholders have to use food provision provided by brokers and firms. Although, they have not got involved in improving conditions and terms of contracts, the nature of informal contract in this context indicated farmers as good producers to supply sponsors. Besides, the most important factors that contribute to the success of contract farming is environmental condition particularly in raising fish in Chi River therefore the Ministry of Natural Resources and Environment has to get involved in improving quality of water and restrict on water treatment as another government instrument. However, the fiscal has not reached the environment committee that set up in the area that created a barrier to alleviate burden of farmers that has to be solved at the policy making level. So far, the government agencies attempt to provide training and workshop in order to strengthen capacity of smallholders without legal assistance particularly for informal contract farming. Even though, government intervention should be implemented from top down as well bottom up, most of the concerned agencies provide technical assistance for smallholders through local offices, while the legal assistance have been provided for formal contract farmers only due to legal status of farmers trading off with firms informally. Government intervention table Government agencies Responsibility Recognition Implementation/Implementers

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Ministry of Agriculture

-providing knowledge and skills for contract farmers

-formal contract farmers and informal contract farmers; unwritten forms and written form of contracts -recognized informal contract farmers as labour in informal sector

-establish social insurance fund for farmers in informal labour sector - formulating welfare provision in collaboration with the Ministry of Labour (healthcare, compensation, pension, education fund for offspring) -imposing regulations on density of fish stock in Chi River in collaboration with the Ministry of Environment and Natural Resources

Ministry of Commerce

-providing technical assistance and information for formal contract farmers -negotiator between firms

-formal contract farmers through written contracts

-formalization of contracts -introduce organic plantation as high value added contract items -measurement quality of soil in collaboration with the Land Right Department

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and farmers

Contract farming as extra income generation from different angles Contract farmers adopted the practice mainly to increase their income, which they have not expected skill improvement as indirect benefit that contributes to sustainable practices. Although, the skill improvement is crucial in maintaining quality of products and prolonging their contracts with firms, since the success of contract farming has to be measured in the long run not within short period of time. Most of the concerned parties set their targets to introduce contract farming as extra income generation; however the smallholders who rely on producing contract goods only have not fit in their objectives. Therefore, there should be some forms of formalisation to inform smallholders in terms of benefits and rights they are entitled to receive in response to policies carried out by government agencies. To sustain the practice, farmers should benefit from entering contract farming in the long run, thus the decision making to participate in contract farming should be made with adequate information. since, they have to encounter risks more than farmers who engage in other occupations as well as contract farming producers. Roles of middlemen; a savoir or a scapegoat The issue has been looking at from different angles, which has been underlined by government staff from the Ministry of Agriculture and Ministry of Commerce regarding government

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intervention in regulating roles of middlemen. Similarly, they agree that government agencies face difficulties in regulating roles of middlemen, even though they are aware that middlemen are the only link between firms and farmers that allowed them to exploit smallholders such as high interest rate, and dominant roles in determining price of provision. However, the rationale behind the limited power to control their roles has been highlighted by Ms.Suthawin It is almost impossible to control the roles of middlemen, since they operate independently that forbidden us to intervene due to free market principle. Particularly, informal contract created a barrier to prevent government agencies to enforce legal action on middlemen that caused by informality of contract. Without concrete information, the government agencies could not interfere with middlemen in case of high input provision prices and inadequate technical assistance. Although, it is vital for government agencies to take action on regulating their roles, since most of farmers are engaging in contract farming in informal forms. This required certain forms of regulation to ensure that farmers have access to information of input provision and technical assistance. Since, firms are not obligated to provide welfare for smallholders, which differs from formal contract that leaves it to government agencies to supervise the operation. With knowledge provided by middlemen, there is no formalisation in standardizing technical assistance obtained by middlemen that enable farmers to adopt the practices. This has clearly shown in the response of smallholders who acquired welfare from middlemen only, they want to give up the practices from losing fish stocks. As a consequence, technical assistance and information became essential during natural calamity and poor physical conditions of the river. Classification of contract farming The ambiguous term of contract farming has been addressed by most of respondents in the study, which they refer to legal protection serve between both parties. Initially, legal

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framework of country should be taken the highest priority to formulate contract in order to develop other components of contacts such as formula, format and specifications. However, the term itself has been misinterpreted by related actors, since the forms of contract farming featured 3 main characteristics defined by relationships between firms and farmers as presented by Mr.Wangsuwattana in the study on legal protection for contract farmers. This has a justification to legal protection, which subjected farmers from tax exemption and classed as labour in informal sector, once farmers and enterprise trade off as sponsor and producer. According to the study, this has not implied to pig breeder industry only, but the issue has revealed through aquaculture sector as well. Even though, most of relevant papers have not recognised the area of legal status of smallholders and intensity of contract that have direct impact from labelling farmers as producers, they could not access to other state welfare and compensation. Similarly, the intensity of contractual arrangement defined characteristics according to complexity of provisions referred to FAO contract farming guideline emphasized on varied degree of conditions and terms between firms and farmers along with the use of input provision. Within aquaculture sector, smallholders have to use specific input provision along with timeframe dictated ceasing fish stock arrangement that restricted by firms, which has not specified legal status of farmers engaging in this type of contractual arrangement. This allowed the party that have more dominant power as employer to regulate terms and conditions with absolute control on payment in case contract products have not met the standards or failure caused the delay of delivery process. In this sense, employers are entitled to void contract apart from that farmers are recognised as employee, they could not receive any protection as labour in informal sectors either. Theoretically, farmers and firms trade off through the forms of credit provisions, which legal protection on contract farming has not been applied practically. At this stage, the progress

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in launching legal protection to serve this category is still in progress, which most of related agencies could not take any legal action against any parties under informal contract farmers except formal contract farmers. Hidden risk of cage tilapia Subjecting from compensation in case of natural calamity and poor quality of water, most of smallholders are not aware of consequences from failing to comply with agreed quality and quantity of contract goods. Defining risk in this context becomes necessary subject to be addressed, since farmers become dependent on quality of water to raise fish in cage tilapia in Chi River, this has not been included in one of risks in contracts. Meanwhile, main actors in contract farming do not share the same view in defining risks, which leads to failure in adopting contract farming from interpreting risks as in economic sense through uncertainty of market rather than taking other contributing factors into account to form effective risk management programmes for farmers that mislead them to join contract farming for stability of income and market access. In fact, a majority of farmers comply with terms and conditions therefore the contracts should be fair on risk sharing between enterprise and smallholders in case of environmental damage that caused the loss in contract products beyond the control of producers. Since, the quota given to middlemen allowed firms to have alternative supply that substitute the loss rather than taking responsibility in terms of compensation and grace period. Inadequate knowledge as a barrier to sustainable practice Technical assistance providing for formal contract farmers by government agencies and firms should not be applied differently from creating a solid ground for informal contract farmers. Comparing to welfare in formal contract farming provided by enterprise and government

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agencies, they mostly succeed from adopting the practices, even though they need to comply with highly supervision in quality and quantity standards. With strong supports from main actors, most of formal contract farmers obtained skills in producing contract farming goods that could apply to none contract farming items as well. From different perspective, the success from informal contract farmers are concentrated on multiple occupations rather than mono contract farmers, which involved risk redistributing among different sources of incomes instead of strengthening their capacity in practicing contract farming. Price insurance or price stability According to contract farming principle, there are certain degree of price stability, since agreed prices has been indicated in contracts, however smallholders have not participated in determining price. Mostly, firms dictate input provision prices along with purchasing rate, while smallholder are lacking of bargaining power, thus they urge firms to adjust price according to prevailing price at the market. At this stage, government agencies claim that formal contract farming was designed to prevent smallholders from being exploited by firms through mediator role undertake by government agencies. Therefore, the integration between contract farming price agreement and prevailing market price adjustment are incompetent models, since they do not have any common ground that could be applied in contract farming practices. In response to this, one of the key informants state that some of informal contract farmers see a better opportunity to trade off with transactional cooperation that seek for supply by offering higher paid along with logistic arrangement to farmers due to the growth of supermarket chain like Tesco. As a result, the growth of transactional supermarket chain has not contributed to sustainable practice of contract farming, since they operate differently referring to some of the studies claiming that the growth of contract farming created by the change in global market trend (Glover, 2002). In fact, the

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change to supply transaction cooperation is a consequence of the failure in price adjustment according to prevailing price at the market. Conclusion Contract farming has been widely practices as a part of extra income generation among smallholders, since it result in income stability and reducing risks of market uncertainty. Opportunities perceive by farmers have been addressed in the study associated with access to market and credit provided by firms and middlemen. Informal contract farming emerged from trust based social structure, the main actors in this process are familiar with smallholders either neighbours or friends. The result of study present motivations of farmers that reflects existed evidences on firm preferences over large scale farmers and government intervention along with roles of middlemen. The most common form of contract farming in aquaculture found in form of input provision that deduct from total income per stock. Under collateral system, there are certain requirements to assure credit payment through asset in exchange of loan, farmers often access to informal credit loaners to invest in capital cost in order to set up tilapia cages. Although, most of contract farmers gain incomes through multiple sources that could be regarded as risk redistribution management adopted by farmers. Therefore, it could be said that risk management is included financial security through multiple occupations of smallholders, which has been raised by numbers of farmers showing that successful stories of informal contract farming inherent in farmers who are able to pay for the loss from other non-contract fields. On the contrary, smallholders who engage in one informal contract farming tend to experience failure from the loss, since they could not redistribute their income to substitute fixed cost that leads to heavy burden from interest rate as well as input credit provision. A majority of informal contract farmers are not engaging in mono contract production, which exposed themselves with less risk

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in comparison to mono contract producers. Thus, perceptions of smallholders regarding motivations are different, since mono contract producers have not considered contract farming as extra income generation. They rely heavily on income generating from participating in contract farming, which have not been recognized by existed evidences that could help a better understanding on varied degree of vulnerability of smallholders along with motivations. Thus, there is a need to conduct further study on different categories of contract farmers based on formality of contracts and numbers of occupations of each individual within target groups. Since, firms play important roles in encouraging farmers through middlemen in providing credits in forms of input provisions as well as capital cost to build tilapia cages. By examining middlemen roles, the study captured the importance of dealers and local stores provide input provision for farmers. Nevertheless, the lack of supervision over their roles have been mentioned, dealers have a dominant power in regulating input provision price without information provided for farmers in terms of market price. Without formalization of technical assistance, smallholders experience in the loss over mortality of fish, they could not receive compensation or medication from dealers under informal contracts. Most of void contract farmers received welfare and provision through middlemen only that present inadequate technical assistance and information that result in failure of practice. Therefore, roles of middlemen should be regulated as well as formalizing technical assistance that required collaboration from government agencies. In addition, financial institutions should consider grace period during natural calamity for farmers to postpone their payment similarly to dealers allowed farmers to use input provision in advance. Besides, logistic arrangement has not been significantly raised by informal contract farmers, they have their own means to transport them or they received services from dealers to transport fish. Although, they have to adopt marketing

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tactics to attract dealers to receive collecting services. This feature shown different characters of informal contract farming differs from related studies, since most of them present logistic arrangement as the main reason in relation to distance from the field to market, which contribute to farmer participation in contract farming. In contrast, formal contract farming model provide logistic arrangement to assure quality of products, since most of contract items are high value added products therefore close monitoring required to fulfill by firms along with technical assistance after new crops being introduced to smallholders. As a consequence, service provision apply in contract farming should be equally adopted by informal contract farmers without marketing tactics adopted to attract dealers. As a result, government intervention becomes a main driver in this process to motivate farmers and reduce risk for farmers being exploited by middlemen and firms from the beginning of contract farming terms. Albeit, the definition and legal status of contract farming have been recognized differently by relation government agencies, formal contract farmer has been recognized by the Ministry of Commerce, while the rest of informal contract farmers have been recognized by the Ministry of Agriculture and Ministry of Labour recognised as labour in informal sector. Similarly, they aim to provide skill improvement for farmers and increase bargaining power, however formalization of contract should be undertaken by concerned agencies to set up standards for multi-collaboration, since they could not operate separately in terms of legal status of farmers along with rights to welfare and services such as price insurance, compensation, mediator and technical assistance.

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