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Baby corn business under the contract farming system.
Abstract:
The objectives of this research are to compare the production costs and returns between contract and non-contract farmers on baby corn production and the procurement costs of the company through contract versus non-contract (open market) channels. The data were collected during the crop year 2005/2006 from 60 farmers in Kanchanaburi and Nakhon Pathom provinces, including 30 contract farmers and 30 non-contract farmers.

The results of this study show no significant differences in the socio-economic situations of contract and non-contract farmers. The production costs and returns between the two groups of baby corn farmers demonstrate that the contract farmers have higher costs and higher net incomes than the non-contract farmers. The higher production costs mandate farmers to follow the specifications of the production line to meet the required standard. The investment in baby corn production for contract farming has lower risk than non-contract farming. In addition, the results also show that the procurement cost via the contract channel is higher than the non-contract channel, because the contract prices, on the average, are higher than non-contract prices. However, the contracting company is willing to pay higher costs for standard products of which the source of origin was known.

Keywords: Baby Corn, Contract Farming, Production Costs.

Subject:
Corn (Growth)
Corn industry (Contracts)
Authors:
Thanyakhan, Sutana
Limsombunchai, Visit
Pub Date:
09/22/2009
Publication:
Name: European Journal of Management Publisher: International Academy of Business and Economics Audience: Academic Format: Magazine/Journal Subject: Business, international Copyright: COPYRIGHT 2009 International Academy of Business and Economics ISSN: 1555-4015
Issue:
Date: Fall, 2009 Source Volume: 9 Source Issue: 3
Topic:
Event Code: 490 Contracts & orders let; 610 Contracts & orders received Computer Subject: Company growth; Contract agreement
Product:
Product Code: 0115000 Corn NAICS Code: 11115 Corn Farming SIC Code: 0115 Corn
Geographic:
Geographic Scope: Thailand; United States Geographic Code: 9THAI Thailand; 1USA United States
Accession Number:
260792639
Full Text:
1. INTRODUCTION

Among fruits and vegetables exported to foreign countries, baby corn is one of the major export crops of Thailand. The export of baby corns draws thousand million baht to Thailand each year and is on the rise. The US, Australia, Japan and some European countries are the major baby corn importers of Thailand. These countries have a strict policy in grading the quality of the products, especially the contamination of pesticide. Consumers' consumption behaviors have changed to be more health conscience these days and the Department of Agricultural Extensions (DAE) have been promoting producing toxic-free vegetables nationwide in responds to the health needs of the customers both domestically and internationally. DAE works with the private sectors and farmers to promote contract farming between farmers and product collectors or purchasing companies for high quality vegetable productions (Department of Agricultural Extensions, 1994).

Contract farming plays a crucial role on farmers which benefits the farmers in selling their products since they have risk assurance in price, marketing and other production factors, which lead to a stable income (Bauman, 2000). The purchasing companies on the other hand gain in terms of stability in input prices and the amount of inputs supplied to the factories. In addition, the products meet the required standard quality without investing in costly quality control projects. Pornsuwan (2003) study shows that contract farming allows the companies to purchasing raw materials at a small cost and to transfer knowledge and technology to farmers. The farmers are pleased with the contract systems since they received the supports for production inputs, price insurance, and product purchase.

Contract farming refers to the production and supply of agricultural produce under advance contracts, the essence of such contracts being a commitment to provide an agricultural commodity of a type, at a time and a price, and in the quantity required by a known buyer. The contract farming can divided into five types: (i) the centralized type, (ii) the nucleus estate type, (iii) the multipartite type, (iv) the informal type, and (v) the intermediary type (Eaton and Shepherd, 2001).

However, farmers have the responsibility to adhere to the contract farming regulations, such as hygiene in managing production process and the product quality which have to meet the required standards. These requirements may increase the cost of production, which increases the farmers' investment risks. Kaewmaneechai (2001) study on asparagus production shows that the total investment cost in the production process of the farmers under the contracts was higher than those without contracts. In addition, contract farmers are exposed to higher risks in farm's net profit than non-contract farmers.

Beside price and income influencing the farmers' decision enter contracts with the companies, there other factors that should also be taken into the consideration in the farmers' decision making process. These factors include production credit, production inputs supply, production knowledge and technology transfer, and so on. Thus, this study aimed at analyzing the production costs and returns between contract and non-contract farmers on baby corn production. This includes analyzing the procurement costs of the company between contract and non-contract (open market) channels.

The paper is organized as follows. Methodology and data collection are described in section 2 and section 3, respectively. Section 4 presents the results, and the last section, section 5, is conclusion and suggestion.

2. METHODOLOGY

2.1 The analysis of cost and return

This study uses the total cost (TC), total revenue (TR) and profit (PF) to assess the production efficiency of the farmers by examining the relationship between the investment cost and the revenue of baby corn production as follows:

TR = P x Q = NCI + CI (1)

TC = TFC + TVC = NCC + CC (2)

PF = TR - TC = TR - TFC - TVC (3)

GM = TR - TVC (4)

NCP = CI - CC (5)

where TR = total revenue (baht), P = price of product (baht/kg.), Q = total quantity of products sold (kg.), NCI = non-cash income (baht), CI = cash income (baht), TC = total cost (baht), TFC = total fixed cost (baht), TVC = total variable cost (baht), NCC = non-cash cost (baht), CC = cash cost (baht), PF = profit (baht), GM = gross margin which refers to the income over the variable cost (baht), and NCP = net cash profit (baht).

2.2 Analysis of the procurement cost

To study and compare the procurement costs of the contracting company, with and without projects evaluation concept is adopted by assuming that the procurement via the contract channel is the situation of having the project, where the company has the responsibility in supporting the farmers in the management processes and other aspects covering the assurance of the minimum purchasing price which cause the higher investment cost. On the other hand, if the company purchases the raw material or has the procurement process via the non-contract farms or open market channel, the company spent nothing, which could be compared to the situation of not having the project.

In analyzing the procurement cost of the company, it could be done by multiplying the quantity of the products purchased in any certain time and channel by its unit price. Then, the incremental procurement cost could be calculated by differencing the procurement cost of contract channel with non-contract channel.

To compare the procurement costs between the contract and non-contract channels, the incremental procurement costs can be computed as follows:

[TC.sub.CF,i] - [TC.sub.NCF,i] = ([P.sub.CF,i] x [Q.sub.i]) - ([P.sub.NCF,i] x [Q.sub.i]) (6)

[DELTA]TCi = ([P.sub.CF,i] - [P.sub.NCF,i]) x [Q.sub.i] (7)

where [TC.sub.CF,i] and [TC.sub.NCF,i] = the total procurement costs through the contract and non-contract channels for the ith month (baht), respectively.

[P.sub.CF,i] and [P.sub.NCF,i] = prices paid for the baby corn under the contract and open market for the ith month (baht/kg.), respectively.

[Q.sub.i] = the quantity of baby corns purchased for the ith month (kg.).

[DELTA][TC.sub.i] = the incremental procurement costs (or the differences between budget paid for purchasing products through the contract and non-contract channels) for the ith month (baht).

If [SIGMA][DLTA][TC.sub.i] > 0, the procurement cost through the contract channel is higher than that through the non-contract channel. The company should consider ways to purchase those from the noncontract channel in order to decrease the cost.

If [SIGMA][DLTA][TC.sub.i] = 0, the procurement cost through the contract channel is equal to the non-contract channel. The company should continue purchasing from the contract farms, since there is no difference in price between the two sources and the company can control the price, quality, and quantity of the products.

If [SIGMA][DLTA][TC.sub.i] < 0, the procurement cost through the contract channel is lower than the non-contract channel. The company should continue purchasing the products from the contract farms, since it costs lower, guaranteed quantity, and high quality of the products.

3. DATA COLLECTION

The data used in this study are collected through a survey questionnaire and face to face interviews with both the contract and non-contract farmers who grew the baby corn in Kampaengsaen District, Nakorn Prathom Province, and Thamaka District, Karnchunaburi Province. The data set are divided contract and non-contract groups, and each group comprises of 30 farmers. The data set consists of general socioeconomic information of the farmer's households, the production costs and revenues from the baby corn productions, and the problems found on their productions in the 2005/2006 crop year. Costs and returns are then estimated for the baby corn productions. Middle men and the company's representatives were also interviewed and asked about the contract's details, the quantity purchased in each period, and the purchasing prices under the contract agreement. These information were used to analyze the company's budget in purchasing raw material or the company's procurement cost.

4. RESULTS

Our results reveal that both groups of farmers shared similar socioeconomic characteristics such as age and education level of the family head, experience on baby corn production, occupations of the farmers, number of family members, and household's labors, and the source of credit.

The survey results also show that the problems confronting both groups of farmers include high input price which leads the high production cost, flooding, and lack of bargaining power on the price with the collectors and the company. Our results are consistent Sathitsirikun (1989) findings.

The results from cost and return analysis on the non-contract farmers group show the average total variable cost and the average total fixed cost are 4,266.64 and 390.48 baht/rai, respectively. In addition, the average total cost is 4,657.12 baht/rai. The average yield is 1,736.91 kg./rai. The average product price received is 2.54 baht/kg. The income from selling baby corns and stems are 4,411.75 and 674.44 baht/rai, respectively. The average total revenue and the average total cost of the non-contract farm are 5,086.19 baht/rai and 4,657.12 baht/rai (or about 2.68 baht/kg), respectively. The production net profit is 429.07 baht/rai. The gross margin and net cash profit are 819.55 and 1,466.86 baht/rai, respectively. In addition, the coefficient of variation of the net profit is 2.02 (see Table 2).

The data in Table 2 also show the average total variable cost and the average total fixed cost for the contract farmers are 4,591.73 and 323.22 baht/rai, respectively, and the average total cost is 4,914.95 baht/rai. The average yield is 1,830.00 kg./rai, with an average production cost of 2.69 baht/kg. The average product price received via the contract agreement is 3.13 baht/kg. The income from selling baby corns and stems are 5,727.90 and 615.00 baht/rai, respectively. Thus, the average total revenue of the contract farm is 6,342.90 baht/rai with a net profit of 1,427.95 baht/rai. The gross margin and net cash profit are 1,751.17 and 2,664.21 baht/rai, consecutively. The coefficient of variation of the net profit is 0.79 (see Table 2).

Our study shows no major differences in the socioeconomic conditions and the production problems of both the contract and non-contract farms. On the average, the contract farmers have higher revenue and production cost than the non-contract farmers. The average production costs of both groups (2.69 and 2.68 baht/kg.) were not significantly difference, but the contract farmers have higher gross margin, net cash profit, and net profit but the coefficient of variation of the net profit was lower. Therefore, the results indicated that the investment risk in the baby corn production under the contract farming system is lower.

From the comparative analysis of the company's procurement costs via contract versus non-contract (open market) channels based on the monthly data throughout the 2006 production year, it was found that the procurement cost through the contract channel (42,660,000.00 baht) was higher than that of the purchase from the open market or non-contract channel (41,277,600.00 baht). This makes the purchase cost from the contract farms to be 1,380,400 baht higher than the purchase from the open market (see Figure 1 and Table 3).

[FIGURE 1 OMITTED]

Our survey results reveal that one of the advantages in baby corn contract farming is the guaranteed market for the products. Contract farmers received production technology and knowledge, and support from the company. However, the farmers have to strictly follow the conditions and the practices set by the company and have no opportunity to bargain on the price. They also have to be responsible for the products that did not meet the required standards. Thus contract farmers incur a higher investment costs than that of the non-contract farmers. In studying the benefits of the company on the contract agreement with the farmers, our study reveals that the company does not know and does not control for the amount of products supplied to the processing factory, Moreover, the company could receive the traceable and the high quality products to meet the importer's requirement. However, the investment cost paid in such process is higher than buying the products from the non-contract channel (see Table 4).

5. CONCLUSION AND SUGGESTION

Our study results on the financial cost and return analysis between the contract and non-contract farmer groups reveal that the total revenue and the net profit of the contract farm group were higher than the non-contract group. This was because the farmers who were under the contracts had to follow the regulations and the production guide line of the company, but they received a higher price for their products in return. The coefficient of variation of the net profit shows that baby corn production under the contract farming system was less risky than the non-contract system. The result of this study contradicts Kaewmaneechai (2001) study which shows that production under contract farming system has a higher risk than the non-contract system in term of the stability of the farm's net profit.

Our study results also show that the company has a higher procurement cost when buying the product through the contract channel than from the open market channel. This is because, on the average, the product price under the contract agreement is higher than the price in the open market. However, the contracting company is willing to pay the additional costs for high quality and traceability (known source of origin) of the products. The result of this study contradicts Pornsuwan (2003)'s study which shows the company could receive the least procurement cost when obtaining the product through the contract channel.

The results of this study suggests that the farmers should produce the baby corn under the contract farming system, since they receive a higher income and return, and have a lower risk than producing under the non-contract system. In addition, the company should accept the opinions and suggestions of the farmers regarding to the contract details, and should adjust the term of condition in the contract to assure the satisfaction of both the farmers and the company. For the future study, the model and the method or process in determining the contracting price should be conducted, since it would enhance the efficiency of the contract farming system and price setting.

ACKNOWLEDGEMENT

The authors are thankful to Assoc. Prof. Dr. Christopher Gan (Commerce Division, Lincoln University, New Zealand) for his invaluable comments and suggestions on this paper.

REFERENCES:

Bauman, P., Equity and Efficiency in Contract Farming Schemes: The Experience of Agricultural Tree Crops, London: Overseas Development Institute, 2000.

Department of Agricultural Extensions, An Extension Guide Line for Vegetable Productions, Department of Agricultural Extensions, Ministry of Agriculture and Cooperatives, Thummada Press (in Thai), 1994.

Eaton, C., and Shepherd, A. W., "Contract Farming: Partnerships for Growth", FAO Agricultural Service Bulletins, 2001, 145.

Kaewmaneechai, K., An Analysis of Cost-benefit and Risk of Asparagus Production Comparing between Toxic-free Production under Contract Farming System versus Traditional Production in Nakornphathom Province, Master Thesis in Agricultural Economics, Kasetsart University (in Thai), 2001.

Pornsuwan, J., Contact Farming in Thailand's Potato Chip Industry, Master Thesis in Economics, Thummasart University (in Thai), 2003.

Sathitsirikun, W., Baby Corn Production and Marketing in Thailand, Master Thesis in Agricultural Economics, Kasetsart University (in Thai), 1989.

Sutana Thanyakhan, Mahasarakham University, Mahasarakham, Thailand

Visit Limsombunchai, Kasetsart University, Bangkok, Thailand

Dr. Sutana Thanyakhan earned her Ph.D. at the Lincoln University, New Zealand in 2008. Currently she is an Associate Dean for Special and International Affairs at Faculty of Accountancy and Management, Mahasarakham University.

Dr. Visit Limsombunchai earned his Ph.D. at the Lincoln University, New Zealand in 2006. Currently he is an assistant professor and Head of Post Graduate Studies Programme for Department of Agricultural and Resource Economics, Faculty of Economics, Kasetsart University.
TABLE 1: CHARACTERISTICS OF CONTRACT FARMING STRUCTURE MODELS

STRUCTURE            SPONSORS

Centralized          Private corporate sector
                     State development agencies

Nucleus estate       State development agencies
                     Private/public plantations
                     Private corporate sector

Multipartite         Sponsorship by various
                     organizations, e.g.
                     --State development
                     agencies
                     --State marketing authorities
                     --Private corporate sector
                     --Landowners
                     --Farmer cooperatives

Informal             Entrepreneurs Small companies
developer            Farmer cooperatives

Intermediary         Private corporate sector
(tripartite)         State development agencies

STRUCTURE            GENERAL CHARACTERISTICS

Centralized          Directed contract farming. Popular in many
                     developing countries for high-value crops.
                     Commitment to provide material and
                     management inputs to farmers.

Nucleus estate       Directed contract farming. Recommended for
                     tree crops, e.g. oil palm, where technical
                     transfer through demonstration is required.
                     Popular  for  resettlement schemes.
                     Commitment to provide material and
                     management inputs to farmers.

Multipartite         Common joint-venture approach. Unless
                     excellent coordination between sponsors,
                     internal management difficulties likely.
                     Usually, contract commitment to provide
                     material and management inputs to farmers.

Informal             Not usually directed farming. Common for
developer            short-term crops; i.e. fresh vegetables to
                     wholesalers or supermarkets. Normally
                     minimal processing and few inputs to
                     farmers. Contracts on an informal
                     registration or verbal basis. Transitory in
                     nature.

Intermediary         Sponsors are usually from the private
(tripartite)         sector. Sponsor control of material and
                     technical inputs varies widely. At time
                     sponsors are unaware of the practice when
                     illegally carried out by large-scale
                     farmers. And farmers can have negative
                     consequences.

Source: Eaton and Shepherd (2001)

TABLE 2: COSTS AND RETURNS ON BABY CORN PRODUCTION FOR
2005/2006 CROP YEAR (CONTRACT VS. NON-CONTRACT FARMS)

                                              Contract    Non-contract
                                              Farm (1)      Farm (2)

1. Average yield (kg./rai)                     1,830.00        1,736.91

2. Average price of product (baht/kg.)             3.13            2.54

3. Total revenue (bath/rai) = (3.1)+(3.2)      6,342.90        5,086.19
3.1 Income from baby corns (baht/rai) =        5,727.90        4,411.75
    (1)x(2)                                      615.00          624.44

3.2 Income from stems (baht/rai)

4. Total variable cost (baht/rai)              4,591.73        4,266.64

5. Total fixed cost (baht/rai)                   323.22          390.48

6. Total cost (baht/rai) = (4)+(5)             4,914.95        4,657.12

7. Cash cost (baht/rai)                        3,678.69        3,619.33

8. Net profit (baht/rai) = (3)-(6)             1,427.95          429.07

9. Gross Margin (baht/rai) = (3)-(4)           1,715.17          819.55

10. Net cash profit (baht/rai) = (3)-(7)       2,664.21        1,466.86

11. Average product cost                           2.69            2.68
    (baht/kg.) = (6)/(1)

12. Coefficient of variation of Net Profit         0.79            2.02

                                              Difference
                                                (1)-(2)

1. Average yield (kg./rai)                          93.09

2. Average price of product (baht/kg.)               0.59

3. Total revenue (bath/rai) = (3.1)+(3.2)        1,256.71
3.1 Income from baby corns (baht/rai) =          1,316.15
    (1)x(2)                                        -59.44

3.2 Income from stems (baht/rai)

4. Total variable cost (baht/rai)                  325.09

5. Total fixed cost (baht/rai)                     -67.26

6. Total cost (baht/rai) = (4)+(5)                 257.83

7. Cash cost (baht/rai)                             59.36

8. Net profit (baht/rai) = (3)-(6)                 998.88

9. Gross Margin (baht/rai) = (3)-(4)               931.12

10. Net cash profit (baht/rai) = (3)-(7)         1,197.35

11. Average product cost                             0.01
    (baht/kg.) = (6)/(1)

12. Coefficient of variation of Net Profit

Source: From survey (2006)

TABLE 3: COMPANY PROCUREMENT COST THROUGH THE CONTRACT VS. NON-CONTRACT
(OPEN MARKET) CHANNELS IN THE 2006 PRODUCTION YEAR
                                                        Procurement
                                                        cost (baht)

--Procurement cost through the contract channel         42,660,000.00
--Procurement cost through the non-contract channel     41,277,600.00
--Difference                                             1,382,400.00

Note: The average price of the baby corn for Thailand was used to
estimate the company's procurement cost through the non-contract
(open market) channel.

Source: From calculation (2006)

TABLE 4: ADVANTAGES AND DISADVANTAGES OF THE CONTRACT FARMING

Farmer and Collector

        Advantages              Disadvantages

--had a certain market for   --had to strictly follow
the products.                the conditions in
--gained the knowledge       contract.
and support from             --had no chance to
company.                     bargain on the price.
--had stable income and      --had to be responsible
less risky.                  for the products in
                             case of not being in
                             required standard.

Company

        Advantages              Disadvantages

--could control for the      --spent higher
amount of the products       investment cost
supplied to the              than purchasing
processing factory.          from the open
--know source of origin      market.
of the products
(traceability).
--received the required
quality products.

Source: From survey (2006)
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