The Impact of Contract Farming on Income of Smallholder Vegetables Farmers in the Central Rift Valley of Ethiopia

Recently, due attention was given to commercialization of smallholder agriculture through contact farming hoping that it would bring positive impact on income of smallholder produces in Ethiopia. This article presents the results of data analysis conducted to generate empirical data required to inform smallholder agricultural commercialization policy using data collected from 424 (194 participants and 230 non-participants) randomly selected vegetables producer farmers from two districts of the East shewa zone of Oromia Regional State, Ethiopia. The propensity score matching was used to assess the impact of contract farming on smallholder farmers’ income in the study area. The probit model result shows that the proportion of total crop area allocated to vegetables, access to credit, frequency of extension contacts, market information, and distance of the market center have a positive and significance effects on decision of vegetable producers to participate on contract farming. The impact assessment result using PSM reveals that gross annual income of contract participants is lower by 3.8% (Birr 2,942) compared to the non- participants. This may due to the nature of contract itself, being prone to manipulation, absence of effective contract enforcement mechanism, and lack of government support. However, some of the contract farming participants would like to continue to access inputs, credit, and technical advice and to reduce marketing risks and uncertainty. In conclusion, contract farming is a useful institutional arrangement which increases smallholders’ income and benefit from remunerative value chains but it is not a panacea that works in different contexts. Hence, policy makers should base their choices on empirical evidence and consider alternative and complementary intervention options to enhance smallholder commercialization and ensure sustainable livelihood in the research area.