1. Small Farmers in High
Value Chains
The impact of contract growing on tobacco
farmers in Ilocos
Briones, Roehlano M.
Galang, Ivory Myka R.
1

2. What to expect
O Aims and scope
O Issues and context
O Hypotheses
O Method
O Results
O Conclusion and policy recommendations
2

3. Aims and scope
O Agriculture: employs one-third of the labor force.
O Poverty incidence: in 2009, 57% among
agricultural households, 17% among non-
agricultural households. (Reyes et al., 2012)agricultural households. (Reyes et al., 2012)
O To raise incomes of agricultural households, one
strategy is to promote the use of high value crops
O Parallel strategy: increase production of
traditional crops, e.g. targeting rice self-sufficiency
O Where should priorities lie?
3

4. Aims and scope
O Such high value crops are often produced
within organized value chains.
O A value chain refers to the set of linked
economic activities that successively increaseeconomic activities that successively increase
value added of the output of the chain.
O A supply chain is an organized value chain
O Typically structured as contract growing
O Contrast is traditional marketing channel (i.e.
roving trader, spot transaction; common in most
crops)
4

5. Aims and scope
O Does contract growing raise farm income?
O Goal 1 of PDP Ch. 3: “Food Security
Improved and Incomes Increased”
O Help define priorities: diversification vsO Help define priorities: diversification vs
increased production of now-dominant crops
O What factors determine inclusion of small
farmers in high value chains? elements of
an agricultural diversification strategy
5

6. Issues and context
O Skeptics, e.g. Borras and Franco: [Contract
farming] is perhaps the most commonly cited
type of incorporation of poor peasants and small
farmers into large-scale agri-industrial schemesfarmers into large-scale agri-industrial schemes
and is thought to result in win-win scenarios.
Over time and in many diverse settings, however,
this has proved not to be the casethis has proved not to be the casethis has proved not to be the casethis has proved not to be the case. Instead, such
arrangements generally result in processes and
outcomes that mainly favor the transnational
companies…” [underscoring supplied]
6

7. Issues and context
O Literature on contract farming: contract
farming has positive impact on income
O Concerns that smallholderssmallholderssmallholderssmallholders are excluded in
modern supply chainsmodern supply chains
O Huang et al: modern marketing chains biased
towards more capable farmersmore capable farmersmore capable farmersmore capable farmers
O Impact confounded by selection effects
O Addressed in some studies, e.g. Madagascar,
China; no study in the Philippinesno study in the Philippinesno study in the Philippinesno study in the Philippines
7

8. Context: Tobacco Industry
• One of the important commercial crops
• Significant supply chains (exports, domestic processing)
TOBACCO TYPE
2011 2012
Number of Tobacco Farmers and Areas (2011-2012)
8
No. of FCs Area (ha) No. of FCs Area (ha)
Virginia Tobacco 26,839 20,794.32 27,858 21,317.02
Burley Tobacco 14,426 9,383.74 10,944 6,969.63
Native/Dark
Tobacco
14,268 8,096.72 13,142 7,443.39
GRAND TOTAL 55,533 38,274.78 51,944 35,730.04
TOBACCO TYPE
2011 2012

9. Production trends
ProductionProductionProductionProduction VolumeVolumeVolumeVolume AreaAreaAreaArea harvestedharvestedharvestedharvested
40
50
60
30
35
40
45
9
0
10
20
30
40
2001
2004
2007
2010
‘000‘000‘000‘000mtmtmtmt
0
5
10
15
20
25
30
2001
2004
2007
2010
‘000has‘000has‘000has‘000has
Source: BAS Source: BAS

10. Regional distribution
Ilocos Sur
Cagayan
2%
Others
17%
Pangasin
an
7%
Cagayan
7%
Others
9%
Area harvested by regionArea harvested by regionArea harvested by regionArea harvested by region
10
Ilocos Sur
33%
Isabela
9%
Ilocos
Norte
7%
La Union
16%
Pangasin
an
16%
17%
2001200120012001
Ilocos Sur
42%
Isabela
17%
Ilocos
Norte
9%
La Union
9%
7%
2011201120112011
Source: BAS

11. Export trends
O Value O Volume
200
250 219
MillionsMillionsMillionsMillions
35
40
45
33
43
MillionsMillionsMillionsMillions
11
0
50
100
150
200
2009 2010 2011
97 106
123
109
161
MillionsMillionsMillionsMillions
Unmanufactured Manufactured
0
5
10
15
20
25
30
35
2009 2010 2011
30
33
17
23
29
MillionsMillionsMillionsMillions
Unmanufactured Manufactured
Unit: USD Unit: kg
Source: NSO 2009-10 & NTA Reg. Dept for 2011

12. O Value O Volume
300
350 332
293
348
MillionsMillionsMillionsMillions
80
90
100
73 73
94
MillionsMillionsMillionsMillions
Import trends
12Unit: USD Unit: kg
0
50
100
150
200
250
2009 2010 2011
6 13 5
MillionsMillionsMillionsMillions
Unmanufactured Manufactured
0
10
20
30
40
50
60
70
80
2009 2010 2011
0 2 0
MillionsMillionsMillionsMillions
Unmanufactured Manufactured
Source: NTA Regulation Department

13. Taxes, Duties and other Fees collected
on Tobacco and Tobacco Products
YEAR
EXCISE
TAXES
DUTIES, VAT,
INSPECTION
MONITORING
AND OTHER
CORPORATE
TAXES
GRAND
TOTAL
13
Source: NSO, NTA
Unit: billion pesos
FEES
2010 31.506 2.42 5.09 39.02
2011 25.504 1.55 4.06 31.11
2012 32.181

14. NTA programs
O Tobacco Growers Cooperative Program
O Tobacco Free Public Education Program
O Research and Development ProgramResearch and Development Program
O Tobacco Contract Growing System
O Regulatory Services Program
O Quality Assurance/Analytical Services
14

15. NTA: other programs, services
O Tobacco Seed Varieties Collection, Purification and
Maintenance
O Production Technology Enhancement
O Curing Structures and Management Improvement
Production, Evaluation and Application ofO Production, Evaluation and Application of
Vermicompost on Tobacco
O Integrated Pest Management Technology
Enhancement
O Tobacco Pest Clinic/ Quick Response System
O Setting of Tobacco Floor Prices/Tripartite
Consultation Conference
15

16. Hypotheses
1. Small farmers who are participating in the supply
chains have relatively higher net farm income
per hectare than similar farmers not
participating in supply chains.participating in supply chains.
2. Farmer characteristics such as educational
attainment, asset endowment, experience in
farming, and so on, determine the likelihood of
participation and benefits from supply chains.
3. Farmers with larger farms are more likely to
benefit from organized supply chains.
16

17. Hypotheses
4. The existence of good quality transport and
telecommunications infrastructure are more
favorable for the inclusion of small farmers in
supply chains.supply chains.
5. Farmers will choose to participate in supply
chains based primarily on cash price, followed
by other considerations such as price stability,
support for working capital, and technical
assistance.
17

18. Method
O Desk Review
O Field Investigation
O Survey: 317 farmers (159 ULPI farmers)
Other tobacco firms: Trans-Manila, Inc., andO Other tobacco firms: Trans-Manila, Inc., and
PMFTC
O Site: Ilocos Norte and Ilocos Sur (see map)
O A key (and unanticipated) finding of the
study: majoritymajoritymajoritymajority of Ilocos tobacco farmers are
part of supply chain
18

19. Go to Main slides
19

20. Results
1. Hypothesis 1: Small farmers who are participating in the supply chains have
relatively higher income per hectare than similar farmers not participating in
supply chains.
89
80
100
Ave. netAve. netAve. netAve. net incincincinc/ha (‘000 P)/ha (‘000 P)/ha (‘000 P)/ha (‘000 P)
235
300
CountCountCountCount
(74.3%)
20
8
0
20
40
60
80
SC Non-SC
SC Non-SC
Farmers participating in the SCs have higher average net
income per ha than farmers who are not part of SCs.
235
81
0
100
200
SC Non-SC
(74.3%)
(25.7%)

21. Results
2. Hypothesis 2: Farmer characteristics such as educational attainment, asset
endowment, experience in farming, and so on, determine the likelihood of
participation and benefits from supply chains.
Lower Third Middle Third Upper Third
% SC farmers
21
Lower Third Middle Third Upper Third
Years of schooling 77.14 78.10 68.57
Years of experience 76.19 69.52 77.14
Farm assets 69.81 71.70 79.25
On the contrary: participation in SCs does not seem to
depend on schooling, experience, or assets.

22. Results
2. Hypothesis 2: Farmer characteristics such as educational attainment, asset
endowment, experience in farming, and so on, determine the likelihood of
participation and benefits from supply chains.
Lower Third Middle Third Upper Third
Average net income per hectare of SC farmers
22
Lower Third Middle Third Upper Third
Years of schooling 106,194 86,840 73,647
Years of experience 87,238 83,943 96,565
Farm assets 78,449 86,745 101,498
Among SC farmers, net income from farming seems
independent of education and farm experience, and weakly
dependent on assets

23. Results
3. Hypothesis 3: Farmers with larger farms are more likely to benefit
from organized supply chains.
Small FS Large FS
AVERAGE NET INCOME PER HA (P)
Large FS : >1 ha; Small FS: <1 ha
See count
See percentages
23
Small FS Large FS
SC 92,895 77,108
Non-SC 747 34,462
On the contrary: SC farmers with smaller farms have
higher average net income per ha.

24. Results
5. Hypothesis 4: The existence of good quality transport and
telecommunications infrastructure are more favorable for the inclusion of small
farmers in supply chains.
poor fair good
24
41 131 144
92.68 78.63 65.28
39 125 149
94.87 81.60 63.76
Quality of roads and bridges
% of the total who are in SC
% of the total who are in SC
Access to cellphone signal
On the contrary: Contract growers tend to be found in areas
with poorer infrastructure!

25. Results
5. Hypothesis 4: The existence of good quality transport and
telecommunications infrastructure are more favorable for the inclusion of small
farmers in supply chains.
poor fair good
38 103 94Quality of roads and bridges
25
38 103 94
16.17 43.83 40.00
37 102 95
15.81 43.59 40.60
Access to cellphone signal
Among all SC farmers
Quality of roads and bridges
Among all SC farmers
Likewise, SC farmers do not necessarily cluster the most in
the barangays with best infrastructure.

26. Results
5. Hypothesis 5: Farmers will choose to participate in supply chains based
primarily on cash price, followed by other considerations such as price
stability, support for working capital, and technical assistance.
Ranking Average Frequency
1 Pinansya Presyo
2 Presyo Pinansya
26
2 Presyo Pinansya
3 Inputs Inputs
4 Teknikal Teknikal
5 Proteksyon Proteksyon
Cash price is only the second most important factor considered by SC farmers.
Working capital advances more important.
Suggests transmission channel of supply chain benefit: higher price; financing
enables better farming techniques. Average cost/kg
Non-SC 67
SC 39

27. 27

28. Multiple regression analysis
O Control for variables simultaneously affecting
net income
O Key explanatory variable: participation in the
supply chainsupply chain
O Binary (SC farmer-1, Non-SC farmer-0)
O Continuous (percent of output sold to SC buyers)
O Endogeneity problem: need to instrument for
contract growing variable: suggest location
indicator as a control (e.g. Miyaka and Minot,
2008)
28

29. Variable definition
schain_pct % of output sold to SC buyers
schain_dummy SC farmer-1 ; Non-SC farmer-0
edad age, in years
tabako_ha farm size, in ha
zfarm_assets farm assets (e.g. tractor, farm animals)zfarm_assets farm assets (e.g. tractor, farm animals)
yrs_exp years of farming experience
yrs_school years of education
kasarian Male-1; Female-0
govt_support Yes-1; No-0
trans_kalyetulay quality rating (0,1,2; Poor, Fair, Good)
telkom_cellphone access rating (0,1,2)
telkom_internet access rating (0,1,2)
29

30. Summary statistics
Variable Obs Mean Std. Dev. Min Max
netinc_ha 316 68,540.66 84,996.48 -154,600.00 433,440.00
edad 316 46.30 12.46 19.00 81.00
zfarm_assets 316 284,663.80 415,870.00 0.00 3,305,000.00
tabako_ha 316 0.61 0.42 0.13 4.00
yrs_exp 316 23.12 13.90 1.00 66.00
30
yrs_exp 316 23.12 13.90 1.00 66.00
yrs_school 316 8.28 2.76 0.00 14.00
kasarian 316 0.83 0.38 0.00 1.00
govt_support 316 0.35 0.48 0.00 1.00
trans_kalyetulay 316 1.33 0.69 0.00 2.00
schain_dummy 316 0.74 0.44 0.00 1.00
telkom_cellphone 316 1.51 0.63 0.00 2.00
telkom_internet 316 0.28 0.54 0.00 2.00

31. Strategy:
Main equation: net farm income per ha regressed against farmer
characteristics and supply chain variable
Instrumented: schain_pct/ schain_dummy
Instruments: edad tabako_ha
yrs_exp zfarm_assetsyrs_exp zfarm_assets
yrs_school kasarian
govt_support trans_kalyetulay
telkom_cellphone telkom_internet
Instrumental variables (schain_pct) and treatment effects
(schain_dummy)
31

32. schain_pct Coef. t P>|t|
edad -0.27 -0.94 0.35
zfarm_assets 0.00 1.19 0.24
F( 10, 305) = 6.99
Prob> F = 0
Adj R-squared = 0.1676
IV Reg GMM: 1st Stage
zfarm_assets 0.00 1.19 0.24
tabako_ha -0.12 -0.02 0.98
yrs_exp -0.09 -0.35 0.73
yrs_school -1.48 -1.59 0.11
kasarian -6.78 -1.19 0.23
govt_support 15.92 3.54 0.00
trans_kalyetulay -6.24 -2.02 0.05
telkom_cellphone -11.20 -3.31 0.00
telkom_internet -18.78 -3.46 0.00
_cons 128.86 8.42 0.00
N.S. InN.S. InN.S. InN.S. In
OLS regOLS regOLS regOLS reg
of 2ndof 2ndof 2ndof 2nd
stagestagestagestage

33. Wald chi2(9)= 42.17
Prob > chi2= 0
netinc_ha Coef. z P>|z|
schain_pct 1,272.81 3.84 0.00
edad 954.66 1.53 0.13
IV Reg GMM: 2nd stage
edad 954.66 1.53 0.13
zfarm_assets 0.00 0.42 0.67
tabako_ha 1,828.64 0.14 0.89
yrs_exp -867.12 -1.58 0.12
yrs_school -229.57 -0.12 0.91
kasarian 11,797.38 1.06 0.29
govt_support -25,820.79 -2.51 0.01
trans_kalyetulay -8,466.74 -1.10 0.27
_cons -39,574.58 -0.73 0.46 33

34. Coef. z P>|z|
schain_dummy
telkom_cellphone -0.43 -2.81 0.01
telkom_internet -0.58 -3.88 0.00
edad -0.01 -0.88 0.38
Treatment effects: 1st stage
edad -0.01 -0.88 0.38
zfarm_assets 0.00 1.49 0.14
tabako_ha -0.02 -0.08 0.94
yrs_exp 0.00 -0.41 0.68
yrs_school -0.06 -1.66 0.10
kasarian -0.23 -0.96 0.34
govt_support 0.55 2.87 0.00
trans_kalyetulay -0.26 -1.87 0.06
_cons 2.89 4.74 0.00 34

35. Treatment effects: 2nd stage
Wald chi2(17) = 53.94
Prob >chi2 = 0
Coef. z P>|z|
netinc_ha
edad 1,001.09 1.61 0.11
zfarm_assets 0.00 0.24 0.81
35
zfarm_assets 0.00 0.24 0.81
tabako_ha 2,464.50 0.22 0.83
yrs_exp -838.45 -1.50 0.13
yrs_school -111.50 -0.06 0.95
kasarian 11,760.13 0.95 0.34
govt_support -25,288.79 -2.34 0.02
trans_kalyetulay -7,706.20 -1.00 0.32
schain_dummy 127,780.60 4.09 0.00
_cons -45,585.08 -0.89 0.38

36. Conclusions
O Contract growing results in higher farm
income.
O No confirmation that contract farmers
selected based on personal characteristics,selected based on personal characteristics,
farm assets, or farm size
O Farmers consider cash credit and price as
their basis for participation in contract
growing
36

37. Conclusions
O Assistance to farmers makes a difference in
their participation in supply chains
O Targeting disadvantaged farmers?
Evidence favors:Evidence favors:
O Strategy that prioritizes diversification,
participation of farmers in high value crops
(unless strong evidence for alternative priority
can be found)
O Promotion of smallholders in high value chains
by way of contract schemes
37

38. The beginning
Of your most valuedOf your most valued
questions and comments.
38

39. Results
3. Hypothesis 3: Farmers with larger farms are more likely to benefit from
organized supply chains.
Large FS : >1 ha; Small FS: <1 ha
See average net income
See percentages
Back to previous slide
39

40. Results
3. Hypothesis 3: Farmers with larger farms are more likely to benefit from
organized supply chains.
Large FS : >1 ha; Small FS: <1 ha
See count
Back to previous slide
40