Over the past week I have been flat out writing a long overdue paper on the emergence of contract farming in Baan Tiam, the northern Thai village where I have been undertaking research for a number of years. Here is a brief extract from my (very rough!) draft that addresses some of the reasons farmers have taken up this option. It starts out by discussing the problems of debt that have arisen in recent years in relation to garlic production. Garlic is Baan Tiam’s traditional cash crop, but yield and price reductions in recent years have seen a signficant move towards the contract cultivation of alternative crops – tobacco and sweet corn in particular.
The adoption of contract farming in Baan Tiam needs to be understood in terms of the central problem of agricultural debt. A common statement summing up the recent economic dilemma of garlic production is “the more we work the poorer we get” (ying tham ying jon). Garlic is a high cost crop. Part of the reason for this is that new seed stock has to be purchased each year. Farmers consistently claim that using their own garlic production as a source of seed stock results in very low yields. On top of this initial cost, garlic production has increasingly required substantial applications of fertiliser, pesticide and sometimes fungicide. If yields are good these costs are readily covered but declining yields in the early 2000s left many farmers with substantial debts. Of course, garlic production is not the only source of indebtedness but it has been a very significant contributing factor. It is not uncommon for dry season cultivators to report debts of between 50 and 100 thousand baht, with some notable cases reporting debts of 200-300 thousand baht. Baan Tiam’s headman, who had compiled some data on the issue for an official poverty alleviation scheme, told me that there was a total of around 10 million baht of debt within the village (an average of about 80,000 baht per household). In an economy where the average payment for one day’s employment is around 120 baht these debts represent very substantial financial challenges and they are a key source of anxiety, and some resentment.
One farmer eloquently recounted his tale of impoverishment (leaving out the minor detail of the busy rice mill located behind his house). When he first came to Baan Tiam to marry a local woman about 20 years ago he grew garlic and made good profits. Eventually he saved enough to buy a pickup with a “cab.” But his profits started to decline and he sold the large vehicle and bought a more modest standard pickup. But further economic troubles, combined with a rather expensive extra-marital liaison, forced him to sell the pickup and now he is reliant on a motor-bike. And, he added, so many villagers are in debt that a system of rotating debt (nii mul wian) had developed whereby farmers borrow from the agricultural cooperative to pay the bank and borrow from the bank to pay the cooperative, and borrow from local money lenders to pay both.
The primary attractiveness of contract farming for these farmers is that they don’t have to pay the crop’s input costs. Farmers regularly state that they have become interested in contract farming because they do not have to invest their own capital (which is usually borrowed): “we are growing for the companies because at least they are willing to invest the capital, we don’t have to hurt ourselves with debt, we don’t have to get stressed or tired. Investing labour is not as stressful as investing money.” Almost all the contracting companies provide the farmers with seedlings (or seed) and agro-chemicals. The cost of these inputs is then deducted from the selling price of the crop. If the crop fails the loss is borne by the company. Of course crop failure is still regarded as something of a disaster, but farmers regularly state that their only loss is the time they have invested in the crop and that their debt situation is not worsened. Farmers also acknowledge, not without some resentment, that the input prices charged by the company are often somewhat higher than market rates but the fact that the company is bearing the risk of investment is generally regarded as outweighing this disadvantage. One farmer, Jakrit, summed up the common view of the benefit of contract farming:
The companies have been coming for a long time but people were not interested because people just wanted to grow garlic. People only really became interested in the past few years. The first person to grow peas for a company was the headman. The first year, he grew 15 rai and made about 200,000 baht. The second year he could not rent so much so grew a lot less. This year I tried out less than one rai and I made 6000 baht from just that little bit. The company is good, the inputs just arrive – seeds, fertiliser and chemicals. If it is not Saturday or Sunday you can just ring up the broker and the fertiliser and chemicals just come. And the extension officers come and check on what we are doing and give us advice if we need to change anything. And if the crop fails there is no cost and no problem. The company does not want us to invest our own money because they are afraid we will sell to other companies. There are several of them that would want to buy. Modern Foods has a quota of about 500 rai for the whole district. So why not grow for them? If you grow your own crops you have to go and borrow from the cooperative and if the crop fails you are in debt and the interest just mounts up and up (dok, dok, dok, dok, dok, dok). And you get more and more into dept. But there is no problem with the company. All you lose if it fails is your labour.
Thanks. This sort of article of article with hard data is very interesting. Digging deeper and finding (probably multiple) causes of farming debt and solutions is certainly more satisfying than the stock explanation I first heard of farming debt being caused by bad advice the government gave farmers so it should be covered by the government.
Contract seems to have two dimensions, 1. the larger company is better able to insure:
“Almost all the contracting companies provide the farmers with seedlings (or seed) and agro-chemicals. The cost of these inputs is then deducted from the selling price of the crop. If the crop fails the loss is borne by the company. ”
2. The larger company is better able to do the research and calculations to find crops with a viable profit margin given current and possibly changing market conditions.
I wonder how the financing of longer term fixed costs are covered, like the Tap Tim fish cages of one fish farmer in the Mekong south of Chiang Saeng. This motivates me to do my own poking around and find out how the economics of it all works.
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Andrew, I have some questions:
1) Which district is the village in?
2) How and why did people get into garlic production 20 years ago?
3) What caused yield and price reductions in the early 2000s? Have the farmers been affected by FTA and imported garlic?
4) Do they hire labor in farm?
5) Can these households subsist solely on contract farming?
6) What do young men and women aged 18-35 do? (In the village I’ve carried out fieldwork in Lampun young people are mainly in non-farm employment.)
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Hi Tip, thanks for your interest. Here are some quick answers:
1. I would rather not say.
2. There has been longstanding interesting in growing garlic which, in the past, has been very lucrative for the village. 30 or so years ago it was grown much less extensively (partly given that dry season fields were used for raising cattle). But it has expanded gradually to become the dominant cash crop in the 1990s and early 2000s.
3. I will do a post in a few days on the yeild reductions. Key issues, according to the farmers, are climatic variability and soil fertility decline. The trade agreement with China had some impact on price (and a significant impact on perceptions about price). There was also a government scheme encouraging farmers to switch out of garlic given concerns about the impact of Chinese garlic imports.
4. There is considerable labour hire within the village (about half of the village depend on wage labour). Sometimes labourers are also bought in from neighbouring villages. Labour is usually hired for high input tasks like planting, weeding and harvesting. But there is also extensive use of exchange labour.
5. No. Of the 40 farmers I worked with in detail about 30 (if I remember my data correctly) nominated wage labour as their primary or secondary source of income. Livelihoods are typically rather diverse.
6. Very few young people are engaged in agriculture. Most are studying or working in urban employment.
If you get in touch with me direct via email we could have some more extensive discussions.
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How are costs and profits divided between farmers and company? do they get a percentage of sale (as for the rubber farmers in Laos in an earlier post), or a fixed price per kg, or some other arrangement? Are input prices subtracted from this as you seem to suggest?
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James: the contracts generally “guarantee” farmers a fixed price per kilogram. But there is usually a scale of prices according to the “grade” of the crop. This gives companies some flexibility to adjust the price by downgrading the crop. The input costs (often slightly inflated above market rates) are subtracted from the total payment made to the farmer. If the crop fails, the company bares the cost of the inputs.
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Another question: do the villagers still do any subsistence (ie for home consumption) farming? rice etc?
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Yes, my comments about cash cropping (garlic and contracted crops) relate to the dry season. During the wet season rice is by far the dominant crop. As a result of improved rice varieties the village enjoys very good rice yields.
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