An Analysis of contract farming in East Java, Bali, and Lombok, Indonesia

Abstract

This article examines the emergence and benefits of contract farming in East Java, Bali, and Lombok, Indonesia. After a general review of contract farming in these regions, three contracts, for seed corn in East Java, seed rice in Bali, and broilers in Lombok are described and analyzed using key informant interviews and household survey data. A review of the contracts suggest that there is a wide array of contract types and this is related to the technical requirements of production and the associated costs. Probit analysis is used to identify factors contributing to smallholder participation in farm contracts and a two-stage estimation process used to measure the effects of farm contracts on gross margins and labor use. Results indicate participation in contracts is influenced by farm size and other factors such as smallholder's age, education, and participation in farm groups. Contracts increased returns to capital for the seed corn and broiler contracts but not for the seed rice contract. All three contracts influenced the types of labor used; however, none of them influenced total farm employment.