Effect of contract farming on the U.S. crop farmers' average return

Abstract

In the literature of contract farming, most of the studies focus on the functions of risk managements and reducing transaction costs. Only a few study the effect of contract farming on the productivity efficiency or profitability. Literature in the crop sector is especially lacking. In this paper, we use a unique farm-level dataset (Agricultural Resource Management Survey from the U.S. Department of Agriculture) to examine the effect of contract farming on the farmers' average return for the corn, soybean and wheat producers. The matching estimation is used in the nature to compare the farmers' average return with or without participating contract farming. We first run a logit model to calculate the propensity score from the farmers' contracting decision problem. Then, use the propensity score to match farmers using the contracts and not using the contracts and compare their average returns. The empirical results show that contract farming has a positive effect on the corn and soybean producers' average return and insignificant effect on wheat producers'.