Contract Farming and Environmental Protection: Evidence from Ghana

Over the past three decades, contract farming has grown in popularity with policymakers and development practitioners throughout low- and middle-income countries. Under contract farming schemes, farmers and buyers enter into preharvest agreements regarding the production and sale of agricultural goods. Farmers are thus assured they will have a buyer for their product, and traders and retailers are guaranteed a supply of saleable goods. These agreements have been shown to increase smallholder farmers’ market participation, improve household incomes and welfare, and spur rural development and agricultural transformation. However, less is known regarding the impact of contract farming schemes on environmental outcomes, including the use of sustainable farming practices. A new study published in Applied Economics Perspective and Policy looks at the environmental impacts of contract farming among cashew producers in Ghana.

The question of how contract farming schemes may impact the environment is an important one, the study’s authors suggest, because these schemes and other market-driven agricultural transformation programs can lead to a rapid expansion of cropped land and intensified use of chemical fertilizers and other agricultural inputs. If done unsustainably, these practices can have detrimental effects on local ecosystems and exacerbate shocks posed by climate change.

The study focuses on farm-level data collected from 391 Ghanaian cashew farmers and uses an index variable to determine the impact of a range of farming practices—fertilizer application, pest and weed control, intercropping, and soil and water conservation techniques—on environmental sustainability. The study also estimates marginal treatment effects (MTEs) to account for heterogeneity in farmers’ characteristics. The authors chose to focus on cashew farmers because cashes form an important cash crop in Ghana and are also associated with unsustainable production practices such as increased chemical use and monoculture farming.

Organic fertilizer use was found to be significantly lower among contract farmers than among farmers who did not engage in contract schemes. The authors posit that this could be because the surveyed contract farmers in general had older cashew trees, which require less fertilizer. Alternatively, the surveyed contract farmers owned less livestock than their noncontract counterparts, meaning they have less access to readily available organic fertilizer. Neither contract nor noncontract farmers in the survey used inorganic fertilizers, again potentially due to a lack of access.

Contract farmers also used significantly more pesticides and performed significantly less manual weeding. While the differences were not statistically significant, contract farmers were also found to use less intercropping and fewer water and soil conservation techniques.

The authors found that these results do differ based on farmers’ characteristics. Overall, female farmers are less likely to participate in contract farming than their male counterparts. Similarly, older and more experienced farmers and farmers with larger farm sizes are more likely to enter into contract schemes than younger farmers and those with smaller farms. Finally, farms that use hired labor are more likely to participate in contract farming.

However, when female farmers do participate in contract farming schemes, they are 47 percentage points more likely to use sustainable production practices than male farmers. When older farmers participate in contract farming, their use of sustainable farming practices falls by 2 percentage points. Similarly, native farmers who participate in contract farming are 30 percentage points less likely to use sustainable farm practices compared to farmers who are not natives of the community in which they farm.

Overall, the empirical results suggest that participation in contract farming may prevent farmers from adopting important sustainable farming practices. If these results are correct, the rise in contract farming schemes across Africa south of the Sahara and other low-income regions could mean a decline in environmental outcomes. For regions already struggling to cope with the impacts of climate change, such a decline could be devastating.

The authors suggest that tying contract schemes directly to the use of sustainable farming practices could be an effective way to address contract farming’s potentially negative environmental impacts. For example, contracting companies could train participating farmers in sustainable production methods and provide them with environmentally friendly inputs. Contracts could also be linked to sustainable farming certification programs. Governments also have an important role to play, including launching public awareness campaigns about the importance of sustainable farming and providing incentives for companies to incorporate sustainable farming requirements into their contract schemes.

In these ways, both the public and the private sector can help ensure contract farming schemes move the world closer to achieving the Sustainable Development Goals of ending hunger, achieving food security, improving nutrition, and promoting sustainable agriculture.