What promotes production contract in Indian agriculture? Managing market risk versus profit orientation

Abstract

We identify factors influencing farmers’ decision-making on various production contracts and are explicitly concerned with whether managing market risk or profit orientation promotes contract farming (CF). After controlling for potential endogeneity, the IV-Tobit regression results indicate that farmers’ risk behavior and profit orientation are vital factors driving CF participation decisions. However, we observed that the impact of profit orientation is relatively more substantial than the risk management motive, suggesting that earning a higher profit, rather than managing market risks, is the primary objective of CF adoption. In addition, other factors such as farm size, mean contract price, education, age, and extension services play a significant role in CF participation. The major policy implications, based on results, call for enhancing the CF network and encouraging farmers to commercialize agriculture as it facilitates access to the market and higher profits. Further, agribusiness firms should share more market risks with farmers to invite risk-averse smallholders into the fold of commercial farming.