Asymmetric Information And Farmer’s Participation In Tobacco Contract Farming

Mohammad Rondhi, Sisca Imelda, Hendrik Setyawan, Joni Murti Mulyo Aji, Yuli Hariyati, Mustapit M, Sugeng Raharto, Diana Fauziah, Ati Kusmiati


Contract farming (CF) is an important tool to initiate structural transformation of agricultural sector in developing countries. However, one of pertinent problems in its establishment is asymmetric information. This problem creates a condition of mutual distrust between the contracting parties and decreases farmer’s participation in it. Thus, this study aimed to explain the asymmetric information problem in CF and find the correlates of farmer’s participation in it. As one of important industrial crops, this study focused on tobacco CF. This study was conducted at two villages (Antirogo and Nogosari) on two different sub-district (Sumbersari and Rambipuji) in Jember. A sample of 113 farmers were interviewed to collect the data. A descriptive analysis was used to explain the contract arrangement and asymmetric information in tobacco CF. A probit estimation was used to identify the coorelates of farmer’s participation in tobacco CF. The results showed that asymetric information does exists in tobacco CF and can be minimized through intense monitoring and increased transparancy. Both of these are possible when the company contracting directly with farmers. Meanwhile, younger farmer and those with more land are more likely to participate in CF. Furthermore, participation in CF is highly correlated with the increases in farm income. Finally, policy aimed to fostering CF should focused more on regulation that minimize the transaction cost of CF. In addition, in the long term, the policy should focused on incentivize young farmers and encouraging youth to enter agriculture.


contract farming, tobacco, asymmetric information, moral hazard, adverse selection

Full Text:



Abadi, B. (2018). The determinants of cucumber farmers’ pesticide use behavior in central Iran: Implications for the pesticide use management, Journal of Cleaner Production. Elsevier B.V., 205, pp. 1069–1081. doi: 10.1016/j.jclepro.2018.09.147.

Adonteng-Kissi, O. (2018). Causes of child labour: Perceptions of rural and urban parents in Ghana, Children and Youth Services Review. Elsevier Ltd. doi: 10.1016/j.childyouth.2018.05.034.

Ahmad, I. and Dutra, L. M. (2019). Imitating waterpipe: Another tobacco industry attempt to create a cigarette that seems safer, Addictive Behaviors. Elsevier Ltd, 91, pp. 244–252. doi: 10.1016/j.addbeh.2018.10.024.

Aiello, G., Enea, M. and Muriana, C. (2015). The expected value of the traceability information, European Journal of Operational Research. Elsevier Ltd., 244(1), pp. 176–186. doi: 10.1016/j.ejor.2015.01.028.

Arumugam, N., Arshad, F. M. and Mohamed, Z. (2011). Determinants of Fresh Fruits and Vegetables (FFV) Farmers’ Participation in Contract Farming in Peninsular Malaysia, International Journal of Agricultural Management and Development (IJAMAD), 1(2), pp. 65–71.

Ba, H. A. et al. (2019). Inclusiveness of contract farming along the vertical coordination continuum: Evidence from the Vietnamese rice sector, Land Use Policy. Elsevier, 87(May 2018), p. 104050. doi: 10.1016/j.landusepol.2019.104050.

Barrett, C. B. et al. (2012). Smallholder Participation in Contract Farming: Comparative Evidence from Five Countries, World Development, 40(4), pp. 715–730.

Bellemare, M. F. (2010). Agricultural extension and imperfect supervision in contract farming: Evidence from Madagascar, Agricultural Economics, 41(6), pp. 507–517. doi: 10.1111/j.1574-0862.2010.00462.x.

Bellemare, M. F. (2012). As You Sow, So Shall You Reap: The Welfare Impacts of Contract Farming, World Development. Elsevier Ltd, 40(7), pp. 1418–1434. doi: 10.1016/j.worlddev.2011.12.008.

Bellemare, M. F. (2018). Contract farming: opportunity cost and trade-offs, Agricultural Economics (United Kingdom), 49(3), pp. 279–288. doi: 10.1111/agec.12415.

Bellemare, M. F., Barrett, C. B. and Just, D. R. (2013). The welfare impacts of commodity price volatility: Evidence from rural ethiopia, American Journal of Agricultural Economics, 95(4), pp. 877–899. doi: 10.1093/ajae/aat018.

Bellemare, M. F. and Bloem, J. R. (2018). Does contract farming improve welfare? A review, World Development, 112, pp. 259–271. doi: 10.1016/j.worlddev.2018.08.018.

Bellemare, M. F. and Lim, S. (2018). In All Shapes and Colors: Varieties of Contract Farming, Applied Economic Perspectives and Policy, 40(3), pp. 379–401. doi: 10.1093/aepp/ppy019.

BPS-Statistics of Jember Regency (2017) Jember Regency in Figures. Jember: BPS Kabupaten Jember.

BPS (2014) Analisis Rumah Tangga Usaha Peternakan di Indonesia. Edited by H. Marhaeni. Jakarta: Badan Pusat Statistik.

BPS (2015a) Analisis Rumah Tangga Usaha Hortikultura di Indonesia. Edited by H. Marhaeni. Jakarta: Badan Pusat Statistik.

BPS (2015b) Analisis Rumah Tangga Usaha Perkebunan di Indonesia. Edited by H. Marhaeni. Jakarta: Badan Pusat Statistik.

BPS Jember (2019a) Jember dalam Angka 2019. Jember: BPS Kabupaten Jember.

BPS Jember (2019b) PDRB Kabupaten Jember Menurut Lapangan Usaha Tahun 2014-2018. Jember: BPS Kabupaten Jember.

Drope, J., Li, Q., Araujo, Edson Correia, et al. (2017). The economics of tobacco farming in Indonesia : Health, Population, and Nutrition Global Practice. Available at:

Drope, J., Li, Q., Araujo, Edson C., et al. (2017) The Economics of Tobacco Farming in Indonesia : Helath, Population, and Nutrition Global Practice.

Eaton, C. and Shepherd, A. (2001) Contract Farming: Partnerships for Growth. Rome, Italy: Food and Agricultural Organization.

Elms, D. K. and Low, P. (2013) Global value chains in a changing world. Switzerland: World Trade Organization.

Essig, M. et al. (2016) ‘Performance-based contracting in business markets’, Industrial Marketing Management. Elsevier Inc., 59, pp. 5–11. doi: 10.1016/j.indmarman.2016.10.007.

Fanani, A., Anggraeni, L. and Syaukat, Y. (2015). Pengaruh Kemitraan Terhadap Risiko Usaha tani Tembakau Di Kabupaten Bojonegoro Provinsi Jawa Timur Produksi Tembakau ( Ton ) Periode (Tahun), Jurnal Manajemen & Agribisnis, 12(3), pp. 194–203. doi: 10.17358/JMA.12.3.194.

Fischer, S. and Wollni, M. (2018). The role of farmers’ trust, risk and time preferences for contract choices: Experimental evidence from the Ghanaian pineapple sector, Food Policy. Elsevier, 81(October), pp. 67–81. doi: 10.1016/j.foodpol.2018.10.005.

Freguin-Gresh, S., D’Haese, M. and Anseeuw, W. (2012). Demythifying contract farming: Evidence from rural South Africa, Agrekon, 51(3), pp. 24–51. doi: 10.1080/03031853.2012.749567.

Gray, A. W. and Boehlje, M. D. (2005). Risk sharing and transactions costs in producer-processor supply chains, Choices, 4(20), p. 4.

Hartmann-Wendels, T. (1993). Optimal incentives and asymmetric distribution of information, European Journal of Operational Research, 69(2), pp. 143–153. doi: 10.1016/0377-2217(93)90159-K.

Holly Wang, H., Yu, H. and Li, B. (2017). Is dairy complex a solution to milk safety? A comparison of farmers’ perceived and realized food safety effects, International Food and Agribusiness Management Review, 20(4), pp. 605–613. doi: 10.22434/IFAMR2016.0160.

Hu, W.-Y. (2012). Effect of Contract Farming on the Farmers ’ Average Return - The Case of the Grain Industry in the USA, Selected Paper Prepared for Presentation at the Agricultural and Applied Economics Associations (AAEA) 2012 Annual Meeting, Seattle, Washington.

Huang, Z. ying et al. (2018). One size fits all? Contract farming among broiler producers in China, Journal of Integrative Agriculture. CAAS. Publishing services by Elsevier B.V, 17(2), pp. 473–482. doi: 10.1016/S2095-3119(17)61752-0.

Ito, J., Bao, Z. and Su, Q. (2012). Distributional effects of agricultural cooperatives in China: Exclusion of smallholders and potential gains on participation, Food Policy. Elsevier Ltd, 37(6), pp. 700–709. doi: 10.1016/j.foodpol.2012.07.009.

Katchova, A. L. and Miranda, M. J. (2004). Two-Step Econometric Estimation Of Farm Characteristics Affecting Marketing Contract Decisions, American Journal of Agricultural Economics, 86(February), pp. 88–102.

Key, N. (2005). How much do farmers value their independence?, Agricultural Economics, 33(1), pp. 117–126. doi: 10.1111/j.1574-0862.2005.00339.x.

Key, N. and Runsten, D. (1999). Contract farming, smallholders, and rural development in Latin America: The organization of agroprocessing firms and the scale of outgrower production, World Development, 27(2), pp. 381–401. doi: 10.1016/S0305-750X(98)00144-2.

Khan, M. F., Nakano, Y. and Kurosaki, T. (2019). Impact of contract farming on land productivity and income of maize and potato growers in Pakistan, Food Policy. Elsevier, (April), pp. 1–12. doi: 10.1016/j.foodpol.2019.04.004.

Knoeber, C. R. and Thurman, W. N. (1995). ‘’Don’t Count Your Chickens...”: Risk and Risk Shifting in the Broiler Industry, American Journal of Agricultural Economics, 77(3), pp. 486–496. doi: 10.2307/1243218.

Kuijpers, T. G., Willemsen, M. C. and Kunst, A. E. (2018). Public support for tobacco control policies: The role of the protection of children against tobacco’, Health Policy. Elsevier Ireland Ltd, 122(8), pp. 929–935. doi: 10.1016/j.healthpol.2018.05.004.

Kumar, A. et al. (2016) Can contract farming increase farmers’ income and enhance adoption of food safety practices?: Evidence from remote areas of Nepal, International Food Policy Research Institue. 1524.

Lambrecht, I. B. and Ragasa, C. (2018). Do development projects crowd-out private sector activities? Evidence from contract farming participation in Northern Ghana’, Food Policy. Elsevier, 74(June 2017), pp. 9–22. doi: 10.1016/j.foodpol.2017.11.001.

Lee, J., Gereffi, G. and Beauvais, J. (2012). Global Value Chains and Agrifood Standards: Challenges and Possibilities for Smallholders in Developing Countries’, in Proceedings of the National Academy of Sciences of the United States of America. National Academy of Sciences, pp. 12326–12331.

Lestari, E. K. et al. (2016). Keuntungan Petani Tebu Rakyat Melalui Kemitraan di Kabupaten Jember, Buletin Tanaman Tembakau, Serat & Minyak Industri, 7(2), p. 79. doi: 10.21082/bultas.v7n2.2015.79-89.

Maertens, M. and Vande Velde, K. (2017). Contract-farming in Staple Food Chains: The Case of Rice in Benin, World Development. Elsevier Ltd, 95, pp. 73–87. doi: 10.1016/j.worlddev.2017.02.011.

Masakure, O. and Henson, S. (2005). Why do small-scale producers choose to produce under contract? Lessons from nontraditional vegetable exports from Zimbabwe, World Development, 33(10), pp. 1721–1733. doi: 10.1016/j.worlddev.2005.04.016.

McDaniel, P. A., Cadman, B. and Malone, R. E. (2016). Shared vision, shared vulnerability: A content analysis of corporate social responsibility information on tobacco industry websites, Preventive Medicine. Elsevier B.V., 89, pp. 337–344. doi: 10.1016/j.ypmed.2016.05.033.

Minot, N. and Sawyer, B. (2014). Contract Farming in Developing Countries : Theory, Practice, and Policy Implications, in Innovation for inclusive value-chain development: Successes and challenges, pp. 127–155.

Mishra, A. K., Kumar, A., Joshi, P. K., D’Souza, A., et al. (2018). How can organic rice be a boon to smallholders? Evidence from contract farming in India, Food Policy. Elsevier, 75(August 2017), pp. 147–157. doi: 10.1016/j.foodpol.2018.01.007.

Mishra, A. K., Kumar, A., Joshi, P. K. and D’Souza, A. (2018). Production risks, risk preference and contract farming: Impact on food security in India, Applied Economic Perspectives and Policy, 40(3), pp. 353–378. doi: 10.1093/AEPP/PPY017.

Miyata, S., Minot, N. and Hu, D. (2009). Impact of Contract Farming on Income: Linking Small Farmers, Packers, and Supermarkets in China, World Development. Elsevier Ltd, 37(11), pp. 1781–1790. doi: 10.1016/j.worlddev.2008.08.025.

Mouzas, S. (2016). Performance based contracting in long-term supply relationships, Industrial Marketing Management. Elsevier Inc., 59, pp. 50–62. doi: 10.1016/j.indmarman.2016.05.028.

Moyer-Lee, J. and Prowse, M. (2015). How traceability is restructuring Malawi’s tobacco industry, Development Policy Review, 33(2), pp. 159–174. doi: 10.1111/dpr.12096.

Murthy, M. and Madhuri, S. B. (2013). A Case Study on Suguna Poultry Production Through Contract Farming in Andhra Pradesh, Asia Pacific Journal of Marketing & Management Review, 2(5). Available at:

Nandhita, L. and Rondhi, M. (2018). Pola Kemitraan Petani Cabai Merah dengan Koperasi di Desa Andongsari Kecamatan Ambulu Kabupaten Jember, in Pembangunan Pertanian dan Peran Pendidikan Tinggi Agribisnis: Peluang dan Tantangan di Era Industri 4.0, pp. 344–349.

Otsuka, K., Nakano, Y. and Takahashi, K. (2016). Contract Farming in Developed and Developing Countries, Ssrn, (June), pp. 1–24. doi: 10.1146/annurev-resource-100815-095459.

Oya, C. (2012). Contract Farming in Sub-Saharan Africa: A Survey of Approaches, Debates and Issues, Journal of Agrarian Change, 12(1), pp. 1–33. doi:

Prowse, M. and Grassin, P. (2020) Tobacco, Transformation and Development Dilemmas from Central Africa, Tobacco, Transformation and Development Dilemmas from Central Africa. doi: 10.1007/978-3-030-33985-2.

Prowse, M. and Moyer-Lee, J. (2014). A comparative value chain analysis of smallholder burley tobacco production in Malawi - 2003/4 and 2009/10, Journal of Agrarian Change, 14(3), pp. 323–346. doi: 10.1111/joac.12022.

Ramaswami, B., Singh Birthal, P. and Joshi, P. K. (2009). Grower heterogeneity and the gains from contract farming: The case of Indian poultry, Indian Growth and Development Review, 2(1), pp. 56–74. doi: 10.1108/17538250910953462.

Reardon, T. et al. (2009). Agrifood Industry Transformation and Small Farmers in Developing Countries, World Development, 37(11), pp. 1717–1727. doi: 10.1016/j.worlddev.2008.08.023.

Restuccia, D., Yang, D. T. and Zhu, X. (2008). Agriculture and aggregate productivity: A quantitative cross-country analysis, Journal of Monetary Economics, 55(2), pp. 234–250. doi: 10.1016/j.jmoneco.2007.11.006.

Roberts, M. J., O’Donoghue, E. and Key, N. (2014). Separating Moral Hazard from Adverse Selection: Evidence from the U.S. Federal Crop Insurance Program, Department of Economics Working Paper Series. 14–10. Manoa. doi: 10.1002/path.

Rueda, X., Garrett, R. D. and Lambin, E. F. (2016). Corporate investments in supply chain sustainability : Selecting instruments in the agri-food industry, Journal of Cleaner Production. Elsevier Ltd. doi: 10.1016/j.jclepro.2016.11.026.

Setboonsarng, S., Leung, P. and Stefan, A. (2008). Rice contract farming in Lao PDR: Moving from subsistence to commercial agriculture, ADB Institute, (90), p. 24. Available at:

Simmons, P., Winters, P. and Patrick, I. (2005). An analysis of contract farming in East Java, Bali, and Lombok, Indonesia, Agricultural Economics, 33(SUPPL. 3), pp. 513–525. doi: 10.1111/j.1574-0864.2005.00096.x.

Sumartono, E. (2015). Analisis Produksi Tembakau Rajangan Tipe Magelangan Dalam Pola Kemitraan, Cv. Merabu-Pt. Djarum Kudus, Agrisep, 15(2), pp. 131–146.

Sumo, R. et al. (2016). Using performance-based contracts to foster innovation in outsourced service delivery, Industrial Marketing Management. Elsevier Inc., 59, pp. 12–24. doi: 10.1016/j.indmarman.2016.05.029.

Swain, B. B. (2012) Determinants of Farmers’ Participation in Contract Farming: The Cases of Gherkin and Paddy Seed in Andhra Pradesh, India, Millennial Asia, 3(2), pp. 169–185.

Timmer, C. P. (2009) A World Without Agriculture : The Structural Transformation in Historical Perspective. AEI Press.

Ton, G. et al. (2018). Contract farming for improving smallholder incomes : What can we learn from effectiveness studies ?, World Development. Elsevier Ltd, 104, pp. 46–64. doi: 10.1016/j.worlddev.2017.11.015.

Urip (2009). Analisis Missing Factor’s yang Perlu Diinjeksikan pada Kemitraan Usaha Antara Petani dengan PT. TTDS Mitra Garuda dalam Menanam Kacang Tanah Benih Unggul di Kawasan Meru Betiri Kabupaten Jember, Jurnal Sosial Ekonomi Pertanian, 3(1), pp. 40–46.

Veldwisch, G. J. (2015). Contract farming and the reorganisation of agricultural production within the Chókwè Irrigation System, Mozambique, Journal of Peasant Studies, 42(5), pp. 1003–1028. doi: 10.1080/03066150.2014.991722.

Vicol, M. (2017). Is contract farming an inclusive alternative to land grabbing? The case of potato contract farming in Maharashtra, India, Geoforum. Elsevier, 85(July), pp. 157–166. doi: 10.1016/j.geoforum.2017.07.012.

Wainaina, P. W., Okello, J. J. and Nzuma, J. M. (2012). Impact of Contract

Farming on Smallholder Poultry Farmers’ Income in Kenya, in International Association of Agricultural Economist (IAAE) Triennial Conference. Foz do Iguacu: IAAE.

Wainaina, P. W., Okello, J. J. and Nzuma, J. M. (2014). Blessing or evil? Contract farming, smallholder poultry production and household welfare in Kenya, Quarterly Journal of International Agriculture, 53(4), pp. 319–340.

Wang, H. H., Wang, Y. and Delgado, M. S. (2014). The transition to modern agriculture: Contract farming in developing economies, American Journal of Agricultural Economics, 96(5), pp. 1257–1271. doi: 10.1093/ajae/aau036.

Wang, Xinhui, Guo, H. and Wang, Xianyu (2017). Supply chain contract mechanism under bilateral information asymmetry, Computers and Industrial Engineering, 113, pp. 356–368. doi: 10.1016/j.cie.2017.09.008.

Widjayanti, F. N. and Rizal, M. (2016). Sistem Kemitraan dalam Usahatani Peternakan Ayam Broiler di Kabupaten Jember, Surya Agritama, 5(1), pp. 110–129.

Zhao, Y. feng et al. (2017a). A test on adverse selection of farmers in crop insurance: Results from Inner Mongolia, China, Journal of Integrative Agriculture. Chinese Academy of Agricultural Sciences, 16(2), pp. 478–485. doi: 10.1016/S2095-3119(16)61440-5.

Zhao, Y. feng et al. (2017b). A test on adverse selection of farmers in crop insurance: Results from Inner Mongolia, China, Journal of Integrative Agriculture. Chinese Academy of Agricultural Sciences, 16(2), pp. 478–485. doi: 10.1016/S2095-3119(16)61440-5.



  • There are currently no refbacks.

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.