Empowering farmers: Unveiling the economic impacts of contract farming on red chilli farmers’ income in Magelang District, Indonesia

Abstract

Abstract Contract farming is widely recognised as an empowering tool to improve the welfare of farmers in developing countries and as an institutional solution to address issues related to market failure, credit, insurance, and information. This research endeavours to scrutinise the socio-economic distinctions between farmers engaged in contract farming and those not involved in such agreements. Additionally, it seeks to identify the factors influencing farmers’ participation in contract farming schemes and assess the impact of such arrangements on the income of red chilli farmers. The study, conducted in Magelang District, included 40 respondents from contract farmers and 45 from non-contract farmers. Employing the probit model, the ordinary least square model, and the treatment effect by Heckman, the research aimed to estimate the income impacts of existing contract farming. The findings revealed a noteworthy 57.50% increase in farmers’ incomes attributed to enhanced productivity and effective product management within the context of contract farming. Moreover, contracted farmers demonstrated advanced socio-economic conditions, boasting higher levels of education, knowledge, productivity, and agricultural assets compared to their non-contracted counterparts.