The Sustainability of Contract Farming with Specialized Suppliers to Modern Retailers: Insights from Vegetable Marketing in Indonesia

Abstract

Specialized suppliers to supermarkets in rural Java showed that smallholder farmers could engage in contract farming with the rise of retail modernization. This paper examines whether they have sustained contract farming with the recent decline of modernized stores. Our field survey, based on cases reported by the World Bank in 2006, provides the following findings: (1) Some suppliers failed to sustain contract farming due to growers’ hold-up problems; (2) The suppliers could prevent contract breaching by either undertaking contract-specific investments to train growers or provide inputs. Moreover, they selected growers based on their social reputation to avoid contract breaching; (3) We found that farmers in breach of contract farming on the modern channel begin to arrange farmers’ groups by themselves and return to the traditional channel as a new type of intermediaries. This indicates an evolution of the traditional marketing channel with the supermarket revolution.