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A Way Forward To Promote The Farming Contracts Between Firms And Farmers In Cultivation Productions: A CASE STUDY Of VIETNAM

TL;DR: In this paper, the authors assess the factors affecting the level of linkages between businesses and farmers in crop development in Thai Binh province, Vietnam, using exploratory factor analysis (EFA) and regression analysis with survey data.
Abstract: In an age of market liberalization, globalization, and expanding agribusiness, there is a danger that small-scale farmers will find difficulty in fully participating in the market economy. One of the solutions to solve the above situation is to strengthen linkages between farmers and firms through contract farming. The purpose of this study is to assess the factors affecting the level of linkages between businesses and farmers in crop development in Thai Binh province, Vietnam. The two main research methods used were exploratory factor analysis (EFA) and regression analysis with survey data which was conducted from 300 farmers, 10 firms, and 15 factors related to contract-farming. The results indicated that there are 5 factors that significantly affect the level of participation of farmers in the linking process, the order of impacts from strong to weak is as follows: (1) Commitment and sharing of benefits and risks between farmers and firms in the linking process, (2) Issues related to management skills and enterprises capacity of link firms, (3) Price issues that farmers are interested in in the process of implementing links with firms, (4) Policy environment - Institutions related to farmer contracts between firms and farmers, (5) Household awareness about the benefits brought about by farmer contracts with firms. Based on results, a number of specific solutions have been proposed to enhance the efficiency of farming contracts between firms and farmers in cultivation production.

Summary (3 min read)

1. Introduction

  • Linking in production and business is always the direction to encourage the development of many economies in the world.
  • The farmer contract between firms and farmers was not strong and sustainable because there was no mechanism for sharing profits and risks, mainly still in the form of negotiation for buying and selling (Nguyen Van Chi, 2020).
  • Thai Binh is a Vietnamese administrative unit and a coastal province in the Red River Delta.
  • The above studies analyzed different topics of linkage issues in Vietnam.
  • Thirdly, the authors formulate policy recommendations to improve linkage efficiency in production in Thai Binh and can be applied to other localities.

2. Literature reviews

  • Hirschman (1958) divided the concept of farmer contracts based on industry and interdisciplinary relationships:.
  • Some places, forms of contracting are dependent on specific institutions such as marketing orders and bargaining cooperatives (Sporleder, 1992).
  • Reardon and Barrett (2000) have observed that the agricultural industrialization process in many developed countries has brought a number of effects in regulating the supply chains that make them more closely connected.
  • Contracting farmers can increase profit opportunities through a greater product range and differentiated products (Pasour, 1998), or by diversifying out of traditional crops in developing countries in order to grow high-value crops and thereby increase their income (Williams, 1985; Levin, 1988; Delgado, 1999).
  • Fujita & Mori (2005), Hussain & Planning (2000) have concluded that there are two main types of linkages, creating a driving force in cross-industry interactions.

3.1. Conceptual Research Framework

  • This study aims to explore the factors related to the level of participation of farmers in linkage with firms in Thai Binh province.
  • The process of developing the survey table and conducting data collection survey has been carried out in the following main stages.

3.2.1. Secondary data

  • Secondary data used in the study include: data on land, population and labor of Thai Binh province and data on the situation of business-farmer farmer contracts in crop production.
  • These secondary data were collected from the available public sources: General Statistics Office, Statistical Office of Thai Binh Province, Department of Agriculture and Rural Development of Thai Binh Province, enterprises participating in the association in the province, Research related to links in Thai Binh province.

3.2.2. Primary data

  • Primary data was collected through survey methods, direct interviews with enterprises and farms.
  • Primary data was collected through two main methods:.
  • The author also conducted indepth interviews with provincial, district and cooperative managers, investigating enterprises involved in agricultural production in Thai Binh province.
  • The author has selected 3 districts to represent for the survey: Dong Hung district, Vu Thu district and Kien Xuong district.
  • The set of questionnaires was distributed to 300 people from farmers who have participated, are participating and have not joined the link, 10 firms and 15 professional officials in the localities (Table 1).

3.3. Data analysis

  • This study performed two main analyses that are Exploratory Factor Analysis (EFA) and Multivariate Regression Analysis using IBM SPSS Statistics 22 package.
  • Similarly, the Bartlett’s Test of Sphericity to see the sufficiency correlation items to proceed in the analysis when it is significant at p < 0.001, which means that there are some relationships between the items.
  • The number of factors is determined based on the Eigenvalue index (The value of the variance divided by each factor) - representing the variance explained by each factor.
  • After completing the Exploratory Factor Analysis, the variables do not guarantee values convergence is removed from the model.
  • Expect a strong linear correlation between dependent variables and independent variables.

4.3.2. Exploratory Factor Analysis (EFA)

  • After assessing the reliability of the scales, the author conducted an exploratory factor analysis to evaluate the convergence value and discriminant value of the independent and dependent variable scales.
  • In all statements, the factor larger than 0.5 suggests that the statements can optimally explain variances of their related factors, and thus the questions are significant.
  • Thus, the factors after implementing EFA discovery factor ensure the ability to represent the original survey data and be eligible to perform multivariate regression analysis.

4.3.5. Exploratory Factor Analysis for dependent variables

  • These results suggest that factor analysis was suitable for these statements.
  • There are one dimension or component emerged from the EFA procedure based on the computed Eigenvalue >1.0.
  • This has confirmed the ability to converge and perform well of the observed observation variables.

5. Discussion

  • As described above, the degree of farmers participation in the link was classified according to five factors: Commitment and sharing of benefits and risks, household awareness about the benefits of contracts, policy environment, management skills and enterprises capacity of link firms and price issues.
  • Regarding the factor of commitment and sharing of benefits and risks, all 10 variables had factor loading scores between .721 and .973, and the top-3 factor loading scores were the farmers are committed to providing information for firms (CK04; .973), following the production process (CK03; .970), selling products to enterprises as the original commitment (CK05; .931).
  • For the factor of policy environment, there were 4 variables which had factor loading scores between .760 and .848.
  • The variable with the highest β value is the relatively most important independent variable.

6. Conclusions and Implications

  • Based on secondary data and primary data from the 300 farmers survey of Thai Binh province, using the method of economic statistical analysis, comparative method, exploratory factor analysis method.
  • First, the link between farmers and farmers in Thai Binh was vertical linkages.
  • This form of farmer contracts between farmers and firms will help develop the crop sector in the province to achieve higher economic efficiency.
  • Contracting parties must have certain binding conditions stipulated in the contract of agreement, thereby improving the responsibility among the participating parties.
  • Second, strengthen the management capacity and business capacity of linked firms.

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1
A Way Forward To Promote The Farming Contracts Between Firms And Farmers In
Cultivation Productions: A CASE STUDY Of VIETNAM
𝑁𝑔𝑢𝑦𝑒𝑛 𝑉𝑎𝑛 𝑆𝑜𝑛𝑔
, Vu Ngoc Huyen
1
, Nguyen Thị Thuy
2
, Dinh Van Tien
3
, Thai Van Ha
3
, Nguyen Xuan Diep
4
,
1
Vietnam National University of Agriculture (VNUA), Trau Quy, Gia Lam, Hanoi, Vietnam
2
Hanoi University of Industry (HAUI), Minh Khai, Bac Tu Liem, Hanoi, Vietnam
3
Ha Noi University of Business and Technology (HUBT), Vinh Tuy, Hai Ba Trung, Ha Noi, Vietnam.
4
Thai Nguyen University of Economics & Business Administration (TUEBA), Thai Nguyen, Vietnam.
Emails: nguyensonghua@gmail.com, vungochuyen.vnua@gmail.com, thuynguyen17072007@gmail.com,
dvtien.napa@yahoo.com, vanha280182@gmail.com, nguyenxuandiep@gmail.com.
Corresponding author is Dr. Vu Ngoc Huyen,
Email of Corresponding author: vungochuyen.vnua@gmail.com
Abstract
In an age of market liberalization, globalization, and expanding agribusiness, there is a danger
that small-scale farmers will find difficulty in fully participating in the market economy. One of
the solutions to solve the above situation is to strengthen linkages between farmers and firms
through contract farming. The purpose of this study is to assess the factors affecting the level of
linkages between businesses and farmers in crop development in Thai Binh province, Vietnam.
The two main research methods used were exploratory factor analysis (EFA) and regression
analysis with survey data which was conducted from 300 farmers, 10 firms, and 15 factors
related to contract-farming. The results indicated that there are 5 factors that significantly affect
the level of participation of farmers in the linking process, the order of impacts from strong to
weak is as follows: (1) Commitment and sharing of benefits and risks between farmers and firms
in the linking process, (2) Issues related to management skills and enterprises capacity of link
firms, (3) Price issues that farmers are interested in in the process of implementing links with
firms, (4) Policy environment - Institutions related to farmer contracts between firms and
farmers, (5) Household awareness about the benefits brought about by farmer contracts with
firms. Based on results, a number of specific solutions have been proposed to enhance the
efficiency of farming contracts between firms and farmers in cultivation production.
Keywords: farm contracts, firms, farmers, cultivation production, Thai Binh.
1. Introduction
Linking in production and business is always the direction to encourage the development of
many economies in the world. Vietnam's agricultural sector is still small, fragmented and
traditional agriculture. Therefore, cooperation and alignment in the industry are more necessary
than ever (Tran Quoc Nhan, 2012). However, the results of implementing this linkage in
Vietnam were not as expected. Farmers have remained on the sidelines of the growth; they are
not keen on joining the agricultural association and accepted to keep the traditional farming
practices with many risks (Quang Sang, 2019). In the total 50,000 firms involved in the
agricultural sector, only about 1,000 are directly linked to farmers (Bao Loan & Duong Thanh,
2019). Investment in agricultural production is not effective, high risks; besides the support
Preprints (www.preprints.org) | NOT PEER-REVIEWED | Posted: 19 October 2020 doi:10.20944/preprints202010.0395.v1
© 2020 by the author(s). Distributed under a Creative Commons CC BY license.

2
policy for firms to invest in agricultural production is not specific, so the largest enterprises are
not interested to invest in agriculture. The farmer contract between firms and farmers was not
strong and sustainable because there was no mechanism for sharing profits and risks, mainly still
in the form of negotiation for buying and selling (Nguyen Van Chi, 2020). The proportion of
commodity agricultural products that are consumed through contracts between farmers and firms
are still low. The form of contract for consuming agricultural products is only done mainly in the
relatively large-scale production sectors such as rice and phantasies, but especially for the
vegetable and fruit industry, it is still through merchant (Quynh Anh, 2020).
Thai Binh is a Vietnamese administrative unit and a coastal province in the Red River Delta.
By the end of 2018, Thai Binh ranked 13/63 provinces and cities in terms of population, ranked
29th in Gross Regional Domestic Product (GRDP) and ranked 8th in speed GRDP growth (Thai
Binh Statistical Office, 2018). Thai Binh is the only plain province without hills and mountains,
suitable for agricultural production. Agriculture is the main industry, accounting for a large
proportion in the value of agricultural products of the province (over 50%), the area of food
crops in 2017 was about 171,9 thousand hectares, of which the rice area was 158,7 thousand ha
(General Statistics Office, 2017). However, the current implementation of farming contracts
between firms and farmers in Thai Binh province has been still very limited.
In order to improve the effectiveness of production linkages, the Government of Vietnam has
issued many different policies. The government perceives contract farming as an excellent
opportunity to boost rural economic development; it reveals its strong interest in contract
farming through the issuance of a legal framework for its implementation (Hélène et al., 2019).
Decision No. 80/2002/QD-TTg of June 24, 2002 of the Prime Minister (the policy of linking 4
houses) and the Directive No. 25/2008/CT-TTg of October 10, 2008 of the Prime Minister The
Government has strengthened the direction of consuming agricultural products through contracts.
These policies have positively affected the formation of many raw material areas associated with
processing and consumption, especially for sugarcane and tobacco production, milk, some
vegetables. However, the promotion and implementation of large-scale contract farming require
information on the determinants that affect farmers’participation, which is very important for key
planners books to develop more appropriate programs. However, despite growing adoption rates,
to the best of our knowledge no studies evaluating the inclusiveness of farming contracts and
analyzing the factors that influence people's participation in farming contracts in Vietnam.
Several studies have attempted to assess the determinants of contract farming participation by
farmers for specific crops and the actors in the linkage. The model of "linking four houses" has
been researched, built, and applied in rural agriculture production practices in Tra Vinh province
in the works of Vo Huu Phuoc (2010), and in the Red River Delta of Nguyen Tat Thang (2014),
Enterprises and Farmers are the two main actors of linkages in agricultural production. In
particular, Enterprises are the engine of the linkage and play an important role in linking the
remaining "3 houses" to form production areas; supporting inputs and purchasing products for
farmers; step by step towards branding of agricultural products. Le Thi Kim Oanh et al. (2016)
focuses on analyzing the benefits of tea producers that sign contracts with companies in term of
tea marketing channels in Phu Tho province, the study found that contract farmers received
lower price than non-contract farmers did in exchange for higher stability of price and better
market access. As a result, it is highly recommended that small tea farmers should participate in
contract farming in Phu Tho Province, Vietnam. Nguyen Dinh Phuc et al. (2017) studied the
annual sugarcane production activity in Gia Lai province, the study pointed out 4 factors that
Preprints (www.preprints.org) | NOT PEER-REVIEWED | Posted: 19 October 2020 doi:10.20944/preprints202010.0395.v1

3
have a great influence on the ability of sugarcane farmers to participate in the associated model
including the capital (95.38%), agricultural extension (94.98%), experience (65.27%), and area
(61.09%).
The above studies analyzed different topics of linkage issues in Vietnam. However, there are
many scientific gaps that can develop: The fact that the process of implementing business links
and farmers in each locality is different. Lessons learned from localities are only for reference to
the process of implementing links in Thai Binh. On the other hand, to our understanding, there
has not been any scientific and comprehensive and systematic research on how to link businesses
and farmers in the development of crop production in Thai Binh province.
Against this background, this study contributes to the literature in three ways. First, we
generalized the situation of agricultural production linkages between farmer households and
businesses in Thai Binh province. Secondly, we modeled the factors that influence people's
participation and analyzed the impact of each of them.Thirdly, we formulate policy
recommendations to improve linkage efficiency in production in Thai Binh and can be applied to
other localities.
2. Literature reviews
Hirschman (1958) divided the concept of farmer contracts based on industry and
interdisciplinary relationships: Links include backward linkages and forward linkages. The
backward linkages arise from the demand for input supply of a newly established industry, while
forward linkages arise from using that sector's output as the input of the pull-along activities.
Contract farming, as an institution in agriculture, has a long history. Various forms of this
institutional arrangement were employed by United States multinationals in Central America at
the beginning of the 20th century, and by the Japanese to secure sugar production in Taiwan
from 1885 (Runsten & Key, 1996).
During the period 1930-1950, contracting was used increasingly in many food and fibre sectors.
The fruit and vegetable canning sectors expanded in the United States and Europe (Little & Watts,
1994; Clapp, 1994). From the late 1950s, Mexican growers increasingly supplied the American
markets with fruit and vegetables under contract (Watts, 1994), and in the period 1960-80 there
was a significant increase in contracting for vegetables, fruit, nuts and seed crops (Kilmer, 1986).
Contract farming has also spread rapidly in Asia, Latin America and Africa owing to the higher
returns earned by high-value export crops and the impact of new technologies (Clapp, 1994; Staatz
& Eicher, 1998). Some places, forms of contracting are dependent on specific institutions such as
marketing orders and bargaining cooperatives (Sporleder, 1992). The contract could specify the
price, quantity, quality, the provision of agribusiness inputs (Sporleder, 1992; Runsten & Key,
1996). Reardon and Barrett (2000) have observed that the agricultural industrialization process in
many developed countries has brought a number of effects in regulating the supply chains that
make them more closely connected.
Boehlje (2000) argues that in many developed countries, agricultural production is changing
from an industry dominated by family-based, small-scale farms or firms to one of larger firms
that are more tightly aligned across the production and distribution value chain. This implies that
changes in agricultural industrialization are needed. This has led to the introduction of various
forms such as vertical links and alliances, which become an outstanding feature of the
agricultural supply chain. From the above points of view, the signing of contracts allows farmers
to overcome barriers to integration into the world economy (Carney, 1988; Clapp, 1994; Jackson
Preprints (www.preprints.org) | NOT PEER-REVIEWED | Posted: 19 October 2020 doi:10.20944/preprints202010.0395.v1

4
& Cheacher, 1994; Little & Watts, 1994; Royer, 1995; Pasour, 1998; Delgado, 1999; Vellema,
2000). Contracting could also improve access to capital and credit (Hudson, 2000).
Contracting farmers can reduce production costs and increase production and income as a
result of their use of new technology and their access to company inputs (Watts, 1994; Clapp,
1994). Contracting farmers can stabilise output of the product and stabilise income. At the same
time, contracts may simplify production and marketing decisions, thus improving the farmer’s
effectiveness (Hudson, 2000). Contracting farmers can increase profit opportunities through a
greater product range and differentiated products (Pasour, 1998), or by diversifying out of
traditional crops in developing countries in order to grow high-value crops and thereby increase
their income (Williams, 1985; Levin, 1988; Delgado, 1999).
Saggi (2002), Giroud & Scott-Kennel (2006), Unctad (2001) have concluded that horizontal
linkages shows the interaction between foreign and local enterprises in the production of goods
and services in the same production phase. The most important effect is called the spillover
effect, which arises as a side effect of the activities of foreign companies in the economy (Coe &
Helpman, 1995; Coe et al., 1997; Giroud & Scott-Kennel, 2006; Dieppe & Mutl, 2013). Fujita &
Mori (2005), Hussain & Planning (2000) have concluded that there are two main types of
linkages, creating a driving force in cross-industry interactions. The first type is called economic
link (E-farm contracts), including activities related to the production and trading of goods and
services. The second type is called knowledge link (K-farm contracts), including human
activities in creation and transfer of knowledge, thus creating the knowledge spreading effect.
Mesquita & Lazzarini (2008) concluded that linkages have a combination of vertical and
horizontal links, which appear in the development and integration process when the relationship
between households, facilities and enterprise is a combination of cooperation and competition.
These units, on the one hand, link together horizontally to form groups or cooperatives in order
to improve the competitiveness of each member, limiting the situation of level price squeezing;
On the other hand, groups or cooperatives that are formed in close linkage with processing
enterprises or groups of households and cooperatives are also the suppliers of products to the
next actor of the process of production and business.
Otsuka et al. (2016) review focuses on literature in developing countries; they find that
although contract farming contributes to the improvement of farmers' income by introducing new
crops and production methods, there is room for strengthening its effects on poverty reduction
through policy. Olounlade et al. (2020) found evidence of significant negative effects on rice
production income at a 1% level. The more the rice farmers join in contract farming, the lower
the farm income became. Hung Anh & Bokelmann (2019), analyze the market preference of
coffee farmers in Vietnam, found out formal institution brings better market access for coffee
farmers, but main issues are regarding opportunistic behavior, imperfect market knowledge,
traditional farming habits, and contract noncompliance, which have resulted in a lower
preference for the market of processors/exporters.
Through the theory of contract farming, it can be seen that contract farming gives contract
farmers many benefits such as easy market access and more stable market, the contract could
specify the price, quantity, quality, the provision of agribusiness inputs. The form of contractual
cooperation helps businesses and farmers have certain "constraints". Through an economic
contract, the parties must be responsible and obliged to implement the terms of the contract.
These are also the scientific bases for us to build a hypothetical research model for this research.
Preprints (www.preprints.org) | NOT PEER-REVIEWED | Posted: 19 October 2020 doi:10.20944/preprints202010.0395.v1

5
3. Research methodology
3.1. Conceptual Research Framework
This study aims to explore the factors related to the level of participation of farmers in linkage
with firms in Thai Binh province. There were six factors that were expected to affect the level of
participation of farmers as follows: (1) Awareness of farmers about benefits of farmer contract
with firms; (2) Commitments in the process of linking with firms; (3) Sharing benefits and risks
between farmers and linked firms; (4) Management skills and business competence of linked
firms; (5) Policy environment - Institutions related to the farmer contract between firms and
farmers; (6) Price issues that farmers are interested in in the process of implementing farmer
contracts with firms.
The process of developing the survey table and conducting data collection survey has been carried
out in the following main stages.
Fig. 1 Model of building survey table and conducting data collection survey
Source: Summary of the author (2019)
3.2. Data Collections
3.2.1. Secondary data
Secondary data used in the study include: data on land, population and labor of Thai Binh
province and data on the situation of business-farmer farmer contracts in crop production. These
secondary data were collected from the available public sources: General Statistics Office,
Statistical Office of Thai Binh Province, Department of Agriculture and Rural Development of
Thai Binh Province, enterprises participating in the association in the province, Research related
to links in Thai Binh province.
3.2.2. Primary data
Primary data was collected through survey methods, direct interviews with enterprises and
farms. Primary data was collected through two main methods: Survey method, direct interview
with enterprises, farmers, farms and Expert method including business leaders, the professional
officials in the localities.
EFA analysis
Overview of theory
Design of preliminary survey
table (Draft scale 1)
Discussion groups; expert
interview; adjust the scale
Edit the first questionnaire
(Draft scale 2)
Direct trial survey in combination
with expert consultation
Edit the second
questionnaire
Official
investigation
Cronbach Alpha test
Collect and clean
data
Calibrate the model
Multivariate
Regression Analysis
Analysis and
discussion
Conclude
Preprints (www.preprints.org) | NOT PEER-REVIEWED | Posted: 19 October 2020 doi:10.20944/preprints202010.0395.v1

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Frequently Asked Questions (1)
Q1. What are the contributions in "A way forward to promote the farming contracts between firms and farmers in cultivation productions: a case study of vietnam" ?

The purpose of this study is to assess the factors affecting the level of linkages between businesses and farmers in crop development in Thai Binh province, Vietnam. The results indicated that there are 5 factors that significantly affect the level of participation of farmers in the linking process, the order of impacts from strong to weak is as follows: ( 1 ) Commitment and sharing of benefits and risks between farmers and firms in the linking process, ( 2 ) Issues related to management skills and enterprises capacity of link firms, ( 3 ) Price issues that farmers are interested in in the process of implementing links with firms, ( 4 ) Policy environment Institutions related to farmer contracts between firms and farmers, ( 5 ) Household awareness about the benefits brought about by farmer contracts with firms.