Profitability of Organic Agriculture in a Transition Economy: the Case of Organic Contract Rice Farming in Lao PDR

Summary

Poverty is prevalent among smallholder farmers in transition economies where market failures prevail and where the capacity of the public sector is limited. This study assesses the potential of organic contract farming as a private sector institutional arrangement to reduce rural poverty. Contract farming appears to facilitate market linkages for smallholder farmers to produce organic rice for export markets while providing necessary technical supports. Using an endogenous switching regression model to assess the profitability of organic contract farms and conventional farms in Lao PDR, it was found that organic farmers under contract earn significantly higher profit than conventional farms. The findings also showed that organic contract farming tends to provide the greatest increase in income to farmers with below average performance. These findings suggest that contract farming can be an effective mechanism to facilitate the development of organic agriculture and an effective tool to improve the profitability and raise incomes of small farmers, thereby reducing poverty in rural areas with limited market development.