Contract farming through cooperatives and smallholder satisfaction: Evidence from Malawi

Contract farming (CF) through cooperatives represents a distinct hybrid governance structure that can strengthen smallholders' bargaining power while simultaneously resolving market failures in developing countries. This paper estimates the impact of CF through cooperatives on multiple dimensions of smallholders' satisfaction with production and marketing arrangements in Malawi's soybean sector. Using data collected from 504 farmers across five contracted and six non-contracted cooperatives, we apply a cluster-robust ordered logit model, correcting for potential endogeneity via a Two-Stage Residual Inclusion (2SRI) approach with an instrumental variable, and addressing ex-post rationalization bias through placebo regressions. Results show that CF through cooperatives has a statistically significant negative effect on satisfaction with payment terms, transportation, and pricing. Effects on market access, grading, negotiation, credit, technical assistance, and input provision are statistically insignificant, though some show positive trends. These findings suggest that although CF through cooperatives has the potential to address market failures, its ability to improve smallholder satisfaction with production and marketing arrangements is highly context dependent. To unlock the potential of CF through cooperatives, the study recommends strengthening market-oriented cooperatives, enforcing the provisions of the national contract farming strategy, and prioritizing sectors where crop characteristics and market structures support stable, mutually beneficial CF.