Impact of Contract Farming Scheme on Smallholder Farmers’ Income: The Case of Coffee Farming System of Shebe Sombo, South West Ethiopia

This research investigated the impact of contract farming on the livelihoods of smallholder coffee producers in the Shebe Sombo district of Ethiopia. Specifically, the study aimed to understand factors influencing farmer participation in contract coffee production, evaluate the impact of contract farming on household income, and analyze the structure of existing contract farming arrangements. Employing a two-stage sampling method, the study collected data from 71 contract farming participants and 63 non-participant households through structured interviews. Data analysis involved descriptive statistics, inferential statistics, and an econometric model utilizing propensity score matching to estimate the causal impact of contract farming on household income. The findings revealed a significant positive impact of contract farming on the annual income of participating households. Notably, frequent interaction with agricultural extension services and livestock ownership emerged as key factors positively influencing both farmer participation in contract farming and subsequent income from coffee production. Conversely, larger household sizes and reliance on credit were found to negatively influence both participation in contract farming and overall household income. The study's analysis, utilizing propensity score matching, demonstrated that, on average, involvement in contract farming led to an increase of 8252.21 Ethiopian Birr in household income. These findings strongly suggest that, compared to traditional marketing channels, contract farming offers a more profitable avenue for smallholder coffee farmers to enhance their livelihoods.