Contract Farming Risks: A Monte Carlo Assessment

Glenn Jenkins () and Arkins M. Kabungo ()
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Arkins M. Kabungo: Arkins M. Kabungo Eastern Mediterranean University, Famagusta, Mersin 10, Turkey

No 2013-07, Development Discussion Papers from JDI Executive Programs

Abstract: The objective of this study is to identify the key risks facing each of the stakeholders in the export-focused paprika value chain in Zambia. Although a deterministic cost–benefit analysis indicated that this outgrower scheme would have a very satisfactory net present value (NPV), a Monte Carlo analysis using an integrated financial–economic–stakeholder model identifies a number of risk variables that could make this system unsustainable. The major risks include the variability of the real exchange rate in Zambia, the international price of paprika and the farm yield rates. This analysis points out that irrigation systems are very important for both stabilizing yields and increasing them. The analysis also shows the limitations of loan financing for such outgrower arrangements when at the sector level it is difficult or even impossible to mitigate the risks from real exchange rate movements and movements of international commodity prices. This micro-level analysis shows how critical real exchange rate management policies are in achieving sustainability of such export-oriented value chains.

Keywords: Monte Carlo simulation; outgrower scheme; paprika; smallholder farmers; sustainability (search for similar items in EconPapers)
JEL-codes: H42 Q12 Q17 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2013-12
New Economics Papers: this item is included in nep-afr and nep-agr
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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