The Impact of Vertical Integration Intensity on Broiler Farms Technical Efficiency: The Case of Contract Farming in West Sumatera

Harianto Harianto, N. Kusnadi, D. A. Paramita


Contractual arrangements of different types have increasingly found in West Sumatera not only in subsistence and commercial crops but particularly also in livestock sector.  Contract farming in livestock agribusiness is generally defined as broiler farms under an agreement between farmers and a livestock inputs supplier. Within this broad definition, there are different variants of contracts depending on the formality and intensity of contractual arrangement. This study objective was to prove that the design of a contract, as representation of vertical integration intensity in broiler agribusiness, has different efficiency effects on production.  The stochastic frontier production function was used in this study, and employed a regression method to estimate the level of technical efficiency.  Data were collected from 87 broiler fattening farms consisted of 50 broiler fattening farms under formal contractual system and 37 broiler fattening farms under informal contractual system. The results showed that farm experience and improvement of the contract system would reduce the level of technical inefficiency of broiler farms. The study concluded that broiler farms under formal and detail contract farming had greater technical efficiencies compared to broiler farms under informal unwritten contract arrangement.  However, the broiler farms under informal contract obtained higher net returns compared to the broiler farms under formal contract arrangement.


Ajao, A. O. & G. A. Oyedele. 2013. Economic efficiency of contract farming in Oyo state: Experience from British American Tobacco Company. Intl. J. AgriScience 3: 699-707.

Akhter, S. & M. H. A. Rashid. 2008. Comparative efficiency analysis of broiler farming under Aftab Bahumukhti farm limited supervision and farmers’ own management. Progress. Agric. 19:195-204.

Ali, M. S. & M. M. Hossain. 2010. Factors influencing the performance of farmers in broiler production of Faridpur District in Bangladesh. J. World’s. Poul. Sci. 66: 123-131.

Todsadee, A., K. Hiroshi, N. Kamol, & Y. Koh-En. 2012. Contract Broiler Farming. American J. Econ. Bus. Adm. 4: 166-171.

Bahari, F. N., M. M. Mustadjab, N. Hanani, & B. A. Nugroho. 2012. Analisis contract farming usaha ayam broiler. Agro. Eco. 30: 109-127.

Battese, G.E., S. J. Malik, & M. A. Gill. 1996. An investigation of technical inefficiencies of production of wheat farmers in four districts of Pakistan. J. Agri. Econ. 47:37-49.

Begum, I. A., M. J. Alam, J. Buysee, A. Frija, & G. H. Huylenbroeck. 2012. Contract farmer and poultry farm efficiency in Bangladesh: A data envelopment analysis. App. Econ. 44: 3737-3747.

Bellemare, M. F., & L. Novak. 2017. Contract farming and food security. American J. Agri. Econ. 99:357–378.

Besanko, D., D. Dranove, M. Shanley, & S. Schaefer. 2013. Economics of Strategy. 6th ed. John Wiley & Sons, Singapore.

Burhanuddin, Harianto, R. Nurmalina, & R. Pambudy. 2013. The determining factors of entrepreneurial activity in broiler farms. Med. Pet. 36: 230-236.

Carvalho, E. H., J. B. Zilli, A. S. Mendes, G. M. Morello, & D. V. Bonamigo. 2015. Main factors that affect the economic efficiency of broiler breeder production. Brazilian J. Poul. Sci. 17: 11-16.

Chaddad, F. R. & M. L. Cook. 2004. The economics of organization structure changes: A US perspective on demutualization. Annals of Public and Cooperative Economics 75: 575-594.

Coelli, T. J. 1994. A Guide to FRONTIER Version 4.1: A Computer Program for Stochastic Frontier Production and Cost Function Estimation. Department of Econometrics. University of New England (Armidale), England.

Coelli, T. J., D. S. P. Rao, C. J. O’Donnell, & G. E. Battese. 2005. An Introduction to Efficiency and Productivity Analysis. 2nd ed. Springer. New York, NY, United States.

Emokaro, C. O. & O. P. Emokpae. 2014. Technical efficiency and production elasticity of broiler producers in Edo State, Nigeria. App. Trop. Agri. 19: 59–65.

Ezeh, C. I., C. O. Anyiro, & J. A. Chukwu. 2012. Technical efficiency in poultry broiler production in Umuahia Capital Territory of Abia State, Nigeria. Greener J. Agri. Sci. 2:001-007.

Gondalia, V.K., Y.C. Zala, & R.K. Bansal. 2017. Comparative economics of contract and non-contract farming of potato in Gujarat. Econ. Aff. 64: 683-690.

Issa, N. & N.J. Chrysostome. 2015. Determinants of farmer participation in the vertical integration of the Rwandan coffee value chain: results from Huye District. J. Agric. Science. 7:197-211.

Kodde, D. A., & F. C. Palm. 1986. Wald criteria for jointly testing equality and inequality restriction. J. Econ. 54:1243-1248.

Mahjoor, A. A. 2013. Technical, allocative and economic efficiencies of broiler farms in Fars Province, Iran: A Data Envelopment Analysis (DEA) approach. World. J. App. Sci. 21: 1427-1435.

Mendes, A. S., D. C. Gudoski, A. F. Cargnelutti, E. J. Silva, E. H. Carvalho, & G. M. Morello. 2014. Factors that impact the financial performance of broiler production in Southern States of Paraná, Brazil. Brazilian. J. Poul. Sci. 16:113-120.

Mwambi, M. M, J. Oduol, P. Mshenga, & M. Saidi. 2016. Does contract farming improve smallholder income? the case of avocado farmers in Kenya. J. Agri. Dev. Emer. Econ. 6: 12-20.

Narayanan, S. 2014. Profits from participation in high value agriculture: evidence of heterogeneous benefits in contract farming schemes in Southern India. Food Policy. 44: 142–157.

Nguyen, A.T, J. Dzator, & A. Nadolny. 2015. Does contract farming improve productivity and income of farmers? a review of theory and evidence. J. Dev. Areas. 49: 531-538.

Ohajianya, D. O., J. U. Mgbada, P. N. Onu, C. O. Enyia, A. H. Henri-Ukoha, Ben-N. G. Chendo, & C. C. Godson-Ibeji. 2013. Technical and economic efficiencies in poultry production in Imo State, Nigeria. American J. Expe. Agri. 3: 927-938.

Oya, C. 2012. Contract farming in Sub-Saharan Africa: a survey of approaches, debates and issues. J. Agra. Change. 12: 1–33.

Pakage S., B. Hartono, Z. Fanani, & B. A. Nugroho. 2014. Analysis of technical efficiency of poultry broiler business with pattern closed house system in Malang-East Java, Indonesia. J. Econ. Sust. Dev. 5: 16-22.

Porter, G. & K. Philips-Howard. 1997. Comparing contracts: an evaluation of contract farming schemes in Africa. World. Dev. 25: 227-238.

Ragasa, C., I. Lambrecht, & D. S. Kufoalor. 2018. Limitations of contract farming as a pro-poor strategy: the case of maize outgrower schemes in Upper West Ghana. World. Dev. 102: 30-56.

Resti, Y., R. Baars, M. Verschuur, & G. Duteurtre. 2017. The role of cooperative in the milk value chain in west Bandung Regency, West Java Province. Med. Pet. 40: 210-217.

Roopa, H.S., N. Nagaraj, & M.G. Chandrakanth. 2013. Comparative economic analysis of baby corn under contract and noncontract farming in Karnataka. Agri. Econ. Research Rev. 26: 40-50

Tuan, N.P. 2012. Contract farming and its impact on income and livelihood for small-scale farmers: case study in Vietnam’, J. Agribusiness and Rural Dev. 4: 147-166.

Udoh, E. J. & N. A. Etim. 2009. Measurement of farm level efficiency of broiler production in Uyo, Akwa Ibom State, Nigeria. World J. Agri. Sci. 5:832-836.

Umboh, S.J.K., D. B. Hakim, B. M. Sinaga, & I K. Kariyasa. 2014. Impacts of domestic maize price changes on the performance of small-scale broiler farming in Indonesia. Med. Pet. 37:198-205.

Wainaina, P. W., J. J. Okello, & J. M. Nzuma. 2014. Blessing or evil? contract farming, smallholder poultry production and household welfare in Kenya. J. Inter. Agri. 53: 319-340.

Wang, H., P. Moustier & N. T. T. Loc. 2014. Economic impact of direct marketing and contracts: the case of safe vegetable chains in Northern Vietnam. Food Policy 47: 13-23.

Wang, H. H., Y. Wang, & M. S. Delgado. 2014. The transition to modern agriculture: contract farming in developing economies. American J. Agri. Econ. 96: 1257–1271.

Yunus, I. 2012. Estimation of technical efficiency of broiler production in Peninsular Malaysia: A stochastic frontier analysis. Journal of Business Management and Accounting 2: 77-96.


Harianto Harianto
N. Kusnadi (Primary Contact)
D. A. Paramita
HariantoH., KusnadiN., & ParamitaD. A. (2019). The Impact of Vertical Integration Intensity on Broiler Farms Technical Efficiency: The Case of Contract Farming in West Sumatera. Tropical Animal Science Journal, 42(2), 167-174.

Article Details

List of Cited By :

Crossref logo