DAIRY CONTRACT FARMING, ITS ENFORCEMENT AND IMPACT ON ECONOMIC EFFICIENCY AND HOUSEHOLD INCOME OF SMALLHOLDER FARMERS: THE CASE OF NORTH SHEWA ZONE OF OROMIA NATIONAL REGIONAL STATE, ETHIOPIA

Recently, due attention was given to whether contract farming brings a holistic impact on the livelihood of smallholder farmers or not. Hence, the objectives of this study were to identify the determinants of dairy contract farming, its enforcement, and impact on milk production efficiency and annual income using data collected from 424 (192 participants and 232 non-participants) randomly selected milk-producing farmers from three districts of the North Shewa zone of Oromia Regional State, Ethiopia. Descriptive statistics and econometric models were used to analyze the data. The binary logistic regression model was employed to identify factors affecting participation in dairy contract farming. Results show that age, sex, perception of price uncertainty, extension contact, and training significantly and positively affect participation in dairy contract farming while distance to milk collection center affected it significantly and negatively. The results from the multivariate (trivariate) probit model show the likelihood of choosing a reputation was 54.56% as compared to the probability of choosing trust (67.94%) and legalistic (43.44%) as contract enforcement mechanisms. The results of a multivariate (trivariate) probit model also indicated that off/non-farm income, wealth status, equib involvement, frequency of extension contact, time of enforcement, cost of enforcement, access to input supply and power relationships significantly affected the contract enforcement choice decisions in one or another way. Thus, the study recommends strengthening the currently used contract enforcement mechanisms and looking for other types by absorbing those constraints to guarantee the benefit of smallholder milk producers in the North Shewa zone. The mean technical, allocative, and economic efficiencies of milk production were 85.5%, 29.9%, and 25.1% respectively. This shows that farmers can increase up to 14.5%, 70.1%, and 74.9% in their technical, allocative and economic efficiency levels with the available technology and resources respectively. The marginal effects result after the Tobit model show as, a positive and significant influence of access to training, quality of xvi purchased feed, and breed type on overall efficiency (economic efficiency) of smallholder milk producers in the study area. The study recommends the training program provided by the government or NGOs in the study area must incorporate appropriate allocation of scarce resources, establishing quality based animal feed supply system, and introducing the new crossbreed cows to the existing stock should be implemented by considering the associated cost invested and the benefit generated. The result from impact analysis using PSM confirms that dairy contract farming increases technical efficiency and household income, but reduces allocative and economic efficiencies of contract farmers in the study area. Generally, dairy contract participating households are in acrostic road which is covered by production improvement and income generated as the result of participation, but they are about to smash out from the dairy business if the required solution is not provided on time and lets them continue like this. Nevertheless, if all the challenges articulated in this study about dairy contract farming are set in timely, the study suggests promoting dairy contract farming specifically in the study area and in the dairy sector, in Ethiopia.