BACKGROUND: Despite being capital intensive, tobacco farming, internationally, has been shifting to lower-income countries. In these countries, many smallholder farmers struggle to obtain financing to farm, but they produce tobacco leaf. The tobacco industry often fills this financing gap through contractual arrangements with farmers. It is unclear, however, how these contracts complement other credit avenues or affect smallholder farmers’ production efficiency. This study investigates smallholder tobacco farmers’ technical efficiency (TE), or the ratio of observed output to optimal output (0 to 1), and how (1) contracts and (2) reception of loans affects it in Indonesia and Kenya, two established tobacco leaf producing countries.
METHODS: This study uses longitudinal household-level economic survey data from Kenya (2016, 2019) and Indonesia (2016, 2017, 2019) from the Political Economy of Tobacco Farming Study and stochastic frontier analysis to estimate the technical efficiency of smallholder tobacco farming and how access to credit and/or contracts affect it. Smallholder farmers from 216 households in Kenya and 310 households from Indonesia were included for the analysis.
RESULTS: 72.2% and 77.1% smallholder tobacco farmers in Kenya and Indonesia respectively farm at low efficiency level (i.e., TE<0.7). Farming tobacco under a contract, compared to no tobacco contracts, is associated with lower technical efficiency in both countries. Reception of loans is associated with a lower technical efficiency among Kenyan farmers but a higher technical efficiency among Indonesia farmers. In both countries, reception of loans only improved technical efficiency of non-contract farmers.
CONCLUSIONS: Most smallholder tobacco farmers are farming at objectively low technical efficiency in both countries compared to their potential. Smallholder tobacco farmers should seek alternative livelihoods to more efficiently use their scarce resources. Tobacco farming contracts do not complement other credit avenues and can reduce farming efficiency. Governments must intervene more as a provider of credit at least until more robust credit markets develop.