Milk supply contracts and default incidence in Kenya

Using cross sectional data from all 47 Counties in Kenya, the presence of contract breaches between the producers and chain intermediary node is investigated. Most farmers do not engage in contracting and for those who do, many of these contracts are found to be informal. In addition, most of these contracts (whether formal or informal) were breached. However, some buyers appear to be associated with contract breaches. A distinct pattern emerges showing that larger milk producers are more likely to make formal contracts than small producers while the results also confirm that most of the contracts between farmers and individual consumers as well as traders and middlemen are informal and subject to contract breaches. Using a multiple correspondence analysis, these associations between contract breaches and farmer characteristics are explored. Results indicate that collective action institutions might encourage formalization of contracts while households that do not engage in some form of collective action engagements in most cases make informal contracts although both formal and informal contracts are equally subject to contract breaches. An examination of the underlying institutional, psychological and sociological drivers to contract breaches is recommended as such information can reveal how best to upgrade successful contract farming arrangements.