Exploring Product Diversification: the Case of Contract and Non-contract Farmers in the Philippine Cavendish Banana Value Chain

Abstract

Uncertainties arising from market fluctuations limit choices of banana famers under contracts. However, they can opt not to renew their contracts with multi-national firms to sell to spot market or diversify. This paper examines optimal portfolio of Cavendish banana products of contract and non-contract farmers under uncertainty. We explore the effect of diversification by including banana flour from rejects aside from fresh banana. Constrained M-estimation of parameters and robust portfolio optimization results show that (1) non-contract farms benefit more from diversifying compared to contract farms; and (2) prices are higher for non-contract farms but profits are lower compared to contract farms.