This paper investigates the determinants of participation and performance of tobacco contract farmers, and the effects of participation on overall crop and household incomes in the Zambezi Valley of Mozambique. We test the existence of threshold effects in land holdings and educational attainment to identify the types of farmers that benefit. Several results stand out. First, participation in the schemes is driven by factor endowments, asset ownership and alternative income opportunities, and very little by demographic factors. Second, we find no returns to education in tobacco; this result is consistent with previous research in Mozambique but surprising in an agronomically demanding crop like tobacco. Third, there appear to be economies of scale in tobacco production, perhaps through more efficient use of hired labor. If true, tobacco could drive greater economic differentiation through the growth of "emergent" or commercial smallholder households - something that has been conspicuously lacking in Mozambique to date. Fourth, farmers without wage income are more likely to grow tobacco; since other research shows that wage labor has driven most income growth in Mozambique over the past six years, tobacco could be inequality reducing. Tobacco growers also hire much more labor than non-growers, contributing to second-round inequality reducing effects. Further analysis, preferably in a general equilibrium framework, is needed to understand how the simultaneous forces of economic differentiation and spreading of economic benefits will affect income distribution. Potential adverse environmental impacts also deserve far more attention than they have received to date.