P3.2. Linking Smallholders to Markets

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Karen Brooks, Maximo Torero

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  • Economies of scale: Fixed costs involved in transportation and processing fees, which rise the unit cost of output considerably when volumes sold are small. Bargaining power: with higher volumes, farmer groups can get better prices and conditions for their members than individual farmers. Coordination costs: Cost of organizing the group and coordinating activites for a collective sale. Time costs: Collective sales increase waiting periods between harvest and payment for a sale because of the need to wait for everybody to deliver during bulking period and for the group to find a buyer and pay back to individual members, since farmer groups very rarely have cash to pay members for their output directly. Uncertainty costs: uncertainty about the length of the waiting period between harvest and payment, and also trust that group leaders will get a good price and will not appropriate an unfair share of the payment. Evidence of limited success of farmer groups in improving market access: lower share of transactions through groups than directly to traders among Ugandan coffee farmers (Fafchamps and Hill, 2005), low benefits from memberships in farmer groups in Senegal and Burkina Faso (Bernard et al., 2008) and Ethiopia (Bernard and Seyoum-Taffesse, 2012). This project’s baseline survey indicates than more than 60% of the transactions made by farmer group members do not go through the group.
  • Economies of scale: Fixed costs involved in transportation and processing fees, which rise the unit cost of output considerably when volumes sold are small. Bargaining power: with higher volumes, farmer groups can get better prices and conditions for their members than individual farmers. Coordination costs: Cost of organizing the group and coordinating activites for a collective sale. Time costs: Collective sales increase waiting periods between harvest and payment for a sale because of the need to wait for everybody to deliver during bulking period and for the group to find a buyer and pay back to individual members, since farmer groups very rarely have cash to pay members for their output directly. Uncertainty costs: uncertainty about the length of the waiting period between harvest and payment, and also trust that group leaders will get a good price and will not appropriate an unfair share of the payment. Evidence of limited success of farmer groups in improving market access: lower share of transactions through groups than directly to traders among Ugandan coffee farmers (Fafchamps and Hill, 2005), low benefits from memberships in farmer groups in Senegal and Burkina Faso (Bernard et al., 2008) and Ethiopia (Bernard and Seyoum-Taffesse, 2012). This project’s baseline survey indicates than more than 60% of the transactions made by farmer group members do not go through the group.
  • Economies of scale: Fixed costs involved in transportation and processing fees, which rise the unit cost of output considerably when volumes sold are small. Bargaining power: with higher volumes, farmer groups can get better prices and conditions for their members than individual farmers. Coordination costs: Cost of organizing the group and coordinating activites for a collective sale. Time costs: Collective sales increase waiting periods between harvest and payment for a sale because of the need to wait for everybody to deliver during bulking period and for the group to find a buyer and pay back to individual members, since farmer groups very rarely have cash to pay members for their output directly. Uncertainty costs: uncertainty about the length of the waiting period between harvest and payment, and also trust that group leaders will get a good price and will not appropriate an unfair share of the payment. Evidence of limited success of farmer groups in improving market access: lower share of transactions through groups than directly to traders among Ugandan coffee farmers (Fafchamps and Hill, 2005), low benefits from memberships in farmer groups in Senegal and Burkina Faso (Bernard et al., 2008) and Ethiopia (Bernard and Seyoum-Taffesse, 2012). This project’s baseline survey indicates than more than 60% of the transactions made by farmer group members do not go through the group.
  • Economies of scale: Fixed costs involved in transportation and processing fees, which rise the unit cost of output considerably when volumes sold are small. Bargaining power: with higher volumes, farmer groups can get better prices and conditions for their members than individual farmers. Coordination costs: Cost of organizing the group and coordinating activites for a collective sale. Time costs: Collective sales increase waiting periods between harvest and payment for a sale because of the need to wait for everybody to deliver during bulking period and for the group to find a buyer and pay back to individual members, since farmer groups very rarely have cash to pay members for their output directly. Uncertainty costs: uncertainty about the length of the waiting period between harvest and payment, and also trust that group leaders will get a good price and will not appropriate an unfair share of the payment. Evidence of limited success of farmer groups in improving market access: lower share of transactions through groups than directly to traders among Ugandan coffee farmers (Fafchamps and Hill, 2005), low benefits from memberships in farmer groups in Senegal and Burkina Faso (Bernard et al., 2008) and Ethiopia (Bernard and Seyoum-Taffesse, 2012). This project’s baseline survey indicates than more than 60% of the transactions made by farmer group members do not go through the group. In Uganda, we provide a random group of farmer groups (marketing coffee and maize) with a fund that mimics a working capital loan, to be used exclusively to give farmers a partial cash payment as soon as they deliver their output to the group, plus training on a voucher/bookkeeping system to manage the fund. Since many farmers argue that urgent need for cash is the main reason to sell to trader, by reducing the waiting period to get paid associated with collective sales, the intervention aims to make groups a more attractive option. This, in turn, increases the number of farmers selling through the group which increases the group’s bargaining power, and ultimately, the price the group can get. Groups that decided to continue with the intervention applying for microfinance loans belong to NUCAFE, an umbrella organization for coffee farmer groups in Uganda.
  • Economies of scale: Fixed costs involved in transportation and processing fees, which rise the unit cost of output considerably when volumes sold are small. Bargaining power: with higher volumes, farmer groups can get better prices and conditions for their members than individual farmers. Coordination costs: Cost of organizing the group and coordinating activites for a collective sale. Time costs: Collective sales increase waiting periods between harvest and payment for a sale because of the need to wait for everybody to deliver during bulking period and for the group to find a buyer and pay back to individual members, since farmer groups very rarely have cash to pay members for their output directly. Uncertainty costs: uncertainty about the length of the waiting period between harvest and payment, and also trust that group leaders will get a good price and will not appropriate an unfair share of the payment. Evidence of limited success of farmer groups in improving market access: lower share of transactions through groups than directly to traders among Ugandan coffee farmers (Fafchamps and Hill, 2005), low benefits from memberships in farmer groups in Senegal and Burkina Faso (Bernard et al., 2008) and Ethiopia (Bernard and Seyoum-Taffesse, 2012). This project’s baseline survey indicates than more than 60% of the transactions made by farmer group members do not go through the group. In Uganda, we provide a random group of farmer groups (marketing coffee and maize) with a fund that mimics a working capital loan, to be used exclusively to give farmers a partial cash payment as soon as they deliver their output to the group, plus training on a voucher/bookkeeping system to manage the fund. Since many farmers argue that urgent need for cash is the main reason to sell to trader, by reducing the waiting period to get paid associated with collective sales, the intervention aims to make groups a more attractive option. This, in turn, increases the number of farmers selling through the group which increases the group’s bargaining power, and ultimately, the price the group can get. Groups that decided to continue with the intervention applying for microfinance loans belong to NUCAFE, an umbrella organization for coffee farmer groups in Uganda.
  • P3.2. Linking Smallholders to Markets

    1. 1. Linking Smallholders to Markets Karen Brooks and Maximo ToreroInternational Food Policy Research Institute
    2. 2. LinkingSmallholders toMarkets
    3. 3. The CGIAR Research Program on Policies, Institutions and MarketsThis program identifies how policies, institutions, and markets canbe improved to help poor farmers and consumers live better lives,through•effective policies and better public spending•inclusive governance and collective action•connecting smallholders to markets, largely through work on valuechainsStarted in January, 2012Eleven CG Centers (led by IFPRI, Bioversity, CIAT, CIMMYT, CIP,ICARDA, ICRISAT, IITA, ILRI, ICRAF, Worldfish); many partners
    4. 4. Markets that deliver for the poorGoal: making markets function for the poor at local, regional, and international levels by:• Releasing constraints to participation• Enhancing benefits from participationMajor Market Failures:• Externalities (+/-)• Merit and demerit goods inefficiency• Public goods• Information asymmetry and high• Monopoly (monopsony) power• Government failure transaction costs
    5. 5. Innovation 1: Incentives through contract farming• Returns to contract farming can be increased for both parties to the contract—a potential win-win• Capturing the win requires addressing asymmetries in information and building information into the contract• Concrete example in dairy in Vietnam, but applicable to contract farming in other developing countries as well• Implemented in Vietnam, Peru and Tanzania
    6. 6. Dairy in Vietnam: Information asymmetry in agricultural markets Quality determines price but buyer cannot observe; pays on assumption of low quality. Seller therefore delivers low quality. How to overcome the information asymmetry?• Through 3rd -party quality assessment, monitoring (Young and Hobbs, 2002; Olken, 2005)• Evidence from the laboratory for increased efficiency through 3rd -party enforcement (Wu and Roe, 2007)• But: Limited external validity of lab experiments? (Levitt and List, 2007) Field experiment on independent quality verification
    7. 7. Dairy in Vietnam: Experimental design!? $ i
    8. 8. Dairy in Vietnam: Main Results• Methodological contribution through collaboration with private company• Positive (heterogeneous) impact with regard to input use, output supply (quantity) and mild effect on household welfare• Pareto improvement in supply chain• Trust spillover could have led to underestimation of treatment effect• Scope for public role in 3rd-party enforcement of contracts in many (agricultural) sectors in Vietnam and beyond
    9. 9. Innovation 2: Working together for market access• By engaging markets collectively, farmer groups can help smallholders overcome economies of scale and increase their bargaining power in input and output markets.• However, collective marketing also involves additional costs: coordination, time, uncertainty.• Evidence shows farmer groups have had limited success in improving smallholders’ access to markets.• Project goal: Strengthen farmer groups’ market access through simple innovations in institutional mechanisms in Uganda and Senegal.
    10. 10. Uganda: Working capital loan intervention 4. Group deducts Smallholder Smallholder fees andB. Trader 1. Farmers distributes A. Traderpays farmer deliver payment between buys output output to farmerson the spot from group, producer at Intervention: farm gate receives no Intervention: payment yet Working capital Working capital loan to allow loan to allow groups to make groups to make a a partial partial payment to payment to Itinerant Itinerant farmers on farmers on Farmer group Farmer group trader trader delivery delivery 2. Group 3. Price and volumes bulks from Processor / / Processor are negotiated and farmers and Exporter Exporter buyer pays for group delivers to buyer delivery
    11. 11. Uganda: Working capital loan intervention Key results• We evaluate the impact of a working capital loan in Uganda that enables groups to make partial payments on delivery to its members.• In addition to the loan funds, we introduce a simple voucher/bookkeeping system that allows farmers to claim the partial payment and better understand deductions when the balance is paid.• The intervention reduces the cost of selling through the group, which increases the volumes sold collectively and the ability to negotiate better prices.• Preliminary results indicate that the working capital loan almost doubled the amount of output collected from members for group sales, which resulted in prices 80% higher than those accepted by farmers selling individually.• Success in this pilot intervention has motivated groups to apply for loans from microfinance institutions to increase and sustain the working capital fund beyond the life of this project.
    12. 12. Innovation 3: Weather insurance Problem:  Uninsured risk constrains investment in high-value crops  Innovations in weather index insurance can help insure risk, but demand has typically been low Research:  Testing innovative weather insurance products that are high quality, flexible, simple, and scalable  Understanding what complementary financial products—such as savings and lending—help farmers manage risk  Evaluating improvements in welfare and investments in high-value crops Research programs in Ethiopia, Bangladesh, India, and Uruguay
    13. 13. Simple Weather SecuritiesCan we improve the design?• Weather securities; easy to understand• Flexible - farmers choose what they cover• Scalable - do not require redesigning for each crop (and perhaps not each location) Demand has been high: In 2012, 1500+ policies issued with 48% of targeted farmers purchasing in some districts In 2012 82% of all policies were sold in villages where group saving and lending was encouraged. 13
    14. 14. Innovations in weather insurance: Ethiopia• Late-season rains failed in 2011, policies provided protection to policy holders• Widespread improvements in welfare outcomes in villages where there was both index insurance and increased group saving and lending: • Durable consumption goods: households were 8-13% more likely to purchase clothing and footwear. • Livestock: 28% higher cattle ownership, 37% higher small ruminant ownership, and 21% higher chicken ownership.• Stated interest to invest further in subsequent seasons: • Farmers in villages where there was both index insurance and increased group saving and lending were 21% more likely to say they would spend on improved seeds and 28% more likely to spend on fertilizer.

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