P3.2. Linking Smallholders to MarketsPresentation Transcript
Linking Smallholders to Markets Karen Brooks and Maximo ToreroInternational Food Policy Research Institute
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
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
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
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
Dairy in Vietnam: Experimental design!? $ i
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
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.
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
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.
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
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
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.