Linking Smallholders to Markets

Karen Brooks and Maximo ToreroInternational Food Policy Research Institute

Linking Smallholders to Markets

The CGIAR Research Program on Policies, Institutions and Markets

This program identifies how policies, institutions, and markets can be 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 value chains

Started in January, 2012

Eleven CG Centers (led by IFPRI, Bioversity, CIAT, CIMMYT, CIP, ICARDA, ICRISAT, IITA, ILRI, ICRAF, Worldfish); many partners

Markets that deliver for the poor

Goal: 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• Public goods• Information asymmetry• Monopoly (monopsony) power• Government failure

inefficiency and high

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

Quality determines price but buyer cannot observe; pays on assumption of low quality. Seller therefore delivers low quality.

How to overcome the information asymmetry?

Dairy in Vietnam: Information asymmetry in agricultural markets

• 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

$ i?!Dairy in Vietnam: Experimental design

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

SmallholderSmallholder

1. Farmers deliver

output to group,

receives no payment yet

1. Farmers deliver

output to group,

receives no payment yet

Farmer groupFarmer group

2. Group bulks from

farmers and delivers to

buyer

2. Group bulks from

farmers and delivers to

buyer

Processor / Exporter

Processor / Exporter

Itinerant trader

Itinerant trader

A. Trader buys output

from producer at farm gate

A. Trader buys output

from producer at farm gate

3. Price and volumes are negotiated and buyer pays for group delivery

4. Group deducts fees and distributes payment between farmers

B. Trader pays farmer on the spot

Intervention:Working capital loan to allow groups to make a partial payment to farmers on delivery

Intervention:Working capital loan to allow groups to make a partial payment to farmers on delivery

Uganda: Working capital loan interventionKey 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

Can 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

Simple Weather Securities

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.