Agricultural markets in ‘rising’ Africa

The notion of ‘agriculture in Africa’ often evokes the image of a small-scale farmer growing food crops for subsistence. While millions of farms across the continent still fit that description, the sector has undergone substantial transformation in recent decades. Investment has flowed into dairies, juice plants, breweries, and other modern processors that source their inputs domestically. New and profitable export markets have emerged, such as those for flowers in Ethiopia and Kenya. A growing middle class is investing in farming, leading to increases in the number and share of medium-scale farms (Jayne et al. 2016). Yet, despite this ongoing transformation, questions remain about whether the benefits of modernisation and market expansion are flowing down the supply chain and reaching small-scale farmers.

In this column, we discuss some recent work in economics that paints a cautiously optimistic picture about the performance of supply chains in sub-Saharan Africa. The presentation is by no means exhaustive. Instead, we discuss evidence on four important topics that recent observational and experimental/quasi-experimental research has focused on. It is worth emphasising at the outset that evidence is evolving quickly, as new methods and new datasets push the knowledge frontier forward.

At the farm gate, markets are generally competitive

Crop traders have a bad reputation in development circles. It is often supposed that traders enjoy market power, and that they use that power to suppress the prices that they pay to farmers. Dillon and Dambro (2017) recently reviewed the evidence from sub-Saharan Africa on this question. Across various threads in the literature – time series studies of market integration, trader surveys, RCTs intended to improve farmers’ bargaining power, and others – they find little empirical support for the notion that output markets are not competitive. Casaburi and Reed (2017) develop an experimental approach to study competition in the Sierra Leone cocoa sector. Their results also suggest that farmers face competitive traders.

This is not the final word on whether all output markets are competitive. There is surprisingly little well-identified empirical evidence on this topic, given its importance. Many researchers and development practitioners – ourselves included – have encountered anecdotal evidence of trader actions that seem to indicate collusion. A particular concern is that concentration may be greater further down the supply chain, where traders sell to larger traders or processors, and where there is sometimes heavy state involvement in the market. To date, however, the evidence suggests that imperfect competition in the first links in the supply chain is the exception rather than the rule.

What is the takeaway? First, until we have reliable evidence that traders are to blame for low crop prices and high poverty among farmers, the safer course is to assume that these intermediaries are hardworking businesspeople who provide valuable services on thin margins. Second, there is plenty of scope for innovative research to identify the conditions under which output markets may not be fully competitive. Creative approaches in related settings include experimental work by Bergquist (2017) on consumer maize markets in Kenya, and Mitra et al. (2016) on the potato supply chain in India.

Buyers can provide farmers with credit, insurance, and saving services

When farmers have limited access to input markets and financial services, intermediaries can fill these gaps. Supply chain service provision can take many forms, depending on the environment. Recent experimental and quasi-experimental evidence shows that buyers provide producers with credit (Casaburi and Reed 2017), insurance (Ghani and Reed 2017) or saving devices (Brune et al. 2016; Casaburi and Macchiavello 2016). Barrett et al. (2012), among many others, study contract farming schemes, in which large buyers provide inputs on credit and demand assurance to farmers.

There are still numerous open questions about when these service arrangements arise and how they affect farmers. However, there are two immediate implications for how we think about supply chains. First, one must account for these services when measuring how surplus is split between farmers and buyers. Traders who provide credit may charge an implicit interest rate by paying farmers a lower price. In this case, a lower purchase price may reflect the value of the financial service, rather than traders’ market power.

Second, when markets are inter-linked, the impact of increased buyer competition on farmer welfare may not be uniformly positive. Consider a farmer who receives a loan from a buyer before harvest, on the condition that the farmer sell her output to the buyer. If contract enforcement is poor and there are many eager buyers at harvest time, the temptation to default may be substantial. Anticipating this, many buyers would be unwilling to make the loan in the first place. Macchiavello and Morjaria (2015) find that increased competition lowers service provision from mills to cocoa farmers in Rwanda. Casaburi and Reed (2017), however, find evidence of substantial competition among traders who also provide credit to cocoa farmers in Sierra Leone. A possible interpretation of this result is that contract enforcement in this setting is sufficient to deter side-selling.

Big players are changing the landscape

As early as 2003, Reardon et al. described the rapid rise of supermarkets in Africa and other regions. To meet the expectations of a rapidly growing base of urban and suburban customers, these stores require a steady supply of high quality produce. This creates opportunities for farmers who are in the right place at the right time, and who have the capability to produce high quality products for the supermarket supply chain. Rao and Qaim (2011) estimate that participating in supermarket channels in Kenya is associated with increases in household income of roughly 50%. What is harder to know is whether this association is causal. Supermarkets do not appear at random, and do not randomly choose farmers with whom to partner. Neven et al. (2009), also in Kenya, find that grocery store suppliers are primarily medium-scale farmers who can meet the capital requirements of participation.

Internationally connected agribusiness operations are also increasingly important players in crop supply chains. Global food and drinks manufacturers like Nestlé, Diageo, and SAB Miller are working hard to increase the share of local inputs used to make their products. High-value export markets in fruit, flowers, and other products can have positive effects similar to those of grocery stores, improving quality and efficiency at every link in the supply chain (Maertens et al. 2012).

Large agribusinesses can drive modernisation and quality improvements by creating new markets, providing credit, and pushing standards down the supply chain. The impact of these activities on domestic farmers is likely even higher when governments impose local content requirements on grocers (Das Nair and Dube 2016). Yet, the growth of large players may also be a force for concentration in wholesale markets, dampening price pass-through to farmers in the long run (Dhingra and Tenreyro 2017). Understanding who wins and who loses from the growth of large buyers in sub-Saharan Africa remains a wide open area for future research.

Cooperatives help, sometimes

Cooperatives and other types of farmer associations are often considered a promising strategy to improve market access for smallholders (Csaki de Haan 2003). Yet cooperatives may themselves be subject to rent-seeking and capture by elites. What evidence do we have on the circumstances under which collective action mechanisms improve farmer outcomes?

Not surprisingly, the existing evidence is mixed. Commercialisation benefits to farmers seem largest for high-value cash crops. Narrod et al. (2009) suggest that farmer groups may be particularly valuable when supply chains require quality and safety certification and traceability. This factor may have growing importance as more smallholders become more integrated with big players.

Evidence on staples is less favourable. For instance, when looking at cooperatives of cereal farmers in Ethiopia, Bernard et al. (2008) find that cooperative members obtain higher prices but do not increase the share of production sold commercially. In addition, cooperatives may primarily benefit wealthier households in the community (Fischer and Qaim 2012), while the poorest farmers are less likely to join and be included in decision making processes (Bernard and Spielman 2012). This is consistent with a literature that points at cooperative failures arising from elite capture and governance problems (e.g. Banerjee et al. 2001).

One area of hope comes from Latin America, where the World Bank has supported efforts to integrate groups of farmers and private processors through commercial business plans, which are funded partially by the public sector. Such arrangements, called ‘productive alliances,’ have been shown to generate profitable companies, and to substantially increase farmer incomes (Horst and Polo 2016). This suggests that efforts to organise farmers and processers are most likely to be effective when targeting a real commercial opportunity.

References

Banerjee, A, D Mookherjee, K Munshi and D Ray (2001), “Inequality, control rights, and rent seeking: Sugar cooperatives in Maharashtra”, Journal of Political Economy 109(1): 138-190.

Barrett, Christopher B, et al. (2012) "Smallholder participation in contract farming: Comparative evidence from five countries", World Development 40(4): 715-730.

Brune, L, et al. (2016) "Facilitating savings for agriculture: Field experimental evidence from Malawi", Economic Development and Cultural Change 64(2): 187-220.

Casaburi, L and R Macchiavello (2017), "Firm and market response to saving constraints: Evidence from the Kenyan dairy industry".

Casaburi, L and T Reed (2017), “Competition in agricultural markets: An experimental approach”, Working paper.

Csaki, C and C de Haan (2003), Reaching the rural poor: a renewed strategy for rural development, World Bank Publications.

Das Nair, R and S Chisoro Dube (2016), “The expansion of regional supermarket chains and implications for local suppliers: A comparison of findings from South Africa, Botswana, Zambia, and Zimbabwe”, CCRED, Working Paper No 7/2016.

Dhingraa, S and S Tenreyroa (2017), "Piggy-back exporting, intermediation, and the distributional gains from trade in agricultural markets”.

Dillon, B and C Dambro (2017), “How competitive are crop markets in sub-Saharan Africa?” American Journal of Agricultural Economics 99(5): 1344-1361.

Ghani, T and T Reed (2017), "Relationships, risk and rents”.

Horst, A C and M Polo (2016), “Linking farmers to markets through productive alliances: An assessment of the World Bank experience in Latin America”, World Bank Group, Washington, DC.

Jayne, T S, et al. (2016), "Africa's changing farm size distribution patterns: The rise of medium‐scale farms", Agricultural Economics 47(S1): 197-214.

Macchiavello, R and A Morjaria (2015), Competition and Relational Contracts: Evidence from Rwanda's Coffee Mills,  No 431, Society for Economic Dynamics.

Maertens, M, B Minten and J Swinnen (2012), “Modern food supply chains and development: Evidence from horticulture export sectors in sub-Saharan Africa”, Development Policy Review 30(4): 473-497.

Mitra, S, D Mookherjee, M Torero and S Visaria (2016), “Asymmetric information and middleman margins: An experiment with Indian potato farmers”.

Narrod, C, D Roy, J Okello, B Avendaño, K Rich, and A Thorat (2009), “Public-private partnerships and collective action in high value fruit and vegetable supply chains”, Food policy 34(1): 8-15.

Neven, D, M Makokha Odera, T Reardon and H Wang (2009), “Kenyan supermarkets, emerging middle-class horticultural farmers, and employment impacts on the rural poor”, World Development 37(11): 1802-1811.

Rao, E J O and M Qaim (2011), “Supermarkets, farm household income, and poverty: Insights from Kenya”, World Development 39(5): 784-796.

Reardon, T, C P Timmer, C B Barrett and J Berdegue (2003), “The rise of supermarkets in Africa, Asia, and Latin America”, American Journal of Agricultural Economics 85(5): 1140-1146.