Market access and quality upgrading: Evidence from Uganda

Following an extraordinary global reduction in extreme poverty over the last century, progress on eliminating poverty has stalled. In fact, in sub-Saharan Africa, the number of people in extreme poverty has risen (World Bank 2022). Today, half of the world’s extreme poor – over 430 million people – live in sub-Saharan Africa, and the number is predicted to increase by 25-40 million people due to the COVID pandemic. The vast majority live in rural areas and work in agriculture, which has some of the lowest productivity in the world. This keeps welfare low now and in the future, as technology adoption is viewed by many as a conditio sine qua non for both structural transformation (Gollin 2015) and to avoid the worst impacts of climate change (Nath 2021). 

Indeed, there is robust panel data evidence that the green revolution and general productivity increases lead to income growth and poverty reduction (Gollin et al. 2018, De Janvry and Sadoulet 2010). Thus, the potential benefits of agricultural productivity growth are clear. What is less clear is how to jump-start productivity growth and a green revolution in sub-Saharan Africa where productivity has stalled for decades – particularly in a way that leads to income growth. In fact, results from more than a decade of research on technology adoption in African agriculture, suggest that interventions, which focus on increasing farmers’ ability to invest in inputs to produce more, have not proven transformative, and any improvements have been relatively modest (de Janvry et al. 2017, Suri and Udry 2022). Partly in response to the difficulty of generating productivity- and income-growth through supply side interventions, policymakers are increasingly focusing on the demand side.

Shifting focus to demand-side constraints on selling high-quality produce

In line with a neoclassical production function, modern input use may be low in sub-Saharan Africa simply because prices for output are low (and input prices are high), and make technology adoption unprofitable. Low prices may be due to several reasons: small-holder farmers may be able to earn more for what they produce if markets were more integrated, and if intermediaries had less market power. Prices may also be low because farmers produce low-value or low-quality output. Upgrading quality, processing and refining products more, and integrating framers into global value added chains is a complementary road to poverty reduction (World Bank 2020) which may endogenously encourage the adoption of modern technology and productivity growth.  

Relative to research on the supply-side, “the demand-side approach has promise, but received insufficient attention” (de Janvry and Sadoulet 2020). A nascent literature studies market structure and its effect on income and productivity growth in Sub-Saharan Africa. Bergquist and Dinerstein (2020) use randomised subsidies to estimate the level of market power traders have vis-à-vis consumers in the maize market in Kenya. They estimate that the level of competition is low and that traders capture over 80% of total surplus. To study the extent of market integration (or lack thereof), Bergquist and McIntosh (2021) examine the effects of introducing a mobile phone based marketplace for maize, with the purpose of matching buyers and sellers who don't operate in the same geographical market, thus shortening the chain of intermediaries. The intervention increased volume traded and decreased intermediaries' profits, increased largeholder farmers’ profits but did not help smallholders offering smaller volumes, only 2% of whom ever completed transactions on the platform. 

While more research is needed, this suggests that it may be difficult for farmers to earn higher prices for their output as is. A small number of papers has explored the complementary strategy of upgrading the quality of output, and thus its value. Bernard et al. (2017) have shown – in the context of Senegalese onion farmers – that farmers increase the quality of their output in expectation of a market reform that increases the returns to producing higher quality. The authors also find a positive effect on prices. Quality upgrading thus shows promise. To date, however, there are few experimental studies of quality upgrading and market access, possibly because “assessing the impact of a vertically coordinated value chain on (say) farmers production or welfare is particularly challenging” (de Janvry and Sadoulet 2020). In Bold, Ghisolfi, Nsonzi, and Svensson (2022), we overcome these challenges and conduct a series of four experiments to study the effect of providing farmers access to markets where high-quality produce attracts a premium.

Giving maize farmers in western Uganda access to more lucrative markets

The study follows smallholder maize farmers in a maize-growing district of western Uganda over seven harvest seasons. We begin by studying the functioning of local maize markets prior to the market access intervention. In the first experiment, we measure the quality of maize sold in local markets and show that quality is indeed low: the typical bag sold by farmers in local markets contains 25% waste, and 70% of the bags are classified as ‘reject maize’, unfit for human consumption according to the East African Maize Quality Standards. 

We then turn to the question of why farmers produce and sell low-quality maize. The neoclassical agricultural household model offers a possible answer: farmers will produce high-quality maize only if the extra cost is rewarded with higher market prices. In the second experiment, we test whether local markets provide such a reward by creating exogenous variation in the quality of maize sold in local markets. Specifically, we offer randomly selected farmers a free package of post-harvest services to improve the quality of their maize. While this service package significantly improved the quality of maize sold, prices did not budge, and treatment and control maize earned the same price. 

That price is not sensitive to quality may be because traders find it difficult to ascertain maize quality at the farm gate. We are, however, able to rule out this explanation with data from the quality measurement experiment where we find a strong correlation between quality assessed through visual inspections at the farm gate, and quality assessed in lab tests. Hence, although ‘true’ quality is – at least partially – observable at the farm gate, the market for quality maize is missing – at least for smallholder farmers. This appears to be a general and important phenomenon. As pointed out by Suri and Udry (2022), “African agriculture often seems to lack markets for quality – that is, the lack of different prices for varying quality of crops”.

Investigating supply-side constraints on producing high-quality maize

Since local markets do not reward farmers for producing higher-quality maize, farmers have no incentives to incur the extra cost and effort to increase quality. However, it may be constraints on the farmers’ side that explain why there is no demand for high quality in local markets. For example, farmers may not be aware of the quality standards for maize or may not know what techniques are required to achieve these quality standards. Moreover, even if traders were willing and able to pay a quality premium to smallholders, this may not be large enough for quality upgrading to be profitable. Given these potential constraints, buyers of high-quality maize may not be active in these markets simply because they do not expect to be able to procure maize of sufficient quality. 

To test this hypothesis, we conduct a third experiment to investigate if and how farmers respond when offered access to a market where quality maize attracts a price premium. Following farmers over several seasons, we find that a majority of farmers increase the quality of their maize and sell to buyers of high-quality when offered the opportunity. Treatment farmers’ profit increases substantially, ranging from 36% to 81% depending on how family labour is valued. These effects represent large absolute increases in the context of our study, where most people live on less than one dollar a day.  Importantly, the profit effect is driven both by an increase in farm productivity (yields increase by 15%) and by higher prices, which increase by 11% in treatment villages. To increase quality and quantity of their output, farmers also increased their investments both pre- and post-harvest. They did so predominantly by employing more labour, rather than by increasing the application of modern inputs, despite the market access intervention being coupled with a learning-by-doing extension training on agricultural best practices.

Policy implications

Our work highlights both new insights and challenges. On the former, while pre- and post-harvest training on best agronomic practices remains a core pillar of most agricultural development programmes, our findings suggest that such a supply side intervention alone has little impact on productivity or income without market access – we also ran an agricultural extension-only experiment that showed no impacts on either agricultural practices or welfare. On the latter, while farmers increased their use of modern inputs, which is one pathway to increased productivity, adoption of these technologies remained low. This result is consistent with Suri and Udry’s conclusion (2022) that “[n]o single constraint explains the low productivity in African agriculture; instead, different combinations of constraints seem to bind for different farmers”, and suggests the need to couple demand and supply interventions. 

The intervention also provides a case study of an integrated value chain operation involving smallholders as suppliers of high-quality products. As such, it highlights some of the challenges these operations face. First, even though the quality of maize grain is partially observable, this is no longer true for the final product that is sold to consumers – maize flour is an ‘experience’ good, so consumers can only learn about its quality by purchasing it. It thus takes time to build up a reputation for high-quality maize flour and a domestic customer base willing to pay a premium for it. Second, the price elasticity of quality among large segments of consumers is low. This could be because consumers do not value quality highly, either because they are not aware of the benefits of food safety or because they perceive actual quality to be low due to the inability of the government to publicise, test, or enforce quality standards at all stages of the value chain. Exporting is another option when the domestic market is small. However, entering the export market requires a large, fixed investment, established contacts with international buyers, and production at the necessary scale. These fixed costs help explain why the formal export market is dominated by a few large actors.

What investments could a low-income country make to bolster markets for high-quality output, thus unlocking benefits for farmers and consumers? Firstly, the government could facilitate entry in the high-quality export market for smallholders, or buyers operating with smallholders. Secondly, governments should enforce quality standards for raw maize grain and the final product (maize flour) to reduce the cost of reputation-building, and to allow the demand for quality maize grain and flour to increase. Thirdly, investment in infrastructure, roads, and security are crucial for allowing agro-traders enough margins to pay for quality produce. An alternative or complementary approach – if the returns to sourcing high-quality maize from smallholder farmers are not sufficiently high to attract private actors to enter this market – is to consider a subsidy to raise returns. The large income increases from farming that we document in our work suggest that such an approach is worth at least investigating.

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