A Financial Contracting Approach to the Role of Supermarkets in Farmers' Credit Access

American Journal of Agricultural Economics (Impact Factor: 1.36). 02/2008; 92(4). DOI: 10.2139/ssrn.1102579
Source: RePEc

ABSTRACT Traditional moneylenders monitor farmers to ensure that their investment is not diverted. Modern farming contracts offered by supermarkets in developing countries often entail a loan component, and monitoring arises as well. However, unlike moneylenders, supermarkets do care about the attributes of the product. Whether such attributes are obtained is influenced largely by the advice and the extension services received by farmers. We build a financial contracting model where we show that supermarkets optimally undertake both the monitoring and the advisory missions. This contract is shown to potentially enhance credit access for small farmers but sometimes also involves excessive monitoring.

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    ABSTRACT: This doctoral dissertation aims to contribute to the existing knowledge on the interplay between agricultural market institutions and development, with a focus on emerging agricultural value chains, and their implications for agricultural producers in developing countries. The dissertation contains both theoretical work (Chapters I and II) and empirical work based on field-work in India (Chapters III and IV), and it is the result of collaborative work with various co-authors. The first essay presents a basic model of vertical coordination in high value chains, and addresses the question of whether (and if so, under which circumstances) vertical coordination can be used as a rent extraction device by large companies in the specific context of many developing countries, in particular the absence of effective contract enforcement institutions, and the presence of market imperfections. We argue that for a broad range of model parameters, vertical coordination offers a useful device for the creation and sharing of rents. We also show that competition and development will have mixed effects and that poor producers may, paradoxically, sometimes be better off at low levels of development. The second essay applies the same basic model of vertical coordination in value chains to empirical data in a comparative framework, and puts forward a tentative and novel explanation for differential agricultural reform effects in Africa, Asia and Europe. Our analysis explicitly integrates factor market imperfections, the absence of effective contract enforcement institutions, and the prevalence of linkages between input and output markets. Moreover, it takes into account a range of relevant prereform differences such as typical production structures, income levels, agricultural price distortions, land institutions, as well as differences in the sequencing of reform. The first two essays start from the assumption that rich consumers are prepared to pay a premium for quality. These rich consumers may live abroad (in the case of exports to rich countries) or in (urban areas of) developing countries. The third essay investigates how relevant this assumption is for domestic markets of developing countries. This is relevant in the view of assessing the scalability of the ongoing processes of structural transformation in developing countries agricultural supply chains. We use primary data from a survey which was conducted in Madagascar in 2006 and a similar survey conducted in India in 2007. Based on revealed as well as stated preference methods, we show that the share of high quality products on offer, as well as the observed quality premiums are higher in India and we present a stylized theory model which explains the observed differences based on differences in income. Finally, the fourth essay examines the vices and virtues of traditional horticultural supply chains in India, with a view on assessing the scope for resilience of traditional supply chains in a fast-growing agrarian economy like India.We use primary data from a survey which was implemented in Uttarakhand, a state in the North of India in 2007. In particular, we investigate whether the services that are delivered in practice on traditional wholesale markets are in line with existing market regulations. Our main finding is that the existing regulations are ineffective as most government-licensed brokers charge commission rates that significantly exceed the regulated ones. In a second part of the paper, we analyse the presence and the implications of market interlinkages in these traditional markets. Interlinkages imply that contract terms in the input market (in casu the credit market) are linked to contract terms in the output market and they have long been considered as a tool for rent extraction by landlords or agricultural traders. In contrast with the existing literature, our analysis suggests however that interlinkage is merely an extra service by brokers as to establish farmer loyalty and thus to ensure future supplies and that it does not lead to worse inputs, high interest rates, or lower implicit output prices.
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    ABSTRACT: Contractual arrangements between farmers and traders aiming at providing input/credit in return for output selling have been widely studied in the literature on agricultural economics. Nonetheless, there is one issue, which is barely mentioned in the literature: how to enforce the contract terms when traders offer credit in cash rather than input advances? This article aims to describe an innovation in farming contracts, used by fresh fruit and vegetable wholesalers in Turkey, which involves a kind of private voucher system. Drawing on original data collected from wholesalers—a segment in the supply chain hardly covered in the literature—we investigate the factors determining contract adoption using a two-limit Tobit model. Our results suggest that this private voucher system contributes to supply chain coordination and facilitates smallholder farmer participation in export and supermarket channels, which are growing rapidly in this developing country.
    Agricultural Economics 12/2013; 45(4). DOI:10.1111/agec.12100 · 1.09 Impact Factor
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    ABSTRACT: Standards are increasingly important in the global market system. Consumers rely progressively more on public standards (set by governments) as well as private standards (set by firms) to make their consumption decisions. Similarly producers rely heavily on standards to gear their production systems to one another and to increase transparency and traceability throughout the supply chain. Standards address a large variety of issues in consumption and production such as nutritional (e.g. low fat, vitamin-rich), safety (e.g. pesticide residues, small toy parts), quality (e.g. minimum size requirements, life span guarantees), environmental (e.g. low carbon dioxide emissions, waste management), and social concerns (e.g. no child labor, fair trade). While the above examples illustrate some of the potential benefits of standards, their implementation also entails costs and affects prices. The second chapter of this dissertation illustrates that standards may therefore have different positive or negative welfare impacts on different actors in the market. Additionally, standards may increase or decrease social welfare. These potentially different impacts on various groups in society have caused suspicion that standards may be captured by lobby groups to serve their individual interests instead of the public. Despite standards potential benefits, fears have arisen (a) that these public regulations may be used as strategic trade-protectionist tools to shelter domestic producers; (b) that private standards may be introduced by retailers as devices to extract rents from other agents in the supply chain; and (c) that certain (groups of) producers in developing countries may be excluded from these production systems governed by high standards and high quality. Each chapter in this dissertation addresses one of these concerns. To analyze the first concern that standards may serve as protectionist instruments, the third chapter develops a political economy model of public standards in which both consumers and producers try to influence the governments standard-setting behavior through lobbying. The model shows that public standards nearly always affect imports and can be either catalysts or barriers to trade, even if standards are optimal from a social welfare perspective. Hence a public standards impact on trade cannot be directly linked to protectionism since the change in imports may be optimal from a (domestic) social welfare perspective. Additionally, even if public standards deviate from the social optimum, this does not necessarily amount to producer protectionism as producers may be hurt by suboptimal public standards as well. Importantly, the model does not refute the possibility that public standards may serve protectionist intentions, but it nuances the argument that all standards are pure protectionism. Hence an important implication of this chapter is that one should be careful in categorizing standards as protectionist instruments or not, and that standards may be welfare optimal while negatively affectingtrade. Additionally, this model contributes to explaining the observed positive correlation between standards and development, and demonstrates that this relation not necessarily implies that protectionism through standards rises with development as well. The fourth chapter addresses the same concern of standards-as-protectionism but from a strategic and dynamic perspective. The chapter advances a dynamic political economy model of technology regulation in which two countries governments strategically decide which of two technologies to allow by setting a public standard. We show that a temporary difference in consumer preferences between those countries may trigger differences in initial technology regulations, and thus different investments by producers. Due to these technology-specific investments, producer interests in both countries shift in favor of maintaining the regulatory status quo which excludes foreign imports, although producers were initially indifferent towards the technology choice. Consequently, if governments are responsive to domestic producers pressures, regulatory differences may be long-lasting even if consumer preferences are identical between countries in the long run. Hence producer lobbying may create hysteresis in (differences in) technology regulation. These results fit well the differences in biotechnology regulation between the EU and the US, and illustrate that both consumer preferences and protectionist motives play a crucial role in explaining these differences. The main factor that causes producer lobbying and thus regulatory persistence is the cost related to switching between different technologies. If producers could adjust their production technology without losing profits to foreign producers, their incentives to lobby in favor of a regulatory status quo would disappear and hence the hysteresis in technology regulation as well. This holds the important policy implication that to overcome the status quo bias, adjustment costs need to be reduced. This would effectively reduce the capture of public standards and technology regulation by interest groups that aim at protecting their home markets from foreign imports. The fifth chapter tackles the second issue, namely that retailers may employ private standards to extract rents from other agents in the supply chain. The model shows that several factors may cause retailers to set their private standards at more stringent levels than public standards. Retailers are more likely to set relatively more stringent and rent-extracting private standards if (a) the rent transfer from the retailer to producers is smaller such that producers bear a larger share of the standards implementation cost; (b) the producers interest group has a larger political power when producers interests are opposite to those of the retailer; (c) the standard creates a smaller efficiency gain for consumers; and (d) the standard entails larger implementation costs for producers. We also show that retailers market power is crucial in this argument: if retailers have no market power, private standards are never set at higher levels than public standards. Hence when producers use their political power to obtain lower public standards, retailers may apply their market power to set higher private standards. In combination these factors may contribute to explaining why industry-wide private standards may be more stringent than their public counterparts. Importantly, the model also demonstrates that, in general, the optimal private standard differs from the socially optimal one. This sub-optimality generates additional profits for retailers at the expense of consumer and/or producer welfare. Therefore government intervention that regulates the use of private standards could be warranted. However, doubts might be cast on the optimality of government intervention in the domain of private standards because, as demonstrated in the third chapter, also politically optimal public standards may differ from their social optimum due to interest group lobbying. Finally, the sixth chapter addresses the issue that certain (groups of) producers may be excluded from a high-quality economy (HQE) and supply chains governed by high standards. The partial equilibrium model developed in the sixth chapter shows that the initial production structure (in terms of productivity heterogeneity) affects who is able to participate in the HQE and who is not. The most productive producers switch first to the HQE, and in countries with a more heterogeneous production structure this process is more likely to lead to an initial exclusion of producers, although the emergence of the HQE occurs faster in terms of rising incomes. In countries with a more uniform production structure, the emergence of the HQE, although delayed, can be expected to be more inclusive. We also demonstrate that, depending on their nature, transaction costs may or may not reinforce the disadvantaged position of less productive producers. Additionally, our model shows that contracting between producers and processors i.e. processors supplying credit to producers may induce the HQE to be more inclusive towards less efficient producers. The model thus lays out three different mechanisms by which a HQE can be made more inclusive towards different groups of producers, namely (a) by reducing heterogeneity in the initial production structure through raising productivity of the least productive producers; (b) by reducing transaction costs in general and especially those transaction costs that reinforce productivity disadvantages; and (c) by creating an institutional environment that is favorable to contracting between producers and processors or that facilitates producers access to credit.

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