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Small they may be and Indian farmers they are but export they can: The case of mahagrapes farmers in India

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Success in High Value Horticultural Export
Markets for the Small Farmers: The Case
of Mahagrapes in India
DEVESH ROY
International Food Policy Research Institute (IFPRI), Washington, DC, USA
and
AMIT THORAT
*
Jawaharlal Nehru University, New Delhi, India
Summary. In spite of being the second largest horticultural producer in the world, India is a
failed exporter mainly because of the inability to meet the food safety standards. Hence, successes
in horticultural exports are rare. Here, we study one unique success story, Mahagrapes, a marketing
partner to farmer cooperatives attributing its success to a combination of collective action and pub-
lic private partnerships. Our results indicate that Mahagrapes farmers earn significantly higher in-
come vis-a
`-vis their outside marketing option and smallholders face no bias in selection. Together
with the farmer’s ability to consistently meet standards, this implies that the model can be scaled
up.
Ó2008 Elsevier Ltd. All rights reserved.
Key words — standards, food safety, exports
1. INTRODUCTION
Since 1971, global agricultural exports have
grown at 3.0% per year in real terms, on aver-
age, while agricultural production has grown
at 0.7% per year. As a result, the share of agri-
cultural production that is exported has dou-
bled, rising from 19% in 1971 to 40% in 2003.
The composition of agricultural exports has
changed as well. The grain exports have fallen
sharply as a proportion of the total value of
agricultural trade, declining from 15% in the
1960s to less than 8% in the 1990s. At the same
time, exports of higher-value agricultural prod-
ucts such as fruits and vegetables, meat, dairy
products, eggs, and fish and seafood have
grown from 29% to 42% of the total over the
same period. Concomitantly, the share of pro-
cessed products in agricultural exports has in-
creased from 41% in the 1980s to 51% in the
1990s. The growth in the share of agricultural
exports that are processed can be seen in almost
all commodity categories (FAO, 2005). The
exceptions to this pattern are fruits and vegeta-
bles: both primary and processed fruits and
vegetables have increased their share of world
agricultural exports over this period, but
growth in fresh fruit and vegetable exports
has been greater. This reflects both consumer
willingness to pay for fresh produce and
improvements in transportation and logistics
*Our heartfelt gratitude goes to the Mahagrapes and
independent farmers who shared the information dili-
gently on a wide range of questions. Thanks also to the
people at Mahagrapes especially Mrs. Bhushana Karan-
dikar who accompanied us on our field visits and made it
an enriching experience for us. We also acknowledge the
contribution of the participants at the Plate to Plough
conference in New Delhi in September 2006 and seminar
participants at the Markets Trade and Institutions Di-
vision at the International Food Policy Research Insti-
tute. Final revision accepted: September 6, 2007.
World Development Vol. xx, No. x, pp. xxx–xxx, 2008
Ó2008 Elsevier Ltd. All rights reserved
0305-750X/$ - see front matter
doi:10.1016/j.worlddev.2007.09.009
www.elsevier.com/locate/worlddev
1
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..., World Development (2008), doi:10.1016/j.worlddev.2007.09.009
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that has made it possible to transport perish-
ables over long distances.
The growth in fresh fruits exports offers a win-
dow of opportunity to those developing coun-
tries that have a low processing capacity but
have high labor and suitable agro-climatic
endowments. During 1971–2002, the largest
net exports from developing countries were
fruits and vegetables (FAO, 2005). At the same
time, there exists differentiation across develop-
ing countries in their ability to benefit from this
market opportunity mainly because of the dif-
ferences in capacity for meeting international
food safety standards (Athukorala & Jay-
asuriya, 2003). The ability to meet high food
safety and quality standards is lowest in small-
holder agriculture because of the scale econo-
mies that standards lead to. India is one such
country dominated by smallholders (with 82%
of landholdings less than 2 ha in 2001) but the
policy debate on whether or not smallholders
can access high value export markets encom-
passes the whole gamut of developing countries.
India is one of the leading producers of fruits
and vegetables in the world. In 2005, India con-
tributed to about 9% of world fruit production
and was the third biggest producer of fruits after
China and Europe, producing nearly 50 million
tons of produce (FAO, 2005). Similarly, India
also contributes to about 14% of world vegetable
production. In 2005, it was the second largest
vegetable producer after China, at around 35
million tons.
1
At the same time India is a rela-
tively small horticultural exporter. According
to the 2005 World Bank report on Indian horti-
culture, India is a competitive producer of horti-
cultural products on farm but owing to off-farm
disadvantages, she fails to compete abroad. In-
dia’s share in world horticultural trade was just
2.3% in 2004, a figure disproportionate to its
share in global production.
2
Diversifying into
horticulture is often seen as an opportunity for
uplifting incomes for the small farmers. Addi-
tionally, if rich country markets are accessible
to farmers, it would result in a significant in-
crease in farm incomes.
What are the constraints that make India an
unsuccessful exporter of horticultural products?
The most important reason is the inability of
the smallholder dominated production systems
to meet the food safety and quality require-
ments of the rich country markets. The small-
holder-based agriculture in India imposes
limits on the number of farmers capable to
adopt more sophisticated farm practices and
undertake the necessary investments (e.g., land
improvements, obtaining necessary certifica-
tions, and cold storage) to meet more stringent
food quality and safety requirements (Umali-
Deininger & Sur, 2006).
The western food standards such as Euro-Re-
tailer Produce Working Group Good Agricul-
tural Practices (EurepGAP) have often turned
out to be too stringent for Indian producers
to remain competitive given their cost of com-
pliance. The inability to meet these stringent
standards results from several factors, like
underdeveloped physical infrastructure, such
as limited supply of power and irrigation, lim-
ited number and narrower spread of pre cool-
ers, cold storages and refrigerated transport
vehicles and accredited certification agencies.
Most importantly, these standards require a
high degree of information on requirements re-
lated to inputs, packaging, etc., that is costly to
obtain and process.
Also, the standards keep changing and the
producers have to be abreast with that informa-
tion. Acquiring information from buyers, get-
ting access to post harvest infrastructure or
getting certified for meeting the standards are
all subject to scale economies.
3
The small farm-
ers typically face scale disadvantages and are
thus unable to meet the rich country standards.
4
Often, the product attributes are imperfectly
observed especially if the goods have the prop-
erty of credence. In such situations, the signifi-
cance of reputation goes up. Without perfect
observability, expected quality from an individ-
ual seller is determined by the average. Since
Indian horticultural producers are largely per-
ceived to be inept at meeting the standards,
negotiating and initiating marketing contracts
in developed country markets can be difficult
for the individual producers owing to the aver-
age reputation effect.
India’s reputation in complying with SPS
standards in richer markets is dismal. Consider
India’s exports to the United States. During
May 1999–April 2000, the total number of
detentions by the US originating from all (52)
countries was 9875, of which 860 shipments orig-
inated from India. This was the highest number
of shipments rejected by United States Food and
Drug Administration (USFDA) that originated
from a single country (Mehta & George, 2003).
Recently, during February 2006–January 2007,
the number of detentions was 16,818. India
again faced the highest number of detentions
with a total of 2,085 detentions (FDA, 2007).
What are the institutional solutions that can
be proposed to overcome these problems? To
2 WORLD DEVELOPMENT
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..., World Development (2008), doi:10.1016/j.worlddev.2007.09.009
ARTICLE IN PRESS
overcome scale diseconomies for the small pro-
ducers or to exploit the scale economies, the
most common solution that is proposed is the
creation of producer organizations.
5
Europe
is a good example of this, with substantial share
of national demand for fruits and vegetables
being supplied by the farmer cooperatives.
Dairy in many countries is dominated by coop-
eratives including in India. In general, fruits
and vegetables have a much smaller share of
markets with the cooperatives in many coun-
tries. In the United States, in 1997 where the
share of cooperatives in dairy was 83%, in fruits
and vegetables it was merely 19%. In 1997,
across developed countries in Europe, the high-
est market share of cooperatives in fruits and
vegetables was in Belgium (greater than 70%)
(Bekkum & Dijk, 1997).
Producer cooperatives can exploit economies
of scale by collectivization of output of the
farmers. Economies of scale in production
are, however, different from economies of scale
in marketing that are dominant in high value
export markets. The requirements of marketing
in terms of information procurement and dis-
semination, the role of reputation and branding
and the importance of negotiations (in initiat-
ing and maintaining contracts) lead to different
kinds of scale economies.
Here, we study the case of Mahagrapes, a mar-
keting partner to a group of producer coopera-
tives in Maharashtra state of India. A
marketing cooperative was first described by
Helemberger and Hoos (1962) as an organiza-
tion that has the objective of maximizing the
price paid to the members of the marketed prod-
uct. Mahagrapes is not a marketing cooperative
but a marketing partner to the cooperatives. It
not only negotiates better prices for its members
but also provides technical assistance, inputs
and information to the farmers to enable them
in meeting the stringent requirements of the ex-
port markets. The role of Mahagrapes is broadly
twofold. First, as a facilitator it provides market-
ing expertise (in both inputs and output markets)
which is lacking among the producer coopera-
tives. In providing information, negotiating con-
tracts and supplying certification, Mahagrapes
overcomes the diseconomies of scale of small
farmers through collectivization. As a provider
of technical assistance and inputs, in its second
role Mahagrapes again overcomes the scale dis-
economies through bulk buying or through in-
house production.
As a success story of smallholders in the high
standard high return export markets, the issue
of interest to the development practitioners is
whether this kind of arrangement can be scaled
up or replicated. This is the issue we address in
this paper. As discussed below, policy initiatives
of various types (public and public private) have
been involved in the success of Mahagrapes.
However, in spite of the political and institu-
tional support, for the model to be scaled up,
three conditions must be satisfied: (i) consistent
ability of the smallholders to meet the standards
required in the developed country markets, (ii)
absence of any bias in the selection/participa-
tion of the farmers in terms of commonly found
attributes in the population (such as small land
size), and (iii) conditional on participation and
compliance with the standards, there should be
significant gains to the farmers.
Several papers have looked at the issue of
participation of small farmers in export ori-
ented agriculture. Here, we approach the issue
of selection more broadly. Linking with large
farmers is likely to involve lower transaction
costs but catering to high standard markets im-
plies that different characteristics of the farmers
could be important such as education and expe-
rience in farming. Thus, we posit the selection/
participation question as one of negative versus
positive selection based on several characteris-
tics. We find that it is not the land size but hu-
man capital attributes of the farmers that
significantly determine participation.
Conditional on participation, do the farmers
linked with Mahagrapes earn significantly high-
er profits relative to independent farmers after
controlling for farmer characteristics? The net
returns to the farmers has to take into account
the incremental costs of standardizing the prod-
uct for western markets with the use of im-
proved inputs in production (such as the use
of bio-pesticides and fertilizers) and in market-
ing (the use of better packaging materials). Our
results indicate that after controlling for both
observed and unobserved characteristics of
the farmers, the net returns to farmers per acre
of cultivated land are significantly higher.
Though there exists a large body of literature
that estimates the gains to the farmers from
participation in high value markets, most stud-
ies do not control for the potential selection
bias that could affect the results (Warning &
Key, 2002 being an exception). Several studies
simply compare the gross margins per hectare.
von Braun and Immink (1994) found that ex-
port horticultural production in Guatemala
generated gross margins per hectare 15 times
as large as maize production and gross margins
SUCCESS IN HIGH VALUE HORTICULTURAL EXPORT MARKETS 3
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..., World Development (2008), doi:10.1016/j.worlddev.2007.09.009
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per labor day twice as large. McCulloch and
Ota (2002) show that horticultural export
growers have higher incomes after controlling
for farm size, education, irrigation, and other
factors.
None of these studies, however, takes into ac-
count the fact that those who participate in high
value markets (for exports or otherwise) make
relatively higher gains simply because they have
better skills or face better conditions some of
which are unobserved and hence not captured
in the data. The problem of non-random selec-
tion creates an upward/downward bias in the
estimates of the benefits of linking up. We con-
trol for the endogeneity bias using instrumental
variables technique. The result that Mahagra-
pes farmers earn significantly higher profits is
robust to controlling for selection bias.
We further find that the impact of member-
ship in Mahagrapes varies between small and
large farmers. The impact on small farmers in
modern marketing channels like supermarkets
or in export horticulture has been extensively
studied (e.g., Birthal, Joshi, & Gulati, 2005;
Faiguenbaum, Berdegue, & Reardon, 2002;
Farina, 2002; Ghezan, Mateos, & Viteri, 2002;
Reardon & Berdegue, 2002). This strand of lit-
erature, however, has largely been descriptive.
We find that controlling for other farm charac-
teristics, the marginal impact on the small
farmers from participation is higher.
The paper is divided into the following sec-
tions. Section 2gives background information
on Mahagrapes including details on its forma-
tion and the organizational and institutional
structure. Section 3highlights the features of
Mahagrapes especially with regard to the en-
abling role it plays in farmers’ ability to meet
the requirements of the export markets. Section
4discusses the data and the descriptive statis-
tics from the primary survey. Section 5presents
the regression results. Section 6addresses the
issue of selection/participation. Section 7 con-
cludes.
2. BACKGROUND INFORMATION ON
MAHAGRAPES AND ITS ROLE AS A
FACILITATOR TO SMALL FARMERS
Mahagrapes came into existence in 1991.
Several government agencies supported its
establishment including some federal agencies
(like National Cooperative Development Cor-
poration (NCDC), National Horticultural
Board (NHB), Agricultural and Processed
Food Products Export Development Authority
(APEDA)). Alongside there were state agencies
that helped in establishing Mahagrapes (e.g.,
Department of cooperation, Government of
Maharashtra and Maharashtra State Agricul-
ture Marketing Board (MSAMB)).
The creation of Mahagrapes is unique in the
Indian context as it is the first to make use of a
special provision (following an amendment)
under the cooperative laws of the state. This
amendment in 1984, allowed cooperatives to
associate with other agencies (including mar-
keting partners). Such an association of cooper-
atives with other agencies was forbidden prior
to the amendment. Mahagrapes is registered
as a marketing partner to the producer cooper-
atives under the clause following this amend-
ment in the cooperative law of the state.
The organization of Mahagrapes is as fol-
lows. At the apex are two executive partners.
This is followed by an executive council com-
prising seven elected cooperative heads, fol-
lowed by a board of directors composed of
the heads of the 16 cooperatives. The executive
council and the board of directors are responsi-
ble for transmitting the views of the farmers.
All decisions finalized by the executive partners
are taken after achieving a consensus of the
executive council. The members of the execu-
tive council in turn being the representative of
farmer cooperatives, voice the opinion of the
farmers. The executive council, however, also
has a discretionary power to make emergency
decisions including financial decisions up to
the tune of 40 million rupees.
Mahagrapes is a for profit organization. The
price which each farmer gets is decided based
on the quality of the grape that can be ascer-
tained due to traceability of the produce. So
when the price is decided for grapes from a par-
ticular farmer, Mahagrapes deducts a facilita-
tion fee per unit of output and passes on the
rest to the cooperatives. The cooperative then
keeps a part of the price for itself and passes
on the rest to the farmer. The amount which
the cooperative keeps varies from one coopera-
tive to another depending upon their specific
requirements.
The primary source of funding of Mahagrapes
is membership equity. The government does not
provide any explicit assistance to Mahagrapes in
its functioning. The only government assistance
that Mahagrapes receives is the general assis-
tance provided to all horticultural and processed
food exporters in the country in the form of
transport assistance (from APEDA).
4 WORLD DEVELOPMENT
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Since Mahagrapes works as a facilitator, an
important source of current financing for
Mahagrapes is the facilitation charge. Addi-
tionally, the transfer of inputs by Mahagrapes
to the cooperatives is a commercial transaction
though the inputs are sold at little or no profit.
Thus, the inputs transacted between the coop-
eratives and Mahagrapes do not involve any
subsidy.
In the beginning, Mahagrapes had 29 grape
growing farmer cooperatives as its members.
This number came down immediately within
three years and currently there are 16 farmer
cooperatives. The initial time periods were
characterized by difficulty for Mahagrapes
resulting from high rates of consignment rejec-
tions in the European markets. In the second
year after exports started in 1991, a large con-
signment was rejected and there were losses to
the tune of 20 million rupees. As a result many
cooperatives left Mahagrapes to concentrate on
the domestic market or to look for alternate
marketing arrangements thus bringing a reduc-
tion in the number of cooperatives that contin-
ued to link up with Mahagrapes.
Though not as acute as in initial time periods,
Mahagrapes has had to deal with the issues of
consignment rejection on an annual basis for
a substantial period of time.
6,7
As the fruit
quality and SPS measures as well the methods
used to ascertain these fruit characteristics
change year to year, Mahagrapes has to keep
abreast with them and amend their own pro-
duction, processing, storing and testing meth-
ods regularly. For instance, consignment
rejection occurred from the Netherlands mar-
ket, as the method employed in India for testing
chemical residues was different.
8
Other product attributes which could be the
basis for rejection are: berry size, fruit color,
bunch weight, blemish, bag weight (mini-
mum–maximum), stem color, berry shrived,
split berry, SO
2
damage, waste berry, pest dam-
age, shatter berry, chill damage, temperature,
residue, taints and odor, packing quality and
average check weight. Over the years, Mahag-
rapes has learnt how to minimize these poten-
tial problems and rejection rates have gone
down substantially.
9
In the initial periods
when the consignment rejections occurred, the
government stepped in with soft loans to the
cooperatives to help set up pre-cooling and cold
storage infrastructure in the cooperatives.
The institutional arrangement linking small
farmers to export markets through Mahagrapes
can be broadly summarized as a mix of collec-
tive action and public private partnerships.
Conceptually, the role of collective action arises
wherever there are economies of scale in pro-
duction or marketing. This includes the role
of farmer groups in being better able to ensure
traceability. In these chains, the costs for the
establishment of traceability are lower for firms
and farms with collective action than without.
Similarly, collective action has a rationale if
agents in the supply chain have different com-
parative advantages. Thus, a producer group
(with comparative advantage in production)
could benefit from collective action with agents
that have expertise in marketing.
Additionally, public private partnerships
(PPPs) might be required to play a complemen-
tary role in linking small farmers with HVA
markets. The traditional public supply func-
tions can be inadequate to meet the needs of
the HVA supply chains from the perspective
of the smallholders. Traditional public sector
activities such as extension, research and devel-
opment, and price and marketing policies have
been largely commodity-based and hence may
not provide the support smallholders require
in a HVA supply chain.
Mahagrapes is a good example of public–pri-
vate partnership.
10
Ownership of Mahagrapes
lies solely in the hands of the farmers; as they
have collectively contributed their share in the
fixed and operating costs of Mahagrapes and
they also handle the governance of the firm.
However, as discussed above, in the initial peri-
ods (including in the initiative to establish), the
role of public institutions such as MSAMB was
essential. MSAMB deputed and paid the sala-
ries of the first governing officers of Mahagra-
pes for three years who were brought in from
other state departments. MSAMB also pro-
vided for consultancy services from experts on
agri-marketing, packaging, technical services
such as refrigeration and cooling. All the liai-
soning with institutions such as the Central
Food Technology Research Institute (CFTRI)
was done by Mahagrapes. The National Coop-
erative Development Commission (NCDC)
gave loans to the societies for pre-cooling and
pack-houses. Loans from the private sector that
has a higher discount rate would not be forth-
coming (as success in export markets with
smallholders usually takes time).
With assistance from a spectrum of govern-
ment bodies, it is important that the government
assumed the role of a mere facilitator. In con-
trast to the system of other cooperatives in India
(e.g., in dairy and sugar), the government was
SUCCESS IN HIGH VALUE HORTICULTURAL EXPORT MARKETS 5
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..., World Development (2008), doi:10.1016/j.worlddev.2007.09.009
ARTICLE IN PRESS
not assigned any direct role in the decision mak-
ing of cooperatives or in Mahagrapes. In many
dairy cooperatives, for example, elite capture
and rent seeking by the top management has be-
come quite common in India. Similarly, Banner-
jee et al. (2001) present evidence for rent seeking
and elite capture by the management of sugar
cooperatives in Maharashtra.
What has Mahagrapes done to facilitate
farmers in meeting the export standards? As a
marketing partner of the producer cooperatives
facilitating exports, Mahagrapes has enabled
the farmers in several ways: Kleinwechter and
Grethe (2005) while analyzing the adoption of
EurepGAP standards by mango exporters in
Peru categorize the compliance process into
three stages viz. the information stage followed
by a decision stage and finally an implementa-
tion stage. Mahagrapes has been active in all
the three stages of the compliance process.
In course of facilitation Mahagrapes solves
the diseconomies of scale problem in marketing
in several ways. In the input markets and in the
output markets, procurement of information
and negotiation of contracts involve economies
of scale. Mahagrapes undertakes this activity
on behalf of the farmers. Mahagrapes also pur-
chases inputs in bulk (like bio-fertilizers from
Australia) and to the extent that it collectivizes
the input demand of all the members, it benefits
from economies of scale more than what coop-
eratives would enjoy separately.
Related to compliance, Kleinwechter and
Grethe (2005) point out that certain knowledge
of the standard is necessary to make a decision.
Creating a knowledge base about standards
and about export markets in general involves
large fixed costs (e.g., foreign travel) and infor-
mation once procured can be disseminated at
low marginal cost. Small farmers would find
it prohibitive to incur such fixed costs and thus
benefit from Mahagrapes procuring this infor-
mation on their behalf.
Once the information on the market require-
ments is available with Mahagrapes, it dissem-
inates this information to the farmers free of
cost. This follows the long tradition of holding
quality and product safety related workshops
and field demonstrations which the grape grow-
ers association in Maharashtra had been con-
ducting from before. Farmers and grape
handlers/sorters (primarily women) are contin-
uously informed about and trained in the latest
grape growing and handling methods and pro-
cesses, as well as the latest weather and climate
updates.
Mahagrapes continuously updates the list of
banned and approved pesticides and fertilizers,
which keep changing from year to year across
markets. Similarly, the changes in the permissi-
ble levels of chemical residues are also provided
by them regularly. All this information is pub-
lished in the form of a yearly hand book in the
native language and distributed free of charge
among the farmers.
Once the information on the standards is
available, action is needed relating to the deci-
sion on implementation. What are the steps
that need to be taken, if there are restrictions
on inputs, and how and where from can they
be procured are some of the decisions that
emerge regarding implementation of the stan-
dards in the next stage. The Mahagrapes deci-
sion to produce organic pesticides itself would
fall under its actions in the decision stage.
In the implementation stage, Mahagrapes
provides materials and technical help along
with infrastructural support to facilitate the
implementation of the standards. Mahagrapes,
for instance, provides the farmers with packag-
ing material which comply with international
norms. Plastic bags and palettes are imported
from Spain. Special SO
2
sheets (sulfur di oxide
sheets) are imported from China which are used
to cover the grapes before being sealed in corru-
gated cardboard boxes. This releases the SO
2
gas right after 15 days when the consignment
of grapes arrives at the destination, so as to re-
strict the spread of bruising or any other dam-
age sustained by the grapes in transit.
Regular and constant monitoring of the
grape plant by the farmers themselves is facili-
tated by the scientists from the National Re-
search Centre (NRC) in Pune. This ensures
that the plant remain healthy throughout the
year and not just in the fruiting season. Bio-fer-
tilizer and bio-pesticide are developed and pro-
duced by Mahagrapes and provided to member
farmers cheap, that helps them meet the Eurep-
GAP requirements.
11
Acquiring a EurepGAP certificate individu-
ally is costly for the small and medium farmers.
However, Mahagrapes has managed to provide
the entire cooperative societies with certifica-
tion. Thus, each society gets certified as Eurep-
GAP compliant along with the member farmers
who now have to pay just Rs. 1,200 per annum
(approximately $28). In our sample, for the
smallest exporter also, this expenditure is less
than 2% of the annual export revenues. Note
that the certification is marketing relationship
based and holds for cooperatives/farmers only
6 WORLD DEVELOPMENT
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..., World Development (2008), doi:10.1016/j.worlddev.2007.09.009
ARTICLE IN PRESS
as long as they are linked to Mahagrapes as
their marketing partner.
With the infrastructure and information dis-
semination system set up that has been critical
in enabling the farmers to meet the high stan-
dards, the issue remains with regard to the real-
ized gains from accessing the export markets.
Since rejection rates have gone down substan-
tially and have stabilized, risks have been re-
duced significantly. Yet, it is possible that
compliance with standards erodes margins of
profitability substantially enough, so as to real-
ize only insignificant gains. In order to address
the issue of potential for scaling up, we now
analyze the data from the primary survey
involving Mahagrapes and independent farm-
ers and subject it to empirical investigation
for the issue of selection and significance of
the realized gains.
3. DATA AND DESCRIPTIVE STATISTICS
The data were collected from a primary field
survey (involving questionnaire based-inter-
views) in the districts of Pune, Nasik and San-
gli, comprising two types of grape farmers;
those who are members of the Mahagrapes
and those who are independent, selling mostly
in the local markets. Out of a total of 183 sur-
veyed farmers, the number of farmers associ-
ated with Mahagrapes is 88 and of
independent farmers is 95. The survey was
undertaken in 2005. The collected information
pertains to the year 2004. The Mahagrapes
farmers were randomly chosen from a list of
farmers provided by the cooperative while the
independent farmers were randomly selected
from the list of registered grape farmers in the
same area (registered with grape growers asso-
ciation that has 22,000 members) but not asso-
ciated with Mahagrapes.
The data were based on the recall memory of
the households while some of the information
was cross-checked with the cooperative/
Mahagrapes for validation. The survey col-
lected detailed information on household char-
acteristics, infrastructural environment of the
farmers, details of the inputs and outputs in/
from grape production and details on transac-
tion costs.
12
The survey comprised five parts. In the first
part, information on the access of the farmers
to village level infrastructure was collected (to
gauge their physical access to markets and
connectivity through phones, transport, etc.).
Table 1 compares the availability of infrastruc-
ture across the Mahagrapes and the indepen-
dent farmers. The Mahagrapes farmers on an
average are marginally farther away from the
city centers (with the difference in means being
significant) and all the farmers in the sample
have access to bus facilities in the vicinity. In
terms of access to communication infrastruc-
ture, though there is near parity between the
two types of farmers, the variable is an imper-
fect measure of actual access. Private access to
telephone has a much greater impact on connec-
tivity than the presence of a telephone facility in
a locality. A simple test for difference in means
indicates that there is not much to distinguish
the two groups of farmers in terms of their ac-
cess to infrastructure (except in their access to
regional rural banks).
The second type of information in the survey
relates to the characteristics of the farmers
including education, experience in farming and
current and past occupation. Clearly, the
Table 1. Access to infrastructure at the village level (%)
Independent Mahagrapes
Average distance of
village to urban area
(km)
*
13.9 16.1
Does the village have
a cooperative credit
society (%)
96.9 98.9
Does the village have
a regional rural bank
(%)
**
80.4 89
Does the village have
a land line phone
facility within a
distance of 5 km (%)
100 100
Does the village have
a post office (%)
94 93
Does the village have
access to a bus stop
within the distance of
5 km (%)
100 100
Does the village have
access to a cold
storage facility (%)
61 60
Does the village have
an agricultural mandi
in the vicinity (within
5 kms)
76 76
Source: Primary survey;
*
, 10% level of significance;
**
,
5% level of significance;
***
, 1% level of significance for
test in difference of means between Mahagrapes and
independent farmers.
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Mahagrapes farmers have substantially higher
experience in farming. Moreover, relative to
the independent farmers, the average levels of
education are also higher for the Mahagrapes
farmers especially in the category graduate edu-
cation and above. Labor economists define skill
as a combination of education and experience
(Borjas, 2003). Thus, the Mahagrapes farmers,
on an average are higher skilled with the differ-
ence in means being statistically significant. In
light of the stringent standards requirements in
the western markets, this kind of positive selec-
tion is quite likely. Note that (from Table 2), skill
and not the land size is the distinguishing charac-
teristic between the two groups of farmers.
In terms of occupational characteristics (e.g.,
primacy of grape farming as an occupation),
the two groups of farmers are nearly identical.
An interesting observation from Table 2 is that
a substantial proportion of grape farmers in the
sample (both Mahagrapes and independent)
have prior non-farming experience. Several of
the grape farmers have invested capital accu-
mulated elsewhere to get into commercial grape
production.
The third part of survey collected information
about the inputs, outputs, prices and revenues
for the farmers over a one-year period. Table 3
presents information about the levels of input
use for the Mahagrapes and the independent
farmers. More detailed information on the input
costs of the farmers is provided in the Appendix.
The details about inputs are particularly rele-
vant as standards alter the mix of inputs
through compliance requirements. Costs of
compliance ultimately determine the relative
profitability of production for the western mar-
kets vis-a
`-vis domestic markets. For example,
the grapes produced for the European markets
have restrictions on their pesticide residues
Table 2. Individual characteristics of Mahagrapes and independent farmers
Independent Mahagrapes
Experience in grape farming
*
(number of years)
*
617
Average age (years) 44 45
Levels of education
a,**
– Illiterate (%) 0 1.2
– Schooling (%) 81.5 58.5
– Graduate (%) 16.3 30.5
– Post graduation (%) 1.1 6.1
– Specialization (%) 1.1 3.7
Proportion of farmers whose main occupation is grape farming (%) 51.5 47.3
Note: There is only one illiterate farmer in the sample and he is a member of Mahagrapes.
Source: Author’s calculations based on primary survey.
a
Schooling refers to a high school degree, graduate refers to a bachelors degree and post graduation refers to a
masters degree.
*
denotes significance at 10% level.
**
denotes significance at 5% level.
***
denotes significance at 1% level.
Table 3. Annual input charges per ton: annual averages (Rs./ton)
Independent Mahagrapes
Average area under grape cultivation (acres) 5.56 5.48
Variable inputs
Chemical fertilizers (Rs./ton) 2350.93 2861.63
Bio-fertilizers (Rs./ton) 1893.53 1793.19
Pesticides (Rs./ton) 3225.74 4023.66
Bio-pesticides (Rs./ton) 767.42 603.88
Irrigation –
a
a
Electricity (Rs./ton) 867.54 963.56
water charges (Rs./ton) 1035.82 2094.56
Source: Author’s calculations based on primary survey.
a
Data missing.
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and farmers are restricted to using bio-fertilizers
rather than chemical fertilizers.
Constrained to using better quality and differ-
entiated inputs from the producers for the local
markets, the role of cooperatives/Mahagrapes
in providing inputs cheaper becomes very
important particularly for the small farmers.
Thus, for requirements on specific factors, the
input costs of Mahagrapes farmers are statisti-
cally not different (on an average) from the inde-
pendent farmers (Table 3). The specific inputs
that are imported are purchased by Mahagrapes
and sold to the farmers at little or no profit.
Mahagrapes imports an expensive hormone
from Australia on behalf of the farmers and
due to bulk buying charges a lower price from
the members. Additionally, Mahagrapes pro-
duces its own brand of specialized inputs such
as bio-fertilizer/organic manure (MahaTiko)
and bio-pesticide (MahaVert), both of which
are provided cheaper to members.
13
Mahagrapes farmers have higher yields and
also earn higher revenues per acre of grape land
(Table 4). The difference in means between the
two groups of farmers is highly significant in
this case. There are several possible reasons
for this. First, the average land size for the
Mahagrapes farmer under grapes is slightly
higher by 0.08 acres.
14
Also, Mahagrapes
farmers get better quality inputs including
extension services at cheaper rates. Though all
the outputs produced by the Mahagrapes farm-
ers are intended for the export markets, a part
of the output gets rejected for quality reasons.
The rejected output is then sold in the open
market. Since, the rejected output is of better
quality than the average stock in local markets,
it fetches a higher price. In the export markets,
the gross price is three times higher than in lo-
cal markets. However, selling to the export
markets requires availing of marketing services
and use of cold chain facilities for which farm-
ers pay a fee. Net of these charges the prevail-
ing price in 2004 was about twice as high.
Table 5 shows that though the revenues for
the Mahagrapes farmers are moderately higher,
net of costs of compliance, the difference be-
comes much smaller. However, the returns
could differ within the group of Mahagrapes
farmers and we are particularly interested in
the differential impact among the farmers based
on size. Importantly, those independent farm-
ers (there exist very few such farmers and they
are large farmers) who sell some of their out-
puts to export markets have to purchase inputs
at higher prices (even if they purchase from
Mahagrapes).
4. GREATER EARNINGS FOR THE
MAHAGRAPES FARMERS
Are the Mahagrapes farmers significantly
better off (in terms of operating profits) relative
to the non-members? The comparator is the
farmer who is outside Mahagrapes but shares
similar characteristics. If the comparator were
other similar farmers who exported but were
not part of Mahagrapes, then the comparison
would represent the contribution of Mahagra-
pes in enhancing the gains from exporting.
Comparing across similar farmers, those who
are linked with Mahagrapes and others who
are independent (and selling mostly domesti-
cally) captures the difference between selling
domestically and in export markets albeit with
the premise that small farmers are able to ex-
port only when linked with Mahagrapes.
15
Summary comparisons of profit (as in Sec-
tion 3) among the two groups does not control
for the fact that the two groups might not share
similar characteristics that matter for profit-
ability. If being an independent or a Mahagra-
pes farmer were random, average returns would
Table 4. Annual output and revenues (averages)
Independent Mahagrapes
Output sold in open market (kg) annually 20,452 19,582
Output sold in export markets (kg annually)
***
765.96 7417.58
Revenue (Rs./acre of grape land)
***
80,667 144,474
Revenue (Rs./kg) (total = open + contract market)
***
15 23
Gross price in the export market (Rs./kg) 32.56
Net price in the open market (Rs./kg) 19
Price open (Rs./kg)
***
14.89 16.14
Source: Author’s calculations based on primary survey;
*
, 10% level of significance;
**
, 5% level of significance;
***
,
1% level of significance for test in difference of means between Mahagrapes and independent farmers.
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be a good measure to demonstrate greater prof-
its from joining Mahagrapes.
It is possible that Mahagrapes and indepen-
dent farmers earn different profits precisely be-
cause of a process of screening by Mahagrapes
or self selection by the farmers. For example,
Mahagrapes might select farmers based on cer-
tain attributes such as land sizes or skills (edu-
cation and experience). If the farmers picked up
by Mahagrapes on an average are higher skilled
or larger farmers than the average of the inde-
pendent ones, this will imply a case of positive
selection. Similarly, if the pool of farmers se-
lected (or chose to be selected) is inferior to
the pool of independent farmers then there is
negative selection. The positive or negative
selection can occur in terms of both observables
and unobservables, for example, farmer’s edu-
cation level and skill, respectively.
The profit regression that we are interested in
estimating is given as
Pi¼aþddiþcXiþei;ð1Þ
where P
i
denotes the profit of the ith grape
farmer, d
i
is a dummy variable that assumes va-
lue equal to 1 if the farmer is a Mahagrapes
farmer and zero otherwise and X
i
is a vector
of control variables relating to the characteris-
tics of the ith grape farmer. The matrix X
should ideally include all those variables that
determine whether a particular farmer is a
member of Mahagrapes or not. Further, if the
variables in the Xmatrix are uncorrelated with
the error term (e), then the ordinary least
squares estimates of (1) will be consistent
(Ramaswami, Birthal, & Joshi, 2006). In that
case ^
d, the OLS estimate from the regressions
in 1 can be treated as the true level effect on
profits from membership of Mahagrapes.
The specification in Eqn. (1) if estimated
using OLS can suffer from omitted variables
bias. Unobserved ability or characteristics like
reputation that cannot be controlled for in the
regression will lead to a selection bias. If the
farmers, for example, who are the members of
Mahagrapes have greater unobserved ability
then the estimated coefficient ^
dcaptures the ef-
fect of this omitted variable and not the effect
of membership per se. Similarly, it is possible
that those who become the members of Mahag-
rapes have poor prospect outside owing to low-
er ability or knowledge and thus the coefficient
^
dis downward biased. In both cases the dummy
d
i
will be correlated with the error term e
i
.
In order to correct for the selection bias,
standard instrumental variable technique can
be used. The ideal instrument is such that it is
correlated with d
i
, the participation variable
and not correlated with variable P
i
. Here, we
appeal to the role of transaction costs in deter-
mining the benefits of coordination. If transac-
tion costs are higher then the incentive for the
farmers to become the members of a coordina-
tion arrangement such as Mahagrapes is likely
to be stronger. This follows from the fact that
farmers have a greater motivation to save on
other costs if the transaction costs on the inputs
not provided by the cooperative or Mahagrapes
are higher.
Consider the following equation that deter-
mines participation in Mahagrapes:
di¼bþhZiþui;ð2Þ
where Z
i
vector comprises variables that deter-
mine membership of Mahagrapes. For the esti-
mated ^
dito satisfy the exclusion criterion of an
instrument, there must be one variable in Z
i
that is not in X
i
. The exclusion variable (the
instrument) is the transaction costs on the in-
puts not provided by the Mahagrapes or the
cooperatives.
Imbens and Angrist (1994) show that with a
dummy endogenous variable, instrumental vari-
ables methods estimate causal effects for those
Table 5. Operating profits for Mahagrapes and independent farmers
a
Independent Mahagrapes
Revenues 206282.9 248235.3
Operating profits (per kg)
***
9.39 14.98
Operating profits/acre grape land # (without the specific costs for the export
market)
***,b
52,633 119,370
Operating profits/acre grape land (discounted for costs specific for export markets)
***
26,633 59,586
a
Note: The profits are based on variable costs only, fixed costs are not included due to data constraints.
b
Note that a part of cost of compliance is included here in terms of the type of pesticides and fertilizers used that are
dictated by the standards. The parts that are not part of production are included separately such as cleaning, grading,
packing and certification.
***
denotes significance at 1% level.
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whose behavior would be changed by the instru-
ment if it were assigned in a randomized trial.
That is, the effect is estimated for subjects who
will take the treatment if assigned to the treat-
ment group, but otherwise not take the treat-
ment. This parameter is known as the Local
Average Treatment Effect (LATE). If everyone
in the population has the same response to a
particular intervention or treatment, the distinc-
tion between LATE and other parameters does
not matter. But with ‘‘heterogeneous treatment
effects,’’ the parameter identified by instrumen-
tal variables may differ from the average effect
of interest. Since there are farmer level heteroge-
neity, the instrumental variables measure the
LATE and not the average effect necessarily.
As Angrist and Krueger (1991) have argued
using probit or logit to generate first-stage pre-
dicted values is not necessary and may even do
some harm. In two-stage least squares, consis-
tency of the second-stage estimates does not de-
pend on getting the first-stage functional form
right (Kelejian, 1971). So using a linear regres-
sion for the first-stage estimates generates consis-
tent second-stage estimates even with a dummy
endogenous variable (see Table A.3 in the
Appendix for the first-stage regressions). More-
over, using a nonlinear first-stage to generate fit-
ted values that are plugged directly into the
second-stage equation does not generate consis-
tent estimates unless the nonlinear model hap-
pens to be exactly right, a result which makes
the dangers of misspecification high. Thus, the
IV regressions here use the first-stage linear mod-
el to obtain predicted values for membership.
The results presented in Table 6 show that
controlling for both observed and unobserved
characteristics, Mahagrapes farmers earn sig-
nificantly higher profits than their independent
counterparts most of whom sell to local mar-
kets where quality and safety requirements are
low but so are the returns. Since the IV estimate
of the coefficient on membership is higher, it
implies that OLS estimates are downwardly
biased. Thus, the farmers who participate in
Mahagrapes and export are likely to have
poorer prospects as independent farmers thus
pointing to negative selection. One caveat for
these profit results is important. Since these
are operating profits, they do not include some
of the fixed costs that are important for export
markets and would thus further lower the prof-
its for Mahagrapes farmers. For example,
EurepGAP compliance requires that there be
adequate sanitation facilities in places where
grapes are sorted and pruned.
5. SELECTION/PARTICIPATION IN
MAHAGRAPES
Given the significantly higher net returns to
the Mahagrapes farmers, the question is why
there still are farmers who are not associated
with Mahagrapes? These farmers are producing
their outputs in the same area, facing similar
production conditions and having access to
similar public infrastructure.
The probit analysis of participation in Mahag-
rapes below captures the role of different factors
in explaining the sorting of the farmers into
Mahagrapes and independent farmers. Among
the determinants of participation, the variable
that we are most interested in is the land size.
Table 6. Profit equation—dependent variable profit in thousands per acre of land
Explanatory variables Coefficients (tvalues)
OLS estimates
Coefficients (tvalues) instrumental
variable estimates
Membership (the level effect) 27.6 (2.53)
**
96.36 (2.53)
*
Distance from the city center 0.093 (0.18) 0.58 (1.10)
Schooling 2.28 (0.30) 11.68 (1.59)
Age 0.28 (0.59) 0.67 (1.55)
Land 2.39 (4.54)
***
2.56 (2.65)
**
Experience 1.76 (0.87) 2.95 (1.15)
Experience squared 0.060 (1.10) 0.08 (1.10)
Total land
*
membership 1.5 (1.2) 3.51 (1.29)
Grapeland
*
membership 2.5 (2.28)
**
0.22 (0.09)
Number of observations 132 132
Instrument—transaction cost per unit of output on common inputs.
*
denotes significance at 10% level.
**
denotes significance at 5% level
***
denotes significance at 1% level.
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The participation equation does not support
the hypothesis of significant influence of land
size in participation. Neither the total land
holdings of the farmer nor the land of the farm-
er under grapes is a significant determinant of
whether a farmer belongs to Mahagrapes.
Since, the land size data correspond to current
time period, the insignificance of land sizes is
even more informative. Most farmers have in-
creased their land sizes since their joining of
Mahagrapes (Table 7).
Thus, at the time of selection, the true unob-
served coefficient on land sizes is likely to be
smaller. Indeed, given that farmers need capac-
ity to meet the requirements of the product
standards, other attributes like age of the farm-
er (proxy for experience) and his education le-
vel are influential in determining participation.
Most importantly the transaction costs related
to the purchase of inputs not provided by the
cooperative or Mahagrapes significantly affects
participation. This is the variable that we use as
instrument in profit regressions above. The list
of variables included in the transaction costs is
given in the Appendix (Table A.2).
To summarize, the results on participation do
not support any evidence for a systematic bias
against the smallholder. Neither the aggregate
land size nor the land area under grapes deter-
mines participation significantly. Conditional
on participation, all farmers gain. As regression
results show, the level effect on profits per unit
of land does not differ significantly by land
size (the coefficients on the interaction terms
in Table 7 are insignificant).
(a) The issue of small farmers
Figures 1 and 2 show the distribution of
farmers in the sample by land size (in acres).
The distribution of the independent farmers is
centered in the middle while that of Mahagra-
pes farmers is skewed towards smaller land
sizes.
Ceteris paribus, small farmers are less likely
to have access to foreign markets owing to
scale diseconomies that they face. Large farm-
ers have more resources and better access to
technology and information. In the sample,
42% of the small farmers (less than 2 ha of
cultivated grape land) belong to Mahagrapes,
while rest are independent. The summary sta-
tistics with regard to the land sizes for the
grape farmers in the sample are given in
Table 8.
Within the class of small farmers, the operat-
ing profit per kg of output sold in the market is
substantially higher for the Mahagrapes farm-
ers. The operating profit per acre of small farm
is also substantially higher for Mahagrapes
farmers. Though the numbers are not presented
in Table 8 but the difference is substantial for
the class of medium farmers as well. The differ-
ence in profits for both the classes of farmers
either per unit of land or per unit of output is
statistically significant.
6. CONCLUSION
Overall, Mahagrapes has emerged as a suc-
cessful example of the cooperative model in
the horticulture sector in India. It provides
farmers with a platform for collective bargain-
ing especially in negotiation with foreign buy-
ers. Most importantly, Mahagrapes epitomizes
the role of scale economies in information pro-
curement and processing regarding the export
markets. A group of lead farmers procures
information and because of greater skill can
process and disseminate it to smaller and lesser
skilled farmers. Also, the scale economies in
branding (creating and preserving brand value)
involves fixed costs, which get averaged out
over greater outputs in an organization such
as Mahagrapes.
Our results indicate that conditional on par-
ticipation, the Mahagrapes farmers earn signif-
icantly higher net profits. The result that
farmers earn significantly higher profits is ro-
bust to controlling for endogeneity. The results
on factors determining participation provide no
Table 7. Probit estimation: factors determining
participation/selection in Mahagrapes
Explanatory variables Coefficients (tvalues)
Distance from the city
center
0.021 (1.90)
**
Schooling 0.38 (2.08)
**
Age 0.01 (1.64)
*
Land 0.007 (0.61)
Experience 0.05 (1.18)
Experience squared 0.0008 (0.75)
Land under grapes 0.008 (0.48)
Transaction costs for
factors not provided by
cooperative or Mahagrapes
0.0002 (1.92)
**
Number of observations 132
*
Significance at 10% level.
**
Significance at 5% level.
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evidence for a systematic bias against the small
farmers being selected.
Given the higher net returns the question is
why are there farmers who are not associated
with Mahagrapes? First, there are reasons pos-
sible for which Mahagrapes could restrict its
membership. Most importantly, demand for
new members by the cooperative is a derived
demand and Mahagrapes is demand con-
strained. Mahagrapes supplies its output to
few retail outlets in the European markets.
Each year, the buyers specify the amount of
grape they will buy. Procurement from farmers
is done according to the demand.
Frequeny distribution of Maha Grapes farmers
0
2
4
6
8
10
12
14
16
579111315171820253040
land size
Number of farmers
Figure 1. Distribution of Mahagrapes farmers in the sample by size (land size in acres).
Table 8. Summary sample comparison among small farmers
Mahagrapes Non-Mahagrapes
Percentage of medium sized farmers in terms of total land area (4.9–12.3 acres) 43% 49%
Percentage of medium sized farmers in terms of total grape land area (4.9–12.3
acres)
41% 34%
Percentage of farmers who are small in terms of total land area (<4.9 acres) 15% 19%
Percentage of farmers who are small in terms of grape area cultivated (<4.9
acres)
42% 57%
Average total land among the small farmers (in acres) 11.8 9.6
Average grape area for small grape farmers (in acres) 2.5 2.9
Average grape area for small farmers (in acres)
*
4.6 3.9
Average operating profit per acre of small farm (in thousand rupees per
annum)
**
135 78
Average profit (in rupees) per kg of output among small farmers
**
14.5 10.3
Authors’ calculations
*
denotes significance at 10% level.
**
denotes significance at 5% level.
Frequency distribution of Independent farmers
0
2
4
6
8
10
12
14
1 3 5 7 9 111315171921232527
Land size
No of farmers
Figure 2. Distribution of independent farmers in the sample by size (land size in acres).
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The more important reasons are the strin-
gent quality norms that farmers have to com-
ply with. These include standards for size,
shape and color of grapes. There are strict
standards also for permissible levels of pesti-
cides and other chemicals. A farmer who
wants to be a part of the Mahagrapes should
have the capacity to bear the costs of comply-
ing with the standards. Further, foreign buyers
reject the consignments if it fails to meet any
of the quality criteria. In such a case, it is
important that the farmer has the capacity to
bear this risk. Both these things imply that
not all farmers can contract with the firm
and gain from this association. However, in
terms of common attributes in the population,
we find no bias against the small farmers in
participation.
However, the case of Mahagrapes is impor-
tant from the point of view of success in high
standard high return markets for small farm-
ers. Our results indicate that net of costs of
compliance, the small farmers do earn signif-
icantly higher profits compared to their out-
side option. Since there is no bias in
selection based on land sizes and conditional
on participation the small farms can comply
with standards and earn significant profits;
without demand constraints, the model can
be scaled up.
NOTES
1. Calculations based on FAO Data, 2005.
2. FAO Stats, 2006.
3. Consider, for example, the cost of obtaining infor-
mation on standards. It often requires communication
and possibly travel. The information once procured
applies to the whole output.
4. India’s average farm size has decreased from 2.2 ha
in 1950 to 1.4 ha in 1995/96 (FAO Statistics Division).
Smallholders, defined to be those operating less than
2 ha, operate about 36% of the aggregate land area.
5. Alternatively, institutional arrangements such as
contract farming have been suggested as a means of
strengthening the linkage between markets and produc-
ers which at the same time improves access of the
farmers to inputs such as credit, information and
improved varieties of the crops. In India, contract
farming though quite prevalent is still not institutional-
ized in most places. The state run cooperatives have been
in existence for decades and have been pioneers in
successfully consolidating farmers and helping them to
market their produce collectively. Sugar cooperatives are
a good example of this. Over time however, bureaucratic
red tape-ism and rent seeking (Bannerjee, Mookherjee,
Munshi, & Ray, 2001) has shifted the decision making
and economic powers away from the small farmer
majority into the hands of the governing few.
6. In the early years of exports, consignment rejection
at times was as high as 80%. At present the Mahagrapes
claims a negligible rate of rejection (less than 1% after
2001, less than 10% after 1995).
7. In the initial years, consignment rejections occurred
because there was imperfect understanding of market
requirements—from seed quality, to harvest and post
harvest care to packaging practices. The average rejec-
tion rate prior to 1995 was 50% (Naik, 2006).
8. In Indian laboratories residues were tested using
GC/MS method (gas chromatography/mass spectrome-
try) while in EU laboratories they were tested by LC/MS
method (liquid chromatography/time-of-flight mass
spectrometry).
9. EU Regulation EC No. 1148/2001, introduced on
July 1, 2002, requires all fresh produce arriving in the
Europe to undergo an ISO 9000 style inspection to verify
conformity with marketing standards. This inspection is
carried out at the port or airport before release into
circulation. The only exceptions are for consignments
with certificates of compliance from countries whose
systems of export quality inspection have been approved
by the Europe. Such consignments with both a phyto-
sanitary and a quality conformity certificate are released
when customs procedures are complete. Exporters with
approved certification systems obviously have a com-
petitive edge. Some countries, such as Jordan, have
established a pesticide residue testing laboratory and a
heavy metals testing laboratory, and issue conformity
documents on consignments to the Europe (Kane,
Sallah, Alex, & Meer, 2002).
10. Land distribution pattern of Maharashtra shows
that 70% of the holdings are less than equal to 2 ha and
20% are between 2 and 4 ha. The remaining 10% are
medium, large and very large farmers. In the three
districts surveyed 64% of land holding are less then 2 ha.
It would be safe to categorize all the farmers with less
14 WORLD DEVELOPMENT
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than 2 ha of land as small farmers (normally defined
marginal farmers being included in the definition of
small farmers).
11. These inputs are also sold to non-members but at
higher prices implying cross-subsidization.
12. Of the 183 farmers chosen, 47 are from Nashik, 26
are from Pune and 111 are from Sangli districts.
13. Since Mahagrapes farmers also sell domestically
and to export markets in the Gulf and in Sri Lanka, they
need not necessarily use only specialized inputs.
14. In the three surveyed districts, Pune, Nasik and
Sangli, the average sizes of the landholdings are 5.5, 6.2
and 4.3 acres, respectively (Agricultural Census, Gov-
ernment of India 2001). Thus, by the average size of their
grape farms, the Mahagrapes and the independent
farmers are near the area average. However, compared
to the land sizes in countries that compete with
Mahagrapes in the same market (e.g., Chile and Aus-
tralia), the average size of landholdings is several times
smaller.
15. There are no independent small farmers in the area
who export and the few independent exporters who
exist, they are all large farmers.
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Table A.1. Detailed input costs
Annual input charges for output: annual averages (Rs./ton) Independent Mahagrapes
Fixed inputs
Green houses (Rs./ton)
a
a
Tube wells (Rs./ton) 32.96 8.07
Tractors (Rs./ton) 14.75 19.16
Nursery raising (Rs./ton) 982.05 1016.76
Seed (Rs./ton) 1127.93 1446.63
Variable inputs
Chemical fertilizers (Rs./ton) 2350.93 2861.63
Bio-fertilizers (Rs./ton) 1893.53 1793.19
Pesticides (Rs./ton) 3225.74 4023.66
Bio-pesticides (Rs./ton) 767.42 603.88
Irrigation –
a
a
Electricity (Rs./ton) 867.54 963.56
Water charges (Rs./ton) 1035.82 2094.56
a
Data missing.
Table A.2. List of transaction costs for selected inputs
Items in transaction costs (in Rs.) Inputs (figures below show the sample average)
Tubewell
Cost of communication — telephone, etc. 48.02
Travel costs 115.02
Loading costs 33.9
Unloading costs
Commission to agent
Average transaction cost 65.64
Pesticides
Cost of communication — telephone, etc. 31.70
Travel costs 121.28
Loading costs 32.92
Unloading costs
Commission to agent
Average transaction cost 61.96
Manures
Cost of communication — telephone, etc. 67
Travel costs 85
Loading costs 168
Unloading costs
Commission to agent
Average transaction cost 106.6
APPENDIX A
See Tables A.1–A.3.
16 WORLD DEVELOPMENT
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Available online at www.sciencedirect.com
Table A.3. First-stage regressions for IV profit equation
Dependent variable (contract = 1, independent = 0)
Grape land size 0.002 (0.53)
Distance to urban center 0.007 (1.96)
**
Farmer’s education level 0.13 (2.28)
**
Age of the farmer 0.006 (1.61)
Experience of the farmer in grape farming 0.01 (1.18)
Experience of the farmer in grape farming squared 0.09 (1.55)
Transaction cost 0.0009
***
Constant 0.31 (1.55)
SUCCESS IN HIGH VALUE HORTICULTURAL EXPORT MARKETS 17
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