Where’s the Money?

In villages across the world, smallholder farmers have banded together to cut their costs and raise their profits. These collectives of 10–30 producers give smallholder farmers many of the advantages of large-scale farmers by allowing them to share costs like fertilizer, processing, and transport and to jointly bargain with buyers for the highest price. So why do farmers often go around the groups and sell their crops individually—often for a lower price?

Too Much Uncertainty

IFPRI researchers Ruth V. Hill and Eduardo Maruyama recently completed a study of Ugandan coffee and maize farmers, showing that a bit of tweaking can make these collectives work better. The researchers identified two types of farmer groups in Uganda: village-level producer organizations and district-level depot committees. The producer organizations collect the crops at the village level. Then the depot committee gathers the output from several producer organizations, processes the crop, coordinates transportation, and finds a buyer.

Depot committees cannot give farmers any assurances about the final price. “They might have an idea of what price they could get,” says Maruyama, “but they cannot easily predict the time it takes to bulk from all group members, find a buyer, and make the sale, and what the market price will be at the end of
this process.”

Farmers balk at the lengthiness and uncertainty of this selling process. “Though almost all of these coffee producers belong to a producer organization and are linked to a depot committee, they end up selling most of their product to traders,” Maruyama says. These informal traders, who regularly pass through rural villages, offer cash on the spot. Although they often pay a lower price, the quick cash lets farmers pay off their
immediate expenses.

Cash Up Front

To address farmers’ need for cash, Hill and Maruyama tested a straightforward solution. Through the depot committees, they supplied producer organizations with funds they could use to pay farmers a percentage of the projected revenue upfront, in cash. The depot committees now had more output to sell and more time to find a buyer. When the coffee was sold to the highest bidder, the farmers would receive the balance.

This approach almost doubled the amount of output that farmers provided to the producer organizations, according to preliminary results of the study. Even better, participating farmers received significantly higher prices than those offered by itinerant spot traders. Some of the farmer groups participating in the study decided that this new approach was worth keeping: they are using the research results to secure bank loans and put the system in place for themselves.

For more information on this topic:
Ethiopian cooperatives and the conditions under which they successfully promote commercialization of small-scale farmers

• Cooperatives for Staple Crop Marketing: Evidence from Ethiopia, Tanguy Bernard et al., 2010.

Agricultural cooperatives in Uganda, why they arise, and why farmers do or do not join

• Cooperative Behavior in Rural Uganda: Evidence from the Uganda National Household Survey 2005, Ruth Vargas Hill, Tanguy Bernard, and Reno Dewina, 2008.

How Ugandan producers decide where to sell their coffee

• “Selling at the Farmgate or Traveling to Market,” American Journal of Agricultural Economics, Marcel Fafchamps and Ruth Vargas Hill, 2005.