Finding Missing Markets: An Agricultural Brokerage Intervention in Kenya
In much of the developing world farmers grow crops only for local or personal consumption, despite export options which could be more profitable. There are several plausible reasons why farmers might choose to sell crops at local markets, forgoing the opportunity to make more money by exporting them. There may be information gaps about profitability, lack of access to capital needed to make the switch to export crops, inadequate infrastructure to bring crops to urban centers, concern over risky export markets, or misinterpretation by researchers as to the true profit opportunities.
Kenya, a country with a 50% poverty rate1, has received a great deal of attention over the past decade because of rapid and sustained growth of its horticultural sector. Europe’s appetite for Kenyan agriculture exports has been great, but small farmers have largely failed to cash in on this opportunity. Instead, many farmers receive low prices for their cash crops by selling them at their farm gate or local market. About half of the household income of surveyed farmers came from agriculture, and most own the land they cultivate, which is usually about 1 acre. Farmers grew subsistence crops 50% of the time, cash crops 34% of the time, and only 12% of farmers grew some proportion of export crops.
Researchers conducted a randomized study with DrumNet, a Kenyan NGO, to evaluate whether a package of services could help small farmers overcome barriers to adopting, financing and marketing export crops. DrumNet was designed as a horticultural export program with additional microcredit services that tried to link smallholder farmers to commercial banks, retail farm suppliers, transportation services and exporters. To be a member of DrumNet, a farmer must agree to attend self-help meetings, express interest in growing export crops marketed by DrumNet, and have irrigated land.
DrumNet clients received a four week orientation course in which the financing and selling process was explained and good agricultural practices were taught. Farmers also opened a personal savings account with a local commercial bank to accommodate possible future business transactions. At harvest time, DrumNet negotiated prices with an exporter and arranged a produce pickup. Additionally, DrumNet hoped to reduce uncertainty of selling in the export market by convincing farmers and exporters that the other party would honor their commitment to supply crops and purchase at previously agreed prices.
A random selection of clients were also invited to make a cash contribution equivalent to a week’s labor wages, which served as partial collateral for a line of retail credit. Farmers were organized into groups of five, jointly liable for individual loans taken out. These clients received a line of credit with the local agriculture supply store, mediated through DrumNet.
Researchers randomly selected 36 self-help groups for the evaluation, and divided them evenly into three experimental groups. Two treatment groups received all of DrumNet’s services, and one of these also received a line of credit (see chart below).
|
|
Self-Help Group |
Education on Good Farming Practices |
Savings Account at Local Bank |
Group Credit for Agriculture Supplies |
Individuals |
|
Treatment-Credit |
X |
X |
X |
X |
373 |
|
Treatment-no |
X |
X |
X |
- |
377 |
|
Comparison |
X |
- |
- |
- |
367 |
Impact on Export Crops: One year after the program began, treatment individuals were 19.2 percentage points more likely to be growing an export crop, but there were no significant gains in income. Out of twelve self-help groups, ten decided to take advantage of DrumNet services when credit was offered, compared to only five of twelve when it was not, implying that farmers perceive credit as an important factor for cultivating export crops. While credit might have made exporting easier to some clients, access to credit had no effect on income gains compared to no-credit groups.
Long-term Consequences: Unfortunately, one year after the evaluation ended, farmers were unable to obtain EU export certifications and the exporter stopped purchasing their crops. This led to DrumNet’s collapse as farmers’ export crops were left to rot and loans went into default. Farmers returned to growing for local markets, underscoring the original concerns over export market risk.
1 As of 2000. CIA World Fact Book, “Kenya,” https://www.cia.gov/library/publications/the-world-factbook/geos/ke.html (accessed August 24, 2009).
