Domestic Market Policies

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The cases in this section illustrate the role of food markets and food marketing in the economy and discuss the links between farmers and markets. These cases discuss policies designed to help integrate small farmers into the market economy, with emphasis on the facilitation of contract farming, collective bargaining, farmer associations, food price stabilization, and the successful development of high-value agriculture on small farms. They also discuss the increasing concentration of food retailers and wholesalers, the role of government, and the importance of infrastructure to facilitate market-based poverty reduction.

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The Dairy Sector of Armenia: Relationships among Supply Chain Members
Poleshkina, Irina; Peplozyan, Elbis (CUL Initiatives in Publishing (CIP), 2016)
Agriculture plays a special role in transition economies, in both economic and social terms. The sector produces a major portion of the country's GDP and not only provides food but often serves as the only source of income for a large part of the population. For the Armenian government, the key objectives of dairy sector development are to attain the country's full self-sufficiency in dairy products, make them more competitive in foreign markets, protect local suppliers' rights, and ensure that rural incomes are compatible with urban income levels. But, according to data of 2015, the milk self-sufficiency of Armenia remains low (62.7 percent) and processors continue to underprice farm-gate milk. In Armenia, the insufficiency of milk output is accounted for, primarily, by the uncompetitive standing of raw milk producers in the chain of added value. Most of these producers (99.2 percent) are individual farms with an average livestock population of 1 animal. For this reason, the margin is distributed among farmers, processors, and traders disproportionately relative to their inputs; incomes of local people go down; milk supplies for commercial processing is decreased; processing capacities are underutilized; and the performance of the dairy sector as a whole is impaired. To make milk producers more competitive, several policy options are proposed: the introduction of a mechanism for regulating price relations among milk producers and processors; the use of incentives such as direct payments to producers to encourage them to reduce the seasonality of milk supply to processors; the establishment of marketing and milk processing cooperatives; the establishment of large commercial milk producers; and the delivery of training programs for farmers. The key stakeholders in the dairy sector of Armenia are government bodies, farmers, milk processors, retailers, and dairy product consumers (rural and urban populations). Your task is to develop recommendations for decision makers to help them select the best government regulation policies in the dairy sector, taking a balanced approach to the interests of all supply chain participants; and to identify the economic, social, and food implications of such policies.
The Growth of Supermarkets and its Implications for Smallholders in Uganda
Elepu, Gabriel (CUL Initiatives in Publishing (CIP), 2009)
The growth of supermarkets is a phenomenon that characterizes many developing countries. The growth of supermarkets in Uganda can be attributed to the country's favorable investment climate coupled with the increase in supermarket demand factors such as the rise in urbanization, the growth of the middle class, and the increase in the number of employed women. As in other developing countries, supermarkets in Uganda are patronized mostly by younger and better-educated consumers with smaller families. Changes in food preferences and eating habits among urban consumers can partially explain the increasing patronage of supermarkets in Uganda. Moreover, supermarket customers regard these stores as offering higher food quality, safety, variety, and customer service than open or roadside markets. Most supermarket shoppers, however, also continue to patronize traditional food retail outlets, such as open markets, which still dominate agri-food retailing in Uganda. At this initial stage of supermarket growth, early participation by local farmers in the new agri-food marketing system could promote commercialization of agriculture in Uganda. There has been a public outcry, however, that supermarkets are marginalizing local farmers by importing food products that could be procured locally. In response to this supermarket procurement behavior, Ugandan policy makers have twice proposed the formulation of supermarket trade policies to regulate the importation of specific food products. Although it is true that Ugandan supermarkets import most of their food products, some foods are locally sourced depending on their availability, quality, and safety. A few Ugandan smallholder farmers supply supermarkets with fruits, vegetables, and staple foodstuffs. These farmers have found supermarkets to be more reliable and preferred markets than traditional food buyers. Yet these farmers face a number of constraints in supplying supermarkets because of the latter's stringent supply terms. Your assignment is to advise the government of Uganda on appropriate policies to help ensure that local smallholder farmers benefit from supermarket development in Uganda.
The Growing Trend of Farmers' Markets in the United States
Phillips, Erica (CUL Initiatives in Publishing (CIP), 2007)
Farmers' markets have surged in popularity in the United States during the past 30 years. Since the U.S. Department of Agriculture (USDA) began collecting information on farmers' markets in 1994, the number of markets increased from 1,755 to more than 4,385 in 2006 (USDA AMS 2007b). It is estimated that more than 3 million consumers shop at these markets, and about 30,000 small farmers and food entrepreneurs earn a partial or full living selling their local products at farmers' markets (PPS 2006). Farmers' markets are launched and operate owing to a multitude of factors and objectives. Some open in response to demand from the production side, as farmers seek direct-to-consumer outlets for their produce. Other markets open as a result of consumer interest in the perceived benefits of locally grown produce. Finally, some farmers' markets are initiated with the broader goals of supporting the local economy, promoting community food security, revitalizing public spaces or downtown areas, addressing public health and nutritional concerns, or improving disadvantaged populations' access to fresh produce. Whatever the impetus for starting a farmers' market, all markets have potential strengths and weaknesses. Policy decisions made at the federal, state, and local levels influence the success of farmers' markets. The policy framework within which these markets operate can have powerful impacts on how markets operate, who has access to shopping or selling at farmers' markets, and how well markets are coordinated and connected with each other. Because farmers' markets are located in numerous and diverse locations, they often reflect the interests of the communities in which they operate. This diversity of farmers' markets, however, has also contributed to a lack of centralized or largescale evaluation of markets. This dearth of information is reflected in scattered studies and poorly evaluated market impacts. Analyzing the effects of market operations and policy issues surrounding farmers' markets, such as economic, environmental, social, and health issues, can help policy makers understand potential policy options for improving and possibly expanding market growth. Your assignment is to propose the establishment of a local food market from the perspective of a consultant to a community and to identify the most important policy issues for starting and operating farmers' markets, taking into account the diverse goals of various stakeholders.
Rural Road Investments, Agricultural Development, and Poverty Alleviation in China
Shimokawa, Satoru (CUL Initiatives in Publishing (CIP), 2007)
Beginning in late 1978, China adopted a series of policy and institutional reforms and achieved rapid economic growth and poverty reduction. National gross domestic product (GDP) grew at more than 9 percent a year from 1978 to 2005, and per capita income increased by 8 percent a year. The level and speed of economic growth and poverty reduction are diverse across regions, however, and income inequality has worsened between the coastal and inland regions, as well as between urban and rural areas. Although a number of factors have contributed to this widening regional disparity in China, differences in the stock and quality of transportation infrastructure have been among the key factors. When the reforms began in 1978, China's transportation infrastructure was relatively poor compared with that in other countries with a similar level of per capita GDP, like India. Following rapid economic growth during the reform period, the demand for road transport skyrocketed, and transportation shortages and urban congestion became serious problems. The government started increasing its road investments in 1985 and further prioritized road investments in the 1990s. In particular, the government focused on the construction of high-grade roads connecting major cities in the coastal region (such as highways and expressways). With these investments, road density in China increased from 93.1 kilometers per thousand square kilometers in 1979 to 189.2 kilometers per thousand square kilometers in 2002 (National Bureau of Statistics of China 2003). Although the government initially allocated more resources to the coastal region, it has recently started allocating more resources to the inland region, making road projects an important part of the development strategy for that region. The government still emphasizes projects for high-grade roads, however, rather than low-grade and rural roads. In the wake of the rapid economic growth and poverty reduction stimulated by policy and institutional reforms, China now faces a new phase of economic development. The government must adapt its policies and institutions to new socioeconomic circumstances, such as increased regional inequality, decentralization of governance, and past investments in high-grade roads. Your assignment is to advise the Chinese government on a long-term plan that will address rural road development for facilitating agricultural and rural development and poverty alleviation.
Contract Farming in Costa Rica: A Case Study on Contracts in Pepper Farming
Sáenz-Segura, Fernando; D'Haese, Marijke; Ruben, Ruerd (CUL Initiatives in Publishing (CIP), 2007)
Contract farming is defined as an agreement, which may range from a simple verbal commitment to a written document, between a farmer and a firm, in which the farmer agrees to deliver fresh or partially processed products and the firm commits itself to purchasing the produce under certain agreed price and non-price conditions. Contract farming is usually considered a substitute for poorly functioning or absent markets. The literature on contract farming presents two opposite views of the potential of this alternative market institution as a bridge for trading between smallholders and agroprocessing firms. Some researchers argue that contracts are an adequate mechanism for integrating smallholders into dynamic markets by overcoming the constraints of a failing market. Others warn about the downside of contracting. We present the rationales for different types of contractual regimes between small-scale pepper producers and agroprocessing firms in the northern region of Costa Rica under two market configurations— namely, a competitive market and a local monopsony. Three types of contractual agreements (written contracts, verbal commitments, and no agreement) are found. The analysis is based on a survey of pepper producers using a semistructured questionnaire to obtain data on production systems and marketing arrangements. Pepper is an attractive diversification activity for smallholders because it is a labor-intensive crop, does not require complex technologies or machinery, requires detailed attention and frequent disease control through the cropping cycle, and can reach high, fairly stable yields per hectare. A major drawback is the high entry cost during the start-up phase, stemming from the need for initial investments in crop establishment and the long maturation time before the first harvest. Contracts may help overcome these constraints and permit market entry at a reduced level of uncertainty. A farmer's level and sources of income have a clear effect on his or her contract choice and bargaining power. Income diversification enables farmers to increase their asset specificity in pepper crops,1 even without the insurance provided by contracts. Therefore, pepper companies prefer to offer contracts to less-endowed farmers who have some farming experience but limited income diversification. These farmers are likely to engage in contract farming owing to their limited bargaining power. Even though the enterprise operating in the monopsonistic market also maintains high asset specificity, it is able to buy from some farmers without any prior agreement, since the latter possess limited bargaining options for valuing their asset-specific investments. Farmers with contracts definitely invest more inputs and time in soil maintenance activities on their pepper plots. Resource-providing contracts in the competitive market have a stronger effect on farmers' investments than simple market specification contracts in the monopsonistic market. This finding confirms the literature regarding the importance of resource-providing contracts and vertical integration for sustainable agricultural intensification (Kuyvenhoven and Ruben 2002). Budgetconstrained farmers that intend to tailor their investment decisions in line with the designed technological package may substitute for the default level of fertilizer use with additional labor investments in soil maintenance activities. Your assignment is to recommend a government policy to assure an acceptable level of competition and to facilitate increasing incomes and reduced risks for low-income pepper farmers in Costa Rica.
Enhancing Smallholder Farmers' Market Competitiveness in Tanzania
Kawa, Ibrahim; Kaitira, Loyce M. (CUL Initiatives in Publishing (CIP), 2007)
Tanzanian agriculture is dominated by small-scale subsistence farming. Like the entire economy, agriculture is in a transition from being a command to a market-based production system. The transition process started in the mid-1980s as part of the economic adjustment and structural reform programs and policies supported by Tanzania's development partners. Despite some impressive macroeconomic achievements resulting from the reform programs, agricultural growth and rural poverty reduction continue to present daunting challenges. Few smallholder producers understand how markets work, and even if they do, they do not have the information they need to participate effectively. In response to these development issues, the government of Tanzania, in consultation with International Fund for Agricultural Development (IFAD), identified the suboptimal structure and functioning of the agricultural marketing system as a key area for attention. Liberalization policy has removed many of the old certainties but has not yet provided adequate basis for an efficiently functioning alternative. To meet this need, an investment program entitled Agricultural Marketing Systems Development was proposed to remove constraints to effective operation of the agricultural marketing system and to help smallholder producers acquire the tools needed to participate on favorable terms in the open market. The program consists of four components: producer empowerment and market linkages, financial market support services, rural marketing infrastructure, and agricultural marketing policy development. The producer empowerment and market linkages component was designed to transform agriculture from a subsistence activity to a profitable enterprise in the mindset of smallholder producers by building the management and marketing capacity of these producers and small-scale traders and processors. About 50 percent of all participating producer groups are now well organized, have adopted collective marketing, and can understand which enterprises are profitable. This shift will lead to the commercialization of agriculture. The financial market support services component was created to improve access to financial services for smallholders and small-scale rural traders and processors, and this goal has been achieved among 20 percent of targeted beneficiaries. The rehabilitation of marketing infrastructure, including markets, warehouses, and rural roads, has been 43 percent achieved. The agricultural marketing policy component was designed to create a conducive policy environment for smallholder farmers to gain access to both domestic and export markets in an organized and sustainable manner, with the help of both financial market support services and infrastructure. Issues that currently impede smallholder farmers' access to markets include a weak legal, regulatory, and institutional framework; poor-quality agricultural products; inadequate entrepreneurial skills; poor facilities for processing agricultural products; poorquality agricultural marketing infrastructure; and poor access to market information and intelligence. The program has come up with some policy options designed to facilitate the strategic marketing of agricultural products and ensure fair returns to all stakeholders based on a competitive, efficient, and equitable marketing system. Policy options include harmonizing legislation and regulations to enhance fair and free marketing of food and cash crops; establishing an institutional framework that will improve performance of the agricultural marketing systems based on needs assessments; creating awareness of quality, standards, grades, and governing regulations among agricultural marketing stakeholders; supporting training in entrepreneurial and marketing skills for agricultural marketing stakeholders; promoting primary agroprocessing and value-addition chains; strengthening links between local and foreign firms; mobilizing adequate resources for investment in agriculture and development of agricultural marketing infrastructure in rural areas; and strengthening the Agricultural Marketing Information Services (AMISs) to enhance timely, demand-driven collection, analysis, storage, and dissemination of marketing information. Through the National Strategy for Growth and Reduction of Poverty, Tanzania aims to reduce poverty by transforming the agriculture-based economy into a market-led, competitive, and semiindustrial economy where smallholder farmers dominate the sector. This approach is strongly supported by Tanzania's development partners, including IFAD and the World Bank. In view of the challenges facing smallholder farmers' agricultural marketing systems, your assignment is to assess the adequacy of the developed policy options in assisting the government of Tanzania to achieve its aim and identify the key policy options for success.
Food Price Stabilization Policies in a Globalizing World
Rashid, Shahidur (CUL Initiatives in Publishing (CIP), 2007)
This case examines various aspects of food price instability. It focuses on (1) the sources of price instability, (2) various policy options and the conditions under which they are viable, and (3) experiences with both market-based and nonmarket- based policy responses to price instability. All sources of price instability—such as inadequate infrastructure, asymmetric information, and incomplete or missing institutions—qualify as market failure. One could therefore argue that an appropriate policy response would be to invest in the critical determinants of well-functioning markets and create enabling market conditions, which in turn improve price stability. But the proponents of direct government interventions have argued that it takes time to develop infrastructure, improve information flow, and build institutions, and hence direct intervention for price stabilization is a legitimate short-run policy response. This is the idea most developing countries adopted when they embarked on food price stabilization policies in the 1960s and 1970s. Over the years, however, it became clear that such policies are expensive, may be dictated by special interests, and can distort agricultural incentives. These problems were particularly relevant for marketing board–led price controls in centrally planned economies. In Asian countries, most of which adopted dual pricing policies, interventions did produce beneficial results during the early years of the Green Revolution. But recent studies suggest that Asian food price stabilization is plagued by the very problems that the opponents had predicted with their theoretical models. These programs are becoming increasingly expensive, being captured by special interests, and hindering the process of diversification and commercialization. Furthermore, some countries in the region have demonstrated that reductions in public intervention can be beneficial. The Asian countries that adopted liberalization have been able to reduce food subsidy bills, strengthen markets, and allocate more resources to poverty alleviation programs—all without jeopardizing food price stability. Given the policy vacuum created by liberalization and the increasing affordability of information and communication technologies, recent years have seen many initiatives in developing countries to set up market-based institutions, such as commodity exchanges, for managing price instability and risks. Some countries have also used international futures markets to protect their domestic market against global market volatility. In most cases, however, these initiatives have not produced the desired results, and addressing price instability continues to be a challenge for many developing countries. This case provides an overview of these challenges with the hope of stimulating critical thinking about policy solutions that can ensure an acceptable level of price stability, especially in low-income countries in Africa. Your assignment is to consider a low-income, landlocked country in Africa with poor infrastructure and to recommend a set of policies to the government that would ensure an acceptable level of price stability for agricultural commodities. For decades, the country controlled agricultural prices through its marketing boards, which heavily distorted agricultural production incentives. Beginning in 1999 the country started dismantling its marketing boards and liberalizing agricultural markets. With liberalization, however, prices have become more volatile, and there has been increasing pressure on the government to undertake stabilization policies.
Smallholder Farmers' Access to Markets for High-Value Agricultural Commodities in India
Birthal, P. S.; Joshi, P. K. (CUL Initiatives in Publishing (CIP), 2007)
Sustained economic and income growth, a fastgrowing urban population, and the increasing integration of global agri-food markets are fueling rapid growth in demand for high-value food commodities in India. This is an opportunity for farmers, especially smallholder farmers, in India to augment their incomes and use surplus family labor in the production of high-value, labor-intensive food commodities. The transition to high-value agriculture, however, is unlikely to be smooth. One of the major impediments is smallholders' lack of access to markets for high-value commodities. Local rural markets are thin, and trading in distant urban markets is not remunerative owing to high transportation and transaction costs. Besides, they also face problems in gaining access to credit, highquality inputs, improved technology, information, and services. Improving smallholders' access to markets requires close linkages between farmers, processors, traders, and retailers to coordinate supply and demand. Institutions such as cooperatives, producers' associations, and contract farming are important means of linking producers with markets, as well as a source of credit, inputs, technology, information, and services. But there is concern that smallholders may be excluded from the institution-driven value chains. Agribusiness firms, to reduce the transaction costs of contracting with a large number of smallholders, have tended to contract with a few large producers who can supply large volumes and are capable of complying with food-quality standards. There is also a fear that agribusiness firms may exploit smallholders by extracting monopsonistic rent in the output market and manipulating the terms and conditions of contracts. Nonetheless, there is growing evidence that the advantages associated with institutional marketing outweigh its disadvantages. Policy makers should therefore create a level playing field to allow for the growth of the right kind of market institutions, promote competition among various market players and institutions, protect smallholders from institutional exclusion and unscrupulous trade practices, and support them with credit, insurance, technology, and services to improve their competitiveness and ensure food safety for consumers Policies should also focus on improving public infrastructure that generates widespread economic benefits. Your assignment is (1) to compare advantages and disadvantages of cooperatives, producers' associations, and contract farming, and (2) to identify required government policies and other conditions for the success of these institutions, focusing on social, economic, and political and legal aspects.
Small-Farm Access to High-Value Horticultural Markets in Kenya
Dever, Joseph (CUL Initiatives in Publishing (CIP), 2007)
The goals of poverty alleviation and rural agricultural development have long been elusive among poor Sub-Saharan Africa countries. Rural areas still lag behind urban ones in economic growth, and formerly lucrative export cash crops such as coffee and tea are no longer as profitable to the average small farm. Rural population growth and environmental degradation have made the challenge of developing the agricultural sector even more difficult. It is in the context of these challenges that many have championed the expansion of the export horticultural sector to provide a significant boost to the rural economy and permit the participation of the small farm sector. In Kenya the development of the export fresh fruit and vegetable (FFV) and flower industries has been a clear success in private sector–led industry development, with significant gains accruing to participants at all levels along the FFV value chain. As the sector has grown over the past 20 years, changes in the industry have resulted in significant consolidation at all levels and in the exclusion of small farms from the industry, threatening the sector's ability to deliver poverty alleviation to its most vulnerable participants. Many factors led to the consolidation of the export FFV industry in Kenya, including (1) the increased involvement of European Union (EU) supermarket chains in procuring FFVs directly from farms in Kenya, (2) competitive pressures to cut costs and increase supply chain efficiency among exporters and importers, (3) increased consumer and regulatory demands for more stringent production and food safety standards, and (4) the inability of small farms to gain access to credit, market information, cost-effective transportation, and drip irrigation technology necessary for highvalue market participation. As small farms, traders, and exporters have been forced out of the export sector, the supermarket importers, commercial exporters, and large commercial farms that remain have strengthened value chain governance. There may still be a role to play for smaller, less well capitalized, and less management- and technologyintensive farmers, but barriers to successful participation by these entities remain high. Many in the international development and humanitarian fields are concerned about the exclusion of poor, small farm households from high-value market opportunities and are seeking ways to increase participation of small farms and to encourage more broad-based dispersal of the benefits and successes of this industry. Recent studies have shown that the rural poor, particularly landless families and young women, can benefit greatly from participation as labor on farms or in processing sheds (McCulloch and Ota 2002). In the interest of maintaining competitive participation of small farms in the sector, others have promoted the benefits of contract farming practices and the organization of small farms into farmer marketing associations or cooperatives (Masakure and Henson 2005). Thus far, the Kenyan government has not been heavily involved in regulating or promoting the export FFV sector. It could play a greater policy role in order to strengthen the global competitiveness of the industry and to enable greater participation of the rural poor in this sector, with the ultimate goal of increasing the broad-based benefits of the export FFV sector for economic growth and poverty alleviation. Your assignment is to make recommendations to the Kenyan government on what policies should be pursued to enable the FFV export industry to make a greater contribution to the alleviation of rural poverty in Kenya.
A Revolution in the Making: The Case of Agro-Food Retailing in India
Narayanan, Sudha (CUL Initiatives in Publishing (CIP), 2007)
Recent discussions of global agro-food systems have turned the spotlight on food retailing. Observers concur that globalization has been accompanied by, and may have aided, retail concentration in agro-food markets. This transformation, especially in developing countries, has been nothing short of a revolution. Until now, India has been conspicuous as an exception to the rule. Only around 2 percent of all retail trade in India is in the organized sector. The food retail sector is likely even more fragmented and continues to be a complex mosaic of diverse smallscale actors, including itinerant vendors, government outlets, cooperative markets, and small-scale corner stores. This fragmented retail sector was attributable in large part to the policy framework. So far, foreign direct investment (FDI), a critical driver of retail transformation in other countries, has been disallowed in the retail sector. Laws putting ceilings on urban land use limit the physical space available to giant retail stores. In addition, domestic trade in agricultural produce was tightly regulated. Postharvest practices related to storage and transportation, as well as logistical bottlenecks, have also stood in the way of large-scale investments in the sector. Yet these factors might be changing now. Growing urban consumerism and the rise of a newly wealthy professional middle class that values shopping experience and convenience have spurred a growth in demand for processed and branded ready-to-eat convenience foods. In the absence of FDI, domestic businesses have responded powerfully to this demand and intensified their focus on food retailing. Meanwhile, with India ranked the top destination for global retail investment for the second consecutive year, multinationals are seeking ways, other than FDI, to enter the Indian market. Advocates enthuse, rightly, over the efficiencies that large-scale investments would bring. At the same time, there is considerable concern that the emergence of supermarkets, especially if it leads to retail concentration, might have distressing implications for a large constituency of poor actors along the entire chain—small and poor farmers, informal traders, and retailers, as well as poorer consumers. Retail transformation raises important questions about the relative position of farmers in the supply chain. Although consumers are the presumed beneficiaries of supermarkets, because of improvements in quality, safety, and choice, it is not clear if supermarkets will be able to serve the poorer segments of the population. As for small traders, the emergence of large-scale retailers with deep pockets could dismantle their livelihoods if they succeed in weaning away small traders' clientele. In short, it is not clear if supermarkets will be part of a solution to poverty or part of the problem. Clearly, two issues merit careful scrutiny. First, how will the efficiency gains from this transformation be distributed across actors? Second, what is the nature of costs associated with the displacement of livelihoods that such a transformation would entail? Given these considerations, should the government enable or aid such a transformation by reconfiguring domestic policies and opening up FDI in retailing? Your assignment is to recommend to the Government of India a set of policies to be pursued to guide future developments in the food retail sector, taking into account the interests of the different stakeholder groups.

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