High transaction costs obstruct smallholder access to better markets

Smallholder potato farmers in the Huancayo region of Peru can sell their produce locally, at regional markets, or at the national market in Lima. Long-distance selling entails extra transaction costs – information, negotiation, and monitoring costs – but earns higher prices. Which factors most affect farmers’ ability to reach better markets?

This research by FAO used data collected during a household survey of small-scale potato producers from the Huancayo region of Peru. The aim of the analysis was to learn in detail which transaction costs affect households’ marketing decisions, and to measure the impact of those decisions on the household.

Farmers are able to get a significantly better price at the larger and more distant markets, and can sell more produce there. The average value of a transaction in the local fairs of Pichus or Pazos is only 1.7 soles, while in the Lima market it is 51.3 soles. Despite this, the Lima market accounts for only 5.7 per cent of sales from Huancayo.

Transaction costs fall into three main categories:

• Information Costs are incurred before the transaction. They take account of when farmers learn the price, how accurate that information is, and whether they have already agreed to a sales price.
• During the transaction, Negotiation Costs are incurred, including transporting goods, deducting losses for damages, waiting in the market, and co-ordinating transport.
• Finally, Monitoring and Enforcement Costs happen after the transaction, and centre on the merchant. Did he pay what was agreed, on time, and provide a receipt? Was business carried out without conflict, increasing producer confidence in the merchant?

The findings show that those smallholders who were more likely to sell large amounts and sell in markets that are outside the local area had lower transaction costs due to:

• better and timely knowledge of prices in the market
• higher confidence in and no conflict with the merchant, along with previously agreed contracts
• good road access, co-ordination of transport with other producers, and little damage during transport
• membership of an organisation, such as a local farmer’s organisation
• selling improved varieties of produce
• knowledge of Spanish

As expected, analysis of the research results shows that sales are higher where transaction costs are lower. It also shows what factors, other than price, affect whether households sell to the larger regional and national markets. The development of policies that allow smallholders better access to markets will require more attention to and better understanding of:

• the cost of transactions and the policy options available to reduce these costs
• which smallholders are more likely to be able to reap the benefits of globalisation, and how best to define and target better support for them
• particular transaction types and the way global value chains affect them. For example, where private voluntary standards (such as fair trade) are increasingly common, the need for smallholders to learn how to compete in that market is a new transaction cost.
• The designations employed and the presentation of material in this information product do not imply the expression of any opinion whatsoever of the part of the Food and Agriculture Organization of the United Nations concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries.

Source(s):
‘Transaction Costs, Institutions and Smallholder Market Integration: Potato Producers in Peru’, ESA Working Paper No. 05-04, FAO: Rome, by Irini Maltsoglou and Aysen Tanyer-Aybur, June 2005 Full document.

Funded by: FAO

id21 Research Highlight: 30 March 2007

Further Information:
Irini Maltsoglou
Agricultural and Development Economics Division (ESA)
FAO
Viale delle Terme di Caracalla
00100 Rome
Italy

Tel: +39 06 57054358
Fax: +39 06 57055522
Contact the contributor: irini.maltsoglou@fao.org

Food and Agriculture Organization

Other related links:
'Removing barriers to rural-urban trade'

'Barter markets: sustaining people and nature in Peru'

'From seed to plate: valuing local food systems'

'Balancing indigenous crops and market demands in the Andes'

'Getting to market: support for smallholder farmers'