Despite more than a decade of NGO and government activities promoting developing world farmer participation in high-value agricultural markets, evidence regarding the household welfare effects of such initiatives is limited. This article analyzes the geographic placement of supermarket supply chains in Nicaragua between 2000 and 2008 and uses a difference-in-differences specification on measures of supplier and nonsupplier assets to estimate the welfare effects of small farmer participation. Though results indicate that selling to supermarkets increases household productive asset holdings, they also suggest that only farmers with advantageous endowments of geography and water are likely to participate.
Smallholder participation in contract farming and agricultural value chains offers a good example of unthinking policy making.
As Hope writes in her abstract, many governments and NGOs believe that a way out of poverty for smallholders is to become growers for agricultural processors. That belief almost always stems from the fact that those smallholders who already do participate in contract farming and agricultural value chains appear better off.
But that would be like me telling a homeless person that they should start their own hedge fund, because people who already do so appear better off. That is, it completely neglects obvious selection effects and the fact that those who run their own hedge funds do so because they had a sizable amount of financial capital at their disposal.
Likewise, smallholders who select into becoming growers for agricultural processors do so because they had the necessary financial, human, and physical capital.
The difficulty, of course, lies in identifying the causal relationship flowing from participation in contract farming and agricultural value chains to increased incomes, asset holdings, and so on. Here, Hope uses a difference-in-differences methodology. In my own work on the topic, I use a quasi experimental methodology. Elsewhere, my coauthors and I have discussed other methodologies which could help in identifying that causal relationship.
Another sobering aspect of Hope’s findings is that geography seems to be a real constraint to participation in contract farming. That is, processors do not choose at random the communities where they choose to contract with growers. Rather, they almost always choose communities easily accessible by road and whose agro-ecological conditions favor the production of contracted crops.