Empowering or Exploiting? The Implications of Direct Market Access for Improving Smallholder Farmers' Welfare

Abstract

Problem definition: Enabling market access is widely recognized as a priority for local governments aiming to reduce poverty among smallholder farmers. Traditional market access strategies, which connect farmers to wholesale intermediaries and reach consumers indirectly, have been criticized for exposing farmers to exploitation. Although it is commonly believed that enabling farmers to sell directly to consumers can mitigate this issue, farmers often rely on service intermediaries to facilitate direct sales and continue to face exploitation. Consequently, it remains unclear which type of market access strategy---indirect or direct---is more beneficial to smallholder farmers. We address this question by comparing representative strategies of the two types: contract farming, where farmers sell to a buying firm at a predetermined wholesale price, and rural livestreaming, where farmers sell directly to consumers via live broadcasts hosted by a media company that charges a percentage commission fee. Methodology/results: We construct game-theoretic models of the two strategies and compare farmers' income in equilibrium. We show that, compared to contract farming, rural livestreaming can mitigate exploitation and increase farmers’ income for niche crops or crops with low planting costs. For crops with mass appeal or that are costly to plant, rural livestreaming may aggravate exploitation and decrease farmers’ income. Furthermore, rural livestreaming can be more effective in improving farmers’ income under yield uncertainty. However, it may undermine the intended benefits of government subsidies to farmers and reduce their income. We validate our results via a case study of the market access strategies for smallholder farmers in Western China. Managerial implications: Policymakers should be mindful of the operational and market characteristics of local crops when choosing between direct and indirect market access strategies to improve farmers' income. Moreover, coordination among poverty reduction instruments is important to avoid unintended consequences.

Keywords: smallholder framers, market access strategies, exploitation, yield uncertainty, subsidies