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

Abstract

Poor market access is a major hurdle to poverty reduction for smallholder farmers. Traditional market access strategies that connect farmers with wholesale intermediaries are criticized for exposing farmers to exploitation. While it is commonly believed that this issue can be resolved by direct market access under which farmers sell directly to consumers, practice indicates that farmers often need to work with service intermediaries to facilitate such direct sales and continue to suffer from exploitation. Hence, it is unclear whether and under what circumstances direct market access can benefit smallholder farmers. In this paper, we address these questions through a comparative study of two widely observed strategies: contract farming, which provides farmers with assured sales of their output to a buying firm at a predetermined wholesale price, and rural livestreaming, whereby farmers sell directly to consumers in a live broadcast run by a media company that charges a percentage commission fee. We construct game-theoretic models of the two strategies and compare farmers' income in equilibrium. We show that compared to contract farming, the direct market access enabled by rural livestreaming can mitigate exploitation and improve farmers' income for niche crops or crops with low planting costs. For crops with mass appeal or that are costly to plant, direct market access may aggravate exploitation and hurt farmers' income. Furthermore, direct market access can become more effective in improving farmers' income under yield uncertainty or if farmers' power is enhanced, but may backfire and reduce farmers' income in the presence of agricultural subsidies. We validate our results via a case study of the market access strategies for smallholder farmers in western China. Our study indicates that policymakers should be mindful of the operational and market characteristics of local crops when choosing between direct and indirect market access strategies. Furthermore, coordination between different poverty reduction instruments is important to avoid unintended consequences.

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