Market participation, channel choice and impacts on household welfare : the case of smallholder farmers in Tanzania.

Abstract

Markets and improved market access plays an important role in improving rural incomes of smallholder farmers in sub-Saharan African countries, particularly in Tanzania. Despite this, participation of smallholder farmers in markets in Tanzania remains low due to a range of constraints. In rural areas, farmers are lacking sufficient means to overcome the costs of entering the market due to high transaction costs. Poor infrastructure and weak institutions raise transaction costs that considerably alter production and market participation decisions. It is widely acknowledged that the involvement of small farmers into markets can contribute to higher productivity and income growth which, in turn, can enhance food security, poverty reduction efforts, and overall economic growth. Following the liberalisation of agricultural markets in Tanzania, smallholder farmers have alternative market channels for selling their agricultural produce, including maize and pigeonpea. These market channels offer different prices and sales services, which determine farmers’ choices of the channel and impact on household income and welfare outcome. However, in Tanzania, where smallholder farmers’ market access is a constraining factor, quantitative evidence of the relationship between market participation, market channel choice and impacts on household welfare specifically in maize and pigeonpea farmers is scant. The main objective of this study was to determine factors influencing smallholder farmers’ market participation decision, channel choice and the impacts of market participation and channel choice on household welfare. The research focused on four districts: Karatu and Mbulu in the northern zone and Kilosa and Mvomero in the eastern zone of Tanzania. A multi-stage sampling procedure was used to select villages and households, whereby a total of 700 farm households were surveyed. Heckman selection model results showed that fixed transaction costs associated with market information and household characteristics (such as gender and education level of the household head) had a statistically significant influence on maize and pigeonpea market participation. Similarly, distance to market, output prices, farm size, labour force, membership of farmer associations and geographical location of households influenced both market participation and intensity of participation. These results suggest that policies aimed at improving rural road infrastructure, market information systems, smallholder asset accumulation, human capital and promotion of farmer associations could reduce transaction costs and enhance market participation and marketed supply by smallholder farmers.

The multinomial logit results revealed that transaction costs (as a result of distance to markets, quality of road to market, lack of price information, and lack of trust in working relationships with buyers), household wealth, membership in farmer association/group, access to extension services and access to credit significantly influence the choice of profitable market channels by maize and pigeonpea smallholder farmers. The results suggest that policies aimed at reducing transaction costs (such as through increased investment in rural infrastructure, improved market information systems and farm households’ access to assets) appear to be important intervention avenues that can affect profitable channel choice in the study area. Promoting farmers’ groups/associations (such as producer and marketing groups) is among the efforts that need to be focused to facilitate smallholders’ technology and information transfer, bargaining power and trust between farmers and buyers. This study also examined the impact of market participation and channel choice on household welfare. The propensity score matching and endogenous switching regression results indicated that participation in maize and pigeonpea markets has positive and significant impact on household welfare, measured by consumption expenditure per capita among sample of rural households. The results also showed that the level of market participation has significant positive impact on consumption expenditure per capita. This confirms the role of market participation and level of participation in improving rural household welfare, as higher gain of consumption expenditure from market participation and level of participation also means improved food security and reduced poverty. The empirical results from multinomial endogenous treatment regression showed that market channel choice has positive impact on household welfare. Participation in rural traders and wholesalers market channels has significant positive impact on consumption expenditure per capita relative to brokers channel, for both maize and pigeonpea. The study suggests that policies and programs that support household capacity to produce surplus production and inclusion of smallholder farmers in more profitable markets could increase market participation, improve household welfare and reduce poverty among rural households.