Market Competition in Export Cash Crops and Farm Income in Africa

August 25, 2011
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Cash crops, such as cocoa, cotton, coffee and tobacco, are a major source of export revenue for a large number of Sub-Saharan African countries and the livelihood basis for millions of rural households who grow those crops.

Generally speaking, poor farmers in the cash crop sector should stand a better chance to rise out of poverty – on the back of export market prices which normally bring better returns than selling to other low-income consumers in the same low-income domestic economy. Take the current world commodity boom for example, and you could imagine millions of rural farmers getting richer. But often the reality is more complex: farmers don’t always get the best deals on their farm gate sales. The agricultural export supply chains on which small-scale farmers depend to sell their produce to world markets are frequently dominated by a few firms that have market power over farmers and are able to extract some of the surplus that the export market generates.

But if conditions were to improve, if markets were to be significantly more competitive, how much more of the export market price could farmers get at the farm gate?  “A whole lot more” – according to this paper.

If competition improved, how much more cash will farmers make?

This paper is a game-theory model of supply chains in cash crop agriculture between many atomistic smallholders and a few exporters to study how the internal structure of export markets and the level of competition affect poverty and welfare in remote rural areas in Africa. In the paper we decided to imagine the best of all possible worlds; we asked: if policymakers could engineer the best market we could imagine – what economists call the perfectly competitive market – how much more price value could cocoa farmers in Ghana or cotton growers in Zambia get which current market conditions do not allow them to reap? We explored the question for cocoa, coffee, cotton and tobacco sectors in eight African countries that are leading producers of these crops.

We found that in a perfectly competitive market, farmers in all these crop markets will benefit significantly more than they do now. Cotton farm gate price would have been 97.4% higher in Benin and 89.4% higher in Burkina Faso. Cocoa farmers in Ghana would have made 47% more; and Rwandan coffee farmers will reap 32% more.

Of course the idea of a perfectly competitive market is not possible in the real world; it exists only in the mathematical models of economists.  So what is the point of our research? It is simply to demonstrate a vision of the ideal reward that farmers can get for their work and then use that as a perfect benchmark to seek imperfect improvements in the real world.

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