Price premiums,payment delays,and default risk: understanding developing country farmers’ decisions to market through a cooperative or a private trader |
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Authors: | Tina L Saitone Richard J Sexton Benoît Malan |
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Institution: | 1. University of California, Davis, Davis, CA, USA;2. University FHB‐Abidjan, Abidjan, C?te d'Ivoire |
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Abstract: | Smallholder farmers in developing countries face a competitive disadvantage in modern agricultural supply chains. Joint marketing through cooperatives is a potential tool to mitigate these disadvantages; yet cooperatives’ success in these settings is uneven at best. We develop an analytical model to study a farmer's choice of selling to a private trader who pays cash on delivery but may exercise market power or a cooperative that promises a price premium but delays payment and carries a concomitant risk of default. In the presence of impatient and risk‐averse farmers, we show that these factors can severely limit smallholder patronage of a cooperative, despite a promised price premium. We then construct and parameterize a simulation model to fit a profile of heterogeneous farmers within a prototype developing‐country village, and study the optimal decisions of farmers regarding marketing through a cooperative versus a private trader. Results suggest that modest improvements in either timeliness of payment or probability of default can induce a substantial increase in a cooperative's market share and economic viability. Extending the simulation analysis to a dynamic setting shows how implementing reasonable policies to improve a cooperative's payment timeliness and default probability can markedly improve its growth trajectory. |
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Keywords: | O13 Q13 Developing country Marketing cooperative Risk aversion Smallholder farmers Supply chain |
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