Impacts and Impact Dynamics of Smallholder Participation in High-Value Markets in Kenya

Many developing countries are experiencing a food system transformation with a rapid growth of supermarkets. This supermarket growth can be attributed to demand-side factors such as rising incomes, urbanization, and changing lifestyles, as well as supply-side factors, such as market liberalization in the food industry and greater openness for foreign direct investment. The retail revolution has also caused structural changes along the supply chains. Supermarkets try to offer their customers a consistent variety of high-quality products. To ensure continuous supply, supermarkets have established their own procurement systems, involving centralized buying points and contractual arrangements with farmers and traders. Several studies have analyzed determinants and impacts of farmer participation in these new supermarket channels, or in other emerging high-value supply chains in general, but various issues still remain under-researched. First, past research shows that access to market information can help speed up the diffusion of technical and institutional innovations. In most rural areas of developing countries, however, smallholders have limited access to market information. Due to infrastructure and institutional constraints, the cost of searching and processing formal market information tends to be high. Informal information networks could possibly be used as an avenue to reduce transaction costs. However, so far little is known about the role of information networks for high-value market (HVM) participation. Second, the nutrition impacts of supplying supermarkets and other emerging high-value markets remain unexplored. This is despite high rates of undernourishment among the rural population of developing countries. Given positive income effects observed in previous research, it is conceivable that supplying supermarkets can have profound impacts on the nutrition of smallholder farm households. Third, past studies that analyzed welfare effects of participation in high-value markets used cross-sectional data, which may lead to bias in impact assessment, especially if unobserved factors affect participation, or if valid instruments cannot be found. With panel data, unobserved heterogeneity can be controlled for much better. Furthermore, panel data help to better understand possible impact dynamics. This dissertation consists of three essays. In the first essay we investigate the role of informal information networks for HVM participation. We focus on informal farmer interactions to exchange information, what we call ‘information links’. Specifically, we analyze the determinants of the existence of information links between individual farmers and effects of having information links with other farmers that previously supplied HVM on own HVM participation and participation dynamics. In the second essay, we analyze impacts and impact pathways of participation in supermarket channels on rural household nutrition. In the third essay, we analyze impacts and impact dynamics of supplying HVM on household income. All three essays utilize data from smallholder vegetable farmers in Kenya. Panel data for 2008 and 2012 are available. Kenya is an interesting example for this type of research, because supermarkets have rapidly gained in importance there in recent years. Supermarkets in Kenya now account for about 10% of national grocery sales and over 20% of food retailing in major cities. In the first essay, we use social network data at individual level and dyadic regressions to analyze determinants of the existence of information links between farmers. In our definition, an information link exists if farmers exchange information on possible vegetable marketing options. We find a higher likelihood of exchange of vegetable market information among farmers supplying HVM, as compared to traditional market (TM) farmers. Also, farmers supplying HVM are more likely to obtain market information from those supplying TM. Further, using household level data and probit models, we find that having an information link with at least one farmer who previously supplied HVM increases farmers’ own probability of participation in HVM by at least 10 percentage points. Finally, using multinomial logit models we analyze the effect of having information links with HVM farmers on the dynamics of participation in HVM (joining and also dropping out from these markets) over two time periods. We find that having an information link with at least one farmer who previously supplied HVM increases farmer’s own probability of participation in HVM in both periods by 5 percentage points or more, at the same time decreasing the probability of supplying TM in both periods by at least 9 percentage points. In the second essay, we use household level data to analyze impacts of participation in supermarket channels on farm household nutrition. Using an instrumental variable (IV) approach to control for both observed and unobserved heterogeneity, we show that participation in supermarket channels has sizeable positive impacts: calorie, vitamin A, iron, and zinc consumption are all increased by 15% or more. We also analyze possible impact pathways, using simultaneous equation models and find that supermarket-supplying households have higher incomes, a higher share of land under vegetables, and a higher likelihood of male control of revenues. Furthermore, income and the share of land under vegetables have positive impacts, while male control of revenues has negative impacts on dietary quality. In the third essay, we use panel data to analyze welfare effects of participation in high value markets. Employing differencing techniques and IV models, we show that participation in HVM is associated with a 59% increase in household income. On the other hand, dropping out of HVM is associated with a significant decrease in household income. Finally, we find that the difference in income between farmers supplying HVM and those supplying TM is diverging over time. We derive a few general conclusions from the three essays. It is certainly important that market information is disseminated to smallholders, as it increases the probability of participation and continued supply to HVM. However, farmers already supplying HVM seem to be the ones using informal social networks to assess market information. Further development of these farmers alone may create even larger disparities between farmers supplying HVM and those supplying TM. Therefore, there is need for inclusive involvement of farmers supplying both channels whenever market information is being disseminated to smallholders, as this is likely to increase participation hence improving household welfare in general. Participation in HVM has a significant effect on the dietary quality of the participating households. The effect could however, be even larger if women are supported to keep control of revenue from crops sold in HVM. Finally, participation in HVM has a positive income effect that is growing over time, whereas dropping out leads to huge income loss. Therefore, there is need to support smallholder farmers to participate and stay in HVM