The farm outputs pyramid
The farm outputs pyramid involves the entities that smallholders engage with to sell or market their farm production. The ease of access to and interaction with agricultural markets to sell farm products at prices that realistically meet production cost is critical in enhancing food and income security of smallholders. In many situations, a number of impediments hamper such farmers from having adequate access to markets (IFAD, 2003).
A common mode through which smallholder farmers (especially in food crops) market their products is through their local markets. These markets are often characterized by a large number of smallholder suppliers and a low number of demand intermediaries, who thus can virtually dictate the price of the products. Bigger markets offering better prices are often too distant and, hence, too expensive due to high transportation cost (poor road infrastructure in rural areas), high post-harvest losses, and ensuing high transaction costs. These markets are typically close to larger urban centres and present high potential for growth. Consequently, smallholders are obliged to sell at low prices to intermediaries and traders who come to the village market to buy, with little choice regarding where they conduct transactions, with whom, and at what price (IFAD 2003). Sadly, producers are again at a disadvantage when it comes to purchasing farm inputs (e.g., seeds, cutlasses, fertilizer) as they have no direct control over the market forces that control their prices.
Several studies have pointed at smallholder farmer lack of skills and education in understanding important market factors, setting an important impediment to their ability to access good markets (Doss, 2006; Mukwevho and Anim, 2014; Osmani and Hossain, 2015). By virtue of this, many farmers lack an understanding of market factors such as price fluctuation, market conditions, and the quality of goods (IFAD, 2003). In addition, smallholders are too little organized to collectively bargain (on an equal footing) with larger and stronger market intermediaries. This situation hinders farmers from planning a market-oriented production system or obtain realistic market prices through knowledge-based negotiations.
As a result, governments and international organizations have been working towards improving rural farmer access to market. These include improved road access to rural communities, linking producers to traders and processors, helping producers to form commercially oriented organizations (e.g., cooperatives and farming franchises) with the required negotiation skills, training producers to identify new markets, building market information systems and improving the rules of trade at national, regional and international levels in favour of smallholders (IFAD, 2003). For example, in recent years mobile phone services have allowed farmers to receive and compare market prices and these have become popular in some regions (Fafchamps and Minten, 2012).
Unlike the food crop markets, which are typically characterized by informal arrangements between smallholders and intermediaries, export crop markets are characterized by more formal relations between producers and agro-processing firms, governments and other private sector players (IFAD, 2003). The purchase of cash crops such as cocoa, cotton and coffee follow more formal procedures, although farmers still have limited control on the farm gate prices. For cash crops, governments or private sector players may supply inputs and provide production support services to ensure that quality standards are met. Often a national production agency is in place to address one specific cash crop. Export crop markets in many countries have emerged faster and more smoothly than food crop markets (IFAD, 2003).
Smallholder farmers from developing countries face significant challenges in accessing global markets. They are unable to compete at this stage (in terms of pricing) due to the huge subsidies paid to farmers from developed countries. In addition, developed countries occasionally use food aid and agricultural input supplies programs to dispose of surpluses, which drive local prices down and undermine local markets in developing countries (IFAD, 2003). Inability of smallholder farmers to meet the strict international quality and consistency standards or to obtain costly export certification further limit their access to global markets. Even at the regional level, policy obstacles and bureaucratic bottlenecks have stifled interregional trade agreements to the detriment of smallholder farmers. All these factors leave the smallholders with rather limited options to improve their livelihood and food security situation through better market access.