Abstract:
When the world price of a crop increases, how do the incomes of the crop’s farmers in a developing country change? This paper investigates the distributional gains stemming from changes in agricultural world prices. Agricultural markets in developing countries are often characterized by the presence of a large number of small farmers who sell their produce to one or few big companies with significant monopsony or oligopsony power. We develop a flexible theoretical framework that captures this market structure and allows us to examine the impact of international trade on the incomes of farmers, agribusiness and traders in developing countries. The model highlights the conditions under which small farmers benefit (or lose) from increases in the world price of their crops. Using household-level panel data from Kenya, we empirically study the magnitude of the trickle-down effect of world price changes on the incomes of farmers. Farmers benefit from quality spillovers when selling through agribusinesses, but when global crop prices increase, on average, their income increases 30 percent less if they sell through agribusinesses rather than small traders. The model helps inform the debate over land and market reforms recently implemented or planned by several developing countries
Host: Andreas Moxnes