Commercialization of Smallholders: Is Market Participation Enough? Gebremedhin, Berhanu and Jaleta, Moti

Transcription

1 Commercalzaton of Smallholders: Is Market Partcpaton Enough? By Gebremedhn, Berhanu and Jaleta, Mot Contrbuted Paper presented at the Jont 3 rd Afrcan Assocaton of Agrcultural Economsts (AAAE) and 48 th Agrcultural Economsts Assocaton of South Afrca (AEASA) Conference, Cape Town, South Afrca, September 19-23, 2010.

2 Commercalzaton of Smallholders: Is Market Partcpaton Enough? Berhanu Gebremedhn 1 Scentst, Internatonal Lvestock Research Insttute (ILRI) P.O.Box 5689 Adds Ababa, Ethopa e-mal: b.gebremedhn@cgar.org Mot Jaleta Post Doctoral Scentst, Internatonal Lvestock Research Insttute P.O.Box 5689 Adds Ababa, Ethopa e-mal: m.jaleta@cgar.org 1 Berhanu Gebremedhn s correspondng author: b.gebremedhn@cgar.org 1

3 Abstract The lterature on commercal transformaton of smallholders makes lttle dstncton between market orentaton (producton decson based on market sgnals) and market partcpaton (sale of output). However, polcy mplcatons to enhance commercal transformaton of subsstence agrculture drawn from the analyss of the determnants of household market partcpaton alone could be nadequate, f n fact, the determnants of market orentaton and market partcpaton are not the same or not consstent wth each other. Ths paper analyzes the determnants of market orentaton and market partcpaton n Ethopa separately and examnes f market orentaton translates nto market partcpaton. Emprcal results show that the determnants of market orentaton and market partcpaton n crop output markets are not the same, but market orentaton translates strongly nto market partcpaton. Results mply that whle nterventons to enhance market orentaton could also help n promotng market partcpaton, nterventons to promote market partcpaton may not be adequate to promote market orentaton. Key Words: commercalzaton, smallholders, market orentaton, market partcpaton. JEL Classfcaton: C21, C24, Q12, Q13 2

4 1. Introducton Commercal transformaton of subsstence agrculture s an ndspensable pathway towards economc growth and development for many agrculture dependent developng countres (von Braun, 1994; Pngal and Rosegrant, 1995; Tmmer, 1997; World Bank, 2008). Sustanable household food securty and welfare also requres commercal transformaton of subsstence agrculture (Pngal, 1997). Commercal agrcultural producton s lkely to result n welfare gans through the realzaton of comparatve advantages, economes of scale, and from dynamc technologcal, organzatonal and nsttutonal change effects that arse from the flow of deas due to exchange-based nteractons (Romer, 1993; 1994). Commercalzaton enhances the lnks between the nput and output sdes of agrcultural markets. Commercalzaton entals market orentaton (agrcultural producton destned for market based on market sgnals) and market partcpaton (produce offered for sale and use of purchased nputs). However, the lterature on commercalzaton of smallholders makes lttle dstncton between market orentaton and market partcpaton of smallholders. In fact, most of the lterature consders market orentaton and market partcpaton as synonymous and thus most of the analyss of the determnants of smallholder commercalzaton s based on the analyss of the determnants of output market partcpaton (von Braun et al., 1994; Jaleta, et al., 2009; Oteno et al., 2009). However, polcy mplcatons to enhance commercal transformaton of subsstence agrculture drawn from the analyss of the determnants of household market partcpaton alone could be nadequate, f n fact, the determnants of market orentaton and market partcpaton are not the same and not consstent n ther drecton of effect. The lterature on commercalzaton of smallholders also focuses on the output sde of commercalzaton, gvng lttle attenton to the nput sde. The prmary objectves of the paper, therefore, are (1) to analyze the determnants of market orentaton and market partcpaton separately, and nvestgate whether the determnants of the two are the same wth consstent drectons of effects, and whether hgher market orentaton s translated nto hgher output market partcpaton, and (2) to analyze the determnants of the ntensty of use of purchased nputs for annual crop producton, as a measure of household commercalzaton from the nput sde. 3

5 In addton to nformng Ethopan polcy makng to facltate the transformaton of subsstence agrculture nto commercal orentaton, ths paper s hoped to contrbute to the smallholder commercalzaton lterature by analyzng the determnants of market orentaton and market partcpaton separately, and determnng f market orentaton translates n hgher market partcpaton. The paper s organzed as follows. The next secton gves the context of the study n bref. Secton three presents the conceptual framework. Secton four deals wth emprcal models, methods and hypotheses. Secton fve presents results, whle secton sx concludes the paper and draws mplcatons. 2. Context Ethopa has adopted commercalzaton of smallholder agrculture as a strategy for ts economc transformaton. The agrcultural servces of extenson, credt and nput supply are expandng sgnfcantly to support commercal transformaton, although the domnant player n these servces stll remans to be the publc sector. A recent study by Gebremedhn et al. (2009) showed that the expanson of the agrcultural servces had sgnfcant mpact on the ntensty of nput use, agrcultural productvty and market partcpaton of Ethopan smallholders. Results n ths paper are based on household and plot level data collected from annual-crop based farmng systems of three dstrcts (Bure, Goma and Meso), thought to represent the major annual crop producton systems n the country n terms of agrcultural and market nfrastructure characterstcs 1. Bure dstrct receves adequate ranfall (about 1600 mm per year) and has relatvely well developed road networks and market places. Goma dstrct receves abundant ranfall (about 1860 mm per year and lastng for about 8 months n a year), wth less developed road networks and market places. Meso s characterzed as drought prone wth ranfall (about 800 mm per year) as the most mportant constrant of crop producton, but wth well developed road networks and 1 Bure s located n North Western Ethopa n the Amhara regon, at about 300 km north of the captal, Adds Ababa; Goma s located n South Western Ethopa, n the Oroma regon, at about 400 km south of the captal; and Meso s located n Eastern Ethopa n the Oroma regon, at about 300 km east of the captal. 4

6 market places. Annual crops cover about 93% of cultvated land n the study areas. Hence, commercalzaton s analyzed n terms of annual crop producton. 3. Conceptual framework Our overall conceptual framework s gven n Fgure 1. The determnants of market orentaton and market partcpaton may not be the same because a household may produce marketable commodtes but use them for home consumpton f the household specfc endogenous prces le between the mark-up sellng and buyng prces. Ths stuaton s more common when there are hgh transacton costs and the prce band s wder (Key et al., 2000). A household could also have hgh market partcpaton because of surplus producton due to varous reasons, ncludng favorable weather condtons, although t may not be market orented. Our conceptual framework s based on the lterature on frm and farm market orentaton (Hndernk and Sterkenburg, 1987; Kohl and Jaworsk, 1990; Immnk and Aarcon, 1993; Jaworsk and Kohl, 1993; Frtz, 1996; Selnes et al., 1996; Jaworsk and Kohl 1996), and household market partcpaton (Goetz, 1992; Pngal and Rosegrant, 1995; Pngal, 1997; Lapar et al., 2003; Bellemare and Barrett, 2006; Ros et al., 2008; Omt, 2009). In developng our conceptual framework, frst we make the dstncton between market orentaton and market partcpaton. The concept of market orentaton has been used more wdely n the manufacturng sector (eg. the food ndustry) to refer to the extent to whch a producer uses knowledge about the market (esp. customers and prces), as a bass to make decsons on the three basc economc questons of what to produce, how to produce and how to market (Kohl and Jaworsk, 1990; Jaworsk and Kohl, 1993; 1996). Several studes have also demonstrated that the degree of market orentaton s a major determnant of compettve advantage (Frtz, 1996; Selnes et al., 1996). Market orentaton n agrculture s bascally a producton decson ssue. Based on the extant lterature on agrcultural commercalzaton, we defne market orentaton n agrculture as the degree of allocaton of resources (land, labor and captal) to the producton of agrcultural produce that are meant for exchange or sale (Hndernk and Sterkenburg, 1987; Immnk and Aarcon, 1993). Hence, n ths study, we measure 5

7 market orentaton as the extent to whch a household s crop portfolo ncludes crops that are relatvely more marketed 2 evaluated at farmng system level. On the other hand, market partcpaton n crop producton s measured by the proporton of crop produce sold. Household Characterstcs and Resource Endowments Land Fragmentaton Alttude Crop Dversfcaton (evenness of farmland dstrbuton to the potental number of annual crops grown) Crop Output Market Partcpaton (COMP) Insttutonal Servces, Market and Road Access Credt Ranfall Extenson Market Orentaton (relatve mportance of more marketable crops n the portfolo of crop choce) Crop Input Market Partcpaton (CIMP) Market nformaton Market access Fgure 1. Conceptual framework of household level crop dversfcaton, market orentaton, and crop nput and output market partcpaton. Most of the lterature on smallholder commercalzaton deals only wth the output sde of commercalzaton. However, sustanable commercalzaton of smallholders also requres ntegraton nto the nput markets (Pngal and Rosegrant, 1995). To contrbute to redressng the gap n the commercalzaton lterature on the 2 In ths study, we do not make the dstncton between cash crops and staple crops, snce market orentaton s measured n terms of the relatve mportance of more market orented crops n the household crop portfolo. 6

8 determnants of crop nput market partcpaton of households, we analyze determnants of the proporton of the value of purchased crop nputs used to total value of nputs. In order to determne the ceters parbus effects of the varables of our focus, we control for household characterstcs, resource endowments, access to nsttutonal factors (extenson, credt, nput supply, market nformaton) access to markets and roads, and vllage level factors (ranfall, alttude) wherever approprate. 4. Emprcal Model, Methods and Hypotheses 4.1 Emprcal Model Our specfcaton of emprcal model s dvded nto three parts, (1) the determnants of market orentaton of households n crop choces, (2) the determnants of household partcpaton n crop output as seller, and (3) nput markets as buyer. 1. Market orentaton Household level market orentaton ndex (MOI) s modeled as a functon of household characterstcs (age, sex, and lteracy of household head), household resource endowment (labor supply, land, land qualty, draft power, equnes and other lvestock), access to market and roads (dstance to nearest market and nearest all-weather road), access to nsttutonal servces (extenson, credt and market nformaton), vllage level factors (ranfall and alttude), and land fragmentaton (Eq. 1). MOI f HH, HR, MKTac, EXT, CRD, MIS, RF, ALT, SI, ) (1) Where ( u MOI u MOI s an error term assumed to be ndependently and dentcally dstrbuted wth zero mean and constant varance. 2. Crop output market partcpaton (COMP) Crop output market partcpaton (COMP) s modeled as a functon of household characterstcs, resource endowment, access to market and roads, access to nsttutonal servces, ranfall and household ncome from off-farm and non-farm sources (OINC). We 7

9 use results of ths model to examne f the determnants of market orentaton and crop output market partcpaton are the same and wth consstent drecton of effect (Eq. 2). In a second model, we also nclude household level crop dversfcaton (MEI) and market orentaton (MOI) as explanatory varables to test the relatonshp between market partcpaton and dversfcaton, and to test f market orentaton s translated nto hgher market partcpaton (Eq. 3). However, both dversfcaton and market orentaton decsons can be endogenous varables n ths specfcaton, f the realzed level of market partcpaton was envsoned durng producton decson. To account for ths possble specfcaton problem, we have used land fragmentaton and alttude as nstrumental varables for the two explanatory varables. COMP f HH, HR, MKTac, EXT, CRD, MIS, RF, OINC, ) (2) ( u COMP COMP f HH, HR, MKTac, EXT, CRD, MIS, RF, OINC, MEI, MOI, ) (3) ( u COMP 3. Crop nput market partcpaton (CIMP) Crop nput market partcpaton (CIMP), s modeled as a functon of household characterstcs, resource endowment, access to markets and roads, access to nsttutonal servces, ranfall, household level crop dversfcaton (MEI) and market orentaton (MOI) (Eq. 4). We excluded the off- and non-farm ncome varable, as most nput use decsons are made early n the producton season, but off-farm and non-farm ncome s realzed mostly late n the season. CIMP f HH, HR, MKTac, EXT, CRD, MIS, RF, MEI, MOI, ) (4) ( u CIMP 4.2 Methods Data sources 8

10 Results are based on a survey of 168 households and all plots operated by the households, and 53 communtes (peasant assocatons (PAs)) n the three dstrcts n 2007/08. Farmng systems were stratfed nto PAs and households n each PA were selected randomly based on proportonal to sze samplng. Vllage level data on ranfall, alttude, dstance to nearest market and all-weather road were collected at communty level. Indces of land qualty, land fragmentaton, annual crop dversfcaton, market orentaton, and crop output and crop nput market partcpaton n annual crops were computed usng the household, plot and communty level data. Below, we brefly present the computaton of these ndces. Weghted land qualty ndex: Household level land qualty ndex ( LQI ) s derved from the plot level sol fertlty scale weghted by the plot sze (Eq. 5). LQI J j1 f * L j T L j, 1 LQI 3 (5) where f j s sol fertlty scale (1 to 3, where 1 s poor, 2 s medum and 3 s good) for plot j, L j s area of plot j and T L s the total crop area operated by the th household. Land fragmentaton: Land fragmentaton can be measured ether n sngle dmenson or ntegrated ndcators. Among the ntegrated ndcators, Smpson ndex (SI) and Januszewsk ndex (K) are the most common (Blarel et al., 1992; Wu et al., 2005). We use the Smpson ndex to measure the degree of land fragmentaton of households as defned below (Eq. 6). J 2 aj j1 2 A SI 1, 0 SI 1 (6) 9

11 Where a j s area of the j th plot and A s the total area of annual crop land operated by a household. We chose the Smpson ndex because the Januszewsk ndex does not take farm sze nto account 3. Zero value of SI ndcates complete land consoldaton (one parcel only), whle the value closer to one ndcates numerous parcels of equal sze. Market orentaton ndex (MOI): We defne that a smallholder s market orented f ts producton plan follows market sgnals and produce commodtes that are more marketable. Under a semcommercal system, where both market and home consumpton are playng a central role n producton decson, all crops produced by a household may not be marketable n the same proporton. Thus, households could dffer n ther market orentaton dependng on ther resource allocaton (land, labor and captal) to the more marketable commodtes. Based on the proporton of total amount sold to total producton at farmng system level, a crop specfc marketablty ndex ( ) s computed for each crop produced at farmng system level as follows (Eq. 7): k N S k 1 k N ; Qk S k and 0 k 1 (7) Q 1 k Where k s the proporton of crop k sold (S k ) to the total amount produced (Q k ) aggregated over the total sample households n a farmng system. k takes a value between 0 and 1, nclusve. Crops manly produced for markets usually have k values closer to 1. 3 Januszewsk ndex K n a 1 n a 1 a a, where n s the number of plots, and a s the area of each plot. 10

12 Once the crop specfc marketablty ndex s computed, household s market orentaton ndex n land allocaton (MOI ) s computed from the land allocaton pattern of the household weghted by the marketablty ndex of each crop ( ) derved from Eq. 7 as follows (Eq. 8). k MOI K k k 1 T L L k T ; L 0 and 0 MOI 1 (8) Where to crop k, and MOI s market orentaton ndex of household, Lk s amount of land allocated T L s the total crop land operated by household. The hgher proporton of land a household allocates to the more marketable crops, the more the household s market orented. Crop output market partcpaton: Followng von Braun et al (1994), we computed household crop output market partcpaton n annual crops as the proporton of the value of crop sales to total value of crop producton, whch we refer to n ths paper as crop-output market partcpaton (COMP) ndex, computed as follows (Eq. 9): COMP K k 1 K k 1 P P k k S Q k k (9) where S k s quantty of output k sold by household evaluated at an average communty level prce ( P k ), Q k s total quantty of output k produced by household. Crop nput market partcpaton: 11

13 Household commercalzaton from the nput sde s commonly computed as the proporton of the value of purchased nputs to total value of crop producton. However, dfferent crops may have dfferent nput requrements, whch may have mplcatons for the need to purchase external nputs. Hence, we compute household partcpaton n nput markets as the proporton of the value of purchased crop nputs to total crop nput used, whch we refer to n ths paper as crop-nput market partcpaton (CIMP) ndex (Eq. 10). CIMP R r1 R r1 w w r r X X p r T r (10) where w r, and p X r s the amount of nput r purchased by the household at the average nput prce T X r s the total amount of nput r used n the producton of annual crops Econometrc approach The dependent varables analyzed n ths paper are market orentaton, crop output market partcpaton, and crop nput market partcpaton of households n annual crop producton. The econometrc model used depends on the nature of the dependent varable. For the determnants of household market orentaton we use ordnary least squares (OLS) model, snce t s a contnuous varable (summary of descrptve statstcs of varable used n the regresson models are gven n Table 1). For the household partcpaton n crop output market as seller, and the household partcpaton n crop nput markets as buyer, we use Tobt models, snce these varable are lower censored at zero. All coeffcents and standard errors are adjusted for samplng weghts, clusterng, and stratfcaton usng the SVY command (STATACorp, 2008). Crop dversfcaton and market orentaton are potentally endogenous varables n the models for crop output and nput market partcpaton. We use land fragmentaton and alttude as nstruments to check for endogenety, snce we do not expect land fragmentaton and alttude to affect market partcpaton once we control for crop dversfcaton and market orentaton. We faled to reject exogenety. 12

14 Market partcpaton of households may dffer by the level of crop dversfcaton. It could be that as a household starts movng nto producton destned for markets, t mght brng n addtonal crops nto exstng croppng mx, thus ncreasng dversfcaton, and as the level of ntegraton nto market ncreases, a household may move nto specalzaton n few crops (Pngal and Rosegrant, 1995). Hence, we derved three dummy varables from the contnuous crop dversfcaton ndex to test ths hypothess. Farmers were grouped nto three based on ther tercle of crop dversfcaton ndex. 4.3 Hypotheses In settng our hypotheses, our man nterests are n analyzng the determnants of market orentaton and market partcpaton separately, n analyzng the determnants of crop nput market partcpaton, n testng the effect of crop dversfcaton on crop output and nput market partcpaton, and n testng whether market orentaton translates nto hgher crop output and nput market partcpaton. However, to capture the ceters parbus effects, we need to control for other relevant explanatory varables. Hence, we also present our hypotheses about the effect of key varables that mght nfluence, market orentaton and market partcpaton. Household characterstcs If the self-suffcency preference or atttude towards rsk of households would change as the household grows older, we would expect a U-shape or an nverted U-shape relatonshp between age of the household, and market orentaton and household market partcpaton n crop output and nput markets. Male headed households, due to ther potental crop producton effcency advantages over female headed households, are expected to be more market orented, and have hgher partcpaton n output and nput markets. Lterate households are expected to have better sklls, and better access to nformaton and ablty to process nformaton, and thus may be postvely assocated wth market orentaton and market partcpaton. Household sze ncreases domestc 13

15 consumpton requrements and renders households more rsk averse. Hence, controllng for labor supply, larger households are expected to have lower market orentaton and market partcpaton. Household resource endowment When agrcultural factor markets are mperfect, ownershp of the factors matters for effcency and productvty (Sadulet and de Janvry, 1995). For example, when land markets are mperfect, households wth larger farm holdngs may be more lkely to be more market orented and have hgher market partcpaton (von Braun and Immk, 1994). Hence, household endowments of labor, land, bullocks and farm equpment are expected to be postvely assocated wth market orentaton and market partcpaton. Ownershp of equnes s also expected to have the same effect through ts role n reducng marketng (transportaton) costs. We expect ownershp of lvestock other than oxen and equne, to be negatvely assocated wth market orentaton and market partcpaton, snce they offer alternatve cash ncome sources. Access to markets and roads The role of marketng costs n completely hnderng or lmtng the level of smallholder market partcpaton has been examned by several authors (de Janvry et al., 1991; Sadoulet and de Janvry, 1995; Key et al., 2000; Gabre-Madhn, 2001; Barret, 2007; Pender and Alemu, 2007; Alene et al., 2008). Access to markets and roads s expected to reduce marketng costs, thus encourage market orentaton and market partcpaton. Insttutonal Servces Agrcultural servces (extenson, credt, market nformaton) are expected to enhance farmer sklls and knowledge, lnk farmers wth modern technology, and ease lqudty and nput supply constrants (Lerman, 2004), thus are expected to nduce market orentaton and market partcpaton. 14

16 Ranfall and alttude Ranfall may ncrease farm productvty, thus encouragng market orentaton and market partcpaton. Alttude determnes the type of crops grown. Hgh alttude areas are expected to have wder crop choce than low alttude areas, because of the more vared and more favourable clmatc condtons. However, the effect of alttude on market orentaton s ndetermnate. Market orentaton We defned market orentaton n terms of the relatve mportance of more marketable crops n the crop mx of the household. Underlyng market orentaton s the proft motve of households (Pngal and Rosegrant, 1995; Pngal, 2001). The realzaton of proft depends on market revenues. The realzaton of proft also requres ncreased producton effcency usng modern nputs and technologes. Hence, we expect that market orentaton wll be postvely assocated wth household partcpaton n crop output and nput markets. 5. Results 5.1 Descrptve nformaton Descrptve statstcs of varables used n the regresson analyss are gven n Table 1. The average market orentaton ndex s about 0.30, ndcatng moderate market orentaton of smallholders n the study area, whle the average crop output and crop nput market partcpaton are 25% and 20%, respectvely, also ndcatng moderate market partcpaton. The average value of annual crop produced per household s Brr , of whch Brr 1468 worth of produce s sold. The average nput value used for annual crop producton s also Brr 2604, of whch about Brr 520 s purchased nput. These results ndcate that the average return to land per household s about Brr 977. Households n 4 At the tme of the survey 1 US $ = Brr

17 the study area get about Brr 530 of ncome from non-farm and off-farm employment and remttances. Table 1: Descrptve statstcs for varables used n econometrcs Varables N Mean Std. Dev. Mn Max Crop dversfcaton (modfed entropy ndex) Crop dversfcaton (low) (yes=1, no=0) Crop dversfcaton (medum) (yes=1, no=0) Crop dversfcaton (hgh) (yes=1, no=0) Market orentaton ndex Crop nput market partcpaton ndex Crop output market partcpaton ndex Land fragmentaton ndex (Smpson ndex) Age of household head (year) Age of household head squared (year) Sex of household head ((male=1, female=0) Educaton of household head (lterate=1, llterate=0) Famly sze (no.) Avalable famly labour (persons) Farmland sze owned (ha) Weghted land qualty Oxen owned (no.) Equne owned (no.) Other lvestock owned (TLU) Dstance from settlement center to nearest market place (km) Dstance from settlement center to all-weather road (km) Involvement n extenson program (2005/06) (yes=1, no=0) Access to credt (2005/06) (yes=1, no=0) Market nformaton servce avalable n PA (yes=1, no=0) Ranfall (mm) Alttude (m above sea level) Off and non-farm ncome (Brr) Value of farm equpment (Brr) About 11% of households n the sample are female headed. The average household sze s about 6.44, wth famly labour supply of 3.4 persons per household, fgures whch are close to the natonal average. A household on average operates about 16

18 1.33 ha, a result also qute close to the natonal average. However, the land qualty ndex of 2.32 appears to be hgher than would be expected for a natonal average n Ethopa. Almost 50% of household heads are lterate. The average populaton densty n the study area s about 347 persons/ km Results of econometrc analyss Market Orentaton Market orentaton of households s nfluenced by lteracy of household head, household sze, labor supply of household, land qualty, ownershp of equne, access to all-weather road, nvolvement n extenson, ranfall and alttude, all of them wth expected sgns (Table 2). Of the sgnfcant varables, lteracy of head, labor supply, land qualty, ownershp of equnes, and nvolvement n extenson servce have stronger numercal effects on market orentaton. Lteracy of head s assocated wth hgher market orentaton. Lterate households may have better access to nformaton and better able to process t than llterate households, thus more able to see the benefts from market orentaton. Household sze detracts from household market orentaton due to ts effect on ncreasng household domestc consumpton needs. Household labor supply s assocated postvely wth market orentaton. Factor markets n rural Ethopa are far from perfect and so ownershp of resources matters for effcency (thus proftablty) of agrcultural producton, all else equal. Hgher land qualty ncreases market orentaton due to ts effect on land productvty. Ownershp of equnes and proxmty to all-weather road encourage market orentaton due to ther effect of reducng marketng costs, thus mprovng proftablty. The Ethopan agrcultural extenson servce appears effectve n nducng market orentaton. Whle hgher ranfall s assocated wth hgher market orentaton (perhaps due to ts effect on proftablty), hgher alttude appears to detract from t. 17

19 Table 2: Estmaton results for market orentaton ndex (OLS) and Crop output market partcpaton (Tobt) Crop output market Market orentaton ndex partcpaton ndex Explanatory Varables Coef. Std. Err. Coef. Std. Err. Age of household head (year) Age of household head squared (year) Sex of household head (male=1, female=0) Educaton of household head (lterate=1, llterate=0) * ** Famly sze (no.) ** Avalable famly labour (persons) *** Farmland sze owned (ha) Weghted land qualty *** Oxen owned (no.) ** Equne owned (no.) *** Other lvestock owned (TLU) * Dstance from settlement center to nearest market place (km) ** Dstance from settlement center to nearest all weather road (km) ** Involvement n extenson program (2005/06) (yes=1, no=0) * Access to credt (2005/06) (yes=1, no=0) Market nformaton servce avalable n PA (yes=1, no=0) Ranfall (mm) *** Alttude (m above sea level) *** Value of farm equpment (Brr) Off and non-farm ncome (Brr) Land fragmentaton ndex (Smpson ndex) Constant ** Number of strata 4 4 Number of observatons F(20, 145) Prob > F R-squared Note: ***, **, and * are sgnfcant at 1%, 5%, and 10% sgnfcant levels, respectvely. Comparsons between the determnants of market orentaton, and household market partcpaton n crop output markets show that the determnng factors can ndeed vary between market orentaton and market partcpaton (Table 2). However, results confrmed that there s no nconsstency n the drecton of effect of the sgnfcant varables. We fnd that most of the sgnfcant factors that explan market orentaton faled to have sgnfcant effect on output market partcpaton. Household characterstcs tend to be more mportant n explanng market orentaton than market partcpaton. 18

20 Among the household characterstcs, lteracy of household head and household sze explan market orentaton, of whch only lteracy of head turns out also mportant factor for output market partcpaton. Household resource ownershp factors are also more mportant n explanng market orentaton than for market partcpaton. Whle labor supply, land qualty, and ownershp of equnes are mportant for market orentaton, only ownershp of oxen s mportant for output market partcpaton. Market and road access factors turn out mportant both for market orentaton and market partcpaton. Whle dstance to nearest market s mportant for output market partcpaton, dstance to all-weather road s mportant for market orentaton. The extenson servce, whle effectve n nducng market orentaton, has no effect on output market partcpaton. Whle the vllage level factors of ranfall and alttude are mportant for market orentaton, none of them has sgnfcant effect on output market partcpaton. Crop output market partcpaton Household crop output market partcpaton s determned by lteracy of household head, ownershp of oxen, nearness to market place and household market orentaton (Table 3). All sgnfcant varables have expected sgns. Of the sgnfcant varables, market orentaton has the hghest explanatory power. Households wth lterate heads have hgher crop output market partcpaton, as expected. Lteracy of head ncreases the proporton of output sold by about 6% on average for the populaton of study, and by about 7% for those who already partcpate n output market as sellers, and ncreases the probablty of market partcpaton n output market as seller by about 7%. Ownershp of oxen also ncreases output market partcpaton, perhaps due to ts effect on producton. Oxen s the sole tracton power used n the study area. An ncrease n ownershp of an ox ncreases the proporton of output sold by about 3% for the populaton of study, and by about 4% for those who are already n the output market as sellers. Ownershp of an ox also ncreases probablty of partcpaton n output market as seller by about 4%. 19

21 Table 3: Tobt estmaton results for crop output market partcpaton ndex (COMPI) Crop output market partcpaton ndex Margnal effects Explanatory varables Coef. Std. Err. a b c Age of household head (year) Age of household head squared (year) Sex of household head (yes=1, no=0) Educaton of household head (lterate=1, llterate=0) ** Famly sze (no.) Avalable famly labour (persons) Farmland sze owned (ha) Weghted land qualty Oxen owned (no.) *** Equne owned (no.) Other lvestock owned (TLU) Dstance from settlement center to nearest market place (km) *** Dstance from settlement center to nearest all-weather road (km) Involvement n extenson program (2005/06) (yes=1, no=0) Access to credt (2005/06) (yes=1, no=0) Market nformaton servce avalable n PA (yes=1, no=0) Ranfall (mm) Off and non-farm ncome (Brr) Value of farm equpment (Brr Crop dversfcaton (low) (yes=1, no=0) Crop dversfcaton (medum) (yes=1, no=0) Market orentaton ndex *** Constant Number of strata 4 Number of observaton 159 F(22, 134) 6.76 Prob > F Note: a Margnal effect on the truncated expected value, de[compi* COMPI >0]/dx (for market partcpants only) b Margnal effect on the censored expected value, de[compi COMPI >0]/dx (for whole sample of study) c Probablty of beng censored, Pr(COMPI >0) ***, **, and * are sgnfcant at 1%, 5%, and 10% sgnfcance levels, respectvely. Ownershp of other lvestock detracts from crop output market partcpaton, snce these lvestock offer alternatve sources of cash ncome. Nearness to market enhances market partcpaton. One km reducton n dstance to nearest market ncreases the proporton of output sold by about 1% for the populaton of study, by about 1.4% for those who are already n the market, and ncreases the probablty of market partcpaton by about 1.4%. 20

22 Our results also sow that market orentaton of households translates strongly to output market partcpaton. An ncrease of 0.1 n market orentaton ndex ncreases the proporton of output sold by about 9% for the populaton of study, by about 11% for those already n the output market as sellers, and the probablty of market partcpaton by about 11%. These results suggest that nterventons n promotng market orentaton could enhance household market partcpaton, as well. Crop nput market partcpaton Household partcpaton n annual crop nputs market as buyer s nfluenced by famly labor supply, ownershp of equnes, nearness to market place, access to allweather road, ranfall, and household dversfcaton n annual crop producton (Table 4). All sgnfcant varables have the expected sgns. Market orentaton of households faled to have sgnfcant mpact on crop nput market partcpaton, despte ts strong effect on crop output market partcpaton. Of the sgnfcant varables, labor supply, ownershp of equne, and specalzaton n annual crop producton have stronger numercal effects. Household labor supply s postvely assocated wth household partcpaton n crop nput markets as buyer, snce labor s lkely to be a complementary nput to external nputs under the Ethopan condton. On average for the populaton of study, an ncrease n one unt of household labor supply ncreases the proporton of purchased crop nput use by about 1.8%, by about 2.5% for those who are already n the nput market, and ncreases the probablty of crop nput market partcpaton by about 6.7%. Ownershp of equnes s also postvely assocated wth crop nput market partcpaton due ts effect of reducng marketng costs and ncreasng farm proftablty. A unt ncrease n ownershp of equnes ncreases the proporton of purchased nput use by about 1.2% for the populaton of study, by about 1.7% for those who are already n the nput market, and ncreases the probablty of partcpaton n the market by about 4.5%. 21

23 Table 4: Tobt estmaton results for crop nput market partcpaton (CIMP) Crop nput market partcpaton ndex Std. Margnal effects Explanatory varables Coef. Err. a b c Age of household head (year) Age of household head squared (year) Sex of household head (yes=1, no=0) Educaton of household head (lterate=1, llterate=0) Famly sze (no.) Avalable famly labour (persons) ** Farmland sze owned (ha) Weghted land qualty Oxen owned (no.) Equne owned (no.) ** Other lvestock owned (TLU) Dstance from settlement center to nearest market place (km) * Dstance from settlement center to nearest all-weather road (km) *** Ranfall (mm) *** Market nformaton servce avalable n PA(yes=1, no=0) Involvement n extenson program (2005/06) (yes=1, no=0) Access to credt (2005/06) (yes=1, no=0) Value of farm equpment (Brr) Crop dversfcaton (low) (yes=1, no=0) * Crop dversfcaton (medum) (yes=1, no=0) Market orentaton ndex Constant *** Number of strata 4 Number of observaton 157 F(21, 133) 7.09 Prob > F Note: a Margnal effect on the truncated expected value, de[cimpi* CIMPI >0]/dx b Margnal effect on the censored expected value, de[cimpi CIMPI >0]/dx c Probablty of beng censored, Pr(CIMPI >0) ***, **, and * are sgnfcant at 1%, 5%, and 10% sgnfcance levels, respectvely. Dstance to nearest market detracts from crop nput market partcpaton due ts effect on ncreasng marketng costs of both nputs and outputs. A 10 km reducton n dstance to nearest market ncrease the proporton of purchased nput use by about 5% for the populaton of study and by about 7% for those who are already n the nput market, and ncreases the probablty of nput market partcpaton by about 18%. 22

24 Smlar to the effect of dstance to nearest market, we also fnd that nearness to all-weather road ncreases crop nput market partcpaton. A 10 km reducton n dstance to all-weather road ncreases the proporton of purchased nput use by about 6.6% for the populaton of study, by about 9% for those already n the market, and ncreases the probablty of crop nput market partcpaton by about 25%. Ranfall has postve effect on crop nput market partcpaton snce external nputs are lkely to be complementary to sol mosture. On average for the populaton of study, an ncrease n ranfall by 100 mm ncreases the proporton of purchased nput use by about 2%, and by about 3% for those who are already n the market, and ncreases the probablty of crop nput market partcpaton by about 7.7%. We also fnd ndcaton of a U-shape relatonshp between crop nput market partcpaton and dversfcaton. Households who are relatvely more specalzed have hgher crop nput market partcpaton than those who are hghly dversfed. Although the effect s statstcally nsgnfcant, those household who are moderately dversfed tend to have lower market partcpaton than those who are hghly dversfed. 6. Conclusons and Implcatons Commercal transformaton of smallholder agrculture entals producton decsons based on market sgnals and sgnfcant partcpaton n nput and output markets. Hence, analyss of the commercal transformaton requres analyss of market orentaton and market partcpaton. Polcy, nsttutonal and technologcal strateges to enhance commercal transformaton based on the analyss of market partcpaton alone may not be adequate f the determnants of market orentaton and market partcpaton are not the same. However, the lterature on commercalzaton of smallholders rarely makes the dstncton between market orentaton and market partcpaton. Ths study s an attempt to fll ths gap of knowledge n the commercalzaton lterature. Market orentaton of smallholders s found to be moderate. Only about 30% of annual crop produce s sold, whle only 20% of total annual crop nput used s purchased. Factors related to household characterstcs, household resource endowment, market and transportaton factors, extenson servce, and the vllage factors of ranfall and alttude are 23

25 mportant n explanng varatons n household market orentaton. Access to and ablty to process nformaton, productvty factors (household labor supply, land qualty, and ranfall), and transportaton cost advantage due to ownershp of equnes or nearness to all-weather road, and techncal effcency advantage due to nvolvement n extenson programs all ncrease market orentaton of households. On the other hand, hgher domestc consumpton requrements due to larger famly sze and locaton n hgher alttudes detract from market orentaton. These results mply that market and transport nfrastructure development, nterventons to ncrease productvty, and famly plannng nterventons could enhance market orentaton of households. Promoton of more market orented crop technologes n hgher alttude areas also deserves better attenton. Informaton advantage due to lteracy, ownershp of tracton power, and cost advantage due to proxmty to markets are mportant n ncreasng household crop output market partcpaton. Cost advantages due to ownershp of equnes, and proxmty to market place and all-weather road are mportant determnants of hgher crop nput market partcpaton. Ownershp or avalablty of factors that are lkely to be complementary to external nputs s also mportant to enhance crop nput market partcpaton. These results mply that, n addton to market and transport nfrastructure development, nterventons to promote nput market partcpaton may need to address the problem of avalablty of complementary nputs. Market orentaton s strongly translated nto hgher output market partcpaton, but not nto hgher crop nput market partcpaton. We also fnd that the determnants of market orentaton and market partcpaton n output markets are not the same. Several of the explanatory varables that have sgnfcant effect on market orentaton faled to have sgnfcant effect on output market partcpaton. However, we do not fnd nconsstency n the drecton of effect of the factors that explan market orentaton and those that explan market partcpaton. These results mply that whle nterventons to enhance market orentaton could also help n promotng market partcpaton, nterventons to promote market partcpaton may not be adequate to promote market orentaton. These results also confrm our overall proposton that the analyss of commercal transformaton of smallholders needs to addresses market orentaton and market partcpaton separately. 24

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