Market Orientation and Market Participation of Smallholders in Ethiopia: Implications for Commercial Transformation

Transcription

1 Market Orentaton and Market Partcpaton of Smallholders n Ethopa: Implcatons for Commercal Transformaton Berhanu Gebremedhn 1* and Mot Jaleta 2 1 Internatonal Lvestock Research Insttute (ILRI), P.O.Box 5689, Adds Ababa, Ethopa, emal: b.gebremedhn@cgar.org 2 Internatonal Maze and Wheat Improvement Center (CIMMYT), P.O.Box 5689, Adds Ababa, Ethopa, emal: b.gebremedhn@cgar.org Selected Paper prepared for presentaton at the Internatonal Assocaton of Agrcultural Economsts (IAAE) Trennal Conference, Foz do lguacu, Brazl, August, Copyrght 2012 by (Berhanu Gebremedhn, and Mot Jaleta). All rghts reserved. Readers may make verbatm copes of ths document for non-commercal purposes by any means, provded that ths copyrght notce appears on all such copes. Acknowledgments: We are grateful to the Canadan Internatonal Development Agency (CIDA) for the fnancal support for ths work. We are also thankful to the many farmers and agrcultural staff who patently and wllngly responded to our numerous survey and qualtatve questons. We also thank the IPMS staff for ther support. * Correspondng author: P.O. Box 5689 Adds Ababa, Ethopa; Tel: ; Fax: ; E-mal: b.gebremedhn@cgar.org

2 Market Orentaton and Market Partcpaton of Smallholders n Ethopa: Implcatons for Commercal Transformaton Abstract The lterature on commercal transformaton of smallholders makes lttle dstncton between market orentaton and market partcpaton. Ths paper analyzes the determnants of market orentaton and market partcpaton n Ethopa separately and examnes f market orentaton translates nto market partcpaton. Results show that subsstence requrements, market access, and producton factors affect market orentaton, whle market access and volume of producton affect market partcpaton. Results also show that market orentaton translates strongly nto market partcpaton. The key mplcaton of ths study s that nterventons amed at promotng commercal transformaton of subsstence agrculture should follow two-pronged approach: mprovng market orentaton of smallholders at producton level, and facltaton of market entry and partcpaton of households n output markets. Focusng on ether may not be as effectve n achevng the transformaton. Keywords: commercalzaton, smallholders, market orentaton, market partcpaton. JEL Classfcaton: C21, C24, Q12, Q13 1

3 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). Moreover, commercalzaton enhances the lnks between the nput and output sdes of agrcultural markets. The concept of market orentaton has been used 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 1 (Kohl and Jaworsk, 1990; Jaworsk and Kohl, 1993; 1996). Several studes have also demonstrated that the degree of frm market orentaton s a major determnant of compettve advantage (Frtz, 1996; Selnes et al., 1996). The lterature on commercalzaton of smallholders makes lttle dstncton between market orentaton and market partcpaton of smallholders. As a result, 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, analyss of the determnants of market orentaton and market partcpaton separately would be useful n gudng the type of nterventons needed at producton and marketng levels to facltate commercal transformaton. Ths paper, therefore, makes the dstncton between market orentaton and market partcpaton and attempts to analyze the determnants of each separately. In addton, the paper attempts to determne f market orentaton translates nto market partcpaton. By so dong, n addton to nformng Ethopan polcy makng to facltate 1 Kohl and Jakowsk (1990) defne frm market orentaton as the organzaton wde generaton of market ntellgence pertanng to current and future customer needs, dssemnaton of the ntellgence across departments, and organzaton wde responsveness to t. 2

4 the transformaton of subsstence agrculture nto commercal orentaton, the paper s hoped to contrbute to the smallholder commercalzaton lterature 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 agrcultural development. 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 Ethopan 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 2. Annual crops (cereals, pulses, ol crops, and vegetables) 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 gven n Fgure 1 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., 2 Bure s located n North Western Ethopa n the Amhara regon, at about 400 km north of the captal, Adds Ababa and receves adequate ranfall (about 1600 mm per year) and has relatvely well developed road and market networks. Goma s located n South Western Ethopa, n the Oroma regon, at about 400 km south of the captal, and receves abundant ranfall (about 1860 mm per year and lastng for about 8 months n a year), wth less developed road networks and markets. Meso s located n Eastern Ethopa n the Oroma regon, at about 300 km east of the captal and 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 market places. 3

5 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). Household and household head characterstcs (age, sex and lteracy of head; household sze) Lvestock ownershp (cattle, shoats, poultry) Household endowment of Crop producton factors (land, oxen, famly famly labor labor and farm and farm equpment) Natural Agro-ecologcal factors affectng factors crop and land fragmentaton producton affectng (ranfall, crop alttude producton and land (ranfall, fragmentaton) alttude and land fragmentaton) Market orentaton (MOI) (relatve mportance of more marketable crops n n the the portfolo of of crop household choce) crop producton) Crop output market partcpaton (COMP) (proporton of output sold) Market Market and road access access (dstance and transport to nearest equne market place (dstance and road, to nearest ownershp market of place and road, equne) ownershp of equne) Insttutonal servces (nvolvement n extenson and credt servces the prevous year) Fgure 1. Conceptual framework of the determnants of household level market orentaton, and crop nput and output market partcpaton. In developng our conceptual framework, frst we make the dstncton between market orentaton and market partcpaton. Market orentaton n smallholder agrculture s bascally a producton decson ssue of what to produce snce ndvdual farm 4

6 households are mnor players n the market. Hence, 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). On the other hand, market partcpaton refers to the extent by whch a household partcpates n the market as seller. 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 wde (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. Hence, producton possbltes, comparatve advantages and expected proftablty are expected to be major determnants of market orentaton. Realzed output, proftablty and market orentaton are then expected to be major determnants of market partcpaton. Hence, we hypothesze that whle market orentaton s nfluenced by factors related to household and household head characterstcs, ownershp of lvestock as alternatve source of cash ncome, producton and market access factors, and nsttutonal support servces, household market partcpaton n crop output markets s determned by household market orentaton, the realzed level of crop producton, household and household head characterstcs, ownershp of lvestock, and market access and nsttutonal servces, and. Producton related factors affect market partcpaton n no way other than through ther effect on crop producton. 4. Emprcal Model, Methods and Hypotheses 4.1 Emprcal Model Our specfcaton of emprcal model s based on our conceptual framework descrbed earler and s dvded nto two parts, (1) the determnants of market orentaton of households n crop choces, and (2) the determnants of household partcpaton n crop output as seller. 5

7 1. Market orentaton Household level market orentaton ndex (MOI) s modeled as a functon of household and household head characterstcs (HH) (age, sex, lteracy of household head, and household sze); household endowment of crop producton factors (HR) (labor supply, land, oxen, and farm equpment); ownershp of lvestock (LVSTK); market access (MKTac) (dstance to nearest market and nearest all-weather road, and ownershp of equne); access to nsttutonal servces (extenson (EXT), credt (CRD)); natural factors affectng producton (ranfall (RF), alttude (ALT)) and land fragmentaton (SI) (Eq. 1). MOI f HH, HR, LVSTK, MKTac, EXT, CRD, 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 and household head characterstcs (HH); ownershp of lvestock (LVSTK); market access (MKTac); access to nsttutonal servces (extenson (EXT), credt (CRD)); and value of annual crop producton (CRVP). In order to test whether market orentaton translates nto hgher market partcpaton, we also nclude market orentaton ndex (MOI) as a rght hand sde varable n the crop output market partcpaton model (Eq. 2). 3 COMP f HH, LVSTK, MKTac, EXT, CRD, CRVP, MOI, ) (2) ( u COMP Where u COMP s an error term assumed to be ndependently and dentcally dstrbuted wth zero mean and constant varance. 3 We were not able to nclude crop prce as rght hand sde varable, because the dependent varable s the summaton of all annual crop values and t was dffcult to come up wth a representatve prce at household level. 6

8 Market orentaton decson can be endogenous varable 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 the physcal and natural crop producton factors to test for possble endogenety of MOI n the model for crop output market partcpaton. An F-test confrmed that these varables are sgnfcant correlates wth MOI but not wth COMP, once we control for value of crop producton. 4.2 Methods Data sources 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 fragmentaton, market orentaton, and crop output market partcpaton n annual crops were computed usng the household, plot and communty level data. Below, we brefly present the computaton of these ndces. Land fragmentaton: Land fragmentaton can be measured ether n sngle dmenson or n 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. 3). J 2 aj j 1 2 A SI 1, 0 SI 1 (3) 7

9 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 4. 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. Marketablty of annual crops was computed at the dstrct level snce dstrcts are the closest representatves of the farmng systems ncluded n the study. Hence, based on the proporton of total amount sold to total producton at dstrct level, a crop specfc marketablty ndex ( ) s computed for each crop produced as follows (Eq. 4): k N S k 1 k N ; Qk S k and 0 k 1 (4) Q Where 1 k 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 dstrct. k takes a value between 0 and 1, nclusve. Crops manly produced for markets usually have k values closer to 1. Once the crop specfc marketablty ndex s computed, household s market orentaton ndex n land allocaton (MOI ) s computed from the land allocaton pattern 4 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. 8

10 of the household weghted by the marketablty ndex of each crop ( ) derved from Eq. 4 as follows (Eq. 5). k MOI K k k 1 T L L k T ; L 0 and 0 MOI 1 (5) 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. 6): COMP K k 1 K k 1 P P k k S Q k k (6) 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 Econometrc approach The dependent varables analyzed n ths paper are market orentaton and crop output 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 the 9

11 dependent varable s contnuous. For household partcpaton n crop output market as seller we use Tobt model, snce ths varable s lower censored at zero. Summary of descrptve statstcs of varables used n the regresson models are gven n Table 1. All coeffcents and standard errors are adjusted for samplng weghts, clusterng, and stratfcaton usng the SVY command (STATACorp, 2008). Market orentaton can potentally be endogenous varable n the model for crop output market partcpaton. Snce standard Tobt model s more effcent than IV Tobt when the explanatory varables are exogenous (Wooldrdge, 2003), we frst tested for endogenety of MOI n the COMP model. We use the physcal and natural producton factors as nstruments, snce we do not expect these varables to affect market partcpaton once we control for value of crop producton. The Wald test faled to provde suffcent nformaton to reject the null hypothess of exogenety (see appendx 1 for the IV test of endogenety). Hgh mutlcollnearty among the dependent varables nflates standard errors and may render mportant determnants nsgnfcant. We checked for multcollearty and found no evdence of serous multcololnearty problem as all varance nflaton factors were below Hypotheses In settng our hypotheses, our man nterests are n analyzng the determnants of households market orentaton and crop output market partcpaton, and n testng whether market orentaton translates nto hgher crop output market partcpaton. We present our key hypotheses about the effect of explanatory varables below. Household characterstcs 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 consumpton requrements and may render households more rsk averse. Hence, 10

12 controllng for labor supply, larger households are expected to have lower market orentaton and market partcpaton. Household endowment of crop producton factors 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 (va hgher outputs) (von Braun and Immk, 1994). Hence, household endowments of labor, land, oxen and farm equpment are expected to be postvely assocated wth market orentaton. Ownershp of lvestock The effect of ownershp of lvestock (other than oxen) on market orentaton and market partcpaton s ambguous. It could be that ownershp of lvestock s negatvely assocated wth crop output market orentaton and market partcpaton by offerng alternatve cash ncome sources. On the other hand, cash ncome obtaned from lvestock can be used to acqure crop producton resources. Market access 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; Barrett, 2007; Pender and Alemu, 2007; Alene et al., 2008). Nearness to markets and roads, and ownershp of transport equne are expected to reduce marketng costs, thus encourage market orentaton and market partcpaton. Insttutonal Servces Agrcultural servces (extenson, credt) are expected to enhance farmer sklls and knowledge, lnk farmers wth modern technology and markets, and ease lqudty and nput supply constrants (Lerman, 2004), thus are expected to nduce market orentaton and market partcpaton. 11

13 Ranfall and alttude Ranfall may ncrease farm productvty, thus encouragng market orentaton by mprovng proftablty, thereby favorng market orentaton and 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. Hence, we expect alttude to be postvely assocated wth market orentaton and market partcpaton. 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. Hence, we expect that market orentaton wll be postvely assocated wth household partcpaton n crop output market as seller. Land fragmentaton Household level land fragmentaton s defned as the practce of operatng a number of spatally separated plots (McPherson, 1982). Land fragmentaton has advantages and dsadvantages. The most frequently cted advantages of land fragmentaton s the ablty of farmers to dsperse producton rsk by growng varety of crops n dfferent agrcultural envronments related to sol, weather, pest and other producton condtons, and overcomng seasonal labor bottlenecks (Melmed-Sanjak, et al., 1998; Blarel, et al., 1992). The most wdely mentoned dsadvantages of land fragmentaton nclude hgher producton costs related to labor, transport, and operatonal costs (Smons, 1987). Hence, the effect of land fragmentaton on market orentaton and market partcpaton s ndetermnate. 12

14 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 29%, ndcatng moderate market orentaton of smallholders n the study area, whle the average crop output market partcpaton s 25%, also ndcatng moderate market partcpaton. 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. Lvestock owned excludng oxen and transport equne averages 4.25 TLU. A household on average operates about 1.33 ha, a result also qute close to the natonal average. Households own on average a par of oxen used for tracton. Annual crop producton per household was valued at Brr Almost 50% of household heads are lterate, a fgure whch has shown sgnfcant rse n recent years. The average populaton densty n the study area s about 347 persons/ km 2. Households n the study area are on average about 5 km away from nearest market center, and about 7 km away from nearest all weather road. The extenson servces reached out to almost half of the farm households, whle the credt servce extended credt to about 60%. 13

15 5.2 Results of econometrc analyss Market Orentaton Household sze, labor supply of household, ownershp of equne, nvolvement n extenson the prevous year, ranfall, and alttude, are sgnfcant correlates wth market orentaton, all wth expected sgns (Table 2). Household sze detracts from household market orentaton due to ts effect on ncreasng household domestc consumpton needs, as expected. 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. Ownershp of equnes encourages 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 productvty and thus proftablty), hgher alttude appears to detract from t. It may be that the hgher alttude areas of Ethopa are more subsstence orented due to hgher populaton pressure and hgher rsk due to land degradaton. Crop output market partcpaton Dstance to nearest market place, value of crop producton, and market orentaton of households are sgnfcant correlates wth household partcpaton n crop markets as seller, all wth expected sgns (Table 3). Of the sgnfcant varables, market orentaton has the hghest explanatory power, both statstcally and numercally. Households further away from market places have lower market partcpaton as expected. Households wth hgher crop value produced sell hgher proporton of ther produce, mplyng that buldng the capacty of households to produce surplus producton s crtcal to mprove market partcpaton n the Ethopan context, consstent wth several pror fndngs n other places (Omtt et al., 2009; Ros et al. 2008; Barrett, 2007). Market orentaton translates strongly nto market partcpaton ndcatng the strong need 14

16 to ntervene on mprovng household market orentaton at the producton level n order to promote commercal transformaton of subsstence agrculture. Comparsons between the determnants of market orentaton and household market partcpaton n crop output markets shows that producton related factors affect market partcpaton only through ther effect on market orentaton and crop producton, mplyng that analyss of commercal transformaton of households should also address determnants of market orentaton, and not be lmted to the analyss of market partcpaton only. The extenson servce, whle effectve n promotng market orentaton, faled to have sgnfcant effect on market partcpaton, ndcatng the weak component of marketng extenson n the extenson servce. 6. Conclusons and Implcatons Commercal transformaton of smallholder agrculture entals producton decsons based on market sgnals (market orentaton) and sgnfcant partcpaton n nput and output markets (market partcpaton). 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 n the study area s found to be moderate, wth an average market orentaton ndex of 29%. Only about 25% of the Brr 3874 annual crop value produce s sold. We fnd that the sgnfcant correlates wth market orentaton are factors related to household characterstcs, market access, techncal support by the extenson servce, and sol mosture. Consstent wth the fndngs of Heltberg and Tarp (2001), Lapar et al. (2003) and Edmeades (2006), on the negatve effect of household sze on market partcpaton, we fnd household sze to be negatvely correlated wth market orentaton. Ths result mples that nterventons amed at promotng famly plannng amongst farm communtes can contrbute to commercal transformaton of subsstence agrculture. Household labor supply s postvely assocated wth market orentaton, consstent wth the fndngs of Barrett (2007) on the postve assocaton between 15

17 household human captal and market partcpaton. Market transportaton cost consderatons are mportant deterrents from market orentaton of households, mplyng that mprovng market and transport nfrastructure can be mportant for commercal transformaton. The fact that market orentaton translates strongly nto market partcpaton mples that nterventons amed at promotng market orentaton of households at producton level s lkely to have sgnfcant effect on commercal transformaton of households. Moreover, mprovng market access and household capacty to produce surplus producton stand out as crtcal to mprove household partcpaton n output markets, consstent wth several fndngs n other places ((Omtt et al., 2009; Ros et al. 2008; Barrett, 2007). Avalablty of adequate sol mosture mproves market orentaton of households, perhaps due to ts effect on crop productvty, consstent wth the fndngs of Barrett (2007) on the postve assocaton between favourable agro-ecologcal factors and surplus producton for sale. Ths mples that mproved avalablty of sol mosture through varous means help farmers choose market orented crops. The development of smallscale rrgaton at household or communty level offers an opton to mprove sol mosture. The extenson servce n the study area appears effectve n promotng market orentaton, although t faled to have sgnfcant effect on market partcpaton. Agrcultural extenson servces are nstrumental n promotng mproved technologes, and mprovng farmer sklls. Agrcultural extenson servces are also expected to facltate market entry through facltaton of collectve marketng, farmer lnkages wth buyers and the supply of market nformaton. The nsgnfcant effect of extenson servce on market partcpaton mples that a successful commercal transformaton of small holder agrculture n Ethopa wll need the strengthenng of marketng extenson servce n the country. The key mplcaton of ths study s that polcy, technologcal, organzatonal and nsttutonal nterventons amed at promotng commercal transformaton of subsstence agrculture should follow two-pronged approach: mprovng market orentaton of smallholders at producton level, and facltaton of market entry and partcpaton of 16

18 households n output and nput markets. Focusng on ether may not be as effectve n achevng the transformaton. 17

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23 Table 1: Descrptve statstcs for varables used n econometrc analyss Varables N Mean Std. Dev. Mn Max Market orentaton ndex Crop output market partcpaton ndex Land fragmentaton ndex (Smpson ndex) Age of household head (year) Sex of household head (yes=1, no=0) Educaton of household head (lterate=1, llterate=0) Famly sze (no.) Other lvestock owned (TLU) Avalable famly labour (persons) Farmland sze owned (ha) Oxen owned (no.) Value of farm equpment (Brr) Ranfall (mm) Alttude (m above sea level) Dstance from settlement center to nearest market place (km) Dstance from settlement center to nearest all weather road (km) Equne owned (no.) Involvement n extenson program (2005/06) (yes=1, no=0) Access to credt (2005/06) (yes=1, no=0) Value of annual crop produced (Brr)

24 Table 2: Estmaton results for market orentaton ndex (MOI) (OLS) Explanatory Varables Coef. Std. Err. Household and household head characterstcs Age of household head (year) Sex of household head (yes=1, no=0) Educaton of household head (lterate=1, llterate=0) Famly sze (no.) *** Ownershp of lvestock Other lvestock owned (TLU) Ownershp of crop producton factors Avalable famly labour (persons) *** Farmland sze owned (ha) Oxen owned (no.) Value of farm equpment (Brr) Natural factors affectng crop producton Ranfall (mm) *** Alttude (m above sea level) *** Land fragmentaton ndex (Smpson ndex) Market access Dstance from settlement center to nearest market place (km) Dstance from settlement center to nearest all weather road (km) Equne owned (no.) *** Insttutonal servce Involvement n extenson program (2005/06) (yes=1, no=0) ** Access to credt (2005/06) (yes=1, no=0) Constant *** Number of strata 4 Number of observatons 168 Populaton sze Desgn df 164 F(17, 148) 4.59 Prob > F R-squared ***, **, and * are sgnfcant at 1%, 5%, and 10% sgnfcant levels, respectvely. 23

25 Table 3: Tobt estmaton results for crop output market partcpaton (COMP) Explanatory Varables Coef. Std. Err. Household and household head characterstcs Age of household head (year) Sex of household head (yes=1, no=0) Educaton of household head (lterate=1, llterate=0) Famly sze (no.) Ownershp of lvestock Other lvestock owned (TLU) Market access Dstance from settlement center to nearest market place (km) *** Dstance from settlement center to nearest all weather road (km) Equne owned (no.) Insttutonal servce Involvement n extenson program (2005/06) (yes=1, no=0) Access to credt (2005/06) (yes=1, no=0) Realzed nput and market orentaton Value of annual crop produced (Brr) *** Market orentaton ndex *** Constant Number of strata 4 Number of observatons 157 Populaton sze Desgn df 153 F(12, 142) 8.99 Prob > F ***, **, and * are sgnfcant at 1%, 5%, and 10% sgnfcance levels, respectvely. 24

26 Annex 1: IV Tobt estmaton results testng endogenety of MOI Frst-stage regresson Source SS df MS Number of obs = 157 F( 17, 139) = 5.31 Model Prob > F = Resdual R-squared = Adj R-squared = Total Root MSE = mo_w Coef. Std. Err. t P> t [95% Conf. Interval] labsuply landown oxen farmequptv ranfall alttude sndexf hhage hhsex lterate hhsze tluothlv dscnmpkm dscnawrkm equne hhepy dhhacrpy _cons Two-step tobt wth endogenous regressors Number of obs = 157 Wald ch2(11) = Prob > ch2 = Coef. Std. Err. z P> z [95% Conf. Interval] mo_w hhage hhsex lterate hhsze tluothlv dscnmpkm dscnawrkm equne hhepy dhhacrpy _cons Instrumented: mo_w Instruments: hhage hhsex lterate hhsze tluothlv dscnmpkm dscnawrkm equne hhepy dhhacrpy labsuply landown oxen farmequptv ranfall alttude sndexf Wald test of exogenety: ch2(1) = 0.69 Prob > ch2 = Obs. summary: 27 left-censored observatons at coc100o<=0 130 uncensored observatons 0 rght-censored observatons 25