Smallholder output market participation, channel choice and its impacts: empirical evidence from paddy markets in Uttar Pradesh, India

Abstract

Market access for smallholders is a key policy issue in developing economies. Smallholders face considerable challenges in accessing farm and allied output markets due to poor access to credit and output markets, high transaction costs, information asymmetry, high-quality requirements, low marketable surplus, and presence of interlocked markets. However, there is paucity of empirical research examining the potential factors that influence their participation in the output markets in India. Additionally, there is scanty information about the determinants of smallholders’ choice of marketing channels and associated impacts. This thesis examines smallholder output market linkages using a cross-sectional data of paddy smallholders in Uttar Pradesh. First, it explores the key factors influencing smallholders market participation and extent of participation. Second, it examines determinants of smallholder market channel choices. Channel choice assessment is done for the four paddy marketing channels viz. village traders, government agencies, processors and APMC licensed traders. Third, it investigates the impact of market channel choices on market price realization and paddy crop income. Simultaneous equations, multinomial logit and multinomial endogenous treatment effect models are used to conduct the analysis. Results indicate that smallholder socio-economic characteristics namely years of education, household size, farm size, access to off-farm income sources and transportation facilities, and institutional factors viz. access to institutional credit, road infrastructure and membership of farmer organizations along with market distance influence their market participation decision. The study also reveals that marketed surplus, lagged effect of market prices, credit access, educational level, family size and time taken to receive payment for produce are the key determinants of smallholder choice of market channels. Furthermore, the analysis indicates that choice of public agencies as marketing channel results in high price realization and high paddy net income whereas choice of processors and APMC licensed traders as marketing channels results in reduced paddy prices. Findings stress the need for formulating policies that focus on improving transportation and road infrastructure, extension services and promotes financial inclusion of resource poor smallholders. Institutional support in ensuring access to reliable and adequate market information and timely payment can facilitate smallholders’ inclusion in profitable marketing channels. Furthermore, policies aimed at promoting farmer producer organizations and strengthening public procurement system are recommended.