The Impact of Market Structure on Agricultural Technology Transfer

An agribusiness focus has emerged in public discussions as way to enhance agricultural production in Indonesia and to improve sustainable income for farmers. The focus has led to increased attention on marketing. Marketing agricultural products via processing technologies can indeed address national objectives of rural poverty alleviation. REI-Indonesia observed that limited marketing alternatives are frequently mentioned by farmers as a significant constraint. In Indonesia, a significant amount of institutional support currently exists for the ideas presented in this paper. In particular, one should consider the multifaceted mission of agricultural development in Indonesia, which includes: (a) policies that encourage competition and, therefore, create welfare improvements; (b) the creation of new processing enterprises that increase competition; (c) the establishment of processing facilities that are owned and operated by farmer cooperatives; and (d) the utilization of government resources to assess processing technologies. Thus, the mission of agricultural development, as articulated by the Department of Agriculture, already encompasses in a broad way the specific agenda presented here. This paper provides the rationale behind a specific program that is directed toward mission goals. 1 Director of Agricultural Program Development REI-Indonesia The Impact of Market Structure on Agricultural INTRODUCTION An agribusiness focus has emerged in public discussions as way to enhance agricultural production in Indonesia and to improve sustainable income for farmers. Such a focus has motivated much research on farmer institutions and marketing. The agribusiness focus has led to increased attention on marketing, since marketing issues have a major impact on the incomes of agricultural households. In general, food processing of one sort or another has emerged as a possible marketing strategy that can improve agricultural household income. Indeed, processing agricultural produce creates added value, which, if captured by agricultural households, promises to raise living standards for a large segment of the rural population. Processing holds the additional benefit of potentially employing landless workers, who are isolated from any general improvements in agriculture. Thus, marketing agricultural products via processing technologies can indeed address national objectives of rural poverty alleviation. At the household level as well, marketing issues represent a major concern. Utilizing an approach that invited farmer participation in agricultural training and technology transfer, REIIndonesia observed that limited marketing alternatives are frequently mentioned by farmers as a significant constraint. Budianto and Zaini (2003) report results of a nationwide set of participatory rural appraisals among rice farmers that show that price issues are among the chief concerns for most of the participating farmers, earning the top ranking of all the mentioned issues. Price and profitability issues are prominent concerns among non-rice farmers, too. A thorough assessment of farmers’ complaints of low output price levels requires an analysis of the downstream marketing channels for a given agricultural product in a particular area. In West Java, a considerable amount of market power is wielded by retailers for a wide range of fresh produce commodities, including fruits and vegetables. In such markets, farmers typically receive only a third of the final marketed value (Kasryno, 2003). If the final product is marketed through a supermarket, the farmer’s share of marketed value drops to 20%. These observations raise the suspicion that downstream market channels are characterized by imperfect competition. Where imperfect competition exists in any stage of marketing, welfare losses will attenuate progress in agricultural development. As a preliminary response to farmers’ marketing concerns, this paper will focus attention on the theoretical issues of imperfect competition and its impact on agricultural technology transfer. An investigation of the way markets affect agricultural technology transfer will shed light on possible courses of action. In particular, the role of the regional AIAT offices can be enhanced by setting before them the task of improving competition in local agricultural markets. By utilizing AIAT the resources that are resident in the post-harvest and socio-economic departments, many market structure issues can be addressed. By successfully combating imperfect competition, strategies for agricultural technology transfer will be more fruitful. The rest of the paper is organized as follows. Section A will discuss the basic elements of a theory of imperfect competition and the way in which agricultural technology transfer is affected by 2 The fact that processors enjoy a generous spread between the price they pay for the agricultural good and the price they obtain for the processed good does not, in itself, imply imperfect competition. As risk averse processors bear price risk they must exact a premium to compensate for the uncertainty. For instance, Schroeter and Azzam (1991) show that the marketing margins of U.S. meatpackers included a significant component that was due to price uncertainty. Contracts that shift risk-bearing of agricultural prices from the farmer to the processor must include an expected profit for the processor that at least covers processing costs and price uncertainty.