EFFECT OF TRANSACTION COSTS ON CHOICE OF MANGO MARKETING CHANNEL AND INCOME OF SMALL-SCALE FARMERS IN MAKUENI COUNTY, KENYA

ABSTRACT
Makueni County in Kenya is one of the leading producers of mango fruits. The County experiences surplus mango production that ends up being wasted or sold at throw away prices due to imperfect marketing. The marketing of fruits is liberalized giving rise to multiple channels. Given the freedom to select a channel, different transaction costs such as information cost, negotiation and contract enforcement have not been evaluated in relation to farmer‟s choice of marketing channel. This study evaluates what influences choice of a particular channel and the gain from trading in the channel in terms of revenue. Specifically, the study analyzed the effect of transaction costs on choice of mango marketing channel, mango revenues obtained in different marketing channels and the effect of marketing channels on farmers‟ income. A simple random sampling was used to select 277 households where primary data was collected using semi-structured questionnaire. Data was analyzed using descriptive statistic, multinomial Logit regression model (MNL), gross margin analysis (GMA) and Ordinary Least squares (OLS). MNL results indicated that extension visit, age, education, experience, extension, gender, trust level, search in market price, information cost, transport cost, negotiation time, group membership and market distance significantly influenced the choice of marketing channel. GMA results showed that there exist significant differences in the gross margins in all the channels as a result of variation in prices in the four channels and also the difference in transaction costs. Reducing transactions cost and improving information symmetry can be enhanced through improving social networking among the farmers. The study recommends that the stakeholders should re-evaluate the existing information dissemination pathway, and promote farmer awareness of the available technologies such as SMS services, radio, television and internet where they can access price information and formal markets for mangoes. The government should invest in rural infrastructure in order to reduce high transport cost incurred by the farmer due to bad roads accessed when transporting mango to the market. Policy implementers should promote gender awareness by empowering more women to engage in mango farming. In developing market linkages, policies in support of promoting formation of mango marketing group should be enhanced in order to promote knowledge dissemination, improve farmers bargaining power, reduce the transaction cost and increase the income of the farmers.

CHAPTER ONE 
INTRODUCTION 
1.1 Background information 
Access to new and better-paying markets for agricultural products is vital in enhancing and diversifying the livelihoods of poor subsistence or semi-subsistence farmers (Barrett, 2009). Assured markets have implication on producer decision with regards to choice of input as well as on the choice of marketing channel for the output. The type of marketing channel available not only has influence on producer choice of commodity but also determines relationship between processors and ultimate consumers. 

1.1.1 Horticulture sub -sector 
Kenya is a large horticultural producer in the world (Minot and Ngigi, 2004; HCDA, 2010). The sub-sector comprises vegetables, flowers, fruits, nuts, medicinal and aromatic plants (MAPS). Of the total value of horticultural produce, vegetables account for (44.6 %), fruits (29.6%), flowers (20.3%) while nuts, medicinal and aromatic plants account for the rest. The horticulture sector plays an important role in the socioeconomic welfare of Kenyans. The horticultural sector employs directly and indirectly about 4 million people and small scale farmers contribute over 60% of the production (HCDA, 2012). Most Kenyan horticultural farms are small units of less than two hectares (HCDA, 2010) with vegetables dominating followed by fruits and cut flowers. 

In 2012, fruits contributed KES 61.5 billion accounting for 22% of the domestic value of horticultural produce. The area under fruit was 167,000 hectare (ha) with a production of 

5.2 million tons. Although the area under fruits declined by 6% as compared to the previous year, the production and value increased by 46% and 1% respectively due to favourable weather. The main fruit categories grown in Kenya are the tropical and temperate fruits. The major fruit grown in order of importance are bananas (37.6%), mangoes (19.6%), pineapples (12.1%), avocado (9.8%), paw paw (5.4%), oranges (4.6%), water melon (4.2%) and passion fruit (3.7%) (HCDA, 2012). 

Mango production and marketing 
Mango (Mangifera indica) production has been on the increase due to enlarged demand for fruits for fresh market, processing, and health concerns. In the effort to develop a cash crop in the marginalized areas, there has been an upward trend in both production and expansion in 2012 registering 57,021 ha and 2.8 million Metric Ton (MT), especially in North Rift and Eastern region As a result, the value increased to 13 billion from 11.9 billion in 2011. This steady increase can be attributed to marketing systems with various government and private sector initiatives across the value chain, increase in mango juice and salad consumption. In terms of value, the leading counties in mango production were, Makueni (21%), Machakos (21%), Kilifi (15%) and Kwale (13%) (HCDA, 2012). 

As an export crop, mango earns the country foreign exchange while at the same time acts as a source of food and household income for resource poor farmers. There are about 32 mango varieties in Kenya grown in various parts of the country categorized as local and exotic. The latter are grafted on local mangoes and are grown for the export market. Most local varieties tend to have high fibre content, commonly referred to as “stringy”, and this characteristic makes them unpopular for fresh consumption. The local mango varieties are left to grow naturally without much crop husbandry. The local varieties are ngowe, dodo, boribo and batawi. The exotic varieties grown in Kenya include Apple, Kent, Keit, Tommy Atkins, Van Dyke, Haden, Sensation, Sabre, Sabine, Pafin, Maya, Kenston and Gesine (Griesbach, 2003). 

Approximately 98% of mangoes produced in Kenya are consumed locally or processed while the remaining 2% enter the export market in the Middle East and in some European countries (HCDA, 2012). Mangoes earned Kenya $70 million in 2010 in the domestic market, up by 25% per year from $23 million in 2005. Likewise, export earnings were $10.1 million, which was 25% higher than 2009. On average, Kenyans consume 12.7 kilogram of mangoes per capita per year giving a total estimated consumption of 474,608 metric tons in 2009. Currently, Kenya mango export earnings amount to roughly $10 million per year; a 31% annualized increase since 2008, when exports were valued at $5.9 million (MoA, 2012). 

Research on mango has been accorded a high priority under the horticulture program (KALRO, 2005; KALRO, 2008). The development policy spells out the need to accelerate the transformation of the sub-sector from subsistence to business and market-oriented agriculture. Thus, according to Salami et al. (2010) one way of empowering small scale farmers is through improving access to input and output markets in order to transform the agricultural sector from subsistence to commercial production. However, the existing constraints in post-harvest practices, disease/insect-pest management (KALRO, 2006) and inefficiencies in infrastructure and marketing systems have led to low profitability of small scale farmers (Minot and Ngigi, 2004). Poor organization of mango farmers reduces prosperity of their businesses thus, by organizing farmers there are opportunities for them to develop and gain financial resources which may lead to decreased rural poverty (IFAD, 2010). An increase in market participation in turn makes it easy for farmers to shift into commercial farming, in turn increasing economic growth (Jari and Fraser, 2009). 

Past research in Kenya concentrated on introduction of high yielding varieties (Gathambiri et al., 2006). Yet even with availability of high yielding varieties and absence or inefficient market structures, returns from mango farming will not be realised. Carlander and Lothigius (2011) suggested that the most suitable marketing strategy for the small scale farmers in Nyanza is to collaborate with each other and with different organizations. Collaborations bring many advantages for the farmers such as accessing financial resources, knowledge, information and larger markets, enhancing their bargaining power, and increased profits. Msabeni et al. (2010) indicated that the major challenges to mango value chain strengthening include weak or lack of organizational/institutional linkages and low capacities between and within the different stakeholders along the value chain. These, coupled with poor infrastructure, have significantly contributed to the poor performance of the mango industry. If these are not addressed from the ground level, the country‟s competitiveness will trail further beyond the current stage. 

Small scale mango marketing and transaction costs 
Most mangoes produced are consumed within the same production area or sold in local urban markets. Lack of local processing technologies to preserve it causes high wastage due to perishability nature of the fruit. A market exchange involves transactions costs which can be fixed or variable. These transaction costs are related to farmers produce, market produce, difficulty in enforcing contracts, reliability on middlemen, location in remote areas and inability to meet stringent food safety norms (Nkhori, 2004). Mango is a highly perishable commodity and due to its high frequency of exchange, transaction costs will always arise among the interaction of actors in the channels. Transaction costs are categorized into three groups namely information costs, negotiation/contract costs and monitoring/enforcement costs (Hobbs, 1996; Stanford et al., 1999; Adhikari and Lovett, 2006). Transaction cost approach offers another perspective to help understand the forces shaping channel structure (Klein et al., 1990). North (2000) stated that institutions that emerge to reduce transaction costs are crucial to the performance of economies. The role of the government is also crucial in specifying property rights and enforcing contracts both of which promote specialization and reduce the costs of market exchange. The inability of societies to develop effective, low-cost enforcement of contracts is an important source of stagnation and contemporary underdevelopment in the developing countries (North, 2000). In Kenya underdeveloped rural roads and other key physical infrastructure have led to high transport costs of marketed agricultural products as well as farm inputs, which reduce farmers‟ competitiveness (Salami et al., 2010). 

Mango marketing involves a number of actors as the fruit is transported from the farm to the final consumer. Farmers can market their fruit themselves or through alternative actors in the marketing channel. In Makueni, a farmer can market their mango by selling directly at the market, to brokers, local traders or through mango marketing groups. The area under mangoes in Makueni increased from 6,721 ha to 11,574 ha between 2011 and 2012 respectively. The value increased from KES 2,272 to 2,778 millions in 2011 and 2012 respectively. The quantity produced in 2011 was 60,396 tons and in 2012; 138,887 tons of mangoes were produced in the County (HCDA, 2012). Infrastructure factors such as type of road accessed by the farmers in transporting mangoes to the market determined whether the farmer will participate in the market directly or they will use middlemen. The condition of the road is also important as it will either increase or reduce the transport cost to the market. Small scale famer decision to participate in a particular channel is therefore influenced by the transaction cost incurred in the channel. Low transaction cost is an incentive for the farmer to increase production and obtain high income from the traded output.

For more Agricultural & Applied Economics Projects Click here
===================================================================
Item Type: Kenyan Postgraduate Material  |  Attribute: 68 pages  |  Chapters: 1-5
Format: MS Word  |  Price: KSh900  |  Delivery: Within 30Mins.
===================================================================

Share:

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.

Search for your topic here

See full list of Project Topics under your Department Here!

Featured Post

HOW TO WRITE A RESEARCH HYPOTHESIS

A hypothesis is a description of a pattern in nature or an explanation about some real-world phenomenon that can be tested through observ...

Popular Posts