The Rise of Agribusinesses and its Distributional Consequences

Crops are often modelled as homogenous products that are exchanged in perfectly competitive markets. While this may be true of world commodity markets, smallholder farmers face high trade barriers in selling their crops at home and abroad. Selling to agribusinesses with better intermediation technologies can enable smallholder farmers to overcome these barriers. This has provided a rationale for policies encouraging agribusinesses. We document the reliance of farmers on intermediaries and find that farmers selling to agribusinesses differ systematically from others. We incorporate these stylised facts into a flexible theoretical framework to study the aggregate and distributional consequences of the rise of agribusinesses. The rise of agribusinesses brings productivity gains to farmers, but it also skews the distribution of buyers of farm produce towards larger firms with greater buyer power. Taking the theory to data, we quantify behind-the-border barriers to trade embedded in a national policy which encouraged agribusiness participation. We combine this with microdata on household-crop incomes and find that the policy led to a reduction in incomes of small farmers. Losses were concentrated among farmers who sold to agribusinesses and in villages with a comparative advantage in policy-affected crops. On average, their incomes fell by 6 per cent with no offsetting gains in non-farm channels of income. Profit margins of agribusinesses specialised in policy-affected crops rose, in line with the theoretical channel. The findings contribute to the academic and policy debate on the impacts of integration and market power on the size and distribution of the welfare gains from trade.