Can Cocoa Farmer Organizations Countervail Buyer Market Power?

Structural adjustment in less developed countries has often mandated removal of state-run marketing boards to enhance efficiency in the marketing chain and to raise farm income. Concerns have been mounting about the negative side effects of cocoa market liberalization, including replacement of the parastatal by imperfectly competitive marketing institutions and the loss of public goods (e.g. research and extension). It is believed that the link of the supply chain closest to the farmgate may be the least competitive, as farmers in remote areas lack good market information and encounter relatively few buying agents. These concerns, especially related to domestic market competitiveness, have prompted governments, foreign donors and NGOs to promote farmer organizations in an effort to protect farmers (Rabobank, 2000; Baffes, et. al., 2003). The objective of this study is to estimate the degree of market power that exists at the farmgate and determine the efficacy of existing farmer groups to countervail this market power. In the case of cocoa, widely dispersed farmers create a challenge for those who wish to secure supply for export. If the market post-liberalization were characterized by perfect competition then margins should vary across space by differences in transaction costs that are determined by infrastructure conditions, distance to port or buying center, fuel prices, technology, and other costs that are incurred during transport. If private agents who now interface directly with farmers have the ability to exert monopsony power, then margins will also contain rents that allow part of the efficiency gains to accrue to the private intermediaries, and these may vary according to institutional relationships. Cameroon provides an opportunity to examine whether cooperatives provide a competitive yardstick that serves to countervail the market power exerted by local buyers and large traders on farmers since after liberalization farmer organizations have remained active to varying degrees across the country. To examine these issues, price transmission models that estimate the effect institutional forces have on the marketing margins that exist between the internal market (buying center) price and the farmgate price are developed using primary data from a survey performed in 2004. Our price transmission models for various cocoa producing regions in Cameroon attempt to capture intervening policy, institutional factors (e.g. cooperatives as buyers) and transactions costs. Results show that price transmission and so market integration between the port or buying center and the farmgate dissipates as product passes downstream, with significant regional variation. Institutional arrangements have a significant effect on the prices received by farmers. Infrastructure and market distance variables do not significantly affect market outcomes due to the hub-and-spoke nature of procurement at the farmgate and, in some regions, the captive supply nature of doing business. Market information, once provided by the government, is asymmetric in favor of the buyer, resulting in significantly lowers prices being received by farmers. Access to accurate and timely information often comes from membership in a farmer group. In addition, itinerant buyers exert market power against farmers who often do not have another outlet for their product. This power is also rooted in the inability of farmers to measure product quality at the farmgate, previous arrangements for credit and the tendency of itinerant buyers to demand a discount based simply upon the lack of other willing buyers. Institutional innovations of antiquated supply chain links, fostered by farmer organizations, may also reduce transactions costs currently contributing to low farm income. Marketing cocoa via farmer groups does appear to countervail buyer power but the results are sensitive to the transparency of the internal governance and regional institutional structure. Premiums are found for transactions involving farmer organizations in the center region where coops are most active and successful, and depend on how fees collected by the cooperative are treated. Farmer groups receive additional premiums associated with their capacity to aggregate production and control quality allowing buyers to gain from associated scale economies and limit quality-related risk.