Access to Dynamic Markets for Small Commercial Farmers: The Case of Potato Production in the Peruvian Andes

The purpose of this study is twofold. On one hand, the objective is to assess the impact of new and more complex contracting schemes, as opposed to traditional marketing channels, on small farmers’ welfare. On the other hand, the study explores which may be the critical factors that determine the small farmers’ participation in these institutional arrangements. In this context, two critical factors are stressed. The first one has to do with access to credit and the second one is the size of the agricultural plot. In order to examine the decision of farmers to access the dynamic markets, the paper follows the study of Lapar et al (2003). The paper also follows impact evaluation techniques to identify the differences in the performance of farmers with access to dynamic markets and those without access. As it can be seen, in all cases, the difference between farmers with access and those without access is positive. This implies that having access to dynamic markets has positive impacts on the welfare of farmers. The results show that the farmers linked to the dynamic markets gain two cents of a dollar more per kilogram of potato. Although, in average potato producers in the Sierra need about 7,500 US$ additional credit to access dynamic markets, the variance between producers is huge. Some farmers, for example, are extremely close to gaining access the market and just a small increase on the credit line would allow them to achieve that. On the other hand, an important group of small farmers —more than half of them — are much further away from accessing the market; about 25,000 soles (US$ 7,500). In this case the amount needed to access the market is almost three times higher than the average sales of a farmer selling to the traditional market. Moreover, 10% of the formers in the sample need over 15,150 US$ to ensure access to the market, which is the maximum credit line registered in the sample of farmers with access to dynamic markets. On the other hand the lack of scale of the producers is another major bottleneck. Our simulations showed that increase of their plot size to a minimum of five hectares (optimal size according to the industry) increases their sales to dynamic markets in 16%. However, the impact of new and more complex contracting schemes, as opposed to traditional marketing channels, could reduce significantly the access gap to dynamic markets by reducing transaction costs, increasing productivity, and increasing scale production through coordination of smallholders.