Can local procurement for food aid foster market development? Evidence from indirect conditional contracting in Uganda

Smallholder farmers in low-income countries often operate in fragmented markets characterized by volatile prices, weak bargaining power, and limited incentives to invest in productivity and quality. Large institutional buyers procuring locally can reshape these conditions by creating structured demand and embedding sourcing requirements in contracts with intermediaries, potentially transmitting incentives upstream to farmers. This study evaluates a maize procurement policy introduced in 2021 by a major institutional buyer in Uganda that required its large trader-aggregator suppliers to source at least 20 percent of deliveries directly from smallholder farmers through “indirect conditional contracting.” Using survey data collected in 2024 from nearly 1,300 smallholder farmers and nearly 300 aggregators across six districts, we estimate effects on prices, technology adoption, quality upgrading, welfare, and resilience. Intent-to-treat (ITT) estimates show that residing in areas where the major buyer operates is associated with 5–6 percent higher farmgate prices on average, with instrumental variable (IV) estimates suggesting upper bound premiums of up to 45 percent. Farmers in the conditional contract group earn positive net returns and increase adoption of improved inputs and postharvest practices. Intermediary aggregators receive about 7 (ITT) to 30 (IV) percent lower selling prices but increase adoption of postharvest quality practices. Mediation analysis indicates that gains for farmers arise primarily through increased competition between intermediaries. However, downstream welfare outcomes remain inconclusive, with suggestive evidence that non-participating farmers in treatment areas may face lower prices due to market segmentation. Overall, our findings show that indirect conditional contracts can reshape value chain incentives by attracting intermediaries, increasing competition, and stimulating upstream investment, even as they generate uneven distributional effects.