Why do agricultural value chains fail? Part V: Incentives to exploit

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logoWednesday, 24 May 2017

Introduction

Farming is better when it is done collectively. Collaboration might happen between farmers, traders and agricultural extension officers. The collaborations can be at different strength levels, for example in some farmer communities the relationship and the collaboration between the farmers and the agriculture extension officer is very weak, while in some communities the officer is always welcome to farmer households. All these relationships are supposed to help farmers to uplift their livelihoods.

Farmers who do collective cultivation can influence buyers and demand for a better price. They can help to eliminate supply shortages and control quality when cultivate together. However, collaborations and relationships among farmers, traders and agriculture extension officers sometimes leads to situations where farmers are being used as instruments for the betterment of the agriculture extension officer and the trader.

While farmers do get some benefits out of such cases, the major benefits are for the other party. Some of these situations are inevitable and being controlled by the particular characteristics of the value chain. However it is interesting to evaluate these cases from an economic point of view. Therefore the aim of the article is to look at some of the cases where collaboration and relationships among the actors of the value chain have put farmers at a disadvantage.

My references are based on the Good Agricultural Practices (GAP) value chain. Things I want to focus on are (1) agriculture extension officers becoming middlemen in the agricultural value chain, (2) agriculture extension officers becoming farmers (3) and agriculture extension officers controlling the farming decision.

Why farmers and other actors in the value chain engage in collaborative actions and relationships can be explained using the economic theory of “incentives”. In the examples discussed in this article the central question being asked is whether the incentives are being used to exploit the farmers and the value chain.

Agriculture extension officers becoming middlemen in the agricultural value chain

The role of the agricultural extension officer is simply to advice and guide farmers throughout their cultivation cycle so that they make a successful harvest and sale. In order to do this the extension officers are given a proper training and most of them are agricultural graduates or diploma holders. They are supposed to be spending lot of time in the field, visiting farmers advising and guiding them. They are supposed to be at their office on all Wednesdays and are free to travel to farm fields and meetings on other days.

Extension officers most of the time go beyond their limits and try to help farmers. They sometimes link farmers with the input suppliers such as seed, plants and fertiliser suppliers. They also try to link farmers with the buyers. In the export value chain that I am taking here the buyers are the vegetable collectors and exporters.

In the GAP value chain the extension officers most of the time try to link farmers with the vegetable collectors and exporters. In this situation, the incentives for the extension officer to help farmers are:

(1) Administrative incentives: Advising and guiding farmers is the occupational responsibility of the agriculture extension officer. Therefore he must fulfil his employment responsibilities in order to maintain the employed status. His performance evaluations are based on his collaborations with the farmers and the number of initiatives he has taken, for example training and awareness programs. Hence it is clear that administrative incentives motivate agricultural extension officers to keep close collaborations and relationships with farmers.

(2) Social incentives: Being an agricultural graduate one would expect the agriculture extension officer to have a genuine interest in agriculture, therefore the probability is high for him to establish collaborations and relationship with farmers to see the growth in the agriculture sector. At the same time as a socially-responsible person one would expect the agriculture extension officer to help the farmers to become better at cultivation so that they can at the end of the day come out of poverty.

(3) Reputational incentives: My experience in the field has clearly shown that agriculture extension officers are held in high regard by the farmers (most of the time). I have been to farmer meetings where farmers would refuse to begin the meeting unless the agriculture extension officer is there. For some young farmers older extension officers are a farther figure. All these elements define the character of the extension officer and would elevate his reputation among farmers and other stakeholders in the value chain. Therefore an agriculture extension officer would develop close collaborations and relationships with other stakeholders in the value chain to enhance his reputation.

In my argument an agricultural extension officer who works in a value chain with a standard job description has only the above incentives to work closely with farmers and other stakeholders of the value chain. However the particular value chain at discussion is different. The GAP value chain would require a closer collaboration and relationships with its stakeholders. In order to understand those, we need to be clear on the GAP value chain. The GAP value chain produces fruits and vegetables for the EU market. The production/cultivation process has to be closely monitored by the agriculture extension officer.

The agriculture extension officer monitors and approves every step of the cultivation. After an audit the agriculture extension officer’s officer would issue a “GAP certificate” so that the farmer can export his produce to the EU. There are intermediate certifications as well where farmers can obtain a temporary certificate to export from the quarantine office based on the agriculture extension officer’s recommendations. Whether it is the temporary certification or the full GAP certification, the agriculture extension officer holds the full discretion power to approve both. The exporter will receive the harvest from the farmer only if the certification is there.

Therefore this particular value chain would bring different incentives to the agriculture extension officer. And those are the (4) Economic incentives: The agriculture extension officer or the GAP officer holds the ability to bring in a farmer to the GAP value chain (basically by introducing the GAP concepts and then approving the farmer’s application). Then the GAP officer holds the ability to keep the farmer in the cultivation process, basically by advising farmer and monitoring his progress in adhering to GAP standards. Finally the agriculture extension officer holds the ability to make sure that farmer has a buyer.

The exporters work closely with the agriculture extension officer than with farmers. Most of the time the farmers do not have a clear idea who buys their produce. Rather the agriculture extension officer would contact the farmer and would introduce an exporter to the buyer. In most cases there is little room for the farmer to negotiate prices, rather the agriculture extension officer would directly convey the price information to the farmer.

There are instances where the agriculture extension officer would come to the field with the exporter and take the harvest away and later would bring the payments to the farmer on behalf of the exporter. These close relationships with the exporters and the farmers are based on the way that the GAP value chain is set up. The structure does not allow the agriculture extension officer to involve one time in the cultivation or the certification process, rather it happens every cultivation season. Therefore the situation presents many opportunities for the agriculture extension officer to become a middleman and become a rent seeker in the value chain in addition to the advisor role.

In order to remove the possibility of the agriculture extension officer becoming a middleman in the GAP value chain, the following actions are possible:

03(1) Make the certification process a one-time activity: The intermediate certification issues by the quarantine department is only valid for couple of weeks in a season. The GAP certificate is valid for more than one cultivation season based on the crop. Therefore the constant involvement of the agriculture extension officer is needed to approve the intermediate and GAP certificate to the farmer.

(2) Establish a traceability system to the individual farmer level: At the moment the exporter can recognise the produce by the agriculture extension officer level. Several farmers would send their produce to one exporter under the signature of a one agriculture extension officer. Therefore if the harvest is rejected, the exporter informs that to the agriculture extension officer first where he will identify the responsible farmer. Then the rejection information will be communicated to the farmer via the agriculture extension officer. This is not an efficient traceability system. If a proper traceability system is in place where the exporter can directly identify the particular farmer then the need for the agriculture extension officer to take the harvest to the exporter and then identify the farmer when produce is rejected is not there anymore. An efficient traceability system would eliminate the chances for an agriculture extension officer to become a middleman and extract rents.

(3) Disclose the exporter information to the farmer (may be though an online platform): In the beginning of the GAP value chain there were only a handful of farmers. Therefore exporters had to obtain farmer information from the agriculture extension officer to find harvest. This process did not change as the farmer list grew. Exporters stuck with their initial suppliers and contacted them directly. However when additional harvest is needed exporters relay on the agriculture extension officer hence they became the middleman. One would suggest to publish the farmer information on an online platform possibly in the website of the department of agriculture. This would not work since the lists with the Department of Agriculture are outdated and the latest lists and information is only with the relevant agriculture extension officers. Therefore the Department of Agriculture should first collect all the information on farmers and then publish then on the website. This information can also be shared with other stakeholders in the value chain like the “fruit and vegetable exporters association”. At the same time, farmers should also be given access to the information on exporters. It is surprising to see some of the farmers are do not have a clue where their exporters are, they do not have a contact number, address, contact person and not even an invoice.

Agriculture extension officers becoming farmers

Though the primary role of the agriculture extension officer is to advice and guide farmer on cultivation and sale, they are not prohibited from becoming farmers themselves. In fact most agricultural extension officers are farmers. This is justifiable since they have the necessary knowledge, access to training and awareness and sometimes the resources as well. However one might argue that this is a perfect situation for “conflict of interest” (a situation in which a person is in a position to derive personal benefit from actions or decisions made in their official capacity).

This is exactly what happens in the GAP value chain. GAP value chain is focused on EU hence attracts a higher price. For example 1 kg of bitter gourd would be around Rs. 60-100 in the local market (this can fluctuate, these are the current average prices). However 1 kg of the same cultivated under the GAP program would yield around Rs. 250-300 per 1 kg. Therefore there are enough economic incentives to adopt the GAP program when other necessary inputs are in place. Agriculture extension officers can use their official capacities to find input markets, obtain certifications and buyers.

There are, as mentioned above, several main benefits for an agricultural extension officer if he becomes a farmer in the GAP value chain:

(1) Access to inputs and other facilities: Agriculture extension officers are in better contacts with the seed companies therefore it is possible for them to get better quality seeds possibly at a lower price. Agriculture extension officers are responsible for suggesting seed sellers to farmers, therefore seed companies are in a position to favour the agriculture extension officer turned farmer.

The perfect example is the recent viral outbreak in the GAP value chain for bitter gourd. This outbreak affected all the cucurbits farmers in the country who are under the GAP program. Farmers claim that the seeds were of bad quality. The Department of Agriculture did testing but was not conclusive. The seed companies claim that the viral outbreak is a result of the soil and other climatological conditions of the country. At the end of the day many farmers lost their harvest repeatedly, and the only recommendation by the agriculture extension officers was not to buy seeds from the particular affected (farmers claim that seeds are affected and most agriculture extension officers are in agreement with them) seed lot.

Obviously farmers are not insured hence encountered enormous losses due to this viral outbreak. However agricultural extension officers who became farmers exhibit less economic damages since the seed companies compensated them (they got fertiliser for future cultivations as a compensation for the damages).

(2) Access to exporters: Agriculture extension officers are in constant contacts with the exporters. Therefore they have enough opportunity to build a better relationship with the exporters. Hence once the harvesting is done the agricultural extension officer has the capacity to sell what they produce without any difficulty. This will probably limit the chance of another farmer.

In addition, agriculture extension officers who become farmers are in a better position to get the payments in time from exporters. There are many farmers who are still waiting for their money from exporters and collectors. Once these farmers (who are agriculture extension officers as well) sell their produce to exporters, it leaves less room for a regular farmer and most of the time they have to accept a very low price.

An agriculture extension officer would become a farmer so that he could extract economic rents by doing so. Therefore his incentives for such actions are economic incentives: if there isn’t any rule stating that the agriculture extension officers can’t become farmers in the same value chain that they work on, then the GAP value chain is similar to an “open access resource”.

In such a metaphor, the agriculture extension officer is just another farmer who tries to profit from participating in a value chain. The difference is that he, in this case, is equipped with better relationships and better information and has the comparative advantage to extract the highest economic rents. In this situation it will be hard to control agriculture extension officers becoming farmers unless a condition is put in place preventing them becoming so. Or otherwise one would expect the agriculture extension officers to be fair in the game and not exploit the opportunities of farmers with their comparative advantage (here I am being too optimistic).

Agriculture extension officers controlling

farming decisions

In most cases farmers are capable of deciding what they want to cultivate, when to cultivate and how to cultivate. This is with many years of experiences and advices and guidance from agriculture extension officers. However, in any other value chain it is quite possible that the farming decisions are been taken by evaluating all possible information and advice. Farmers in other value chains might probably be using the advices of the agriculture extension officers but at the same time might be using their own decision-making power as well. One would argue why this is not possible in the GAP value chain. After all farmers are cultivating on their own lands and buying inputs using their own money. But as explained earlier, the structure of the GAP value chain prevents farmers from taking independent decisions on cultivations, rather they rely on the agriculture extension officer too much. I will explain this further.

As explained before agriculture extension officers are responsible for making sure that farmers adhere to GAP standards, recommending temporary quarantine certificate and the full GAP certificate and connecting farmers with the exporters. All these activities give discretion power to the agriculture extension officer to influence farmers to cultivate a particular crop.

For example the GAP program started with cucurbits but now been expanded to other crops. There are other export value chains that focus on Middle Eastern countries and Maldives (especially leafy vegetables, beans and gherkins). There are cases where farmers are been suggested to cultivate crops that are linked to these parallel export value chains rather than the GAP value chain when clearly the demand for GAP-related vegetables exists. One would argue that this does not bring any externalities since farmers will be anyway cultivating and getting money from other value chains as well. However the problem is that:

(1) GPA value chain attracts the highest market price compared to other value chains

(2) Department of Agriculture has invested money and human resources in building the GPA value from the scratch hence it will be a lost opportunity to use those resources for another value chain and

(3) The department has plans to expand the GPA program for more fruits and vegetables that are export-oriented and local-oriented as well.

There are cases where farmers have given up the GPA value chain altogether and shifted to other export value chains under the direct influence of the agriculture extension officers. In some cases the agriculture extension officer has not only influenced the farmers to adopt a different value chain but also has become the middleman/collector in the value chain. Again there isn’t a written rule that an agriculture extension officer can’t become a middleman/collector, however the issue is the problem of conflict of interest.

In order to address this issue one needs to understand the incentives behind the actions by the agriculture extension officer. The incentives for him here are economic incentives: As already mentioned, the extension officer controls major components of the GPA value chain including the most important component, the link between the farmer and the exporter. Therefore it presents enough opportunities for him to convince farmers to cultivate what would yield economic rents rather than to the farmers.

His advice to the farmer would be “cucurbits do not have a demand these days, therefore please cultivate something else”. This will be a genuine piece of advice for a farmer who is dependent on the agriculture extension officer to find an export market. What should happen is that a farmer be given enough information to decide on what he should cultivate rather than fully relying on the agriculture extension officer who has incentives to exploit economic rents.

If a farmer is deciding by himself after consulting the agriculture extension officers, exporters and his opportunity cost of production, then it will be a production decision based on the market information. This should be the ideal decision-making process.

(Dr. Chatura Rodrigo is an agriculture economist. He can be contacted through chatura_rodrigo@yahoo.com, and

94 77 986 7007).

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