Farmers' Access to Markets: The Case of Cotton in Pakistan

• Author: Akhter Ali,Awudu Abdulai,Dil Bahadur Rahut
• Published date: 01 June 2017
• DOI: http://doi.org/10.1111/asej.12116
• Date: 01 June 2017

Farmers’Access to Markets: The Case of Cotton

in Pakistan*

Akhter Ali, Awudu Abdulai and Dil Bahadur Rahut

Received 11 September 2014; accepted 19 October 2016

Using a cross-sectional primary dataset collected from a survey of 325 farmers in

the seven highest cotton-producing districts of Punjab Province of Pakistan, the

present paper examines cotton farmers’market participation decisions, and the

factors driving participation, as well as the impact of participation on net returns.

Tobit and censored least absolute deviation models were used to estimate the

participation of farmers in markets, and the Heckman two-stage approach and the

propensity score matching method were applied to analyze the impact of

participation on net returns, taking into account potential selection bias. The

empirical results revealed that households with more education, wealth, and better

transport facilities are more likely to participate in the markets. As the distance to

market increases, households prefer to sell at the farm gate rather than the market.

The results also indicated that households that sell their goods at the market obtain

higher net returns than those selling at the farm gate.

Keywords: Farm gate, impact assessment, market participation, transaction costs.

JEL classification codes: Q120, Q130, Q140.

doi: 10.1111/asej.12116

I Introduction

Efficient marketing plays a crucial role in economic development (Barrett &

Mutambatsere, 2005; Onumah et al., 2007), but the marketing systems in

developing countries face problems, such as high transaction costs, poor

infrastructure (physical and institutional), absence of market information and

insufficient markets (Jones, 1996). In Pakistan, the first steps towards liberalizing

export trade were taken in 1987 when exports were unlocked to the private sector

for the first time since 1973. Prior to 1983, external trade was monopolized by the

Cotton Export Corporation (CEC), a government-managed parastatal, which in

addition to its role as the sole exporter, was in charge of keeping a minimum

support price for suppliers of seed cotton (growers) and cotton lint (ginners).

*Ali (corresponding author): International Maize and Wheat Improvement Center (CIMMYT),

NARC, Park Road, Islamabad, Pakistan. Email: akhter.ali@cgiar.org. Abdulai, Department of Food

Economics and Food Policy, Christian-Albrechts Universitat zu Kiel, Germany. Rahut, Centro

Internacional de Mejoramiento de Maíz y Trigo, Carretera México-Veracruz Km. 45 El Batán,

Texcoco, México, C.P. 56237.

© 2017 East Asian Economic Association and John Wiley & Sons Australia, Ltd

Asian Economic Journal 2017, Vol.31 No. 2, 211–232 211

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However, the CEC never played a significant part in the procurement of seed

cotton as the support price tended to remain below the market price. Private

traders have always dominated this part of the marketing chain, acting as the main

link between the growers and ginning factories. The CEC has not purchased

cotton since 1993–1994 due to financial constraints. As a result, all cotton exports

moved to private sector companies and in February 1995, all residual duties and

restrictions on the export of cotton were removed (Lohano et al., 1998).

In Pakistan, a household’sfinancial condition plays a crucial role in

determining where cotton is sold: at the farm gate or in the market (Lohano

et al., 1998). Richer farmers can easily access credit from formal sources and need

not depend on informal sources of credit; hence, richer farmers do not face

liquidity constraints. The vast majority of cotton producers require credit during

the cotton season to endure the heavy input demands of the cotton crop and to

buy inputs from local traders (commission agents); in doing so, producers commit

to sell their cotton to the local trader/commission agent.

1

The existing formal

credit programs in the cotton-growing areas of Pakistan are, unfortunately, not

very effective as the procedure to borrow funds is lengthy; the markup rates are

extremely high and do not favor small farmers.

2

Landless farmers are

disadvantaged in terms of accessing credit facilities from formal sources, as they

cannot provide collateral.

3

Because of the procedural and institutional hurdles, poor farmers turn to

informal credit sources (i.e. local traders and commission agents), as they provide

ready credit.

4

These traders usually operate year-round, buying cotton in the

winter and wheat in the summer.

5

Many local traders provide credit and farm

inputs, usually interlocking the provision of credit with an assurance from the

grower that they will sell their output to the dealer (commission agent).

6

Commission agents and other traders are the primary source of infor mal credit

for small farmers in Pakistan (Lohano et al., 1998).

7

The availability of credit

plays a critical role in the decision to sell at market in Pakistan, and as the formal

sector has generally failed to meet farmers’demand, the informal sector fills the

gap, meeting 70–80 percent of credit demand (Lohano et al., 1998). The majority

1 The interlocking of input supply, credit and crop marketing is a common feature of marketing in

many developing countries in Asia (Smith et al. 1999).

2 In most cases only the wealthy and influential farmers are able to gain access to loans from formal

sources.

3 Because land is used as a medium of guarantee, the sharecropping or landless households gain

even less access to formal sector credit (Smith et al., 1999).

4 Traders frequently act as moneylenders and input suppliers as well as providing crop marketing

services (Smith et al., 1999).

5 The contracts between farmer and trader are informal and verbal in nature (Smith et al., 1999).

6 Another school of thought, drawing evidence particularlyfrom South Asia, sees the interlocking of

transactions as providing traders with a powerful means of extracting surplus from poor and vulnerable

peasants (Smith et al., 1999).

7 The observed interest rates are quite high and vary in the range of 40 to 80 percent per year.

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© 2017 East Asian Economic Association and John Wiley & Sons Australia, Ltd