Publications

Working Paper

Problem Definition: Large buyers of agricultural commodities (e.g., cocoa, coffee, hazelnuts) have spearheaded programs to improve smallholder farmers’ yields. However, some farmers, especially those not enrolled in such programs, are concerned that yield improvements could result in a decrease in crop prices and negatively affect their profits. The authors analyze the implications of such programs on market prices and smallholder farmers’ individual and aggregate well-being and identify farmer selection strategies into those programs that mitigate the potential conflict among those objectives.

Methodology/Results: The authors consider a Cournot competition model where farmers choose their planting areas under yield uncertainty. Farmers are differentiated in terms of their planting cost and yield. They analytically show that a) because yield-improvement programs push market prices down, they may decrease the profits of some farmers; b) the only possible farmer selection into the program that may not be harmful is to enroll all of them; c) selecting the lowest-cost farmers minimizes farmers’ individual economic losses, performs well in terms of their aggregate well-being, and either maximizes or minimizes the crop price reduction, depending on whether the yield-improvement program targets a decrease in yield variability or an increase in average yield. Calibrating our model using industry data, we find that farmers’ well-being is more sensitive than crop prices to farmer selection. Thus, the lowest-cost farmer selection performs well along the three objectives of crop price reduction, improvement in farmers’ aggregate well-being, and minimization of farmers’ individual losses.

Managerial Implications: Because this study formalizes smallholder farmers’ concerns about the potential downsides of yield-improvement programs, it can help policy-makers assess the various trade-offs involved and guide buyers in their farmer selection strategy.

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