In order to address the question of what kind of marketing relations induce producers to invest more and/or target their production to specific markets, this study assesses small-scale potato growers' access to dynamic markets. This study defines dynamic markets as those capable of absorbing increasing quantities of farmers' produce, either because of the scale of the market, or because demand is rising rapidly. Using potato marketing in the most important region for this crop in Peru - the Mantaro Valley, which is located in Peru's central mountains - as a case study, the dynamic considered in this study are the processing (potato chip) market and the seed potato market; both are generally considered more profitable than the traditional potato market aimed for direct consumption. This study examines the features and conditions governing sales in the various markets where potato growers place their produce. We have employed two consecutive surveys of the same producers, one focusing on transactions and the other on the socio-economic attributes of individual producers. Quantitative results were supplemented by in-depth interviews with a variety of participants in the marketing chain, in order to better understand how these producers connect with different markets, and what contractual modalities and conditions enable them to creat solid, successful market arrangements. The research shows that the most complex marketing arrangements are the most profitable. However, these arrangements also involve greater transaction costs, since they take place in markets that demand higher quality product and more product differentiation, requirements that can only be met if growers invest more in the production process. It should be noted that institutional costs play a dominant role in these markets due to information asymmetries. The high transaction costs entailed are a barrier to access for producers with fewer resources, preventing them from entering these more dynamic and hence potentially more profitable markets. The study also explores the main bottlenecks that producers face in attempting to enter more complex markets, and examines the role that these barriers play in informing producers' choices and decisions regarding activity in given markets and investment. The study found that any isolated actions do not suffice to solve these problems; only a series of interventions (involving education and training, risk management, and organization) can increase the probability of access to these markets under favourable conditions for the growers in questions.
IPPG Discussion Paper Series Number Twelve, DFID, London, UK, 17 pp.
Transaction Costs and Institutional Arrangements in Potato Marketing by Small Producers in Rural Peru.