Economic evaluation of marketing channels and the impact of transaction costs: a case study of green pigeon pea marketing in Makueni district, Kenya

Abstract

The agricultural sector dominates the economies of most countries in Sub-Saharan Africa by providing food, employment, income and foreign exchange. The liberalization of domestic markets and globalization have provided new opportunities and challenges, such as better prices, that could benefit poor smallholder farmers in developing countries. To take advantage of these new opportunities and challenges, smallholder farmers must be able to participate in productive activities in which they have a competitive advantage. Unfortunately, smallholder farmers face high transaction costs and uncertainties arising from inadequate input and product markets, market access barriers and cost of information and other market imperfections that restrict market access. The question then is how smallholder farmers can be integrated into high value markets through interventions that increase productivity and reduce transaction costs. The current study attempts to answer this question by using green pigeon pea as an example. The objective of the study was to assess the effects of transaction costs on the efficiency of green pigeon pea marketing channels. The study also explored opportunities to reduce transaction costs, so that farmers can take advantage of these i emerging and promising markets. The study used the Policy Analysis Matrix (PAM) approach to analyze the efficiencies of different marketing channels of green pigeon pea. Unlike the traditional PAM analysis, the current study incorporated transaction costs to adjust the social prices. Nominal Protection Coefficient (NPC), Domestic Resource Cost (DRC), and Private Cost Ratio (PCR) ratios were calculated to circumvent the problem that would anse due to dissimilar technologies that are employed by different intermediaries in different marketing channels. The results indicated that the export channel had the lowest DRC and PCR, while the farm level had the highest DRC and PCR. Inclusion of transaction cost increased the PCR and DRC, hence reducing the efficiency. Sensitivity analysis indicated that group marketing with well-laid contracts with exporters would improve the competitive advantage of farmers. The study concluded that the export market channel is both privately and socially most profitable. The study therefore recommends that the export channel should be promoted and that the farmers should be vertically integrated with this channel. Farmers should also be availed credit facilities to enable them produce the ICPL pigeon pea variety that meets the export demand specifications. Farmers should be encouraged to form marketing groups and be trained on the managements of these groups. Contract arrangements should also be made between farmers and exporters to facilitate smooth flow of market information and hence reduce transaction costs.