Leveraging institutions for collective action to improve markets for smallholder producers in less-favored areas

Using survey data from the community, producer marketing groups (PMGs) and farm households in Kenya, this paper investigates the potential of rural institutions (farmer organizations, their rules and enforcement mechanisms) for remedying pervasive market imperfections and facilitate access to new technology in rural areas. Qualitative and quantitative analyses show that while the functioning of markets is constrained by high transaction costs and coordination failures, PMGs present new opportunities for small producers through vertical and horizontal coordination of production and grain marketing. They pay 20 to 25% higher prices than other buyers and facilitate the adoption of improved varieties that help increase marketable surplus. Their accumulated assets and traded volumes are influenced by participatory decision making, member contributions and initial start-up capital. While participation declines with farm size, the associated benefits depend on marketed amounts. Moreover, the time lag to payment for deliveries makes PMGs less attractive marketing channels for the poor. The success of such groups requires policy support, increased capital access, rural finance and market information.