Agricultural Networks in Emerging Markets: Planting, Pricing and Processing Policies

Abstract

We study the development of effective agricultural supply networks in emerging economies for better utilization of land and downstream processing resources for harvested goods. Using the cotton sector of Mozambique as a prototypical example, we study the decisions made by farmers, down-stream processors and government officials in agribusiness supply chains (agri-chains). The structure/con guration and management of the supply network, associated sourcing rights of downstream processors, government minimum price guarantees to farmers, and taxes on cross-region ‡flows affect the performance of these chains and are in the domain of our study. We develop a stylized model of an agricultural supply network that consists of two farmers, supported by two downstream processors (ginners), who make two types of fundamental decisions under yield uncertainty: how much land to allocate for planting before the start of the growing season, and, the pricing rules followed by downstream processors that purchase the harvest. We consider a variety of decision making structures, from centralization to complete decentralization, for our agrichains. The resulting analysis depends on the nature of decision-making and on the structure of yield uncertainty. Analytical results supported by numerical experiments, allow us to conclude that appropriately setting minimum price guarantees at intermediate levels, can lead to near first-best solutions independently of decision rights in agricultural networks. The analysis also suggests that some farmer co-operation in land allocation or regional integration of farmer-ginning assets, together with moderate minimum price guarantees, might be implementable pathways to achieve agri-chain efficiency in emerging economies.