Transaction Costs in Agriculture: From the Planting Decision to Selling at the Wholesale Market: A Case-Study on the Feeder Area of the Dambulla Dedicated Economic Centre in Sri Lanka

Abstract

With the increasing concern with regards to reducing poverty in the world, lowering transaction costs within the value chain is one of the key elements to ensuring growth in agriculture which will in turn have a significant impact in reducing poverty. This paper presents the results of a study to identify the information-related transaction costs of selected small-holder farmers who sell their produce at Sri Lanka’s largest wholesale agriculture market. It then analyses the potential reduction of these costs if they were to use Information and Communication Technology (ICT) tools in obtaining such information.This study finds that information related costs form 70 percent of the total transaction costs, which is 15 percent of the total production cost, incurred by these farmers. Therefore, it is argued that simple mobile phones can reduce these costs significantly. Such information can help farmers not only in deciding where and at what price to sell their produce, but also in reducing the high search costs associated with locating outlets that has (subsidized) fertilizer available for distribution on a given day.Overall, it is postulated that benefits to farmers can become much greater if a phone-based ICT platform could tie the selling decision with that of the decision to grow a particular produce while incorporating information needs of the farmer throughout the value chain. It is believed that this a reasonable approach because the mobile phone is expected to reach 90 percent of the world’s population by 2010 (GSMA, 2006), including these farmers.