Interlinked credit and farm intensification: evidence from Kenya

doi:10.1016/j.agecon.2004.09.008

Agricultural Economics

Volume 31, Issues 2–3, December 2004, Pages 209-218

https://doi.org/10.1016/j.agecon.2004.09.008 Get rights and content

Abstract

This paper addresses the potential for interlinked credit/input/output marketing arrangements for particular cash crops to promote food crop intensification. Using panel survey data from Kenya, we estimate a household fixed-effects model of fertiliser use per hectare of food crops, using an instrumental variables approach for addressing the endogeneity of participation in interlinked credit arrangements. Results indicate that households engaging in interlinked marketing programs for selected cash crops applied considerably greater fertiliser on other crops (primarily cereals) not directly purchased by the cash crop trading firm. These findings suggest that, in addition to the direct stimulus that interlinked cash crop marketing arrangements can have on small farmer incomes, these institutional arrangements may provide spill-over benefits for the productivity of farmers’ other activities such as food cropping.

Introduction

Meeting the challenge of raising rural incomes in Africa will require some form of transformation out of the semi-subsistence, low-input, low-productivity farming systems that currently characterise much of rural Africa. High-valued cash crops represent one potential avenue of crop intensification. Evidence indicates that, where agro-ecological and infrastructural conditions are favourable, smallholders can raise their agricultural productivity and incomes by engaging in commercialised crops with coordinated input, credit and output marketing systems (von Braun and Kennedy, 1994, Kelly et al., 1996, Dorward et al., 1998).

However, staple food crops continue to account for the bulk of area cultivated in most African countries, and increasing the productivity of these food crops remains a major development priority. Moreover, there has been longstanding concern over how cash crop promotion affects households’ food crop production. Concerns are often expressed that cash crops compete with food crops for scarce land and may jeopardize households’ ability to feed themselves, particularly when markets fail. However, there is some evidence that participation in cash crop schemes can promote access to crop inputs for credit-constrained farmers, and thus, provide ‘spill-over’ benefits to their food crops (Goetz, 1993, Govereh and Jayne, 2003). Thus, in addition to the direct effect of cash cropping on household incomes, there may be important indirect effects of cash cropping on the productivity of other household activities such as food cropping. These potential synergies between cash crops and food crops have been generally neglected in food crop research and extension programs, although they may have important implications for programs designed to promote smallholder food crop productivity growth.

This paper measures the potential synergies between interlinked cash cropping schemes and intensification of fertiliser use on food crops. Interlinked schemes are programs where farmers receive inputs on loan from traders and pay back the loan through sale of the crop at harvest. Credit, input supply and output sale are thus ‘interlinked’ in one transaction (Gangopadhyay and Sengupta, 1987, Hayami and Otsuka, 1993). Our analysis focuses on the interlinked crop marketing arrangements between small-scale farmers and the trading firms handling sugarcane, coffee and tea in Kenya.

Results are based on panel survey data from 1422 small-scale farm households in 1997 and 2000. We estimate a household fixed-effects model of fertiliser use per hectare of food crops, using an instrumental variables approach for addressing the endogeneity of participation in interlinked credit arrangements. Our analysis indicates that participation in interlinked cash crop schemes has enabled small farmers in Kenya to substantially increase the level of fertilizer on crops other than the one purchased by the cash crop firm, in addition to applying more fertilizer on the crop actually purchased by the cash crop firm. A better understanding of why and how these synergies occur can help in the design of policy strategies to intensify food crop production in Africa.

Section snippets

Research question

Our main interest in measuring the effects of participation in alternative cash cropping schemes on food crop productivity is to explore the potential for cash crop programs to serve as an indirect vehicle for the promotion of food crop productivity. Food crops account for the majority of area under cultivation in most African countries, and raising food crop productivity will be central to structural transformation and poverty alleviation (Johnston and Kilby, 1975). However, many small farmers

Data

Analysis is based on a two-year panel of rural household surveys in 1997 and 2000.¹ In September 1997, a total of 1540 households were randomly selected within the eight provinces of the country in which crop production is important, using a sampling frame derived from the Central Bureau of Statistics. In June 2000, 1422

Spill-over effects of interlinked credit on fertiliser use on other crops

A key feature of the more sustainable cash cropping schemes in Africa has been ‘interlocked transactions’, or the tying of credit (usually in-kind) to the delivery of product at harvest (Dorward et al., 1998). Provided that institutional arrangements are successfully designed to limit the incentives for farmers to default on their loans by ‘side-marketing’ their output to other buyers, marketing firms may find it possible to profitably extend credit, inputs and other services to support

Estimation strategies and variables

The main purpose of this paper is to measure the effects of interlinked credit on fertiliser use on other crops (non-ILC crops) that are not part of interlinked credit contracts.² The main problem of estimating the effects of interlinked credit is the selection problem at

Results

This section reports results of two models. We first present results from Eq. (3) explaining the factors associated with whether a household receives interlinked credit or not. We then present results from the reduced-form difference model showing the influence of participation in crop-specific interlinked credit arrangements on the intensity of fertiliser nutrient use on other crops.

Conclusions

This paper addresses the potential for interlinked credit/input/output marketing arrangements for cash crops to promote food crop productivity. Findings from Kenya suggest that, in addition to the stimulus that such institutional arrangements can have on household incomes directly through their production of the cash crop, interlinked input/credit/marketing arrangements may have spill-over benefits for the productivity of other household enterprises such as food cropping. Specifically, our

Acknowledgements

The authors gratefully acknowledge funding for this research from the Tegemeo Agricultural Monitoring and Policy Analysis II Project (TAMPA II), funded by USAID/Kenya, and from the Food Security III Cooperative Agreement between AID/Office of Economic Growth and Trade and the Department of Agricultural Economics at Michigan State University.

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Interlinked credit and farm intensification: evidence from Kenya

Abstract

Introduction

Section snippets

Research question

Data

Spill-over effects of interlinked credit on fertiliser use on other crops

Estimation strategies and variables

Results

Conclusions

Acknowledgements

Agric. Econ.

Food security policy reform in Mali and the Sahel

The relationship between credit and productivity in chinese agriculture: a microeconomic model of disequilibrium

Am. J. Agric. Econ.

Small Farmers, Moneylenders, and Trading Activity

Interlinked markets and the cash crop-food crop debate in land-abundant tropical agriculture

Econ. Dev. Cultural Change