Measuring smallholder competitiveness in the tomato value chain in Cambodia: A transaction costs perspective

Abstract

Smallholders in developing countries face many challenges in participating in high-value agri-food value chains. High transaction costs are an important constraint, but there is little in the value chain literature that quantifies these effects. While Cambodia has an agriculturally-based economy with a strong demand for vegetables, it relies on tomatoes imported from neighbouring countries, namely Vietnam and Thailand. Given that Cambodia has comparably favourable climatic conditions, an important research gap concerns why Cambodian smallholder farmers cannot competitively supply these markets. This study hypothesises that transaction costs are an important source of low competitiveness for Cambodian smallholders. There are three main objectives in this study: 1) to characterise the trade and marketing patterns of the tomato value chain in Cambodia; 2) to quantify the transaction costs that affect the competitiveness of tomato smallholders; and 3) to examine and quantify the role that alternative governance mechanisms could play in reducing transaction costs. This study uses a combination of value chain analysis (VCA) with the policy analysis matrix (PAM) to address transaction costs in value chains, adding value to both types of analysis. Data used for the computation and analysis were collected from focus groups, key informants, and available secondary sources. This research revealed interesting results contributing to the research gaps. There is a high level of transaction costs faced by tomato smallholders in Cambodia as a result of loose coordination in the domestic tomato value chain. The adapted PAM result indicates that profits at private prices (which include transactions costs) are substantially lower than optimal profits at social prices, with transactions costs reducing private profits by almost 60 percent. Computations of domestic resource costs (DRC) indicate that tomato production has a comparative advantage over imports, even in the baseline. However, a variety of market failures hurt the ability of smallholders to capitalise on this. Based on this result, farmers are encouraged to move to one of two alternative models which have a comparative advantage over the currently prevailing market-based governance structure. The first one is a structure where a sponsor provides advanced technology and collateral-free credit, and uses informal contracts in vertically coordinating both inputs and output transactions. The second structure relies on formal contracts with farmers as well as a vertical integration of input supply and targets a domestic niche market. Model results show that these two models can bring about higher profits for smallholders, lead firms and the sponsor.