Agriculture plays a critical role in emerging economies worldwide. Unfortunately, however, farmers in such regions remain trapped in poverty, due in large part to information asymmetry in agricultural supply chains. Governments and farming cooperatives are in urgent need of strategies to redress this imbalance and improve farmers’ welfare and profitability. Thanks to a landmark study by Ying-Ju Chen of HKUST and colleagues, policy makers in emerging markets now have unprecedented insights into the impact of government information provision on agricultural economics—and when this approach may do more harm than good.
In traditional agricultural supply chains, local producers are at a major disadvantage: they have little or no access to information on market trends or consumer demand. “Farmers seldom comprehend the tastes/preferences of the end market,” say the researchers. This lack of market knowledge prevents them from planting the most profitable crops, making it near-impossible for them to escape poverty. This is not the only information barrier that farmers face. “Downstream suppliers do not know the quality of agricultural produce before they order it,” the authors add, “making them hesitant to buy.”
To tackle these problems, governments in many emerging economies have initiated projects to disseminate market information to local farmers for free. Meanwhile, farmers—especially farming cooperatives—can assuage downstream suppliers’ concerns by signaling the quality of their products in a variety of ways. “Field visits, vivid videos, high-resolution pictures, and professional quality certifications are effective ways to communicate quality,” say the researchers.
Breaking new ground in research on agricultural economics, the authors asked how these two information channels interact. “We investigate how the government’s free provision of demand information can influence a farming cooperative’s incentives to provide quality certification and its overall profit,” they explain. Focusing on China, an emerging market, they examined a supply chain comprising a farming cooperative and a product distributor. “Farmers in Renshou, in China’s Sichuan Province, plant and sell a unique fruit, loquat, in the form of a farming cooperative, through the Jingdong electronic platform.” Their goal was to identify the cooperative’s optimal strategy for signaling the quality of its loquat while receiving free market information from the government.
Their results were complex and illuminating. “Developing a quality certification strategy does not necessarily benefit the farming cooperative,” the authors report. The overall impact of such a strategy depends on multiple factors: the cost of certification, the quality standard of certification, and the precision of the information provided by the government. Strikingly, the researchers also found that in some circumstances, free market information supplied by the government may harm rather than help farmers. “The farming cooperative could become worse off with the government’s free information provision,” they warn. “Although the intention is to help farmers better promote their agricultural products to the end market, the outcome may be undesirable.”
The authors conclude that “from the government’s perspective, whether to provide free demand information forecasting to its local farmers should be a carefully considered decision.” This study sounds an important warning to the designers of quality certification schemes and counsels governments to exercise caution when implementing policies to improve farmers’ welfare.