Intermediation in the Supply of Agricultural Products in Developing Economies

by Kris Johnson Ferreira, Joel Goh, and Ehsan Valavi

Overview — This paper develops insights into the structural drivers of farmer and supply chain profitability in emerging market supply chains, then studies the impact of an e-intermediary (i.e., a digitally-enabled new supply channel) on this profitability. Results provide a more balanced perspective on the value of e-intermediation compared to the generally positive view that is advanced by case studies.

Author Abstract

Problem Definition: Farmers face several challenges in agricultural supply chains in emerging economies that contribute to extreme levels of poverty. One common challenge is that farmers only have access to one channel, often an auction, in which to sell their crops. Recently, e-intermediaries have emerged as alternate, technology-driven posted-price channels. We aim to develop insights into the structural drivers of farmer and supply chain profitability in emerging markets and understand the impact of e-intermediaries.

Academic / Practical Relevance: In practice, much attention has been given to e-intermediaries, and they have often been touted as for-profit social enterprises that improve farmers' welfare. Yet, studies in the operations literature that systematically analyze the impact of e-intermediaries are lacking. Our work fills this gap and answers practical questions regarding the responsible operations of e-intermediaries.

Methodology: We develop an analytical model of a supply chain that allows us to study several key features of intermediated supply chains. We complement the model's insights with observations from a numerical study.

Results: In the absence of an e-intermediary, auctions cause farmers to either overproduce or underproduce compared to their ideal production levels in a vertically integrated chain. The presence of an e-intermediary with limited market share improves farmers' profits; however, if the e-intermediary grows too large, it negatively impacts both farmers' and supply chain profits. Finally, as the number of farmers increases, farmers' profits approach zero, irrespective of the e-intermediary's presence.

Managerial Implications: Our results provide a balanced perspective on the value of e-intermediation, compared to the generally positive views advanced by case studies. For-profit e-intermediaries that also aim to improve farmers' livelihoods cannot blindly operate as pure profit maximizers, assuming that market forces alone will ensure that farmers benefit. Even when e-intermediation benefits farmers, it is insufficient to mitigate the negative effects of supply fragmentation, suggesting that for farmers, market power is more important than market access.