Modern technologies requiring external inputs only have a chance of adoption when smallholders produce for the market. However, with poorly developed markets and infrastructure, trying to produce for them can be highly risky and economically unattractive. Stifel and colleagues (2003), for instance, found that the incidence of poverty in rural Madagascar increases with remoteness, the yields of major staple crops fall considerably and the use of agricultural inputs declines as one moves farther from markets.
Nevertheless, when markets eventually develop, transport and transaction costs usually decline substantially, which make production for the market more attractive. The difficult and risky start-up phase of market development impedes the transition from subsistence- to market-oriented agriculture. Along similar lines, Omamo and Lynam (2002) argue that subsistence farmers are further constrained by their own learning and production routines.
Market reforms in Africa are seen to have been necessary, but they have not gone far enough to generate greater supply response and competitiveness in export markets (Kherallah et al., 2002). Market liberalization may have removed price distortions, but it did little to benefit most small-scale farmers, especially those living away from roads and markets. Indeed, high transaction costs and the limited development of private trade are forcing many small-scale producers back towards subsistence modes of farming. Without opportunities for export, successes in expanding production frequently result in large price drops because of inelastic domestic demand.
Africa currently imports 25 percent of its food grains. This offers scope for better integration of domestic and intraregional food-grain markets within Africa and expanded intra-African trade, which can place a floor on grain prices. However, such integration is currently constrained by poor regional infrastructure, institutions, market coordination and competition from low-cost and often subsidized imports from OECD countries. Recent research suggests that reducing marketing margins and increasing the productivity of the grains and livestock sectors, in tandem, would have a greater impact on income and food consumption growth in Africa than increased export growth in the traditional and nontraditional export sectors alone (Diao et al., 2003).
Growing competition in export and domestic markets also makes it imperative that African farmers meet more stringent demands for grading and food quality/safety standards and strive to differentiate their products from competitors. Several things are needed: (a) increasing attention to market development (e.g., strengthening institutions responsible for standards and quality control, enforcement of contracts, market information and product promotion); (b) strengthening market-support services (e.g., credit and other financial services, transport, refrigeration and storage); (c) improving rural infrastructure (especially roads, information and communications technology and telecommunications) and (d) reinforcing policymaker commitment to market reforms. Nongovernment organizations (NGOs), producer organizations and the private sector could play a greater role in facilitating the development of effective marketing institutions, particularly in remote areas. Price information systems developed using the Kenya Agricultural Commodity Exchange are innovative examples of best practice in this regard.
With more liberalized markets, farmers and consumers are now exposed to more volatile prices than before, and this is impacting on the vulnerability of the poor and on farmers' willingness to invest in new technology options. Some forms of market mediation - such as efficient and targeted input subsidies, safety net programs, subsidies for provision of environmental services provided by farmers where market failure leads to inferior societal outcomes and market-based risk management interventions (e.g., weather insurance and futures price contracts) - may still be needed. There are new institutional possibilities for these kinds of instruments today.
