ANALYSIS OF TRANSACTION COST AND TRANSACTOR CHARACTERISTIC EFFECT ON MARKET OUTLET CHOICE AND GROSS MARGINS AMONG IRISH POTATO FARMERS IN KINANGOP SUB-COUNTY, KENYA

Abstract

Irish potato ranks second after maize as an important food crop in Kenya. It has the potential to enhance food security and alleviate poverty among smallholder farmers. Irish potato market outlet choice is among the key decisions in every household since it determines the profits attained by the households. About, 90% of smallholder Irish potato farmers in Kinangop sub-county sell their produce to brokers at the farm gate which result in low (12%) gross margins. On the other hand, brokers sell the produce purchased from farmers to various market outlets earning up to 26-50% profit. Farmer’s profits are reduced by high transaction costs and transactor characteristics. This study therefore aimed at analyzing the transaction cost and transactor’s characteristic effect on market outlet choice and gross margins among smallholder Irish potato farmers in Kinangop sub-county, Nyandarua County. The study employed descriptive research design to collect cross-sectional data from a population of 14,000 smallholder Irish potato farmers. A sample of 241 smallholder Irish potato farmers were selected using a cluster sampling technique. Data on the transactor’s characteristics, transaction cost factors, market outlets, and gross margins was collected using a semi-structured questionnaire. A multivariate probit model determined the transaction cost and transactor’s characteristics effect on market outlet choice. Gross margin analysis and quantile regression models were employed to analyze the effects of transaction costs on gross margin. The results showed that majority (92.95%) of Irish potato farmers sold their produce to brokers, 4.56% sold to local market, 2.01 to urban and 1.66% to contracts. Study showed that Irish potato farmers incur an average of Ksh. 8265.14 per acre as transaction cost and information search (50%) contributed to the highest cost. From the multivariate probit results, Age, land size, market distance and phone access were significant (p<0.05) and positive on sale of potatoes through brokers. However, information access was significant (p<0.05) and negative on sale of Irish potato to brokers. Information access (p<0.05) was significant and positive on sale of potato in the local markets. However, land size, market distance, gender and extension service access were significant (p<0.05) and negative on sale of potatoes in the local market. The sale of potatoes in the urban market was significant (p<0.05) and positive for age, information and phone access. Contract markets were significant (P<0.05) and positive for land size, credit access and main occupation but significant (P<0.05) and negative for age, information and phone access. Indirect and direct input transportation cost, indirect market information cost direct market bargaining costs were significant (p<0.05) and negative on the likelihood of selecting brokers. Indirect market transport costs significantly (p<0.05) and positively influenced the likelihood of selling through the brokers. The likelihood of choosing the local market was significant (p<0.05) and positively influenced by direct input transport and direct market bargaining costs. At the first regression (25%) and median (50%) quantile; indirect input transportation, indirect market bargaining, indirect contract marketing, direct contract search, direct market bargaining and direct contract marketing costs positively and significantly (P<0.05) influenced gross margins. At 75% quantile indirect input transport, indirect market bargaining, direct market bargaining and indirect market information search costs significantly (p<0.05) and positively influenced farmers’ gross margins. Therefore, smallholder farmer’s characteristics and transaction costs can determine smallholder farmer’s market outlet decisions and profits. Therefore, the study recommends smallholder Irish potato farmers should be provided with adequate information and be encouraged to form active collective action groups to help in sharing information and collective marketing of Irish potato to minimize the transaction costs and maximize profits.