Investigating Interlinked Transactions and Relational Contract Farming in the Ghanaian Palm Oil Sector
In Ghana, the majority of oil palm fruit (measured in fresh fruit bunches a.k.a. FFB) is produced by low-productivity smallholder farmers and processed at small, inefficient artisanal mills that produce low quality crude palm oil, or CPO. An important barrier to the development of the modern processing sector is the phenomenon of “side-selling,” which is when a farmer reneges on a commitment to supply FFB to an industrial mill, in favor of processing at an artisanal mill and selling into local markets. I hypothesize that artisanal mills and the local market for palm oil exacerbate the problem of side-selling, by providing farmers with access to informal financial services. Specifically, farmers who process at artisanal mills can store the resulting CPO and sell it in the local market at a future date, which may serve as a (commitment) savings device, a form of insurance, or provide option value. In the proposed study I seek to deeply understand the financial services CPO inventory provides to farmers, and the financial, operational, and institutional (limited enforceability of contracts) constraints that currently prohibit more efficient supply chain organization. To do so, I am requesting funding from SEED to (1) conduct a survey of 300 smallholder palm oil farmers in the region of Juaben, in central-west Ghana, and (2) conduct 10 in-depth semi-structured interviews with the managers of an industrial mill in Juaben, and leaders of the mill’s cooperative-based outgrower scheme. Using the information gathered during this proposed field research, I will (3) develop innovative theoretical approaches to designing relational contracts between industrial mills and smallholders that can potentially overcome the problem of side-selling and coordinate complementary investments in processing capacity and smallholder productivity. By collecting detailed information about how farmers’ output supply decisions are related to the financial challenges and constraints they face I hope to contribute to the emerging literature on interlinked transactions in developing countries. Furthermore, applying these insights to the design of novel theoretical models, I hope to extend the frontier of research on the operational management of commodity firms (ex. processors), and the design of relational contracts between actors in agricultural supply chains.