The implications of utilizing market information and adopting agricultural advice for farmers in developing economies

Abstract

To alleviate poverty in developing countries, governments and non-governmental organizations disseminate two types of information: (i) agricultural advice to enable farmers to improve their operations (cost reduction, quality improvement, and process yield increase); and (ii) market information about future price/demand to enable farmers to make better production planning decisions. This information is usually disseminated free of charge. While farmers can use the market information to improve their production plans without incurring any (significant) cost, adopting agricultural advice to improve operations requires upfront investment, for example, equipment, fertilizers, pesticides, and higher quality seeds. In this study, we examine whether farmers should use market information to improve their production plans (or adopt agricultural advice to improve their operations) when they engage in Cournot competition under both uncertain market demand and uncertain process yield. Our analysis indicates that both farmers will use the market information to improve their profits in equilibrium. Hence, relative to the base case in which market information is not available, the provision of market information can improve the farmers' total welfare (i.e., total profit for both farmers). Moreover, when the underlying process yield is highly uncertain or when the products are highly heterogeneous, the provision of market information is welfare-maximizing in the sense that the maximum total welfare of farmers is attained when both farmers utilize market information in equilibrium. Furthermore, in equilibrium, whether a farmer adopts the agricultural advice depends on the size of the requisite upfront investment. More importantly, we show that agricultural advice is not always welfare improving unless the upfront investment is sufficiently low. This result implies that to improve farmers' welfare, governments should consider offering farmer subsidies.