Improving the quality of agricultural products is often considered an important step in the process of structural transformation, moving farmers from subsistence farming to market-driven, commercial agriculture. However, disorganized supply chains with many layers of intermediaries often prevent the transmission of quality premiums to upstream farmers, which discourages farmers from upgrading quality. This is especially true when quality is unobserved at the farm gate.

READ ON: Digital Traceability and Quality Upgrading in Kenyan Dairy Value Chain

Certification as the Solution: Effective but Expensive

A growing body of literature finds that quality certification can reduce the market friction caused by asymmetric information and improve product quality. The cost to get certified, however, can be high and not financially feasible for smallholder farmers or even farmers’ cooperatives. Therefore, in markets where the producers are mainly smallholders and products are aggregated by intermediaries, downstream buyers typically certify the quality in bulk after aggregation. Although studies show that producers respond to quality incentives and improve product quality, when quality is only certified further downstream in the value chain, whether and how the quality incentives are transmitted to upstream producers remain open questions.

In my job market paper, I examine a new potential solution to enhance accountability and incentivize quality improvement in value chains: establishing a traceability system that enables precise rewards for farmers who deliver high-quality products, particularly when quality is difficult and costly to observe at the farm gate.

I establish digital traceability systems for Kenyan dairy cooperatives and introduce an innovative quality monitoring method, using Bayesian statistical models to infer individual milk quality from pooled samples and reduce testing costs. The model-predicted quality shows a high correlation with random milk tests among 940 farmers from two different counties. I reveal randomly selected farmers’ milk quality as determined either by the model or by random tests to both cooperatives and farmers. I find that cooperatives and farmers respond to both quality monitoring methods, and the milk quality improves at the endline. The digital traceability system outperforms conventional random testing in most metrics.  Additionally, farmers in both treatment groups who consistently provide high-quality milk receive higher credit limits from the cooperative and use more credit on animal feed at the endline.

Kenyan Dairy (Formal) Value Chain

As Figure 1 shows, in the Kenyan dairy (formal) value chain, farmers sell their milk to dairy cooperatives. Dairy cooperatives hire milk transporters to collect milk from farmers. Milk is not tested at this point due to the prohibitively high testing cost (both time and monetary), and thus, farmers are paid based solely on quantity. Transporters usually aggregate the milk from multiple farmers to fill larger milk cans, which are then transported to collection centers. The collection centers pour the milk together into cooling plants (usually containing 10 to 100 of these cans). Cooperatives then sell the aggregated milk to processors who either accept it with a premium price, accept it without a premium, or reject it based on their comprehensive milk testing results.

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https://farmerstrend.co.ke/wp-content/uploads/2024/12/Figure0-Top-of-Blog_1140x500-1024x449.webphttps://farmerstrend.co.ke/wp-content/uploads/2024/12/Figure0-Top-of-Blog_1140x500-150x150.webpFarmersTrend# TrendingDairy Value ChainImproving the quality of agricultural products is often considered an important step in the process of structural transformation, moving farmers from subsistence farming to market-driven, commercial agriculture. However, disorganized supply chains with many layers of intermediaries often prevent the transmission of quality premiums to upstream farmers, which discourages farmers...New Generation Culture in Agriculture