Trust and the Invisible Hand in Agriculture

The following is a guest post from Mark Brown, an agriculture value chains specialist with Engineers Without Borders Canada working in Ghana.  The post originally appeared on EWB’s blog, Untapped Markets.

Market Facilitation is about fostering new relationships between businesses in agriculture. In sub-Saharan Africa much of the business that takes place happens “informally”. Informal business is any business activity that it is not overseen by the government. These activities are not taxed or regulated. They are also not legally binding. As the businessplace in Africa becomes more productive, the flow of goods will increase and require a higher degree of predictability. Farmers need to know how many tonnes of produce their markets will consume before a given season begins; processors need to make sure that they have an appropriate supply of incoming product that will not overwhelm their storage or production capacity or undersupply their output markets. As businesses in agriculture forge new formal relationships, it is of paramount importance that they know that their business partners are committed to buy or sell increasingly predictable volumes. A memorandum of understanding (MOU) is the typical guarantee that businesses make with each other to ensure that they can know in advance where produce will flow. Since market facilitators are constantly linking up agricultural business actors and facilitating their agreements to increase production, they often find themselves facilitating the signing of MOUs. MOUs are useful, but they need to be used carefully, because at the end of the day, any business relationship is ultimately about trust.

An important attribute to MOUs is the fact that they are not forged in stone.  They are not always honoured. It can be extremely hazardous to a business relationship if MOUs are recklessly ignored. It is also hazardous if fears of the repercussions of default keep a business from sharing their challenges with their partners. Both of these pitfalls can happen if an MOU is introduced to a business relationship that lacks trust between the partners.

Lacking Trust, Ignoring Responsibilities and the realities of legal recourse

In one instance in my experience, a market facilitator helped an aggregator arrange for pre-financing of her outgrowers to help them boost their yields. It seemed like both sides were going to benefit immensely. The aggregator required a loan and it would be extremely easy to pay back the loan with the amount of increased yield that she was about to purchase. The farmers were going to have new interest free access to inputs  for their farms. The aggregator was not well acquainted with many of the new outgrowers who she pre-financed but they did sign an MOU with her. At harvest time many of the farmers “side-sold” to another buyer who was paying a higher price. The aggregator lost a lot of prefinanced money and had to delay payment for the product from the farmers who did supply her. In reality, the legal cost – both in actual legal fees as well as time lost from work – of taking several different farmers to court is debilitating to a business and proved to not be cost effective for her. The MOU was there, the farmers defaulted and it was not worth it for her to take legal action. In the next season, she will have to focus more on engaging outgrowers that she knows that she can trust.

Fearing Repercussions and Hiding Difficult Realities

In another example, a newly opened fruit factory contracted its outgrowers to supply fruits according to a schedule in higher volumes than the year before, their business was growing. The MOUs went out to the farmers for their specific volume and the season looked promising. What the factory had not accounted for was some logistical barriers in their production. When these came into effect, fruits started piling up and soon their storage facilities were overwhelmed. When this happened, the agreement had to be breached. The problem was, the factory was intimidated by what was going to happen if all of their outgrowers decided to take legal action against them through their legally binding MOU. Instead of informing the outgrowers and having them leave the fruits on the trees and encouraging them to seek alternative markets, they kept quiet. Trucks full of fruit began arriving at the factory and the factory workers began issuing bogus excuses why the fruits had to be rejected, citing poor fruit quality. Farmers were furious and with the fruits already harvested, it was not easy to find a ready market. Many of the farmers lost vast amounts of fruit and even more farmers lost their trust in the company. Only two farmers took legal action, but this was a case where honesty and a warning that the MOU had to be broken would have been more constructive. If there was more trust between the farmers and the factory, this probably would have happened.

MOUs vs. Trust

In the first case, dishonest business behavior went unpunished because legal costs were too high. In the second case, fear of legal action actually caused the dishonest business behavior. In both cases, there was a business actor that did not trust their business partner – they trusted an MOU. MOUs are useful for agreeing to transact predictable produce volumes. They are capable of specifying what an agreement is between two business partners that trust each other, but it is not capable of formulating the trust between two partners.

Post to Twitter

About Josh

"Josh Weinstein is a visionary. I read his blog every day." - Bono
This entry was posted in Agriculture, Development Economics. Bookmark the permalink.

2 Responses to Trust and the Invisible Hand in Agriculture

  1. Pingback: Trust and the Invisible Hand in Smallholder Agriculture – Develop … | agriculture college

  2. Pingback: What Do I Think of Agriculture Development? Pt. 1 | Develop Economies

Leave a Reply

Your email address will not be published. Required fields are marked *


*