Market Access and Agricultural Production: The Case of Banana Production in Uganda Promotor: prof. dr. A. Kuyvenhoven Hoogleraar Ontwikkelingseconomie Wageningen Universiteit Co-promotor: dr. C.P.J. Burger Universitair Hoofddocent, Leerstoelgroep Ontwikkelingseconomie Wageningen Universiteit Promotiecommissie: prof.dr. W.J.M. Heijman, Wageningen Universiteit prof. dr. ir. H. van Keulen, Wageningen Universiteit dr. A. van Tilburg, Wageningen Universiteit dr. M. Smale, International Food Policy Research Institute, (IFPRI) Washington, D.C., USA Dit onderzoek is uitgevoerd binnen de onderzoekschool Mansholt Graduate School of Social Sciences Market Access and Agricultural Production: The Case of Banana Production in Uganda Fredrick Bagamba Proefschrift ter verkrijging van de graad van doctor op gezag van de rector magnificus van Wageningen Universiteit, prof.dr. M.J. Kropff, in het openbaar te verdedigen op woensdag 14 maart 2007 des middags te 13.30 uur in de Aula Market Access and Agricultural Production: The Case of Banana Production in Uganda / Fredrick Bagamba, PhD Thesis, Wageningen University (2007) With summaries in English and Dutch ISBN 90-8504-633-5 Subject headings: Smallholder poor farmers, market access, bananas, productivity, efficiency, labour demand, labour supply, Uganda Abstract This study investigates the effects of factor and commodity markets on the development of the banana sub-sector in central and southwestern Uganda. The study analyses smallholder household response to production constraints (crop pests and diseases, soil constraints) and development of product markets and off-farm employment opportunities. The study was carried out in central region, Masaka and southwest, which have divergent production constraints and opportunities. Various analytical tools were employed in this study. Cost benefit analysis was used to assess the competitiveness of banana production versus other crop enterprises. The stochastic production frontier was used to analyze the technical and productive efficiency of banana farmers. Production functions were estimated for the important crops to analyze the allocative efficiency of farmers in each study region. Finally, labour supply and demand functions were estimated to determine the factors that influence labour allocation decisions and to assess the farmers’ response to changes in economic conditions. A multinomial logit model was fitted to identify factors that influence farmers’ labour supply decisions between farm and off-farm work. Results for the cost benefit analysis show that banana is the most profitable of all the crops grown, in terms of gross margin. However, imperfections in labour and food markets cause farmers in the central region to allocate more land and labour to the less profitable annual crops (sweet potatoes, maize and cassava) but are more satisfying in terms of household food requirements. High food prices and limitations in access to the off-farm labour market induce farmers to rely on own farm production for their household food needs. Results from the technical efficiency analysis show that banana farmers in Uganda are technically inefficient, and output can be increased by 30 in the southwest and 58% in the central region. Improved roads, formal education and access to credit are some of the factors that improve technical efficiency. Agricultural extension visits significantly increases banana productivity in the southwest. Results confirm that pest (banana weevil) and disease (Sigatoka) infestation contribute to the low banana production in the central region. Farm size is positively related to farm productivity. However, production is more efficient on smaller plots (decreasing returns to scale). The low productivity on small farms puts to question the sustainability of smallholder agriculture, given the imperfections in labour and food markets and limited access to purchased inputs. Analysis of the marginal products of labour shows that farmers are allocatively inefficient and production and consumption decisions are nonseparable. Findings from labour supply analysis show that farmers respond positively to changes in shadow wage rates and negatively to changes in shadow income. This implies that the farmers are responsive to economic incentives. Access to off-farm opportunities takes away the most productive labour from farm production. Thus improved road access and high wage rates are associated with lower farm labour productivity and lower labour supply. Education and road access have a positive effect on time allocated to off-farm activities while farm size is negatively related to work hours in off-farm activities. The study reveals that policies that promote income diversification into off-farm activities can contribute to sustained development in the rural sector. In particular, policies that reduce transaction costs are likely to improve productivity and efficiency in both the off-farm sector and farm sector. Investment in road infrastructure, education and financial institutions that are suited to smallholder production needs could help in alleviating the bottlenecks in the v labour, food and financial markets, and improve resource allocation between the farm and nonfarm sectors. Key words: Smallholder poor farmers, market access, bananas, productivity, efficiency, labour demand, labour supply, Uganda. vi Acknowledgements My desire to pursue PhD training was finally fulfilled with funding from the Rockefeller Foundation and a sandwich fellowship from Wageningen University. I am very grateful to Cliff Gold and Arnold van Huis for the role they played in my initial contact with the Wageningen University. I especially thank John Lynam for allowing me to obtain a study fellowship from the Rockefeller Foundation through the National Banana Research Programme (NBRP). While at Wageningen University, I benefited from INREF funding through the RESPONSE Program, which I highly appreciate. I give special thanks to the Head of NBRP, Wilberforce Tushemereirwe, for the encouragement, advice and for the financial support while in Uganda. I thank the Director of Kawanda Agricultural Research Institute (KARI), Matthias Magunda, for the good working environment at the Institute. I wish to express my profound gratitude to my excellent team of supervisors. I was greatly encouraged by the fatherly advice and consistent guidance of my promoter, Arie Kuyvenhoven, during the course of writing the thesis. My daily supervisor, Kees Burger, contributed a lot to the final shaping of the study. He provided constructive critiques and suggestions in data analysis and interpretation, and comments on the many drafts I gave him. He was always available to attend to my numerous questions despite a very busy schedule. I am thankful to Rued Ruben for his contribution in the initial stages of the study. I benefited a lot from his guidance and advice during the proposal writing. I thank him for his useful suggestions and comments during field data collection and his contribution in the analysis and interpretation of results of chapter 3. I had a cordial relationship with the staff at the Development Economics Group and benefited a lot from the discussions I had with them. Peter Roebeling, with whom I shared an office in my first year inspired me a lot and provided me with a friendly working office environment. He never complained about the many questions I asked him, concerning my coursework. I benefited a lot from the lectures of Henk Moll, Nico Heerink and Rob Schipper. I received comments on my first draft chapter from Marrit van den Berg and her suggestions helped a lot in shaping the draft into what is now Chapter 3 of the study. I also received comments from Aad van Tilburg on the earlier version of what is now Chapter 4. I acknowledge the help I received from Marijke D’Haese. I benefited a lot from the almost daily discussions I had with Feng Shuyi, Girmay Tesfay and Lawrence Mose. Ingrid Lefeber and Henny Hendrikx were always helpful when contacted and the working environment could not have been better. I am grateful to them. There are people I worked with in the course of my field work and later in writing. Special thanks go to Melinda Smale for enabling the collaboration between NBRP and IFPRI, which made the data collection process successful, and for commenting on my earlier work. Svetlana Edmeades contributed to the initial data collection and design of the data collection instruments. Mariana Rufino is acknowledged for providing the soils data used in Chapter 3. Enoch Kikulwe contributed a lot to the data collection and management. He later joined me at Wageningen and gave good company, together with Christopher Bukenya, Richard Mugambe and Dickson Malunda. David Mugerwa made our life easy during the fieldwork by driving long distances without getting tired. I have to thank the farmers for the valuable data availed to us during our many field visits. I am sincerely grateful to Philip Ragama and Dezi Ngambeki for commenting on my work. Finally, I am very grateful to my family for the enormous contribution, sacrifices and patience throughout the study, and especially during the times I was away from home. vii Special thanks go to my beloved wife Christine for the love and commitment she has provided me. I am thankful to our children Daisy and Denise for their patience and love. The support from friends and relatives, especially from Brazio Mugisha, Jackline Kekikomera and Siliver Nuwagira, is highly appreciated. viii Dedicated To My wife Christine And Children