Transaction costs and governance of value chains of organic pineapples from Uganda

Abstract

The organic sector is one of the fastest growing sectors globally. It provides an opportunity for developing countries to export high value products in the global market. One such opportunity for Uganda is the export of organic pineapples. Uganda has the tropical climate and fertile soils which favor pineapple production. The less use of inorganic chemicals in Uganda makes it relatively easy for farmers to convert to organic farming. Despite the advantages that favor Uganda to compete in the global organic pineapple market, export of organic pineapples to this market is very low. The export demand for organic pineapples from Uganda is estimated to be 5-10 times higher than the supply. The main objective of this study was to determine how transaction costs and the governance of the value chain of organic pineapple from Uganda influence the amount of organic pineapples sold to consumers in the global organic markets. Primary data was collected from organic pineapple farmers and exporters in Uganda. The study employed transaction costs theory and borrowed from contractual incomplete contract theory, and global value chain governance framework to characterize the organic pineapple value chain actors, examine the transaction costs experienced by farmers and exporters, determine the relationship between transaction costs and the governance forms, and determine the nature of contracts between farmers and exporters. Findings indicate that organic pineapple value chain in Uganda is private- sector-driven, with a few (ten) small scale export companies. There is almost equal participation of men and women who plant on small acreages and only certify plots where organic pineapples are planted. Only 45% of the organic pineapples produced by farmers is sold to the export and domestic organic markets. The phenology of organic pineapple brings about periods of peak and slump production, the alternative conventional markets bring about transaction costs which limit the amount of organic pineapples exported. Other sources of transaction costs are the perishability and perennial nature of organic pineapples, the specific high labor requirements, specificity of the processing plants, specificity in the organic markets and temporal nature of the transactions. Three forms of governances exist between farmers and organic exporters: the captive, modular and relational governance. The modular governance has the lowest transaction costs, and a high proportion of organic pineapples are sold in this governance. Involvement of farmers in contract formulation, building trust between exporters and farmers and high asset specificity increases the proportion of organic pineapple sold by farmers to organic exporters. Farmers obtained a value of USD 2010 per hectare per year from organic pineapple sales. The distribution of value depicts the “frowning” distribution, with more value going to mid-stream (exporters and importers) than to the upstream (farmers) and downstream actors (retailers in importing countries). There is quasi-involvement of the farmers in contract formulation, with the group leaders signing contracts on behalf of farmers. The less involvement of famers in writing contracts is a source of opportunism for both exporters and farmers to breach contracts. Female and educated farmers were more loyal to the contracts, while wealthier farmers and those with leadership roles in the communities were less loyal. Contracts between farmers and exporters were estimated to be 63% incomplete. The study found a positive relationship between trust, relational governance with contractual incompleteness but a negative relationship between contractual incompleteness with the captive governance and age of the farmer. Policy recommendations drawn from this study that could minimize transaction costs and thus increase the quantity of organic pineapples exported from Uganda include promotion of the modular governance through strengthening farmer producer groups, trust building between farmers and exporters and involving farmers in contract formulation, favorable legislations and investment environment to foster functional upgrading.