Supermarkets and Michoacán Guava Farmers in Mexico

Julio A. Berdegué, Thomas Reardon,

Fernando Balsevich, Anabel Martínez, Rubén Medina, Marx Aguirre, and Flavia Echánove

Staff Paper 2006-16 April 2006

Department of Agricultural Economics Michigan State University East Lansing, Michigan 48824

Staff Paper

Supermarkets and Michoacán Guava Farmers in Mexico

JULIO A. BERDEGUÉ - Rimisp-Latin American Center for Rural Development, Santiago, Chile

THOMAS REARDON and FERNANDO BALSEVICH -Michigan State University, East Lansing, Michigan USA

ANABEL MARTÍNEZ - Colegio de Mexico RUBÉN MEDINA and MARX AGUIRRE - Secretariat of Agricultural Development,

State Government of Michoacán (SEDAGRO) FLAVIA ECHÁNOVE - National Autonomous University of Mexico (UNAM), Mexico City Summary. -- This paper analyzes the participation of small farmers in the fresh fruit and vegetable supply systems of supermarkets in Mexico, using the case of small-scale guava farmers in the state of Michoacán. Three findings emerge. (1) The most important determinant of access of these farmers to more modern markets is their territorial (spatial) context and the way in which those territories interact with different markets, followed by fixed capital assets. Farm size, education and participation in organizations are not significant determinants. (2) Farmers working in the more modern markets compared to those in the traditional markets, are labor-constrained and overuse chemical inputs to a lesser extent. (3) Farmers that have accessed the more modern market channels, have substantially higher net income per hectare. Policies and projects aimed at promoting the inclusion in more modern markets of small-scale farmers such as those producing guava in Michoacán, must act on the territorial dimension of the problem of inclusion/exclusion, and not restrict themselves to actions aimed at improving the supply chains or the capacities of the households or their farms and organizations. Key words – Mexico, horticulture, supermarkets, wholesale, rural development.

Acknowledgements - Per agreement among collaborators, this paper can be distributed in parallel under institutional covers by USAID, Rimisp, MSU, and SEDAGRO. We gratefully acknowledge: (a) the financial support of USAID/Mexico via a USDA contract with Michigan State University; (b) the encouragement and very active involvement in the study of the authorities and staff of SEDAGRO (the Secretariat for Agricultural Development of the Government of the State of Michoacán), and, in particular, the then Secretary Ing. Silvano Aureoles, and the Under-Secretary Lic. Mauricio Soberanes; (c) the active support and engagement of the leading guava small-scale farmers’ organizations of the state of Michoacán: PROGOMICH, FRUTMICH, GUYAMICH, GUCEMICH, Unidad Frutícola El Sabino and Unión de Guayaberos José María Morelos.

Copyright © 2006 by Julio A. Berdegué, Thomas Reardon, Fernando Balsevich, Anabel Martínez, Rubén Medina, Marx Aguirre, and Flavia Echánove. All rights reserved. Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies.

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SUPERMARKETS and MICHOACÁN GUAVA FARMERS in MEXICO

1. INTRODUCTION

In 2004 supermarkets in Mexico for the first time sold more food than did traditional

retailers, achieving a market-share of 57% (supermarkets and chain convenience stores

combined, with a 49% share for hypermarkets/supermarkets, and 8% for chain convenience

stores), up from 5% ten years ago (Acosta, 2005). In the five years leading to 2004,

supermarkets expanded their food sales by 144% (PECC, 2005), and the traditional retail

sector was displaced at 2% a year! Left behind are the traditional forms of food retail: central

markets (Centrales de Abasto), open-air fixed or mobile markets (tianguis), municipal

markets, and family-owned and operated neighborhood stores (tiendas de abarrotes), which,

however, continue to serve the poor and those living in remote areas (PECC, 2005;

Schwentesius and Gomez, 2002)1.

Concentration and multi-nationalization of food retail markets are nearly universal

correlates of the rise and spread of supermarkets in Latin America (Reardon and Berdegué,

2002), and Mexico is not an exception. The supermarket sector in Mexico is dominated by

only four chains whose sales account for 76% of the industry, or 43% of the food retail

market (PECC, 2005). The local subsidiary of Wal-Mart leads with about 41% of the industry

food sales (Euromonitor, 2004, cited by PECC, 2005). Since opening its first store 14 years

ago, Wal-Mart de México reached sales in 2005 of almost $ 16 billion (5% of its global

banner sales) through its 420 stores in close to 100 cities, of which 95 stores in 60 cities were

opened in 2005; on average, each Mexican citizen shops 7 times per year in a Wal-Mart

store2.

The supermarket market share of fresh fruits and vegetables (FFV), at around 28%

(Acosta 2005), is significantly lower than their share of total food retail, a trend observed in

3

many countries, both developed and developing (Reardon and Berdegué, 2002) – but steadily

taking share from the traditional sector. In 2000, traditional retailers sold FFV at a

substantially lower price than the supermarket (Schwentesius and Gomez, 2002), while at the

same time offering a broader spectrum of quality and ripeness, which allows them to tailor

their supply to the preferences of different groups of consumers. Four years later, evidence

emerged that the price gap is closing; Martínez (2005) cites preliminary evidence (from

2004) that for 7 of 10 key produce items in Mexico City, at least several of the leading chains

sold at or lower than the price of the traditional retailers.

Consumption of fresh fruits and vegetables in Mexico is growing by over 10% per

year among the low income social strata, and by more than 3% per year in the high income

households (Acosta, 2005), and the participation of the supermarket sector is growing at a

faster rate than that shown by traditional retailers. In addition, the smaller share of

supermarkets is dominated by a handful of very large firms, while the larger market share of

the traditional sector is dispersed among close to half a million very small stores; hence, due

to market concentration and economies of scales, supermarkets exert an influence along the

FFV supply chains which is far greater than their market share.

It has been shown elsewhere (Reardon and Berdegué, 2002; Berdegué et al., 2005;

Vorley et al., forthcoming) that the rise of supermarkets is correlated with disproportionate

opportunities for the larger producers or more capitalized small producers or both, and

typically exclusion from the dynamic food retail markets of the least-capitalized smaller

farmers, which of course are the majority of producers. Our hypothesis is thus that small-

scale and poor producers face significant difficulties in implementing the technological,

organizational, managerial and financial changes that are required to meet the grades and

standards and other contractual conditions of the supermarkets’ FFV procurement systems.

Widespread exclusion of the Mexican smallholder sector from the dominant and fastest-

4

growing food retail market, would have significant social, economic, political and even

international repercussions, in a country where about half the rural population is poor and

where literally tens of thousands of farmers each year leave their homes to become

undocumented migrants in the USA or to be underemployed in the informal economy of the

large Mexican cities.

This paper addresses the following questions: (1) What are the determinants of access

to the supermarket market as compared to the traditional market?; (2) What are the

technological, organizational, and managerial changes at the farm and farmers’ organization

levels that are concomitant to participation in the supermarket market, and what are their

financial implications?; and (3) What are the costs and benefits to farmers of these changes?

The paper proceeds as follows: Section 2 presents the data and methods. Section 3

presents findings, first with a summary of the main findings that are then substantiated by the

evidence introduced progressively in the rest of the paper, second with a basic description of

guava (Psidium guajava L.) production and producers in Michoacán and their marketing

systems; third with a description of guava supply chains leading from Michoacán to the

supermarkets; fourth with an analysis of different types of farmers according to the type of

supply chain in which they participate predominantly, and last with a presentation of the

results of our econometric analysis of determinants of access to more-modern-market

channels, output supply and input demand, and production relations, followed by an

evaluation of allocation and technical efficiency. Section 4 presents the conclusions and the

policy implications of our study.

2. DATA AND METHODS

The study analyzes the case of guava producers from the state of Michoacán

(population, 4 million). The state is located in the Central-Western part of Mexico, with its

5

capital city, Morelia, about 280 km northwest of Mexico City. Michoacán was selected as the

site of this study for the following reasons: (1) in the past decade, the agricultural sector in

Michoacán has grown at a rate substantially higher than the national average, led by a very

rapid expansion of fruits such as avocado, guava, strawberries, pears, peaches, lemon, and

grapefruit; (2) over 50% of the agricultural land is in the hands of small-scale producers

(ejidatarios), which include both market-oriented and subsistence farmers; (3) the state of

Michoacán has a decades-long tradition of small farmers’ organizations; (4) there is a strong

private sector in Michoacán of traders, agribusinesses, and agro-processors; (5) the state

government has put in place a vigorous, market-oriented policy of agricultural development,

with a strong bias in favor of small-scale farmers and their organizations. Hence, the

Michoacán agricultural sector, and its small farmers in particular, are in principle well poised

to participate in the supermarket revolution in Mexico.

Guava was selected because: (1) small growers produce a very high percentage of the

national harvest; (2) there are large variations in quality and productivity, which in principle

correlate with access to different markets; (3) the production areas are quite concentrated

geographically and this facilitates the study, and; (4) the Michoacán State government has

prioritized guava and guava small farmers in its support programs.

The data sources included: (1) a one-month (June-July 2005) very detailed rapid rural

appraisal in all the guava-producing municipalities of Michoacán, which included dozens of

interviews and meetings with members of numerous guava farmers’ organizations and ejidos

(rural communities that originated in the Agrarian Reform, but with independent, family-

owned and managed farms), large and small guava traders (retailers, wholesalers,

supermarket agents), officials from the municipal, state and national government agencies,

etc.; (2) a survey of 25 guava wholesalers and retailers in Mexico City, including

supermarkets and traditional retailers, by far the most important market of Michoacán

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producers; (3) a survey of several different types of retailers in traditional retail markets in

Mexico City; (4) a household and farm survey of a representative sample of the state’s guava

producers.

The sample for the household/farm survey was drawn from a sampling frame of

(nearly) all the guava producers in Michoacán, compiled during the rapid rural appraisal from

the lists of members or beneficiaries of the guava farmers’ organizations, the Local

Phytosanitary Boards (Juntas Locales de Sanidad Vegetal), the ejidos, and the government

projects and programs; several key informants agreed that it was highly unlikely that a guava

farmer did not belong to at least one of those organizations or projects, and, in fact, it was

usual that the same name appeared several times in the initial, pre-filtered list. A random

sample of 373 observations was drawn from the list of 3,337 guava farmers; the sample is

randomly distributed in the nine municipalities in which there is guava production in

Michoacán. The sampling error is of 5% with a probability of 95%. The survey was done by

six enumerators and two field supervisors between 23 August and 15 September 2005.

3. RESULTS

(a) Preview of key findings

In this paper we provide evidence that leads to the following main findings of our

research:

(1) The supply of guava from Michoacán to supermarkets – even to the largest

multinational chains- in Mexico in 2005 was heavily dependent on the complex, diffused

supply networks ultimately developed and governed by wholesalers in the traditional Central

Markets (Central de Abastos) of Mexico City and other large cities. This is not what we had

expected at the outset; extrapolating from recent findings in Nicaragua, Guatemala,

7

Honduras, and Costa Rica (Balsevich 2005; Balsevich et al., 2006; Hernandez et al, 2006.),

as well as from recent research on supermarkets, wholesalers, and producers of tomatoes (a

mass domestic market commodity also heavily exported) in Mexico (Cook and Reardon

2006). We had hypothesized that we would find again - in the Mexican guava sector -

heavily centralized supply chains, firmly and directly governed by supermarket firms through

their procurement officers. In our original hypothesis, these centralized chains would link the

Distribution Centers of the supermarkets, dedicated and specialized wholesalers, and

preferred suppliers (farmers), using clearly defined private grades and standards and quasi-

contractual arrangements as the institutional beacons to be dutifully followed by all the

agents in the chain (Reardon et al., 2005; Berdegué et al., 2005).

(2) As different branches or subsystems of the diffuse supply networks that we instead

found, one can find some that link the most powerful wholesalers in the Central Market of

Mexico City (and other major urban centers), and the farmers in the best guava production

areas, that is, those regions were there is an abundant supply of high quality fruit, and where

the access (road) conditions are favorable (or at least, not as bad); these relatively more

modern branches lead (although not exclusively or even primarily in terms of volume) to the

supermarkets and other dynamic retail markets. Other branches are served by the small,

traditional, very informal, largely local, and much hated intermediaries (called coyotes by

Mexican farmers); they source their guava from different areas, ones with less abundance of

good quality fruit, and with more difficult access; the fruit is then sold in local markets, in

street fairs and in small neighborhood stores, although much of it also reaches the Central

Markets of Mexico City and other major urban centers.

(3) These two subsystems are spatially segregated, since, as we will explain, the

former (more modern market channel) is dominant in the Eastern region of Michoacán, and

the latter (the traditional channel) rules the Central region of the state. Hence, there is a very

8

important territorial determinant of (modern) market access. We now hypothesize that under

the conditions found in guava in Michoacán in 2005, farm and farm household characteristics

(in terms of access to physical, financial, social, and human capitals) in a sense are ‘second

round’ determinants of market access.

(4) This territorial determination of market access in the case of guava in Michoacán

has resulted in one virtuous and in one vicious cycle, also spatially distributed, that reproduce

the co-existence of the two supply networks, driving the preferred regions and the farmers in

them closer and closer to the more dynamic markets, and those in the other areas more and

more away, in a kind of ‘spatially determined path dependency.’ This is consistent with Peter

Timmer’s (2004) prediction that the dynamics of diversification of consumer preferences,

plus the economies of scale of the supply systems of supermarkets, would lead to regional

specialization. This finding is also consistent with the theories of neo-economic geography

(e.g., Krugman, 1995)3. More developed and financially stronger buyers, serving modern

markets, buying fruit in the best regions, provide better incentives to farmers, who in turn do

more (and here is where the household- and farm-level determinants come in) to respond to

the grades and standards and other conditions characteristic of that supply chain. Less

developed, financially weaker buyers, serving traditional and declining markets, operating in

the less favorable regions, do not provide sufficient incentives to the farmers, who in turn

have less or no reason to enhance their yields, fruit quality, or productivity, since no matter

what, their efforts tend to go largely unrewarded.

The policy implications of these findings will be discussed at the end of the paper.

(b) Basics of guava producers and production in Michoacán

Guava production in Michoacán took off in 1997, after a very harsh winter in the

then-leading production areas in the state of Aguascalientes caused substantial damage to the

9

guava orchards and resulted in a sharp drop in production and in abnormally high prices.

According to Mexico’s Ministry of Agriculture statistics, in 1992 Michoacán was a distant

third in guava production in Mexico, with less than 9000 tons (about 5% of the total national

supply). Since then, the Michoacán guava acreage grew by an average 19% per year,

production by 31% per year, and yields by 9.4% per year. As a result, in 2001 Michoacán

became the leader in guava production with 39% of the supply (over 100,000 tons). Our

survey results allow us to estimate that in 2005 Michoacán produces slightly less than

160,000 tons, which is equivalent to 50-55% of the total national supply. Between 1998 and

2005, the number of guava farmers in Michoacán has increased by 38%. In short, since the

start of the guava expansion in 1997, the state of Michoacán has duplicated yields, increased

the area by two thirds, and tripled production. Guava makes a substantial contribution to

Michoacan’s rural economy also through the labor market, as the annual labor costs add up to

approximately $ 9 million (nearly a million laborer-days).

Within the state of Michoacán there are two distinct guava growing areas: the Central

zone, around the municipality of Taretan, and the Eastern zone, near the city of Zitácuaro,

that includes the municipalities of Benito Juárez, Jungapeo, Zitácuaro, Susupato, Tuzantla,

and Tuxpan. In the year 2005, 90% of the guava producers were in the Eastern zone, and

within it, 61% in the municipalities of Benito Juárez and Jungapeo.

The Central zone lagged behind the Eastern zone in the expansion of guava orchards,

by about 3-4 years. From the rapid rural appraisal it appears that a major reason behind the

delayed response in the Center region were the significant government social, price, credit,

and input subsidies directly linked to sugar cane production, the predominant crop in this

area. To this day and despite the fact that sugar cane is far from being a profitable crop, two

thirds of guava farmers in the Central zone still maintain a significant part of their land under

sugar cane, as this gives them direct access to social security and other social benefits. The

10

farmers in the East, dedicated as they were to maize and low-productivity cattle production,

as well as areas of earlier commercial small-scale horticulture, did not have this incentive to

hold back, and immediately responded to the positive price shock resulting from the 1997

frosts in Aguascalientes4. We will later show what a major difference this delay of 3-4 years

has made in terms of actual and potential market access, in the context of the very rapid speed

of the change processes driven by the expansion of supermarkets in Mexico.

Guava orchards have on average 2.3 hectares, and on average each farmer has 1.2

orchards (although some have up to 5 orchards). The orchards of each farmer are of different

age, as the new plantings have been financed in large part with the profits from previous

years. It is also observed that the several orchards, belonging to different family members, are

managed by one of them as a single production and business unit.

Each orchard is subdivided into several sections. This allows a system of orchard

management that revolutionized the guava supply in Mexico by allowing a more or less

constant production of fruit throughout the year, while in the past guava used to be a highly

seasonal product. This is done by staggering the pruning of the different sections of each

orchard. The length of the growing and the harvest cycles is also influenced by the average

temperature (as affected by altitude and other location attributes of the orchard). The

combination of several orchards in different places and of several sections in each orchard

pruned at different times, results in a farmer having fruit to sell up to 3 to 5 times throughout

the year; this may have been a factor that facilitated the establishment of more or less stable,

longer term relationships between producers, informal local brokers and intermediaries, and

wholesalers, which are a distinctive characteristic of the guava supply chains, as will be

discussed below in more detail.

Table 1 summarizes some characteristics of the producers. Of importance to our

discussion below are: the significantly greater experience in guava of the farmers in the East

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zone; the greater reliance of guava farmers in the Central region on family labor; the greater

dependency of the economically active household members in the Central region on guava

production as a source of employment. There are no differences in the very low levels of

schooling of guava farmers, the majority of which have less than complete primary

education.

Table 1 also shows that the average farm size is below 3 hectares, but that farms in the

East are somewhat larger than in the Central region; that guava orchards in the East are twice

as old as in the Central zone (leading to much higher average yields and better average

quality), and; that the orchards in the East are significantly closer to paved roads. On the

other hand, there are few differences between both regions in terms of the type of agrarian

regime (95% family-owned ejido farms). Basically all guava orchards are irrigated; water is

cheap and abundant and irrigation techniques (orchard flooding) are very inefficient, a factor

which guava experts identify as a major source of nematode (fought with highly toxic

chemicals) and fruit yield and quality problems. The abundance of cheap water for irrigation

is a major competitive advantage of Michoacán against the former leading area of

Aguascalientes, which depends on (expensive) deep wells.

A very important indicator of the profitability of guava production in Michoacán is

that between 20% and 30% of the land in our sample planted with guava, depending on the

region and the municipality, was actually bought and not inherited by their current owners.

Over 85% of the farmers in our sample declared being members of at least one local

organization, the ejido and the Local Phytosanitary Boards being the predominant ones.

Although there is a huge number of small farmers’ economic organizations in all the

municipalities and almost each guava farmer seems to belong to more than one, participants

in the Rapid Rural Appraisal agreed that with very rare exceptions, they are inactive since

they were set up as formalities to be able to fulfill the requirements of the different

12

government programs which discourage services to individuals and want to ‘promote’

collective action for production, market access and other such objectives.

Table 1 shows that the expansion of guava has been financed mainly through the

reinvestment of profits from previous crops (58% of households in the Central region, 36% in

the East), sale of cattle (23% and 31%), and remittances from migrants (about 20% of

households in both regions). Less than 12% of the households in each region have had access

to formal financial services, either from government or private sector sources, to finance their

guava orchards. This result confirms the limitations of rural financial services in Michoacán,

a fact that will come into perspective when we present evidence that shows that fixed capital

assets are one of the main determinants of access to the more developed and profitable guava

supply chains.

Table 1 shows that technical assistance and advice for guava farmers comes basically

from two sources: their neighbors and the distributors and salesmen of agricultural chemical

inputs. It is then no surprise to find that guava farmers - in particular those most isolated from

the more developed market channels - over-fertilize and over-spray their orchards. This major

gap in the provision of technical assistance services undermines the effectiveness of the

investment by the Federal and State governments of close to $ 2 million in 2004-2005 in

production and marketing development projects specifically aimed at Michoacán guava

farmers (about $ 256/guava farmer/year). The econometric analyses below will confirm that

guava farmers are over-using fertilizers and in particular chemical pesticides, and that this has

a major impact in the profitability of the crop, in particular for farmers working in the more

traditional markets.

Table 1 also shows the average guava orchard yields in each region, with the East

almost duplicating those of the Central zone. A comparison of same-age orchards confirms

that yields are lower in the Central region for all age categories. Constructing from our data

13

two hypothetical guava farms, one in the East and one in the Central zone, using the average

yields for each 1-year orchard age category from 0 to 20 years, one concludes that over a

two-decade period, a guava orchard in the East will produce about 370 tons of guava,

compared to only 109 tons of the ‘farm’ in the Central zone. While natural factors such as

temperature, rainfall of soil quality certainly play a role, there is a strong correlation in our

sample between average yields and variables such as farmer experience and the prevalent

technologies in use (particularly, greater use of fertilizers in the East), and these patterns

show a clear spatial distribution as shown above.

Table 1 also shows the percentage of each farm’s production under each fruit quality

category. Again, the Central regional is at a disadvantage. Of the slightly more than half of

the fruit in the Central zone that is sold in boxes graded by quality, only one fifth is of Extra

or Super Extra quality, the top two grades. In contrast, in the East 74% of the fruit is sold

graded, and of that 40% is of top quality. Selling the fruit packed in graded boxes is a clear

sign of market development, and an important step beyond selling it ungraded by boxed,

which in turn is better than selling the fruit before it is harvested. The reader should note that

in both the qualitative and the quantitative surveys, we recorded the quality of fruit according

to the farmers’ own classification and perception.

Why would farmers in the Central region sell their fruit ungraded? Because on

average they get paid the same $0.20 per kilo of the best (Super Extra) or the worst fruit

(Seconds), while in the East there is a 266% price differential between the extreme qualities,

and analogous differences between the intermediate grades. And what explains these stunning

differences in the way farmers get paid in one or another region? The basic answer to these

questions is that in the Central zone, half of the harvest is bought by the local intermediaries

(coyotes), and 40% is sold in the local (Michoacán) market. In contrast, in the prime

municipalities of the East up to 78% of the fruit is bought by wholesalers, and only 13% is

14

sold in the local market while 57% goes to Mexico City. On average, across all qualities of

fruit sold graded, the price paid to the farmer when the fruit is sold in Mexico City is 22%

higher than the price she gets is the fruit goes to the local market.

(c ) The guava supply chains

In November-December 2005 we interviewed 25 wholesalers in the Central Market

(Central de Abasto, CEDA-CM) of Mexico City, including 12 working directly for different

supermarket chains, others supplying the supermarket suppliers, and some supplying

traditional retail systems. CEDA-CM occupies 328 hectares in which 3700 wholesale and

retail stores operate, 51% of them buying and selling each day 13,000 tons of fresh fruits and

vegetables (FICEDA, 2005). Echánove (2002) estimated that 12% of Mexico’s fresh fruits

and vegetables are sold in this market. CEDA-CM supplies 80% of the perishable products of

Mexico City, one of the largest urban areas in the world, and 15% of the neighboring states.

According to the management of CEDA-CM, around 100 fresh fruit and vegetable

wholesalers (5% of the total) are direct suppliers of supermarket chains. This is consistent

with the findings of Torres (2003). Of the 120 guava wholesalers in CEDA-CM, based on our

interviews we estimate that no more than 12 are regular, direct suppliers of supermarkets, and

even they (with the exception of one) sell to a variety of clients, including other wholesalers

and traditional and modern retailers different than supermarkets. It is safe to say that

supermarkets, large and small, domestic and multinational, source no less than 90% of their

guava from CEDA-CM; there are no reliable statistics on the absolute volume or value of this

transaction.

A few medium-small supermarket chains with stores mainly or solely outside Mexico

City (HEB, San Francisco de Asís, Arteli and Futurama), keep offices and warehouses in

CEDA-CM, to receive the produce sourced from wholesalers in the same market. From there,

15

these chains send the produce to their Distribution Centers and/or stores in the different cities

where they are present.5 Arteli, with 21 stores in the states of Tamaulipas and San Luis

Potosí, in the North of Mexico, does not source its guava from the nearby large production

region of Calvillo, Aguascalientes (second most important after Michoacán); the small

amounts of guava required on a daily basis do not justify sending a truck to the production

area, and is more efficient to receive a truck from far-away CEDA-CM loaded with a number

of different products, a move that according to the procurement office of that chain results in

lower average transport costs. The San Francisco de Asís chain, with 40 stores in the

Southeastern states of Yucatán, Campeche and Quintana Roo, used to source guava from

CEDA-CM until 2-3 years ago. Now it sources from production areas closer to their stores, a

move taken to reduce transportation costs. Hence, it can be seen that transportation costs and

economies of scales not only of an individual product but of a basket of similar products, are

important variables in the decision to source from CEDA-CM or directly from the production

regions.

The large chains with stores in Mexico City, such as Wal-mart, Gigante, Comercial

Mexicana, Chedraui, or Grupo Cifra, also source almost all their guava from CEDA-CM.

According to the wholesalers who are direct guava suppliers of these major chains, some of

these chains – who require relatively large quantities of guava consistently through the year -

have tried to source directly from producers, but have concluded that working through

CEDA-CM they reduce cost of the constant selection and repackaging that is required

because of the very perishable nature of guava (it lasts in adequate conditions a maximum of

1 or 2 days) and the inconsistent grading done at the farm level, which results in the need to

constantly reselect, grade and package in the wholesaler’s warehouses. Guava, being a small

volume fruit compared to others such as apples or bananas, does not justify having special

16

cold storage areas, and the fruit is immediately damaged if it is stored at the low temperatures

that are adequate for these other fruits.

Another important reason for these large chains sourcing from CEDA-CM, according

to these same sources, is that these large wholesalers can absorb the price discounts imposed

unilaterally by the chains to compensate for damaged, unsold guava, a condition that the

small or even the relatively “large” guava producers could not sustain. Also, according to

these wholesalers, the chains can negotiate better prices with large-volume wholesalers than

with the producers. It could be that in a product such as guava in Michoacán, where almost

all of the production comes from a large number of small farms, supermarkets may have

more difficulties and/or higher costs that slow down the process of supply chain

concentration, compared to other crops in which medium and large farmers can meet a

significant percentage of the supermarket’s demands – such as is the case for tomatoes to

supermarkets in Mexico (Cook and Reardon 2006). In the latter situation, it would be easier

for the supermarkets to put in place their preferred centralized supply chains as described by

Reardon and Timmer (2005) and Berdegué et al. (2005). Of course, collective action through

effective small farmers’ organizations in theory could also make it more feasible for the

supermarkets to establish direct links with producers, even if they are small. In fact, the

examples of PROGOMICH in Michoacán with an old (and failed) arrangement with Wal-

Mart and their ongoing contract with the SORIANA chain, as well as other similar cases in

the state of Aguascalientes, show that this is an avenue already being actively tested by

different supermarket chains; unfortunately, several of these experiences have been

unsuccessful, and those that seem to be doing well still represent more the exception than the

rule, or at least are still only emerging experiences. Finally, during the rapid rural appraisal

we became aware that some of the local brokers and the local (larger) wholesalers that collect

guava from several small farmers to take it to Mexico City’s Central Market, are also starting

17

to provide the same service for some supermarkets, in what may be that initial stages of a

process of development of specialized guava brokers and wholesalers dedicated to servicing

supermarkets thanks to their capacity to coordinate a number of farmers in a given region.

These large wholesalers, with direct relationships with the supermarket chains, buy

their guava from different sources: (a) directly from guava producers (some of whom also act

as intermediaries with other producers) with whom they often have had a long commercial

relationship, so that the producer ships the fruit to Mexico City and the wholesaler makes the

payment a few days later; (b) from guava producers who operate through informal local

brokers called ‘fleteros’ (often guava farmers themselves) that collect guava from several (4

to 10) small farmers, provide transportation to the CEDA-CM, receive the payment from the

wholesaler for the fruit delivered the previous week or so, and take the payment back to the

producers, charging a fee for his services; (c) from the more classical intermediaries (coyotes)

who buy the fruit either from farmers, or from other, smaller and even more informal

coyotitos; (d) from wholesalers based in the main production areas of Michoacán and other

states, some of whom are also producers; (e) from wholesalers who on their way to Mexico

City from other production regions in the North of the country (Aguascalientes), detour to

buy fruit in Michoacán to take to Mexico City; (f) from other wholesalers in the CEDA-CM

who fill in their orders according to need, and who in turn used one of the previous channels

to obtain the guava. Very frequently there are long-standing relations between the

wholesalers in CEDA-CM and the agents in these different supply chains.

Most of the fruit that arrives in CEDA-CM is received and sold by the wholesaler on

commission, and a service fee of between $ 0.5 and $ 1 per 13-kg box is charged. In addition,

if a fletero was used to facilitate the transaction, the wholesaler pays another $ 1 per 13-kg

box to the fletero for his intermediation and transportation services, and this amount is

deducted from the payment to the farmer; which is made on a weekly basis. Only in rare

18

occasions will a wholesaler buy the fruit on reception, in which case the payment is made in

cash on the spot.

All the guava thus received by these large wholesalers who supply to the

supermarkets, upon arrival to the warehouses is taken out of its boxes and reselected,

regraded and repackaged in new boxes according to the standards and conditions of their

different clients6. The quality standards used by the supermarkets are those of the traditional

markets, but they buy fruit that attains certain grades: extra and ‘first’ size, of green color (not

mature), and consistente (firm). According to the wholesalers, the chains Superama

(belonging to Wal-Mart) and Chedraui insist on buying only the best quality. According to

our informants, the chains do impose temporary or permanent penalties, up to delisting, on

suppliers who fail to meet their quality standards.

The type of and size of the packages varies among chains and, in some cases, among

different store formats within the same chain, as in the case of Wal-mart which requires

plastic boxes of 12, 15 and 20 kilos for most of its stores, but in small plastic cases of 950

grams for Wal-Mart’s Sam’s discount format. (The use of plastic boxes is a packing

technology change that is diffusing in the market, as the traditional packing is in wooden

boxes and recently in cartons.) The fruit is then sent to the Distribution Centers of the

supermarket chains and, occasionally, to individual stores.

Payment from the chains is received by the wholesalers in 30 to 45 days, with the

exception of Comercial Mexicana that pays after 15 days. In addition, the chains regularly

apply discounts of between 7% to 10% for ‘publicity and for damaged or unsold fruit’. Each

chain has one day in the week, or sometimes a full month, when it offers deep discounts to

consumers on purchases of fruits and vegetables; these discounts are transferred in full to the

wholesalers who supplied the fruit.

19

A few supermarket chains source a small fraction of their guava through free agents

called ‘introductores’ who play a role similar to the ‘fleteros’ relative to the CEDA-CM

wholesalers. Finally, there has been a handful of experiences – mostly failures from what we

could learn in our rapid rural appraisal - of supermarkets sourcing directly from formal or

informal associations of groups of producers. One such case is that of PROGOMICH, an

organization of small guava farmers active in several municipalities of the Eastern zone of

Michoacán, who supplied guava to Wal-mart in 2004. Despite the very favorable price

conditions and the very strong technical and financial support from the Michoacán state’s

development programs, the Wal-Mart/PROGOMICH deal fell apart within one year as the

farmers’ organization was unable to coordinate sufficient producers to consistently, week in

and week out, meet the volume and quality conditions imposed by the supermarkets.

In addition to the large wholesalers selling to the supermarkets, there are in CEDA-

CM dozens of smaller wholesalers (‘revendedores’) who sell guava in 13 kg boxes to

traditional retailers of different kinds (tianguis or mobile street markets, fixed street markets,

municipal markets, and small processors/retailers such as juice and ice cream makers). While

much of their fruit is bought from the larger wholesalers, these revendedores increasingly are

sourcing directly from producers thanks to the services of the informal brokers or fleteros,

who often can be relatives or close acquaintances.

(d) Typology of guava farmers in Michoacán

To begin answering the research questions, a non-hierarchical cluster analysis was

done with the household survey data. The households were classified into five clusters

according to the variable percentage of fruit sold to buyers in the “MMM” (more-modern

market) channel, explained below.

20

Table 2 shows the results of the cluster analysis. The variable “MMM” requires a

detailed explanation, since given the diffuse nature of the guava supply chains, there is no

clear, direct, unequivocal path from one farm to a single form of retail market, and, de facto,

the farmers are working in a multi-market context. This market channel variable has been

calculated as both continuous and a categorical variable that can take on two values: more

modern or traditional. Continuous is defined as sales to the modern channel over total sales

which takes on a range of values from 0 to 1 and in this form is used for the cluster analysis

above. The categorical variable (used in the market channel determinants model below)

considers if a farmer sells the majority of his/her guava to one or more of the market

intermediaries that we classify in the “MMM,” then that farm is assigned as a “MMM”

farmer. If not, he/she is a “traditional channel” farmer. The set of intermediaries classified in

the modern channel are: (1) local wholesalers; (2) non-local wholesalers; (3) supermarket-

servicing ‘introductores’; and (4) farmers’ organizations. Those in the traditional channel are:

(1) the farmer /her/himself as own marketer; (2) the local small-scale informal, traditional

intermediaries (‘coyotes’); and (3) local informal brokers-truckers (‘fleteros’).

There are several important things to note about the categorical variable observations

and their interpretation. First, the goal in constructing this variable is to bifurcate the sample

into farmers whose fruit is more likely to be sold in a supermarket versus those not. Doing

this directly and simply was not possible, due to the fact that few if any of the farmers sell

directly to supermarkets, and many intermediaries in turn sell to other intermediaries before

the guava arrives at the retailer. Moreover, apart from the supermarket-servicing

‘introductores’, all of the above intermediaries in theory could eventually sell to a

supermarket. But we know, from the rapid rural appraisal qualitative information, as well as

from the survey of wholesalers in Mexico City, that some of the intermediaries are

21

substantially more likely to sell to the supermarkets or to wholesalers who sell to the

supermarkets, and others less so.

Resource limitations kept us from being able to do a quantitative survey of the

intermediaries, which would have allowed us to estimate the conditional probability

distributions, per intermediary type, of that intermediary’s selling in the supermarket channel

versus the traditional channel. We thus generated rough working hypotheses, based on our

qualitative information, of which intermediary types sell most of their guava into more formal

channels from which supermarkets source, and which not. The upshot is that we cannot with

any confidence say what is the specific probability of selling to supermarkets associated with

a given channel. Rather, the distinction of the channels reflects our qualitative estimation of

the relative probabilities of one set of intermediaries being more likely to sell to supermarket-

markets. Thus, the categorical variables are subjective (but informed) categories that

represent different distributions, the modern being more (but we cannot estimate precisely

how much more) centered in the formal market supplying the supermarkets, and the

traditional not.

Second, there is variation over the intermediaries in a given vector (associated with a

given channel) of classification error, but we believe that the “center of gravities” of the two

channels are indeed substantially differentiated. On the one hand, in the modern channel, our

qualitative survey gives us confidence that there is low classification error for non-local

wholesalers, organizations, and introductores, all of which have a notably higher chance of

selling to the formal channels than are most of the intermediaries we have classed in the

traditional channel. There is probably higher classification error for the case of the “local

wholesalers” as they sell to both channels; they were assigned to the modern channel mainly

because of local subjective assessments; farmers tended to use the term “wholesaler” for

larger intermediaries who take possession, have larger trucks, and operate on more formal

22

terms, and farmers typically contrast those with the other local group that takes possession,

the small intermediaries (coyotes) who they say focus on the informal sector retail and

wholesale – so the assignment of local wholesaler to modern was done on the basis of this

bilateral comparison. Note that in all cases, we do not make the classification on how the

farmer and the intermediary transact (contractual, payment mode, delivery mode such as via a

third-party transport or directly, and so on).

On the other hand, in the traditional channel, the qualitative survey makes us

confident that there is low classification error in the case of the small intermediaries

(‘coyotes’) and farmer-direct marketing. There is, however, probably higher classification

error in the case of the local, informal brokers of ‘fleteros’. This agent is by nature

ambiguous in our context, as he does not take possession (as opposed to what the other

intermediaries do) and so could sell to any of the other intermediaries in either channel. We

put that agent in the traditional channel because of a subjective reason observed in the survey

pretests: farmers tended to waffle between coyote and fletero when they were indicating that

a local small-scale player marketed their product.

Third, the upshot of the above is that the cluster (and later, the econometric) results,

thus show the effects of various determinants on the probability of a farmer being a given

category – a category which reflects a subjectively (qualitatively) determined conditional

probability of marketing to a channel that ends in a supermarket versus a traditional retailer.

Table 2 shows that slightly more than half of the farmers (Cluster 1) sell no guava at

all to the MMM, while 30% of the farmers (Cluster 5) sell all of their fruit to MMM. The

level of farmer inclusion in the more modern pole of the distribution, is very high compared

to other studies that have focused on highly centralized, supermarket-controlled supply

chains. What we see in Michoacán then is a very strong bimodality of market access.

Remember that this situation has taken shape in only 5-7 years, a very rapid process of

23

differentiation. This bimodality neatly corresponds to the two production zones, with 91% of

the farmers in Cluster 5 (all fruit to MMM) being located in the Eastern region. On the other

hand, being a farmer in the Eastern zone does not assure access to MMM, as half of the

farmers there are in Cluster 1 (all their fruit sold to the traditional market).

Looking now at the assets section in Table 2, a striking result is that farm size (access

to land) is not correlated to access to MMM; this is very good news to small guava farmers.

Other important factors that are not related to having gained access to MMM, include:

education, membership in farmers’ organizations, and access to credit.

On the other hand, age of the orchard is significantly different between Cluster 1 and

Cluster 5 farmers. It is seen that those farmers in Cluster 5 (high access to MMM) established

their orchards almost immediately after the initial price shock that catalyzed the expansion of

guava in Michoacán, while the orchards of farmers in Cluster 1 are two years behind; what a

difference 2 years appear to make when market change process are rapid and dramatic!

Access to technical assistance is another variable that is related to access to MMM,

and farmers in Cluster 5 have more sources of technical assistance than those in Cluster 1.

There are significant differences, all in favor of Cluster 5 farmers (100% MMM) in terms of

access to public and private technical assistance (including in this groups input salespersons

as well as farmer-to-farmer advice).

Table 2 also gives (indirect) evidence about the ways in which these farmers finance

the establishment and operations of their orchards. We have seen that there are no important

differences in terms of access to credit. Farmer households working only in traditional

markets (Cluster 1) tend to have more members working off-farm than those that gained

access to the MMM, and a greater proportion of them also receive remittances. On the other

hand, farmers in Cluster 5, working only in the MMM, rely more on the profits from other

crops and on sales of cattle. In addition, it can be seen that farmers in the MMM, tend to be

24

more specialized as guava producers, a finding that is similar to those of Balsevich at al.

(2006) and Hernández et al. (2006) with tomato producers in Nicaragua and Guatemala, and

Flores and Reardon (2006) with lettuce producers in Guatemala.

Turning now to the technological differences, the striking difference is that farmers in

the traditional markets (Cluster 1) have substantially higher costs per hectare than farmers in

the MMM (Cluster 5), including 22% higher labor costs per hectare7 and 53% higher costs in

agricultural chemical inputs different from fertilizers (i.e., insecticides, nematicides,

fungicides and herbicides). From the rapid rural appraisal we gathered that the agronomists

that we interviewed believe that chemicals are being over-applied and misused across both

regions and all types of producers but that this is a more acute problem in the more traditional

areas, while those better linked to markets, because they have access to more information and

advice form a wider range of sources, are more in tune with the broad issues surrounding

excessive pesticide use. This is markedly in contrast with what has been found in other

studies (Balsevich et al., 2006, Hernández et al., 2006) where a relationship has been

established between domestic modern retail markets and higher use of chemical inputs to

meet the quality grades and standards.

The ratio of labor to land is much higher in those in the traditional market (Cluster 1),

while those in the MMM have 54% more fixed capital as measured by an index that takes

into account the local prices of the most frequent types of equipment and machinery found in

these farms. This is a critical distinction: access to the more modern markets – at least so far -

is not constrained by farm size, but is definitely affected by access to capital, in the form of

trucks, screening, grading and packaging equipment, and so on. Balsevich et al. (2006),

Hernández et al. (2006), and Flores and Reardon (2006) reached the same conclusion in their

studies in Nicaragua and Guatemala: fresh fruit and vegetable farms in the more modern

markets may be small in size, but they need to be capitalized.

25

Farmers working in the MMM have higher yields and, hence, produce more guava.

The average price they obtain for their product is 28% higher than those selling to the

traditional market. As a result of the higher yields, higher prices, and lower production costs,

the net income per hectare of guava is almost 5 times higher for farmers in the MMM than

those in the traditional market, while if one counts as household income the cost of household

labor, then the total household income per hectare is twice as large for the farmers in the

MMM.

(e) Econometric results

We conducted several econometric tests on the household survey data focused on

answering the three research questions.

The first stage of analysis is an analysis of market channel participation by farmers.

This is undertaken both as an end in itself as well as to generate observations on the inverse

mills ratio (IMR) used to control for the conditional probability of a farmer being included in

a given stratum in the second stage analyses of production presented below.

The market channel adoption model is specified with one equation system as:

ijijjij XY εβ +=

where Yij indicates if the ith producer chooses the modern market channel j=1, or j=0

otherwise (traditional market channel). The probability of producer i selling to market

channel j=1 is represented by a function F(x, β ) where the vector x represents the farm and

producer characteristics that we hypothesized affect the market channel adoption and the

vector of parameters β represents the significance and effect of changes in x on the market

channel adoption. ijε is the error term.

The x vector contains the following variables:

26

(a) total guava area of the farm, measured in hectares;

(b) average age of trees on the farm, measured in years;

(c) education of the producer and measured as: none = 0, incomplete primary

school = 1, complete primary school = 2, incomplete secondary school = 3, complete

secondary school = 4, preparatory incomplete = 5, preparatory complete = 6, technical

incomplete = 7, technical complete = 8;

(d) age in years of the producer;

(e) producer’s gender; female is equal to one if the producer is female, 0

otherwise;

(f) distance to paved road in kilometers;

(g) organization membership, equal to 1 if the producers is member of an

organization, 0 otherwise;

(h) quasi-fixed capital, an index (sum of units weighted by price of

replacement) generated from equipment and machinery owned by the producer;

(i) region is equal to one if the producer is located in the East region and equal

to 0 if located in the Central Region;

(j) a variable reflecting the two main municipalities of guava production, equal

to one if the producer is located in the municipalities of Benito Juárez and Jungapeo

(recall that these two municipalities account for most of the guava production, and as

such they are the core of the East region);

(k) two interaction variables, one between region and road and the other

between region and guava area.

The estimation model uses the standard probit model Prob (j=1) = Ф(β ’ x), where Ф

denotes the normal distribution.

27

Table 3 contains the results of the first of these analyses, on determinants of market

channel choice. It can be seen that access to the more modern market (MMM), which is the

dependent variable, is determined only by two variables: first and foremost, by being located

in the two main municipalities in the Eastern zone (Benito Juárez or Jungapeo), and, to a

lesser but still significant extent, by the household’s fixed capital assets. Other important

assets, such as size of the guava orchard (strongly correlated to farm size), level of schooling

of the producer managing the guava farm, membership in a farmers’ organization, or the

interactions between size of guava orchard and region and between region and distance to

paved roads, are not significant. Another important result in Table 3 is that distance from the

farm to a paved road is not significant if one is controlling for region.

The second stage of analysis focuses on two goals: (1) comparing the technical

efficiency of the MMM farmers versus the traditional channel producers; this involves

estimating production functions; (2) comparing the allocative efficiency of the MMM farmers

versus the traditional channel farmers. This involves using the MPP (marginal physical

products) derived from the production function estimates, multiplying them by guava prices

to calculating “Marginal Value Products” (MVP), and then compare them to the factor

prices, and then a la Lau and Yotopoulos (1971) and Carter and Wiebe (1990) to assess

allocation efficiency. We undertake each of these two things in turn.

First, we estimate three production functions, one for the whole sample and one for

each of the two market channel sub-samples (modern and traditional) controlling for the

conditional probability of being in a market channel. Note that the subscript j is used to

indicate the production functions specific to a market channel (modern or traditional), hence

for the whole sample j it is dropped. The model is:

ijijjijjijjjij KlnXlnYln ελββββ ++++=

28

where Yij represents the total guava production measured in kilograms of producer i. jβ is

the vector of parameters estimated that include the constant term, and other parameters that

reflect the effect of Xij and Kij on Yij. Xij is the vector of the following variable factors:

a) Labor, which is the total labor days used in guava production on the farm.

b) Fertilizer is the total cost of fertilizers used per farm (weighting by prices over

types).

c) Chemicals are the total costs of pesticides, herbicides and agro-chemicals used in

guava production per farm (weighting by prices over types).

d) Kij represents the vector of the following fixed factors: Treeage, Region,

Bigmunicipalities, Experience, Quasi-fixed capital and Education, all as defined

above.

e) Density is the farm’s average number of guava trees over guava area.

f) Three dummy variables to control for soil types (clay, sand, silt) are included.

g) ijλ is the inverse mills ratio (IMR) calculated from the first stage used to control

for the producer’s conditional probability of being in a channel (hence not used

when estimated the production function for the whole sample).

h) ijε is the error term.

The Chow test of equality of parameters is rejected for the estimations by market

channel at 1% significance level. Other functional forms did not add explanatory power (such

as the quadratic and translog), as judged by an F Test between the functional forms; hence we

used the Cobb Douglas production function (Debertin, 1993).

The production function estimations are presented in Table 4. The test for technical

efficiency differences over strata in this model involves comparing the intercept term. The

MMM farmers are substantially more efficient. The marginal physical productivity of labor

29

(controlling for physical capital which augments labor) and tree age are also higher among

the MMM farmers, as expected. By contrast, the productivity of density and experience are

higher among the traditional channel growers, as expected, given their relative lack of those.

Finally, an increment of land adds more production among the traditional farmers, suggesting

relative land scarcity.

Second, from the production function parameter estimates results and sample average

we calculate the marginal value product (MVP) per factor of production (Table 5). These

results highlight several important issues. First, with respect to labor, while traditional market

farmers are overusing this factor (MVP is about 60% of the factor price), ‘modern channel’

farmers appear to be facing a substantial labor constraint. Second, both groups of farmers are

over-utilizing fertilizers, but the problem is twice as important in the case of traditional-

market farmers. In the case of other chemical products (mainly pesticides) there is also

significant overuse, and again, the situation is much worse in the case of the farmers selling

to the traditional channel.

4. CONCLUSIONS AND POLICY IMPLICATIONS

The answers to the research questions are rather clear and they are consistent between

the qualitative and the quantitative analyses: (1) access to the more modern market channels

of guava is determined in the first place by the territorial context in which the farm/household

is located. There is a very strong relationship between different market channels, some more

modern than others, and different guava production areas. (2) Controlling for production

zones, fixed capital is a very important determinant of modern market access, while other

important factors such as farm size, education and participation in farmers’ organizations do

not have a significant influence. (3) Education, farm size, membership in a small-farmers

30

organization, and credit, did not affect access to the more modern channel. (4) Access to

more modern market channels results in significant gains in efficiency for these small-scale

farmers, due to higher yields, less use of labor and of chemical inputs, and in general with

significantly lower production costs per unit of land and of labor; that is, farmers in this

market channel show substantial gains in productivity compared to those in the more

traditional channels. (5) As a result of these efficiency gains, small-scale farmers who sell

their guava in the more modern market supply chains, make substantially higher profits and

household incomes.

These results are intimately dependent on the nature of the diffused nature of the

guava supply chains, which are governed by wholesalers operating out of the traditional

Central Markets. The situation probably would have been very different if the guava supply

chains had been highly centralized and directly controlled by supermarkets, as we have seen

in other situations, such as tomato supply chains to supermarkets in Mexico (Cook and

Reardon 2006).

However, even in these diffuse supply networks governed by wholesalers operating

out of traditional markets, we have seen substantial differentiation. The most powerful

wholesalers, serving the more dynamic markets such as supermarkets, source their products

from those regions with better access, high production levels, and a higher density of high

quality product. The less favorable areas are left to be served by small-scale, informal

intermediaries, who lack the capacity to supply the more dynamic and demanding markets.

This significant level of economic and social differentiation has occurred in just eight years

between 1997 and 2005.

An important policy implication of this research is that it is essential that governments

and development agencies understand and internalize in their policies and programs, the

dizzying speed of these processes of market restructuring; we cannot continue to act as if we

31

had unlimited time. Hence, policies need to be proactive and anticipatory. In fact, time is

perhaps the most important constraint in facilitating and supporting the access of small-scale,

resource-poor farmers to the more dynamic restructured national markets.

Another very important policy implication of this strong spatial differentiation of the

opportunities to access more dynamic markets is that development policies and programs

cannot aim solely at their usual two sectoral objectives: (a) improving the quality of supply

chains, or (b) strengthening the capacities of the farmers and their organizations. In addition,

a third dimension, the territorial one, may need to be considered, to link the territory as a

whole to the more dynamic markets.

It is not isolated households or farms that access (or do not access) dynamic national

markets, it is whole rural territories, including the farms within them, but also the small

traders, the truck drivers, the wage laborers, the agricultural input or equipment suppliers, and

so on. An individual small farmer, or even a group of them, may have the required physical,

financial, human, natural and social capital assets, but if they are in areas similar to the

Central region in the case of guava, they are more likely to be bypassed than another group of

farmers with perhaps less of those assets but who are located in areas such as the East region.

The strengthening of the localized networks linking farmers to more dynamic markets

through a maze of informal local brokers, intermediaries, and local wholesalers, should

feature prominently in addressing this territorial dimension of market access and inclusion.

These networks, of course, rely on local institutions to function well (as highlighted by the

fact that the vast majority of the guava farmers in both regions consistently sell, season after

season, through the same local broker or intermediary, citing ‘trust that at least I will receive

the payment’ as the main reason for doing so) and this is another important element to be

addressed as part of this territorial dimension. These ‘soft’ issues tend to be ignored in many

of the prevalent approaches and methods to support market access by smallholders, which

32

tend to focus on technologies, equipment, credit, good managers, and public infrastructure

such as roads or telecommunications. This is because of the strong if not exclusive focus of

these prevalent approaches on the farmers, the farm, and the farmers’ organization.

A third aspect to be addressed as part of this territorial dimension, is the strengthening

of urban-rural links, since the rural hinterland of regions such as the East in Michoacán, link

to major markets through services and service-providers that are localized and rely on

intermediate urban centers (in this case, the city of Zitacuaro, population 75,000).

In the Central region, addressing the territorial dimension this requires putting in place

policies and programs to break the chicken-and-egg problem of having to rely on the small

and very informal intermediaries serving shrinking markets that do not pay for quality, while

at the same time having serious productivity and quality problems at the farm level because

farmers are largely caught in this poor market. Strengthening farmers’ organizations and the

capacities of the small farmers at the farm level, will lead nowhere unless they take place in

the context of programs that aim at stimulating a more positive cycle of better markets -

better intermediaries, brokers and wholesalers – better quality and higher productivity at the

farm level. We ask ourselves if building and equipping warehouses for the farmers

organizations in the Central region, in the absence of a better market channel, will do much

good. Perhaps the key that can unlock the stalemate, is to attract a few of the larger

wholesalers for a sufficiently large period of time, through the targeted and temporary use of

part of the $ 2 million that the government is already spending in the guava region; a

combination of investment in road improvement, simple collection centers in strategic places,

effective technical advisory services, and direct subsidies to farmers and to wholesalers to

improve their links, could possibly aid in this regard8.

On the other hand, the Eastern production region as a whole also has strategic choices

to make if it is going to sustain its rapid development. To link to even better markets, some

33

“regional public goods” are necessary, and by far the main one is achieving the phytosanitary

standard (free of fruit fly) that will allow it to link, as a region, into the more profitable

markets in the Northern states and even for export. There are programs in place to this end,

but they are hampered by the weaknesses of the farmers’ organizations in the East region of

Michoacán, which find it difficult to be effective in coordinating collective action among

their members.

A final point has to do with that sacred totem of market access programs: the Small

Farmers’ Organization (SFOs). We have seen that both guava regions are swarming with

SFOs promoted by a number of development agencies. Literally millions of dollars have been

invested in these SFOs (heavily subsidized by donors, NGOs, and government) to equip them

with machinery, trucks, rotating credit funds, advisors, managers, and just every other kind of

asset one could think of. The vast majority of the farmers declare that they are members of

one or more of these organizations. And yet, both the household survey data and the results of

the rapid rural appraisal, very clearly show that these SFOs played no role in facilitating

access of their members to the more-modern markets. And yet, we have also concluded that

is not isolated small-scale farmers who relying on their own individual efforts manage to

reach these markets. What we have found is collective action organized in manners which

have little to do with the traditional SFO model that in one way or another attempts to

replicate the model of the cooperatives in the developed world. What we find is that market

access in fact is promoted and mediated by collective action organized in the form not of

SFOs but of localized networks, that include individual farmers or informal groups of farmers

that live in the same village or the same ejido, and even a few more effective SFOs (of the

“new generation cooperative” type that have a limited membership and focused objectives),

but also the much-hated coyotes (intermediaries), fleteros (informal local brokers), local

wholesalers, agricultural advisors, traditional leaders of the ejidos and other community

34

organizations, and a myriad other social and economic agents. Our development theory says

that these complex networks need to be replaced by modern-looking SFOs; we conclude and

propose that this is a premise that surely needs some careful rethinking.

REFERENCES

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37

Table 1a. Description of guava producers, East and Central zones of Michoacán, 2005.

East Region Central Region Total Sig

Variable Mean CV Mean CV Mean CV Orchard size (ha) 3.0 0.78 1.8 0.75 2.7 0.81 *** Number of orchards 1.4 0.49 1.6 0.57 1.4 0.52 ** Farm size (ha) 4.2 0.90 3.3 0.89 4.0 0.90 * Ejido land tenure 0.94 0.25 0.95 0.22 0.94 0.25 Age of orchard (yr) 8.3 0.42 4.1 0.53 7.4 0.50 *** Orchard bought by current farmer (%) 26 1.68 34 1.41 28 1.62 Orchard irrigated (%) 100 0.09 100 0.00 101 0.08 Distance to paved road (km) 2.1 1.72 5.0 1.14 2.8 1.58 *** Experience as guava farmers (yr) 9.5 0.49 5.4 0.74 8.6 0.56 *** Farmer with incomplete primary education (%) 53 0.95 56 0.89 53 0.94 Household members who work in guava orchard (No.) 1.5 0.68 2.7 0.54 1.7 0.70 *** Dependency ratio of household members on guava production 0.28 1.68 0.48 1.50 0.32 1.67 *** Member of Ejido organization (%) 87 0.39 85 0.43 86 0.40 Member of Local Phytosanitary Board (%) 81 0.48 65 0.74 78 0.54 ** Guava orchard financed through: Income from other crops (%) 36 1.33 58 0.86 41 1.20 *** Sales of cattle (%) 31 1.48 23 1.86 30 1.55 Remittances from migrant household members (%) 21 1.94 24 1.78 22 1.90 Number of migrant household members 1.1 1.43 1.8 1.09 1.3 1.34 *** Source of technical assistance: Agricultural supply salesperson 54 0.93 27 1.65 48 1.04 *** Other farmers 44 1.13 47 1.07 45 1.12 Government or government-supported services 52 0.96 42 1.17 50 1.00 Guava orchard yield (kg/ha) 17289 0.70 9030 0.98 15564 0.77 *** Notes: T-test between East vs Central regions: *significant at 10%, **significant at 5%,

***significant at 1%

38

Table 1b. Description of guava producers, East and Central zones of Michoacán, 2005.

East Region Central Region Total Sig Variable Mean CV Mean CV Mean CV Guava sold: Before harvest ing (US$/Kg) 0.21 0.30 --- --- 0.21 0.30 --- Packaged ungraded (US$/Kg) 0.40 0.74 0.20 0.18 0.28 0.75 *** Packaged graded (US$/Kg) 0.29 0.49 0.23 0.15 0.28 0.48 * Average price of graded guava by quality grade: Super extra (US$/Kg) 0.41 0.62 0.19 0.22 0.40 0.63 * Extra (US$/Kg) 0.33 0.45 0.22 0.19 0.32 0.46 *** First (US$/Kg) 0.27 0.48 0.21 0.16 0.26 0.47 *** Second (US$/Kg) 0.15 0.54 0.20 0.21 0.16 0.50 *** Average price of graded packaged guava sold to: Producer herself (US$/Kg) 0.31 0.43 0.25 0.12 0.30 0.42 ** Informal local broker (fletero) (US$/Kg) 0.27 0.53 0.18 0.10 0.26 0.53 * Local intermediary (US$/Kg) 0.24 0.38 0.20 0.16 0.22 0.34 Local wholesaler (US$/Kg) 0.22 0.33 0.23 0.09 0.22 0.31 Non-local wholesaler (US$/Kg) 0.34 0.60 0.21 0.20 0.32 0.61 ** Broker for supermarket (US$/Kg) --- --- 0.25 0.24 0.25 0.24 --- Agriprocessor (US$/Kg) --- --- 0.14 --- 0.14 --- --- Farmers´organization (US$/Kg) --- --- 0.23 0.29 0.23 0.29 --- Average price of graded packaged guava sold in: Local market (US$/Kg) 0.29 0.89 0.22 0.16 0.25 0.77 ** Mexico City (US$/Kg) 0.27 0.46 0.25 0.19 0.27 0.46 Other main city in Central Mexico (US$/Kg) 0.31 0.73 0.24 0.13 0.28 0.69 *** Other main city in Northern Mexico (US$/Kg) 0.35 0.37 0.20 --- 0.33 0.40 --- Other (US$/Kg) 0.26 --- --- --- 0.26 --- --- Average sales of guava per farm (Kg) 52521 1.13 18803 1.55 45477 1.23 *** Guava sold: Before harvest ing (%) 16 3.38 0 --- 15 3.83 --- Packaged ungraded (%) 10 4.03 42 1.79 13 3.42 *** Packaged graded (%) 74 1.50 58 2.59 72 1.65 *** Quality of graded guava: Super extra (%) 13 2.03 2 4.45 12 2.31 *** Extra (%) 27 1.92 21 3.49 26 2.11 ** First (%) 47 1.70 62 3.30 48 1.88 *** Second (%) 13 1.77 15 2.00 13 1.89 *** Guava sold to: Producer herself (%) 8 5.62 3 5.96 8 6.16 *** Informal local broker (fletero) (%) 18 3.26 13 4.10 18 3.49 *** Local intermediary (%) 21 2.92 38 2.31 23 2.91 *** Local wholesaler (%) 13 3.76 4 4.36 12 4.14 *** Non-local wholesaler (%) 39 2.12 37 3.55 39 2.29 Broker for supermarket (%) 0 15.20 2 4.96 1 12.56 --- Agriprocessor (%) 0 --- 1 7.75 0 17.06 --- Farmers´organization (%) 0 --- 3 4.76 0 10.59 --- Guava sold in: Local market (%) 13 1.00 42 0.88 15 1.36 ***

39

Mexico City (%) 57 1.00 3 0.21 54 1.01 *** Other main city in Central Mexico (%) 23 0.83 50 1.06 25 0.95 *** Other main city in Northern Mexico (%) 7 1.23 4 --- 7 1.26 --- Other (%) 0 --- 0 --- 0 --- --- Notes: T-test between East vs Central regions: *significant at 10%, **significant at 5%, ***significant at 1%. When T-test was not possible to compute we indicate with “---“.

40

Table 2. Cluster analysis on market channel

Variable (sample average per farm) 1 2 3 4 5 Total SIG* Number of producers in cluster (Canal) 151 11 31 11 87 291

% of producers in cluster 52 4 11 4 30 100

Volume sold to the modern channel (% of total) 0.00 0.26 0.49 0.73 1.00 0.39

12;13;14;15;23;

24;25;34;35;45

% of producers in the cluster from: Central Region (%) 24 36 29 27 9 21 East Region (%) 76 64 71 73 91 79

Benito Juárez (%) 22 45 39 36 37 30 Jungapeo (%) 15 0 16 27 39 22 Susuapato (%) 10 9 10 9 8 9 Zitacuaro (%) 25 0 3 0 5 15 Tuxpan (%) 3 0 0 0 1 2 Tuzantla (%) 1 9 3 0 1 2 Total (%) 100 100 100 100 100 100

% of producers of the region/municipality are in the cluster

Central Region (%) 60 7 15 5 13 100 East Region (%) 50 3 10 3 34 100

Benito Juárez (%) 38 6 14 5 37 100 Jungapeo (%) 35 0 8 5 52 100 Susuapato (%) 56 4 11 4 26 100 Zitacuaro (%) 88 0 2 0 9 100 Tuxpan (%) 80 0 0 0 20 100 Tuzantla (%) 40 20 20 0 20 100 Total (%) 52 4 11 4 30 100

a) Assets Farm size (Has) * 3.9 6.5 5.2 4.9 3.5 4.0 12;13;35

Guava specialization 0.75 0.70 0.83 0.80 0.81 0.78 Corn specialization 0.12 0.08 0.04 0.18 0.09 0.10 Specialization in other fruits and vegetables 0.05 0.12 0.05 0.01 0.06 0.05 14;45

Total Guava area (ha)* 2.5 4.1 3.9 3.2 2.5 2.8 12;13;35 Total guava trees (units) 915 1506 1421 1232 859 987 12;13;35;45 Age of trees (years) 7.1 7.5 6.9 6.8 8.6 7.5 15;35 Density (trees per ha) 366 372 368 395 349 363

Producer experience (years) 8.3 9.0 8.4 8.5 9.3 8.7 Producer education (level) * 1.9 2.4 1.8 1.2 2.1 1.9 Distance to paved road (Kms) 3 5 2 3 2 3 12;23;25 Distance to nearest city (Kms) 3 3 2 3 2 3

Receives technical assistance (TA) (Yes=1) 0.84 0.91 0.90 0.73 0.93 0.87 15 Number of TA sources 1.51 1.36 1.68 1.18 1.91 1.63 15;25;45 TA from Government 0.39 0.64 0.61 0.36 0.67 0.51 13;15;45

TA from input suppliers 0.43 0.18 0.61 0.55 0.57 0.49 12;13;15;23;2

4;25

TA from other producers 0.54 0.36 0.23 0.09 0.43 0.45 13;14;15;35;4

5 TA from producer organizations 0.14 0.18 0.16 0.18 0.20 0.16

41

Membership in Producer organization (Yes=1) 0.36 0.36 0.48 0.27 0.37 0.37 Off farm employment (household member)* 0.43 0.18 0.32 0.36 0.25 0.35 12;15 Receive credit (Yes=1) 0.33 0.36 0.48 0.27 0.28 0.33 35 Receive remittances (Yes=1) 0.44 0.36 0.32 0.27 0.29 0.37 15

Use remittances in guava production (Yes=1) 0.33 0.18 0.29 0.27 0.25 0.30

Source of money for initial investment in guava (Yes=1)

Income from other crops 0.35 0.55 0.33 0.36 0.52 0.41 15;35

Livestock sales 0.25 0.00 0.35 0.36 0.40 0.30 12;15;23;24;2

5 Migrant remittances 0.20 0.27 0.23 0.18 0.24 0.22

b) Production technology Total cost of guava (US$/ha) 2903 3028 3070 2775 2211 2713 15;25;35

Total Cost of Labor (US$/Ha) 1451 1704 1538 1299 1185 1384 15;25;35 Labor cost in production (US$/ha) 659 857 732 762 532 640 15;25;45 Labor cost in harvest activities (US$/ha) 792 848 1007 538 661 769 13;15;34;35 Permanent hired labor costs (%) 0.31 0.08 0.26 0.09 0.30 0.29 12;14;25;45 Family labor costs (%) 0.85 0.92 0.86 0.91 0.80 0.84

Non-Labor variables inputs (US$/Ha) 885 615 847 1108 605 794 Cost of fertilizers (US$/Ha) 366 247 279 192 266 316 Cost of chemicals (US$/Ha) 519 368 568 916 339 478 12;15;23;35

Index 1: Variable capital /Labor * 0.6 0.4 0.6 0.7 0.6 0.6 12;15;23;25 Index 2: Labor/Land * 1.5 1.7 1.5 1.3 1.2 1.4 15;25;35 Index 3: Quasi-fixed capital * 52 74 65 49 80 63 15;45

c) Production Results Total production per farm (Kg) 39321 79907 69582 51584 42969 45633 12;13;25;35 Yield (Kg/ha) 14234 23538 17066 14527 16635 15616 12;25 Quality ratio * 0.38 0.34 0.40 0.29 0.43 0.39

d) Market channel Type of sale

Packaged ungraded (% in cluster) 18 9 16 18 15 16 Packaged graded (% in cluster) 65 73 71 45 72 67 Before harvesting (% in cluster) 17 18 13 36 13 16

Average Guava price (US$/Kg) * 0.25 0.25 0.26 0.20 0.32 0.27 14;15;34;45 Info. source are the associations (Yes=1) 0.05 0.09 0.06 0.00 0.06 0.05 45 Info. source are the neighbors (Yes=1) 0.42 0.27 0.39 0.55 0.34 0.40 Info. source are the buyers (Yes=1) 0.47 0.45 0.45 0.55 0.56 0.50

Use receipt for sales (Yes=1) 0.25 0.36 0.26 0.09 0.17 0.22

Number of buyers * 1.08 1.45 1.45 1.64 1.06 1.15 12;13;14;25;3

5;45

e) Economic outcomes

Gross income (US$/Ha) 3600 5681 4420 2125 5395 4249 12;15;24;34;4

5 Total Cost (US$/ha) 2903 3028 3070 2775 2211 2713 15;25;35

Net income of guava production (US$/Ha) 681 2652 1350 -650 3184 1525 12;15;24;34;3

5;45 Family labor income from guava (US$/Ha) 1210 1585 1394 1113 938 1158 15;25;35

Income from guava production and family labor income (US$/Ha) * 1891 4237 2700 463 4122 2679

12;15;24;34;45

42

Table 3. Determinants of access to more modern market channel

Variable Parameters Guava area (hectares) 0,164 (0,14) Age of trees (years) -0,025 (0,03) Age of producer (years) -0,005 (0,01) Schooling of producer (years) -0,016 (0,05) Female producer (1= yes) -0,111 (0,40) Distance to paved road 0,029 (0,04) Membership in farmers’ organization (1=yes) 0,096 (0,19) Fixed capital ($) 0.004** (0,00) Guava area * region interaction -0,201 (0,14) Distance to paved road * region interaction -0,031 (0,05) Region 0,437 (0,39) Main production zones in East region 0.761*** (0,22) Constant -0,639 (0,52)

Observations 279 Wald chi2(12) = 28.66 Prob > chi2 = 0.0044 Log pseudo-likelihood = -178.05741 Pseudo R2 = 0.0792 Standard errors in parenthesis * significant at 10% level; ** significant at 5%; *** significant at 1%.

43

Table 4. Production functions

All guava producers

Producers in more modern market

Producers in more

traditional market

Producers of East region

Producers of Central

region

LN Labor 0.234** 0.513*** 0.248* 0.353*** 0,169 (0,10) (0,17) (0,14) (0,12) (0,18) LN Fertilizers 0,002 0,02 0,016 0 0,027 (0,01) (0,01) (0,02) (0,01) (0,02) LN Chemical ag inputs 0,004 0,021 -0,072 -0,033 -0,062 (0,05) (0,08) (0,07) (0,07) (0,07) LN Age of trees 0.503*** 0.813** 0.342** 0.587** 0,307 (0,15) (0,33) (0,14) (0,24) (0,19) LN Tree density 0.504*** -0.497* 0.768*** 0,194 0.790** (0,19) (0,26) (0,25) (0,24) (0,31) LN Producer experience (years) -0,016 -0,349 0.282* 0,051 0.441** (0,10) (0,27) (0,14) (0,18) (0,19) LN Producer schooling 0.036*** 0.032* 0,021 0.031* -0,021 (0,01) (0,02) (0,02) (0,02) (0,02) Soil - sandy 0,019 0,315 -0.412* -0,26 0,168 (0,23) (0,30) (0,25) (0,27) (0,34) Soil – clay -0,018 -0,416 -0,086 -0,191 -0,393 (0,22) (0,32) (0,20) (0,26) (0,34) Soil – lime -0,039 -0,235 -0,252 -0,268 0,064 (0,22) (0,29) (0,20) (0,24) (0,29) LN Fixed capital 0,069 0,075 -0,021 0,07 0,027 (0,05) (0,07) (0,05) (0,05) (0,08) LN Size of guava orchard 0.791*** 0.474** 0.907*** 0.673*** 1.187*** (0,12) (0,20) (0,14) (0,14) (0,21) Region 0,116 0,151 0.355* (0,18) (0,34) (0,19) Main production zones in the East

0,074 -0,484 -0,193 -0,137

(0,11) (0,45) (0,33) (0,28) Mills ratio -0,744 -0,269 -0,132 -0,107 (0,54) (0,47) (0,43) (0,73) Constant 3.994*** 9.618*** 3,083 5.760*** 2,494 (1,09) (1,81) (1,87) (1,73) (2,12) Observations 275 88 145 188 45 R-square 0,65 0,72 0,71 0,63 0,81 Standard errors in parenthesis. * Significant at 10%; ** Significant at 5%; *** Significant at 1%. Chow test rejects hypothesis of equality of market and region estimations, at 1% level of significance.

Table 5. Estimation of Marginal Value Product (MVP)

Factor

Price per uniti

($) MVP all

producers

MVP producers in more modern

market

MVP in more

traditional market

MVP in East region

MVP in Central region

MVP of adding one day of labor 9,85 7,2 19,0 6,4 12,0 3,0 MVP of adding $ 1 in fertilizer 1 0,028 0,339 0,156 0,003 0,208 MVP of adding $ 1 in chemical inputs 1 0,033 0,2 -0,6 -0,3 -0,3 MVP of adding 1 unit to the fixed capital index 12,4 13,3 14,6 -4,1 14,4 3,7

1

NOTES

1 An important question, not covered in this study, is whether in countries with very high levels of income inequality, such as Mexico, the dynamics of the rise of supermarkets will eventually lead to a dual system of food distribution, with one branch serving the poor and, another one the middle classes and the rich. An alternative hypothesis is that supermarkets will develop differentiated formats to provide universal coverage. 2 Planet Retail, 10 February 2006 (http://www.planetretail.net/) 3 It is worth noting Krugman’s (1995, p. 92) conclusion that “... cumulative causation suggests that initial advantages due to historical accident [our emphasis] may play a major role in explaining the pattern of location.” This is clearly the case with the 1997 frost in Aguascalientes that displaced guava production towards Michoacán. The question is how can one deal with such historical accidents when trying to design normative public policies? 4 It should also be noted that in the East there is a history going back at least 40 years of diversification and reconversion to adjust to changes in markets, policies, pest and diseases and other factors. 5 The French chain Carrefour, whose Mexican stores have been very recently sold to the domestic chain Chedraui, used to operate in a similar manner but now they work directly out of the Distribution Center in San Luis Obispo, near Mexico City. 6 We observed in Michoacán two instances of mechanized guava sorting and packaging, using adapted machinery originally used in avocado, the main agricultural product of the state. One of these two machines is owned and operated by PROGOMICH, a small farmers’ organization. The expansion of these services in the production areas, could in the future facilitate more direct relations between supermarkets and producers. 7 This includes hired as well as own-family labor. 8 Chile’s “Supplier Development Program” (PDP is the acronym in Spanish) is an example of how these direct subsidies could be provided in a way which is consistent with a market approach. This program subsidizes the costs of a coherent set of systematic actions (technology transfer, training, coordination costs, and so on) that are part of a comprehensive plan to develop or improve the links between a group of small and medium suppliers and a downstream firm such as an agri-processor or an exporter.