Production support by marketing enterprises

2.28 Food marketing enterprises often have an important role in stimulating and directly supporting raw material production. They can do this by various means, including the supply of market and technical information, the supply of production financing, and the supply of certain material inputs (e.g. seeds, chicks, fertilizers). The incentives for marketing enterprises to provide such services will depend upon their ability to appropriate the benefits deriving from them; benefits such as increased output, enhanced product quality, and output better timed for marketing or processing requirements. The scope for appropriability of benefits will depend upon the nature of the goods/services themselves as well as the prevailing market structure.

2.29 For example, the dissemination of technical and market information has public good properties: such information is non-rival in its consumption and it is very difficult or costly to exclude individuals benefiting from the information without contributing to its cost. The marketing enterprise is unlikely to capture the full benefits from its supply of information since in a competitive environment, producers can utilize the information and then sell to a competing buyer. Where such 'free-riding' is widespread, there will be little incentive for private firms to provide more than minimal market or technical information. The provision of technical and market information may also be associated with so-called 'moral hazard' problems. The directed message may be biased toward the particular needs of the buyer rather than properly informing the producer about the wider range of technical and market options. The provision of technical information and the direct supply of production inputs can also give rise to negative externalities as when the recommended practices (e.g. heavy chemical use) adversely affect neighboring farmers or residents.

2.30 With respect to production financing, barriers arise due to limited collateral and asymmetric information. The producer is generally better informed than the marketing enterprise about his creditworthiness. The firm's ability to recover the loan may be better in a non-competitive than in a competitive market, since in the former case producers will have little or no alternative market outlet, enabling the lender to deduct the loan amount from the payments due for the commodity.