Measuring the Impact of a Change in the Price of Cashew Received by Exporters on Farmgate Prices and Poverty in Guinea-Bissau

Abstract

This paper assesses the impact of a change in the price of cashew received by exporters in general -- and by FUNPI, a fund to promote the industrialization of agricultural products, in particular -- on farmgate prices and poverty in Guinea-Bissau. The analysis builds a theoretical model of supply chains in export agriculture that includes exporters, traders, and farmers competing in a bilateral oligopoly fashion. The model is adapted to data from the country's cashew sector and a household survey. Given the market structure, a shock on export prices or the introduction of an export tax, such as the FUNPI contribution, has a strong effect on farmgate prices, as farmers absorb about 80 percent of the tax (while exporters take up 13 percent and traders absorb the remaining 7 percent). The effect is uneven across households, as poor rural households are more exposed to price volatility and most cashew farmers are poor. It is estimated that their income falls by 12 percent as a result of the FUNPI contribution. Complementary policies can overcome the effect of the FUNPI surcharge on farmgate prices by aiming for reductions in transport, infrastructure, and transaction costs for traders and exporters. Fostering cashew processing would create added value through a displacement of volume from exporters to processors. The analysis finds it implausible that, under reasonable assumtions, a subsidy would overturn the welfare costs of the FUNPI contribution.

Keywords: Inequality, International Trade and Trade Rules