Policy options for improving market participation and sales of smallholder crop producers: A case study of the Free State Province of South Africa

The paper identifies underlying factors behind farmers’ market participation decisions and level of commercialisation of South African small scale farmers with a particular emphasis on transaction costs. The two-step decision making process is analyzed based on Agricultural Household Model that incorporates transaction costs using a Heckman selectivity procedure. The key importance of non price factors such as transaction costs over price factors come out clearly. Marginal effects are calculated and decomposed into market entry and intensity. The result showed that while both transaction costs and output prices are important for market entry and intensity; transactions costs have significant negative effects and have induced institutional innovations - such as belonging to farmers group and cooperating with white commercial farmers; and owning transport facilities are emerging to mitigate the costs of accessing markets. Consequently, price interventions to promote market access are likely to solicit a greater volume of additional supply from peasants entering the market for the first time. Overall, the findings clearly highlight the importance of non price policies to address explicitly the conditions of low productivity and low capital endowments of resources of poor farmers in order to promote surplus market supply and alleviate poverty.   Key words: South Africa, small scale crop farming, transaction costs.