Type of agricultural extension and farmer choice of marketing

channel: Evidence from Indonesian smallholder sugarcane farmers

Rokhani1,*, Mohammad Rondhi2, Ad Hariyanto Adi3, Muhammad Agga Rizky

Friadi3, Ahmad Asrofi3, Ahmad Fatikhul Khasan3

1
Department of Agribusiness, Faculty of Agriculture, University of Jember, Jl.
Kalimantan No 37, Jember, Indonesia
2
Department of Agricultural Extension, Faculty of Agriculture, University of Jember, Jl.
Kalimantan No 37, Jember, Indonesia
3
Performa Cendekia, Jember, Indonesia
Correspondence email: [email protected]

ABSTRACT
Agricultural extension plays a crucial role in the introduction and adoption of new
technologies and knowledge for farmers. The type of agricultural extension, whether
public, private, or community, affects the type of technology and knowledge transferred
to farmers and the farmers' farming decisions. The choice of marketing channel is a
crucial decision for farmers because it affects the transaction costs and farm
profitability. This paper aims to identify how the type of agricultural extension agent
affects the choice of marketing channel by smallholder sugarcane farmers in Indonesia.
This paper will use data from the Indonesian Sugarcane Farm Household Survey
consisting of 8831 farmers. There are three types of agricultural extension analyzed:
public, private, and community agricultural extension. Then there are three types of
marketing channels studied: farm gate sales, market sales, and contract sales. This
chapter will provide an essential insight into how agricultural extension plays a role in
directing sustainable agricultural value chain creation.

Keywords: agricultural extension, public extension, private extension, community

extension, sugarcane farmers

1
 INTRODUCTION

A marketing channel can be defined as an organization that implements activities

to connect producers with consumers to make products or services available efficiently
(Dimitrova et al., 2020). Marketing channels are divided into two categories, namely
direct and indirect marketing channels (Brumfield & Matthews, 2017; LeRoux,
Matthew., Agricultural Marketing Specialist, Cornell Cooperative Extension of
Tompkins Country, 2010; MacInnis, 2004; Seemanon et al., 2015). Indirect marketing
channels, farmers can sell their products directly to final consumers while in indirect
marketing channels farmers sell products through intermediaries such as middlemen,
cooperatives, or others (Brumfield & Matthews, 2017; MacInnis, 2004). One of the
important issues of concern to agricultural policymakers is the decline in income
leading to a greater emphasis on marketing strategies. Based on the agricultural census
in 2013 showed that the net income of farming decreased by 16.32% from the
agricultural census in 2003 (BPS, 2014).
The selection of marketing channels is one of the important decisions of farmers
that have a significant influence on farmers' income. Each marketing channel has its
own value chain and input costs that enable farmers to maximize profits and minimize
risks. Some farmers choose indirect marketing channels where there is at least one
intermediary (Hand, 2010). This is because fluctuations in agricultural commodity
prices are the main cause of the decline in farmers' income (Low & Vogel, 2011).
Producers are faced with the difficulty of choosing between direct sales to consumers
who produce higher prices or indirect sales with relatively lower prices (Seemanon et
al., 2015).
Availability of financing is very important to support the production of
agricultural commodities (Bure Suryanarayana And V. Seshagiri Rao, 2013; de Castro
& Teixeira, 2012). In addition, financing in agriculture is able to contribute to
increasing income, improving productivity, and increasing efficiency (Ayaz & Hussain,
2011; Carter et al., 2017; Foltz, 2004; Obilor, 2013). Agricultural financing is identified
as an important aspect because it determines the quantity and quality of inputs in terms
of technology, materials and labor used (Pal, 2012). Sources of agricultural financing
can be in the form of institutional or non-institutional financing and it requires the
2
availability of financial resources, accessibility of funds, utilization of funds, and plans
to repay in the future (Oluwamayokun, 2018). In Pakistan, financing in the agricultural
sector plays an important role. Financing in rural areas can help break the loan interest
cycle by removing financial constraints and accelerating the adoption of new
technologies so as to increase productivity (Wagan & Rahman, 2016).
Most farmers depend on credit financing. This is because farmers need funds after
harvest for the next planting season due to the scarcity of cash due to delayed yield
payments (Ayaz & Hussain, 2011). In Nigeria, financing had a significant positive
impact on agricultural output, economic growth, and poverty reduction in 1981-2010.
Agricultural financing with a credit loan scheme to the agricultural sector significantly
reduces the poverty rate in Nigeria (Egwu, 2016). Therefore, efficient credit financing
will provide opportunities for farmers to meet their consumption needs and use balanced
inputs because farmers need (Feder et al., 1990).
The choice of marketing channels is very important. Different marketing channels
offer different prices and services which in turn have an impact on the welfare and
income of farmers (Abdul-Rahaman & Abdulai, 2018; Fischer & Qaim, 2014).
Therefore marketing of agricultural commodities, decisions about the choice of
marketing channels are very important for farmers, especially to get profit or money as
a result of farming. This is because different marketing channels are characterized by
different costs, margins, profits, and risks (Barrett, 2008; E. Donkor et al., 2018).
Farmers can increase their profitability by choosing profitable marketing channels and
increasing investment in productive assets and increasing welfare (E. Donkor et al.,
2018; Fischer & Qaim, 2012). Therefore, it is important for farmers to understand each
marketing channel including its benefits and limitations as well as know the required
production volume and the price paid to assess the potential returns of the marketing
channel (Mmbando et al., 2016).
So far, research on the choice of marketing channels is still focused on the factors
that underlie farmers choosing marketing channels and the influence of marketing
channels on farm income. In fact, marketing channels are closely related to the speed of
payment of sales results which are closely related to the structure of farming financing.
However, the topic still receives little attention for further investigation. Therefore, this

3
study will analyze the effect of farm financing sources on marketing channels for
sugarcane commodities in Indonesia. The sources of financing used in the research
variables consist of sources of self-financing (direct), institutional financing, and non-
institutional financing. Marketing channels that are known in sugarcane farming in
Indonesia consist of marketing channels for middlemen (farm gate), markets, and
partner markets.

LITERATURE REVIEW

One of the strategies adopted by sugarcane farmers in Indonesia to avoid high

and low incomes is to choose an efficient marketing channel. Some related literature
categorizes marketing channels into two groups, namely direct and indirect marketing
channels. Direct marketing channels have no intermediaries (Mmbando et al., 2016) and
tend to be attractive to farmers because they can directly receive profits without any
distribution with intermediaries (Barrett et al., 2012). Marketing channels are not
directly linked to other intermediaries so that profits are shared between intermediaries
in marketing. Farmers avoid this marketing channel because they do not want to incur
additional transaction costs associated with selling to end-users. In addition, farmers
may not have more capacity to add added value to their products because they cannot
make direct transactions with final consumers (E. A. Donkor et al., 2021).

Farmers in Indonesia make decisions to select marketing channels based on

experience and judgment. This means that many farmers still choose marketing
channels that provide lower bid prices through middlemen compared to direct access to
the market (Upe & Aswan, 2021). Similarly in Ghana, the majority of farmers tend to
choose channels that offer low prices because they have little knowledge of the market
to make profitable decisions. Middlemen take advantage of the existence of producers
who do not have the market knowledge to get the lowest price offer with the highest
selling price (Masters, 2008). Teng & McConville (2016), explains that in ASEAN
countries, including Indonesia, smallholder participation is low and is still a challenge.
In addition, farmers' challenges that have an impact on the selection of marketing
channels are accessible to transportation, market information, use of credit or

4
agricultural financing, and membership in agricultural institutions (Maflahah et al.,
2020).

The selection of marketing channels is closely related to the structure of

agricultural financing. Apart from self-financing, farmers can access financing from
various financing providers such as banks, credit associations, moneylenders, private
institutions, relatives, microfinance institutions, traders, and cooperatives
(Mujawamariya et al., 2013; Thu et al., 2007; Umberger et al., 2015). Several research
literature identifies factors that influence the selection of marketing channels by
farmers. Small-scale and geographically dispersed farmers in an area have to deal with
various traders with different levels of relationship and trust and enforcement
mechanisms. Therefore, the selection of marketing channels by farmers can be
understood in terms of transaction costs, contracts, and law enforcement contracts
(Chirwa, 2014).

Ogunleye & Oladeji, (2007), mention in their research that the selection of
marketing channels by farmers in Nigeria is based on the time and method of payment,
price and product quality, as well as distance and transportation. Late payments are a
negative factor for farmers. Gong et al. (2006), explained that it was not only the cost
and transaction method that influenced the choice of marketing channels by farmers in
China but also influenced by the social and economic characteristics of farmers. It is
also found that the selection of marketing channels by farmers in South Africa is
directly influenced by farmers' economic factors (Nxumalo et al., 2019). Meanwhile,
Lee et al. (2020), found that fruit and vegetable farming in Taiwan's direct marketing
channels tend to have higher incomes but sales volume from direct marketing channels
is relatively smaller than traditional marketing channels.

RESEARCH METHOD

Data
This study uses data from the Indonesian Plantation Household Survey (SKB14)
for sugar cane. SKB14 data is the result of the BPS census of sugarcane plantation
households in Indonesia in 2013. The survey was conducted in May – September 2013

5
and covered 8,831 sugarcane farming households. The research sample selection
method used a two-stage method in stages. The first stage is selecting the census block
using the proportional probability to size method and the second stage is selecting a
sample of plantation farmer households based on the number of plantation farmer
households in each census block.
Table 1 contains descriptive statistical data used in this study. A total of 8,831
sugarcane farmers in the study were divided into three based on the selection of
marketing channels for sugarcane farmers in Indonesia. The marketing channels we
identified in this study are divided into direct marketing channels, through middlemen
and forging partnerships. Where the majority of sugarcane farmers in Indonesia
(51.44%) tend to choose to form partnerships to market their farm products rather than
choosing direct marketing channels (0.52%), while many farmers still choose to market
their products to middlemen (48.04%). On average, farmers who choose marketing
channels through middlemen are one year older than farmers who choose direct
marketing channels.
Tabel 1 Descriptive research variables
Mean dan Frequency
Variable
Spot Market Farm Gate Partnership
Age 51.93 52.26 51.02
Education
No Schooling 12 (26.09) 1149 (27.24) 1272 (28.16)
Elementary 22 (47.83) 1979 (46.92) 1821 (40.31)
Middle 12 (26.09) 976 (23.14) 1246 (27.58)
High - 114 (2.70) 178 (3.94)
Gender
Man 40 (86.96) 3789 (89.83) 419 (9.28)
Woman 6 (13.04) 429 (10.17) 4098 (90.72)
Harvest Area 2.16 1.90 11.26
Conventional Cost
(1) 1 (2.17) 338 (8.01) 258 (5.71)
(0) 45 (97.83) 3880 (91.99) 4259 (94.29)
Own Cost
(1) 33 (95.65) 3738 (89.69) 3389 (75.03)
(0) 2 (4.35) 435 (10.31) 1128 (24.97)
Institutional Fees
(1) 1 (2.17) 97 (2.30) 870 (19.26)
(0) 45 (97.83) 4121 (97.70) 3647 (80.74)
Farmer Group
Not Participate 36 (78.26) 3628 (86.01) 2439 (54.00)
Participate 10 (21.74) 590 (13.99) 2078 (46.00)
Assosiation
Not Participate 44 (95.65) 4152 (98.44) 4120 (91.21)

6
 Participate 2 (4.35) 66 (1.56) 397 (8.79)
Cooperative
Not Participate 44 (95.65) 4080 (96.73) 3318 (73.46)
Participate 2 ( 4.35) 138 (3.27) 1199 (26.54)
CF
Not Participate 43 (93.48) 3938 (93.36) 1786 (39.54)
Participate 3 (6.52) 280 (6.64) 2731 (60.46)
N 46 (0.52) 4218 (48.04) 4517 (51.44)
Source : BPS-Statistics Indonesia (2016)
Meanwhile, farmers who choose to form partnerships are younger. The majority
of farmers in each group have secondary education. In general, farmer households in
each marketing channel selection group are headed by men. The majority of farmers
who choose to form partnerships to market their products have the widest average land
area (11.26 hectares) compared to others, on the contrary, farmers who choose to market
to middlemen (1.90 hectares) while farmers who choose direct marketing channels are
2.16 hectares.
In the context of sugarcane farming financing, we divide it into three types of
financing, namely conventional financing, self-financing and institutional financing.
Where conventional financing is obtained from non-contractual and non-institutional
loans, while institutional financing is obtained from financial institutions and tends to
have an interest. Self-financing is financing whose capital is obtained independently
issued by farmers. The majority of sugarcane farmers, whether they choose direct
marketing channels, through middlemen or forming partnerships, tend to use their own
costs compared to conventional or institutional costs. However, farmers who choose
marketing channels by establishing partnerships tend to follow partner contracts with
related companies or institutions and the number of farmers who are members or not in
farmer groups or not is relatively the same, respectively, 46% and 54%. However,
farmers who choose direct marketing channels also tend not to be involved in several
agricultural institutions such as farmer groups, associations, or cooperatives and also
tend not to form partnerships. Similarly, farmers who choose to market their products
through middlemen are also less likely to join organizations and partnerships.

Empirical Model

7
 In order to determine the factors in the selection of marketing channels by
sugarcane farmers in Indonesia, we developed a conceptual framework. Farming
financing factors are taken as variables that influence the selection of marketing
channels by sugarcane farmers in Indonesia. This study was analyzed using SPSS with
the logistic regression analysis method. Logistic regression analysis was used to analyze
the factors of farm financing in determining the selection of marketing channels by
sugarcane farmers in Indonesia. Logistic regression is a probability estimation model
that is applied when the dependent variable is binary and the independent variable is in
any form of the measurement scale (Jacob & Marcus, 2018).
The dependent variable in this study is the selection of direct marketing channels,
through middlemen and establishing partnerships that are worth 1 and 0. The
independent variables used include age, education, gender, harvest area, agricultural
institutions including farmer groups, farmer associations, and cooperatives,
partnerships, and farming financing consisting of self-financing, conventional, and
institutional financing. The following equation formulates the logistic regression model
in this study.

(1)

Where Yi is the selection of marketing channels for sugarcane farmers in

Indonesia, X1-11 is the independent variable, b0 is a constant, b1-11 is the coefficient
of each independent variable. The Omnibus Test of Model Coefficient, Pseudo R 2, and -
2 log-likelihood was used to evaluate the suitability of the logistic regression used.

RESULTS AND DISCUSSION

Result
This study estimates from equation 1 for each marketing channel selection by
sugarcane farmers in Indonesia. The estimation results show that the equation model is
robust. Two independent variables have a significant effect on the selection of direct
marketing channels by farmers, seven variables on the selection of marketing channels
8
through middlemen and seven variables on the selection of marketing channels by
establishing partnerships. The value of the Omnibus Test of Model Coefficient in the
equation model is significant at the 1% level. That is, the independent variable
significantly explains the variance of farmers' decisions in determining the selection of
marketing channels.
Sugarcane harvested area has a significant positive effect on the choice of
marketing channels by establishing partnerships while reducing the choice of marketing
channels through middlemen. Meanwhile, farmers' age, education, and gender did not
significantly influence all types of marketing channel choices. Self-financing has a
significant positive effect on farmers' choices in establishing partnerships while
reducing farmers in choosing marketing channels through middlemen. This is similar to
institutional financing which has a positive effect on the selection of marketing channels
by establishing partnerships while reducing farmers in choosing marketing channels
through middlemen. Meanwhile, self-financing and institutional financing did not
significantly influence the choice of direct marketing by sugarcane farmers. This means,
both with self-financing and institutions, farmers prefer to market their farm products by
establishing partnerships rather than through middlemen or direct marketing.
The participation of farmers in farmer groups positively significantly influences
farmers in choosing marketing channels by establishing partnerships. Meanwhile, the
participation of farmers in farmer groups tends to reduce farmers' marketing of their
products to middlemen, but it is not significant to the choice of direct marketing
channels. Similarly, membership in cooperatives encourages farmers to partner but
reduces farmers' interest in marketing through middlemen and does not significantly
encourage farmers' decisions to choose direct marketing channels. Farmer membership
in farmer associations tends to reduce partnering options but encourages farmers to
market directly and through middlemen. Farmers who enter into partnerships in this
case will tend to decide to choose partner marketing channels over direct marketing
channels and through middlemen.
Tabel 2. Logistics Regression Estimation Results for each Marketing Channel
Spot Market Farm Gate Partnership
Variable
Coeff Sig. OR Coeff Sig. OR Coeff Sig. OR
Intercept -5.745 0.000* 0.003 1.775 0.000* 5.902 -1.844 0.000* 0.158
Age -0.001 0.967 0.999 0.003 0.214 1.003 -0.002 0.337 0.998
9
Education   0.997     0.224     0.194  
Elementary 0.080 0.832 1.083 0.031 0.653 1.031 -0.045 0.506 0.956
Middle 0.072 0.876 1.075 -0.114 0.173 0.892 0.103 0.215 1.109
High -15.681 0.994 0.000 0.013 0.938 1.013 0.074 0.662 1.076
Gender(1) 0.309 0.490 1.361 -0.101 0.264 0.904 0.092 0.309 1.096
Harvest Area -0.022 0.440 0.978 -0.058 0.000* 0.943 0.047 0.000* 1.048
Self-financing(1) 1.202 0.236 3.326 -0.937 0.000* 0.392 0.936 0.000* 2.550
Loan-financing(1) 0.257 0.858 1.293 -1.768 0.000* 0.171 1.776 0.000* 5.906
Farmer Group(1) 0.270 0.495 1.310 -0.643 0.000* 0.526 0.633 0.000* 1.882
Association(1) 1.403 0.092*** 4.068 0.848 0.000* 2.336 -0.794 0.000* 0.452
Cooperative(1) -0.832 0.297 0.435 -1.227 0.000* 0.293 1.204 0.000* 3.334
CF(1) -1.858 0.004* 0.156 -2.477 0.000* 0.084 2.457 0.000* 11.673
Model Robustness
Omnibus Test 544.622 0.002*   8401.244 0.000*   8448.357 0.000*  
Cox and Snell R2 0.003     0.351     0.349    
Nagelkerke R2 0.055     0.469     0.465    
N 8831     8831      8831     
Note : *) Sig at 1%, **) Sig at 5%, ***) Sig at 10%
Source : Author 2021

Discussion
The harvested area has a positive and significant effect on the choice of marketing
channels to establish partnerships with an odds ratio of 4.8, while a significant negative
effect on the choice of marketing channels through middlemen with an odds ratio of
94.3. This means that sugarcane farmers are 4.8% more likely to choose marketing
channels by establishing partnerships while 94.3% are less likely to choose marketing
channels through middlemen. The risks faced by sugarcane farmers usually include
production area, productivity, and product prices (Rakesh Singh, 2017). Farmers with a
wider harvest area are more likely to choose marketing channels by forging partnerships
to secure their product guarantees (Rondhi et al., 2020). This is because establishing
partnerships or contracts can respond to price, market uncertainty, and information
asymmetry (Anh et al., 2019).
Own costs are the provision of farming capital which is carried out by the farmers
themselves. Farmers who are self-financing are 155% more likely to choose marketing
channels by establishing partnerships. Meanwhile, 39.2% of farmers are less likely to
choose marketing channels through middlemen. Farmers who use their own capital are
more likely to choose partners to avoid price and market uncertainty (Putri & Rondhi,
2020). This is done by farmers to avoid large losses due to fluctuating sugarcane prices
and to avoid excessive losses due to using their own capital.

10
 In addition to their own costs, sugarcane farmers in Indonesia also carry out
financing through institutions or financial providers. Farmers who have institutionalized
financing are 490.6% more likely to choose marketing channels through partnerships
while 17.1% are less likely to choose marketing channels through middlemen.
Financing through institutions generates interest on the loan funds. Therefore, farmers
choose marketing channels that can avoid the risk of failure. By establishing a
partnership this risk and uncertainty can be reduced (Eaton & Shepherd, 2001).
Farmers who join farmer groups have a positive and significant effect on the
choice of marketing channel partnerships with an odds ratio of 88.2 but a significant
negative effect on the choice of marketing channels through middlemen with an odds
ratio of 52.6. This means that 88.2% of sugarcane farmers who are members of farmer
groups are more likely to choose partnership marketing channels while 52.6% of
farmers are less likely to choose marketing channels through middlemen. Farmer groups
are needed to play a role in gathering information from market developments, to
strengthen the bargaining position of farmers with a system that benefits farmers
(Andriani et al., 2019). Farmer groups facilitate farmers in improving contractual
relationships that are useful for easy market access by farmers (Riana et al., 2015).
Strong farmer group institutions will provide information on market prices and
cooperation, which are still largely controlled by middlemen.
Similar to farmers who are members of farmer groups, farmers who participate in
cooperatives are 233.4% more likely to choose marketing channels by partnering.
However, 29.3% of farmers who join cooperatives are less likely to choose a marketing
channel through middlemen. When production uncertainty increases, farmers prefer
marketing by establishing partnerships as well as joining cooperative memberships.
This is because, in cooperative membership, access to information can be easier and can
encourage marketing transactions through market exchanges (Li et al., 2018).
Cooperatives allow to reduce uncertainty and provide control and reduce asymmetric
information between farmers and buyers. Therefore, farmers who are members of
cooperatives tend to choose partner marketing channels rather than middlemen because
of market certainty that can be obtained.

11
 The membership of farmers in associations has a positive effect on the selection of
marketing channels themselves and through middlemen but has a negative effect on the
selection of marketing channels for partnerships. Membership of farmers in associations
increased the selection of marketing channels alone and through middlemen by 306.8%
and 133..6%, respectively. Meanwhile, farmer membership in associations is 45.2% less
likely to choose partnership marketing channels. Sugarcane farmers take advantage of
sugarcane farmer associations to increase their bargaining power with sugarcane buyers
(Suwandari et al., 2020). The Association of People's Sugarcane Farmers in Indonesia
(APTRI) acts as an institution for coordination between investors who buy sugar cane
and farmers because all sugar is submitted to APTRI for auction. APTRI opens
opportunities to sell farmers' sugarcane products to consumers at mutually agreed prices
outside the partner's agreement.
Farmers who enter into partnerships have a significant positive effect on the
selection of partner marketing channels but have a negative effect on the choice of their
own channels and through middlemen. This means that farmers who enter into
partnerships are 1067.3% more likely to choose partner marketing channels.
Meanwhile, farmers who enter into partnerships are less likely to choose their own
marketing channels or through middlemen by 15.6% and 8.4%, respectively.
Guaranteed prices, minimizing risk, credit facilities, and other technical assistance are
the reasons farmers enter into partnerships (Kozhaya, 2020). Sugarcane farmers
participate in partnerships to anticipate risks in marketing (Rokhani et al., 2020).

CONCLUSION AND RECOMMENDATION

This study aims to determine the effect of financing sources on the choice of farmers'
marketing channels. The estimation results show that harvested area, membership in
farmer groups, cooperatives, and joining in partnerships have a positive effect on
farmers' choice of marketing channels in establishing partnerships. Meanwhile, farmers
who are members of associations have a tendency not to choose marketing channels in
establishing partnerships. Farmers who use their costs or institutional costs prefer to sell
their products on partner marketing channels. In contrast to this, harvested area,
membership in farmer groups, cooperatives, and partnerships have a negative effect on
12
farmers' choices in marketing channels through middlemen. Similarly, the use of own
costs and institutional costs tends to reduce farmers in choosing marketing channels
through middlemen. However, membership in the association increases farmers' choice
in choice of marketing channels through middlemen and direct marketing channels.

ACKNOWLEDGMENTS

The author would like to thank the research funders, LP2M University of Jember, and
all members of the INFRARED research group, Faculty of Agriculture, University of
Jember.

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