The role of agribusiness in stimulating on-farm investments - case study of the Armenian diary sector

This paper analyses the impact on investments of contractual arrangements between farms and agribusiness in the Armenian dairy<br/>sector. Our empirical evidence is based on a unique survey of 300 Armenian dairy farms. The dairy sector is of particular importance as it<br/>provides vital employment and income, in an environment of weak social security and scarce job opportunities. Furthermore, milk production<br/>is predominantly organized in small-scale farms, which are most likely to be affected by adversarial financial conditions and limited in their<br/>opportunities to raise resources to invest. The results show that a large share of milk producers in Armenia is actively investing to upgrade<br/>their farm business. Furthermore, investment activity is not limited to large dairy farmers as over 30% of respondents with less than eight<br/>cows have made dairy-specific investments. We find that the linkages between farms and agribusiness – and more specifically the support<br/>programs that agribusiness firms offer to their suppliers – have been crucial in stimulating this restructuring process at the farm level.<br/>Interestingly, farmers with a more exclusive relationship to the buyer and farmers that deliver to more internationally oriented buyers are more<br/>likely to receive support. On the other hand, buyers that operate in a more competitive market are less likely to provide support to their<br/>suppliers. These findings have interesting policy implications. On the one hand, our results point to the gains that can be made from openness<br/>to international firms. On the other hand, the negative competition effect indicates that buyers are unable to enforce repayment of the provided<br/>farm services in an environment where a lot of buyers are competing for the same supply. Policy makers should look at ways of improving<br/>the enforcement capability of dairy companies under these circumstances