The objectives of this study were, a) assess the impact of new and complex contracting schemes, as opposed to traditional marketing channels on small farmers’ welfare, and b) explore the critical factors that determine the small farmers enter these institutional arrangements. In this context, two critical factors were stressed: access to credit and size of the agricultural plot. The results point out that market failure in rural Peru is widespread due to many problems like poor infrastructure, market segmentation, poor enforcement of contracts, imperfect information, high risk, and regulatory uncertainty, among the most important. Under this scenario, it is unrealistic to expect that agro industry by itself will be successful in connecting small farmers to output markets. Such a situation of non-competitive markets and inefficient private provision may justify Government and/or NGO intervention. However, these interventions need to be cautious to avoid amplifying these problems and further retarding or, even worse, impeding the development of efficient and competitive markets.