The Economic Lives of Smallholder farmers in the Global integration

FAO VietnamISG Plenary 2013

Who are they? What are the determinants of smallholder

participation in markets? How can smallholders be integrated into

markets? What policies are required to support

smallholder market integration?

Outline

About two-thirds of the developing world’s 3 billion rural people live in about 425 million smallholder farm households◦ many are poor, food insecure and malnourished with

limited access to inputs and markets

This is a rough estimate – defines smallholders as those who farm 2 hectares or less◦ China: 98% of farmers cultivate 2 Ha or less; India: 80%;

Ethiopia and Egypt: 90%; Mexico: 50%; Brazil: 20%◦ other definitions:

hectare weighted median farm threshold/family labour and family farm

Who are they

They are the backbone of agricultural sector – produce the bulk of food

They do many other things – on average off farm sources of income account for more than 50 percent of rural income

Non-farm activities are quite important ◦ Self employment outside agriculture,

commercial activities and remittances are major sources of income

What do they doProportion of food

produced by smallholders

0%20%40%60%80%

100%

Smallholder agriculture Other agriculture

Pluriactivity

• Smallholder agriculture practiced by a highly heterogeneous group of producers

• Markets into which they sell are also diverse⁃ Size, location, connectivity, governance

• Smallholder heterogeneity along 3 dimensions:– Access to productive assets vs. subsistence needs– Connectivity to different markets– Functionality of these markets

• Patterns of participation differ significantly– Policy interventions to support participation need to

account for these differences

What are the issues?

Changing markets require scale

Changes in markets have been significant◦ globalization & urbanization have resulted in changes in

food and input supply chains

Sophisticated sales channels require:◦ greater managerial and logistics skills ◦ continuity of supply and to meet demanding food safety

and quality requirements

Modern technology is becoming increasingly private:◦ management skills and effective learning

Determinants of smallholder participation: producer constraints

Changing nature of food markets– Shift from self-provisioning/informal markets to

commercial orientation as economy develops– Combination of growing demand and commercial

supply reaches a scale that induces emergence of modern marketing channels• Grading and standards; interlinked contracts; greater

geographic reach etc– Formal and informal coexist in space and time• Market formalization, but informal markets still highly

relevant

Determinants of smallholder participation: market characteristics

Market integration: High transport costs in conjunction with small volumes limit participation◦ informal smallholder groups or cooperatives may offer a

solution Capital assets important to exploit market

opportunities◦ irrigation to meet consistency requirements◦ storage

Credit markets: Banks are reluctant to lend to smallholders due to poor collateral and lack of information

Women small farmers face even greater disadvantages

Missing markets due to scale

Barrett’s frameworkFour stages of “contracting”:

◦ Geographical sourcing assessment of candidate supply location

◦ Choice of Farmer identification of farmers in chosen location

◦ Farmer choice to accept◦ Firm and farmer choice to honour contract

Understanding smallholder participation: Producer + market

The future of smallholders No ‘single’ or deterministic future for

smallholders◦ Governments will shape the future path ◦ family farms are the dominant firm in agriculture◦ large corporate farms arise due to availability of land / low

population density / weak property rights

To stay in agriculture or not? They choose the best available option in a constrained environment◦ often rural labour markets do not function well – low skills◦ food security considerations: staying in agriculture is often a

risk reducing option◦ migration has become an important option – SOFI 2013

many governments restrict rural-urban migration flows from rural to urban areas

Staying in smallholder agriculture

In agriculture, smallholders have to make numerous decisions and these are not separable◦ missing/poorly functioning markets link production, and

consumption decisions, but also decisions on social objectives e.g. in Sub Saharan Africa, farmers sell most of their produce at the end

of harvest (at low prices) to pay the school fees

Decision making depends on government interventions to improve markets and livelihoods

Interventions differ according to development stage, and the farm structure◦ in low income countries with large number of small holder

farms, policies should aim at productivity increases◦ countries with a dual farm structure face more difficult

dilemmas – social protection safety nets

Smallholders’ choices and social protection

Many programmes originate in the social sector ◦ targeting the ultra-poor, labour-constrained households, or

households caring for vulnerable children

Cash transfer programmes also influence the productive dimension◦ livelihoods of most beneficiaries are based on subsistence

agriculture and rural labour markets

Transfers can relax some of constraints brought on by market failure (lack of access to credit, insurance) help smallholders to make choices◦ accumulation of productive assets; investment in productive

activities◦ helping households manage risk; providing households with

liquidity

Institutional solutions Technological solutions Catalysts

Integrating smallholders into markets

• A role for cooperative action?– Reduce transaction costs– Breach market thresholds– Facilitate access to inputs– Reduce risks/facilitate specialization

• Numerous success cases, but also many examples showing impacts limited in scale and scope• Role for intergroup relations/networks

Institutional solutions

• Support services and level of market development–Market related infrastructure and basic services– Storage, extension, seasonal credit

–Market institutions– MIS, WRS, certification/food safety bodies

• Risk management• Risk management instruments constrained by

geographical dispersion, scale, standardization, quality

• Tend to use informal mechanisms which can be ineffective for risk pooling• Intra-household transfers, cooperatives

Technological solutions

• A more proactive role for the state– Goes beyond the “enabling environment”– Markets don’t naturally improve their performance with the

passing of time and the absence of public sector support– Facilitating role working with, and through, the private sector

• Foster private sector investments in market development (the missing middle?)– Coordinated investments by VC stakeholders– Domestic vs FDI

• The international community– Support development of principles– Formulation of international agreements– Crafting improved trade rules

– Improved governance systems (coordination)

Catalysts

• Policy set aligned with longer term development strategy needs to take a dynamic perspective• Different categories of smallholders will follow, by choice or

compulsion, different pathways - not all will seek to increase production for sale in markets

• Smallholder participation as a constrained choice• Choice dependent on ability and willingness to participate

• Need to target to ensure appropriate emphasis and sequencing• Sequential alleviation of critical constraints

• Level of intervention depends on level of integration

Where to focus support, what type of support, how to provide it

Key messages Smallholders’ participation in markets important for improved

food security and poverty reduction Attempts to improve smallholder productivity will have limited

success if participation not strengthened simultaneously Limited smallholder participation in markets is not necessarily

a result of a lack of commercial orientation per se, but the result of constrained choice in a risky environment

Smallholders are very heterogeneous, facing different constraints and opportunities, and will react differently to new market opportunities

Public policy interventions are needed to foster smallholder market integration

Policy interventions need to be prioritized and sequenced according to evidence-based diagnosis of the constraints faced by different categories of smallholders