Friday, July 3, 2009

A missed opportunity for small holder farmers

Over the last two years, food prices especially of staples have increased at unprecedented rates. In many countries, the prices have doubled or tripled. Between March 2007 and March 2008, wheat and maize prices increased by 130% and 35% respectively. Rice prices increased by 80% in the period up to 2008.

The effect of increased food prices is felt worldwide especially by poor (both urban and rural) net food buyers. They reduce real income, which pushes poor people deeper into poverty and worsens food security. However, farmers may stand to benefit from high food prices. High prices result in higher revenue per unit of production which culminates into a higher profit margin. Also, high prices provide an incentive to farmers to increase production. As such the price hikes caused by growing food demand can be met by increasing food supply. Unfortunately this is theoretically sound but hardly plausible in practice. Under the current state of agriculture in Africa, it would be impractical to consider the high food prices as an opportunity for small holder farmers.

First of all, smallholder farmers lack the necessary means to increase agricultural productivity. Farmers cannot afford the much required seeds, fertilizers, and other agrochemicals to increase productivity. High input prices increase costs of production which reduce the profit.

Secondly farmers do not have access to markets because roads are poor or transportation is expensive. To take advantage of increased prices in food markets, farmers need to have access to them.

In addition, high food price increases do not often filter down to the farm-gate of smallholder farmers. Due to logistical constraints, they are forced to depend on middle men with whom they have little bargaining power.

Thirdly, a huge amount of farm produce is gets spoilt due to lack of storage and processing facilities, as well as value-adding systems.

A fourth reason is that small farmers are constrained in their access to credit and other financial services. Credit is an important source of capital to finance fixed and variable costs, as well as to cover other operating expenses in farming.

Finally, smallholder farmers do not have access to the latest market information with which to make production and supply decisions.

In order to truly capitalise on the price increases, Africa requires structural and policy reform. Appropriate investments in development oriented policies and programmes will increase the smallholder farmer’s potential to increase production and benefit from high food prices. Increased investment in agriculture is necessary both in the short and long-run.

Strategies to improve smallholder agriculture must start with making agriculture more favourable to smallholder farmers. An example would be to provide subsidised or cheap inputs (fertilizer and seed), credit, and information to farmers. Malawi has been successful in its efforts to increase agricultural production of the poor through provision of subsidized fertilizers and seed. Cheap inputs reduce production costs, giving small holder farmers a competitive edge in the formal economy.

Coupled with this is the need for improved infrastructure. Substantial investments are required to improve roads and railways. It is important for smallholder farmers to have direct access to well-functioning input and product markets. As such, the middle man is eliminated, or his influence is reduced therefore the high food prices translate to increased profit for farmers. Furthermore, farmers must have access to technology and other communication systems.

Because individual smallholder farmers do not possess much bargaining power, collective action (e.g. cooperatives) among these farmers is vital to make small holder farmers more competitive and sustainable. Through collective action, farmers gain economic power, and the unit transaction costs associated with marketing and distribution of farm produce are reduced. The South African government identified cooperatives as a means to empower the rural poor and smallholder farmers and as such increased its support to cooperative organisations by providing grants, loans, training, market and other resources.

To sum it all, a conducive policy environment is required if farmers are to benefit from the current high food prices. Although it is not known how long the food prices will stay high, government can never go wrong with increasing its support for farmers. Investment in agriculture has a compound effect on increasing rural income, improving food security, eradicating poverty, and thus economic development. Governments of Africa, through the Comprehensive African Agriculture Development Program (CAADP) have committed to increasing agriculture growth by 6 percent annually. This is good news for the continent as Agriculture-led development is the key to Africa’s development.

2 comments:

  1. I agree that governments should endeavor to give more support to producers. However, your statement that governments can never go wrong with increasing support to farmers I do not agree with. I understand your intentions but it has been well documented that government support can distort producer incentives and ultimately create an agricultural sector that functions wholly on subsidies.

    Also take into account that increased rural incomes (through price supports for example) transfers costs to consumers who then pay higher food prices as these products pass the value chain.

    Development of the primary sector is one way in which increased economic growth can be stimulated. If the country does not have the infrastructure and or supporting and related industries, investing wholly in the primary sector is likely to yield little growth. In my opinion Africa needs investment in infrastructure and supporting and related sectors and industries before meaningful growth rates in agriculture are realised.

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  2. You are right JP. I agree with you that support to farmers creates a dependency syndrome that may be difficult to break and it too distorts incentives. My thinking was that if the face of uncertainties such as the food, fuel and financial crises, the governments can intervene mainly as a safety net to assist the farmers regain resilience. Support to farmers, like the subsidised seeds and fertilizers in Malawi, increased food production by far, but this also does not necessarily mena food security.

    Increased rural incomes does not inevitably translate into high food prices for consumers. Increased incomes means that the rural poor will have money to invest in education, health care, e.t.c. and also in value-addition, thus cutting out the middle man, through whom food prices increase. Cutting out the middleman also means direct access to food markets, thus a guarantee of "fair" food prices.

    But yes it is true that investment in infrastructure is key is agricultural growth.

    Thank You JP.

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