On Farm Investment by Smallholder Farms in Developing Economies: Determinants, Constraints and Opportunities S.Mahendra Dev Director and Vice

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1 On Farm Investment by Smallholder Farms in Developing Economies: Determinants, Constraints and Opportunities S.Mahendra Dev Director and Vice Chancellor, IGIDR, Mumbai, India

2 Contents of the presentation Role of small holding agriculture in developing economies: Africa, Asia and LAC On-farm investments by farm size and determinants of investments using farm level data in India Challenges and Constraints Opportunities for small holding agriculture --Technological innovations --institutional innovations Policies to support small holders

3 Role of Small Holders Size and structure of land holdings The average size of operational holdings : 0.6 ha. in Bangladesh, 1.4 ha in India, 3.4 in Thailand, Ecuador 14.7 ha, Panama 11.7 ha, Brazil 72.8 ha The average is declining except in Brazil Small farms represent more than 80% in Sub- Saharan Africa and in most parts of Asia. In India, for example, small and marginal farmers account for more than 80% of total farm hhs. But their share in area is around 44%. Average size of marginal farm holdings which constitute 63% of holdings is 0.24 ha.

4 Land Class % Distribution of small holdings % Distribution of operated area Margina Small Small &margi nal Semimedium Medium Large Total

5 Role of Small Holders Average size of family farms in Latin America: 26 ha in Brazil, 23 ha in Chile, 3 ha in Columbia, 6 in Mexico. Around 87% of world s 500 million small farms (less than 2 ha) are in the Asia-Pacific region. China 193 million and India 93 million small farms. Access to inputs, cropping intensity are higher for small farms (Indian data). They grow both foodgrain crops and high value crops. Many studies in Asia and Africa have confirmed the inverse relationship between farm size and productivity. Efficiency point of view small farms are better but we have to see sustainability


7 On-farm private Investment in Agriculture with data on India The analysis is based on farm level data collected under the scheme of Ministry of agriculture called comprehensive cultivation scheme. We have taken data for three states (Punjab, Andhra Pradesh and Orissa) with a sample of 1350 farmers for two years ( and ). These are high medium and low income states respectively. Data collected for different capitals in agriculture: Animal capital (AC), Farm Machinery (FM), Irrigation capital (IC). We also have land asset but we concentrate on non-land assets. Apart from these, other variables like gross value of output, land, workers, literacy, credit were also collected

8 Analysis Three types of farmers by farm size are covered. These are: small and marginal farmers (upto 2 ha.); semi-medium and medium (upto 10 ha.) and: large (more than 10 ha.) Examined four aspects for the three types of farmers -- Growth of private investment, --Changes in Composition of investment -- Ratios (factor intensity and productivity) -- Determinants of agriculture output (capital as input) and determinants of investment at farm level (regression analysis)

9 Compound growth Rates of Capital Stock: over (%) For all farmers Capital Assets Overall Punjab Andhra Pradesh Orissa Land Animal Capital Farm Machinery Irrigation Capital All Nonland Capital Assets

10 Growth of Capital Stock by Farm Size (%) Capital Assets Marginal and Small Semi-medium and medium Large Land Animal Capital Farm Machinery Irrigation Capital All Non-land Capital Assets Farm mach. And irrig. capi

11 Composition of Non-land Capital by Farm Size (%) Nonland capital Animal capital Farm machin ery Irrigati on capital Marginal and Small Semi-medium and medium Large Total

12 Factor Intensity: Farm size (In Rs.) Marginal and Small Semi-medium and medium Large Capitalland Capital( F+I)- land Capitallabour Capital (F+I)- labour

13 Factor Productivities by Farm Size (%): Punjab Land produc tivity Labour produc tivity Capital produc tivity Marginal and Small Semi-medium and medium Large

14 Determinants of GVO, Productivity of Labour and of Capital Formation with Positive Impact: GVO Productivity of Labour Capital Formation A.C A.C Credit availability F.M F.M Literacy Land Literacy Land Labour Credit availability Literacy Credit availability

15 Committee on Savings and Investments Within the agricultural sector, the degree of progress attained largely depends upon how the farmers deploy the additional incomes generated from year to year from their farm activities. This stems from the fact that the growth rate in the farming economy largely depends on the stock of capital built by the farming community and the ploughing back of such stocks in the form of savings for further improvement of farm activity. Therefore, the analysis on trends and determinants of on farm investment based on farm level data becomes important

16 Constraints and challenges faced by small holders in developing economies Generally, small farmers do not have level playing field with large holding in accessing land, credit, inputs, markets, technology etc. Inadequate savings: It is one of the constraints for sustainability of livelihoods and on-farm investment in agriculture. Indian data shows that consumption is higher than income for farmers upto 2 ha.( fig.) Role of women Lack of property rights and land issues Low level of formal education and skills Access to institutional credit is low and indebtedness


18 Constraints and challenges (contd.) Globalization challenges: Increasing globalization has added to the problems faced by the small holding agri. Globalization has exposed small farmers to greater competition from trade. In Africa, for example, small farmers are being squeezed out of their traditional food crop markets in urban and coastal areas by cheaper imports while being undercut in their tradition tree crops export markets from new competitors from Asia Impact of climate change Diversification challenges Risk and vulnerability

19 Opportunities and Policies for overcoming the constraints Need for different strategies and policies for different regions/countries Sub-Saharan Africa -- Ability of smallholder farmers to raise on-farm investment in productivity is constrained by their capacity to manage the risk. Risks are mainly relates to supply chains. --There are two major challenges : (a)transport costs are high; (b) Lack of timeliness in project interve. --Therefore, manage to ensure that inputs, credit and marketing output get to the Right Place and Right Time to reduce the business risks in SSA. --Farmes pr producer organizations for viability

20 Opportunities in Asia Dietary patterns are changing. due to urbanization and income growth. High value agriculture has emerged in several parts of Asia. The major challenge faced by small farmers in Asia are declining productivity, risks associated with diversification to high value crops, environmental constraints including those arising out of climate change and idiosyncratic risks like floods and droughts (p.31, IFAD, 2011). Although many smallholders are net buyers of food, high food prices can trigger more investments in food production.

21 Opportunities in Asia (Contd.) There are many opportunities like producer organizations, super markets and value chains, contract farming in Asia for marketing. Role of women in agriculture is increasing in Asia Lessons from China throws light on the important role of public policy and government intervention for smallholder farmers. In China, High investments in marketing infrastructure since the 1980s have linked smallholders to value chains effectively.

22 Opportunities in Latin America (a)there is an urgent need to differentiate development strategies and policies according to the three category of family farms; (b) policies ought to focus not only on developing the assets and capabilities of farmers, farm households, farms, and farmers organizations, but of the territorial contexts in which they operate; (c) we ought to much greater attention to domestic food markets, with an emphasis on commodities, and (d) we need to emphasize the development of public services and public goods that can work at the scale of 15 million family farms, in contrast with programs that have given greater priority to transferring private assets to, inevitably, only a small proportion of family farmers

23 Opportunities for Small holding agriculture Technological innovations --zero tillage --Public sector led improved technologies --Nutrient management --Bio-technology --Information technology Institutional Innovations --land and water management: institutions like water user associations for water management of canal irrigation

24 Institutional Innovations Women s collectives: Women s cooperatives, producer women s groups and other forms of group efforts Institutions for Marketing of Small holders --There are several models: Contract farming, self help group model, co-operative model and producer co-operat. --One of the most successful producer organization is dairy cooperative in India with 12.3 million members. --Contract farming is also successful in some cases Super markets and supply chains: Supermarkets now enjoy a retail share of 50-60% in South America, East Asia (China excluded) and South Africa; and a 30-50% in Mexico, Central America and much of South East Asia. While in China, India and Vietnam their market is still low and variable (2-20%), it is experiencing an annual growth between 30% and 50%.

25 Small Farmers and Information (India example) Indian private companies and NGOs are global leaders in providing information to farmers, as a spinoff from India s meteoric rise as a world leader in ICTs. E-Choupal (Internet Kiosks) has expanded access to internet in rural areas. Up to 6,400 internet kiosks were set up between 2000 and 2007 by ITC Limited, one of the largest agricultural exporters. It reaches about 4 million farmers growing a range of crops - soybean, coffee, wheat, rice, pulses or shrimp - in over 40,000 villages. They get free information in their language about local and global market prices, weather forecasts, farming practices and crop insurance. It serves as a purchase centre, cutting marketing costs and allowing farmers to obtain a bigger farm price.

26 Small Farmers and Information (India Example) The M. S. Swaminathan Research Foundation established Knowledge Centers. The women self-help groups use the centers computers to manage their business accounts and coordinate their activities, using video links with the other villages. Mobile phone coverage in India is expanding at breakneck speed. By linking communication technologies to market exchanges in commercial centers, even small farmers can overcome the enormous informational asymmetries that limit their bargaining power in traditional supply chains. The revolution in mobile phones is helping the small farmers to get information about crop prices and input prices and other related information on agriculture.

27 Special Programmes for Small and Farmers National Commission for Enterprises in the Unorganized sector (NCEUS) has advocated a special programme for marginal and small farmers. Objectives are: (1) to improve income prospects; (2) to improve the skill base; (3) provide income earning opportunities in the non-farm sector; (4) to ensure the needs of small farmers and adequately reflected in other agricultural and development programmes for livelihood security Principal activities proposed under the special programme are (a) Promotion of group approach to small farmers: It proposes setting up of Marginal and Small farmers development society (MSFDS) for the promotion, capacity building and coordination of development of

28 Special programme for small farmers Marginal and small farmrers groups. (b) Enabling gender access to institutional credit (c) Training and capacity building (d) Support for strengthening and creation of non-farm activities (e) Gender focused activities (f) Planning for development of marginal and small farmers Basically, the commission advocates that there is a need to special focus on small and marginal farmers for growth and equity in Indian agriculture China also has a comprehensive program for helping small farm holdings Need for promotion of rural non-farm sector

29 Conclusions The objective is to examine constraints and opportunities for smallhoders farming The role of small farms in overall and agricultural development and poverty reduction is well known. Small farmers do not have level playing field in accessing land, input, credit, technology and markets They also face new challenges on integration of value chains, liberalization and globalization effects, market volatility and other risks and vulnerability, adaptation of climate change etc. Our analysis on India shows that overall the on-farm investment growth is negative. Although the capital growth for small farmers is positive, the capital intensity is much lower for small farms.

30 Conclusions One way is to generate savings by having viable economic activities in on-farm and off-farm sectors. The determinants of capital formation for smallholders in India showed that credit availability and literacy are important for raising on-farm investment. The constarints and opportunities differ from region to region. In Africa, high transport costs and geographical isolation are important risks for small holders. Also delay in implementation underscores the importance of timeliness in project implementation.

31 Conclusions In the case of Asia, there are many opportunities for high value agriculture. Chinese experience of government support in infrastructure and linking smallholders to markets provide important lessons for other developing countries. The size of family farm in Latin America is higher than those of smallholders in Asia and Africa. One of the suggestions for LAC is that policies that support family farms should keep in mind territorial context of these farms. In general, farm income alone may not be viable for small farms. Need for growth of rural non-farm sector