The Economic Lives of Smallholder farmers in the Global integration

FAO Vietnam
ISG Plenary 2013
Who are they?
What are the determinants of smallholder
participation in markets?
How can smallholders be integrated into
What policies are required to support
smallholder market integration?
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
Proportion of food produced
by smallholders
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
employment outside agriculture,
commercial activities and remittances
are major sources of income
Smallholder agriculture
Other agriculture
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
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
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
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
◦ irrigation to meet consistency requirements
◦ storage
Credit markets: Banks are reluctant to lend to
smallholders due to poor collateral and lack of
Women small farmers face even greater
Barrett’s framework
Four 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
The future of smallholders
No ‘single’ or deterministic future for
◦ 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
◦ 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
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
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
◦ helping households manage risk; providing households with
Institutional solutions
Technological solutions
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
Support services and level of market
– 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
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)
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
• Sequential alleviation of critical constraints
Level of intervention depends on level of integration
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