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The Organization of Farming: Revisiting the Debate on Small vs Large Farms. . Derek Byerlee World Bank Land Conference, April 26-27, 2010 . A Broad Consensus on the Vital Role of Smallholder Agriculture in Development . Three Basic Premises.

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the organization of farming revisiting the debate on small vs large farms

The Organization of Farming: Revisiting the Debate on Small vs Large Farms


Derek Byerlee

World Bank

Land Conference,

April 26-27, 2010

a broad consensus on the vital role of smallholder agriculture in development
A Broad Consensus on the Vital Role of Smallholder Agriculture in Development

Three Basic Premises

1 consensus around a development agenda based on family farms
1. Consensus Around a Development Agenda Based on Family Farms
  • Family farms widely accepted as being most efficient (Lipton 2009, many others)
    • Difficulty of labor supervision in spatially dispersed production
    • Flexibility management of land and labor resources to fit seasons and markets (Allen, 2004)
    • Local knowledge advantages the owner-manager
  • Family farms, including smallholders, remain as main organizational model in both poor and rich countries
    • Owner-operated employing mostly family labor
vast majority of world s farmers are small and family operated
Vast Majority of World’s Farmers are Small and Family Operated

Source: Eastwood et al., 2009

2 smallholder productivity growth promotes equitable development
2. Smallholder Productivity Growth Promotes Equitable Development
  • Strong growth and employment linkages
    • Especially demand for local consumers goods and services
    • Example of green revolution
  • Local community development and better services in family-farm agrarian structure
  • Re-affirmed in World Development Report, 2008
3 urgent to close a huge investment gap to get agriculture moving
3. Urgent to Close a Huge Investment Gap to Get Agriculture Moving
  • Public investment necessary but not sufficient
  • Market-led approaches imply lead role of private investment
    • Including FDI
    • Investing in farming vs the value chain

Source: WIR, 2009

with growing private invesmtent is there a trend toward large scale
With Growing Private Invesmtent is there a Trend Toward Large-scale?
  • Indicators of significant concentration
    • Latin America—Large regional companies
      • Arg: Top 30 companies total 2.4 m ha.
      • Brazil: 270 sugar mills with average of 12,600 ha own –managed area
      • MatoGrosso, Brazil. Average soybean farm size of 1300 ha, 20% foreign
    • RUK: Companies took over state owned farms and collectives
      • Ukraine: Top 40 companies manage 4.5 M ha; Russia: Top 30 companies 6.7 M ha (mostly home grown companies)
    • SE Asia: 8 of 25 world’s largest agric production companies are in palm oil
world s largest farms are in developing and transition countries
World’s Largest Farms are in Developing and Transition Countries
  • Large in land area, capital invested and sales (often ~ $US1billion farm prod)
    • Sime Darby (oil palm)—Malaysia, Indonesia and with 600 K ha + (220 k planned in Liberia)
    • Cosan (sugar-ethanol)—Brazil with 300k+ ha and 300k ha of contract growers (double with Shell)
    • El Tejar (grains)—Argentina/Brazil 600k ha Pampa
    • Ivolga (grains)—Russia 650 k+ ha
    • Fibria (pulp)—Brazil, 500 k+ ha Eucalyptus
    • Sudan (grains)--
  • (Note operational units usually 5-20 k ha)
major questions
Major Questions
  • Why the renewed emphasis on large-scale farm models?
  • So what? Tradeoffs?
  • Are there other organizational models to access capital and technology?
  • What research to fill major gaps in our knowledge?
historically often stimulated by perverse incentives
Historically, Often Stimulated by Perverse Incentives
  • Subsidies to capital that promote mech.
    • e.g., Brazil until 1990s
  • Regulations that promote mechanization
    • Labor laws that add transactions costs
    • Environmental laws that prevent burning cane
  • Low or zero land prices that encourage risky investments and speculation
    • Large grain farms in Africa, Jatropha
    • Forest extraction policies (Indonesia)
scale economies at the operational level
Scale Economies at the Operational Level
  • ‘Plantation crops’—’derived’ economies of scale through processing
    • 10 K ha for oil palm, 20 K+ ha for sugarcane-ethanol, 250 K ha for pulp mill
      • (Even higher for second generation biofuels)
    • Requirement for processing with 24-48 hrs
      • Harvesting must be closely coordinated with mill capacity
    • Efficiencies of spatial concentration
      • May reduce costs by 20%; Kenyan smallholders, transport is 35% of costs of sugarcane
opening new lands in areas of low population density
Opening New Lands in Areas of Low Population Density
  • High implicit cost of labor
    • Migration and settlement programs
      • Long term and costly, potential for conflict
    • Labor saving via mechanization
      • Until machinery rental market develops
  • Capital costs to open new land
      • Processing, establishing perennials, soil amendments, irrigation, roads
  • Technology for new crops (OP, SC, Soy)
new drivers of scale at operational level
‘New’ Drivers of Scale at Operational Level
  • Standards and certification
    • Now also for bulk commodities
      • Roundtables for sustainable sugarcane, soybean, palm oil, biofuels…
  • Innovations that reduce diseconomies
    • GMOs, zero tillage
    • IT--precision agriculture, satellite ‘supervision’
  • Ability to innovate, new crops, new markts
    • Professional technical and management skills—the “Value of the ability to deal with disequilibria”
institutional innovations new business models
Institutional Innovations:New Business Models
  • Specialized management companies combine production factors
    • Argentina—”Pools de Siembra”
      • Lease land and machinery
      • Assetts—Human capital
    • State of art IT systems to improve technical and allocative efficiencies
influences on scale economies at the company level
Influences on Scale Economies at the Company Level
  • Diversified portfolio—spatially and by product
    • Smooth covariance of risks
  • Market imperfections and transactions costs
    • Access to finance in global markets, poorly functioning financial markets for local farmers
  • Bargaining power in monopsonistic markets
    • Argentinean companies 10-20% price discount inputs
  • Vertical integration to overcome poor logistics
    • Own rails and ports (Brazil, Ukraine)
  • Strong private R&D capacity
many large investors lack expertise in tropical agriculture
Many Large Investors Lack Expertise in Tropical Agriculture

Prizes for failed megafarms

Upland rice investor in Liberia, 2009?

  • 1930s--Fordlandia to produce rubber in Brazil
  • 1940s—British groundnut scheme in Tanzania
    • vs removing export taxes on smallholders
  • 1980s--Saskatoon on the savannah—wheat in Africa
  • 1990s--Mega rice project in Indonesia
combining assets 1 focus on l arge scale production
Combining Assets1. Focus on Large-scale Production

(Low population density areas, mechanized grain production)

combining assets 2 contracting of smallholders and their associations
Combining Assets2. Contracting of Smallholders and Their Associations

(Settled areas, horticulture, oilseeds, sugarcane?)

combining assets 3 partnerships
Combining Assets3. Partnerships

(Best for perennials and irrigated areas with high upfront investments)

business models specific to context and commodity
Business Models Specific to Context and Commodity
  • Outgrower schemes
    • Initial subsidies for participation of smallholders
    • May not involve contracts
  • Cooperatives and shares in companies
    • Malaysia, Zambia
  • Independent growers with public support
    • Rubber in SE Asia, Jatropha
some conclusions
Some Conclusions
  • Growing land concentration but family farms still dominate
  • Impacts likely to be highly variable
    • Specialized Agbiz firms with tech, knowhow vsinstitutional investors
    • R&D and technology still major issue for sustainable and profitable investments in food crops in Africa
  • Level the playing field for smallholders
    • Case for special support for start up costs and public goods (extension)
big agenda for research
Big Agenda for Research
  • Research to understand trends and performance of emerging corporate models
    • Operational size, company size
    • Role of IT, new tech, new business models
    • Rigorous evaluation of partnership models
      • + Piloting of institutional innovations
    • Research on impacts—tradeoffs between growth, equity, social impacts and the environment
technology and competitiveness
Technology and Competitiveness
  • Best companies profitable and highly competitive (rapid growth)
    • Grains and oilseeds (LA and RUK)
    • Sugarcane (Brazil), Oil palm (Indonesia)
  • Sub-Saharan Africa
    • History of failure of large-scale farms
    • Some FDI associated with tech transfer
      • Plantation crops, biofuels, but not for food crops
contrasting models
Contrasting Models

Family farm

Non-family corporation

  • Mostly family labor
  • Mostly own assets (e.g., land)
  • Owner-managed
  • Focus on production
  • Flexible
    • Degree of commercialization
    • Access to finance
    • Little use of specialized services
  • Separation of management and ownership
  • All hired labor
  • Variable arrangements on:
    • Access to finance
    • Specialized services
    • Vertical integration