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

1. The Organization of Farming: Revisiting the Debate on Small vs Large Farms . Derek Byerlee World Bank Land Conference, April 26-27, 2010

2. A Broad Consensus on the Vital Role of Smallholder Agriculture in Development Three Basic Premises

3. 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

4. Family Farming Combines Ownership, Management, and Most Labor Family farming Corporate model

5. Vast Majority of World’s Farmers are Small and Family Operated Source: Eastwood et al., 2009

6. Size of Family Farm Increases During Structural Transformation Gardiner, 2002

7. 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

8. 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

9. 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

10. 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)

11. 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?

12. Factors Increasing Scale: Some Hypotheses

13. 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)

14. 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

15. 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)

16. ‘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”

17. 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

18. 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

19. So What if it is Large Scale?

20. Both Large and Small-scale can be Globally Competitive

21. Employment Benefits vary Widely

22. Returns to Land Can Dominate Gains from Employment Source: Cramb and Ferraro, 2010

23. Efficiency Tradeoffs often Less Than They Seem

24. And Major Equity Gains

25. Potentially Strong Complementarities of Assets

26. But not necessarily

27. 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

28. Combining Assets1. Focus on Large-scale Production (Low population density areas, mechanized grain production)

29. Combining Assets2. Contracting of Smallholders and Their Associations (Settled areas, horticulture, oilseeds, sugarcane?)

30. Combining Assets3. Partnerships (Best for perennials and irrigated areas with high upfront investments)

31. 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

32. 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)

33. 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

34. Extras

35. 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

36. Economic Returns and Competitiveness Favor LA, RUK

37. 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

38. Factor Shares Also Change Over Time Source: Barlow, 1997