The Economic Lives of Smallholder farmers in the Global integration

1. The Economic Lives of Smallholder farmers in the Global integration FAO Vietnam ISG Plenary 2013

2. Outline • Who are they? • What are the determinants of smallholder participation in markets? • How can smallholders be integrated into markets? • What policies are required to support smallholder market integration?

3. Who are they • 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

4. Proportion of food produced by smallholders What do they do • 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 important • Self employment outside agriculture, commercial activities and remittances are major sources of income Pluriactivity

5. What are the issues? • 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

7. 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 markets require scale

8. Determinants of smallholder participation: producer constraints

9. Determinants of smallholder participation: market characteristics 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 relevant

10. Missing markets due to scale • 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 opportunities • irrigation to meet consistency requirements • storage • Credit markets: Banks are reluctant to lend to smallholders due to poor collateral and lack of information • Women small farmers face even greater disadvantages

11. Understanding smallholder participation: Producer + market 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

12. No ‘single’ or deterministic future for smallholders • 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 environment • 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 urban areas The future of smallholders

13. 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 Staying in smallholder agriculture

14. 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 activities • helping households manage risk; providing households with liquidity Smallholders’ choices and social protection

15. Integrating smallholders into markets • Institutional solutions • Technological solutions • Catalysts

16. Institutional 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

17. Technological solutions • Support services and level of market development • 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

18. Catalysts • 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)

19. Where to focus support, what type of support, how to provide it • 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 sequencing • Sequential alleviation of critical constraints • Level of intervention depends on level of integration

20. Key messages • 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