Briefing paper-managing-agricultural-commercialisation1


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Briefing paper-managing-agricultural-commercialisation1

  1. 1. Briefing Paper Number 6 | 2012 GDN Agriculture Policy Series Managing agricultural Vijay Paul Sharma Dinesh Jain commercialization Sourovi De for inclusive growth in South Asia Rapid income growth, urbanization, organized retailing and Women and children sort a huge liberalized trade are dictating the way food is produced, and crop of red chilis in Jodhpur, India. Small and marginal farmers South Asian agriculture is responding by becoming increasingly have been economic pillars in commercialized. New markets could present an opportunity rural areas but risk being excluded for smallholder farmers to increase their income, but many from commercialized markets. jean - leo dugast | panos pictures barriers still prevent their inclusion. This briefing paper is one of the Key messages 10-part Global Development Network (GDN) Agriculture Policy Strong economic growth, rapid p Smallholder producers struggle to p Series for its project, ‘Supporting urbanization, changing demographics, participate in the commercialization Policy Research to Inform Agricultural Policy in Sub-Saharan modern technology and the emergence process. Bottlenecks include Africa and South Asia’. It is based of modern agri-food markets are leading inappropriate policies, lack of access on a longer synthesis paper, to the commercialization of South Asian to technology, institutional barriers, Managing agricultural commercialization for inclusive agriculture. poor infrastructure and, crucially, poor growth in South Asia, which Commercialization has seen a significant p links to markets. draws on extensive published and unpublished research. The shift in patterns of consumption, away To strengthen market linkages and p full paper can be downloaded at: from staple cereals towards high-value encourage smallholder participation, agricultural products such as fresh fruits farmers need vertical integration It will be of value to policymakers, and vegetables, milk and dairy products, into agri-food value chains, coordination experts and civil society working to improve agriculture in South Asia. meat and poultry products, processed and collective action, stronger market This project is supported by the food and beverages. information systems, and better access Bill & Melinda Gates Foundation. Small and marginal farmers have been p to institutional credit. economic pillars in rural areas but face Investment in research and development, p the risk of exclusion due to profound extension services, rural infrastructure changes in the structure and governance and post-harvest management is of regional and global food chains. needed to ensure smallholder producers’ participation in emerging markets. Briefing Paper Number 6 Managing agricultural commercialization for inclusive growth in South Asia 1
  2. 2. Overview A farmer in Jalandhar in India watches as his vegetables are weighed at a Reliance Fresh collection center. Called ‘formal retail’ the stores are a break from small corner stores and open markets. One of the chain’s greatest challenges has been sourcing produce from local farmers, preparing it and transporting it to stores. jacob silberberg | panos pictures In the past two decades, developing Agriculture in South Asia is dominated by countries have witnessed a rapid increase smallholder farms, ranging from less than in the commercialization of agriculture. one hectare in Bangladesh (0.6 hectare), Rising incomes, changing tastes and Sri Lanka (0.69 hectare) and Nepal lifestyles, demographic patterns and the (0.79 hectare), to just above one hectare spread of modern supply chains have led in India (1.23 hectares), while farms to this situation. In many countries in Asia, in Pakistan are comparatively large at new markets have emerged for high-value 3.1 hectares. Evidence shows these farm commodities such as fruits, vegetables, sizes are shrinking and fragmenting. The flowers, livestock products and fisheries. majority of the population live in rural The retail revolution is not only areas and depend on agricultural activities transforming the way South Asian as the major source of income. Agriculture consumers buy their food, it is also is also the main source of employment dictating how food is produced, graded, for the large workforce in the region. But stored and displayed. It offers a potentially because there are only a few corporations, exciting window into the future of there is no effective competition in emerging agri-food markets. The world agri-input industries, food processing, market for high-value food products is manufacturing, trading and retailing. This expanding fast, especially in developing leads to skewed bargaining power between countries. This is an opportunity for South smallholders and agri-business chains. Asian countries to enhance their global While it may seem like there is potential share of exports of high-value agriculture. for smallholder farmers to increase their income and businesses, many barriers exist. 2 Briefing Paper Number 6 Managing agricultural commercialization for inclusive growth in South Asia
  3. 3. Background to the research This paper is based on a systematic review of the literature on commercialization of agriculture, analysis of secondary data from published government sources in the selected South Asian countries, and from individual case studies in India. The review Managing agricultural commercialization for inclusive growth in South Asia focused on four countries in South Asia: Bangladesh, India, Pakistan and Sri Lanka. The term ‘inclusive growth’ can incorporate a range of concerns including poverty reduction, environmental sustainability, food security, nutrition and governance. Researchers conducting the review took the term to imply a form of agricultural commercialization that involves smallholder participation in commercial markets as well as any benefits to smallholder farmers. It puts the farmers’ income and welfare at the center of any evaluation of agriculture. The review chose to put the smallholder farmer centre stage. Researchers used case studies to look at smallholder farmers’ participation in agri-business, the researchers and how they may have benefited. It is therefore impossible to identify general characteristics and trends from these examples. Small and marginal From the perspective of a smallholder Increasing evidence from both research farmers who have farmer, commercial agriculture involves and practice shows that one way for high costs of modern inputs such as smallholders to overcome the problem been economic pillars better seeds, fertilizers, irrigation and of market failure is through organizing into in rural areas face agrochemicals. In the absence of input farmer groups or producers’ organizations. the risk of exclusion due and credit markets, farmers find it difficult Acting collectively, smallholders are better to profound changes to purchase what they need. Access positioned to: reduce transaction costs for to institutional credit for farmers and their market exchanges; obtain necessary in the structure and smallholders is weak in South Asian market information; have better bargaining governance of regional countries and they mostly rely on high- power to secure access to new technologies and global food chains. cost informal sources of credit. and tap into high-value markets. The challenges they In addition, growing high-value crops Agricultural policies in the region are face are many and not for the markets requires getting timely therefore faced with several competing just because the world information on market prices and areas resulting in a policy quagmire. well-developed markets. However, How do we enable smallholder farmers of commercial agriculture smallholder farmers often do not have to emerge out of traditional production is unfamiliar to them. access to that information. Added problems systems and embrace a more responsive are that high-value commodities are approach to emerging food markets? often perishable. Output markets are How do the goals of commercial agriculture under-developed and fragmented and align with ‘inclusive growth’ for poor have acute shortages of post-harvest farmers? The review examined the infrastructure, leading to high volatility challenges and barriers that smallholder in their prices and large losses. farmers confront if they are to participate in commercialized agricultural systems. Moreover, new procurement systems What specific conditions are required often demand larger supply volumes and to support smallholder participation a uniform product, favoring larger farmers. and increase farmer income and welfare? It is difficult for small farmers to participate What policy options would support in commercial agriculture unless they find these conditions? What is the agenda ways to improve their bargaining power for future research? and reduce transaction costs. Briefing Paper Number 6 Managing agricultural commercialization for inclusive growth in South Asia 3
  4. 4. The challenges in more detail The growing demand for high-value In developing countries a significant agriculture and the rising importance number of the working population reside of commercialized supply chains poses in rural areas and depend on agriculture for many questions and challenges for their livelihood. While smallholder farmers, developing country smallholder agriculture. who might own less than two hectares Traditionally, agriculture was expected of land, have been and continue to be to feed the teeming industrial workforce, responsible for a large share of agricultural while providing markets for industrial production, their impact on market supplies outputs. Today, agricultural development has been limited. is seen not just as a vehicle for supporting But increasingly, agricultural industrialization, but also as a mode commercialization is discussed as of inclusive growth, pro-poor economic a potential pathway out of poverty for development, food security and these smallholder cultivators. environmental sustainability. This includes: the trend towards non-staple western dietary habits among growing McCain India: making direct links with farmers urban populations; rising household incomes; foreign investment in food When McDonald’s restaurants entered the Indian fast-food markets, the emergence of supermarkets; market, they discovered that potatoes traditionally grown by and vertical integration of production Indian farmers are shorter in length than the standard size and retail in agriculture. required for the typical french fries served at the chain’s restaurants. Importing potatoes for every pack of fries sold The drivers of agricultural commercialization was not an option and using shorter potatoes for producing in South Asia include rising incomes, fries was also rejected. McCain Foods India (a 100 per cent changing dietary consumption patterns, subsidiary of McCain Foods Canada), suppliers to McDonald’s, urbanization, female labor force decided that a home-grown alternative was the way forward. participation, changing demographics and the growth in export opportunities. McCain invested in research and development to identify the best varieties of potatoes suitable for French fries and other The majority of agriculture in South Asia high-end products. The company developed strong vertical is by smallholder farmers, who struggle to links with smallholder potato farmers in north Gujarat. participate in large-scale commercial activities. This includes producing outputs They worked through contract farming arrangements to that adhere to the quality and safety provide the farmers with seed supply, extension services, quality specifications of the quality-conscious control, storage and processing facilities. The company trained consumer. farmers in better planting methods, irrigation systems, fertilizer application programs and seed treatments. This led to increased Poor market linkages with smallholder crop productivity (from about 18 tonnes per hectare to over farmers are a major stumbling block for 40 tonnes per hectare) and higher profits for farmers. McCain’s the commercialization of agriculture in contract farming initiative has brought a new way of farming South Asia. Ways to improve these linkages to India and its potato growers. include improving rural infrastructure, vertical coordination of agri-food chains, Hitesh Patel, a contract farmer, used to grow cotton on strengthening market information systems his six-hectare farm. Four years ago, he planted one hectare and collective action by smallholders. of potatoes under the guidance of McCain agronomists. Improving farmer access to finance and Now he plants potatoes on all of the 6 hectares he owns and credit service is also important. another 1.6 hectares he has leased. McCain Foods offers him an assured price, and improved productivity and farm income. It is crucial to note that growth in agricultural productivity does not Farmers told researchers that as a result they had bought necessarily lead to poverty reduction. new vehicles, land and cattle as well as investing in larger It results from the deliberate and planned homes. It took McDonald’s roughly six years and US$100 million use of modern technology, investment in to set up a reliable supply chain, with companies like McCain research and development, infrastructure, facilitating the process. But this case study shows that especially rural roads, better access to the private sector can play an important role in providing inputs and services and market linkages. technology, extension services and the required market linkages to smallholder farmers.4 Briefing Paper Number 6 Managing agricultural commercialization for inclusive growth in South Asia
  5. 5. Poor market linkages For example, farmers mainly depend on rain-fed agriculture, yet we see very little Poor market linkages are a critical factor is being done towards expanding the in the success or otherwise of smallholder area under irrigated cultivation. This raises farmers participating in commercial crop yields, which in turn increases labor agriculture. The following factors influence and land productivity. It encourages how smallholder famers link to markets: diversification from traditional low-value Rural infrastructure staples to high-value crops such as fruit, Rural roads, power, water and storage vegetables, flowers and spices for the facilities, processing and post-harvest domestic and export market. Strategies infrastructure are critical factors in should also focus on developing allied commercial agriculture. This is particularly sectors such as dairy, meat, poultry, the case for high-value perishable fruit, fish, non-farm sector, agro-industry vegetables or livestock products. If and agri-business. infrastructure is poor, as it often is, farmers Vertical coordination in experience higher losses and increased agri-food chains marketing costs. However, neither national Vertical integration of business between governments nor international aid agencies the farmer and the retailer is increasingly seem to prioritize investment in the common in agri-business. Contract farming construction of new rural infrastructure is a form of vertical integration where or maintenance of existing infrastructure. the buyer and farmer agree conditions for producing and marketing farm products. Typically the farmer agrees to produce a certain quantity of output, meet quality standards and a delivery schedule. The contract also sets a price or price range to be met. Sometimes the buyer insists on particular inputs and production techniques. Critics of contract farming argue that smaller farmers are often unable to negotiate fair terms of trade themselves and that it is not a transformative approach. Others argue that the relationship is not exploitative if managed properly. Sometimes contract farming can be tapped as a vehicle for smallholder-led agricultural commercialization as it enables large buyers of farm produce to pool the outputs of several small farmers and harness economies of small-scale. Benefits to the farmer depend on the number of intermediaries between producer and final buyer and the buyer’s contribution to Vegetables are laid out for the cost of inputs. sale at an open air market in Dhaka, Bangladesh g m b akash | panos pictures Briefing Paper Number 6 Managing agricultural commercialization for inclusive growth in South Asia 5
  6. 6. Collective action for smallholder Market information systems market access The importance of market information systems in developing countries increases If smallholder producers organize with the move from subsistence farming to themselves and act collectively, they commercial agriculture. As farmers engage are more likely to overcome some more with commercialization, they interact of the significant challenges they face. with traders and others in both input This includes lack of access to market and output markets. Information becomes information, technology and credit, high vital to facilitate these interactions. Access transaction costs and uneven bargaining to information increases the efficiency power. Collective action can help to of agricultural markets. aggregate production volumes to establish links with large buyers, reduce Access to finance transaction costs on both sides of the Smallholder famers need access to supply chain, and improve bargaining institutional finance. High-value agriculture power. Ultimately it allows farmers to is capital intensive and restricts participation compete more effectively. of smallholders in the process as they lack access to capital. Amul cooperative: a success story of collective action The features of this successful model are: In the mid-1940s in Anand, a small town in the state Great leadership and freedom from external p of Gujarat, Western India, milk became a symbol political and bureaucratic controls. of protest against a local trade cartel. Angered by Farmers participating at all levels from production p unfair and manipulative trading practices, farmers to marketing. approached the eminent statesman, Sardar Vallabhbhai Patel, who advised them to get rid of Autonomous, committed professional managers. p the middlemen and form their own cooperative. The Sustainable growth through assured prices, cash p farmers then refused to sell their milk to the trade payments for milk supply, provision of quality cartel and formed the Kaira District Cooperative Milk feed, breeding and animal health care services, Producers Union Limited. They started pasteurizing and support for infrastructure (bulk milk coolers, milk in June 1948 for the Bombay Milk Scheme with testing facilities) at village level. just a handful of farmers in two village cooperative Development of a consumer base by making dairy p societies, producing 250 liters a day. It was an products affordable. assured market and by the end of 1948, 432 farmers Focus on core activities of production, processing p had joined and milk quantities increased to 5000 and marketing and managing other services liters per day. Today in Gujurat, about three million such as logistics for milk collection, distribution, rural producers in 15,712 dairy cooperatives farm etc. through third party/outsourcing. milk under the Amul brand. In 2010–2011 they produced 9.2 million liters. Market-driven production system marked by p transparency and accountability. The Amul model is a three-tier structure with dairy cooperative societies at the village level federated See diagram on the next page for an overview under a milk union at the district level and a of the Amul model. federation of member unions at the state level. The model works by establishing direct linkages between milk producers and consumers. Milk farmers control the procurement, processing and marketing, and the cooperative also hires professional managers. Amul assures guaranteed purchase of all milk at pre-determined prices and assures high-quality products sold at competitive prices to consumers. This happens through vertical coordination from production to market through a vast cooperative network. This is a unique model for rural development, especially for women and small and marginal farmers.6 Briefing Paper Number 6 Managing agricultural commercialization for inclusive growth in South Asia
  7. 7. Recommendations Support infrastructure p Invest in research and extension p Governments should pay attention to Reorient public expenditure away from maintaining and building rural infrastructure large non-targeted subsidies in agriculture that will support smallholder farmers towards research and extension services and increase their ability to participate to enable smallholder farmers to cope in commercial agriculture. with the challenges of cultivating high- value crops. Enable private investment but protect p smallholders Target subsidies toward smallholders p Agricultural policy in South Asia should Ensure subsidy programs for credit, encourage contract farming by offering fertilizers and irrigation are aimed an enabling environment for organized at smallholder farmers. Subsidy programs private investment as well as protecting the should be carefully targeted to free interests of smallholder producers. up budgetary resources for productive agricultural investments. Three-tier ‘Anand Pattern’ of dairy development in India Promote ICT p Strengthen access to market information systems and Information and Market Communication Technology (ICT). Encourage farmer organization p Provide support to farmers’ efforts Milk and Sales revenue to take collective action through groups, dairy products organizations and networks. Improve smallholders’ access to finance p State cooperative milk marketing federation Efforts are needed to improve smallholders’ 1 in Gujarat and 22 in India access to institutional finance. The active participation of different organizations such as public and private banks, cooperatives, Milk and Sales revenue non-governmental organizations, micro- dairy products finance institutions, self-help groups etc. can all help improve access to finance. Research smallholder participation p District cooperative milk union / dairy processing plants Further documentation and research is 15 in Gujarat and 177 in India needed to examine the level of smallholder participation in the supermarket revolution Milk Base milk price Cattle feed in South Asia, in order to formulate Additional Veterinary, evidence-based policies. price difference animal health and Dividend breeding services Rural health services Village dairy cooperative society 15,712 in Gujarat and 144,240 in India Milk Base milk price Cattle feed Additional Veterinary, price difference animal health and Dividend breeding services Rural health services Member milk producers 3 million in Gujarat and 15 million in India Source: Amul (2012) Briefing Paper Number 6 Managing agricultural commercialization for inclusive growth in South Asia 7
  8. 8. Key references The full paper Managing agricultural J Fei and G Ranis (1961) commercialization for inclusive growth ‘ theory of economic development’, A in South Asia is available for download at American Economic Review, vol 514, pp533–65 It was written by: Ashok Gulati, Nicolas Minot, Prof. Vijay Paul Sharma Chris Delgado and Saswati Bora (2005) Indian Institute of Management, India ‘ rowth in high-value agriculture in G Dinesh Jain Asia and the emergence of vertical Indian Institute of Management, India links with farmers’, paper presented Sourovi De at the Workshop on Linking Small- University of Oxford, UK Scale Producers to Markets: Old and New Challenges, The World Bank, and reviewed by Washington DC, 15 December 2005 Prof. Per Pinstrup-Andersen Cornell University, USA P K Joshi, Ashok Gulati and Ralph Cummings Jr (2007) P roject Steering Committee ‘ gricultural diversification in South Asia: A Senior Advisors Beyond food security’, in PK Joshi, Ashok Gulati and Ralph Cummings Jr (eds) Prof. Per Pinstrup-Andersen Agricultural diversification and smallholder Cornell University, USA in South Asia, New Delhi: Academic Prof. Thomas S. Jayne Foundation, pp47–81 Michigan State University, USA Praduman and Mruthyunjaya Kumar (2002) Prof. William A. Masters ‘ ong-term changes in food basket L Tufts University, USA in India’, paper presented at the Prof. Alexandros Sarris International Workshop on Agricultural University of Athens, Greece Diversification and Vertical Integration Prof. David Zilberman in South Asia organized by FICCI-ICRISAT- University of California, Berkeley, USA IFPRI, 5–6 November, New Delhi, India Project Management Team W A Lewis (1954) ‘ conomic development with unlimited E Principal Advisor supplies of labour’, Manchester School Prof. Douglas Gollin of Economics, vol 20, pp139–91 Williams College, USA Project Director Anwar Naseem, Steven Were Omamo Dr. George Mavrotas and David J Spielman (2006) Chief Economist, GDN The private sector in agricultural R&D: Policies and institutions to foster Deputy Project Director its growth in developing countries, Tuhin Sen ISNAR Discussion Paper 6, Lead Strategist, GDN Washington DC: International Food Policy Research Institute Project Consultant Nupur Suri P Pingali (2006) ‘ gricultural growth and economic A Policy Outreach Analyst development: A view through the Vinaina Suri globalization lens’, paper presented you wish to reproduce or build upon this work, If at 26th International Conference of please contact Global Development Network (GDN). Agricultural Economists, 12–18 August, Gold Coast, Australia © Global Development Network Vijay Paul Sharma (2012) Designed and produced for GDN by Panos London, ‘ ndia’s agricultural development I under the new economic regime: All photographs © Panos Pictures, Policy perspective and strategy All rights reserved. for the 12th five year plan’, Indian Journal of Agricultural Economics, Further information vol 67, no 1, January–March, pp46–78. more information on the ‘Supporting Policy For Research to Inform Agricultural Policy in Sub-Saharan Africa and South Asia’ project and for free download of the Agricultural Policy Research App (for iPad, iPhone, Kindle and Android) visit: ew Delhi | Cairo | Washington DC N 8 Briefing Paper Number 6 Managing agricultural commercialization for inclusive growth in South Asia