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  1. 1. AGRICULTURAL MECHANIZATION IN GHANA: ALTERNATIVE SUPPLY MODELS FOR TRACTOR HIRING SERVICES Xinshen Diao, IFPRI International Conference of South-South Knowledge Sharing on Agricultural Mechanization November 1, 2017; Addis Ababa
  2. 2. KEY MESSAGES Mechanization demand has increased in the recent years even among small farmers SUBSTANTIAL VARIATION WITHIN COUNTRY – A NATIONWIDE PUSH FOR MECHANIZATION IS INAPPROPRIATE There is a dynamic private sector in mechanization service market FARMER-TO-FARMER HIRING SERVICES ARE MORE EFFICIENT Agricultural Mechanization Services Center (AMSEC) has been promoted by the Government but few are profitable RETHINKING ABOUT THE VIABILITY OF THIS MODEL Government’s support to mechanization has to be comparable with what the government knows INFORMATION-LIGHT POLICY TO AVOID RANDOMLY DECISION-MAKING BASED ON SECOND GUESS
  3. 3. RECENT EMERGENCE OF HIGH DEMAND FOR MECHANIZATION IN GHANA Agricultural mechanization in Ghana had been slow to develop until the 1990s. But this has changed markedly since the early 2000s Recent Labor Force Survey found that one third of Ghana’s crop-growing farmers including smallholders used some form of machinery equipment, mostly tractors for land preparation Considerable spatial and regional variation:  Mechanization most prevalent in Upper West, Northern, Greater Accra regions – 75% or more of farmers use of mechanization  Central and Ashanti regions are less mechanized – less than 10% of farmers use of mechanization 0 10 20 30 40 50 60 70 80 90 Share of crop-farming households use of mechanization The dominant form of mechanization is tractor plowing; and this is more relevant in regions that grow field crops than in the forest and cocoa growing areas
  4. 4. THE DETERMINANTS OF MECHANIZATION DEMAND Based on a historical analysis of the evolution of tropical farming systems, Hans Ruthenburg (1980) predicts that farming communities will only adopt draft animals or tractors for land preparation once their land use intensity reaches a critical threshold  In long/medium-fallow systems tree stumps are present in the fields and the plough cannot be used  When the systems move to short fallow or permanent agriculture, one reason for the switch in technology is that as fallows get shorter, grassy weeds and hardened soils become more serious problems and they are hard to overcome with hand hoeing, making animal or tractor plowing more attractive However, Binswanger-Mkhize (2017) recently argues that farming systems explanation seems to be no longer sufficient in understanding slow progress of mechanization in some African countries Another relevant theory is the induced innovation theory: mechanization is a labor saving technology, demand will develop once labor becomes sufficiently costly relative to capital and other purchased inputs (Hayami and Ruttan, 1970, 1985; Binswnger and Ruttan, 1978; Pingali et al., 1987)
  5. 5. ECONOMIC FACTORS AFFECTING MECHANIZATION Urbanization  Urbanization leads to growing market demand for agricultural products  Urbanization has change dietary structure and increased demand for cereals, which generally have higher labor requirements than roots and tubers and are more conducive to mechanization (Nin Pratt and McBride 2014) Rising Farm Sizes among Medium-Scale Farmers  The share of middle-sized (2-20 ha) farms increases and the share of small (< 2 ha) farms falls in the recent years. Medium scale farms in Ghana account for half of all farms. In the North (comprising the savannah and transition zones), they account for 60 percent of all farms  Medium scale farmers tend to depend on mechanization for land preparation. Once they become owners of tractors, they tend to participate in hiring out services as they cannot fully utilize the capacity of the tractors on their own farms
  6. 6. ECONOMIC FACTORS AFFECTING MECHANIZATION (CONT.) Rising Rural Wages  The demand for mechanized services is boosted when hired labor represents a relatively large share of production costs (e.g. in land preparation), and becomes more expensive  Reducing the dependency on hired labor improves farmers’ control over the timing of agricultural operations. In semi-arid areas with few days of rainfall and in areas with bimodal rainfall that practice multiple cropping, seasonal labor bottlenecks can have impacts on crop productivity  Recent economic structural changes have increased nonfarm job opportunities in rural areas, and many family members of smallholder households are participating in nonfarm economic activities, putting an upward pressure on rural wages 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 1991 1998 2005 2012 Agricultural daily wages (in new Cedis delated by CPI) Men land clearing Men harvesting Women harvesting
  7. 7. SUPPLY OF MECHANIZATION: THE PRIVATE SECTOR LED MECHANIZED SERVICES IN GHANA The private sector supply chain, which combines machinery importers, mechanized service providers (mostly medium scale farmers), and repair and maintenance shops, has operated in Ghana’s mechanization business for more than two decades, and it has scaled up in the recent decade Secondhand tractors are attractive to farmers because they are affordable; owners can obtain tractor brands of their own choice; and the spare parts for the brands imported by private traders are available in most locations at reasonable prices Farmer-to-farmer hiring-out services dominate the private sector led mechanization  For medium scale farmers as tractor owners, hiring out tractor services after they have plowed their own land is an important way to make the costly lump sum investment profitable  A medium scale farmer tractor owner provided hiring-out services to 100-120 other farmers in average, of which almost half are small-scale farmers with land less than 2 ha 0 200 400 600 800 1000 1200 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 new used
  8. 8. AGRICULTURAL MECHANIZATION SERVICES CENTER (AMSEC) PROGRAM The government concerns that relying only on the private sector could constrain mechanization uptake among smaller sized farms About 90 agricultural mechanization service centers (AMSECs) have been established around the country since 2007 through the sponsor of the government  AMSECs are designed as professional providers of mechanized services, a model unlikely to be profitable in the current stage of mechanization when the demand is primarily for tractor plowing  Tractors provided to AMSECs are imported through concessional loan arrangements and only from the donor countries – not necessary the tractors welcome by would-be buyers without subsidy  Different types and models of tractors are imported under different concessional loan arrangements – making the private sector’s supply chain of spare parts and other services difficult to develop for them  The government selected “private” entities as AMSECs. The subsidized tractor prices are well below market prices to begin with, and the generous financial arrangements make AMSECs a lucrative and attractive business. The government has not had any difficulties in attracting applicants, yet the criteria for selecting the recipients are lack of transparency. This raises concerns about possible rent seeking behavior As an outcome, many AMSECs are losing money and have defaulted on their debt repayments even with subsidized prices without interest payments on the loans
  9. 9. LESSONS LEARNT AND POLICY RECOMMENDATIONS  Mechanized hiring services provided to smaller scale farmers is a common practice in many Asian countries o This service market is private sector led and farmer-to-farmer hiring-out services are a common practice, welcomed by small farmers in both Asian and African countries o The suppliers of hiring-out services are relatively larger scale farmers who are tractor owners but without hiring-out services their machinery cannot be fully utilized for plowing their own land  In the early stage of the market development, there exists uncertainty in the hiring-out services, which increases the risk to the private machinery investors – this market failure could slow down the supply response of hiring-out services o However, the government sponsored mechanized service center did not and cannot overcome such market failure o Instead, the government can play a facilitative role in market coordination (like the local governments in China) or to support the private sector’s innovation (like the call-center in India) to help the private sector overcome the information asymmetry in hiring-out market
  10. 10. LESSONS LEARNT AND POLICY RECOMMENDATIONS (CONT.)  The risk to would-be private investors is associated with the investment cost of agricultural machinery, which in turns is often determined by the engine size of the machinery. There are a wide range of sizes and horsepower as well prices for tractors o In Asian developing countries, power tillers and small low-horsepower four-wheel tractors are popular as they are affordable for many farmers even with smaller farm size o In many African countries, large tractors are popular. Without subsidy only secondhand tractors are affordable  Promoting affordable smaller tractors suitable for African condition is the key  What the government can do? o Research and development focusing on affordable smaller agricultural machinery suitable for local conditions as part of agricultural development strategy o Promotion of knowledge and information about small machinery  Support low-cost outreach courses provided by local or international technical institutes to mechanics and tractor owners to improve their knowledge of tractors and other machinery o R&D for affordable and suitable smaller machinery as part of concessional loan arrangements with donor countries  Collaboration and partnership between technicians, engineers, and other experts from donor countries with local counterparts including tractor users and importers o Encourage engineering departments in local universities to provide technical support for design or adaption of more simple machinery suitable for local conditions  Support local entrepreneurs in fabrication of small and simple agricultural machinery and spare parts o Reform subsidies by avoiding arbitrary selection of recipients and of types of subsidized machinery and increasing transparency to eliminate rent-seeking behavior