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Agrekon: Agricultural
Economics Research,
Policy and Practice in
Southern Africa
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SOURCES OF GROWTH
IN SMALLHOLDER
AGRICULTURE
INTEGRATION OF
SMALLHOLDERS WITH
PROCESSORS IN SUB-
SAHARAN AFRICA: THE
ROLE OF VERTICAL AND
MARKETERS OF HIGH
VALUE-ADDED ITEMS
a
C. L. Delgado
a
International Food Policy Research
Institute , 2033 K St., NW, Washington, DC,
20006, USA
Published online: 09 Jun 2010.
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Agrekon, Val 38 (Special issue) Delgado
1. INTRODUCTION
The point of departure of this paper is that African nations cannot afford to
ignore smallholder agriculture, however difficult its prospects may seem.
Region-wide, at the beginning of the 1990's,85 percent of Africa's population was
rural, and more than a quarter of the labour force was actively engaged in
agriculture, overwhelmingly on smallholder operations, with the exception of
South Africa (United Nations Development Program figures cited in Bryceson,
1996). Even in South Africa, where large private farms are common, more than
half the agricultural population of 2.5 million is estimated to work at least part-
time on smallholdings (Simbi, 1998). Smallholder agriculture is simply too
important to employment, human welfare, and political stability in sub-Saharan
Africa (hereinafter "Africa",for convenience) to be either ignored or treated as
just another small adjusting sector of a market economy, akin to the leather shoe
industry in the United States.
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Agrekon, Val 38 (Special issue) Delgado
One analysis of the issues presented at the recent plenary meeting of the
International Association of Agricultural Economists stressed that promoting
growth in smallholder agriculture in Africa through increased participation in
growing world markets for high-value items will require sigruficant vertical
integration of smallholders to processing and marketing finns (Delgado &
Siamwalla,1997).This is principally due to missing or dysfunctional markets for
some factors, inputs and outputs. This follows very much in the tradition of the
rather large recent literature on contract farming in Africa (see for example
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Glover, 1990; Little & Watts, 1994; Grosh, 1994; Porter & Phillips-Howard, 1997).
The paper will briefly review the structural constraints facing smallholders in
many African countries, which are thought to manifest themselves in high and
often prohibitive transaction costs. Overcoming these transaction costs will then
be shown to be at the heart of a strategy for increasing the access of smallholders
to the assets, information, services and markets necessary to grow their incomes.
The principal tool for reducing transaction costs is institutional innovation. The
paper will show how different degrees of vertical integration in different forms
of producer organisationsaddress specific kinds of transaction costs. Transaction
costs are also shown in order to be commodity-specific.The potential to produce
different commodities in Africa will be shown in order to suggest specific forms
of vertical integration with processing and marketing. The paper will conclude
with thoughts on where and how contract farming, a form of vertical integration
with processing and marketing, can be useful for promoting growth.
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Agrekon, Vo138 (Special issue) Delgado
Futhermore, in many parts of Africa, while some markets for factors, inputs and
outputs may work well, key markets for agriculture(suchas rural land and small
farm credit, for example) may not exist. In the context of missing markets, small
and large farm households in nual areas of Africa may not have access to the
same technology, information, asset base, input supplies, and market outlets,
since the market institutions that provide fungibility among resources (including
over time) are not all there. The same is true for farm households in different
locations.
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Agrekon, Vol38 (Special issue) Delgado
Access to Assets
3 Need for institutions to implement a asset transfer to
smallholders that provides an incentive for increased
productivity.
Access to Information
c Need for institutions to overcome the principal-agent problems
in sharing production and marketing information
Access to Services
P Need for institutions to share the risks of service delivery to
smallholders and to overcome other economies of scale in
production
Access to Remunerative Markets
17 Beyond the removal of artificial barriers, need for institutions to
overcome economies of scale in processing and marketing of
high value tradable items
It is hard to see how any economically viable system can exist over time without
some form of exogenously determined, net resource transfer into the smallholder
farming system. Resource poverty is easily observable among large numbers of
African smallholders, even in relatively high potential agricultural areas, and
rural people are becoming increasingly resource poor in some areas. This is
especially true in Southern and Eastern Africa, and in the reconstruction period
following civil strife or drought in which so many persons in mal Africa now
find them.
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(who provides the dam and water), an aquaculture farmer from either the farm
labour pool or the smallholder sector (who provides the labour and reaps the
benefits). It then associates information inflows from the Division of Aquaculture
of the University of Stellenbosch.While the present numbers are small and the
economics uncertain, this program is an innovative attempt to associate the
assets and information of the formal sector in a business relationship with the
smallholder sector.
The traditional policy response in the past in large parts of Africa to serving the
less choice physical locations is exemplified by pan-temtorial pricing of inputs
by parastatd concerns, or the provision of credit on non-economic bases (seeLele
1991,for example). This is clearly unlikely to be a feasible strategy in the future.
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Even where subsidised State programs and formal sector private institutions for
service provision have not reached smallholders, indigenous institutions for
sharing risks and dealing with market failures have frequently been observed.
In some cases, they can be shown to be efficient in resource allocation, as in the
case of credit pools in Northern Nigeria (Udty, 1993). However, indigenous
institutions that are alternatives to the market tend to he highly location specific
(Swegle, 1994).
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Adding transaction costs to the analysis highlights that incentives involve both
the cost and benefit sides. Following the adoption of majority rule in South
Africa and real exchange rate devaluation in Zambia, coupled with the
elimination of subsidies to maize-growing during the first half of the 1990's, it is
worth speculating why large commercial farmers in Zambia apparently shifted
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Agrekon, Vol38 (Special issue) Delgado
with little difficulty from maize for domestic milling to production of oilseeds for
export to the previously unattainable South African market, whereas
smallholders retreated increasingly into subsistence production (Delgado &
Siamwalla, 1997). Quite possibly the large commercial farmers found it easier to
export than the individual smallholder in Zambia.
shift out of increasingly non-viable things that they did under previous economic
environments, and into increasingly remunerative new opportunities in the
export and import-substitution sectors (Delgado & Siamwalla, 1997). High value
(and high value added) activities in African agriculture typically require large
amounts of processing and often involve goods where quality needs are quite
specific. Such goods are typically associated with high transaction costs
(Binswanger & Rosenzweig, 1986 and Jaffee & Morton, 1995). As will be argued
below, this fact and the institutional needs discussed above for promoting
improved smallholder access to assets, information and services will argue for
commodity-specificity in institutional innovation and a "new" (re-found)
emphasis on sub-sector approaches for promoting African smallholder
agriculture in the post-Structural Adjustment era.
This is the most predominant form of production in the region, and results from
the relative abundance of land (until recently, at least) and the relative absence
of labour-augmenting technology in most areas outside State farms and those
zones settled by Europeans (Eicher and Baker, 1992). IS corresponds roughly to
the "stylised picture" above. Such farmers are "independent" in the sense that
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they buy their inputs and sell their produce independently wherever they choose
(among whatever options are available to them), for whatever they can get.
Where the transaction costs associated with processing and marketing are low,
IS supported by various forms of institutional development in service provision
is probably the most desirable form of organisation.The institutions in question
are most likely in the realm of public goods provision, such as agricultural
research, extension and input supply ("prime movers" of agricultural
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development, in the language of Rukuni & Eicher, 1994). The latter help
overcome structural constraints on the production side. Where the problem is on
the marketing and processing side, high transaction costs suggest the
attractiveness of vertical integration.
One problem with a large part of the previous Literature on various fonns of
smallholder organisation in Africa prior to 1990 is that studies of schemes
typically assessed the value of initiatives relative to a hypothetical ideal (a better
scheme), and not a more realistic counterfactual of "benign neglect" of the
organisational needs of smallholders (or real laissez faire). The "IS" alternative
considered here is an attempt to consider that counterfactual as currently
observed in the majority of smallholder farming situations in Africa, where no
contract farming is present.
These farmers are like IS, except that for at least one input or output they have
a contractual relationship with other farmers, merchants or processors for factor
or input supplies and/or output sales. Typical arrangements are contract
farming, producer co-operatives, and outgrower schemes with or without a
nucleus estate. Within these forms, there are many variants in Africa at the
present time, and they provide some of the most lucrative opportunities
available to smallholders (Hussi et al., 1993;Grosh, 1994;Little & Watts, 1994;
Glover, 1994;Swegle, 1994 and Jaffee & Morton, 1995).
A common thread of these forms of organisation is that the farmer agrees to sell
the product of a specific acreage of a crop to a processor or a marketer (including
a larger farmer or a co-operative), usually at the time of planting (Grosh, 1994).
The farmer typically gains the benefit of assured supplies of the right inputs at
the right time, frequently credit against crop deliveries, and an assured market
for the output at a price not always known in advance, but applied equally to all
farmers in a given location and time period. Extension is usually part of the
services provided, typically at higher rates (and quality) than State extension
services. Little & Watts (1994)and Grosh (1994)estimate that densities of
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extension agents to farmers are from 5 to 20 times higher within contract schemes
in Africa than outside them. To the extent that high-value export items are often
involved, the farmer also gains market access and avoids the hazards of being
stuck with a perishable crop with little domestic demand. Contracts with
processors often overcome the access barriers to assets, information, services and
markets faced by smallholders wishing to produce high value items (Jaffee &
Morton, 1995).
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Parallel non-contract markets for traditional exports may not exist, except for
non-comparable rejects from the export circuit, so price comparisons may be
difficult (Glover, 1994).Where such parallel markets exist, such as for food crops,
the contract price is usually slightly lower than that prevailing on parallel
markets (peanuts in Senegal would be such a case - see Badiane, 1997).
The ways that prices are fixed and negotiated vary greatly across contract
farming arrangements, and matter greatly to the interests of both sides. Fixing
prices ahead of planting either means the risk of an undesirable intake for the
processor, or the risk that farmers will choose to break the contract and sell on
spot markets if the latter price rises above the contract price. Grosh (1994)cites
the case of wholesale breakage of Asian vegetable contracts in Kenya in the early
1980'sthat eventually led to vertical integration of the processing industry.
Fixing prices ahead of planting decreases risk to the farmer, but may also mean
lower income than otherwise in the event of a bad season. Many schemes use a
double tranche system, with an initialpayment at delivery, and a second tranche
later in the year, after final realisations to the processor are in. This typically
reduces processor exposure in highly fluctuating terminal markets such as coffee,
cocoa, cotton and specific vegetable oils. In theory at least, it also permits a
higher margin to be passed on to farmers in the form of profit sharing (Glover,
1990).
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Agrekon, Vol38 (Special issue) Delgado
surveys of contract farming in Africa (Glover, 1990 and Little & Watts, 1994).
Two key issues are the freedom to grow other crops (principally food items),
including using scheme resources to do so, and the level of farmer participation
in decision-making. Generally, schemes that have tried to limit farmer activities
on non-contract crops have not fared well over time. Conversely, schemes that
have involved substantial farmer participation in management have tended to
work more smoothly and to increase production of the contract crop in a more
sustained fashion over time.
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First, educated people from the area, speaking the predominant language of the
farmers, need to be associated in the senior management. Second, resettlement
of farmers for contract farming runs the danger of making participants too
subjugated to scheme management to have effective participatory control. Third,
payments need to be made to those who do the work. Since that is frequently
women, and such direct payments are occasionally resisted by men in local
communities, the gender issue cannot be avoided.5 Fourth, farmers as well as
management need to be associated with the monitoring of quality standards.
Fifth, the pay and benefits of hired labour working on participant farms needs
to be included in the monitoring and deliberations carried out by scheme
management. Sixth, participants should be free to grow other crops, especially
food, outside the scheme (a point also made by many other authors).
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Agrekon, Vol38 (Special issue) Delgado
Another form of contracting between small fanners and processors that merits
special mention occurs in the case of specialised producer co-operatives, such as
dairy co-ops that process and market milk (Hussi et d., 1993and Staal, Delgado
& Nicholson, 1997). Many of the same issues applicable to contract farming are
also applicable to producer coops. In particular, coops often play a similar role
to contract farming schemes in facilitating access to assets, information, services
and markets, especially for perishable items.
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Producer co-ops are unlike contract farming schemes, however, with respect to
negotiations among different partners. If the issue in contract farming revolves
around the power of fanners to negotiate with the processor, in producer co-ops
it is the power of members collectively and individually to hold coop
management accountable. Producer co-ops in Africa have had a generally
unhappy history, because of difficulties in holding management accountable to
the members (i.e. moral hazard), leading to inappropriate political activities or
financial irregularities in management (De Janvry, Sadoulet & Thorbecke, 1993;
Glover, 1994 and see Akwabi-Ameyaw, 1997, for a recent example in Zimbabwe
that is all too typical). The degree of moral hazard seems to be greater if they are
general enterprises rather than organisations created for specific purposes, such
as farmer-run local milk marketing co-ops in Uganda and Kenya (Staal, Delgado,
& Nicholson, 1997). As in the case of contract farming, the degree of effective
farmer participation in the oversight of scheme management is the key to
success.
5.3 Large farms or plantations that are relatively specialised and somewhat
vertically integrated (LF)
Large farms and plantations in Africa have tended to exist only where the local
peasantry lost control over local agricultural resources. In some historical cases,
this was a radical loss, as under some forms of colonial rule or ethnically based
land expropriation (Kenya, Zambia, Zimbabwe and South Africa, for example),
or expropriation by the State (Ethiopia, Tanzania). In others, the lack of rural
representation in governance helped foster a dualistic agriculture of IS, on the
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one hand, and large enclave plantations on the other (coastal West Africa, for
example).
Four aspects of large farm agriculture should be noted for present purposes.
First, the rise of participatory local government in Africa, coupled with
increasing land scarcity, suggests that LF forms of organisation will gradually
disappear over time in the region, unless there is some strong technical
justification for their existence. Second, some rural activities are characterised by
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Since transaction costs create the need for institutional innovation to facilitate the
participation of smallholders in markets, it is useful to review the specific factors
in rural Africa most likely to be associated with transaction costs, and how they
shape the type of producer organisation most suited to dealing with them.6
The absence of property rights and enforcement makes any form of contracting
risky and generally discourages commercialactivity. The absence of participatory
local governance favours a dual production system composed of large
commercial farms and smallholders left to their own devices. Both land scarcity
and having a large share of the national labor force in agriculture tend to favour
the emergence of some form of production system based on small operations.
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operators operators
large farms
and
or
processors/
plantations
marketers
Commodity characteristics in
production:
High labour intensiveness Yes no
Economies of scale in production no Yes
High returns to extension/ no Y e
farm/research linkages
Complex purchased input use no
required
High investment requirements no no yes
Commodity characteristics in
processindmarketing:
Quality specificity no no
Perishability/need for CO- no Yes
ordination with processor
High value to weight no
Principal market is export no
High economies of scale in no
marketing
Economic and political
environment:
Land scarcity no
Agriculture a larger share of no
labour force
Poorly integrated output markets
Missing input or factor markets
Absence of property rights/
enforcement
Absence of participatory local no
governance
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of production in SS
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Notes: *
Scored on a range from 0 to 5, with 5 being the highest (see "sources").
IS = "Independent smallholder/operator"
2
CF = Small operators contracting with processors" such as producer coops,
contract farming, outgrower schemes, etc.
LF = "Large (more specialised) farm, ranch or plantation, with vertical
links to processing, marketing".
Sources: The transaction cost scores are derived from the simple addition of "yes"
answers to the prevalence of the commodity characteristics listed in respect
of the commodity in question. Judgement as to whether the ten commodity
characteristics listed in Table 2 apply to specific commodities in Table 3 are
largely personal, but is also supported by the literature cited below in many
cases. The judgement as to the predominant form of organisation in Africa
is gleaned from the literature and from personal judgement See Minot
(1986), Little & Watts (1994),Grosch (1994) and Jaffee &z Morton (1995) in
particular.
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Results suggest that coarse grains, small ruminants, root crops, backyard swine
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and poultry have relatively few transaction costs associated with them and are
therefore most suitable for independent smallholder production. As suggested
above, these farmers may need institutional support to be able to grow their
incomes, but vertical integration into these commodities is probably not very
helpful.
Table 3 also lists the predominant forms of production observed in Africa for
each commodity, as inferred from the literature cited and personal experience.
The match is good, except that oilseeds are in the intermediate zone where both
independent and contract smallholder farming is observed. Sugar-cane falls on
the contract farming side of the line.
Cattle are a large investment for individual smallholders, and there are
economies of scale in herding, so the practice of contract entrustment to
specialised herders who cumulate the cattle of several owners is very prevalent
in West and Central Africa.’ Rice and wheat also have high transaction costs
arising in production, which are best handled through some form of vertical
integration. But rice has high labour requirements and quality specificity to it,
which suggests that contract farming by smallholders is preferable to large farms.
Wheat, on the other hand, has economies of scale and less quality specificity,
making it ideal for large commercial farms under African conditions.
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Finally, dairy, tea and cut flowers are all high transaction cost items with high
skills needs and relatively high investment requirements, as well as high labour.
intensity and very high quality specificity, which pull in opposite directions
organisationally. They are high value activities that can be undertaken either
through contract farming by smallholders or on large farms. A policy regime
oriented to smallholders should pro-actively promote the former.
8. CONCLUSIONS
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It was argued that certain (but not all) commodities that are produced in Africa
are especially subject to high transaction costs in both production and marketing,
because of the interaction of intrinsic commodity characteristics with Africa's
structural characteristics. In particular, high value-for-weight and high value-
added tradable commodities, of which the potential profitability has been
enhanced by structural adjustment, are typically among those items with the
highest associated transaction costs. Examples would be millc and meat on the
importable side, and fish, vegetables, coffee, tea and cocoa on the exportable side.
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Agrekon, Vol38 (Special issue) Delgado
small stock. Not surprisingly, low value starchy staples and domestic small stock
are ubiquitous products in Africa's smallholder agricultures. Public policy will
probably have to become more involved in public goods provision in these
sectors to promote growth. However this was not investigated here.
These are sectors where smallholders are otherwise unlikely to be able to become
involved due to lack of the appropriate assets, information, access to services and
possibilities of marketing. They are also sectors where the lack of smallholder
involvement in some countries and time periods has led to these items being
supplied by large vertically integrated farms. This situation is unlikely to be
politically sustainable over time. Furthermore, the distribution of transaction
costs suggests that large farms will probably have problems competing with
contract farming solutions in the future, if they can be substituted.
Pineapples, bananas and palm oil for export are likely to remain economically
viable in Africa, but more so on large farms than small ones, even when
vertically integrated. Wheat, to the extent that it is cultivated, is unlikely to
become a contract crop for smallholders.
To the extent that policy actors are involved with the design and supervision of
contract farming schemes, it will be important to establish the conditions for
good governance and the fair representation of all stakeholders on governing
boards, including farm labour of both genders. Finally, experience embodied in
the literature and from observation in the field suggests that contract farming
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Agrekon, V o l 3 8 (Special issue) Delgado
schemes will do best where they do not attempt to organise farms completely or
to change production patterns, but where they represent an additional
opportunity for smallholders anxious to have access to assets, information,
services and high-value markets.
NOTES
4. A comprehensive revimv is outside thescop ofthe present paper. Detailed source mnferials
at diffireent levels of economic conceptualisation (typically inversely related to usefulness
jbr practical application) are Hofi Braverman, b Stiglitz (1993); Hussi et al. (1 993); and
Swegle, 1994.
5. This issue was reportedly a major sticking paint in at least one Uganda dairy co-operative
observed by the author in 1996, until the institution of a joint checking account for
husband and u@ was introduced in the local rural bank, with co-op milk payments made
directly into that account, which was independently accessible by the wifi (Staal, Delgado,
b Nicholson, 1997).
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Agrekon, Vo138 (Special issue) Delgado
6. The material in this section draws heaviZy on the s011rces listed in Table 2, and especially
on Minot (1986), Little b Watts (1994), Grosh (1994) and Glover (1994).
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