Can Diversification Towards High Value Commodities Strike Gold For Farmers?

Farmer at Malda, West Bengal. Source: (Flickr): Divya Pandey, IFPRI
Farmer at Malda, West Bengal. Source: (Flickr): Divya Pandey, IFPRI

Konark Sikka former intern with IFPRI-South Asia office

Despite small land holding, agriculture’s falling share in national income, and limited scope of transfer of labor to non-farm sectors, agriculture still plays a significant role towards food security and poverty reduction. A recent IFPRI discussion paper on Agricultural Diversification and Poverty in India looks into hypothesis and assesses options for improving the outcomes of the farmers through crop diversification into high-value crops (HVCs) that boost incomes, generates employment, and reduce poverty. The estimates in the paper show that over 5 percent reduction in farm poverty in India can be achieved through crop diversification.

Overall, about 22 percent of farm households in India grow at least one HVC crop. In this study, the authors use Generalized Propensity Score Matching and Dose Response Functions to establish ranges within which crop diversification would effectively reduce poverty. The authors suggest that for marginal farmers, the allocation of land towards cultivation of HVCs needs to rise from the current rate of 39 to around 50 percent, in order to pull such farmers out of poverty. Expectedly, larger the land size, a smaller proportion of land allocated to high value crops is needed for this purpose.  However, increasing area need not be the only option with marginal farmers, since there often is an inverse relationship between farm size and productivity.

In moving towards HVCs, small and marginal farmers face several constraints such as lack of access to credit, input, seeds, high yielding varieties, technology and information, and limited markets in rural areas. For marketing their produce in urban areas they have to bear additional costs  for transporting.

Studies reveal that, with rise in income, urbanization, consumers preferences are shifting from cereals towards high value produce. With a rise in demand of HVC there is potentially a transformational shift of the agri-food marketing system that would involve movement towards  vertical coordination away from spot markets. Vertical coordination would be needed to improve  access to inputs, services, and output markets, and a reduction in marketing and transaction costs.

The authors conclude that diversifying crops with the cultivation of more high value commodities, which have a growing market in the urban areas of the country, could provide farmers with the much needed extra income. Contract farming will help in connecting small holder farmers in the supply chains that would enhance their livelihood.  Further they add, with better infrastructure and improved supply chain coordination, the same increase in income could also be achieved with lower levels of diversification.


Scattering the Crowd: Freeing up Indian Agriculture

Konark Sikka is an intern with IFPRI- South Asia office

Farmer in the field at Nalanda District, Bihar. Source: (Flickr) Divya Pandey, IFPRI
Farmer in the field at Nalanda District, Bihar. Source: (Flickr) Divya Pandey, IFPRI

Smallholders form the core of the agricultural system in India. Yet, they are marginalized and their
problems overlooked. They face rising wages, rural-urban migration as well as growing market and climatic risks. In order to deal with these complex challenges, a “one size fits all” policy may not work.

At the 74th Annual Conference of Indian Society of Agricultural Economics, Dr P K Joshi, Director of the IFPRI South Asia Office, gave a keynote address titled ”Has Indian Agriculture Become Crowded and Risky? Status, Implications and the Way Forward”.

Dr Joshi stressed that the issue is compounded by the growing number of smallholders and their declining areas of operation, which leads to continual shrinking of the size of their landholding. Developing countries, including India, have praised smallholders on their efficiency, promoting them on the belief that “small is beautiful”. Although there is no doubt about their efficiency, there are questions regarding their viability and sustainability due to the steep decline in their holdings without any additional income sources.

Over the past 30 years, the number of smallholders has increased by 70%, with their land share jumping to 45%. However, the total operating area has fallen by 4 million hectares (ha), due to increased urbanization, land degradation and real estate development. Furthermore, smallholders are mostly clustered in areas with high poverty and low urbanization, as well as low scores on other social indicators, such as human development, sanitation and access to toilets. Dr Joshi said that increasing smallholders without appropriate measures would have wide socio-economic and political implications.

The crowding of smallholders not only leads to the overuse of natural resources and over-use of chemical fertilizers, but also leads to a rapid degradation of land and water resources. Dr Joshi indicated that,  despite the developments in the markets and value chains in India, smallholders remain at risk because they are left behind due to their lower marketable surplus than large farmers, lower bargaining power, higher transaction costs, greater price volatility and underdeveloped markets in smallholder-dominated areas. Moreover, Dr Joshi said, they are uninformed about markets and financial institutions.

In the public extension system, around 72% of farmers, especially smallholders, are untouched by any source of information delivery system. Those with more access to information sources had more land ownership and irrigated areas. Further adding to the stress is the risk of climate uncertainty. In the past, Dr Joshi said that there had been major risks of drought and flood episodes in South Asia due to climate change, coupled with water shortages and outbreak of water- and mosquito-borne diseases. Such events would cut down productivity and increase prices for staple foods, furthering the burden on smallholders.

Looking at the states of Bihar and Odisha with high concentrations of smallholders (97% and 83%, respectively), they have weak institutions and infrastructure, complex social stratification as well as climate and pest risks, all of which lead to low productivity. Other bottlenecks such as a weak market and credit system, lack of implementation of the Model Market Act as well as a lack of electrification further pull agricultural growth backward, Dr Joshi commented.

On the other hand, diversification toward high-value agriculture as well as several public and private sector initiatives have increased the participation of a large number of smallholders in modern value chains of milk, fruits and vegetables, thus raising their income. Smallholders can benefit with initiatives to bridge yield gaps, promote high-value agriculture, strengthen agro-processing, and create enabling institutions. However, Dr Joshi added, creating job opportunities outside agriculture for smallholders is the ultimate solution to improving their livelihoods.

In his presentation, Dr Joshi highlighted several policy-based ways forward:

1. Land & Labour Reforms: A new land ceiling law for a minimum size of landholding should be implemented in order to prevent further lowering of holding size and fragmenting of landholdings. Labour laws need to be reformed so that industrial and service sectors can absorb surplus manpower from the agricultural sector.

2. Market Reform: Developing markets in areas with more concentrated smallholders would be beneficial, as would adopting a cluster approach while developing markets. Creating institutions, such as contract farming and cooperatives—which link smallholders with markets as well as minimize risk in marketing of agricultural commodities—would help as well.

3. Reform Agricultural Extension System: There is a need for a new cadre of agri-business professionals who should be mandated to develop business plans for farmer groups and link them with service and tech providers as well as markets, especially in smallholder-dominated areas.

4. Minimize Risk: The government should evolve policies and institutions to promote climate-smart agriculture, agricultural insurance and strengthen weather advisory services in order to deal with the risks that climate change portends.

5. Innovations toward pro-smallholders: There needs to be a pro-smallholder thrust in any new agricultural research agenda set out by the national agricultural research system. The time is also right for convergent innovations, related to social mobility, technologies, financing and marketing and processing and retailing

6. Non-Farm Employment Opportunities: Industry and manufacturing needs to be strengthened so that smallholders have means of alternative employment, which allows for poverty reduction.


Move Up or Move Out: Transforming Smallholder Family Farms

Women Farmers in field, Nalanda District, Bihar. Source: (flickr) Divya Pandey, IFPRI
Women Farmers in field, Nalanda District, Bihar. Source: (flickr) Divya Pandey, IFPRI

Most smallholder farms are family-based—of the world’s 570 million farms, 88 percent are family farms while 84 percent are small.  Smallholder farms, with an average size of 2 hectares or less, provide not only livelihoods to 2.5 billion people but also 80 percent of the food consumed in Asia and Africa south of the Sahara. Nevertheless, with emerging challenges such as climate change, price shocks, agricultural-related risks to health, and limited access to finance and capital, smallholder farmers will suffer the most.

In the light of these challenges, strategies are needed that are tailored to different types of smallholders and a country’s level of transformation, said IFPRI Director General Shenggen Fan  at last month’s M.S. Swaminathan Research Foundation’s campus in Chennai, India, where he spoke on  “Enhancing the Profitability of Family Farms” at the Asia-Pacific Regional Consultation on the “Role of Family Farming in the 21st Century: Achieving the Zero Hunger Challenges by 2025.

According to Fan, research shows that smallholders with profit potential should move up from subsistence to profitable farming systems and that already profitable smallholders need to scale up commercial activities. Conversely, farmers who lack profit potential should move out of agriculture and into non-farm employment.

Policies should reflect a country’s stages of transformation: from increased productivity among smallholder farmers to institutional reforms, leading to high-value agriculture and improved links to global and urban markets.

Using the example of India, Fan said that linking farmers with a dairy grid connected over 13 million of farmers—over 25 percent of whom were women—which not only increased their bargaining power but it also helped to provide demand information and reduce costs and risks.

Fan concluded his presentation by outlining next steps to enhance profitability of smallholder family farms, which includes

  1. Institutional reforms that strengthen land rights and help facilitate land transactions (particularly though rental markets),
  2. Increase linkages between smallholders and value chains,
  3. Provision of smallholder-friendly financing,
  4. Promotion of price stabilization mechanisms, and
  5. Development of programs that target young farmers

Transforming Smallholder Farms

Women Selling Mangoes, Warrangal, Andhra Pradesh, India: Source: Flickr: Pallavi Rajkhowa/IFPRI, 2013

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Small farms play an indispensable role in global food security, particularly in developing countries. In fact, according to the UN Food and Agriculture Organization (FAO), four-fifths of the developing world’s food is a product of small-sized farms. That said, not all smallholder farms are cut from the same cloth and strategies that help shift small farms from subsistence to profit should be considered alongside interventions, like non-farm employment, for those whose farms lack profit-earning potential.

Recognizing that smallholders are less likely to take risks and thus skew towards subsistence, Shenggen Fan (director general of IFPRI), Joanna Brzeska (consultant researcher at IFPRI), Michiel Keyzer (director of the Centre for World Food Studies of the Vrije Universiteit (SOW-VU)), and Alex Halsema (researcher at the Centre for World Food Studies at SOW-VU), offer a set of policy recommendations in their Food Policy Report, From Subsistence to Profit: Transforming Smallholder Farms, to both help smallholder farmers with profit potential undertake more commercial activities as well as guide those who are grappling with the search for employment opportunities off the farm.

According to the authors, it’s important to shift the context in which we view smallholders. It’s not a matter of small versus large farms but rather understanding that the ideal farm size is “a dynamic concept that changes as a country’s overall economy grows and as nonagricultural sectors develop.” To illustrate this, the authors present a typology of various development strategies and interventions.

The authors also offer several policy recommendations to help potentially profitable smallholders meet emerging risks and challenges, including the need to loosen rental market regulations, strengthen smallholder links to input and output markets, and endorse land titling programs. Supporting social safety nets, such as vocational training and conditional and unconditional cash transfer programs, is also important to smallholder success.

Fickle weather patterns, and climate change in general, disproportionally impact smallholders, particularly due to their limited resource base to absorb such shocks. This makes access to tools such as flexible insurance crucial to managing such threats. The uncertainty wrought by volatile food prices is especially problematic for smallholders because “although some smallholder farmers with marketable surplus stand to profit from rising food prices, the volatility and uncertainty of prices make it difficult for them to take advantage of these opportunities.”

An integrated approach to agriculture, nutrition, and health is another key policy recommendation. As the authors write, “Development efforts over the past several decades have focused on providing an adequate supply of food through improved agricultural productivity, but they have failed to deliver adequate quantities of nutritionally balanced food, especially to poor people.”

The authors also emphasize the importance of mechanisms that improve smallholder access to market information and bargaining power, such as producer associations, group lending, and information and communication technologies (ICTs). And, they stress the need for smallholder-friendly forms of financing and investment, since limited access to finance and capital presents another major barrier for smallholders, leaving them particularly vulnerable to shocks.



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