The Organization of Farming: Revisiting the Debate on

Small vs Large Farms

.

Derek ByerleeWorld BankLand Conference, April 26-27, 2010

A Broad Consensus on the Vital Role of Smallholder

Agriculture in Development

Three Basic Premises

Family farms widely accepted as being most efficient (Lipton 2009, many others) Difficulty of labor supervision in spatially

dispersed production Flexibility management of land and labor

resources to fit seasons and markets (Allen, 2004)

Local knowledge advantages the owner-manager

Family farms, including smallholders, remain as main organizational model in both poor and rich countries Owner-operated employing mostly family labor

1. Consensus Around a Development Agenda Based on

Family Farms

Family Farming Combines Ownership, Management, and Most Labor

FAMILY FARMING CORPORATE MODEL

Family-management

Land

CapitalLabor

Management

Land

CapitalLabor

Mean size (ha)

% < 2 ha Gini

sub-Saharan Africa

2.4 69 0.49

South Asia 1.4 78 0.54

East Asia 1.0 79 0.50

SE Asia 1.8 57 0.60

WANA 4.9 65 0.70

Central America 10.7 63 0.75

South America 111.7 36 0.90

Europe 32.3 30 0.60

USA 178.4 4 0.78

Vast Majority of World’s Farmers are Small and Family Operated

Source: Eastwood et al., 2009

Size of Family Farm Increases During Structural Transformation

% farms

% sales

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Farm ownership USA

OtherNonfamily corpsFamily partners and corpsFamily ownership

1900 1920 1940 1960 1980 20000

20

40

60

80

100

120

140

160

180

200

0

2

4

6

8

10

12

14

Trends in USA, 1900sFarm size (ha)

Manufacturing wage ($1992/hr)

Gardiner, 2002

Strong growth and employment linkages Especially demand for local consumers

goods and services Example of green revolution

Local community development and better services in family-farm agrarian structure

Re-affirmed in World Development Report, 2008

2. Smallholder Productivity Growth Promotes Equitable Development

3. Urgent to Close a Huge Investment Gap to Get Agriculture Moving

Public investment necessary but not sufficient

Market-led approaches imply lead role of private investment• Including FDI• Investing in farming

vs the value chain19

9019

9319

9619

9920

0220

050

1,000

2,000

3,000

4,000

5,000

6,000

Flow of FDI in Agricultural Pro-duction ($US M)

Source: WIR, 2009

Indicators of significant concentration Latin America—Large regional companies

Arg: Top 30 companies total 2.4 m ha.

Brazil: 270 sugar mills with average of 12,600 ha own –managed area

Mato Grosso, Brazil. Average soybean farm size of 1300 ha, 20% foreign

RUK: Companies took over state owned farms and collectives Ukraine: Top 40 companies manage 4.5 M ha; Russia: Top 30

companies 6.7 M ha (mostly home grown companies)

SE Asia: 8 of 25 world’s largest agric production companies are in palm oil

With Growing Private Invesmtent is there a Trend Toward Large-scale?

Large in land area, capital invested and sales (often ~ $US1billion farm prod) Sime Darby (oil palm)—Malaysia, Indonesia and with 600

K ha + (220 k planned in Liberia)

Cosan (sugar-ethanol)—Brazil with 300k+ ha and 300k ha of contract growers (double with Shell)

El Tejar (grains)—Argentina/Brazil 600k ha Pampa

Ivolga (grains)—Russia 650 k+ ha

Fibria (pulp)—Brazil, 500 k+ ha Eucalyptus

Sudan (grains)-- (Note operational units usually 5-20 k ha)

World’s Largest Farms are in Developing and Transition

Countries

1. Why the renewed emphasis on large-scale farm models?

2. So what? Tradeoffs?3. Are there other organizational

models to access capital and technology?

4. What research to fill major gaps in our knowledge?

Major Questions

Factors Increasing Scale: Some Hypotheses

Subsidies to capital that promote mech. e.g., Brazil until 1990s

Regulations that promote mechanization Labor laws that add transactions costs Environmental laws that prevent burning

cane Low or zero land prices that

encourage risky investments and speculation Large grain farms in Africa, Jatropha Forest extraction policies (Indonesia)

Historically, Often Stimulated by Perverse Incentives

‘Plantation crops’—’derived’ economies of scale through processing 10 K ha for oil palm, 20 K+ ha for sugarcane-

ethanol, 250 K ha for pulp mill (Even higher for second generation biofuels)

Requirement for processing with 24-48 hrs Harvesting must be closely coordinated with mill

capacity

Efficiencies of spatial concentration May reduce costs by 20%; Kenyan smallholders,

transport is 35% of costs of sugarcane

Scale Economies at the Operational Level

High implicit cost of labor Migration and settlement programs

Long term and costly, potential for conflict

Labor saving via mechanization Until machinery rental market develops

Capital costs to open new land Processing, establishing perennials, soil

amendments, irrigation, roads

Technology for new crops (OP, SC, Soy)

Opening New Lands in Areas of Low Population Density

Standards and certification Now also for bulk commodities Roundtables for sustainable sugarcane,

soybean, palm oil, biofuels…

Innovations that reduce diseconomies GMOs, zero tillage IT--precision agriculture, satellite

‘supervision’ Ability to innovate, new crops, new

markts Professional technical and management

skills—the “Value of the ability to deal with disequilibria”

‘New’ Drivers of Scale at Operational Level

Institutional Innovations:New Business Models

Specialized management companies combine production factors• Argentina—”Pools

de Siembra” Lease land and

machinery Assetts—Human capital

• State of art IT systems to improve technical and allocative efficiencies

Diversified portfolio—spatially and by product Smooth covariance of risks

Market imperfections and transactions costs Access to finance in global markets, poorly

functioning financial markets for local farmers Bargaining power in monopsonistic markets

Argentinean companies 10-20% price discount inputs

Vertical integration to overcome poor logistics Own rails and ports (Brazil, Ukraine)

Strong private R&D capacity

Influences on Scale Economies at the Company Level

So What if it is Large Scale?

Both Large and Small-scale can be Globally Competitive

Thailand rainfed Uruguay irrigated4 ha 340 ha

0

20

40

60

80

100

120

140

160

Rice

OtherLand and waterMachineryLaborInputs

Cost

(US

$ p

er

ton

)

Commodity Jobs/1000 ha Invest $/ha Invest $ per job

Jatropha, Tanzania 600 $600 $1,000

Oil palm, Indonesia 350 $4,000 $11,400

Sugar-ethanol manual-Braz

700 $14,000 $20,000

Sugar-ethanol mech--Braz

150 $14,400 $96,000

Plantation forestry-production + proc--Uruguay

20 $7,000 $360,000

Sorghum Sudan—semi-mechanized

53 $900 $17,000

Wheat-soybean irrig--Zambia

16 $6,000 $375,000

Soy—fully mechanized-Brz

18 $3,600 $200,000

Grains Ukraine fully mechanized

10 $450 $45,000

Employment Benefits vary Widely

Returns to Land Can Dominate Gains from Employment

Smallholders Joint Venture Estate0

5,000

10,000

15,000

20,000

25,000

Returns to Factors in Three Models of Oil Palm Production in Sarawak, Malaysia

TaxesHired laborLocal laborInvestor dividendsSmallholder dividends

NP

V (

$U

S/h

a)

Source: Cramb and Ferraro, 2010

0

1

2

Ratio of Yields and Costs of Smallholders and Large Scale

YieldsCosts

Efficiency Tradeoffs often Less Than They Seem

Sugarcane ZambiaOil palm Indonesia

Oil palm Indonesia indepOil palm Cameroon

Rubber MalaysiaGrains NigeriaGrains Zambia

Grains CameroonGrains Sudan

0 2 4 6 8 10 12

Ratio of smallholder incomes to only wage employment

And Major Equity Gains

Smallholders

Land

Labor

Local skills

Companies

Capital

Access to markets and technology

Specialized skills

Potentially Strong Complementarities of Assets

Smallholders

Land

Labor

Local skills

Companies

Capital

Access to markets and technology

Specialized skills

But not necessarily

Many Large Investors Lack Expertise in Tropical Agriculture

PRIZES FOR FAILED MEGAFARMS

UPLAND RICE INVESTOR IN LIBERIA, 2009?

1930s--Fordlandia to produce rubber in Brazil

1940s—British groundnut scheme in Tanzania• vs removing export

taxes on smallholders 1980s--Saskatoon on the

savannah—wheat in Africa

1990s--Mega rice project in Indonesia

Smallholders

Land

Labor

Local skills

Companies

Capital

Access to markets and technology

Specialized skills

Combining Assets1. Focus on Large-scale Production

(Low population density areas, mechanized grain production)

Smallholders

Land

Labor

Local skills

Companies

Capital

Access to markets and technology

Specialized skills

Combining Assets2. Contracting of Smallholders and Their

Associations

(Settled areas, horticulture, oilseeds, sugarcane?)

Smallholders

Land

Labor

Local skills

Companies

Capital

Access to markets and technology

Specialized skills

Combining Assets3. Partnerships

(Best for perennials and irrigated areas with high upfront investments)

Business Models Specific to Context and Commodity

Outgrower schemes• Initial subsidies for

participation of smallholders

• May not involve contracts

Cooperatives and shares in companies• Malaysia, Zambia

Independent growers with public support• Rubber in SE Asia,

Jatropha 1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

Indonesia--Area sown to oil palm by type of pro-

ducer (ha)

PrivateState OwnedSmall Holders

Growing land concentration but family farms still dominate

Impacts likely to be highly variable Specialized Agbiz firms with tech, knowhow vs

institutional investors R&D and technology still major issue for

sustainable and profitable investments in food crops in Africa

Level the playing field for smallholders Case for special support for start up costs and

public goods (extension)

Some Conclusions

Research to understand trends and performance of emerging corporate models Operational size, company size Role of IT, new tech, new business models

Rigorous evaluation of partnership models + Piloting of institutional innovations

Research on impacts—tradeoffs between growth, equity, social impacts and the environment

Big Agenda for Research

Extras

Best companies profitable and highly competitive (rapid growth) Grains and oilseeds (LA and RUK) Sugarcane (Brazil), Oil palm (Indonesia)

Sub-Saharan Africa History of failure of large-scale farms Some FDI associated with tech transfer

Plantation crops, biofuels, but not for food crops

Technology and Competitiveness

Economic Returns and Competitiveness Favor LA, RUK

Arg--V

ery

larg

e 1

Argen

--Ver

y la

rge

2

Arg--A

vera

ge

Braz C

err-R

ep 1

Braz C

err R

ep 2

Braz C

err--

Avera

ge

Zambi

a-Rep

Iowa

Rep

Iowa

Avera

ge0

50

100

150

200

250

300

350

400

Comparative Production Costs, Soybean, 2007-08

OtherInputsLand

Cost

(US$/t

)

Arg--V

ery

larg

e 1

Braz C

err-R

ep 1

Braz C

err R

ep 2

Thai

land

Rep

Ukrai

ne R

ep

Zambi

a LS

Iowa

Rep

Iowa

Avera

ge0

20

40

60

80

100

120

140

160

180

200

Comparative Production Costs, Maize, 2007-09

InputsOtherLand

Cost

(US$/t

)

Contrasting ModelsFAMILY FARM NON-FAMILY CORPORATION

Mostly family labor Mostly own assets (e.g.,

land) Owner-managed Focus on production Flexible

• Degree of commercialization

• Access to finance• Little use of specialized

services

Separation of management and ownership

All hired labor Variable arrangements

on:• Access to finance• Specialized services• Vertical integration

Factor Shares Also Change Over Time

Est

ate

Est

ate

Est

ate

Est

ate

Sm

allh

old

er

Sm

allh

old

er

1922 1963 1978 1995 1964 "1995"

0%

20%

40%

60%

80%

100%Rubber in Malaysia

CapitalLabor and managementLandSeries1

Source: Barlow, 1997