Importance of smallholder farmers

The importance of smallholder agriculture in developing countries is being recognised, which is the reason why there are countries where land is transferred to smallholders and development programs are redirected towards empowering these farmers (Dorward and Kydd, 2006; Lewis, 1954 cited in Todaro, 1997; Mellor, 1966 cited in Todaro, 1997). The proponents of smallholder farming argue that with enhanced market access, smallholder agriculture has potential to commercialise and contribute towards food security and poverty alleviation through food price reduction and employment creation. In addition, efficient smallholder agriculture leads to increased incomes and promotes equitable distribution of income, creates backward and forward linkages necessary for economic growth (Dorosh and Haggblade, 2003; Magingxa and Kamara 2003; Poulton et al., 1998; Reardon and Barrett, 2000). In this way, the smallholder agriculture sector is not only important for the revitalisation of the agricultural sector, but for the economy at large.

In South Africa, the potential contribution of smallholder farmers to the economic growth remains locked. The major challenges facing smallholder agricultural growth are closely associated with lack of marketing knowledge and opportunities, calling for market-oriented interventions. In marketing, the smallholder agricultural sector still resembles past Apartheid legacy, where the sector has difficulties in marketing produce through formal channels (Carter and May, 1999).

3.2.1 Smallholder farmers in markets

Markets are important because they act as a mechanism for exchange, derive benefits such as income and open opportunities for rural employment (Dorward et al., 2003; Machethe, 2004). Marketing activities such as processing, transportation and selling can provide employment for those willing to exit the farming sector. At national level, Lyster (1990) identified that the involvement of smallholder farmers in markets contributes to poverty alleviation and is important for sustainable agriculture and economic growth. Poverty is reduced through food price reduction, employment creation and farm income generation.

Farmers’ abilities to plough back their farm profits into the farm business result in sustainable agriculture and economic growth (Dorward et al., 2003).

3.2.2 Overview of smallholder marketing channels

For farmers, growing and harvesting a crop and rearing animals form only half of the battle because they still have to market the produce. For smallholder farmers in South Africa, marketing produce remains a challenge. This group of farmers faces difficulties in marketing, even though individual smallholder farmers may be integrated with national or international markets (Shiferaw et al., 2006). Before choosing a marketing channel, smallholder farmers consider the costs associated with transportation, profits, level of trust among the available

brokers and familiarity of the markets, among other factors (Makhura, 2001). In other instances, farmers market their produce through channels offering low prices because they either lack market knowledge or have difficulties in accessing markets that are more rewarding.

Most produce from smallholder farmers in South Africa is sold locally, with only a small amount exported. Generally, smallholder farmers market their produce individually in local markets, but make use of market intermediaries in international markets. The marketing channels that are usually followed by smallholder farmers are illustrated in Figure 3.1.

The arrows in Figure 3.1 illustrate the different paths that are followed by produce harvested and sold by smallholder farmers until they reach the consumers. Produce from smallholder farmers is sold to consumers and traders at the farm gate, usually through informal transactions where prices and terms of exchange are unofficially negotiated. These transactions between farmers and traders and between farmers and consumers most often occur in spot markets (Kherallah and Minot, 2001; Ruijs, 2002).

When compared to vertical coordination in the supply chain, some weaknesses are associated with spot markets. For instance, prices and conditions of delivery are negotiated for every transaction carried out on spot markets. This may result in increased marketing costs for the farmer. Moreover, farm gate sales tend to result in lower farmer revenue since the prices are relatively low and variable (Montshwe, 2006). Variable prices may result from unavailability of scales for weighing produce, asymmetric market price knowledge and opportunistic behaviour by the more informed traders. In addition, at the farm gate, farmers may sell to

SMALLHOLDER FARMER

Local Traders Middlemen/brokers

(produce assemblers)

Rural consumers

Urban consumers International

Traders

Foreign consumers

Farm gate price Farm gate price

Farm gate price

their neighbours, even when the latter cannot pay immediately for the produce. However, smallholder farmers tend to prefer farm gate sales because they receive immediate payments and do not incur marketing costs such as transportation costs and tax payments (Shiferaw et al., 2006).

3.2.3 Challenges faced by smallholder farmers in output markets

Smallholder farmers face difficulties in accessing markets, and as a result, markets do not serve the interests of smallholder and emerging farmers. In South African’s less developed rural areas, smallholder and emerging farmers find it difficult to participate in commercial markets due to a range of technical and institutional constraints. Factors such as poor infrastructure, lack of market transport, dearth of market information, insufficient expertise on, and use of grades and standards, inability to conclude contractual agreements and poor organisational support have led to inefficient use of markets, hence, results in commercialisation bottlenecks.

Furthermore, smallholder farmers lack vertical linkages in the marketing channels, which result in their exclusion from the use of formal markets (Delgado, 1999; Fenwick and Lyne, 1999; Makhura, 2001; Wynne and Lyne, 2003). Smallholder farmers have weak financial and social capital and limited access to legal recourse, implying that it is difficult to change these negative market factors individually (Fenwick and Lyne, 1999). As a result, they are trapped and continue to operate within the given market constraints and they do not receive rewarding incomes from their agricultural activities.

Institutional aspects in smallholder agricultural markets

Institutions, defined in the framework of new institutional economics, are rules of the game, which have been formulated to govern relationships between individuals or groups of people involved in transactional activities (North, 1990). Institutions are divided into formal and informal institutions, where formal institutions refer to legal rules whereas informal institutions refer to non-legal rules that are enforced by peers. Market institutions are the underlying determinants of economic performance since they shape the organisation of market transactions (Kherallah and Kirsten, 2001).

Institutional aspects in marketing and economic development include transaction costs, market information flows and the institutional environment. Smallholder farmers in less developed rural economies lack adequate market information and contractual arrangements, lack lobbies in the legal environment and are not easily receptive to changes (Delgado, 1999;

Kherallah and Kirsten, 2001). These factors tend to result in high transaction costs and, hence, difficulties in formal market participation. Where transaction costs are higher than the marketing benefits, smallholder farmers are discouraged from selling their produce using that particular marketing system (Makhura, 2001).

Transaction costs

Transaction costs are observable and non-observable costs associated with enforcing and transferring property rights from one person to another (Eggertson, 1990). These include the costs of searching for a trading partner with whom to exchange with, the costs of screening partners, of bargaining, monitoring, enforcement and, eventually, transferring the product to its destination (Hobbs, 1997; Jaffee and Morton, 1995). Delgado (1999) identified high transaction costs as the embodiment of market access barriers among resource poor smallholders. These high transaction costs result from individual produce transportation and selling, difficulties in getting trading partners and poor bargaining power (Delgado, 1999).

When transaction costs are high, smallholder farmers may cease produce marketing. In other words, with high transaction costs, markets fail in their role of allocating scarce resources to alternative ends. For South Africa, Makhura (2001) explained that high transaction costs prevail among the smallholder farmers.

Market information

Market information is vital to market participation behaviour of smallholder farmers.

Market information allows farmers to take informed marketing decisions that are related to supplying necessary goods, searching for potential buyers, negotiating, enforcing contracts and monitoring. Necessary information includes information on consumer preferences, quantity demanded, prices, produce quality, market requirements and opportunities (Ruijs, 2002). Of equal importance is the source of market information because it determines accuracy of the information.

According to Montshwe (2006), smallholder farmers have difficulties in accessing market information, exposing them to a marketing disadvantage. Smallholder farmers normally rely on informal networks (traders, friends and relatives) for market information due to weak public information systems (FAO, 2004). However, such individuals may not have up to date and reliable market information, making the usefulness of the information doubtful.

Additionally, farmers relying on informal networks for market information are at risk of getting biased information due to opportunistic behaviour of the more informed group.

For instance, Mangisoni (2006) explained that smallholders usually accept low prices for their crops when the broker informs them that their produce is of poor quality. Smallholder farmers accept these low prices mainly because they are unable to negotiate from a well-informed position.

Grades and standards

Consumers demand high quality for the goods they buy. In addition, they will not buy food products unless there is a guarantee that they are safe to eat (Kherallah and Kirsten, 2001).

In other words, consumers make purchasing decisions depending on packaging, consistency as well as uniformity of goods.

Most smallholder crops have no clearly defined grades and standards and, therefore, cannot meet the consumers’ demands (Reardon and Barrett, 2000). Produce from smallholder farmers do not meet certain market grades and standards because the farmers lack the knowledge and resources to ascertain such requirements. In addition, institutions for determining market standards and grades tend to be poorly developed in smallholder farmers environments. Due to uncertainty on the reliability and quality of their goods, they usually cannot get contracts to supply formal intermediaries such as shops and processors (Benfica et al., 2002). This indicates that only well organised farmers can benefit from trade liberalisation by adopting strict quality control measures and obtaining the necessary certification for their goods.

Organisation in markets

Smallholder farmers tend not to be organised in the markets as they usually sell their limited agricultural produce surpluses individually and directly to the consumers without linking to other market actors (Key and Runsten, 1999). In other words, smallholder farmers lack collective action in markets. Individual marketing of small quantities of produce weakens the smallholder farmers’ bargaining positions and often exposes them to price exploitation by traders. They also do not benefit from economies of scale (Kherallah and Minot, 2001).

In a globalised world, there is increasing vertical integration and alliance formation in the agricultural marketing channels and markets, in an effort to meet consumer needs. Such alliances include contract farming, cooperatives and farmer organisations. Agribusiness firms favour contracts with medium to large-scale farmers, such that individual smallholder farmers cannot be part of these contracting arrangements (Key and Runsten, 1999; Kherallah and Kirsten, 2001). Lack of facilitation in the formation of producers associations or other partnership arrangements makes it more difficult for smallholder producers to participate in formal markets. The greater the degree of organisation in the market, the smaller the transaction costs are likely to be and the easier it is to benefit from the exchange opportunity (Frank and Henderson, 1992). Unfortunately, lack of collective action among smallholder farmers denies them entry into formal market channels.

Legal environment

Legal institutions influence the activities performed on the market and the costs of exchange.

Minot and Goletti (1997) affirm that the formal institutional development of a society has a considerable influence on transaction costs. Thus, if trade laws are transparent then agreements can be legally enforced, leading to information accessibility and lower costs.

In other words, effective legal institutions may improve the organisation of the marketing channels and decrease marketing costs.

In many developing countries, laws are not always executed and enforced correctly, bribery and cheating are often not penalised, courts are out of reach for the majority of the population, and market rules are often not transparent to the producers and traders (Ruijs, 2002). In addition, formal contract enforcement mechanisms are weak (Fafchamps, 1996). It is even worse for the smallholder farmers because they lack lobbies in the legal environment. As a result, rural trade prospers where trust has been developed based on repeated transactions or informal relationships (Randela, 2005). Thus, an unfavourable legal environment creates a significant barrier to entry into formal food trade and limits participation by smallholders in the modern marketing system.

Government policies related to smallholder farmers

Prior to 1997, the agricultural marketing policy in South Africa was characterised by government support and controls (Kherallah and Kirsten, 2001). The success stories of the commercial farmers who received support during that time show that the government policies and incentives are influential and important in mobilising the farmers. For instance, the commercial farmers who received support from government policies still enjoy the legacy of the policy because they gained access to markets, an important condition in the deregulated markets.

On the other hand, the emerging and smallholder farmers do not have access to the levels of state assistance and market share, which the government previously guaranteed to commercial farmers. This implies that the smallholder and emerging farmers have to gain and compete for a market share on their own. Since these farmers are still learning, they face difficulties in competing in well-developed markets. The situation calls for a need of the government to create an enabling market environment for the smallholder farmers through selective financial government support, reduction in anti-competitive behaviour and facilitating private sector and farmer organisations partnerships. In addition, the government can ensure that public facilities, such as information and infrastructural facilities are developed in areas where smallholder and emerging reside, for their benefit (Kherallah and Kirsten, 2001; Nel and Davies, 1999).

Technical aspects in smallholder agricultural markets

Technical changes in marketing can be viewed as those transformations that allow goods to be available on the market at lower costs and in a more diversified set of markets. Technical changes are usually influenced by factors in the organisation itself, public regulation and general advances in technology. In agricultural production and marketing, smallholder farmers tend to be lagging in the use of improved technology (Carrè and Drouot, 2002).

Machethe (2004) pointed out that most small producers in South Africa lack appropriate transportation facilities and road infrastructure, communication links and storage infrastructure resulting in high transaction costs. Further, smallholder farmers have limited ability to add value to their produce. Lack of such facilities usually constrains farmers’

supply response to any incentives in both agricultural production and marketing (Dorward et al., 2003). Sometimes transaction costs are too high for farmers and traders to get any meaningful benefits from potential trading activities, discouraging farmers to participate in marketing activities.

Storage facilities

The ability to deliver a quality product to the market and ultimately to the consumer, commands buyer attention and gives the grower a competitive edge (Bachmann and Earles, 2000). Proper post harvest handling and storage contribute in ensuring quality maintenance for perishable agricultural produce. Moreover, agricultural commodities have to be harvested at a specific point in time, but are consumed year-round, thus necessitating proper storage facilities (Sasseville, 1988). Therefore, if crops are to be available for consumption throughout the year, proper storage facilities have to be implemented by both farmers and traders. Amongst farmers, storage may have some added advantages because it increases market flexibility. Households with proper storage facilities do not need to market their produce immediately after harvest when prices tend to be low. They can store their produce and sell when prices are higher.

Most smallholder farmers do not have access to adequate storage infrastructure and end up selling their produce soon after harvest, also because they need the money involved.

Smallholder farmers often rely on open-air storage (Gabre-Madhin, 2001). Due to lack of storage facilities, most smallholder producers are keen to sell produce almost immediately after harvest in order to ease congestion, leading them to sell their produce at lower prices (Wilson et al., 1995).

Market infrastructure

Smallholder farmers are usually served by poor market infrastructure. In some instances, market infrastructure is unavailable and farmers sell from the back of their trucks (Makhura, 2001). These conditions are not conducive for fresh produce, contributing to perishability and loss of produce. Additionally, produce sold under poor market conditions may not be attractive to consumers, putting farmers at risk of losing customers. Fresh produce tends to have a limited shelf life, therefore, they cannot be stored for long periods (Van Tilburg, 2005). This implies that such produce needs to be processed or to be sold while it is still fresh.

When selling them, it is important to be cautious of market place conditions to keep them fresh. Market infrastructure such as sheds and stalls in spot markets is crucial in maintaining freshness of agricultural produce (Wilson et al., 1995).

Road infrastructure

Agricultural commodities must move from the farms where they are grown to the retail outlets where they are bought. Road infrastructure and transport availability have an influence on smallholder market participation, especially if they are located far from the consumption centres (Gabre-Madhin, 2001). According to Bachmann and Earles (2000), one of the most important constraints facing agricultural markets throughout sub-Saharan Africa is transport infrastructure and the need to reduce transport.

The majority of villages in rural areas are served by an inadequate and poorly maintained road network (Montshwe, 2006). The poor conditions of roads, which are often impassable during the rainy season, have an adverse effect on the transportation of the produce. As transport generally marks the passage from one stage of the post-harvest system to the next, if the roads are poorly developed, it becomes difficult to move produce from one stage to another (Goletti and Wolff, 1998). If roads are in bad condition, travelling time is long, implying that it will be difficult to sell fresh produce within the required time limit (Dijkstra et al., 2001).

Market transport

It is difficult to transport produce to the market in time (produce spoilage and losses) if there is no reliable private form of transport, since public vehicles tend to be limited in the rural areas (Bachmann and Earles, 2000). In addition, unavailability of reliable transport will increase transport costs, which in turn increases transaction costs amongst smallholder farmers (Zaibet and Dunn, 1998).

In southern Africa, most smallholder farmers usually pack their goods (especially vegetables) in sacks, which are then transported to the market places using public transport (Jayne et al., 2002). This leads to bruises and damage and, thus, drastically reduces the quality of the agricultural produce being transported. Some farmers use their own vehicles to get to the market centres. Makhura (2001) pointed out that these farmers with these assets are able to move around in search of more rewarding markets. In addition, those farmers stand a better chance of getting market information from different markets.

Value adding

According to Robbins (2005), prices of primary agricultural produce have fallen steeply, but retail prices for the same packaged, cut and processed products in industrial countries, have increased. This means that value adding activities can earn farmers additional income.

Value adding can be in the form of grading, sorting, cutting, packaging in standard weights and processing of produce (Mather, 2005). Lack of value adding and agro-processing is part of missing markets amongst smallholder farmers in marketing. Agricultural produce from

smallholder farmers usually are poorly packaged. With few exceptions, most smallholder farmers cannot add value to their produce because they do not know its importance and lack

smallholder farmers usually are poorly packaged. With few exceptions, most smallholder farmers cannot add value to their produce because they do not know its importance and lack

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