Professor Cyril Nhlanhla Mbatha of (the Institute of Social and Economic Research) outlines some key production and marketing strategies to help promote the economic sustainability of smallholder farmers, and therefore more successful land reform in South Africa.
Some of the problems associated with the failure of South Africa’s land reform projects are linked to limited market access for emerging black farmers.
These problems will not go away unless they are systematically reviewed and replaced with workable strategies.
Primarily, the problems stem from information asymmetries in business agreements and agricultural markets.
A lack of transparency in contracts reported within joint ventures, a lack of information on possible products to cultivate, and a lack of data on buyers lead to high transactional costs that ultimately affect smallholders.
In the search for workable solutions that will help develop a more inclusive agricultural sector, a recent study of Kenyan smallholders in Kilifi County provides a compelling example for South Africa.
The Kenyan agricultural sector, which accounts for almost 75% of the workforce and contributes 26% to GDP, adopts a flexible approach to production and marketing rather than a one-size-fits-all mode.
The study illustrates that, regardless of the business model in place to support small farmers, the internal and external reorganisation of the agricultural sector should be aimed at reducing the risks associated with transactional costs.
Innovative ideas aimed at limiting risk start at the production process and include marketing initiatives that ensure that farmers achieve high-income returns and business sustainability.
Farmers on smaller pieces of land outperform their peers on a per hectare basis when they diversify their production and use various marketing avenues to sell their goods. In addition, smallholders have more incentive to employ innovative strategies when they own, not rent, the land on which they farm.
After 1994 in South Africa, policies aimed at black economic empowerment supported the outgrower model, led by agribusiness capital, which required a capital injection into businesses.
In addition, marketing networks were required, which often came with business partners of outgrowers in joint ventures. The partners tended to be mostly white commercial farmers who had previously owned the land on which black farmers were now resettled through the land reform project.
The intended benefits of these joint ventures were to bring in financial capital, introduce new technologies, and transfer mechanisation skills needed for large-scale production.
Large-scale agribusiness would bring in new national and foreign markets/buyers, and large volumes would improve the standard of produce.
However, challenges in the model have emerged and been documented. They include cases where black farmers handed over pooled land to business partners and waited as ‘armchair farmers’ for money to come (or not). In many of the projects, few skills were transferred.
In addition, employment opportunities were limited for community members who benefitted from land transfers.
The problems mean that venture businesses need some reconfiguration to work more efficiently, and that other modes of business should be advocated alongside the joint-venture model.
Alternatives to the big value chains
Different crops, different farming methods and different economies mean that smallholders are faced with different value chains and marketing strategies. As value chains are neither predictable nor set, they can be modified or created as and when required.
The political aspiration to empower black South African farmers has led to efforts to integrate smallholders into the more lucrative value chains via the implementation of joint-venture businesses.
Longer value chains are normally associated with larger profit margins and bigger businesses, mainly because big producers can afford the mass production, storage and transportation costs associated with their products.
To benefit from economies of scale, smallholders can participate in longer value chains through government support or by participating in joint ventures or cooperatives. However, it is not possible for all new small farmers in land reform projects to be partners in joint business ventures; other approaches or business models need policy attention.
Key lessons from Kenya
The first lesson from Kilifi County is that smallholder farmers can succeed outside the modes of irrigation schemes and joint ventures with bigger commercial players that are typical in South Africa. With innovative ideas in environments that support entrepreneurship, the smallest farmers can run successful businesses. What is key for them is to find or have buyers at good prices through diverse avenues.
- Brokering agreements, building networks
While South Africa’s commercial farmers play a significant role in agricultural joint ventures, in Kenya this role is undertaken by brokers who connect smallholders to new networks, including buyers that otherwise would not be available to smallholders.
Big commercial partners can also enter into agreements with small farmers to supply them with products.
- Agreements to reduce risk
The content details of the agreements entered into in joint ventures should go a long way towards mitigating the transactional cost (that is, risks). The degree to which agreements are clear enough on the responsibilities of each partner reduces these transactional costs and improves transparency.
- A proactive approach by smallholders
Where the responsibilities of each party are not clearly outlined or not legally binding, farmers can find other innovative ways outside existing agreements with brokers to maximise profits. As has been reported in many South African cases, having good contracts in place is only part of the solution; smallholders still have to work hard to meet the required standards of quality and quantity of production. It can also be argued that when smallholders are not protected by venture contracts with big business, they tend to be more proactive at acquiring production and marketing skills to compete with big business. For this reason, venture contracts should always have an expiry date.
- Embedded understanding of skills transfer
Perhaps the lesson for South Africa is to outline clearly in contracts what skills need to be transferred by the end of the contract and how this transfer can be monitored and measured throughout its duration. Ultimately, the contract should ensure that by the time it comes to an end, the smallholders can operate on their own and achieve a level of success similar to that observed among the small farmers of Kilifi County.
Like the big commercial partners, smallholders do not have to work with only one partner in a joint venture. They can diversify their produce to have more partners for different products. This would mean entering into more than one agreement to reduce potential risks to smallholders.
- Size versus ownership
Generally, farmers on smaller pieces of land (about 1,4ha) outperform those on bigger plots in terms of strategies used for monthly income generated per hectare if they own their land and have the title deeds.