Small Holders and the Need for Economies of Scale Contract Farming, Farming Cooperatives, Producing Companies Daniel Ray Lewis, Economics, Chulalongkorn

Farms in Developing countries can play important roles besides producing food Farms are… The haven of last resort for an aging population Diminishingly small as families have children and subdivide A daycare option for working parents A way to work for women with children An alternative for less capable members of the family An opportunity to build a sense of self-respect and pride

Grandparents, Small Children & Auntie and her kids Bi-Polar Communities A Particular Farm Village A Particular City Neighborhood Grandparents, Small Children & Auntie and her kids Sister Cities Mother & Father & Uncle

Farms are commercial enterprises and need to be able to compete in terms of price with agri-business Small Farms Agro-business Higher cost of inputs Debt financing Cannot grade crops Basic Ag. Technology Sell to Middleman No Storage or Transport Buy Inputs in Bulk Self financing Grade and prepare crops Advanced Ag. Technology Market own Products Own Storage and Transport

Middle Men Cooperative Contract Farming Final Marketing Small Farms Input Wholesaler Banking Rent Equipment Crop Aggregator Storage Crop Wholesale Final Marketing Small Farms Wholesale Level Subsidies??

Solution 1 Farming Co-operatives when… Need Local Economies of Scale, Cooperation and Management Example of Problems Free riding on loan repayment or crop quality Incentive: Access to loans at decreasing interest rates over time in exchange for good behavior (repay loans and always supply right quality of fruit) loan rate: 8.5% first year, 7.5% next two years, 6.5% next two years 5.5% after 5 years Loan Inputs Equipment Storage Marketing Cooperative Provides Cooperatives are Often Subsidized by Government

Solution 2 Contract Farming when… Need Processing, Technology, Price Stability, Marketing & Branding Example of Problems Fairness and trustworthiness of the contracting parties When incentives match, the system works well – e.g. technology transfer both benefit Farmers have an incentive to sell outside of contract if price is high – Company has to raise agreed price if prices are high, but cannot lower agreed price if market price is poor. Complicity: Farmers use illegal land to grow corn while company profits without liability. Loan Inputs Training and Technology Fixed Price Processing Marketing and Branding Contracting Company Provides Prices are negotiated before growing season

Solution 3 Producing Company when… Technical Expertise in Production and Marketing (but no Factory) Example of Problems Farmers retain ownership but surrender control over their farms in exchange for professional management and technology Farmers may feel like subcontractors with little power. Low flexibility for individual needs But standardized higher quality product Loan Inputs Training and Technology Management Coordination Marketing Producing Company Provides Professionals Often Provided by the Government