Similar market incentives do not induce uniform behaviour.
Jomo Kwame Sundaram:
With food production growth in the Organisation for Economic Co-operation and Development countries slowing down, developing countries will need to step up production to meet increased food needs in the future. Such growth is primarily expected to be in Latin America and sub-Saharan Africa. In addition to augmenting aggregate production, smallholder producers need to increase cultivation for sale to meet the rising demand for food.
It is often presumed that higher food prices would induce farmers to produce more food for the market. In reality, however, the price responsiveness of output and marketable surpluses produced by smallholder farmers is influenced by many factors, including their interest and ability to respond to what may be seen as temporary price changes.
The agricultural sector in most developing countries comprises many, typically heterogeneous producers, differing in the resources and technologies they have access to, as well as the determinants of their production and consumption decisions. Factors that influence farmers’ production and consumption decisions include access to land and other resources, household dependency ratios, access to off-farm employment, the extent of production, family consumption (of output) and market risks, and the markets to which they have access.
Depending on their nature and context, farm households facing similar incentives may make different decisions. Food and Agriculture Organization research suggests that the factors influencing farmer propensity to increase production are of three types: (i) access to and productivity of assets, natural resources and labour; (ii) the institutional environment, including land tenure and other arrangements through which farmers access productive resources; and (iii) access to and functionality of the markets in which they participate.
Farmers who sell their produce in markets are more sensitive to prices than those who retain a substantial part of their produce for home consumption. Returns to farmers depend on the prices they receive for their produce and their production costs, which vary not only among crops, but also among producers because of variations in input use, technology and access to resources. Prices in many local food markets are often characterised by high inter-seasonal volatility. Such price volatility affects the level and uncertainty of returns to producers.
These factors play out differently for each farm household. Faced with similar market incentives, some smallholders will intensify production on existing plots by adopting new technologies or practices, while others may increase the amount of land they cultivate. Yet others may be constrained from benefiting from the seemingly improved opportunities. In some cases, net buyers of food among farmers may even have to reduce their own output to supplement their incomes by other means in order to buy food.
Within the constraints they face, farmers’ responses are influenced by the prices of the crops they produce relative to the alternatives as well as input costs. If the prices of manufactured inputs rise with food prices, the net price advantage to farmers will be correspondingly reduced.
All these factors also influence the impact of prices on the share of produce smallholders sell. Income increases due to higher prices may lead to more consumption by the poorest smallholders, leaving little for productive investment. Both in Asia and in sub-Saharan Africa, the effect of higher prices on the market surpluses has often been negative for many poor smallholders who produce for both home consumption and sale.
Hence, the ability of smallholders to increase output to benefit from increased food prices involves constrained choices. Smallholders are likely to increase production when they have secured tenure to land and other natural resources, and well-functioning markets provide appropriate incentives and reduce disincentives. When they have access to technology, knowledge, productive resources and infrastructure, and are able to use their assets to produce more, they are more inclined to raise output. However, they may not be able to respond to higher prices to increase output if any of these conditions is absent.
Short-term price spikes are unlikely to induce higher market surpluses from poor smallholders if they are unable to utilise their resources well, and if higher production goes to increased home consumption. Thus, policy interventions intended to increase farmers’ agricultural production and market participation must take better account of their heterogeneity.
Higher prices may be effective incentives for farmers who have the ability to respond. For these producers, more appropriate support may be required, primarily in the form of improved access to risk management instruments and better post-harvest and market facilities.
It is important to identify the critical constraints that discourage smallholder producers from responding to price incentives, and to provide institutional, infrastructural and technological support to strengthen their ability to increase production and participate in markets.
Jomo Kwame Sundaram is the coordinator for Economic and Social Development at the Food and Agriculture Organization.
