ZEF: PARI | Can small farms benefit from big companies’ initiatives to promote mechanization in Africa? A case study from Zambia

After years of neglect, there is a renewed interest in agricultural mechanization in Africa. Since government initiatives to promote mechanization are confronted with major governance challenges, private-sector initiatives may offer a promising alternative. However, given limited scientific studies on such private-sector options such approaches are often viewed skeptically. One concern is that multi-national agribusiness companies take advantage of smallholder farmers. Another concern is that mechanization causes rural unemployment. To shed light on these concerns, this paper analyzes an initiative of the agricultural machinery manufacturer John Deere to promote smallholder mechanization in Zambia through a contractor model. The analysis focuses on the impact of this initiative on farmers who receive tractor services using Propensity Score Matching. The results indicate that farmers can almost double their income by cultivating a much larger share of their land. The analysis suggests that the increased income is used for children’s education and more food, but does not result in increased food diversity. The demand for hired labor increases due to land expansion and due to a shift from family labor, including that of children, to hired labor. Questions that require further investigation are identified, including strategies to incentivize tractor owners to provide services, to also increase land productivity, and to avoid new forms of dependency of agricultural laborers that may result from a shift in the timing of the labor demand.

During the last decade, agriculture has emerged as a top priority on Africa’s development agenda. Even though there is some new scope for large-scale farming, especially in the land abundant countries on the continent (Deininger and Byerlee, 2012), smallholder farming systems will have to play the key role for agricultural development in Africa (Birner and Resnick, 2010, World Bank, 2007, Davis et al., 2017). Almost 70% of the farms in Sub-Saharan Africa operate less than two hectares (Deininger and Byerlee, 2011: 28) and they typically do not realize more than 25% of their potential yields (Deininger and Byerlee, 2011: xxxviii). Substantial efforts have been made to close this yield gap, but in recent years, there has been an increasing recognition that it also important to increase the labor productivity in African agriculture in order to reduce poverty (Diao et al., 2018). In most countries of Africa, population density is relatively low, and the theory of induced innovation would predict that mechanization should play an important role in the early phases of agricultural development (Hayami and Ruttan, 1985). Yet African farming systems remain the least mechanized of all continents (Pingali, 2007, Sheahan and Barrett, 2017).

There were substantial efforts to promote mechanization in Africa’s agriculture in the 1960s and 1970s, but these efforts were state-led and they largely failed (Pingali, 2007). This negative experience led to a subsequent neglect of agricultural mechanization in development efforts, except for some efforts to introduce animal traction. Likewise, research on the mechanization of smallholder farming systems in Africa became a rather neglected field in the 1990s and 2000s (Diao et al., 2012). Research conducted in the 1990s had shown that machinery has an important role to play in improving farmers’ crop management practices, especially by allowing for better tillage, weed control and moisture management (Anderson and Dillon, 1992, Byerlee and Husain, 1993). The institutional dimension of mechanization had always remained a neglected field of research, in spite of overwhelming historical evidence that institutions such as rental markets and cooperative exchange have played a key role in the history of the countries that are now industrialized. As shown by Olmstead and Rhode (1995) for the case of the USA, such institutions were essential to facilitate the access of smallholder farmers to mechanization.

Following the food price crisis of 2008, there has been a renewed emphasis on agricultural development as a top priority in Africa’s development agenda. This new interest in agriculture has also revived the interest in agricultural mechanization (FAO & UNIDO, 2008, Kienzle et al., 2013, Mrema et al., 2008). Governments in several African countries subsidize the provision of tractor services, often by importing tractors that are then provided at subsidized prices to private sector operators who are expected to provide tractor services to smallholder farmers. A study of such a subsidy scheme in Ghana found that it was not a viable business model for private tractor service providers, in spite of substantial subsidies provided by the government to private operators (Houssou et al., 2013). There is evidence that the often neglected governance challenges of mechanization contribute to the failure of such government-sponsored programs (Daum and Birner, 2017).

Against this background, the question arises as to whether private sector models that do not rely on government support are economically more promising and suitable to benefit smallholder farmers. Based on field observations in Ghana and a review of the international experience, Diao et al. (2014) hypothesized that private sector models have more potential than those that involve state interventions. Many services and inputs for smallholders, such as agricultural extension, require public sector involvement due to market failures (Feder et al., 2011). In contrast, considering that agricultural machinery is a pure private good in which innovations are embodied, machinery services offers specific opportunities for the private sector. However, since tractors are indivisible (unlike other inputs such as seeds and fertilizer), business models such as hire markets are required for smallholders to benefit from mechanization. In recent years, major international agricultural machinery companies, such as John Deere and AGCO, have recognized the new business opportunities in smallholder agriculture in Africa, and they have started to invest in developing their own business models to access this market. There is limited evidence in the literature on the opportunities and limitations of such purely private-sector driven options. Expectedly, civil society organizations are highly skeptical of such initiatives. One reason is a general skepticism that multi-national agribusiness companies may take advantage of smallholder farmers (see, e.g., Martínez-Torres and Rosset, 2010). Another reason is the fear that mechanization may lead to rural unemployment. Such concerns are not new. As Juma shows in his book on “Innovation and Its Enemies” (Juma, 2016), farm mechanization has been one of the most controversial of all agricultural innovations – not only in contemporary times, but also historically. During early waves of state-driven and often subsidized agricultural mechanization in newly independent countries of Sub-Saharan-Africa, the International Labor Organisation warned against potential unemployment effects but such concerns were constrained by a lack of empirical data (ILO, 1973). The concerns continue to be voiced but lack of empirical evidence has remained a constraint (Massey et al., 1993, Bhandari and Ghimire, 2016). Based on theory and insights from historical experience, Binswanger (1986) hypothesized that mechanization can – depending on the access to land and output markets – raise or reduce employment. In the same study, he highlighted that farming operations are typically mechanized step-wise – starting with the biggest labor bottlenecks – which may either raise or reduce the labor requirements for subsequent farming steps. In addition, one should differentiate between different types of labor: The loss of (well-paid) work opportunities for laborers constitutes a problem, but a reduction of child labor and unpaid family work (with opportunity costs) would have to be seen as an advantage. Research-based evidence is, thus, very important to better understand whether smallholder farmers can benefit from private-sector led mechanization initiatives and how such initiatives affect rural employment. Yet, there is a lack of empirical evidence on this topic.

The goal of this paper is to contribute to filling this knowledge gap by presenting a case study of a private-sector led smallholder mechanization initiative in Zambia. We analyze an initiative where the company John Deere, the largest manufacturer of agricultural machinery worldwide, worked with its dealership AFGRI to develop business models that allow smallholder farmers to access tractor services. The approach is to support small and medium-sized enterprises and “emerging farmers” that is medium-size farmers who own between approximately 20 and 200 ha and can afford to purchase a tractor. In our sample, their median farm size was 66 ha. The main form of support is facilitating the financing of the tractor. For 10 of the 21 tractor owners in our sample this has been their first tractor. This has been done through different mechanisms since 2010, including a loan provided by AFGRI with an interest rate below the market rate or by facilitating the linkage with a private bank, using the tractor as collateral. John Deere’s dealer AFGRI provides after-sales services such as maintenance services, spare part supply and repairs. While such approaches to provide a dealer credit or facilitate a linkage with a bank are not unusual in the tractor business, the remarkable feature of the initiative by AFGRI and John Deere in Zambia is that they applied this approach to the rather risky customer segment of emerging and medium-size farmers with the explicit goal to facility smallholder mechanization. These customers are more likely to provide tractor services on a contract basis1 to smallholder farmers than large-scale farmers, who can fully utilize the capacity of a tractor on their own land. However, the experience of John Deere and AFGRI indicates that service provision by tractor owners does not simply happen without further efforts, even though it is a common practice in countries where mechanization is well established. According to Sheahan and Barrett (2017), only around 1% of households across all countries of the Living Standard Measurement Study-Integrated Surveys on Agriculture (LSMS-ISA) engage in tractor rental market. A recent study by Baudron et al. (2019) suggests that the demand for mechanization may be much higher than often assumed and that current low levels of mechanization may be due to market imperfections, such as failures to make mechanization accessible. To encourage service provision to smallholder farmers, John Deere and AFGRI linked up with two non-governmental organizations (NGOs). One is MUSIKA, an NGO focused on linking smallholders with business enterprises, and the other is the Conservation Farming Unit (CFU), an NGO focused on promoting conservation agriculture. MUSIKA has supported service provision by providing business training to the tractor owners, where the need to reach high machinery utilization rates was highlighted. CFU facilitated the formation of groups of smallholder farmers who wanted to access tractor services, thus reducing the transaction costs that arise for reaching smallholders. In our sample of 21 tractor owners, 12 provided services to smallholder farmers. On the average, they served approximately 60 smallholder farmers in an average maximum radius of 40 km).

At the current stage, the smallholder farmers typically use tractor services to mechanize the most labor-intensive activity in crop production, which is ploughing. Alternatively, if farmers practice conservation agriculture, they use tractor services for ripping.3 The tractors are often also used for a labor-intensive post-harvest activity: maize shelling. Other steps in crop production, such as weeding, pest control and harvesting continue to rely on hand labor or animal traction.

The overall objective of this study was to assess the economic and social impact of providing tractor services on smallholder farmers under this initiative by John Deere, AFGRI, MUSIKA and CFU (hereafter referred to as the JD initiative) and to calculate the effect on total labor requirements, taking into account that farmers may expand crop production when they access tractor services. Since a randomized control trial approach was not feasible, we used Propensity Score Matching (PSM) to assess the effects of accessing tractor services on smallholder farms. We focus on the effect of the initiative on smallholder farmers, considering that the effects are contested in the policy debate, as highlighted above. Examining different models under which private sector companies can foster the sale of tractors to promote the contracting of tractor services was beyond the scope of this study, but will be an interesting topic for future research.

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Source: Center for Development Research (ZEI): ZEF-Discussion Papers on Development Policy No. 262, June 2018