UNU-WIDER The Rise of Large Farms: Drivers and Development Outcomes

Support functions

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The Rise of Large Farms: Drivers and Development Outcomes

Derek Byerlee and Klaus Deininger

A recurring debate in the development literature is the relative emphasis to place on the roles of small-scale farms versus large-scale farms in fostering agricultural growth, and economic development more generally. In the 1960s, T.W. Schultz’s landmark study, Transforming Traditional Agriculture, convincingly argued the case for the efficiency of small-scale family-operated farms and their responsiveness to new markets and technologies. Together with the success of Asia’s green revolution when hundreds of millions of small-scale farmers rapidly adopted new technologies, this placed small-scale farm productivity at the centre of the development agenda. Recent reviews (Eastwood et al. 2010; World Bank 2007; Wiggins et al. 2010; Christiaensen et al. 2010) reaffirm the importance of growth in smallholder productivity for achieving development impacts.

Globally, agriculture is one of the few industries that remains overwhelming based on a family firm model; that is, farms are owner-operated and rely largely on family labour. This is true in both poor and rich countries although average size of a family farm varies widely from around 1 ha in Asia to 180 ha in the USA.

Three reasons are often advanced for the efficiency of the family farm. First, family workers are more likely to work hard than wage workers who require costly supervision given that agriculture is spatially dispersed. Second, family farms have considerable flexibility to adjust labour supply to the seasonality and annual variability of production since family labour can more easily be reallocated to other tasks on and off the farm. Finally, owner operators have an intimate knowledge of local soil and climate, often accumulated over generations, that gives them an advantage in tailoring management to local conditions.

Yet disillusion with the limited success of smallholder-based efforts to improve productivity in sub-Saharan Africa (Collier and Dercon 2009), and the apparent success of Brazil in establishing a vibrant agricultural sector based on much larger farms, have led some African countries to view the development of large-scale mechanized farming as the path to modernization of the sector. This emphasis on large farms has been re-enforced by a dramatic rise in private investment into agriculture and a surge in interest in farm land which has often been labelled as a ‘land grab’. This raises issues concerning potential development impacts of large farms, in particular whether they can help generate employment, provide access by small producers to new technologies and markets, and whether public policy can or should regulate such transfers in order to promote broader development.

Changing Farm Size in Land-Abundant Regions

The largest crop-based farms in the world are now in developing and transitional countries. With operational units that often exceed 10,000 ha, they are bigger than the largest farms in comparable land-abundant regions in developed countries such as the USA and Australia. Many large operational units are further horizontally integrated into ‘superfarms’ that control hundreds of thousands of hectares with the largest now approaching a million ha of good crop land and sales above US$1 billion annually. Business models generally depart substantially from that of family farming, often separating ownership, management, and labour, and vertically integrating with processing, marketing, and export logistics.

Nonetheless, there are big differences across regions as illustrated by the following examples.

In Brazil’s Cerrado region which has emerged as one of the world’s new breadbaskets the median farm size is more than 1,000 ha and many companies operate more than 100,000 ha of crop land (mostly soybean). In southern Brazil, production of sugarcane, often for ethanol, is expanding rapidly, much of it in vertically integrated operations with mills on land they manage and operate. While average operated size per mill is some 13,000 ha, some very large operators farm over 300,000 hectares.
In Argentina, large farms known as pools de siembra are based around professional management companies that raise finance and rent land and machinery to farm very large areas. The 30 largest companies control some 2.4 million ha in the Pampas.
In Eastern Europe the share of area under corporate farms ten years after the transition, ranged from 90 per cent in Slovakia, to 60 per cent in Kazakhstan, and 45 per cent in Russia (but less than 10 per cent in Albania, Latvia, and Slovenia), reflecting countries’ factor endowment, institutional structure, and the way the reforms were implemented. In Russia, the 30 largest holdings farm 6.7 million ha, and in Ukraine, the largest 40 control 4.5 million ha.
In Southeast Asia, large farms are centered around oil palm plantations. The sourcing area for a typical palm oil mill averages around 10,000 ha, but in many cases companies have integrated operational units to form some very large firms. Eight of the world’s 25 largest agricultural production-based companies identified in the 2009 World Investment Report have major interests in oil palm. Several large palm oil companies now control plantations of 200,000–600,000 ha.
In Africa mechanized large-scale sorghum and sesame production in Sudan average over 1,000 ha, with some farms over 20,000 ha, on a total area officially put at 5.5 million ha but unofficially up to 11 million ha. The recent wave of land acquisitions in Africa has attracted much media attention. Total transfers in 2004-09 amounted to 4.0 million ha in Sudan, 2.7 million in Mozambique, 1.2 million in Ethiopia, and 1.6 million in Liberia (the last mainly renegotiation of existing agreements). Median farm size associated with these acquisitions has varied widely from an average of 700 ha in Ethiopia, to 8,000 ha in Sudan, and 60,000 ha in Liberia.

The growing private sector interest in agriculture presents a major opportunity for developing countries to capture much needed access to capital, modern technology, and new markets to spur agricultural growth and employment. However, despite this potential development outcomes have often been less favourable. Where land tenure is not well defined, or land administration is subject to corruption, investments have often infringed on the right of traditional users without compensation. Land transactions were often not well recorded, lacked transparency, and lacked adequate consultation with local communities. These problems were most severe in sub-Saharan Africa where formal land markets and land titling are generally absent. Emphasis on large farms also risks growing inequality in land ownership with negative consequences for broad-based rural development and future growth. Environmental concerns have also surfaced especially where land expansion occurs at the expense of tropical forests, as with pastures in Latin America and oil palm in Southeast Asia. Finally, even financial and economic benefits may be compromised by lack of technology and land speculation—especially where land is provided through government channels free or at very low prices. The early investments in Africa often failed and many of the recent acquisitions have not resulted in action on the ground.

Factors Increasing Farm Size

There are many reasons behind the rise of large farms. Some of these are well known, others much less studied. Some are important in determining operational size, while others affect firm size that may include many individual operations.

A well-known and important exception to the superior performance of owner-operated units of production over those relying on wage labour is in plantation crops, where economies of scale in processing and the need for close co-ordination of production and processing of a perishable product such as oil palm fruits or sugarcane often make plantations more efficient. Plantations that specialize in perennial crops have also developed highly structured ‘industrial type’ production processes that facilitate labour supervision and management efficiency.

Large farms have been also often associated with the opening of new agricultural frontiers where very low population density and lack of experienced cultivators prevents the rapid emergence of smallholder models. High transactions costs for hiring labour which has to be imported also favours mechanized production even in countries with relatively low wage rates. In the long run, settlement programmes, and better infrastructure and property rights may lead to closer settlement and smaller farms in these areas. In more densely populated areas, private investors often find it more attractive to operate through contract farming or outgrower schemes that involve existing smallholders who are producing well below their potential.

The technology and the nature of farming is itself changing in favour of large farms. Recent innovations in crop breeding, tillage, and information technology make labour supervision easier and reduce diseconomies of scale of large operations. Genetically modified varieties have facilitated broad adoption of zero tillage in Latin America and by reducing the number of steps in the production process allowed management of larger areas. Information technologies such as satellite mapping and crop models reduce the advantage of local knowledge and experience in tactical farm decisions. Large farms that employ professional managers may also enjoy an efficiency advantage under conditions of rapidly changing markets and technologies, especially for new crops and new areas.

As buyers in high-income countries demand certification of social and environmental sustainability, even for ‘bulk commodities’ such as soy, sugarcane, and palm oil, smallholders may find it harder to compete. The high fixed costs of gaining certification and the need to preserve product identity through the supply chain provide advantages to large operating units and to integrated supply chains. Standards may favour large operations in other ways as well; for example, environmental standards that prohibit burning of sugarcane prior to harvesting to reduce carbon emissions essentially rule out manual harvesting, disadvantaging smallholders and reducing labour requirements by half.

Where markets do not work well, large firms comprised of many operational units can reduce transactions costs and risks through vertical integration. For example, integration of livestock production with grain and oilseed production in Russia and Ukraine reflects efforts by large livestock operations to assure feed supplies. The ability of vertically- or horizontally-integrated firms to access capital markets at lower costs is particularly relevant given the widespread failure of domestic financial markets in many countries. In Brazil and Indonesia, state-owned development banks advanced credit lines for export-oriented and ‘strategic’ industries at rates often well below the commercial bank lending rate but these loans typically favour large farms. Argentinean companies that obtain funds from abroad pay only about half of the rate that banks demand from farmers, if they provide them with access to funds at all. Such advantages are particularly relevant in cases of high start up costs for land improvements, irrigation, and establishment of perennial crops.

Horizontally-integrated farm firms that combine many large operators may also have a number of advantages, including:

Compensation for shortcomings in the provision of public goods such as technology. For example, in industries dominated by large companies such as sugarcane (Brazil), oil palm (Malaysia), or plantation forestry, a large part of R&D is now carried out by private firms.
Leveraging their better bargaining power in markets for agricultural inputs and outputs that are often highly concentrated. In Argentina, large companies with more bargaining power are reported to be able to reduce cost on either side of the market by 10-20 percent.
Overcoming failures in risk markets by diversification of operations across space to smooth climatic risks or diversification across commodities to smooth market risks.

Implications for Policy

Large farms have emerged partly in response to policy distortions or market failures related to availability of infrastructure, technology, finance, property rights and insurance. Levelling the playing field is the best way to ensure that family farms can compete. The environmental and social outcomes are also strongly affected by these factors. If these conditions were absent, large farms strategies are unlikely to be conducive to longer-term development.

At the same time, experiences in Latin America in particular have shown that with advances in technology and new business models large farms can overcome diseconomies of scale and be globally competitive. To take advantage of rising private investment in farming, countries will need to design rural development strategies that fit factor endowments and provide opportunities for smallholders and job creation, giving special attention to policy frameworks that provide rights to current users, and the capacity to implement such policies.

About the authors

Derek Byerlee is an independent scholar, based in Washington DC, USA. He was a lead author of the World Development Report 2008, Agriculture for Development, and previously worked at the World Bank, the International Maize and Wheat Improvement Center, and Michigan State University. He has published widely in the areas of agricultural development and science and technology. This note is based on work as a consultant for the World Bank.

Klaus Deininger is Lead Economist in the Development Research Group of the World Bank. He has published widely on income and asset inequality and its relationship to poverty reduction and growth; access to land, land markets, and land reform; and capacity-building for policy analysis and evaluation, in Africa, China, India, Latin America, and East Asia and, over the last four years, has also served as the World Bank's land tenure adviser.