Measures of agricultural commercialization
Models of agricultural production
Leavy and Poulton (2007) found that three different models of agricultural production exist side by side and interact with each other. These are:
Small-scale farmers: further classified in to two groups. The first one refers to non-commercial farmers” (Type A)-these farmers are subsistence oriented but may also sell some of their production in the output market; but they cannot wholly dependent on agriculture for living. And the second one is small-scale commercialization farmers (Type B)-which are better integrated with the market than the first group. In fact, they produce crops both for own consumption as well as for the market. They even exert effort to specialization on high value cash crops.
Small-investor farmers-these are exclusively engaged in market-oriented agriculture even though their size dictates their modest scale production. Samuel and Sharp (2007) refer to this people as being often educated and urban based. They are known also as “emerging commercial farmers”.
Large-scale business farming refers to capital incentive enterprises that are either private or state-owned (Samuel and Sharp, 2007).
These three categories indicate the different scenarios the government can possibly adhere to in the course of assessing smallholder farmers to increase their income and mainly to come out of poverty.
Process of smallholder commercialization
There are three levels of market orientation as far as food production systems are concerned, according to Pingali et al. (1995). These three levels are termed as subsistence systems, semi-commercial systems and commercial systems based on the farm households’ objective for producing a certain crop, their source of inputs, their product mix and their income source.
The process by which smallholders’ commercialization takes place and follows unique path ways. The usual path of commercialization of smallholder agriculture starts with growth in the marketable surplus of agricultural commodities in both agro-ecologies. To be more specific in highland areas this could be achieved by producing marketable surplice of staples and continues until it becomes the dominant portion of the total output of the household. Furthermore, diversification of the marketed portion into staples and other food crops is another alternative for smallholders’ commercialization and or market oriented production system and cash and high value crops production is another path of smallholders’ commercialization.
The market orientation path ways of farm households may not be applicable in many developing countries as simplistic as it is. However, it is much resemblance to the food production systems of smallholder dominated countries of Africa and South-East Asia. This category is quite appropriate to Ethiopia, as a predominantly agrarian country and smallholder dominated nation.
Measuring agricultural commercialization
According to Govereh et al. (1999), “commercialization can be measured along a continuum from zero (total subsistence-oriented production) to unity (100% production is sold)”. Strasberg et al. (1999), suggested a measurement index called household Crop Commercialization Index (CCI) which is computed as the ratio of gross value of all crop sales over gross value of all crop production multiplied by hundred. The advantage of using this approach is that it “avoids the use of crude distinctions as commercialized and non-commercialized farms” (Grovereh et al., 1999). However, this index had its limitations. For instance, consider the case when a farmer producing one quintal of any cereal crop and sales that all and another farmer producing ten quintals of the same cereal crop and sales only two quintals. The CCI will tell us that the first farmer is fully commercialized (100%) while the second is semi-commercialized (20%). This interpretation does not make sense in such circumstances. Even though this limitation of using CCI is wrong nothing, there is still some room to use it in practice especially in the context of developing countries where it is less likely to get smallholders selling all of their output and very large farms selling none of their farm output.
As can be understood from the preceding discussion, the degree of participation in the output market is the conventional way to measure commercialization. However, Von Braun et al., (1994), provide other dimensions to the measurement of commercialization. Commercialization is calculated as percentage of the total produce sold from a household or as a percentage of cash crops as compared to all crops cultivated by household (Von Braun et al., 1994). Von Braun et al. (1994), have specified the forms of commercialization and integration into the cash economy from at least three different angles and measured the extent of their prevalence at the household level with the following ratios according to Gebremedhin et al. (2009):
Empirical review on determinants of commercializing subsistence agriculture in Ethiopia
There are a number of determinants in the commercializing smallholder agriculture. These determinants are broadly categorized as external and internal factors. The external ones are factors beyond the smallholder’s control like population growth and demographic change, technological change and introduction of new commodities, development of new infrastructure and market institutions, development of the non-farm sector and the broader economy, rising labor opportunity costs, macroeconomic, trade and sectorial policies affecting prices and other driving factors (Von Braun et al., 1991; Pingali and Resogrant, 1995). In addition, development of input and output markets, institutions like property rights and land tenure, market regulations, cultural and social factors affecting consumption preferences, production and market opportunities and constraints, agro-climatic conditions, and production and marketing related risks and are other external factors that could affect the commercialization process (Pender et al., 2006).
On the other hand, factors like smallholder resource endowments including land and other natural capital, labor, physical capital, human capital, etc., are household specific and considered to be internal determinants. Some of these factors that affect smallholder commercialization in Ethiopia are briefly discussed in the next subsections.
Population growth and demographic changes
Population growth and demographic changes are considered as demand-side driving forces for smallholder commercialization resulting from the urbanization effect of economic growth (Von Braun et al., 1994). Moreover, Berhanu and Dirk (2008) in their study of the determinants of market participation using household level regression model found that population density is positively associated with proportion of Teff, chickpea and Niger seed produce sold indicates that given the decision to grow Teff, chickpea and Niger seed, households in high population density areas offer higher amount of their produce to market. Thus, it implies that both urban and rural population growth has positive impact for food and cash crops. However, it must be noted that population growth may have negative impact on land access for crop cultivation bearing in mind that urbanization and agricultural transformation would equilibrate the demand for agricultural land at the long run.
Urbanization and higher income from economic growth increases demand for marketed agricultural products which will tend to increase commodity prices and stimulate agricultural production to the market at least in the short run and long run (if there is lack of market competition. Tanguy et al. (2010) on their studies on cooperatives for staple crop marketing indicated that, the impact of cooperatives on output prices is intended to capture whether cooperatives effectively enable their members to obtain a higher price for their output. This indicator is fundamental, because policies promoting cooperatives often highlight, as a rationale, the possibility that such organizations can help smallholders obtain higher prices and increased bargaining power vis-à-vis traders, or the ability to reach more attractive markets. Consequently, the price indicator that the researchers use is an acreage share weighted sum, over all types of cereal sold, of the difference between the price received by the member household and the corresponding average price in the sample.
Agricultural commercialization includes not only crop but livestock subsector as well. As a result, Anteneh et al. (2009) on their studies on towards pluralistic livestock service delivery system for the commercialization of smallholder livestock agriculture in Ethiopia revealed that, the livestock production cannot continue as business as usual but there is a need towards a more coordination along the supply chain so as to serve the commercialization of smallholder livestock producer. Thus, it clearly shows that with urbanization and improvement in standard of living the demand for livestock and livestock products will be increased and market linkage should be created between the smallholder farmers and consumers provided that the quality and quantity of the livestock product is putted under consideration.
Technologies
The importance of source-saving and yield-enhancing technological innovation and adoption by the ultimate users are unquestionable in the smallholder commercialization process. Evidence from Ethiopia showed that there is an enhancement and a tendency to increase smallholders’ market participation in the case of adopters of high yielding varieties than the old fashioned agricultural commodities. According to Asfaw et al. (2010), on their research entitled does technology adoption promote commercialization conducted at Debrezeit, by using double-Hurdle model they found that farmers who knew more number of varieties during preceding year probably have better information about the advantages of the varieties and are likely to adopt and allocate more land for the commodity during the year. Furthermore, Shiferaw et al. (2008), Kristjanson et al. (2005), and Kaliba et al. (2000) found the same result on their studies for pigeon pea varieties, for cowpea varieties and for maize varieties respectively that to farmers technology awareness have a positive effect on adoption of these high yielding varieties. Moreover, the authors found that the level of adoption of improved chickpea varieties were strongly related to a range of household wealth indicator variables. Thus, adoption of high yielding varieties will lead to high allocation of land for that commodity and marketing surplus. Here, knowledge of improved varieties lies as an advantage to increase production and productivity.
Workneh and Michael (2002), in their study of intensification and crop commercialization in Northeastern Ethiopia, found that farm size, age and use of technology (fertilizer) significantly influence the agricultural activity under the study. Moreover, knowledge and perception about the improved varieties were also found to be the limiting factors for adoption despite positive demand for new cultivar. The implication is that there is a need to strengthen and leverage government extension service and rural institutions to promote awareness creation of the existing improved technologies.
Smallholder market participation depends on various factors including farm productivity. According to Moti and Berhanu (2012), except for some households found to be autarkic in live animal markets, most smallholders in a mixed crop-livestock systems participate both in crop and livestock markets. For those who participate in both markets, there is a strong linkage among the net market positions these households had taken in these two markets. However, the strength of linkage among these net market positions is not the same. The effect of net market positions in crop markets on market positions in live animal markets are stronger than the effect of net market positions in live animal markets on market positions in crop markets. This result is consistent with the descriptive data that showed that most households do not tend to sell live animals, particularly cattle, unless the cash demand could not be met by other income sources including crop sale. The earlier evidences show that, to enhance smallholder commercialization agricultural technology adoption by smallholder farmers is a mandatory.
Institutions
To better understand the role of institution in smallholder commercialization, it is important to disentangle and briefly discuss institutional environments and institutional arrangements. Institutional environment refer to the fundamental political, social, and legal ground rules that establish the basis for production, exchange, and distribution. For instance rules governing and right to contract are under this category. On the other hand, institutional arrangements refer to relations between economic units that define how those units can cooperate or compete (Williamson, 2000). A good example is market arranged such as contracts, auctions, exchanges, cooperatives, etc. (Omamo, 2006).
Formal institutions: It is obvious that different governmental and non-governmental institutions participates in developmental activities to enhance smallholder commercialization by delivering inputs like fertilizer, seeds, plant protection chemicals, and other related services. Consequently, access to such institutions improves smallholders’ commercialization process. Research findings show result in line with this statement, Asfaw et al. (2010) concluded that farmers nearest to agricultural extension and research Institutes adopted improved technologies. As a result, access to Research Institutes and Agricultural Bureaus will enable farmers to get expertise advice and knowledge about the newly released varieties by taking part in participatory research like farmers research group, advisory council meetings and participatory variety selection. This further, implies that agricultural research institutions should expand their pre-extension and popularization trials to the relatively remote districts as well. The office of agriculture should also make concerted effort to address all the villages through community-based extension services and improved seed distribution scheme. As a result, the authors showed that participant farmers in chick pea technology adopters are more market oriented than non-adopters in the chick pea market participation.
To enhance commercialization, research institution should focus on demand driven and client oriented commodities. According to EIAR (2006), research and development are also targeted on commodities of significant private investment in Ethiopia. As a result, recent investments in improving value chains for pulses, oilseeds, wheat, potatoes, and small ruminants have drawn smallholders into new value chain relationships with research institutes, extension agents, input suppliers, food industry concerns, and export firms. The process has been highlighted by a series of partnership-based pilot projects to promote proven agricultural technologies, accompanied by plans to expand from a few thousand farmers to larger numbers across multiple districts.
Informal institutions: More or less, informal institutions is associated with traditional, informal organizations at the community level include funeral groups (idiir), work- or labor-sharing groups (jigie), oxen or land-sharing groups (mekenajo), and rotating savings and credit associations (iquob). More formal groups focused explicitly on development activities-community-based organizations (CBOs) supported by or partnered with local and international NGOs exist side-by-side with these institutions (David, 2008).
According to Ellis (1998), decision making behaviour of individuals is influenced by personal capacity and by social and family factors. Degenet (2005) also puts forth that experience, information and differences in capacities to process and interpret information lead to differences in decision making behaviour of smallholder farmers. This implies that informal institutions play a vital role in promoting smallholder commercialization in a sustainable way in the case where intervention made by any of formal institutions is not yet continued.
Risks
In spite of the occurrence of and the exposure to the risk factors, smallholder agricultural producers have a variety of inherited options to help them manage risks. Ideally, risk management would involve utilizing tools or approaches that avoid or limit potential risks, mitigate the effects of unavoidable risks, and enable recovery from the effects of risk events to ensure the continued sustainability of the farming operation (Anderson, 1974; Anderson, 2001; World Bank, 2005). Risk management generally involves first, anticipating that an unfavourable event may occur and acting to reduce the probability of its occurrence and second taking actions which will reduce the adverse consequences should the unfavourable event occur. However, the choice of options to manage risk is the joint expressions of risk bearing and risk combating capacities of the smallholder farmers. Decision making in a risky environment involves attitudes toward risk, risk perception, ability to bear risk, and formation of expectations about the future. The decision making process is complex, and farmers differ both in how they make decisions and in the types of decisions they make. Research findings by Moti and Berhanu (2012) showed that livestock ownership also helps farmers spread some of the risks they face.
Moreover, Gebreselassie and Ludi (2010) showed that likelihood to generate cash income improves consistently as the size of farm increases. Large farmers in general and especially those who cultivate above 5 ha of land generate substantially large cash income. Keeping the effect of other factors constant, the result implies the positive effect of operation at higher level in coping with the risk of higher variance of returns in cash crop production. A policy of enhancing better credit system and designing risk coping strategies may help farmers to build assets that enhance the level of adoption of the new technology and price risks.
Market and their integration
The driving factors in commercialization process are often related to one another. If we take for instance the relationship between agricultural technology and market integration is complex. Hence, the potential for increasing marketed surplus through the diffusion of modern farming technology is substantial. Empirical results by Asfaw et al. (2010) show that adoption of improved chickpea varieties has a positive and robust effect on marketed surplus. These results generally underscore that a household’s production technology choices fundamentally affect its level of market integration primarily by affecting its productivity. Households operating rudimentary agricultural productivity technologies may participate in markets, but often only because they must use commodity markets as a way to resolve pent up demand for financial services to which they have no access. This indicates that promoting adoption of improved production technologies is essential to inducing broader-based market participation in a well-integrated markets that transmit excess supply to distant locations because the returns to increased output diminish less quickly there than they do in segmented or poorly integrated markets and the potential for adverse welfare effects on non- adopters is likewise lower.
Despite dearth of literature regarding analyses of effects of commercialization on output in Ethiopia, this review borrows largely the rationale considered in establishing theoretical relationships in the case of determinants of commercial orientation. Based on this, many studies recognized recursive relationships where market participation influences productivity (Strasberg et al., 1999; Heltberg and Trap, 2001; Bellemare and Barrett, 2006) and productivity influences market participation (Datt and Ravallion, 1998; De Janvry and Sadoulet, 2002), and non-recursive relationships where both influence one another (Von Braun et al., 1994; IFAD, 2003).
Integration of smallholders into markets is essential for sustainable development of the agricultural sector in agriculture-based economies (World Bank, 2008). Moti and Birhanu (2012), on their research on interdependence of smallholders’ net market positions in mixed crop-livestock systems of Ethiopian highlands confirmed the existence of interdependence between household’s net positions in crop and live animals markets and relatively, the net position of households in the live animal market is more strongly affected by their net position in the crop market than vice versa. The interdependence between the two market positions showed that households stock live animal asset through selling of surplus crops produced and finance crop purchased through livestock sales. The authors found that, the degree of participation in crop market is negatively influenced by age of household head. Younger households are more likely to participate as sellers than are older households. The coefficient of livestock ownership is positive and significant, which suggest that farmers with more livestock tend to have higher market integration. The income from livestock production may help farmers to minimize their liquidity constraint to adopt new technologies that increases productivity and sales. Perhaps due to the availability of more manure, which can have positive impact on productivity and further livestock can be used as collateral to get credits. Marketed surplus was also positively affected by farm size, which might have facilitated in boosting production.
Asfaw et al. (2010) confirmed that in line with their expectation, distance to main market variable is negatively correlated with marketed surplus because of the increased transaction costs associated with marketing of the farmers’ agricultural produce. This is also related to better access to improved seeds and other key agricultural inputs. Investment policies aimed at building up more rural road networks and improving the quality of roads may increase the level of market integration.
Similarly, crop sales play important role in financing livestock purchase as seen by the strong relationship between household’s net seller position in crop market and net buyer positions in live animal market. This could be due to the fact that livestock purchase as an input for farm operation or reproduction necessitates crop sale and income from crop sale is saved in a form of livestock asset (Gebremedhin et al., 2009). Thus, integrated/mixed farming leads to market integration. This implied that promotion of both livestock and crop subsectors will lead to smallholder commercialization. Intervention done to improve either livestock or crop eventually leads to improve the other enterprise as well.
Transaction costs
Research findings showed that cooperatives are effective at providing marketing services to their members: the positive and significant impact of membership on price reveals that cooperatives do serve their expected purpose on commercialization through better market opportunities, higher bargaining power or reduced transaction costs (Tanguy et al., 2008). Consequently, access to input supply and services reduce transaction costs (Key et al., 2000; Alene et al., 2008), access to input supply and services (Gebremedhin et al., 2009), and access to output markets (De Janvry et al., 1991).
Bellemare and Barrett (2006) in their study of model of livestock market participation by pastoral households in northern Kenya and southern Ethiopia found out that prices matter to the extent of participation and that fixed transaction costs matter both in the participation and in the extent of participation decisions. The concept that transaction costs in output markets influence crop choice and marketed supply response is also indicated by many authors (Goetz, 1992; Jayne, 1994; Omamo, 1998). The argument is that inputs markets may be subject to costs that differ from those in product markets and thus transaction costs in those markets may present a separate constraint on intensification.
Asset holdings
Household asset holdings, both in terms of capital and buffer to mitigate any production and market related shock are relevant in a smallholder commercialization process. These, assets like oxen, land, farm implements and human capital are essential for marketable surplus production at smallholder level. According an empirical studies (Moti and Berhanu, 2012), the probability of being a net buyer in live animal markets decreases with age of the household head. This could be due to the fact that elderly households have accumulated livestock assets over time. However, the likelihood of being a net buyer in crop market increases with the age of household head.
As mentioned earlier, hired or family labour is another determinant in smallholder commercialization. The availability of larger family labour for agriculture affects the likelihood of being a net seller (buyer) in crop markets positively (negatively). This might be due to the inefficiency of labor market where households with more family labour could produce more outputs (Sadoulet and De Janvry, 1995). According to Asfaw et al. (2010), households with more family labour force, livestock and land allocated more land for the improved chickpea varieties. Ownership of these assets eases the access of households to improved seed and credit.
Results also showed that, the effect of value of crop production and livestock endowment in determining the market position of households are apparently reflected in the estimation results. On the average, an additional crop production with a value of Birr 10,000 increases the likelihood of being a net seller in crop market by 11%. Households with larger livestock endowments are less likely to be net buyers in crop market. In a mixed crop-livestock system more livestock holding usually goes with more crop production due to the availability of draft power for crop production and the use of crop residue for livestock production. Moreover, livestock endowment strongly determines the net position households assume in live animal market as households with larger animal holdings are more likely to be net sellers in live animal markets and the fewer the holding, the more likely there will be net buyers in the same market (Moti and Birhanu, 2012).
Policy aspect
Smallholder commercialization cannot be left to the market alone (von Braun et al., 1994). Pingali (2006) generalized that governments ought to help in increasing enabling policy environments for smallholder commercialization through investing in rural infrastructure and undertaking institutional reforms that could encourage the private sector to participate in the development of rural economy. Over the past decade, Ethiopia has embarked on a major policy drive to promote smallholder marketing cooperatives as a way to increase the commercialization of smallholder agriculture and the improvement of smallholder livelihoods. Studies using analysis is based on propensity score matching, the use of which is justified by the fact that most Ethiopian cooperatives were created under a government policy target of establishing the impulse of an external partner and not by members themselves. Tanguy et al. (2010) has examined the extent to which cooperatives affect their members’ commercialization behavior. Moreover, those authors revealed that innovative RPO models are being held up as the key to helping smallholders better manage the procurement and distribution of inputs, aggregate their surplus farm output, and bargain for better terms of trade in the marketplace.
In addition to the aforementioned, policy interventions in small-scale irrigation and commercial oriented projects have led to commercialization of smallholder commercialization. Empirical results showed that the percent of farm households operated at high degree of commercialization varies between 54 and 30% in favor of participant farmers in small-scale irrigation and commercial oriented policies than non-participant households (Gebreselassie and Ludi, 2010). In general, the result reflects the positive role of targeted public investment in creating an enabling environment for commercialization of small farmers, though the study didn’t control the effect of other factors such as the distinctive features of the area. As a result, both cash cropped area or the number of cash crop growers increased after the intervention. Thus, about 14% of farm land allocated (by farmers operated at low level of commercialization) for production of food crops in pre-intervention period turned into cash crops production in post-intervention period. Similarly, the proportion of farmers allocated half or more of their land to cash crops increased by about 23% and reached 68% after they took part in the commercialization scheme.
To transform smallholders, focus should be given to all sub-sectors within the agriculture. Anteneh et al. (2009) revealed that National policy has envisaged the transformation of subsistence livestock production systems to that of productive and market oriented systems. Despite a plethora of projects and expressed policy intent, the livestock sector has not yet really taken off. One of the major bottlenecks, as many studies revealed, is related to the limited coverage and problem associated with effectiveness, efficiency and coordination of livestock service delivery system and enabling policy and institutional environment.