World Development Vol. 38, No. 10, pp. 14131428, 2010 2010 Elsevier Ltd.

. All rights reserved 0305-750X/$ - see front matter www.elsevier.com/locate/worlddev

doi:10.1016/j.worlddev.2009.06.009

The Future of Small Farms: New Directions for Services, Institutions, and Intermediation
COLIN POULTON, ANDREW DORWARD and JONATHAN KYDD * University of London, UK
Summary. Ecient pre- and post-harvest services are essential if small farms in high potential areas are to intensify production, contribute to economic growth, and reduce poverty. They also matter if small farms in marginal areas are to manage their natural resource base, in the face of growing population pressure and climate change. Diculties that smallholders face in accessing services are reviewed, showing how incentives for commercial delivery of services to smallholders dier between staple food, traditional cash crop, and high value product supply chains. The major challenge in service delivery to smallholders in much of Africa concerns coordination of service development and delivery. Dierent forms of intermediary institution for achieving such coordination are examined. 2010 Elsevier Ltd. All rights reserved. Key words small farms, services, institutions

1. INTRODUCTION Smallholder agricultural producers, in Africa and elsewhere, face numerous challenges. Research into technologies appropriate to the agro-ecological conditions in which they live and increased investment in basic infrastructure (roads, communications, in some cases irrigation) to these areas are both necessary if they are to enhance their livelihoods in the years to come. Land tenure and water rights regimes that combine a concern for equity with security for investment are also a necessary, if not sucient, condition for broad-based agricultural growth. Alongside these, ecient pre- and post-harvest services are critical for the future of small farms. They are essential if small farms in high potential areas are to intensify their production, so as to contribute to national economic growth and poverty reduction. They are also essential if small farms in marginal (e.g., semi-arid or remote) areas are to manage and augment their natural resource base, so as to sustain per capita agricultural production despite growing population pressure and climate change. In this paper we show why service delivery lies at the heart of the small farm debate. We review the diculties that smallholders face in accessing services for more intensive production and market access, and show how the incentives for commercial delivery of key services to smallholders dier between staple food crop production, traditional cash crop production, and high value product supply chains. We then review the broad state of aairs in service delivery to smallholdersfocusing our attention on Sub-Saharan Africaand highlight issues that arise in the supply of particular services. We argue, however, that the major challenge facing service delivery to smallholders in much of Africa concerns coordination of service development and delivery, and the nal section of the paper therefore examines dierent forms of intermediary institution for achieving such coordination. 2. THE IMPORTANCE OF SERVICE DELIVERY The importance of service delivery to small farms is well illustrated by a comparison of the competitive strengths and weaknesses of small farms and large-scale commercial farms
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in a low wage environment such as that found in rural areas of low income countries. For the purposes of this discussion we assume that small and large farms face similar agro-ecological conditions and geographical proximity to markets. There is plenty of evidence in the agricultural economics literature to show that there are few economies of scale in agricultural production in low income economies. This is because low labor costs allow farms to substitute cheap labor for (lumpy) capital equipment in activities such as land preparation, planting, weeding and harvesting. 1 Under such conditions, small farms enjoy a competitive advantage over large commercial farms in the form of their low transaction costs in accessing and supervising motivated family labor (Binswanger & Rosenzweig, 1986; Eastwood, Lipton, & Newell, 2004; Lipton, 1993). They may also benet from intensive local knowledge. However, their small scale leads to high unit transaction costs in almost all non-labor transactions: in accessing capital, market and technical information, inputs and output markets, and in providing product traceability and quality assurance (Table 1). These high transaction costs are exacerbated by most small farmers poverty (with large needs for external sources of capital but limited assets for collateral), dispersion, production, and health uncertainty (associated with poverty and lack of access to capital and services) and low levels of education, and by poor physical and informational communication systems and low density of economic activity in the poor rural areas where they predominate. Thus, whereas large-scale farms can pro-actively source many critical services (e.g., through telephone or periodic face-to-face contact with market intermediaries or through a visit to the nearest branch of a commercial bank), smallholders are heavily dependent on such services being both brought close to them and tailored to their needs and circumstances. Moreover, as agricultural and broader economic development proceed, the relative importance of dierent transaction costs to the eciency and competitiveness of farm operations changes. As rising populations encourage intensication of production, access to inputs, nance, and perhaps also technical information becomes more important. As consumer
*

Final revision accepted: June 23, 2009.

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WORLD DEVELOPMENT Table 1. Transaction cost advantages of small and large farms Small farms p p Large farms

3. SERVICE CHARACTERISTICS AND DELIVERY CHALLENGES TO SMALL FARMS A number of problems need to be overcome if pre- and postharvest services are to be delivered to small farms. These relate to the characteristics of both small farms and the services themselves and aect both how services might be delivered and who is best placed to deliver them:  The problem of small transaction size has already been highlighted. In conjunction with the geographical dispersion of smallholder producers, it dramatically raises the cost of servicing small farms. We note also that the geographical dispersion of smallholders makes it dicult for managers to monitor the productivity of their sta in delivering services. This can be a particular problem for public sector managers whose sta are delivering free services (e.g., extension advice).  The public good attributes of some services (e.g., some market information and extension advice) are widely recognized as a constraint to pure private sector delivery of these services (Smith & Thomson, 1991).  Strategic default (Poulton, Dorward, & Kydd, 1998) describes deliberate failure to complete a contract. This is relevant particularly to credit transactions.  Specication opportunism involves parties to a transaction (having the possibility of) cheating through misinformation in a transaction. Small farmers are often held to be the victims of such opportunism, for example, in the case of adulteration of inputs or xing of scales or measures by traders. (Opportunistic behavior by one player can then reduce demand for that service from all providers, unless eective reputation mechanisms can be established.) However, smallholders can also engage in opportunism, for example, by falsely over-declaring quality of produce sold. The requirements of supermarket chains for assured safe food means that produce buyers within such chains have to be seen to take great care to protect themselves against such opportunism.  A less widely recognized, but we believe critical, problem arises from the complementarity between support services in their farm production and protability impacts. (This may be thought of as an externality eect.) Thus, before the development of intensive agricultural production systems in an area, markets tend to be thin and producers demand for one service depends upon their expectation of reasonable (reliable and acceptable cost) access to supply of complementary services. Producers demand for purchased inputs, for example, may depend upon their ability to access seasonal nance, and vice versa, and demand for these services will also depend upon the degree of access to output marketing services. Since potential service providers investments depend upon their expectations of producer demand for their services, these also depend upon (their own and producers) expectations of supply of complementary services.  Monopoly power (by either public or private suppliers) is also a widely recognized problem that manifests itself in disadvantageous prices for producers and in unresponsiveness to producer requirements. The low volumes of market transactions in remote rural areas and/or areas where little agricultural intensication has yet occurred make producers in these areas susceptible to the exercise of monopoly power. Moreover, there is an interaction with the previous observation of service complementarity. Where the exercise of monopoly power reduces the

Unskilled labor supervision, motivation, etc. Local knowledge Skilled labor Market knowledge Technical knowledge Inputs purchase Finance and capital Output markets Product traceability and quality assurance Risk management

p p p p p p p p

demands become more sophisticated, with greater importance attached to quality and safety attributes (and greater willingness to pay for these attributes), access to market information becomes increasingly important, as does the ability to ensure quality and ultimately to provide product traceability. Meeting quality requirements may also require the use of specic inputs (seeds, fertilizers, crop protection chemicals), along with investment in capital assets (e.g., packing houses, cool chains). The quality and eciency of service delivery thus becomes of increasing importance to smallholder producers over time. In contrast to the case of agricultural production, economies of scale may be observed in agro-processing and export marketing even in low income economies. However, the organization of processing and export marketing can be separated from the organization of productionas long as ecient primary marketing services exist to enable small farms to supply larger processing and/or marketing enterprises with produce. A longrecognized exception here is where very high levels of coordination are required between production ows and processing capacity, most commonly as a result of the perishability of the raw product Binswanger & Rosenzweig, 1986. If the transaction costs associated with organizing multiple small-scale producers to deliver their produce to the marketing or processing point in a smooth ow prove prohibitive, then the economies of scale in processing or marketing may override any production eciency advantages of small farms and production will be organized in large units with centralized management close to the processing facility. This nal example hints at the potential benets to be obtained from collective action among small farmers. Collective action by producers is sometimes conceived of as a substitute for reliance on commercial or public delivery of pre- and postharvest services. However, it may also be a complement to it, reducing the transaction costs faced by external service providers in reaching dispersed smallholders, each of whom produces small volumes, to the point where service provision becomes viable. Collective action is potentially relevant to the provision of all services (e.g., joint acquisition of inputs or sale of output, group liability as a collateral substitute in nancial transactions), but we illustrate with particular reference to the requirement for traceability. There are large xed cost components in the establishment of traceability schemes, which pose particular challenges for small farmers and those wishing to transact with them. However, collective action by small farmers can spread these costs, allowing buyers to deal with organized groups when they could not service members on an individual basis. There is a parallel here with the local knowledge and labor motivation advantages of small farms identied in Table 1. Committed farmers working together can perform some of the monitoring functions required for traceability at lower cost than the employees of buying rms can.

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return that producers achieve from one service, this is likely also to reduce their demand for complementary services.  Finally, not only do smallholder producers lack market power, but they also suer from limited political voice, as a result of their limited education, limited economic power, and geographic dispersion. One important consequence of this is that they are unable to put pressure on public sector service providers (especially research and extension systems) to deliver eective services. Farmer collective action could, in theory, correct for most of these problems to a greater or lesser extent. From the service provider side, various forms of coordination can also overcome them. We distinguish:  Vertical coordination along a supply chain. Thus, for example, the credible promise of repeated contracts between output buyers and selected producers may discourage both specication opportunism and strategic default.  Horizontal coordination between competitors performing the same function in a supply chain. This can reduce the opportunities for side-selling by producers, thereby reducing problems of strategic default.  Complementary coordination between providers of complementary services in a supply chain. As the name suggests, this is a potential response to the problem of service complementarity. To be eective it may require the participation of an additional party (e.g., local government convening of decentralized planning deliberations), especially if this party can provide incentives (scal or otherwise) for the honoring of commitments that are made.  Finally we use the term focal coordination to describe the combination of vertical and complementary coordination that occurs when a single service provider (most commonly an agribusiness) supplies a full package of pre- and post-harvest services to smallholder producers. 4. SERVICE DELIVERY BY COMMODITY AND MARKET TYPE: INCENTIVES AND EXPERIENCE Commercial incentives for investment in service delivery to smallholder agriculture vary by commodity and market type. We begin by distinguishing traditional export cash crop commodities, staple food commodities, and high value products (most notably horticulture). The dierent incentives for commercial investment inuence the role that the state should play in these dierent commodity sectors. They also partly explain dierences in performance observed across commodity types in post-liberalization Africa. (a) Traditional export cash crop commodities For cash crop commodities where buyers or processors need to invest in processing plant and/or downstream marketing relationships, these investments may both limit the number of players within the sector and provide buyers with an incentive to make further investments to increase reliable access to farm products (to improve capacity utilization and/or ensure their ability to honor contracts). The conditions under which processors are likely to choose vertical integration of production and processing rather than sourcing from smallholder producers were discussed above. Where they choose to invest in service delivery to smallholder producers in exchange for rights to buy the resulting output, processing rms typically provide a full package of services to smallholders with whom they work (focal coordi-

nation). Horizontal coordination is also needed between the companies concerned, so that they do not undermine each others investments in service delivery through side-buying. The incentives to work with small farmers in this way thus tend to be strongest where output markets are more concentrated, as (horizontal) coordination is easier the fewer the number of players involved (Poulton, Kydd, & Dorward, 2004). Prior to liberalization many export cash crops suered from both over-valued exchange rates and inecient and cash short monopsonistic parastatals which left farmers with low prices and poor services (Akiyama, Baes, Larson, & Varangis, 2001). However, liberalization has commonly corrected for these failings, allowing an inux of private capital, management expertise, and entrepreneurship such that producers often receive prompter payment and higher prices for produce. Shepherd and Farol (1999), reviewing a number of early studies of cash crop marketing liberalization in Africa, found that farmers access to seasonal nance had often suered as a result of liberalization, along with quality control. However, in many cases coordination mechanisms have now been established to deal with these problems, such that both production and productivity are increasing. The most common coordination mechanisms observed are  horizontal and focal coordination among a small number of large players to enforce interlocking transactions (to deal with default opportunism in seasonal input nance), or  government regulation (e.g., the establishment of regional monopolies) to provide incentives for investment in service provision. There is a risk, however, that market concentration will diminish the competitive pressures for eciency in service delivery. Thus, a major policy challenge is to get the balance right between competition, for ecient service delivery on equitable terms, and coordination, for assured returns to investments in service development and delivery (Dorward, Kydd & Poulton, 1998a; Poulton et al., 2004). In principle, involvement of farmer organizations can both assist in the provision of seasonal nance (including reducing the problem of strategic default) and give producers a voice in the determination of produce prices (especially where they are set on an industry-wide basis within monopoly systems). However, this requires a keen awareness of markets, analytical capability, and also long-term vision on the part of farmer organizations, attributes that are likely to require considerable capacity building input. (b) Staple food commodities A common feature of marketing systems for staple food commodities in Africa is a large number of small buyers engaged in primary marketing and assembly, for whom limited capital is a major constraint to expansion. At the processing stage, there are limited economies of scale (see Jayne et al., 1995) for an account of how small-scale hammer mills outcompete industrial roller mills in maize processing) and/or opportunities for value addition. In such situations commercial buyers have no incentives to invest in service delivery to expand supply or to capture an increased market share of supply. There are, therefore, three alternatives:  A state agency provides a package of pre-harvest services to producers, with credit recovered through some form of statutory control over output marketing;  A range of specialist service providers (public and private) provide individual services to producers. This, however, can run into the problem of complementarity highlighted above;

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 The problem of complementarity is partially sidestepped through the application of input subsidies, which eases the aordability constraint for poor farmers wishing to access purchased inputs without requiring them to take seasonal credit. Historically, large government expenditures have been incurred on state-led eorts to promote intensication of cereals production in a number of low income countries. These have had only limited or short-lived success in stimulating agricultural growth, while being a major drain on government budgets, in some (mainly African) countries, 2 but in other (mainly Asian) countries have contributed to dramatic and widespread processes of growth in cereal crop production. Dorward, Kydd, Morrison, and Urey (2004), in a review of policies in successful and partially successful green revolution areas, found that the majority of transformations involved a staged process of state investment in institutional and economic development. Initial (stage 1) interventions involved basic investments to establish more favorable conditions for productive intensive cereal technologies: investments in physical infrastructure (roads and irrigation), in development of improved technologies, and (where necessary) in land tenure systems providing smallholders with reasonably equitable and secure access to land. These investments improved access and potential productivity. Basically protable new technologies would then be limited to a small number of relatively wealthy farmers with access to seasonal nance and markets. Stage 2 then involved state investment to kick start markets and service development, so as to enable farmers to access seasonal nance and input and output markets at low cost and low risk. Subsidies were provided on inputs, credit, and various costs associated with irrigation, while state-owned nancial institutions provided credit and a variety of interventions (e.g., direct purchase of grains and the establishment of regulated markets) enhanced access to, and reduced the risks associated with participation in, output markets. Once farmers became used to the new technologies, such that volumes of credit, input demand, and produce supply had built up, thicker markets allowed per unit transaction costs to fall. Government could then (in theory at least) withdraw from its service coordination activities and let the market play an increasingly important role (stage 3). However, in important cases (e.g., India) political pressures have so far largely prevented this from happening. It follows from this that the model of state intervention could fail if either stage 1 physical investments were insucient to establish the necessary conditions for intensive cerealbased transformations or if stage 2 institutional investments were ineective in developing high volume and robust service demand and delivery (due, e.g., to poor political or technocratic management, corruption, or the failure to continue with the system long enough for changes to become embedded). In Africa failures of costly state intervention to stimulate agricultural transformation and/or the need to reduce the cost of state intervention even where it had achieved some success contributed to donor pressures for market liberalization and structural adjustment policies. However, subsequent market led development policy has also had very mixed success in promoting food crop production. Liberalization has generally improved access to output markets in accessible and higher productivity areas, but it has weakened output market access in some remoter areas. More generally, the private sector has rarely taken over the role of providing farmers with pre-harvest services. Overall fertilizer use has been stagnant (in large part due to the removal of fertilizer subsidies) and seasonal nance services have been largely absent. The public good

nature of extension and market information means that, except where donor-funded initiatives have sought to involve private actors, these services have remained in the hands of generally poorly funded, often poorly managed, state agencies. As a result, during the 1980s and 1990s Sub-Saharan Africa stood in contrast to Asia in achieving more than 70% of its increased cereal production from area, as opposed to yield, increases (Dorward, Moyo, Coetzee, Kydd, & Poulton, 2001; FAO, 2002; World Bank, 2000). 3 The weak performance with regard to cereals intensication in Africa and other lagging areas (including parts of South Asia) has a number of causes, including insucient public investment in basic infrastructure and state policies that have discouraged private investment even when markets have ocially been liberalized (Jayne, Govereh, Mwanaumo, Nyoro, & Chapoto, 2002; Kelly, Crawford, & Jayne, 2005). However, it is also highly compatible with our earlier discussion of weak incentives for both private buyers and specialist service providers to invest in small farm service delivery. In the past decade or more, numerous African countries have embarked on programs of administrative decentralization. However, in few (if any) cases has this yet produced strong local administrations that might lead eective multi-stakeholder planning processes. Moreover, rarely have Ministries of Agriculture (or other relevant agencies) been restructured so as to facilitate or support such processes. In the meantime, in a number of countries (most notably Malawi) political pressure to expand agricultural production is leading to a return to subsidy policies that both compensate for the lack of longer-term investment in infrastructure and short-cut the need for more complex coordination eorts for market development. (c) High value products The case of high value products has more in common with traditional export commodities than with food staples. However, there are two important dierences. Firstly, investments to increase reliable access to farm products are driven less by the need to achieve high utilization of expensive processing capacity and more by the need to assure consistent supply of high quality produce as a prerequisite for participation in high value marketing channels. Secondly, the incentives for working with small farmers may be undermined where products have high credence attributes, as assuring these involves more or less xed transaction costs per producer, posing major difculties for intermediaries serving small farmers. Historically, horticultural crops (the dominant type of high value agricultural product) have not generally been subject to regulation and state intervention in the same way as traditional export crops, so it is not appropriate to compare performance under state and market led development approaches. However, supply chains serving international and local supermarkets are growing rapidly in most developing countries and are particularly important in Latin America, South East Asia, and transition economies (see, e.g., Reardon & Timmer, 2005). Supermarket growth is slower in poorer countries and has less reach in poorer, low potential, and less accessible areas. High value supply chains have the potential to include small farmers, especially in the production of labor intensive crops, but increasing importance of standards, and particularly private rather than public standards, poses problems for small farms. 4 These standards are dynamic and increasingly demanding, may require fundamental changes in production methods and investments in structures with signicant capital requirements, and often involve process monitoring of credence attributes plus traceability requirements. Many of these

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features involve new risks for producersof rejection of produce that has failed to meet standards or of loss of access to particular high return outlets after signicant investments designed to access them (Henson, Masakure, & Boselie, 2005). Supermarkets and their wholesale suppliers also often look for a limited number of relationships with large-scale producers who can produce signicant and regular quantities of a range of products and who can respond rapidly to changes in consumer demand both in product attributes and in volumes of dierent product lines (Reardon & Timmer, 2005). The result is that many small farms either cannot enter or struggle to remain within increasingly quality and safety conscious supply chains (Carter & Barham, 1996; Dolan, Humphrey, & Harris-Pascal, 1999; Maertens & Swinnen, 2007; Raynolds, 2004; Reardon & Berdegue, 2002). 5 (d) Mapping commercial interest in sourcing from smallholders Figure 1 builds on our discussion around Table 1 and on our comparison of experience with traditional export commodities and high value products to map out areas of likely commercial interest in investing in service delivery to source supplies from small farms. While reality is too complicated to be captured entirely within a 2 2 matrix, this gure attempts to capture the two biggest determinants of commercial interest in such investment. Our discussion around Table 1 noted that small farms enjoy labor cost advantages over large-scale commercial farms, but that these could be oset by their higher unit transaction costs in almost all non-labor transactionstransactions that become more important to overall competitiveness as agricultural and broader economic development proceed. From an agribusiness perspective, the high xed cost element of dealing with any individual supplier (whether large or small) creates a preference for large suppliers, which is reinforced where larger farm enterprises can access their working capital requirements themselves, but smallholders are dependent on the produce buyer for nance. They will thus only prefer working with small farms where the labor cost advantages of such farms mean that they are willing to supply at a lower produce price than large farms. The horizontal axis of Figure 1, therefore, posits that, ceteris paribus, agribusiness is more likely to work with small farms where they have no choice than where they can contract with large suppliers or rely on imports. The vertical axis reects the observations that at times small farms can deliver high quality produce (thanks to motivated family labor), but that they have real problems where competitiveness involves investments with signicant xed cost elements. Examples already cited are traceability systems and the process monitoring systems associated with the assurance of credence attributes, plus repeated capital investments to satisfy the (evolving) quality and safety requirements of buyers. The vertical axis of Figure 1 dierentiates commodity chains/ groups within countries, whereas the horizontal axis dierentiates between countries. However, we note that the nature and speed of evolution of consumer demands are also a function of income levels and growth (i.e., of broader economic development). Just as, on the supply side, a dualistic agrarian structure

creates challenges for small farms in a competitive marketing environment, so high levels of income inequality create challenges on the demand side if small farms that have yet to develop beyond semi-subsistence status (i.e., have yet to experience basic intensication or commercialization) are faced with complex consumer demands (associated with much higher levels of broader economic development). Within Figure 1, the highest interest in investing in service delivery to smallholder producers occurs in the upper left corner (cell 1) and the lowest interest in the lower right corner (cell 4). While quality requirements within many traditional export commodity chains are increasing over time, these still mainly concern search and/or experience attributes (the ber properties of cotton lint being a good example (Larsen, 2003)). Thus these systems generally fall within cell 1, where small farms still have a good chance of competing through traditional contract farming arrangements, or cell 3, where it should be possible for NGO assistance or farmer organizations to reduce some of the transaction cost disadvantages faced by small farms relative to their commercial farm neighbors. By contrast, an increasing number of high value commodity chains fall within cell 2 or 4, as quality standards initially developed for export chains serving developed economy markets are adopted by procurement systems principally serving domestic or regional markets. As already indicated, many of the studies that show small farms struggling to compete with larger competitors are focused on these chains. Indeed, we are aware of few studies documenting viable models of intermediation to enable small farms to compete in cell 4 commodity chains. 6 One such study is that of Henson et al., 2005. As this is in many ways an exception that proves the rule, it is worthy of additional consideration here. Hortico in Zimbabwe was 7 a supplier of various horticultural products into international supermarket supply chains that sourced principally from commercial farmers, but, starting in the mid-1990s, also developed a contract farming system for smallholder suppliers. This grew steadily in its early years, then expanded more rapidly once the Zimbabwe fast track land reform program began in 2001. There are several important points to note about this successful case. Firstly, throughout the life of the scheme, Hortico were forced to handle all crop spraying themselves, as the only way of assuring compliance with environmental and safety requirements of buyers. This was costly and costs had to be passed onto growers. As a result, protability for growers of participation in the scheme was often only marginal. In fact, growers had a range of motivations for contracting with Hortico (as Ghanaian cotton producers did in the study by Poulton, 1998b). Secondly, even in the mid-1990s, before the onset of the fast track land reform program, there was perceived political benet to being seen to be working with smallholders in Zimbabwe. Thus the calculation to work with smallholders was arguably never entirely a simple commercial one. Nevertheless, the fact that the growth of the scheme accelerated after collapse of the commercial farm sector post-2001 (i.e., as Zimbabwe horticulture moved from cell 4 toward cell 2) is in accordance with Figure 1. Finally, Hortico received support from USAID to get the scheme started.

Importance of fixed costs in farm-level activity Low High

Inequality in Farm Structure Low High (mainly small) (dualistic) 1 3 2 4

Figure 1. Commercial interest in sourcing supplies from small farmers.

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Apparently three other companies also got support, but, despite this, did not succeed in establishing viable commercial contract farming models. This illustrates both the point made by Boselie et al. (2003) that innovative models for linking smallholders to remunerative market opportunities generally require some public funding during the establishment phase and the diculties of integrating smallholders into cell 4 systems. Overall, our assessment is that formal supply chains are likely to enter into contract farming arrangements and assist small farmers with the seasonal inputs, nance, technical support, and quality monitoring systems they need to meet production and quality requirements, where some combination of the following factors is observed:  limited opportunities for wholesalers to source from larger farms or political incentives for produce buyers to invest in institutional mechanisms (and learning) for farmer monitoring and support;  limited demand for credence attributes;  highly labor intensive products;  product lines with a certain degree of stability in supermarkets quality and quantity demands;  small farmer motivations for participation that extend beyond short-term direct prots from participation;  external donor or NGO (nancial and/or organizational) support for the establishment of small farm sourcing arrangements;  farmer collective action a necessary, but not sucient, condition for small farm participation in cell 2 or 4 commodity chains? (e) The impact of supermarket expansion on small farms The literature on global supermarket expansion highlights the common features of supermarket growth across countries and regions. Where demand conditions are favorable (due to income growth and urbanization) and restrictions on foreign direct investment have been lifted, 8 supermarkets have rapidly expanded to command major shares of the urban food retail market. However, Figure 1 suggests features that will dierentiate the impacts of supermarket expansion on small farms across countries, even assuming equal rates of supermarket growth. In particular, it suggests that agrarian structure will be a key factor mediating the impact of supermarket expansion on small farms. Thus in Latin America, where dualistic agricultural systems predominate (and where investment in food systems has followed a long period of market repression), supermarket expansion has happened very quickly and there are clear stories of small farms struggling to maintain their position with the supply chain as supermarkets have spread rapidly (Reardon & Berdegue, 2002). By contrast, China provides an interesting case of a highly egalitarian farm structure coinciding with strong demand pressure for supermarket growth as urban populations and incomes explode. The result has been innovative institutional arrangements to link small farms to supermarket chains (Hu, Reardon, Rozelle, Timmer, & Wang, 2004), suggesting that, with appropriate state (or other) intervention, integration of small farms can be achieved even within emerging cell 2 supply chains. Similarly, Dries, Reardon, and Swinnen (2004) argue that supermarkets and their dedicated supply rms will provide support packages to build the capacity of small and undercapitalized farms in transition countries, in particular in those where the market is dominated by small/medium farmsat least when retailers want to source commodities locally (p. 552.)

Indeed, the logic behind Figure 1 also suggests that trade policy and/or rules on sourcing may mediate the impacts of supermarket expansion on small farms. If a country allows its processors and retailers to rely heavily on imported suppliers, then they have little incentive (other than cost) to invest in the domestic production base. Small farms, in particular, will suer from this, as they rarely have the resources to fund investments to raise their capacity to meet supermarket requirements. By contrast, in a country with few large farms and where national policy (or consumer preference) encourages a reasonable degree of local sourcing by supermarkets, supermarkets will be forced to invest more heavily in a small farm supply base if they are to expand. This nal point suggests that, under some circumstances, agrarian structure and trade policy may inuence more than just the impact of supermarket growth on small farms. For the speed of supermarket expansionat least beyond the rst few stores serving middle-upper income consumers in the main citiesdepends on how readily supermarkets can nd suppliers that can deliver them the combination of reliable quantities and quality of produce at low transaction costs to outcompete traditional informal markets. 5. MARKET PROSPECTS AND THE FUTURE OF SMALL FARMS Debates on the future prospects for small farms to contribute to national growth and poverty reduction objectives turn not just on the relative competitiveness of small versus large farms within dierent commodities and markets, but on the growth prospects for those dierent commodities and markets. In particular, it is observed that global demand and hence export opportunities are growing fastest in horticultural and livestock products, while the share of domestic food markets accounted for by supermarkets is rising fast in most developing countries. Both phenomena are driven by rising incomes within developing countries; neither is viewed as particularly positive for small farms. There are three broad responses to these observations. The rst is that, particularly in Africa, domestic markets for staple foods continue to represent a useful growth opportunity. 9 Diao, Dorosh, and Rahman (2003) estimate that the combined value of domestic markets for staple foods in Sub-Saharan Africa is at least US$50 billion per annum (this excludes domestic consumption of horticultural products) and observe that these markets will grow at a respectable 4% p.a. mainly as a result of population growtheven if incomes do not rise much. Quality requirements in such markets are modest, making them highly suited to smallholder production. While individual national markets are often small and subject to price uctuations when local harvests rise and fall, this volatility could be moderated by greater liberalization of intra-regional trade and possibly by carefully designed price stabilization interventions. Import penetration into African food markets has been increasing for some time, driven primarily by increased consumption of wheat and rice in growing coastal cities. However, higher global grain prices over the medium term, driven by expansion in biofuels production in the United States and elsewhere, oer African producers the opportunity to reclaim some of their lost share in their own metropolitan markets. Secondly, while prices of most traditional export commodities continue on a long-term decline (with precipitate falls experienced during the 1980s), the potential for such sectors to contribute to growth should not be totally discounted. Deininger and Okidi (2003) attribute much of the poverty

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reduction experienced in Uganda in the 1990s to a boom in coee production (albeit one that then ran into a coee price slump), whilst a recent cocoa boom has contributed to the impressive falls in poverty recorded in Ghana (Ghana Statistical Service, 2007). Capitalizing on such booms requires that both households and states invest a good proportion of the proceeds in other sectors. Meanwhile, medium-term prospects for some commodities of particular interest to Africa (e.g., cotton) are better than others (most notably coee). Thirdly, the scale of supermarket expansion in the poorest countries, where agriculture is most important to economic growth, should not be exaggerated. Supermarket expansion is driven rst and foremost by demand side developments and demand conditions for supermarket growth vary considerably across continents and countries. While consumer food markets are booming in regions where a long period of market repression has fairly recently ended (e.g., in Latin America and Eastern Europe) and/or where there is a rapid economic growth (in much of Asia, most notably China), demand is more limited in Sub Saharan Africa. This is recognized by Reardon and Timmer (2005), who describe much of Africa as being in a (pending) fourth wave of supermarket expansion, where It is unlikely that the lower end of this set of countries we will see supermarket growth for several decades (p. 2382). Thus, there remain opportunities for small farms to supply alternative marketing channels, including for horticulture and livestock, and there is still a window of opportunity (even if limited) for the development of institutional arrangements to link small farms to supermarket procurement systems as they do expand.

The challenge, therefore, is to nesse simultaneous increases in demand and supply, until such time as thick markets can be sustained largely by the competitive actions of private sector agents. Thus, having reviewed the challenges facing delivery of a number of pre-harvest services, we return in the nal section to consideration of mechanisms for achieving coordination of the provision of the various complementary services required by smallholder producers. (a) Output markets In this section we consider interventions that aim either to improve the eciency of output markets, to reduce the volatility of prices in such markets or to improve smallholder farmers access to such markets. As shown in Table 2, many interventions address more than one of these objectives. Producers should receive a higher share of nal market prices, and hence realize higher returns to their investment, if marketing margins are reduced. This may be achieved, inter alia, through:  improvements in road infrastructure in rural Africa;  more competitive freight transport services (Hine, Ebden, & Swan, 1997; Hine & Rizet, 1991);  reductions in the transaction costs of agricultural trade (Fafchamps, 2004; Fafchamps & Gabre-Madhin, 2004),  reduced local taxation of trading activity (Ellis & Mdoe, 2003);  more competitive output markets, which may be a consequence of any of the former, plus of increased availability of capital for trading. Volatile prices, even around a remunerative mean, can also be a disincentive to farmer investment, given the limited instruments available to farmers for insuring against such risks and/or for smoothing consumption across periods of variable income. In most of Africa the major reason for volatile prices is rainfall variation. However, price volatility is increased by the limited arbitrage across agro-ecological zones (within, but even more so, across countries) and by the limited incentives and capacity for storage of agricultural commodities. In southern and eastern Africa, in particular, stabilizing maize prices is a high prole political issue, given the importance of maize purchases in the budgets of poor consumers. Volatile maize prices also act as a disincentive to net decit producers to diversify away from their own production of maize into potentially higher return commercial crops (Fafchamps, 1992). The prices of perishable crops, such as many horticultural products, tend to be more volatile in the short term than those of staples. For those producers able to get established in horticultural production, greater short-term volatility is compensated for by higher mean returns. However, formal procurement systems for fresh produce (e.g., those being developed by supermarkets and formal wholesalers) also offer more stable prices for suppliers than those observed in traditional wholesale markets. Market information systems (MISs) aim to increase market eciency by highlighting opportunities for arbitrage (spatial
Table 2. Objectives of output market interventions Exchange Eciency p p p Price Stability ? p p p Farmer Access p ? p

6. CHALLENGES FACING SPECIFIC SERVICES Having developed a broad picture of dierent problems and opportunities of service development for small farms in dierent contexts, we now briey consider issues specic to the development and delivery of particular services required by small farms. There is a widespread perception that too many agricultural interventions have been supply pushes that have achieved limited impact due to insucient attention to market realities. Farmers have been reluctant to invest in expanded production without assured access to output markets that oer remunerative prices or, in some cases, have invested only to nd that output prices crash, thereby discouraging further investment. A major objective of structural adjustment programs was to increase the prices that farmers received for their produce, through a reduction in both the direct (e.g., export taxes) and indirect (e.g., overvalued exchange rates) taxation of agriculture. Subsequently it has been realized that the institutional basis for market functioning also needs strengthening if farmers are to consistently receive reasonable prices. We, therefore, start this section with a review of meso-level interventions to enhance the performance of output markets and/ or farmers access to such markets. However, there is another side of the coin, sometimes understated in current dialogs: that the existence and quality of preharvest services is a major determinant of the ability of smallholder farmers to respond to market opportunities. In much of Africa, especially away from major centers, markets are segmented by high transport costs. In food decit areas, therefore, the prices prevailing in local markets represent local import parity prices (i.e., high), yet few farmers respond to these with production intensication. Increased productivity is as important to protability (and competitiveness) as higher output prices.

Market information systems Warehouse receipt systems Commodity exchanges Price stabilization Facilitating market linkages

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and temporal) and by making it easier for smaller and/or newer players to compete eectively in agricultural commodity trade. However, the experience of public investment in MISs has often been disappointing (Shepherd, 1997), with information disseminated too slowly or infrequently to be of real use to traders (or producers), and governments failing to sustain systems originally established with donor funding. Now, though, a number of innovative approaches are being piloted around Africa. These build on advances in communication technology and liberalizationespecially local FM radio, mobile phones, internet, and satellitesto speed up information dissemination and to recognize the need to involve stakeholders in system design, management (e.g., the farmers union in Mali), and/or nancing (e.g., traders and other commercial advertisers in the Foodnet system in East Africa). Commodity exchanges, such as ZIMACE in Zimbabwe (currently closed) and KACE in Kenya, enhance the eciency of impersonal, long-distance trade by providing market information and by oering fast and low cost resolution mechanisms for contractual disputes. The existence of such exchanges is also a prior step to the development of more sophisticated trading contracts, such as futures and options, that could protect traders (and indirectly producers) against price volatility. Warehouse receipt systems are designed to enhance traders access to working capital, thereby increasing the competitiveness of agricultural markets, as well as encouraging storage of non-perishable commodities (Coulter & Onumah, 2002). Strong political support for private trading and storage activity is necessary both to pass the necessary enabling legislation (allowing banks to accept warehouse receipts as collateral against loans) and so that the incentives for private storage are not undermined by unpredictable importation and pricing policies by government agencies (typically motivated by short-term political interests). Poulton, Kydd, Wiggins, and Dorward (2006a) and Poulton, Kydd, and Dorward (2006b) discuss what African states could feasibly do to stabilize prices of staple food commodities (given the political imperative of governments being seen to be doing something in this area) without undermining the incentives for private traders also to engage in storage activities. Linking farmers to markets has sometimes been seen rather narrowly as a question of improving their access to price information (Galtier & Egg, 1998). As Shepherd (1997) notes, information on volumes traded in dierent markets and the quality requirements and terms of business of dierent trading partners are also valuable information for potential sellers. 10 Going beyond this, we observe that personal trust relationships are important even in many informal market systems, meaning that there may be a place for intermediaries to link new suppliers up to buyers (possibly providing some form of initial guarantee of supply performance). This linkage facilitation function is even more important in evolving supermarket supply chains characterized by contractual relationships with listed, preferred suppliers. A service valued by smaller suppliers into such chains is factoring, whereby the intermediary pays the supplier immediately upon delivery, even though the supermarket may not itself pay its suppliers for 30 days after receipt of goods. Meanwhile, the xed transaction costs of trading on commodity exchanges means that it is only well-organized small farmers who are likely to be able to do this. Woomer and Mukhwana (2004) present an example of this happening in Western Kenya. However, as with many of the other innovative institutional arrangements discussed in this paper, the cereal banks that permitted smallholders to participate on KACE were dependent on external (donor) support. We also

note that the existence of large-scale players (both sellers and buyers) may be a prerequisite for the establishment of commodity exchanges, to provide a critical mass of trading activity that smaller players and those wishing to make occasional trades can then link into. (b) Financial services Historically, agricultural development policy has been particularly concerned with one nancial product: seasonal loans for purchases of crop inputs. 11 There were good reasons for this. Without such loans, cash-constrained households are often unable to adopt new seed, fertilizer, or chemical technologies that would enable them to intensify production. However, for a number of reasons seasonal nance has been neglected in Africa for much of the past 20 years. Constructively, the previous diculties in developing sustainable models for seasonal credit provision, plus recognition that not all households want or can manage the risks inherent in seasonal borrowing, have led to the emergence of a more holistic view of rural nance provision that encompasses saving, insurance, and money transfer as well as credit. 12 Less positively, the relative neglect of agriculture by both national governments and donors encouraged the neglect of seasonal credit provision for smallholder producerstrends that, fortunately, have begun to be reversed in the past few years. Provision of all types of nancial service in rural areas of Africa faces a number of common challenges. Transactions are small and perhaps infrequent, but the dispersed client base means that transaction costs are high. In addition, insurance and credit services face problems of covariant risk (most obviously due to adverse weather), moral hazard, and/or adverse selection, with the dispersed client base contributing to high monitoring costs. Compared with Asia, nancial service provision in most of rural Africa has to contend with low population densities, less diversied pre-Green Revolution rural economies (Haggblade, Hazell, & Reardon, 2002), limited irrigation development (hence higher rainfall risk), and higher costs of the semi-skilled labor required for loan agents. Zeller and Sharma (2000) argue that an important aim of nancial services should be to enhance the poors ability to bear risks. They further argue that the requirements of the poor are rst for insurance, then for saving (without minimum deposit or transaction constraints), and then for borrowing. Provision of insurance services to smallholder farmers is not, however, an area that has enjoyed much success. A number of large-scale programs for smallholder agricultural insurance failed in the 1960s and 1970s: large-scale insurance schemes should therefore be approached with great caution (Hazell, Pomareda, & Valdes, 1986). One approach to weather risk is to use agricultural insurance schemes with district, rather than farm-based assessments of loss, using independent yield estimates based on, for example, satellite remote sensing of rainfall and crop growth patterns (see Skees, 2002 in Kelly, Adesina, & Gordon, 2003 and discussion of BASIX in India in World Bank, 2004). However, this approach still faces claim certication problems. Recently there has been an upsurge of interest in schemes based entirely on rainfall at selected monitoring sites. This removes problems of moral hazard and adverse selection, but can also reduce the correlation between personal risk and insured losses, such that payouts become a cross between conventional insurance and winning the lottery. Insurance (or lack of it) is a particular issue in lending to poorer farmers for productive investment, as loans tend to be large in relation to their income and assets. Thus, an event

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that prevents them from realizing a return from that investment may place them in the disastrous situation of needing to nance the burden of future loan servicing and repayment without any increased assets or income from the loan. Successful lending programs for cash crop inputs deal with this problem (at least in covariant risk situations, such as bad harvests) in the same way as moneylenders deal with largely idiosyncratic risks (Aleem, 1990): by rolling unpaid debts over to the next season where a borrower has a previous record of reliable repayment. Lending for food crop production faces greater diculties in this area, however, as there may be political pressure for loan forgiveness in a bad year. This can be disastrous for credit fund liquidity and viability, and, without careful design of loan and insurance systems, promotes a culture of strategic default. Broadly speaking, there are two main options for extending nancial service provision into poor rural areas in Africa. The rst is to strengthen and expand existing informal nancial institutionssuch as savings and credit cooperatives (SACCOs), Caisse Villageois and Village Banks, Rotating Savings and Credit Associations (ROSCAs), and Accumulating Savings and Credit Associations (ASCAs)and to link them up to formal institutions so that they can access additional funds for lending purposes. The main advantage of informal nancial institutions when it comes to serving the poor is their low overhead costs, as they have simple oces (or none at all) and, where they have any paid sta, low sta costs. There are examples of SACCOs with wide rural outreach in Francophone Africa. They can be very eective in savings mobilization and can also provide useful links to and entry points for formal banking services in rural areas, although these links are constrained by poor penetration of banking services. However, rapid expansion of SACCOs as channels of credit from outside funding sources can also weaken incentives for prudent management and protection of savers deposits (Goldstein & Barro, 1999; Outtara, Gonzalez-Vega, & Graham, 1999). Indeed, ensuring acceptable standards of governance is the main challenge in scaling-up any informal nancial institution (Johnson, Malkamaki, & Wanjau, 2004). The requirements of some informal nancial institutions for membership fees, savings, and (for lending) collateral also mean that they often reach better o villages and individuals, and exclude poorer communities and individuals. One informal nancial institution attracting considerable interest across Africa at the moment is the ASCA. Experience in Mali, Zambia, Mozambique, and Kenya (among other places) has demonstrated that, with modest initial training, groups can be equipped to manage ASCAs, even where members have low levels of literacy and numeracy. During the accumulation stage, lending tends to be for short-term, often consumption, purposes. The interest paid on such loans means that members ultimately receive an attractive return on the deposits that they saved within the ASCA, while the lump sums received at the breaking of the ASCA can be used to purchase (modest quantities of) agricultural inputs. In general, however, while informal nancial institutions offer a range of savings and deposit services to rural people, they face considerable diculties in oering seasonal credit services. Some do oer loan products, but without links to wider nancial networks outside rural areas such institutions (and depositors funds) can be vulnerable to covariant risk. Like private, informal lenders they tend to have both a limited capital base and repayment incentive structures which favor lending for short term and consumption loans and (with the exception of interlocking transactions by agricultural traders) are rarely keen to lend for agriculture and natural

resource-based enterprises (Jones, Sakyi-Dawson, Harford, & Sey, 1999). The second main option for extending nancial service provision into poor rural areas in Africa is to adapt semi-formal micronance models and products, so as to reach out to poorer clients and to handle new challenges such as the seasonality of crop production. Conventional micronance saving and repayment patterns are not conducive to lending in poor rural areas, or to lending for agriculture (Dorward, Kydd, & Poulton, 1998b; Morduch, 1999), and the majority of successful micronance organizations in Africa still operate in (peri-)urban areas. Innovative organizations are now seeking to extend the boundaries of micronance coverage (Johnson et al., 2004) and are developing products for dairy producers and more commercial smallholders. However, there remain question marks over whether and/or how quickly they will be able to develop products that can be protably delivered to the majority of Africas semi-subsistence smallholder farmers. Such products will need to include an element of balloon repayment after harvest (with perhaps only interest repaid before this) and will probably entail the use of contact persons, selected from among group members, as intermediaries between loan ocers and groups, handling the nal level of loan disbursement and recovery. Even then, however, some element of public subsidy may be required if poor-middling smallholders are to be eectively served. This would require a degree of public private partnership in rural nance provision that is new in Africa and could require considerable trust-building on both sides. However, in the absence of viable seasonal credit models, African politicians are increasingly returning to direct input subsidy programs to tackle the same aordability constraint. The degree of subsidy required by a micronance organization to assist a smallholder farmer to access a given quantity of inputs on a credit basis should be considerably lower than the cost of subsidizing the price of the same quantity of inputs directly. (c) Input supply It is widely accepted that increased use of purchased inputs (seeds, fertilizers, and chemicals) has a critical place, alongside organic soil fertility enhancement practices, in the technical change needed for sustained smallholder agricultural growth. However, although there are instructive dierences between countries, overall purchased input use is very low in Africa and has remained largely static over the last 20 years or so (Kelly et al., 2005), with particularly low usage in smallholder food crop production and growing concerns about declining soil fertility. Constraints to expanded input use exist on both the supply and demand side. Demand is aected rstly by low protability and high risks in farmers use of purchased inputs and secondly (where use should be protable) by lack of access to seasonal nance. The latter has already been discussed, as have output price levels and stability. Other factors aecting protability and risks in input use are input prices, quality of inputs, and the technical eciency with which they are used. Market liberalization often led both to an increase in input nancing diculties and to a decline in input protability as a result of input price increases following currency devaluation and removal of input subsidies. These changes were particularly serious for more remote surplus food crop producers, for whom market liberalization also led to reduced output prices. One means of improving access to aordable inputs is the provision of mini packs, which enable farmers to buy inputs in small quantitiesto match their access to nance, to allow

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testing out of small amounts, or to allow cumulative purchases during a season, depending on the way that the crop develops. This may be an important step on the path to increased input use, as the main impact of small packs may not be to increase production much themselves (as total sales quantities may be quite small) so much as to encourage farmers to move onto larger purchases. Bulk purchases by farmer organizations may also allow reduced access costs for members. One benet from higher fertilizer prices has been increased interest in improving eciency of use, for example, through integrated soil fertility management (ISFM) approaches in which limited use of purchased inputs is complemented by organic technologies. This is better for the soil and for household nances and risk than the use of inorganic technologies alone, but better for production than use of organic technologies alone. However, despite signicant successes with ISFM (see, e.g., Place, Barrett, Freeman, Ramisch, & Vanlauwe, 2003; Snapp, Blackie, & Donovan, 2003), there has been only limited progress in developing ISFM technologies where population density and land pressure are high. Eciency of input use and farmers demand for inputs can both be encouraged by strengthening of technical knowledge about their use. Traditionally this was seen as the job of the extension services. However, the role of input stockists in informing producers about appropriate use of inputs is increasingly recognized. This argues for the inclusion of stockists in local agricultural development planning (see below). Nevertheless, stockists have limited funds to undertake promotion eorts beyond their own premises (eld days are a good opportunity for them) and such eorts do have a public good element to them: if one enterprise invests in promotion of input use, others may enter and share in the benets of the expanded market. Thus closer cooperation between private stockists and public extension services is probably the way forward. Views about constraints on input supply in liberalized input markets are divided along similar lines to views on constraints to output market development. Jayne, Govereh, Wanzala, and Demeke (2003) document continued government interventions that have clearly depressed incentives for private sector investment in fertilizer supply in Ethiopia and Zambia. However, consistent and transparent government policies are a necessary but not sucient condition for private sector investment in input supply. Jayne, Govereh, et al. (2003) also report high marketing costs, which could be reduced by improving transport infrastructure and management, by reducing uncertainty about government fertilizer interventions, and by cutting taxes and port fees. These issues need to be considered at all levels in the fertilizer supply chain, from large importers to small retail outlets in rural areas. The latter face considerable risks in stocking fertilizers as farm purchases are made in fairly narrow time windows and are also often very uncertaindepending upon farmers assessment of input protability and upon their ability to nance purchases in an uncertain climatic, economic, and political environment. This puts stockists at risk of being left with excess inventory, which often cannot be disposed of for another year and deteriorates in storage. Input selling is not only more risky but also more demanding of capital and knowledge than, for example, retailing of drinks, soaps, and groceries which do not require specialist knowledge and can turn over their capital regularly through the year. Some of these diculties can be addressed through agro-dealer programs which promote technical and business skills and access to supplier credit for specialist agro-dealers and general rural retailers. Bilateral arrangements between input suppliers and farmer organizations can also help to increase the volume of

demand and transaction sizes, while reducing uncertainty all of which can reduce input suppliers costs and risks. Input supply systems face a number of other diculties associated with quality assurance, promotion, and their impacts on the natural environment. The nature of chemicals and seeds makes it dicult for farmers to gauge their quality at purchase, and they therefore need assurance of the genuine quality of their purchases. For seeds, most countries have varietal registration and certication regulations designed to protect farmers against purchase of poor quality seed. The high cost and delays in getting seed approvals, together with the small size of seed markets in most African countries, present a serious disincentive on private sector seed supplies, and more rapid progress is needed on harmonizing varietal registration and certication across countries (Rohrbach, Minde, & Howard, 2003). Further challenges exist where varieties are the products of public research system and for open pollinated varieties, as in both cases the incentives and systems for registering varieties and for commercial distribution may be weak. For chemicals there is a risk of sales of adulterated and/or out of date and ineective stock. This has been a reason for regulations prohibiting repackaging of fertilizers into mini-packs. Stable development of market systems is needed for stockists to build up relationships and reputations with farmers in their localities. Finally, there are important environmental and health risks associated with use of some chemical inputs and considerable sensitivities around the introduction of GM crops. It is likely that GM crops will become increasingly widely used in commercial agricultural production around the world. Biotechnology has a potential major contribution to make in addressing otherwise intractable issues mainly related to tolerance to disease, drought, salinity, etc., and regulation of its use needs to tread a careful line that does not deny smallholder farmers access to technologies that may have the potential to raise their productivity or access to international markets. (d) Agricultural extension It is taken for granted by most African farmers and politicians that farmers will, or at least should, receive agricultural extension advice. However, expectations regarding the performance of extension services are at the same time rather low. Provision of extension is at the heart of how many Ministries of Agriculture perceive their role, but they recognize numerous limitations in delivering on this mandate. Extension services are valued by those who receive them, but only a small minority do. Analytically, a number of major and inter-related questions still require conclusive answers and could benet with greater experimentation within and between countries (see, e.g., World Bank, 2004), plus high quality monitoring and evaluation. These questions concern the role of extension sta, the methods to be used, how extension should be nanced, delivery systems and agents, and ways of achieving mutually benecial linkages with the research system. Here we briey discuss the rst four of these questions. One view (typied, e.g., by the T&V system) is that extension should be clearly focused on the provision of technical advice. However, farmer expectations of extension agents are broader than this. Farmers recognize that technical knowledge has limited value without good connections to markets, so want extension agents to facilitate connections with input and output suppliers. Advice (including on market prices) alone is not enough. Extension agents should act as both information nodes and transactions xers within smallholder

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communities: facilitating market linkages (and perhaps also farmer group development) as well as technical change. This is a challenging agenda and links up with wider arguments in this paper about the need for complementary coordination. Regarding extension messages, there is a debate on the merits of communicating basic technical messages versus more tailored responses to individual farmer (group) problems. The former has the potential to be more cost eective and is the route chosen by agribusiness rms running large outgrower schemes. In Uganda under the NAADS program, there are similar reports of good response to basic extension messages regarding, for example, row planting (Oxford Policy Management, 2005). The diculties with this approach lie in the ability of the system to identify a regular stream of appropriate messages with wide applicability and, related to this, the diversity of farmers agro-ecological and socio-economic conditions (perhaps especially within so-called less favored areas). For cost eectiveness, a more responsive mode of delivery must be accompanied by group-based interaction and/or payment for advice provided (the latter restricting this type of service to the very top end of the smallholder farming spectrum). The methods used and the nature of the messages aect the extent to which extension advice is a public or private good. Public good attributes are just one factor reducing the willingness of small farmers to pay for private extension, another major one being the uncertainty (ex ante) surrounding its perceived benets. As noted in Section 4, within some major cash crop systems crop buyers have sucient incentives to provide extension services to increase smallholder production, because they can capture the returns to their investment at the marketing and processing stages. In these cases they may nd it worthwhile to provide extension messages with apparently strong public good attributes. Furthermore, in such systems extension costs are reduced by eld agents engagement in multi-tasking across credit, input, extension and produce marketing activitiesan example of the sort of support that farmers would like from extension agents in relation to other crops. For food crops and those cash crops where buyers do not have an incentive to supply extension services, willingness to pay for independent technical advice can be extremely limited. 13 Experience is that privately funded extension services only work when combined with input or private service provision at the larger and more commercial end of the small farmer spectrum (see, e.g., Chapman & Tripp, 2003). Even if most extension remains publicly nanced, there are various options for its delivery. These include:  continued delivery by state agencies;  contracting out of extension provision to NGO or commercial service providers;  competitive supply, with client demand expressed through vouchersthe option that has been piloted in Uganda;  a quasi- or internal market system whereby subject matter specialists or groups resource local extension sta to respond to farmer (or farmer group) requests for information. The rst two of these options are likely to be most eective if accompanied by greater client voice within a decentralized model of funding and management of extension (transferred to district administrations?). If farmer organizations, suppliers of complementary private services, and NGOs are involved in participatory priority setting, monitoring, and evaluation, this should strengthen incentives for extension systems to deliver good quality service. The fourth option may be chosen over the third simply because it is opposed by fewer vested interests.

However, there are few a priori reasons why it should perform better unless there are insucient private service providers to make the competitive market model work. 14 Bolivia is experimenting with a system which is closer to the applied research/ extension interface and involves competitive bidding by potential service providers to deliver applied research and extension services demanded by producer associations. One problem that such systems need to address is the need to provide potential service providers with some degree of assurance that longterm capacity investments will yield a return, while at the same time making service provision contestable. Finally, we note that dierent systems may be suited to the delivery of dierent types of information and/or information on dierent types of crops. Thus, the competitive supply or internal market models may be well suited to crops that farmers plan to grow primarily for markets. Commodity-based advice can then encompass both market linkages and the technical advice needed to deliver what buyers want (much as happens within cotton systems). Much of this advice can also be packaged in time-bound extension modules, with the expectation that information ow will switch to communication within the supply chain once market linkages are established. However, such systems seem much less well suited to tackling longer-term or systemic problems with strong externalities (e.g., tackling striga infestation or soil fertility decline). The optimal extension system may thus be a hybrid of (quasi-)market and more conventional, area-based (delivered either by state agencies or by contracted service providers), with funding constraints pushing the area-based part toward some sort of focal area approach, as tried in Kenya under the National Agriculture and Livestock Extension Program in recent years. 7. INTERMEDIARY AND COORDINATION INSTITUTIONS Previous sections of the paper have emphasized the complementarity across a range of pre- and post-harvest services and dierences in constraints and opportunities between dierent types of commodity and product supply chains. In this section of the paper we discuss intermediary institutions that facilitate coordination between small farms and service providers. We divide our discussion of intermediary institutions between those concerned with service provider coordination and farmer coordination, though as we will see there are strong complementarities between these. (a) Service provider coordination We divide our discussion here into forms of interlocking transactionvertical or focal coordination that forms the basis of intermediation between smallholders and downstream players within supply chainsand decentralized planninga possible mechanism for complementary coordination of particular relevance to staple food systems. Interlocking arrangements are the primary form of intermediary institutions for smallholder service provision and output market access in many cash crop systems. 15 Drivers or chain champions (Best, Ferris, & Schiavone, 2005) for interlocking arrangements are generally buyers seeking to increase capacity utilization of specic assets. However, states have in the past used interlocking arrangements to promote staples intensication (Section 4(b)) and we suggest that a similar critical commodity chain model could still have relevance in some places (see below). Less commonly and strongly, interlocking may

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also be attempted by input suppliers wishing to expand input sales (Poulton, 1998a). Arrangements may be bi-partite (with one company providing all interlocked services) or involve relations between multiple service providers coordinating delivery of input, nance, extension, and output marketing services to farmers. Whatever their shape, we note that the successful development and operation of interlocking arrangements require a basic set of conditions, including potential for substantial and reliable responses to investment in more intensive production, a reasonable density of economic activity and communications infrastructure, and sucient margins in the supply chain to provide acceptable returns to dierent supply chain players. (i) Contract farming Reviews and studies of contract farming (and implicitly interlocking arrangements) suggest that contract farming arrangements do allow small farmers to achieve higher yields, diversify into new crops, and to increase incomes, and that these can deliver wider benets through, for example, stimulation of demand for hired labor (see, e.g., Kirsten & Sartorius, 2002; Singh, 2002; Stringfellow, 1996; 2005). However, they also note that there are limits to the inclusivity of contract farming schemes (often restricted to the top tier of smallholder producers), often unequal relations between more powerful monopsonistic service providers and farmers, that farmers may bear very high risks, and that terms for farmers may decline over time in the process of agribusiness normalization. This arises because while the incentives for buyers engaging in these arrangements are high at start up, as the volume of farmers supply approaches the buying companys processing capacity (or the volume of produce that it can sell onto downstream buyers), so the motivation of the company to keep encouraging production from its contracting farmers declines. Farmers bargaining positions are also weakened where buyers are in a monopsonistic position, and this also reduces pressures on contracting companies to continually look for eciency and performance improvements in service delivery. Without such monopsonistic power, however, incentives for company investment and the ability to combat side selling and strategic default by farmers are weakened an important point that needs wider recognition and a more nuanced approach than general calls for reduced barriers to entry and greater competition in agri-business and market development (World Bank, 2004) . The challenge is then to nd alternative ways of aligning farmers and companies incentives and of reducing transaction costs and risks in service provision. Models here include some form of prot sharing or equity participation for farmers in contracting companies (Knight, Lyne, & Roth, 2003; Singh, 2005), competitive coordination among service providers (Poulton et al., 2004; Stockbridge, Smith, & Lohano, 1998), involvement of farmer organizations in representing and organizing farmers in their relations with contracting companies, increasing exit costs for both farmers and contracting companies (for example, through investment in mutually specic assets) (Gow, Streeter, & Swinnen, 2000; Kirsten & Sartorius, 2002) and, more generally, the promotion of greater trust and transparency in farmer-company relations. (ii) Critical commodity chain support Although contract farming arrangements are the dominant mechanism for private sector led focal coordination among service providers and farmers, they are generally only found in crops with fairly restricted characteristics (cash crops with high downstream investments, fairly concentrated buyers

markets). However, it is possible to envisage ways in which focal coordination can be achieved in food or cash crops with large numbers of (small) buyers. State-sponsored support for critical commodity chains is a model proposed by Poulton, Kydd, and Dorward, (2006) as a mechanism for promoting smallholder production of commodities which have strategic importance in pro-poor growth policies, and for doing this in a way that simultaneously addresses a number of problems in staple food crop intensication by small farmers: price instability (aecting both producers and poor consumers), commitment failure in service development, and strategic default in credit arrangements. Under this system, each year around planting time a state agency would oer to chosen farmer organizations a limited number of free options under which it would guarantee to buy from option holders a certain volume of grain after harvest at a specied price. A further set of options could be offered for sale by auction. Owners of options could then decide at harvest time whether or not to exercise their option to sell at the set price. These options would provide an incentive for farmer repayment of seasonal credit for input purchases, a focus for complementary coordination of service delivery, a guarantee or collateral substitute in credit arrangements, and, by protecting farmers against price risks, an incentive to invest in more intensive crop production. Poulton et al. (2006) consider additional aspects of this proposal, for example: using surpluses purchased under the system to provide stocks for fair price shops or other channels for subsidizing food access for poor consumers; management systems (for example, contracting out delivery of dierent services to private rms or NGOs, local restrictions on output market competition), and strengths and weaknesses of the approach in meeting dierent policy objectives. (iii) Decentralized agricultural development planning Decentralized government has been one focus of change in development policy over the last decade, driven by arguments that it can improve eectiveness of government through increased local accountability, greater use of local knowledge, and greater local participation. While the experience of decentralization in Africa so far suggests that there is some way to go before these ideals are realized, we note here that decentralized government does oer opportunities for local level planning and coordination of agricultural service delivery. Furthermore, while local government administrations in higher potential areas often have higher local tax bases than their counterparts in less favored areas, central funding to decentralized government may mean that resources for agriculture are more equitably distributed under decentralization than in previous periods. Local planning can be the responsibility of, for example, district ocers employed by and accountable to local government administrations, but working with NGOs, private sector organizations, farmer organizations, and dierent local government departments. Priorities (in terms both of services and of extension emphases) can be appropriate to local farming systems and agro-ecological conditions. Although there may be echoes here of the integrated rural development projects of the 1970s, the principal problems of these projects (centralized implementation of complex cross ministry programs of work) should be avoided by (a) the context of decentralized management of government services and (b) reliance on service delivery by dierent, specialist agencies rather than a single multi-functional project administration. Nevertheless, the model makes challenging demands on local government ocers and may also require major reform

THE FUTURE OF SMALL FARMS: NEW DIRECTIONS FOR SERVICES, INSTITUTIONS, AND INTERMEDIATION

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of the structure, orientation, and culture of Ministries of Agriculture (and other rural ministries) if it is to be successfully implemented in much of Africa. (b) Horizontal farmer coordination Despite their mixed record in the past, farmer organizations (FOs) are being asked to play an increasing role in supporting commercial small farm development as intermediaries that stand between individual farmers and commercial service providers, often providing some of the coordination functions previously expected from state and parastatal agencies. They are also recognized as having a valuable role to play in policy advocacy on behalf of small farmers and in holding (particularly) state service providers to account for the services that they deliver to smallholders. Indeed the models for service provider coordination described in the previous two sections all either rely on, or are improved by, working with and through eective FOs. FOs oer both farmers and service providers benets by bulking transactions and reducing transaction costs and by providing peer monitoring and pressures to combat strategic default and specication opportunism. FOs may also give smallholders increased bargaining power with service providers, although the latter may be limited in the face of powerful produce buying companies and input suppliers. Processes of agricultural market transformation and agro-industrialization that are shifting power from producers to buyers are also reected in FOs. In staple food and traditional cash crop commodities the primary function of FOs is generally to assist their members in accessing upstream services, and they engage in downstream selling activities to facilitate upstream access. In high value produce chains, however, FOs need to place much more emphasis on facilitating members access to downstream services, for example, by constructing quality assurance capacities and monitoring systems or coordinating members production so as to meet buyers requirements for regular supplies of reliable quality produce. Thus, all ve cases discussed by Boselie et al. (2003) feature some form of farmer organization, as do fair trade initiatives, while efforts to reduce the burden of organic certication for small farmers in developing countries relies on functioning producer groups (Raynolds, 2004). A critical issue in such arrangements is to align incentives for partnership and investment both between FO members and between FOs and private sector partners. Alternative (and not mutually exclusive) models here include peer monitoring of process compliance by FO members (Henson et al., 2005), farmer shares in private company prots (Singh, 2005), the use of Fair Trade premia to nance process monitoring costs (Raynolds, 2004), and farm worker equity schemes (Knight et al., 2003). A fundamental competitive disadvantage that FOs suer when competing with unitary large-scale enterprises is the complexity of collective decision-making structures, which make them less well placed to respond quickly to changes in buyers requirements. This is more of a disadvantage in fastmoving markets for high value produce than in, say, domestic African markets for food staples. Where this is a serious constraint, responses may include the establishment of wholly or partly owned commercial subsidiaries (see Chirwa et al., 2005) for description of innovative structures and partnerships by NASFAM in Malawi) or the adoption of new generation cooperative principles (with, for example, modications to voting rights and share transfer mechanisms, Knight et al., 2003; Singh, 2005).

Enthusiasm for the potential for FOs to undertake these tasks should not, however, lead to unrealistic expectations about their ability to directly serve the poorest small farmers or about the speed at which even successful organizations can be scaled up (Chirwa et al., 2005). Notwithstanding the recent emergence of apparently successful and replicable models, such as that promoted by CLUSA in Mali, Zambia, and Mozambique (Bingen, Serrano, & Howard, 2003), FO development faces substantial challenges, which can be exacerbated by ill-judged external support (Stringfellow, Coulter, Lucey, McKone, & Hussain, 1997). Challenges arise from the structure and governance of member organizations, limited organizational capabilities among leaders and members, lack of nancial capital, and diculties in the institutional, economic, and agro-ecological environment of small farms in poorer rural areas. 8. CONCLUSIONS Our starting point for this paper was the observation that, while small farms competitive advantages over large commercial farms lie principally in their low transaction costs in accessing and supervising motivated family labor and in their intensive local knowledge, their small scale leads to higher unit transaction costs in almost all non-labor transactions. Thus, linkages which allow smallholder farmers to simultaneously and reliably access a range of resources and servicespurchased farm inputs, seasonal and medium-/long-term nance, information and skills (for technology, market, and business activities), and output marketsare critical if they are to survive in increasingly competitive agri-food markets. We highlighted the importance of various forms of coordination (vertical, horizontal, complementary, and focal) in overcoming a range of problems confronting service delivery to small farms. We then observed that the incentives for the private sector to invest in service delivery to small farms vary by commodity system. They are perhaps strongest in traditional smallholder export sectors (e.g., cotton, cocoa, coee)crops with high downstream investments, fairly concentrated buyers markets and relatively low credence attributes. In higher value horticultural systems, the diculties of quality assurance and traceability for smallholder produce tend to outweigh the labor cost incentives for intermediaries to invest in working with smallholders. We are pessimistic about the prospects for intermediation to include smallholders in such systems within dualistic agrarian structures (see our discussion of Figure 1). In much of Africa, domestic marketsfor food crops, rst and foremost, but increasingly also for horticultural and livestock productsstill present signicant opportunities for smallholder producers. We note, however, that food crop systems, in particular, present challenges in the coordination of supply of complementary support services to smallholders. The general trend toward decentralization of African administrations may present opportunities for addressing these challenges. However, signicant reforms to Ministries of Agriculture (and other rural ministries) will be required if these opportunities are to be grasped. Progress with developing viable models for delivery of individual services to small farms was reviewed in Section 6. There is still, at best, limited progress with the development of replicable models for seasonal nance or insurance provision, while in many countries improvements in extension services also require a thoroughgoing reform of the Ministry of Agriculture. Many of the innovative models for service provision discussed

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in this paper have been dependent on donor support, at least for their initial development phase. Donors are thus encouraged to keep (indeed, expand) funding for experimental institutional arrangements, while a priority for national governments should be to create policy-making structures that monitor and learn from the various experiments, then seek to scale up those found to oer most promise. Farmer organizations have a potentially major role to play in both service provision (coordination and/or direct delivery) and advocacy, butdespite the recent emergence of promising modelstheir track record is still mixed. Thus, while national policies (backed by donors) should support the development of farmer organizations and create spaces for them to contribute to policy making and accountability processes, time and training input is required to build strong organizations that will make a dierence for the majority of small farmers. This is a process that is dicult to fast track!

Finally, we note three areas where policy to promote service provision to small farmers must seek to strike a particularly ne balance. First, within interlocking models for service provision, the eciency and equity gains from competition must be balanced against the investment incentives from restricted competition (in capacity utilization and security against strategic default). Second, support to farm organizations needs to provide them with essential support but to do this in ways that avoid distorting and undermining their long-term growth and eectiveness in serving their members. Third, the potential opportunities and threats that large farms pose to small farm service development and delivery in dierent contexts need to be balanced against each other, and an appropriate balance struck between prioritizing public investment toward service delivery to small farms, state encouragement for large farm development, and pressure on large farms (where they exist) to support small farm development.

NOTES
1. As agricultural and economic development proceed, rising cost of labour relative to capital reduces this ability; hence, production economies are observed, based on lumpiness of labour-saving capital inputs. 2. There were, however, a number of notable and instructional exceptions in Africa. 3. Food crop production in West Africa has increased more rapidly than in southern and eastern Africa. This is in part due to the greater prominence of roots and tubers in West African food production, which do not have the same input (hence service provision and coordination) requirements as cereals, and in part due to the devaluation of the CFA franc in 1994 combined with freer intra-regional trade in food products. In some countries the supply response to improved prices has been assisted by prior investments in irrigation or by access to inputs through linkages to cotton production. 4. Similar diculties are, however, also experienced with (third party) organic standards. Raynolds (2004) notes that The work and expense of organic certication creates a major barrier to entry for small-scale . . . producers wishing to enter organic exports networks and take advantage of the 3040% price premium. She specically notes that the extensive farm level records required for certication are burdensome for farmers who are typically only semi-literate and that farm inspections are expensive since farmers often have small, dispersed, unmapped holdings (p. 736). 5. According to Maertens and Swinnen (2007), the replacement of small farms by large farms in horticultural supply chains may not be bad for poverty reduction if the labourers employed on the large farms are poorer than the category of small farmers who might otherwise have supplied the same chains. 6. Boselie, Henson, & Weatherspoon (2003) consider ve cases where small farms are being assisted to link into domestic or international supermarket supply chains. Of these, three might be considered to be cell 4 examples. However, in Kenya it is understood that the importance of small producers in such supply chains has declined over time, despite the continued growth of Homegrowns outgrower scheme. The case of Alice in South Africa needs to be seen in the context of political pressure to tackle the overwhelming dominance of large farms in supplying high value marketing channels. The case of Hortico in Zimbabwe is considered in more detail in the main text. At the time that they were writing, the ve cases cited by Boselie et al. involved a total of 5180 smallholders, of whom 4000 worked with Hortico. 7. We hear that Hortico has since been forced to close due to uctuations in the exchange rate and changes in exchange rate management by the Government of Zimbabwe. 8. While the main emphasis in the literature is on FDI, it is worth noting that domestic planning regulations also inuence the pace and extent of supermarket penetration, both in developed economies and in developing (see, e.g., Hu et al. (2004) on the use of zoning controls in China). Moreover, where domestic regulation is favourable and local enterprises can both develop an appropriate business model and access the necessary nance, as in Chile and Kenya, noteworthy supermarket development has occurred without signicant FDI inows. 9. Emphasis on food staples is also justied because, until food markets function eciently enough for poor households to be willing to buy in the majority of their food needs, lack of progress in intensication of staples production is likely to act as a constraint to such households diversifying into production of potentially higher value crops (Fafchamps, 1992; Jayne, 1994). 10. Linking into our later discussion of pre-harvest services, many smallholder producers will require technical information and advice if they are to produce new crops to the desired quality standards in response to apparent market opportunities or even sometimes if they are to produce known crops in dierent seasons when market prices are higher. For example, tomatoes produced in the rainy season typically fetch higher prices than those produced in the dry season, but this is because many more pests attack tomatoes during periods of high rain. Producers need advice on how to control such pests if they are to produce successfully in the rainy season. 11. Medium-term loans (2+ seasons) for livestock development and purchase of capital equipment were a secondary focus. 12. This holistic view also stresses the non-separability of production and consumption decisions within smallholder households and the fungibility of capital. 13. Within NAADS, farmers were expected to contribute 2% of the cost of extension provision. Even this was believed to discourage some poorer households from seeking advice (Oxford Policy Management, 2005). 14. In Uganda, emergence of private service suppliers has not been a problem. Furthermore, the supply side could have developed more rapidly

THE FUTURE OF SMALL FARMS: NEW DIRECTIONS FOR SERVICES, INSTITUTIONS, AND INTERMEDIATION had state extension sta been laid o as planned (Oxford Policy Management, 2005). 15. While some producers may also be able to access support for food crop production through cash crop-based contract farming schemes

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(Govereh & Jayne, 2003), experience suggests that only a minority of producers will be able to do this, even where a viable contract farming scheme for cash crops exists.

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