Farm clusters: Why and how

Helping our small farms to cluster together is now a key strategy of the Department of Agriculture, so they can attain economies of scale to be more productive, profitable, and competitive. Farm census data show that 88 percent of all our farm holdings are under 3 hectares, and more than half (57 percent) are even less than a hectare. These are as of the last Agricultural Census in 2012; fragmentation is likely to be even worse today.

Farm clustering helps government make its job of providing farm support services much easier. For the farms themselves, the potential benefits could be far greater. It may be pointed out that the benefits of clustering and consolidation go well beyond production at the farm, where, indeed, the scope for cost reduction from economies of scale is wide. Here, savings would come from using labor-saving mass production techniques, which not only reduce costs, but also permit more timely farm operations and better product standardization. But clustering and consolidation could also improve the upstream and downstream links of the farm value chain.

The upstream links include financing and farm inputs procurement. In accessing finance, a farmers’ cooperative can borrow a sizable loan from Land Bank, which favors both sides of the transaction. The bank would prefer a few large loans over a large number of small ones, due to transaction costs. On the other hand, individual small farmers would seldom qualify for bank loans, lacking assets for collateral. In farm inputs procurement, a farmers’ co-op can obtain quantity discounts for volume purchases of seeds, fertilizers, chemicals, machines, and others. Such discounts would not otherwise be offered when an individual small farmer buys them on his own.

On the downstream side of the chain, a farmers’ co-op can pool its members’ produce to be able to negotiate better prices with bulk buyers such as traders or institutional buyers. The co-op could also opt to sell their product in processed (e.g., coco sugar, coco coir, muscovado sugar, tablea) or semi-processed form (as in drying, coffee roasting), thereby earning more from value adding, giving them a greater share of the final product price. Farmers can also take direct part in transport and logistics, if their co-op invests in its own trucks and/or transport facilities to bring their products to the market or institutional buyers. All told, the opportunities to benefit from clustering could transcend the entire span of the farm value chain “from funds to field to fork.”

While all my examples above mention farmers’ co-ops, there are other possible modes for clustering and consolidating groups of small farms. Contract growing has long been used in poultry, bananas, and others, and has wide scope for application to even more farm products. However, contract growing only clusters the farmers for production; thus, their benefit is limited to having an assured market for their primary produce, along with assured provision of farm inputs other than land. There are also thousands of existing or defunct irrigators associations that could be a logical basis for clustering farms. But for them to reap benefits beyond efficient and equitable access to irrigation water, they need to evolve into farmers’ co-ops if they are to tap the wider opportunities discussed earlier.

A third mode of clustering that is now common is private consolidation, where a large investor, often a former landowner who was “CARPed,” leases large numbers of contiguous small farm lots from agrarian reform beneficiaries. He can thus operate and manage the consolidated farm efficiently with economies of scale, and employ the ARBs as farm workers (when willing) apart from paying them a lease rental. While not favored by many who see it to be a reversal of agrarian reform, such private consolidation is arguably better than having an inefficient fragmented small farm structure.

The implication to me is clear: To cluster and consolidate our farms, it is best to do it via cooperatives. Thailand calls its agriculture ministry the Ministry of Agriculture and Cooperatives. I think that speaks volumes about how the DA ought to be moving forward.

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