Study explores business models for small farms

2010-07-06 00:00

DEVELOPING commercially successful small-scale farmers can be achieved by employing various business strategies and without resorting to large-scale farm acquisitions, a recent study on the industry has revealed.

The study, titled “Making the most of agricultural investments: A survey of business models that provides opportunities for small holders”, was researched by the International Institute for Environment and Development on behalf of the United Nations.

It examines a range of business models that can be used to structure agricultural investments in lower- and middle-income countries like South Africa, where the land issue has been divisive.

Authors Sonja Vermeulen and Lorenzo Cotula outlined six broad headings under which the other business models can be explored.

These are contract farming, management contracts, tenant farming and sharecropping, joint ventures, farmer-owned business and upstream-downstream business links.

Contract farming is described as pre-agreed supply agreements between farmers and buyers in terms of which a local farmer grows and delivers produce for specified quantity and quality at an agreed date. In exchange, the farmer is provided with support and materials at an agreed price.

Management and lease contracts refer to the variety of arrangements under which a farmer or farm management company works agricultural land belonging to someone else.

Tenant farming and sharecropping are versions of management contracts in which individual farmers (smallholders) work the land of large-scale agri-businesses or other farmers.

A joint venture involves sharing of financial risks and benefits and, in most but not all cases, decision-making authority in proportion to the equity share.

Farmer-owned businesses are formally incorporated business structures for farmers to pool their assets to enter into particular types of business, gain access to finance, or limit the liability of individual members.

However, the report warns that these models are not perfect as there is room for exploitation.

“For example, depending on its specific terms, contract farming may [lead to] an exploitative relationship where smallholders are effectively providers of cheap labour, and expected to carry production risks,” it says.

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