Wednesday, July 20, 2011

Small Isn’t Beautiful

I have mixed feelings commenting on this issue, but I feel it must be said. From yesterday’s Star (excerpt):

Caring for the livelihood of smallholders

SMALLHOLDERS have always been the backbone of the country's agriculture sector.

Their role, however, is often underestimated despite the big contribution of about 94% of Malaysia's total rubber production, 75% of cocoa and about 40% of palm oil output annually.

Smallholders therefore need to be given the security of having a consistent income and incentives to ensure that they would be able to efficiently produce higher-yielding crops to enable local agriculture products remain competitive locally and abroad…

…Having said that, many have voiced their concern over the turn of events lately, which are expected to have a direct impact on the livelihood of smallholders…

…While plantation companies have their own harvest, it was common knowledge that some would also source for fresh fruit bunches (FFB) externally i.e. FFB from independent smallholders or small growers to support the planters' milling operations.

NGOs also seldom questioned smallholders' issues like the provision of consistent and steady income, housing and education for their children which were mostly derived from the development of the oil palm industry.

Why do NGOs fail to comprehend that Malaysia, as a developing nation with agriculture as one of its major contributors to economy, needs to place priority on the livelihood of its smallholders?…

…For Malaysia, smallholders in fact hold the key towards achieving its target of RM178bil under the National Key Economic Area for palm oil sector by 2020.

Ok here’s the problem (as I see it) in a nutshell – agriculture is a low productivity economic activity. Economic development and growth has historically (not just in Malaysia) been associated with a shift in factor resources from agriculture to manufacturing or services, where higher capital intensity leads to higher labour productivity and hence to higher incomes. This is not to say that agriculture is not important – it is, especially if you want to have food to survive. But to develop into a high income economy, we need to reinforce the already considerable incentives for labour to shift to higher productivity activities (read: higher paying jobs and businesses), not try to set them back.

Expending resources to entrench a smallholder approach to agriculture is a wild misallocation of resources in contradiction to the stated of goal of a high income economy. The article notes that large plantation companies often utilise the harvest from smallholders to feed their mills. This is good business sense – you take advantage of scale economies by utilising your available capacity to the maximum, thereby spreading high fixed costs over a larger volume of output. But the logic of supporting smallholders is the exact opposite – you are deliberately ignoring the potential for productivity improvements through economies of scale.

I don’t know if there are any studies on the most efficient size of an agriculture business (plot-size, manpower, yield etc). It could be that shareholders of the larger plantation companies might benefit from these being broken up into more efficient units – but I’d also bet that the most efficient size will probably be several orders of magnitude larger than the typical smallholder plot.

That’s the economic viewpoint – but there’s also a humanistic viewpoint, which is where the article quoted starts from. The kind of structural change involved has always been difficult to manage in terms of its human cost, and dare I say, its political costs. Because of its high labour intensity, agriculture has always been a big political constituency not just in Malaysia, but throughout the globe. That’s a big reason why agriculture worldwide is one of the most protected of industries, guarded by tariffs, subsidies and quotas. Getting around these, or getting rid of them, will be neither easy nor painless, especially for the people directly involved.

Yet I would have wished for a more pragmatic and realistic assessment of the requirements needed to develop agriculture in this country, not a determination to maintain the status quo.


  1. Written, and therefore reads, well enough to be a model essay for Kertas Am. (;P).

    Any new assessment to develop the industry must include a review of the roles and (in)effectiveness of bodies like Felda, Risda, Fama, Mardi even Pernas. They are the interfaces between the smallholders and the global market.

    These bodies have internal resources which can be unlocked better if not realigned for a single and more cost-effective national platform to help the smallholders get their harvest out at better prices. Sometimes one wonders if those organizational charts don't actually crimp minds rather than propel them to think beyond artificial delimits.

    To this single platform, another national interface can be created so that our research universities and the agro-based international business community present here including fertilizer suppliers, biotech farmers and so on, can shape-charge the R&D program to tap the biodiversity of this land so as to open new crops or agro-processing activities that our smallholders in the rural areas can grow or participate in as part of some cluster formations.

    I don't see any such efforts seriously made despite the large budgets those bodies and institutions have. It is a shame because helping farmers get extra income from new crops can parallel building businesses by economies-of-scale. It is also an imperative as fewer people are taking to growing things. Itself a most satisfying activity. ;P

  2. With the current commodity prices,rubber and palmoil smallholders are already in the high income zone.
    With current food prices agriculture can be good if supply chain more efficient.Middlemen raking more money than farmers.

  3. @Walla,

    I'm much taken by the arguments in William Easterly's "White Mans Burden", especially if you extend it from external aid programs to government programs generally. I'm not sure if national level programs are necessarily the best way, but certainly having someone accountable for these issues would be a step forward.

    Also, these been little progress as yet because developing smallholders falls under the NEM and SRIs, which have only just been launched. It will be a while yet to see if these will be effective.


    Years ago, my first brush with economics was in A-levels, where among the subjects we learned was the cobweb model (here and here for references).

    Agriculture and commodities in general are classic cobweb markets because of the long lags between price signals and changes in supply. Prices can be and are extremely volatile - there is no guarantee that current high prices will persist, especially if demand from China and India fall off, as I expect, within the next 5-10 years. We're in the middle of the boom phase of a commodities supercycle, which is great, but what happens when it turns down a'la the 1990s? Making changes is easier when times are good.

    Taking palm oil as an example, international supply is increasing - Indonesia has overtaken Malaysia as No. 1 producer (albeit through Malaysian companies), and India is heavily promoting palm oil as a cash crop.

    Also, in reference to middlemen, the best way to address this is through increasing the market pricing power of producers relative to wholesalers i.e. a smaller number of bigger producers and/or increasing the number of competitors at the wholesale level (preferably both).

  4. Think scenario a bit different now.
    We have to regard the produce as a product n not merely a commodity.Prices at the consumer end never back track.
    Thats the role of FAMA,Risda,Felcra i.e maximise downstream value-add and reduce intermediary cost.
    With technology esp broadband,farm harvesting n consumer demand balancing can be optimised.Logistics cost can be streamlined for bigger loadings thus cost effectiveness.
    At production end,better eqpt n process improves OERs.And proper utilisation of "waste" yields new income streams.
    Thus small holders are cogs in a big wheel rather than independents.
    I would think that strategy is to ensure reasonable incomes at worse case "price levels" rather than RM 178 bil fairy tales.
    To achieve that needs education,tools and good communications.Replanting is only the 15% of a long journey.
    Smallholders need not be small.

  5. @anonymous

    "Prices at the consumer end never back track."

    Actually they do - if you look at the detailed statistics collected on retail food prices, it's amazing how volatile they can be (both up and down). The problem is everyone notices when prices go up - but almost never when they come down.

    As well, all you've said would apply even better to larger economic units.

    "Smallholders need not be small."

    Which is the objective I'm aiming for. The problem is blanket support for individual smallholders ignores the constraints that agriculture faces.

    In fisheries, the government has provided subsidised fuel and promoted the use of bigger boats, nets and engines which increase the ability of individual fishermen to land bigger catches. If fish stocks were unlimited everybody would be happy, but they're not. This constraint just ensures that support for individual fishermen loads them with debt and leads to them all to slowly starve together.

    In agriculture, the primary constraint is land. To achieve more efficient output, individual farmers and planters need to invest in "green revolution" techniques - higher yielding breeds, better fertiliser, automation. All this takes capital (high fixed costs), and would only be economically feasible on larger plots. But if land is the constraint, then not everybody could, or should, be provided the incentives and the training to scale up and expand their holdings. Doing so would only ensure the slow death of Malaysian agriculture.

    And this is even without taking into account Malaysian agriculture's demographic problem.

  6. Many small holders are actually achieving better yields than Sime.But they are very often at the mercy of the millers in terms of getting the right price for their fruits.
    And what was considered waste from the mill process is now actually valuable products i.e approximately worth RM 40 per ton of FFB.
    I don't fully agree that big is good as much as I doubt that small is beautiful.
    I subscribe more to enhancing processes to get most out of the two models.And this must be done in holistic manner by experts (hands on guys) and not by dwellers of the Ivory Tower.Give it to the guys in short pants n long stockings who chews leaves n tell off the small holders who are selling off their subsidised baja.
    There is no perfect model except Twiggy.

  7. Sime is at the opposite side of the scale from the smallholdes - it's too big. Actually, if you were to dig deeper, Sime's problem is largely to do with having quite a few plantations on sub-standard soil and hillsides (a legacy of the takeover of GHope and Guthrie). Neither better yielding breeds nor automation help under those conditions. But I agree with you that monoliths are not the best solution either - there has to be a middle ground.

    But Twiggy? Really? ;)

  8. Unless you have a solution for what to do with the smallholder / farmer when you make the leap to manufacturing (i.e. higher labour productivity), the rural smallholder will always be a powerful constituency.

    Add to the fact that rural / urban divide also runs along ethnic lines. Don't see a short-term solution to this. You sort of have to drag the rural smallholder kicking and screaming into the 21st century.

    I see parallels of this in China (not the ethnic angle though)

  9. Hi Rodger,

    I think, as in many developed countries, the problem will partially solve itself over time. I don't have the official figure, but I've read that the median age of Malaysian farmers is over 50. With few young Malaysians getting into agriculture, we have both a problem (declining and ageing sector labour force), and an opportunity (easier to restructure).