The challenge of shrinking farm sizes

Countries in South Asia, including India, Nepal, Sri Lanka, and Bangladesh, have been experiencing a decline in agricultural farm sizes because of increasing population and division of land among family members in successive generations. In particular, landholding has decreased rapidly in the areas that have a high population growth with dense populations. Pakistan is no exception to this.

In Pakistan, the average farm size has steadily declined from 5.3 hectares in 1971 to 3.1 hectares in 2000 and then subsequently to 2.6 hectares in 2010 (Agricultural Census 2010). As a result, the agriculture sector is now dominated by smallholders. Over 90 per cent of farms are smaller than 12 acres, out of which 67pc are below even five acres (two hectares).

The majority of farms have become so small due to successive land divisions that they are no longer economically and operationally viable. Small size is a major limiting factor for increasing labour and land productivity, mechanisation of farms, optimal application of quality farm inputs, and adoption of advanced agricultural practices and technologies.

At the same time, more than 8.2 million farms pose a serious challenge for the government to provide extension services, offer credit facility to all farmers, enhance their effective access to the market and even implement government programmes for farmers, primarily due to the high transaction costs involved. All these challenges translate into higher production costs and, in turn, a lack of competitiveness. As a result, farmers demand farm subsidies, putting additional pressure on the country’s scarce financial resources.

In Pakistan, the average farm size has steadily declined from 5.3 hectares in 1971 to 2.6 hectares in 2010

Interestingly, in East Asian countries like South Korea and Japan, instead of shrinking, farm sizes are increasing. In fact, thriving manufacturing and service sectors have provided lucrative employment opportunities, resulting in labour migration from agriculture to non-agriculture sectors.

Many research studies have explored and proven the inverse relationship between farm size and crop yields. In Pakistan, the solution undeniably lies in consolidating agricultural holdings into somewhat larger and more efficient farms. But the real challenge is to devise and execute effective policy measures. Among the options explored, cooperative farming and corporate farming are often the most cited.

Cooperatives (associations of persons united voluntarily) have been successful in many countries in empowering farmers to pool in multiple lands together, use collective bargaining to buy agricultural inputs and sell their produce, and collectively undertake value addition to attain greater efficiencies. Their success can be gauged from the fact that cooperatives in Europe have over 40pc market share in agri-food supply chains, whereas, in the USA, around 75pc of the country’s milk is marketed by dairy cooperatives.

Due to the peculiar socio-cultural context of our rural areas, particularly in Punjab and Sindh, people do not exhibit an inclination towards working together for common needs and aspirations. Therefore, cooperatives in the agriculture sector could not reap the desired results. In Pakistan, cooperatives often do not hire professional managers. Therefore, when the majority of members lose interest in managing the organisation due to one reason or another, a small group takes control and manages it for their own gains and interests.

Another widely mentioned option is corporate farming (large-scale agriculture by large companies). The arguments in favour include companies’ greater capacity and financial muscle to introduce mechanisation and new technologies, undertake effective marketing of farm produce, develop linkages with national and international value chain players, and improve farm and area infrastructure. All these factors result in higher productivity and competitiveness.

However, the major issue is the availability of large areas of land for prospective companies. In Pakistan, however, millions of acres of land are lying uncultivated in Cholistan, Thal, and other regions, which can be leased to local companies for 10-15 years for development and cultivation under high-efficiency irrigation solutions, ideally suitable for water-scarce areas.

Another option is reverse leasing, which is contrary to the historical rural tenancy system where landlords used to lease out their lands to small farmers for a fixed payment or crop sharing. Companies may get land from small farmers on a long-term lease in lieu of biannual payments or by making them shareholders in the business or/and by providing employment. However, its successful implementation requires intense social mobilisation to educate and coordinate with the farmers.

We should be cautious and circumspect about lessons learned from other countries. For example, Ethiopia encouraged foreign investment and foreign companies to transform its agriculture sector, but this drive led to large-scale land grabbing — partly illegitimate appropriation of lands by corporate investors — that has been largely supported by the government in the name of public interest/public purposes. The whole strategy dispossessed and displaced farmers and forced them to seek jobs either in urban centres or with agribusinesses.

Another point of view, expressed by a significant number of labour market experts, is that the issue of shrinking farm sizes would automatically be resolved without any external intervention by developing export-oriented manufacturing and service sectors.

Alternative sources of income generation in non-agriculture sectors would decrease peoples’ reliance on the land and help reduce the high rates of underemployment and disguised employment, which does not affect aggregate economic output in Pakistan’s agriculture sector. Several countries like China, Bangladesh, and Indonesia have experienced similar structural transformations in their labour markets.

However, along with developing manufacturing and service sectors, two policy measures are essential. Firstly, a special credit facility with low-interest rates is required, enabling small farmers to buy land, available-for-sale, adjacent to their farms or family members’ share of the inheritance.

Secondly, the government must take appropriate measures to reduce the cost and time required for land purchase, leasing in, and leasing out, as land purchase currently entails high transaction costs. Already, Japan and China have successfully implemented such policies aimed at land consolidation.

Published in Dawn, The Business and Finance Weekly, January 9th, 2023

Date: 09-Jan-2023