Small scale farmer's brief: macroeconomic impacts on profitability

BFAP BRIEF, Bureau for Food and Agricultural Policy, South Africa, NOVEMBER 2008  

Small scale farmer settlement and development is one of the key priorities in the National Department of Agriculture's (DoA) Strategic Plan. A number of challenges related to the establishment and development of small farmers are, however, present. Amongst others these challenges include a lack of access to land, financial services, mentorship programs and markets. This brief does not analyse the challenges related to small scale farmer settlement but rather focuses on the development aspect, specifically in the case where small scale farmers have already been successfully established and have to operate in a commercial environment.

A small scale farmer development project in the district of Taung in the North West Province serves as a good example of such a program, where small scale farmers have successfully been established and are producing barley and maize for the commercial market. This project is a public-private partnership between the North West Provincial Government, South African Breweries (SAB) and South African Breweries Maltings (SABM). These small scale farmers have access to land, financial services and mentorship programs, and have markets where their produce can be delivered. The initial challenges of being established have thus been overcome, but now these farmers face the reality of producing on a sustainable basis in the commercial market environment where the exposure to external drivers is very high.

The first important fact to mention is that the farmers who form part of this project do not own the land or the irrigation equipment on the land. This implies that their fixed cost component is very low and that high interest rates will not have a large negative impact on farm profitability. However, from the actual farm-level data over the past three years it is interesting to note that there exists a general trend that these farmers do not re-invest to a great extent in their farming operations, apart from sporadic replacement of machinery and tools. It can be argued that because they do not own the land they do not have the necessary incentives to re-invest their profits. This implies that the long-run sustainability of these farmers is dependant on the existence of the public-private partnership between the provincial government, SAB and SABM.

The aim of this brief is, firstly, to construct and model a typical small scale irrigation farm for the Taung project based on data received from SAB/SABM. A set of scenarios is then simulated to determine the potential impact and sensitivity of a small scale farm's profitability to changes in a few selected exogenous factors. The modelling results show that the Net Farm Income (NFI) of the farm is most sensitive to an appreciating Rand/$ exchange rate (elasticity = -1.72), and least sensitive to a lower oil price (elasticity = 0.05). Improvement in maize yields also has a significantly positive impact on farm profitability: NFI increases by 1.37 % for every 1 % improvement in maize yields.

Available for download at http://www.bfap.co.za/reports/BFAP%20Small%20scale%20farmers%20brief%20final.pdf