Saturday, 13 April 2013

Commercializing Agriculture

Arisyi Fariza Raz
The Jakarta Post
10 January 2013

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Indonesia has emerged as one of the fastest growing economies in Asia amid the global economic slowdown. Strong domestic demand, accompanied by structural reform of the financial sector, has formed the foundation of Indonesia’s economic resilience.

Despite the success story of its overall macroeconomic performance, Indonesia’s agriculture sector, once renowned for being Indonesia’s main engine of growth, is facing various challenges to survive.

Statistically speaking, the World Bank’s world development indicators show that the share of Indonesia’s agriculture sector in terms of gross domestic product (GDP) declined from 17 percent in 2000 to 15 percent in 2011.

During the same period, the sector’s average annual growth was less than 3 percent, lower than the country’s average real GDP growth of around 5 percent. Moreover, around 60 percent of the poorest Indonesians are smallholders who live on small farms with poor productivity.

A report by Rabobank in 2011, titled Indonesia Food and Agribusiness Outlook suggested that the challenges in agribusiness development included low-yielding smallholder crop systems, underdeveloped agricultural practices, low-quality crops and underinvestment.

One way of tackling these issues is by introducing agricultural commercialization in Indonesia. By definition, agricultural commercialization is an agricultural growth process that links smallholders in the agriculture sector into commodity value chains.

Currently, the agriculture sector in Indonesia is dominated by smallholders who have limited access to capital and, more importantly, technical expertise. Moreover, these smallholders have little, if any, entrepreneurial skill. As a consequence, farming is carried out on a small-scale basis with low yields and insubstantial profitability.

Through commercialization, smallholders in the agriculture sector are encouraged to be more profit-oriented since production is more focused on sales. In addition, they are also introduced to the agribusiness concept, which leads to entrepreneurial farming.

To achieve commercialization, both government and private sectors have to play their roles effectively. First, the government has to introduce agronomic and farm managerial skills to farmers. By introducing these skills, smallholders are educated to generate more cash in order to improve farming profitability and agribusiness sustainability.

Second, it also needs to provide adequate rural infrastructure, including improved road and irrigation systems. Moreover, crop improvement research is also necessary to create high-yield corps. This will enable smallholders to reduce farming costs while maximizing productivity.

Third, the government can also act as a bridge between smallholders and the private sector to facilitate the transfer of capital and know-how to these smallholders. With adequate capital and sufficient technological capability provided by the private sector, smallholders can increase the value-added of their products, resulting in higher profit margins.

For instance, capital investment in smallholder’s agribusinesses focused on the agricultural processing industry can be stimulated to increase the value-added of agricultural products. Another example is by improving agricultural marketing and distribution flows through government and private sector-led market research and market information systems.

In addition, the government and private sector can also support agribusiness by providing rural credit facilities through state-owned or private commercial banks at market interest rates.

Last but not least, agriculture policy is also crucial since it can create an enabling environment for smallholders if imposed in the right direction. For instance, currently the government imposes several export taxes on various agricultural products. These taxes are levied in order to encourage value addition in farming products, leading to higher employment and better value to smallholders.

By implementing all of these steps, smallholders are facilitated with the knowledge of entrepreneurial farming and profit orientation. Technological and capital supports also help them in conducting agribusiness on a bigger-scale and with greater production efficiency. In addition, smallholders are given easy access to credit facilities at reasonable interest rates, thus allowing them more space to grow.

In the bigger scope, agriculture commercialization can reinforce the overall development of the agriculture sector in Indonesia in several ways.

First, it increases agricultural productivity through agribusiness skills, adequate infrastructure and high-yielding crops. Second, it improves crop marketing and distribution flows, which underpin further the output of the agriculture sector. Third, it creates value addition for agricultural products that will increase their competitiveness in export markets.

In terms of empirical evidence, many countries in the developing world have shown the positive impact of agricultural commercialization. For instance, a report by Michigan State University in 1999 showed, based on a study case in Kenya, that agricultural commercialization at household level improves food crop fertility and productivity. Meanwhile research by Pingali and Rosegrant suggests that appropriate government policies can create a smooth and effective process of agricultural commercialization.

In short, agricultural commercialization is a method that can be used, not only to revive the agriculture sector in Indonesia, but also to reduce the poverty that prevails in the rural sector.

Through profit-oriented farming, smallholders will be able to gain more cash to improve their welfare. Meanwhile, managerial skills will allow them to manage their assets more efficiently that can then result in bigger-scale farming through economies of scale.

In the process, the growing smallholders’ agribusiness can promote the development of the agriculture sector in Indonesia in a sustainable way. 

The writer is a graduate of the University of Manchester, UK.    

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