Reducing Poverty: One Grain at a Time

By Nathan Ellis

Eastern Cape
Provincial Premier Phumulo Masualle

 

Summary

The article “Eastern Cape gravitates towards breaking chains of poverty” outlines the variety of ways that the Eastern Cape of South Africa plans to reduce poverty and stimulate the economy. In order to achieve provincial premier Phumulo Masualle’s goal of turning the area into the “breadbasket of the Southern African Development Community region,” the Eastern Cape’s government has decided to focus on developing its agricultural sector (Miti, 2018, par. 2). To accomplish this goal, the government hopes to create jobs by collaborating with landowners to allow farmers to work the communal land in the area. Additionally, the communal farmers can add value by both producing and milling the agricultural commodities locally and exporting the goods so that they serve as a source of revenue. Local milling is a profitable endeavor for the area as well, so the government wants to incentivize communal farmers to participate in this process in an attempt to stimulate the local economy (Miti, 2018, par. 13).

Off-take agreements have been signed with Nestle SA and Chicory SA in order to encourage and provide reassurance to farmers to plant, cultivate, and harvest their crops. These agreements ensure there is a market for the agricultural goods produced by farmers and provides them with a defined role in the area’s commodity export market (Miti, 2018, par. 8). These seemingly positive measures for economic development beg an important question to consider – why were farmers not already participating in these ventures? The answer may provide theoretical insight about whether it is truly in the Eastern Cape’s best interest to pursue these efforts.

Reasoning

To learn why farmers were not participating in these agricultural ventures, it is necessary to understand the previous milling procedures in place. In South Africa, deregulating the maize industry resulted in three milling facilities dominating the industry and increasing prices of maize meal for consumers (Abu and Kirsten, 2015, p. 4). Initially, farmers chose to participate in these large-scale, centralized milling operations. However, when they wanted to sell their maize, farmers were required to transport their cultivated crops to the large milling facilities (Pichulik, 2013, par. 14). This expensive and laborious process might have made it necessary for farmers to obtain loans in order to finance their efforts and cover costs. However, farmers likely faced credit constraints because lenders may have viewed their investment as risky and unlikely to be repaid due to new added costs (such as transportation) to the borrower. Without the ability to afford this on their own, farmers may have been unable to remain competitive in the large-scale milling market.

The new off-take agreements signed by the government provide assurance to farmers that a market for larger-scale production exists before farming begins (Miti, par. 8). These off-take agreements serve as a form of collateral for farmers when they try to obtain credit from lenders to purchase necessary milling equipment because it shows a defined market for the agricultural output produced. The lender may now view the farmer as more likely to be able to repay post-milling because of the expected revenue source from Nestle SA and Chicory SA. Additionally, the agreements help minimize price risk by allowing the buyer to negotiate a price before production, which can help safeguard against future price changes if a shock occurs. Now, the farmers are no longer credit constrained in their efforts to get a loan to participate in milling (Goldfarb and Busch, 2007, par. 2). The sellers are also able to obtain a minimum level of return on their choice to produce maize, which reduces the accompanying risk of production (Goldfarb and Busch, 2007, par. 3). Because these off-take agreements did not exist previously, farmers may have been unable to obtain credit to participate in the milling process, as the lenders were uncertain if there would be a market for buyers of maize. Thus, they might have been unwilling to lend because they were unsure whether the farmers would be able to repay the loan. These credit constraints may have served as the driving force behind farmers’ prior milling inactivity.

Technological knowledge and available information also play large roles in farmers’ behavior and production habits. Technical change provides the opportunity for economic growth by increasing productivity and long-run output, especially in countries with a heavy reliance on the agricultural sector in their economy. It can reduce poverty for groups in developing countries by allowing farmers to produce and sell a higher quantity of crops at a more efficient rate (Schaffner, 2014, p. 523). However, in order for technological change to make a difference on a local level, farmers must know about its existence, how to use the new equipment, as well as the costs and benefits (Schaffner, 2014, p. 527). Fortunately, crop insurance exists to protect farmers against agricultural loss due to weather or a decline in commodity prices (Schaffner, 2014, p. 530). It is reasonable to think that one reason the communal farmers in the Eastern Cape were not previously participating in milling efforts is because they required proper knowledge about the technology’s accessibility or how to use the machinery. The farmers may not have been aware this technology existed previously. Alternatively, they could have determined that the cost of acquiring, installing, and learning how to use the machinery outweighed the long-term benefits of higher output. This market uncertainty could have been the major cause of prior inactivity in milling and the off-take agreements may be just what the Eastern Cape needs to motivate farmers to participate in these new efforts.

Solutions

Based on this analysis, the provincial government of the Eastern Cape should continue to encourage the economic development of communal rural spaces with a few added provisions not mentioned in the original article. First, the government must continue to show that a market exists for the farmers through increased off-take agreements. These agreements should continue to alleviate some of the credit constraints farmers face when trying to obtain a loan to participate in milling.

The government must also invest in agricultural extension agents that can teach and instruct the farmers about how to use the new milling technology. Although this extension agent work can be difficult and expensive, it is an important investment for the government to make in order to ensure farmers maximize efficiency in production in the long run. This will also provide farmers confidence in their ability to use the technology, allowing them to gain “new information,” easing some of their perceived risk in the process, and making them more willing to adopt the technology (Schaffner, 2014, p. 526).

Finally, the government may want to consider regulating the maize production industry and/or encouraging the use of micro mills: local mills that are communally run. Although micro mills will not directly compete with the three major millers in South Africa, they can serve as an alternative to create economic stimulation through local job creation and incentivize development. The Eastern Cape’s government is moving in a positive economic direction, and these initiatives serve as the next step in reducing the region’s poverty moving forward.

Article Link: “Eastern Cape gravitates towards breaking chains of poverty”

Works Cited

Abu, O., & Kirsten, J. F. (2009). Profit efficiency of small- and medium-scale maize milling          enterprises in South Africa. Development Southern Africa,26(3), 353-368.               doi:10.1080/03768350903086663

Goldfarb, R., & Busch, J. (2007, August 27). Three Important Elements of Offtake Agreements   @EthanolMagazine. Retrieved May 1, 2018, from             http://www.ethanolproducer.com/articles/3242/three-important-elements-of-offtake-         agreements/

Miti, S. (2018, March 16). Eastern Cape gravitates towards breaking chains of poverty. Retrieved May 1, 2018, from https://mg.co.za/article/2018-03-16-00-eastern-cape-gravitates-towards-breaking-chains-of-poverty

Pichulik, M. (2013, June 14). Micro-milling: An obvious solution. Retrieved May 1, 2018, from https://www.dailymaverick.co.za/opinionista/2013-06-14-micro-milling-an-obvious-   solution/#.WujyFtMvw1g

Schaffner, J. (2014). Development economics: Theory, empirical research, and policy analysis.     Hoboken, NJ: Wiley.

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Author: Econ 416 Student

Entries are contributed by undergraduate students enrolled in Economics 416: Theory of Economic Development at the University of Maryland.

5 thoughts on “Reducing Poverty: One Grain at a Time”

  1. Great article! It made me think about one of the main issues underlying the credit market and microcredit initiative which is the lack of profitable investment opportunities in developing countries. Opening up export markets creates a profitable investment opportunity where there was not one otherwise. I wonder in this scenario, whether all socially efficient loans will be made, or whether there is still too much uncertainty and risk driving up interest rates and discouraging some of these safer investments. If not all socially efficient investments were being made, then maybe microcredit joint-liability agreements could fill that gap in this situation.

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  2. “Reducing Poverty: One Grain at a Time” covers the major role off-take agreements play in agriculture markets in South Africa. I did not realize how important these agreements were to mitigating credit constraints and getting farmers to participate in milling. It also makes sense that the government invest in educating farmers about new technology to make production more efficient. Plus, it is interesting that deregulation led the market to end up with only 3 mills. I wonder if re-regulating the industry would open up the economy or if there are other factors at play. – Taylor Friedman

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  3. Here, it is hopeful that government intervention will help farmers as well as the agricultural sector and economy. But I’m curious as to who would absorb the shock if there were a natural disaster? Would this set the farmers as well as the economy back even further than it was before? It is stated above that there is “Crop insurance” but is this something that is integrated into the off-take agreements or something farmers must do themselves? If it is already integrated into the agreements, that would be more beneficial to the government because it gives them a cushion. If not, if there is a natural disaster and multiple farmers do not have insurance, that could put both the government and the farmers with insurance down an even worse path.

    I do agree with all the solutions stated above. Continuing to ensure farmers that there is an existing market is the key to getting them to enter into these communal rural spaces in the first place. Seeing that the government cares enough to alleviate some of the credit constraints will comfort farmers enough to get them to enter. Teaching and informing the farmers of how to use new milling equipment and technology is a great way for the government to boost efficiency in the farmers. And, other farmers seeing this happen could potentially make more want to join in on communal spaces. Overall I do believe the government is invested in helping their farmers and boost the economy by “reducing the region’s poverty”.

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  4. I thought this article and the analysis of the article was super interesting. You looked at many different aspects that contributed to the inactivity within the local milling industry. The barriers to entry varied but they all made sense when actually thinking about it. Specifically, the idea that “technical knowledge and available information also play large roles in farmers’ behavior and production habits” (Ellis 1) is very important when trying to figure out the inactivity within the milling industry and how that inadvertently affects the economy. Without reliable information on efficient farming technologies, like the introduction of certain technologies, then it is close to impossible to prosper in the milling market South Africa. If the government can teach farmers about new technologies then there may be hope for the local milling market and reduction of poverty within South Africa.

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  5. This article solved a lot of puzzles that exist in real life. We learned theoretical solutions for lifting up the poor people and boosting their economy in class, and this article did a great job explaining the constraints that we are facing in real life when implementing the theories. Among those empirical questions, the author explains how the government is making an agreement with both farmers and market to make sure the production process exists. It is quite a first fundamental progress in eliminating poverty, but I am more curious about the following empirical problem that is going to take place, for example, how do each party (government, farmers, and market) respond to weather extremality or market fluctuation. Further analysis will be appreciated.

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