GFAR blog

A cluster here, a cluster there: Can it reduce the riskiness of farming?

Harvesting of demo plot located in Agricultural  cluster

There is a constant call for young people to capitalize on opportunities and also pursue careers in agriculture. However the big question is: how accessible are these opportunities, when there are so many constraints to youth participation in agriculture?

During the GCARD3 thematic session on sustaining the business of farming, we heard about the constraints of smallholder farmers. One of these constraints that stood out to me was the issue of access to micro-financing, which affects farmholders’ ability to benefit from economies of scale.

In trying to ensure smallholder participation, our discussions supported the call for policy makers to make better investments to support farmers’ ability to ‘scale up’ production and productivity. We discussed ‘clustering’ as a strategic approach to this.

Clustering is a tool used in many countries to group producers with similar interests and/or commonalities to benefit from positive outcomes associated with group marketing, access to finance, and economies of scale. Therefore, it is a tool which can aid smallholder farmers to reduce the risks associated with agribusiness development while allowing policy makers to focus resources and policies towards focal points.

Firstly, we identified that the most successful clusters were developed by producer groups that shared common interests. There is commitment among these smallholders to see the cluster work as they ‘owned their system’. Thus, it becomes easier for policy makers to make better investment and result-oriented decisions towards ensuring positive rural development impacts.

Once properly implemented, clustering provides an ideal enabling environment to support smallholders’ involvement in value chains. However, it is extremely important to understand the dynamics of the typical smallholder’s business model and how it fits into these agricultural clusters. Smallholder farmers are not only faced with major production constraints, but are also challenged by constraints specific to marketing and finance acquisition.

So, how does clustering support farmers’ ability to access finance? The reasons we identified were extensive. Clustering allows farmers to share resources for production and collective marketing of their produce. This improves farmer responsiveness to changes in the market place.

It lends support for collective bargaining which increases premiums and incomes of farmers operating in clusters. These activities ensure that farmers become more consistent in their planning and production activities which are favorable for attracting micro-financial institutions.

Micro-financial institutions are adverse to high risk investments which are not supported by collateral. However, fully functional clusters allow financiers to tailor financial packages to support access to finance for their members.

In Jamaica, there are a number of agricultural clusters in operation. Physical infrastructure such as roads, drains and irrigation schemes, and marketing infrastructures including agro-processing and packaging plants are critical public investment components to these clusters. Significant public sector support to improve the enabling environment has definitely invoked a favorable response from micro-financiers to consider working with smallholders operating in these clusters.

With such a model, micro-financiers have increased their responsiveness to smallholders by providing crop insurance products, and loans on a crop-lien basis in addition to loans supported by collateral. Additional financing has been provided within the context of value chain financing as processors and agricultural marketing companies have provided loans to small farmers which are repaid via contractual arrangements to deliver produce over a particular period.

Information and financial literacy is critical to ensuring agribusiness success. The clusters allow micro-financiers to focus capacity building exercises to specific target groups to ensure proper financial management.

Clustering and the requisite infrastructure development supported by policy decisions have proven to successfully transform small farmers into profitable enterprises. Coupled with its perceived attractiveness, this environment also lends to significant economies of scale benefits due to cost sharing of infrastructure and on-farm inputs such as chemicals, and tools and equipment.

Therefore, we can conclude that clustering is an excellent strategic tool to attract the private sector as micro-financiers are allowed to reduce their debt collection risks. Agro-Processors and other value-added service providers are also able to reduce produce acquisition risks further down in the value chain as they now spread this risk among a greater number of farmers. It also improves it attractiveness to young people as it illustrates a structured approach to doing agribusiness while providing opportunities for capacity building.

Clustering is definitely a positive approach for ensuring that small farmers capture and maintain a ‘piece of the pie’.

Blogpost by Latoya Lewis, #GCARD3 Social Reporter – latoyalewis1985[at]

Photo credit: Latoya Lewis

This post is part of the live coverage during the #GCARD3 Global Conference in Johannesburg, South Africa, 5-8 April 2016. This post is written by one of our social reporters, and represents the author’s views only.

Leave a comment

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s