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April 02, 2008

South African land reform process has stagnated

by J. Sartorius von Bach*

It is quite clear that the land reform process has stagnated and pessimists indicate that it could take up to 150 years at the current rate of transfer.

The early optimism of the programme has increasingly been replaced by anger and frustration, and it has been suggested the failure rate of Land Redistribution for Agricultural Development (LRAD) projects has been as high as 50%. This frustration has grown in the face of government’s double-speak, which has talked about uplifting the poor when, in reality, the programme has concentrated on creating an elite black commercial farm sector.

Some of our more radical cadres are suggesting expropriation, while others suggest the Zimbabwe option. The sheer frustration of the process is summed up in the words of the Minister of Agriculture, Lulu Xingwana, who, somewhat inappropriately, suggested that she would be happy if the land market collapsed so that farm prices would become more affordable. Her words are significant because they represent a widespread misconception of the reasons why meaningful land reform has not occurred, as well as why transformation has not taken place in farming.

But, if this is the case, what are the problems retarding the process and is there a solution?

Commercial agriculture resides firmly in the hands of a limited number of large farms, as it does in many other countries in the world. Commercial farming is a high-cost, high-risk game that is certainly not for the faint of heart. Only the best survive in this modern, cut-throat game that has seen agriculture move from smaller-scale family farming to a high-technology industry that is intimately linked to suppliers and retailers in a tightly configured supply chain.

In this game, only farmers who consistently produce large volumes of high-quality food commodities can survive. In South Africa, the days of farmer subsidies and protection are gone but the risks remain the same, namely volatile world prices, erratic weather patterns, global warming and a staggering increase in the cost of inputs.

Land reform has failed because it is a social engineering exercise that contradicts economic reality. Its basic aims are to replace the owners of white commercial farms with large numbers of black farmers or, alternatively, to split up successful large farm operations into a series of small or medium-sized farms.

The creation of a small-medium farm sector defies the economic reality of modern farming because the industrialisation of farming in other countries has been accompanied by an increase in farm size. This is especially the case with respect to the production of a wide range of staple crops that require substantial economies of scale.

Smaller farmers simply cannot afford the high cost of capital inputs in relation to the size of their farms. It is, therefore, more expensive for small farmers to operate than larger farmers and their produce is also more expensive because of increased transaction costs for the buyer.

For example, a supermarket finds it more cost effective to deal with a single supplier than with a large number of smaller farmers, because it is much more difficult to co-ordinate their supply. In short, dealing with large numbers of smaller farmers is chaotic and costly in comparison with interacting with a single, big farm.

Land reform has also failed because the programme focused only on the transfer of land to the bewildered recipients. It neglected to ensure that recipients had the necessary skills, assets and finance to engage in commercial agriculture.

Land is just one of the inputs, albeit an expensive one, in the modern farm sector. Other costs include fixed assets such as farming equipment, buildings and tractors, before a cent is laid out for seed, fertiliser, fuel and wages. Even then the game has not begun. Large sums of money are invested in crops that are subject to the mercy of climatic conditions and fickle markets.

Other reasons for the failure of land reform are that the government simply does not have the administrative capacity to manage this enormously complicated exercise, and it is unable to co-ordinate the activities of its various ministries involved.

So, who can guide and finance the transformation process? Certainly not the government, until after 2014, with its current list of priorities such as Eskom, the 2010 World Cup, public health and crime. Non-governmental organisations do not have the capacity and international donors are unlikely to foot the bill.

The only player capable of making a difference at the moment would appear to be the South African food manufacturing industry, collectively often referred to as the agribusiness sector.

The problem is why should agribusiness inherit the government’s social engineering exercise and why should it adopt supply practices that contradict overseas trends? South Africa does not have a choice. In this case, the equity issue of transformation is more important than efficiency and, way into the future, agribusiness and government will have to charter “good exits” from small farming.

The agribusiness sector is enormously powerful and contributes approximately R124-billion to South Africa’s annual gross domestic product. About 2230 companies are involved in the manufacture of food and beverages. These companies have the financial muscle, technology, management skills and an intimate knowledge of a wide range of commodities. The agribusiness sector could significantly expand black farming in over 23 different food and fibre chains, as well as contribute significantly to the success of the land reform programme.

The institutional arrangement it would employ to expand black supply would be some form of contract farming, which has expanded rapidly throughout the world and is an adequate response to the modernisation of agriculture. Farmers or groups of farmers enter into contracts with a processor or supermarket to supply a food commodity. In return, the agribusiness company often provides a range of support, inputs and technology to the farmers, who are guaranteed a market for their produce.

Yes, farmers lose some of their independence, but the other side of the coin is that they are assisted to overcome the barriers of entry to high-value cash crops. The support provided by contract farming arrangements ensures that all the inputs are considered, not just land.

Each project, moreover, is guided by the direct management skills and inputs of a specific company with respect to a specific food or fibre commodity. Because of this, limited funds are focused.

Certain sectors of the food industry have already made great strides in transforming agriculture in this way. The sugar industry, for example, has contributed to the development of 50000 black commercial farmers and is a leading example of how contract farming can be used to transform.

The question still remains as to how land reform fits into all of this. Many contract-farming projects will require land and the agribusiness company concerned can facilitate this acquisition by providing the accompanying business plan to the finance institution. This business plan, moreover, will be backed by a long-term contract.

Each land reform deal, therefore, would be underwritten, in a way, by the agribusiness company, which would also ensure a wide range of post-land transfer benefits. Land reform projects would be linked to contract-farming opportunities to ensure that each project is viable.

Since the government can do very little to directly finance these opportunities, it must be persuaded to develop specific policies to expand contract farming in South Africa. In particular, a policy is needed to afford relief for agribusiness companies prepared to meet high levels of start-up costs. Furthermore, the history of smallholder contract farming in other countries indicates the government must also develop a specific smallholder policy to ensure any hope of success.

It would be naïve to expect that the land reform debacle, as well as the lack of transformation, can be put right by the rather simplistic explanations offered in this article. The suggestion of the role of agribusiness, as well as contract farming, is just one of the possible answers to some of the problems of land reform and transformation.

*Sartorius von Bach is an associate professor at Wits University

The Sunday Times

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