Reforming the leasing and the use of agricultural land in Fiji

6. LANDOWNERS TAKING BACK THEIR LAND

The explicit recognition of the property rights of landowners, combined with the creation of a land exchange and the application of an efficient rent structure, will create a powerful incentive for landowners to lease out their lands to tenant farmers. This will serve to allay some of the fears relating to lease insecurity, agricultural productivity, and the ongoing viability of the sugar industry. At the same time, it must be recognised that even with such incentives many landowners will still need or wish to farm their own lands. It is, of course, their absolute right to do so. The country, then, will have no choice but to come to terms with the picture of Fijians farming their ancestral lands. What is, by contrast, a matter for analysis and debate are the mechanisms which Fijians can most appropriately utilise in entering the unforgiving world of commercial agriculture.

In Fiji today, commercial agriculture is dominated by the small leasehold system, the origins of which were described in Section 3. This system was developed with cane production in mind, the crop that still dominated the country’s agricultural economy. The tenant community learned its cane farming under the rigorous extension and supervision services maintained by the CSR prior to its departure in 1973. The FSC has endeavoured to maintain its extension capacity but as a publicly owned company operating in a post independence environment it has not been able to function as assertively as the CSR. At the same time, skills and tricks of the trade learned through observation and imitation, have been passed down, father to son, between farming generations.

The smallholder pattern, however, is experiencing problems in Fiji. As the economy develops and alternative employment opportunities present themselves, the family unit is not compelled to exhaust its labour on the farm, which tends to diminish gross output per hectare. Additionally, when farms are passed down from father to son, it is often the case that the son does not inherit his father’s capacity for toil and sacrifice. So, even amongst the Indian tenant community, declining farm productivity is becoming a concern. More public concern, however, tends to accompany the replacement of an Indian farmer by a Fijian.

When a mataqali decides to cultivate sugar land that formerly was leased, typically it does not have the above-described history of experience possessed by the former tenant. Thus, it is only natural to question whether the productivity of new Fijian cane farmers will match that of their former Indian tenants, when finally they get the opportunity to cultivate their own land. And while evidence from Seaqaqa suggests that the best Fijian farmers are as good as the best Indian farmers, it also shows the average Indian farmer to be more productive than the average Fijian.

These productivity fears tend particularly to be emphasised given the importance to the economy of the sugar industry. But what is the correct policy response? Most suggestions tend to revolve around punishing Fijian farmers who fail, by e.g. requiring the recycling of their farm to a more productive tenant, an idea redolent of the colonial land policy. It is suggested, however, that a far better strategy would be to introduce effective procedures, appropriate to the mataqali structure, that would minimise failure in the first place. Contract farming is particularly promising in this regard.

 

6.1 Contract Farming

In view of their productivity, as noted above, it is commonly recognised that small family farms are potentially an important source of growth in agricultural production, in addition, small-scale agriculture has socio-economic advantages of improving income distribution, mitigating urban-rural migration, and enhancing and revitalising village life and culture. But there are serious constraints to the transformation of subsistence and semi-subsistence agriculture to commercial agriculture, especially small-scale commercial agriculture. These constraints arise from problems of access to production inputs, services, information, and credit. Most small farmers are independent producers, who sell their produce individually and have little bargaining power with input suppliers and produce markets. Agricultural marketing is similarly underdeveloped, with overlapping marketing channels, inadequate infrastructure and price information, lack of post-harvest management expertise, inadequate storage and transportation facilities, poor packaging of produce, to mention but a few. Small-farmers often lack the necessary production and marketing information particularly about new crops and varieties. Even with sufficient information, they do not have enough financial resources and credit facilities are limited – mainly due to a lack of collateral.

Government intervention and subsidies are often used to redress these problems. But in developing counties, public interventions and support policies are usually ineffective. In addition, government intervention and subsidies do not help to remove the obstacles mentioned above – they merely ameliorate symptoms without addressing causal factors.

In the last three decades, contract farming has been promoted in less developed countries (LDCs) as a replacement to government intervention and subsidies; as an institutional innovation for improving agricultural performance; as a vehicle for the transfer of technology; as a means of creating a stable and politically conservative class of family farmers; and, as a means of facilitating the transformation from subsistence, semi-subsistence, and traditional agriculture to modern, commercial, industrial agriculture.

Contract farming is an institutional framework that redresses the many constraints encountered by farmers, especially small, traditional farmers, in LDCs. It provides, in an integrated manner, the mechanism for the delivery of price incentives, technology, and other agricultural inputs. It has been used as a key element of rural development and/or settlement projects. Local governments, local private firms, multinational companies, and international aid and lending agencies – U.S. Agency for International Development, the World Bank, Asian Development Bank, and Commonwealth Development Corporation – have also been involved in promoting and facilitating contract farming schemes in LDCs.

Of course, the basic notion of contract farming is not new to Fiji. Sugar, Fiji’s single most important export commodity, is cultivated by small leasehold farmers under "contract" to the Fiji Sugar Corporation (FSC). Since the advent of the small leaseholder system in the 1930s, the success of the sugar industry in Fiji has been directly related to the system of contract farming. Indeed, as discussed below, the future survival of sugar in Fiji will depend on strengthening the system of contract farming and extending it to Fijian villagers. The sad fact is that contract farming, as currently practised by the sugar industry in Fiji, is woefully inadequate in the services provided to farmers, especially new sugarcane farmers, and particularly new Fijian sugarcane farmers. Indeed, "contract farming" as currently practised in Fiji’s sugar industry can, at best, be called quasi-contract farming, since most of the beneficial elements of contract farming (see below) are singularly missing.

Contract farming represents an expanding and much suggested method of agro-industrial integration within developing economies. With contract farming, farmers and agribusinesses are linked by mutually beneficial arrangements that offer producers (farmers) lower market risks and greater access to inputs and financing, and at the same time, ensuring processors (agribusinesses) a guaranteed supply of farm produce.

From the perspective of agribusiness the benefits of contract farming are:

• Reduced capital investment in agricultural land and farm buildings. This is particularly applicable to Fiji. The issues of agricultural leasehold – rental rates, secure tenure, land improvement, and the construction of "permanent" farm buildings – need not pose any problem. With the increased desire of rural landowners to obtain "middle-class" levels of living through commercial agriculture, contract farming with landowners becomes the ideal mechanism to realise their income aspirations; and, at the same time, avoid the issues associated with agricultural leasehold.

• The ability to guarantee a required supply of raw material in a timely manner. Establishment of processing plants requires large outlays for machinery and equipment (fixed investment). Hence, agribusiness has a vested interest in reliable sources of raw materials – open market purchases are unlikely to achieve the necessary degree of reliable raw material flows.

• The desire to secure raw materials of specific quality.

• The introduction (expansion) of new technologies to producers, thus altering or improving producer management skills.

• Reduction of overall firm risks with contracts rather than with ownership integration.

• Control of costs.

• Gaining and improving of market position. This is facilitated through the timely delivery of known quantities of high quality agricultural commodities. Also, since inputs are supplied under contracts, agribusinesses can focus more attention on the marketing end of their operations.

With contract farming, it is important to note that the scope of services provided to farmers by agribusinesses depends, to a large degree, upon the particular crop in question. In some instances, it is possible to accord institutional support for nearly all aspects of an agricultural commodity’s life cycle, while in other instances, institutional support is accorded only some of the aspects of a commodity's life cycle. Obviously, contractual relationships that offer more services are preferred to those that offer less. The full scope of contractual services and their attendant benefits, from the farmer’s perspective, can include:

• Provision of the seed commodity to the farmer so that the farmer cultivates appropriate varieties. Varieties are provided to the farmer that suits prevailing processing and market preferences. The arduous task of establishing consumer preferences is eliminated from the many decisions taken by the farmer. Also the risk of uncertain input supplies and uncertain input price is attenuated.

• Reduced capital investment. This is especially relevant to contract farming of livestock since the farmer does not have to buy animals, feed, or medication.

• Land preparation. Ploughing, harrowing, furrowing, and drainage facilities.

• Irrigation services.

• Specifications for specialised facilities such as housing for broilers and pigs, tobacco curing sheds, fish and prawn ponds, dairy parlours, etc.

• Provision of fertilisers, feedstocks, pesticides, and medicines to the farmer so that the farmer cultivates appropriate varieties using appropriate inputs.

• Extension and husbandry services for all stages of the commodity’s life cycle from sowing to maturity. This ensures that not only are the appropriate varieties cultivated by the farmer using appropriate inputs, but also the appropriate cultivation and harvesting practices are executed by the farmer to achieve a mature commodity of high-quality. It affords the farmer access to sophisticated practices such as environmentally sound, sustainable, and economically viable agriculture. It facilitates the introduction (expansion) of new technologies to farmers, thus altering or improving producer management skill. Also, the private provision of extension and husbandry services negates the need for the public provision of these services, which unfortunately, are usually ineffective or non-existent in many LDCs.

• The introduction (expansion) of new technologies to producers, thus altering or improving producer management skills.

• Contract farming allows the farmer to diversify his farm on a limited number of acres.

• Harvesting and transportation of the mature commodity from the farm to a processing plant. This allows the farmer to specialise in one aspect of the production process, high-quality cultivation. The farmer no longer needs to grow, harvest, then transport, and, finally, market his product.

• Processing of the agricultural commodity.

• Marketing and transportation of the processed commodity to intermediate and end users on a timely basis.

• Lower market risk. The farmer no longer has to seek out buyers for his commodity, nor does he have to instigate and establish commercial relationships with reliable input suppliers.

• Lower risks of price fluctuations.

• Systematic and timely payment to the farmer for his mature commodity.

• Income stability. Because most contract arrangements reduce risks in comparison with traditional production or marketing channels, a contracting farmer’s resulting income tends to be more stable over time.

• Access to credit and collateral. This is especially apropos to Fiji were most land, especially agricultural land, cannot be used as collateral, however, agricultural contracts can themselves be used as collateral.

The nature of the crop and its associated production technology are the most crucial determinants of the success or failure of contract farming. For instance, basic grains do not generally require contract arrangements – they are not perishable, and neither do they require strict quality standards nor prompt harvesting and processing. On the other hand, perishable and bulky products that require concentrated production and careful scheduling are usually amenable to successful contractual relationships. Also, commodities that require uniform standards through the use of specific farming practice and specific inputs, such as broiler production, tend to lend themselves to successful contract farming.

Examples of contract farming include the following commodities – the list is by no means exhaustive.

• Sugarcane
• Fruits
• Vegetables and spices
• Tobacco
• Inland fisheries including prawns and shrimp
• Poultry products
• Pigs
• Dairy products

It is important to note that the category "vegetable and spices" is an extensive one. PepsiCo India Holdings, the Indian subsidiary of PepsiCo Inc. headquartered at New York, is extending its contract farming operations of vegetable and spices to include chilli, garlic, ginger, spinach, mustard, and carrots. While the category fruits consists of, inter alia, bananas, pineapples, mangoes, papaya, citrus, etc. – all of which have been subject to various contract farming agreement in different parts of the world.

The potential of contract farming is far-reaching and should not be underestimated. In 1993, about US $47 billion (32 percent) of the total value of agricultural production in the United States was produced under contract arrangements. And the United States Department of Agriculture’s 1993 "Farm Costs and Returns Survey" found that more than 83 percent of the total value of production under contract was for vegetable, fruit, nursery, cattle, hog, dairy, and poultry products.

Contract farming holds great potential for rural development, especially when it is integrated into the national economy. An important function for the state in facilitating contract farming is in the area of legislative arrangements. In agriculture, there are a wide variety of production enterprises; hence, it is impractical to promote a single comprehensive contract model with universal rules. Instead, government can assist in determining the overall framework for contracts and establish mechanisms for dispute resolution amongst contracting parties. Preferably, the government should not be directly involved in dispute resolution. Its role should be relegated to legislative arrangements and an independent institution should be organised to resolve disputes between firms and farmers. This latter point should not be underestimated; the lack of dispute resolution mechanisms is the major cause for failures in contract farming. The court system, with its long delays, is inappropriate for solving the disagreements and disputes between producers and processors over quality standards, delays in delivery and payments, and default on loans and the like. Thus, an arbitration and/or a conciliation system would be useful by involving government and representatives from non-governmental organisations.

In addition to legislative arrangements, there needs to be wide-ranging improvements in government services to agriculture, market infrastructure, information, farming technology, and farmers’ skills.

As for the farmers, they need to be organised into groups or co-operatives that can use economies of scale in bargaining, co-ordinating supply, and accessing credit and other support services. Resource-poor farmers, particularly, need support in organising producer groups in order to increase their negotiating power and benefit from increasing commercialisation of agriculture.

Of course, contract farming is not a panacea to solve all the related problems of agricultural production and marketing systems associated with the impending transition from subsistence to commercial agriculture in Fijian villages. But contract farming is probably the most effective way for the small-scale village farmer to obtain easier access to credit, inputs, information, technology, and product markets. Contract farming, therefore, should be seen as an integral part of rural development and promoted to improve agricultural performance in Fiji.

The immediate questions at hand are these. Fijian landowners are generally inexperienced sugar cane growers, now that their land will finally be available to them, will they live up to the expectation to produce sugar cane as well as their Indian counterparts? If the inexperienced new sugar cane farmers do not produce the required sugar cane, what will be the future of the sugar industry? Proximate answers to these questions lie with the example, starting over twenty-five years ago, with the Mumias Sugar Company (MSC) located in Kenya.

Following an approach by the Government of Kenya in the late 1960s, Booker Agriculture International, drew up a project proposal to build, operate, and transfer a sugar mill with a smallholder component. The smallholders were traditional farmers who grew mostly subsistence crops. The full details of the successful introduction of the sugar mill are provided in Appendix 2. The highlights of the project are presented below:

• The factory began operations on July 1 1973, reaching its designed capacity by September the same year.

• Between 1977 and 1979, factory capacity was more than doubled, from 125 to 300 tons of cane per hour.

• By 1979, Kenya achieved self-sufficiency in sugar with Mumias providing 45 per cent of its supply.

• The Company was profitable from the first six months of operation. This was due to higher cane yields, higher factory capacity utilisation, and lower costs than had been forecast.

• By the end of 1974, a mere 18 months after production began, the project, based on the opportunity value of sugar at world price levels, had completely) paid for itself.

• Mumias had the lowest production costs of any sugar project in East or West Africa.

• Almost 5,000 permanent and more than 9,000 seasonal jobs have been created, and almost 17,500 farmers are now receiving cash incomes who were not before.

• Company employees have benefited from organised training at the apprentice, technician, and management levels. By 1978, out of 102 management employees, only 17 were expatriates.

• The Company grouped together individuals’ cane plots to make stands of cane no smaller than 6 hectares. This enabled machines to be used economically for deep ploughing and other heavy land preparation work. Cane transport costs could also be kept down in this way.

• Disease-free planting material and fertiliser were supplied to each grower on credit and each farmer was then responsible for his own planting, weeding, and fertilising. However, Company representatives visited the plots regularly to advise farmers and harvesting was carried out by the Company. This control was essential to maintain the necessary regular volume of cane flow to the factory.

• All cane, both on the nucleus estate and on outgrowers’ farms was cut by hand which provided more employment than mechanised methods.

• The relationship between the Sugar Company and the growers was covered by a contract and at the end of 1981 17,474 farmers had signed contracts with the Sugar Company.

The cogent example set by the Mumias Sugar Company, a quarter century ago, is instructive for Fiji, especially with a large number of sugar cane leases expiring over the next few years, and especially as a template for introducing subsistence farmers to modern commercial and industrial agriculture. A brief outline for a new strategic thrust in the sugar industry is discussed below. The new strategy is based on two pivotal notions: a cane payment system based upon sugar content, and a market-based lease system with changing numbers of participants.

• Sell the government’s shares in the FSC to those mataqalis with sugar cane lands at a preferred price.

• Have each sugar mill operate under a separate management agreement with companies such as Booker McConnell, Colonial Sugar Refinery, Tate and Lyle, etc.

• When current ALTA sugar cane leases expire, consolidate individual cane plots to accommodate a comprehensive system of drainage, irrigation schemes (canals), and cane access roads that will enable machines to be used economically for deep ploughing and other heavy land preparation work; and eventually, depending upon labour supply conditions, mechanical harvesting.

• Subdivide the consolidated area into production units of say, 6 hectares or more, so that the newly managed sugar mills can provide land preparation, irrigation, and harvesting services to each cane farmer. Each sugar mill can now schedule, co-ordinate, and provide cane-harvesting services that are fully integrated with the rail transport system, thus facilitating efficient throughput of sugar cane. The goal is to crush the canes within 24 hours of harvesting.

• Implicit in the proposed lease exchange is the need for extension services for the ever-changing number of participants, including landowners who wish to cultivate their own land.

Under this new dispensation, the sugar mill will provide cane farmers with land preparation services (millmud, ploughing, and harrowing), water for irrigation, disease-free planting material, fertiliser, and weedicide. The cost of these services will be credited to the farmer’s account. In turn, each farmer will be responsible for his own planting, weeding, and fertilising. Sugar mill representatives will visit the plots regularly to advise farmers on appropriate sequencing of these events and appropriate cultivation practices. The sugar mill will be responsible for harvesting the canes to suit their specifications, and transporting it to the mills to maintain the necessary regular volume of cane flow to the factory. The goal is to cultivate quality canes of high sugar content that will be crushed within 24 hours of harvesting.

In addition, under this new dispensation, the landowner will now be responsible for all long-term investment in sugar lands – clearing and developing including drainage systems, irrigation systems, and on-farm access roads. The tenant, on the other hand, will be responsible for "very short-term" investment associated with a three-year planting cycle consisting of seedcane, 1^st ratoon, and 2^nd ratoon. The tenant, therefore, will pay the costs associated with the establishment of seedcane for each new three-year cycle. That is to say, every third year, the tenant will pay for seedcane, ploughing, harrowing, millmud, and planting.

In theory, then, sugar cane leases could be as short as three years. In practice, however, nine-year rolling leases say, offer greater security to both tenant and landowner alike, and greater retention of "sugar-related knowledge" within the sugar industry.

In conclusion, it must again be stressed that the end of ALTA does not of itself threaten the viability of sugar or the general health of the country’s commercial agricultural sector. By contrast, it creates a wealth of unique opportunities. It permits the creation of a new land leasing system that is mutually beneficial to landowner and tenant, that provides incentives to galvanise farm productivity, and that is free of the politics that cripples the effectiveness of current leasing practice. It also permits the introduction of bold new approaches to agricultural development. An extension of the practice of contract farming is a case in point. It is suggested that this offers a tried and tested method for successfully integrating subsistence farmers into modern commercial agriculture, something imperative for both the nation and Fijian landowners when finally they have the opportunity to profit from their land assets.

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