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The private sector and rural

development: Can agribusiness help
the small farmer?

Article in World Development · October 1985

DOI: 10.1016/0305-750X(85)90031-2

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WorldDevelopment. Vol. 13, No. lO/ll. pp. 11251138, 1985. 0305-750x/85 $3.00 + 0.00
Printed in Great Britain. 0 1985 Pergamon Press Ltd.

The Private Sector and Rural Development:

Can Agribusiness Help the Small Farmer?

ARTHUR GOLDSMITH*
University of Massachusetts, Boston

Summary. - There is considerable interest today in getting the private sector more involved in
rural development. One potential means is the “core-satellite” model, where corporate food
processors link up with small farmers through production contracts. exchanging agricultural
inputs and services for assured deliveries of produce. Despite some attractive features, however,
the model is feasible only when specific economic, technical, and social conditions prevail,
conditions including active government support.

1. INTRODUCTION There are two major schools of thought on

agribusiness. One stresses that agriculture is an
International donors are increasingly inter- international system, believes that small farmers
ested in finding means of promoting social and can gain from becoming involved in it, and sees
economic development in the Third World that agribusiness as a means of developing rural areas
supplement, or even bypass, government agen- in LDCs. Much of the work in this tradition has
cies. Their motivation is twofold. One is donors’ been fostered by Ray Goldberg (1981) of Har-
recognition that government agencies can be a vard Business School. The second school of
hindrance, rather than a force for change (World thought comes to opposite conclusions. Best
Bank, 1983, pp. 47-56). To avoid the bureau- represented by Frances Lappk and Joseph Col-
cratic inertia, corruption, and incompetence that lins (1977) of the Institute for Food and Develop-
sometimes foil development projects, many ment Policy, this tradition holds that the
donors want to identify non-government chan- internationalization of agriculture hurts small
nels of implementation. Second is their realiza- farmers by exposing them to more efficient
tion that domestic support for traditional competitors and by driving them out of nutritious
government-to-government aid is waning (Devel- traditional food crops. Both bodies of opinion
opment Assistance Committee, 1984, p. 131). make valid points. Their disagreements stem
The need to economize on public development partly from their use of different criteria to
expenditures has increased pressure for tapping evaluate agribusiness activities in LDCs - pro-
private sources of funds and expertise. agribusiness researchers tend to look at the
Because so many poor people live in the internal benefits, whereas anti-agribusiness ones
countryside, and because inadequate food usually focus on external costs. In this paper I
production is a major problem in many less will consider both benefits and costs in my
developed countries (LDCs), development agen- analysis of agribusiness projects for small
cies have turned to agribusiness for possible farmers.
assistance. This essay looks at whether and how I have excluded from consideration voluntary
such companies could become more involved in public service or paid technical assistance under-
promoting rural development. The term takings by agribusiness. These types of activities
“agribusiness” can apply to any agriculturally
oriented firm, but I restrict it here to the food
processing industry (loosely defined to include
*This is an amended version of a paper prepared for the
non-edible crops as well). My focus is on multi-
Office of Multisectoral Development, US Agency for
national corporations (MNCs), though much of International Development. Sharon Green and
the analysis applies equally to locally based firms. Madeleine Hymowitz, first-year students at the Ken-
I will explore what agribusiness can offer small nedy School of Government, helped review the case
farmers, defined as people who are running studies. However, I am solely responsible for the
farms with primarily family labor. analysis presented here.

1125
 1126 WORLD DEVELOPMENT

may promote rural employment and income, and sequence of activities, from primary production
may also provide useful lessons to planners and to marketing. The specialization and mass output
administrators of other rural development pro- of plantations make possible the application of
jects, whether privately or publicly funded. But, increasingly productive technologies. But, as
as adjuncts to firms’ main economic pursuits, enclaves, plantations offer relatively few growth
they cannot form the foundation for rural linkages to the small farm sector (Beckford.
development policy. That requires income- 1972, pp. 183ff). They serve the rural community
generating endeavors that directly benefit com- primarily by providing jobs, not by transferring
panies. skills and technology.
I have also bypassed parastatal agribusiness Stronger linkages are possible in the upper
enterprises and government-supported market- right-hand cell, where the processor, rather than
ing cooperatives, unless these have substantial growing its own raw materials, buys them from
private corporate involvement, either as equity local producers. Processors, however, generally
holders or management contractors. State-run prefer to buy in bulk from larger farmers. Their
enterprises, except perhaps those few that are purchases, moreover, do not enable farmers of
truly independent of political stewardship, have whatever size to overcome production problems.
different strategic options than private com- Breaking constraints on the supply side requires
panies and do not offer a valid model for access to credit, inputs, and technical advice -
agribusiness investment in smallholder develop- services and resources typically provided by
ment. government, not by private firms.
The most promising type of interaction with
small farmers seems to be in the last cell, where
processors provide both an assured market outlet
2. FOOD PROCESSING AND RURAL and critical productive resources. Orville Free-
DEVELOPMENT man and Ruth Karen (1982) call this system
“satellite farming” around a “corporate core.”
In evaluating the role of private food firms in Private sector companies, processors and/or
agricultural development, it is useful to consider marketers of foodstuffs and industrial crops develop
the degree of vertical integration in the produc- in areas of potential productivity an integrated
tion process and the extent to which the company operation. They reach agreement with small pro-
is linked to farmers. These two characteristics ducers guaranteeing a market at a fait price,
can be arranged in a simple matrix, as shown in providing credit. technology, inputs (such as ferti-
Table 1. lizers, herbicides, and seeds), assistance (in soil
Located in the upper left-hand cell is tradi- preparation, harvesting, and storage), and finally,
servicing in moving the product to processing and
tional agriculture, which tends to entail less
market. (Freeman and Karen, 1982, p. 189)
integrated production processes. Although mar-
kets exist in traditional agriculture, the distribu- The processing facility comprises the “core” of
tion chain is controlled by a variety of middlemen the system, with the small farmers living around
and small-scale processors (Simmons, 1975) it making up the “satellites.” The factory and the
rather than by an integrated food company. producers are linked through production con-
Because of its low productivity, this type of tracts, which usually specify the area farmers can
agriculture has few forward or backward linkages plant in specific crops, the time they can harvest
to other rural or urban enterprises (Mellor, 1976, and deliver to the factory, and the quality of the
pp. 161ff) and agribusiness plays little role. crop they have to produce. In some cases, the
Large-scale food processors are far more processor has extensive rights to enter contrac-
important in the lower left-hand cell. in which a tors’ land to insure they have followed recom-
single plantation enterprise typically performs a mended practices.

Table 1. Typology of corporure-smull farmer sysrems

Company-farmer linkages
Production process Weaker Stronger

Less integrated Traditional: small traders purchase and Bulk purchasing: firm buys what it needs
distribute crops on open market
More integrated Plantation: firm produces its own raw Core-satellite: firm uses production
materials using hired labor contracts with small farmers
 CAN AGRIBUSINESS HELP THE SMALL FARMER? 1127

In exchange, the processor provides cooperat- primary production, however, agribusiness

ing farmers with credit, repaid through deduc- companies still find compelling reasons to remain
tions from sales to the processing plant, with integrated to the field level. They need assured
extension services, and sometimes with crop and regular inflows of supplies to operate their
collection facilities. Proponents of agribusiness processing facilities efficiently, and they often
hold that this system has great benefits. Freeman require the commodities they process to satisfy
and Karen (1982, p. 188) argue, in fact, that “in certain quality standards. To meet these needs,
agriculture, a private sector resolution of world many processors have opted for the core-satellite
problems means mobilizing small holders model, in which formal production contracts with
around a corporate core that effectively moves individual growers help to ensure that they
these farmers from subsistence agriculture into obtain produce of sufficient quantity and quality.
the market economy as both producers and The advocates of core-satellite farming assert
consumers, with all the developmental multiplier that it offers many potential advantages to the
effects this implies, socially as well as economic- growers, as well. Production contracts should
ally.” help growers to forecast their income, thus
Although the interest in core-satellite farming facilitating experimentation with new crops and
is a recent development (Glover, 1984), variants techniques. Such a benefit could be particularly
of core-satellite farming have existed for decades helpful for very small farmers, whose limited
(Voll, 1980). Sugar mills in the West Indies have means discourage them from taking the risk of
long relied on outgrowers for a portion of their innovation, though the risk exists of new tech-
sugar cane; peasant growers of traditional cash nology being promoted that is unsuited to small
crops like coffee or cocoa have always had links farm conditions. Participating growers also may
with processing facilities. But more recent out- gain access to material inputs and agricultural
grower schemes seem to differ from earlier ones support services that might otherwise be unavail-
in two ways. One is a trend toward more formal able, even through channels subsidized or run by
and extensive production contracts, which pro- the government. Perhaps most important of all,
mote closer and more stable relationships be- they can acquire a larger market for their output,
tween processors and growers, and therefore potentially permitting them to specialize and
hold more promise for promoting development. increase productivity.*
The second is the spread of core-satellite farming Governments can see several plausible benefits
to a range of new crops, especially horticultural for themselves in such outgrower schemes via
products. The advocates of agribusiness believe increased food supplies, higher export earnings,
an increasing variety and volume of Third World and greater tax revenues. At the same time, of
agricultural commodities will be grown under course, there are possible savings in public
production contracts in the future. expenditures for extension personnel, fertilizer,
Analysts explain these trends by observing that pesticides, and other inputs which the food
food processing companies, small farmers, and processing firm will provide farmers itself.
host governments each derive major advantages
from core-satellite farming. The processors,
while wanting to control their sources of supply, 3. CASE STUDIES
are finding primary production itself increasingly
unattractive. Managing an agricultural labor Despite the considerable enthusiasm about
force is always difficult due to the spatial and core-satellite farming, two sets of empirical
temporal dimensions of farm production. In the questions have not been carefully analyzed. The
developing countries the low cost of labor used to first set concerns the motivation of corporate
offset these management problems, but unioniza- decision-makers. What are the specific conditions
tion and rising wage rates appear to have shifted - economic, social, and technical - that influ-
the balance in the opposite direction. Perhaps ence the likelihood of a firm actually entering a
even more important, many firms now find that joint production project with small farmers?
large overseas landholdings have become a polit- Advocates of the core-satellite model implicitly
ical liability, subject to increasing government assume it is widely applicable, but at present
regulation and potential nationalization. These purchases of small farm output may account for
economic and political forces have encouraged as little as 5% of agribusiness transactions with
many agriculturally based companies to divest Third World farmers (Lipton, 1977). The limited
their primary operations and concentrate on use of outgrower schemes demands some
processing and marketing - where the bulk of explanation.
the value-added lies, in any event.’ The second set of questions involves the
Despite the pressures for deemphasizing advantages and disadvantages of production
1128 WORLD DEVELOPMENT

contracting for the parties involved. Ilow much Most of the cases date from the 1970s. All
does it actually offer participating companies and involved small family-run farms, though some
farmers‘? The spokesmen for agribusiness have also included medium and large-scale partici-
emphasized the positive features, but critics have pants. One somewhat surprising pattern was
shown that these sorts of projects can have many extensive government involvement. Thai Farm-
harmful social consequences, as well. A more ing Company was the case in which the least
balanced analysis is needed before agencies and government role was reported, but even there a
national governments make core-satellite farm- public agency assisted with demonstration plots.
ing a major new initiative in rural development. In four of the cases the government actually
To answer these two sets of questions, I initiated or designed the project; in at least eight
reviewed 12 documented cases of corporate- it provided the firm with concessionary financing.
small farmer cooperation.’ Locating relevant It was also common for the government to
cases was not easy. Numerous core-satellite donate land to the project and to build or
schemes are reported to exist, but only a handful improve roads, buildings and other infra-
have been the subject of detailed, publicly structure. It seems that few of the projects would
available reports. On closer inspection many of have come to fruition without some public
the cases that have been written up turned out to assistance.
be unsuitable, because the processor was a Another dominant theme was repeated re-
cooperative or government corporation, it had liance on local organizations to link the com-
contracts only with large farmers. or it was panies and farmers. Nine of the I2 processors
involved in the rural community for charitable worked with preexisting grassroot groups. usu-
purposes only. ally a cooperative, but in one case a church-
The 12 cases listed in Table 2 conformed more supported training center. Playing a role parallel
or less to the core-satellite model as defined here. to that found in many government development
This is not an unbiased sample of such projects. projects (Esman and Uphoff, 1984). farmers’
The selection process meant that “successful” groups facilitated communication with potential
cases would be over-represented. There is. in investors. and were often the catalyst for getting
addition, a geographical slant, with eight of the the project underway. In eight of the cases, they
cases coming from Latin America, versus three later served as the contracting agent with the
from Africa and one from Asia. Horticultural processor, who tended to prefer group contracts
crops also seem to be over-represented. Because to contracts with individual farmers due to
the case studies were prepared by a variety of savings in supervisory costs. Some of the other
persons for a variety of purposes, there are companies, however, did not find the potential
substantial differences in the quality and type of economies of group contracts sufficiently attrac-
information reported, a problem compounded by tive, particularly those companies that faced
whether critics or supporters of agribusiness were politicized farm organizations. These usually
involved in the research. For all these reasons the preferred a one-on-one approach, to reduce the
12 cases cannot be compared rigorously. likelihood of conflicts erupting with their farmer-
Nonetheless, it is possible to discern some suppliers.
interesting patterns in the reported data. Whether arranged with groups or with indi-

Country crop Corporate parent

ALCOSA Guatemala Frozen vegetables Hanover Brands

Bajio* Mexico Canned vegetables Del Monte
Chapare Bolivia Pork, citrus Dillmann, SA
Chontalpa Mexico Milk Nestle
El Progreso Honduras Peppers McIlhenny
Guanchias Honduras Bananas Castle & Cooke
Mumias Kenya Sugar Booker-McConnell
Thai Farming Co. Thailand Vegetables Eiscnberg Group
Tumbi Tanzania Tobacco BAT
Zacapa* Guatemala Cucumbers ELCO, SA
Zamora* Mexico Fresh strawberries Various US and Mexican companies
Zaria Nigeria Canned tomatoes Cadbury

*Projects which appear to have a high proportion of medium to large farmer participants.
 CAN AGRIBUSINESS HELP THE SMALL FARMER? 1129

viduals, most contracts had specific quantity and opening up of government land. Partial excep-
quality requirements. They usually specified tions to this rule appear to have taken place in
prices as well, though sometimes processors only three of the Latin American cases, which covered
agreed to meet the market price at harvest time. both large and small farmers, probably to the
In several instances, particularly with export projects’ detriment.
crops. there were two prices, a fixed price paid
upon delivery and a floating price paid later in
the season. Neither farmers nor processors 4. PRODUCT DEMAND AND CORE-
seemed to favor any particular method of pricing, SATELLITE FARMING
as long as the price itself was attractive. Thus in
the several cases when farmers felt a fixed price The commodities processed by agribusiness
was unsatisfactory. it had fallen below the market can be divided into two broad categories: export
price during the harvest season. But only in El crops and local crops. These can be further
Progreso in Honduras did their dissatisfaction broken down into more traditional and less
appear serious enough to jeopardize the project. traditional crops (see Table 3). The four cate-
Farmers usually seemed to prefer to receive cash gories are reasonably distinct, though some
rather than a check and to be paid regularly (e.g., overlapping occurs. Bananas, for instance, are
on delivery or biweekly). One exception to this both a major source of domestic food and a
latter rule was in the Thai Farming Company leading export product.
project, whose participants preferred a smaller The earliest agribusiness investment in Third
number of more substantial payments to faciht- World countries was export-oriented, with ori-
ate personal saving. gins in the sugar trade of the sixteenth century.
The case studies do not provide detailed data Tropical commodities used to comprise the great
on local socioeconomic conditions, an unfortun- bulk of agricultural exports from LDCs, but
ate lapse given the strong influence such factors recent years have witnessed an increasing em-
are likely to have on the feasibility of core- phasis on temperate crops. Mexico, for example,
satellite schemes. Nonetheless, two general char- currently supplies about half the United States
acteristics stand out. First, at least nine of the consumption of winter tomatoes (Froman,
projects were located in high potential areas with 1980a, p. 9) and about one-quarter of the supply
fertile soils and/or access to irrigation and trans- of strawberries (Feder, 1977, p. 103). As wage
port. That profit-oriented agribusinesses appear rates continue to rise in the industrialized coun-
to prefer such locations is not surprising. Second, tries, more temperate agricultural production can
most projects for which information is available be expected to relocate in developing countries,
were in areas where there was relatively wide- particularly for labor-intensive crops like fruits
spread access to land. Access occurred in a and vegetables.’
variety of ways, through individual smallhold- Corporate involvement in processing food for
ings, traditional communal ownership, and the Third World markets is a newer phenomenon,

Table 3. Types of crops handled by food processors in developing countries (expected

armual increase in production volume through 1990 in parentheses)

Local Export

More traditional Rice (2.7-3.2) Sugar (2.t!-4.3)

Roots and tubers (3.0) Coffee (2.64.3)
Pulses (3.1) Cocoa (2.5-3.1)
Vegetables (3.9) Tea (263.3)
Other fruit (3.9) Bananas (1.2-3.4)
Less traditional Milk (3.7)
Beef (4.2)
Poultry (7.5) Citrus fruit (3.c4.3)
Pork (5.0)
_Canned fruit (3.2)
Animal feed (11.1) Fresh vegetables (na)
Canned vegetables (2.8)
Jams (8.9)
Baking, crackers (12.5)

Source: United Nations Centre on Transnational Corporations (1981). p. 100.

1130 WORLD DEVELOPMEN’I

deterred until recently by the lack of consumer importing countries, bar much new corporate
purchasing power. In most of these countries the investment. As Table 1 shows, developing coun-
population’s diet remains limited largely to what tries’ exports of bananas. caffee, cocoa, tea, and
it grows itself or can purchase from local traders, sugar increased at an average rate of 13.2%
with minimal processing. But in some places between lY76 and 1079, more slowly than the
economic growth and urbanization have created average for all food exports. Much of that
expanding markets for processed or “conven- increase represented inflationary gains. Actual
ence” foods. This is particularly true of populous production of these crops is expected to increase
countries like Brazil or Mexico. whose middle by an average of only 2.Y’% per year through
classes may be small in relative size, but arc large IYYO (see Table 3).
in absolute numbers. Keinforcing the trend Demand conditions suggest production of tra
toward more food processing in the LDCs is the ditional exports on a core-satellite basis is likely
fact that overall demand for food in the devel- only where processing facilities already exist. The
oped countries is flat. and unlikely to increase case reviews tend to confirm this hypothesis.
much faster than the rate of population growth. since in only one instance (the Mumras sugar
Pulled by buoyant markets abroad and pushed by project in Kenya) was a traditional cash crop
stagnant demand at home. many food processors linked to an entirely new refining plant, and that
have concluded their growth opportunities lie was an unusual situation, with the sugar intended
overseas, and have begun to introduce more for important substitution. not for export. Be-
branded products into developing countries. cause traditional exporters have little incentive to
organize small farmers around new processing
facilities, most core-satellite farming of tradi-
tional exports will have to occur as processors
phase out direct production. Even minor shifts in
Market conditions for export and local crops this direction, however. could have a major
differ widely, a fact which affects the probability impact on small farmers, since traditional exports
of successfully introducing a core-satellite account for one-quarter of the food production in
scheme. The traditional tropical exports arc the developing world.
mature products. Cyclical oversupply. combined Demand prospects for less traditional exports
with relatively stable consumption in the major (primarily fruits and vegetables) are somewhat

Traditional crop3
Coffee x, 106 1 I .957 13.‘)
cocoa 2 ,OYO 3.974 23.‘)
Tea X64 1.3X9 17.1
Sugar 5.713 6570 7.3
Bananas X21 1,0x0 Y6

17.1Y4 24 .Y70 13.7

Less truditional crops
Fresh vegetables 1.310 2,176 1X.7
Preserved vegetables 512 736 12.0
Fresh fruit (ex. bananas) 1,660 3.101 13 .-’
I.
Preserved fruit 575 I.068 72.9

4.066 7,0x I 20.3

Other food, beverage and
tobacco exports 13,14s lY.483 14.0
Total food exports 34.405 51.534 14.4
Other commodity exports
(ex. OPEC countries) 91 .s47 146.187 15.6

Source: United Nations Yearbook of Internationul Trade Statistics (1980) and FAO
Trude Yearbook (various years).
 CAN AGRIBUSINESS HELP THE SMALL FARMER? 1131

more favorable. In recent years the dollar value again serve high income consumers, are also
of LDC exports of fresh fruits (excluding bana- expected to increase rapidly.
nas) and fresh vegetables has been increasing by Among the staple foods, foodgrains are the
23.2 and 18.2% respectively (Table 4). This most important. They occupy more than half the
occurred off a small base, however, as in 1979 arable land in LDCs, and provide up to 80% of
these accounted for only 10% of LDC shipments the caloric intake of the local population. But
of food, beverages, and tobacco. Moreover, a because they entail minimal processing, and
few strategically located countries are respon- hence little value-added, they hold slight allure
sible, with Mexico by far the dominant supplier for private food processors, especially MNCs.
to the United States and Israel, Turkey, and This would appear to be doubly true in countries
Morocco claiming a major share of trade with the where the government sets grain prices at low
European Economic Community. Companies in levels to benefit urban consumers, or where
more distant countries will have difficulty break- subsidized grain imports are available.
ing into these markets, and those that succeed Not surprisingly, few corporations seem in-
are unlikely to find the buoyant demand met by terested in linking up with small farmers to grow
earlier entrants. basic foods. None of the review cases involved
The barriers to entry are as much political as processing such items, though there are instances
economic. Any import that competes with dom- of smaller local firms contracting for grain
estic produce is potentially subject to tariffs and deliveries within the small farm sector.’ When
other forms of protectionism. Given the flat major corporations get involved in grain produc-
demand in the industrialized countries for fruit tion, however, it is usually for animal feed, not to
and vegetables, imports can quickly reach a level supply goods for direct human consumption.’
that triggers reaction. Witness, for example, the Critics of agribusiness such as Lappe and Collins
‘*strawberry war” between California and Mex- (1977) hold this to be one of the industry’s most
ico, which broke out within a decade of Mexico’s pernicious flaws. They are correct in the sense no
emergence as a major strawberry producer evidence shows core-satellite farming can be a
(Feder. 1977, pp. 64ff).’ direct means of increasing food supplies for the
Such conflicts do not preclude export-oriented needy. Private companies, particularly the larger
processors from trying to introduce new products ones, are not likely to begin buying and distribut-
to developed countries. Shifts in consumer pre- ing staple commodities, except those such as beef
ferences will always create opportunities for or poultry that go to high-income markets.
specific commodities. But processors are going to Their bottom-line orientation, however, does
face increasingly intense competition for most not necessarily bar private food processors from
temperate fruits and vegetables. which will limit facilitating food production through more in-
their willingness to start up contracting schemes direct means. In most of the cases studied, the
for such crops with small farmers in LDCs. Not companies put a ceiling on contracted acreage,
surprisingly. all the fresh fruit and vegetable which allowed farmers to leave some of their land
projects reviewed here took place in Central in food or other crops. The motivation for these
America, an area favored by its proximity to the ceilings was both to stabilize the local economy
United States and Canada. Some of these, such and to regulate inflows to the processing facility.’
as the ALCOSA project in Guatemala, have In none of the cases were processors reported
been successful by a number of criteria. but their to take the further step of actively promoting
experience does not appear likely to be repeated food production, whether by providing credit,
in the majority of developing countries, which inputs, or extension services for particular food
lack such locational advantages. crops. Their management appears to view food
promotion as a government responsibility. This
may be shortsighted, since the low productivity
of most food crops restricts the land and labor
(b) Domestic murketing farmers can allocate to cash crops, which could
affect the profitability of the processing
The market prospects within LDCs themselves facilities.” Evidently, the processors believe they
are both better and worse than for overseas cannot capture enough of the benefits of ex-
markets, depending on the crops in question. As panded basic food production to justify the cost
Table 3 shows, production of the more tradi- of launching their own food crop programs.
tional staple commodities is expected to increase The situation with less traditional or branded
only modestly. Faster growth is likely for less foods is different from that of staples. American
traditional goods, with expensive sources of companies pioneered the branded food industry,
protein the most dynamic. Branded items, which and marketing through product differentiation
11.32 WORL,> l)E’ .*.. ,._. ..-. ,..
V~l.~II’iVltN I

remains their greatest competitive advantage as seems to be another strike itgainst contract
they have moved abroad (Horst, 1974, pp. farming of staple foods, which us&y have 21 low
YY-106). Branded foods enjoy strong growth value for their weight. Companies would usually
prospects in the developing countries. markets prefer that such commodities be cultivated in a
likely to be dominated by multinational food concentrated area. perhaps in Iarge production
processors. This will create numerous opportuni- units.
ties for core-satellite production of canned veg,ct- (iii) Punuutctw. Permanent and sem-
ables, iams. dried milk. and other items which permanent crops arc more suited than annual
can be sourced from small farmers. crops for core-satellite farming. The reason is
The likely increase in demand for branded that growers of coffee. tea, and similar crops
foods. however. should not obscure the very low cannot easily abandon production. and so are
starting-point. In lY75, per capita sales of pro- locked into a relationship with the proccsso’.
cessed food in LDCs were only $48, compared to Growers of otmd crops do not face these
$503 in the developed countries (United Nations barriers to exit. If dissatisfied with the pro-
Centre on Transnational Corporations, iY81, p. cessor’s price or other policies, they can switch to
141). Rapid increases in the former figure will different crops the next season. This creates a
obviously benefit processors and outgrowera, but potential for unstable supply which probably
seem unlikely to be of the magnitude to reverse discourages private investment in contracting
rural under- and unemployment in most coun- schemes for vegetables, melons. and other short-
tries. Nor will it represent much improvement in lived crops.
the availability of food to poor people. To meet (iv) Nr& for prouwit~g. Crops requiring
national objectives of providing rural jobs and extensive processing are most appealing to
low-cost food LDCs cannot rely primarily on agribusiness. which can then use its processing
agribusiness. facilities to discipline suppliers. But many crops
have minimal or no processing requirements.
Depending on price movements, farmers often
suspend deliveries to processing facilities. which
5. TECIHNICAL REQUIREMENTS FOR may threaten to bankrupt tho core-satellite pro-
CORE-SATELLITE FARMING ject. Although processors can usually sue farmers
for breach of contract, such ;I course of action is
The demand pattern for different food pro- politically impossible in many countries. and
ducts is only one factor influencing agribusiness often pointless if a large number of small suits arc
interest in setting up a core-satellite farming involved. It is not surprising that whenever crops
project. Also important are the physical charac- have alternate outlets, companies seem wary of
teristics of the crops themselves. Irrespective of initiating production agreements.
demand. there are technical characteristics that (v) V~~ricrtiot2.s itt qudify. Crops that vai-y
make some crops more suited than others for significantly in quality. and for which quality is
contract farming. Five properties stand out as important In processing, are well suited for
particularly important to agribusiness decision- core-satellite production. This category includes
makers: ‘(I many tree crops and types of fresh produce. The
(i)Perishuhilify. Crops that need to be pro- contrast is with homogeneous commodities. such
cessed quickly create incentives for elaborate as grains. which may not justify an expensive
collection systems. Less perishable crops may not system to make sure farmers follow recom-
justify the cost of setting up such a system, which mended practices and meet stringent grading
is likely a major reason core-satellite farming is requirements.”
rarely used for grain. tubers. and other storable These five technical factors do not determine,
food. Companies trading in such commodities by themselves. whether a company will agree to
probably find it easier to purchase these goods in set up a core-satellite system in a particular
bulk on the open market when prices are locale. When other conditions merit. the
favorable. stockpiling them until needed. management may decide to proceed with crops
(ii) Bulkinrss. Crops with a high value per unit that are “unsuitable” in some respects. Several of
of weight or volume make the most likely the review cases bore witness to this fact. ELCO.
candidates for contract farming. These include for example, established a scheme for vegetables
fruits, vegetables, and tropical beverages. all of that were neither permanent nor in need of
which are compact and relatively easy to trans- extensive processing. Nonetheless, companies
port. Bulkier crops, by contrast, may become contemplating core-satellite farming will consider
uneconomic when transported in small quantities the technical characteristics of the crops in
over long distances to a processing facility. This question before committing themselves.
 CAN AGRIBUSINESS HELP THE SMALL FARMER? 1133

6. IMPORTANCE OF THE LOCAL lished itself in an area dominated by subsistence

ENVIRONMENT farmers, who had resisted previous efforts to
promote cash crops. It is likely this decision was
Features of the local environment also affect strongly influenced by the social concerns of the
the feasibility of an agribusiness firm engaging in Kenyan government, which owns 71% of the
core-satellite production. One of the most impor- sugar enterprise. Despite the unfavorable
tant considerations is accessibility. With few environment, the Mumias project was able to
exceptions. the companies in the case studies did involve over 13,000 farmers in sugar cane
not set up projects in remote areas.” The production by offering a profitable technology
obvious explanation is that market access is and backing it up with a vigorous extension
crucial, especially for horticultural products. service.
Out-of-the-way projects are too far from urban A third factor about the locality that enters the
consumers and port facilities to be workable, investment decision is its suitability for the crop
except perhaps in the case of large-scale inte- to be processed. This is true in the obvious sense
grated processing facilities, for which a company that agronomic and climatic conditions must be
might be willing to install its own transportation auspicious. But there is a less obvious considera-
facilities. tion as well, namely, whether the area is also
A good example of a relatively well-located suited to other cash crops. Some firms may not
area is the village of Chimachoy in Guatemala, want to enter a contract farming scheme if
which provides cauliflower to ALCOSA for competition from other crops is likely. Participat-
freezing. As Kusterer et ul. ( 1981.p. 25) noted in ing farmers’ exit barriers may be too low. Though
their review of the project: there is no direct evidence, Chimachoy may be
one area so favored. since its steep slopes
Chimachoy is connected with its municipality by
preclude cultivation of most non-vegetable crops.
barely passable dry weather tracks through the
mountains or by a 30 kilometer detour on the
nearest road through the ncighhoring municipality
of Parramos. Over this bumpy route come trucks. 7. IMPACT OF CORE-SATELLITE
rural buses. and assorted technicians’ jeeps that FARMING
connect Chimachoy with the rest of Guatemala. No
other village around Chimachoy has such an access After a company has found good prospects in a
route. Much of Chimachoy’s recent growth must be given market and decided to invest in a contract
attributed to this relative advantage over theac
farming scheme. the issue remains whether the
surrounding villages.
project is able to succeed. The company’s main
Another locational factor companies consider concern, of course, is profitability. whether over
is whether farmers in the project area have the short- or long-run. It has been asserted,
experience growing the proposed crops. The though without much hard evidence, that core-
advantages of contracting with veteran producers satellite farming can be sufficiently profitable to
are apparent: there is less chance of the crops interest corporate food processors. especially
failing due to improper standards of husbandry, multinational ones. who are accustomed to re-
and there is less need for the company to train turns on capital of at least 10%1.‘3
farmers and oversee their field activities. Given Of greater concern to public policy-makers is
the many operational problems that can emerge whether the core-satellite model has the expected
in core-satellite schemes, these advantages can beneficial impact on the small farm community.
be very important to a project’s financial success. Claims are usually made for two positive results:
Such was the situation in Guanchias in Hon- first, to enable small farmers to increase their
duras, where the experience of local farmers was income and security, and second, to spread new
one reason for Castle & Cooke’s willingness to and more productive technology to the rural
establish an outgrower banana scheme. Many sector. But as with the potential for corporate
area residents had previously worked on banana profits, the accuracy of these claims has not been
plantations, and were familiar with procedures clearly established. This section will review the
such as pruning and cleaning. Even so the evidence on the impact of core-satellite farming
company’s technical advisory service had diffi- on both the company and the farmers.
culty persuading farmers of the value of certain
practices, such as regularly scheduled fertiliza-
tion. (a) Profitability und risk
Exceptions do exist, of course, to the tendency
for processors to locate among experienced Few of the case studies revealed details about
producers. The Mumias Sugar Company estab- corporate earnings. One exception was the
 II34 WOKLD I>E\‘EI_OPMENl

Mumias project which reached a rate of return of firms. and did not specify small farm contract
30% on equity in 1975. Its earnings have been projects. so the real contrast between MNCs and
highly variable, however. fatling as low as 1.2% local companies is probably even niorc pro-
of equity in 1970. In some of the other cases the nounced.
processors were reported to have lost money. Another way companies reduce risk is by
Core-satellite farming. in other words. appears to getting the host government. by itself or with the
be a riaky venture, subject to crop failure and the support of ;I donor agency, to assume part of the
possibility that suppliers will not meet husbandry project‘s cost. In most of the case stud&,
standards for technically demanding crops. Even government assistance sccnis to have been a
if the suppliers do meet the pi-ocasor’\ volume necessary, though probably not sufficient. condi-
and quality requirements. market fluctuations tion to get the core-satellite projects underway.“’
can drive prices below production costs. Prices ot The near ubiquity of government involvement in
the traditional export crops tend to be unstable. these schemes suggests that. by and large, the
although most of these arc’ governed by inter- profit> of core-satellite farming are insufficient to
national commodity agreements which tend to compensate private invcctors for the risks inher-
dampen the fluctuations. Prices of the les\ ent in this system of production. and that most
traditional horticultural crops art‘ even more‘ firms therefore require some public subsidization
uncertain. given their pronounced scason;ility.‘J ;IS a precondition for their investmrnt. If this
The larger. integrated companies arc prcsun- observation is correct. core-satellite farmins
ably best able to manage price risk. whrthcr ccononiizes less on public rcsourccs than it
through the mechanism of transfer pricing or appears to at first.
through market power over their buyers. Such
firms also have the financial resources to absorb
temporary losses on their operations. Some of
the smaller processors in the C~SL‘S sought.
without notable ~cc~‘ss, to reduce their exposure There is little doubt that the cot-e-satellite
to price risk by entering forward contracts with approach can have ;I significant impact on rural
overseas buyers. It is not clear why these effortx incomes, Of the 12 GISL’S reviewed. only Chaparc
have failed. but one reason may bc the absence and Zamora appear to have failed to raise
of ;I futures market for some of the more exotic incomes. and both of these were too new when
productA, which reduces the liquidity. and hence studied to be judged fairly. Unfortunately. how
the desirability to investors. of forward ccmtr;u_3s. L‘v e r . most of the available income data is
Another rc;l\on may be that small proccs\ors qualitative. except for the Tumhi tobacco scheme
lack well-established relations with their buyers, in Tanzania, where participants’ incomes rose by
and thus arc unable to sc’curc‘ preferential ;I\ much as 300%. and the Mumia\ and Zaria
trcatnient.‘5 projects. whose participants’ inconic increased
Two other types of risk facing most food by more than 50%
processing companies are caused by changes in These achievements were due to higher
currency cxcliange rates and in the local political productivity. the result of modern inputs and
climate. Again. the larger companies probably strict husbandry standards, and to increased cash
have the edge in managmg these risks. They are sales. the consquencc’ of local corporate purcti-
far more likely to possess the financial expertise ases. Which of thcsc factors was more important
to initiate a hedging program against cur-racy is impossible to determine without more data.
fluctuations. They may also have greater infln- The two obviously complemented each other.
c’ncc’ with the government to pursue favorable tax As often happens in c~~mmunities undergoing
and other policies. or, barring that. the ability to rapid economic change, many of those reviewed
weather a period of government hostility. in the cast studies experienced social htr’ains. In
Because of their greater risk-bearing capacity. Mutnias. for instance. residents increased cx-
large and particularly multinational companies penditurcs for alcohol and other “wasteful”
would be expected to be morel open to using form\ of consumption. Participants in the
production contracts. The available data support ALCOSA project apparently wont into debt to
this hypothesis. In his study of fruit and vegetable acquire status items. such iis personal crop
processors in Latin America. Morrissy (1074. p. sprayers. Tens of thousands of migrants were
55) reports: “All of the international firms drawn to Zamora in Mexico. although the local
participating in the survey. whether canners or strawberry industry offered only about IY.000
freezers, use contracting. Among the local firms, jobs (Feder, 1977. pp. 88--X9). The companies.
over one-third did not use production contracts..’ rightly or wrongly. did not seem to feel these and
Morrissy’s data over-represented the large local other social problems were their responsibility.
 CAN AGRIBUSINESS HELP THE SMALL FARMER? 1135

The benefits of growth are, as would be nology. One advantage of this situation from the
expected, shared unevenly. Where land owner- LDCs’ point of view is that they can potentially
ship is skewed, as for example in Bajio, Mexico. acquire well-tested and “appropriate” processing
companies seem to favor production contracts technology directly from the industrialized coun-
with larger growers. This reinforces existing tries, something which is not true in most other
inequalities, and suggests public agencies should industries. They may also avoid the comparative
not push the core-satellite model except in areas disadvantage they have with many manufacturing
where land reform is proceeding or unneeded. processes-it is noteworthy that food processing
Even in relatively egalitarian areas, however, appears to have no significant economies of scale
contract farming has a tendency to increase social - and be able to develop a stronger domestic
stratification, as rising land values encourage less industry as a consequence.‘4
progressive farmers to rent or sell their fields
(Burbach and Flynn, 1980, pp. 186187).‘7 The
resulting gains in economic efficiency may be 8. POLICY RECOMMENDATIONS
desirable from the food processor’s perspective,
but too costly from a social point of view, and the The available evidence makes clear that
trade-offs need to be examined carefully by developing countries can gain from agribusiness
governments interested in the core-satellite investments in core-satellite farming, although it
model. is certainly no panacea for rural backwardness.
The core-satellite model cannot solve the prob-
(c) 7’echnology transfer lems of unemployment and hunger in all rural
areas, but it can raise productivity and incomes in
In the majority of cases reviewed, farmers a few favored regions. At the same time,
received new technology through their produc- however, the resultant class and regional income
tion contracts. Usually this consisted of a new disparities have social costs, so the appropriate
crop variety. The new varieties appear usually to government policy should be to encourage core-
have had higher yields than traditional ones, satellite projects where they are feasible, while
especially since growers were able to obtain trying to minimize the undesirable side-effects.
complementary inputs from the processor. To achieve these twin goals, the following actions
Production was sometimes also enhanced by the should be considered:
agronomic advice given farmers by the com- (i) Feasibility studies. One reason smaller
panies. There were exceptions, however, such as companies have been less involved in core-
the Thai Food Company’s provision of a poorly satellite systems is that they lack the resources or
adapted type of onion which failed to do as well expertise to identify new markets and/or oppor-
as traditional strains. tunities to collaborate with small farmers in
Little of the introduced technology seemed production. Because these smaller companies
particularly innovative, however, a fact consist- tend to be locally-owned and may accept less
ent with Bwambale’s (1978) findings about tech- profitable investments than MNCs, their
nology transfer in Kenyan agribusiness. He participation in core-satellite farming should be
discovered that multinational food companies do promoted. One way to do so would be for
little original research because the results are government to fund market research and feasibil-
non-proprietary. What research does occur tends ity studies to interest companies in expanding
to be adaptive, e.g., adjusting an imported seed production. Care would have to be taken to
type to local growing conditions. Nothing is avoid favoritism, perhaps through some sort of
wrong with such research, but there is little bidding process, but at the same time active
reason to expect agribusiness to provide major efforts would be required to sell these projects to
innovations in small farm technology. Such tech- prospective investors. In the past, publicly
nology is a “public good” and government will funded studies of private investment opportuni-
need to provide it (Ruttan, 1980). ties in developing countries have rarely yielded
There is even less chance for much technology tangible results, a tendency which must be
transfer in food processing itself. Canning, freez- avoided if many core-satellite schemes are to be
ing, drying, and so forth are relatively unsophisti- initiated.
cated processes. Ix The developed countries (ii) Lund reform. The redistribution and/or
appear to hold no great edge over the Third registration of land may be needed before
World in this area. Moreover, the food proces- core-satellite development can occur equitably.
sing industry spends less than most industries on Governments should usually discourage out-
research and development, and much of that grower projects in areas marked by-significant
goes into new products rather than new tech- inequalities in land holding.
 (iii) f?yyiai~~ locril OY~NI~~~N~;O~~.S. Coopcrativcs farming is unlikely to increase local food supplies
OI- other local organizations xc often a pre- and may. through competition for land and
requisite for core-satellite farming. In areas labor. cause them to decline. One partial solution
targeted for such projects, ;I major organizing to this problem could bc to “piggy-back” on food
drive by an appropriate government agency or processors’ cash crop extension services, by
PVO may be in order. paying processors to provide inputs and advice
(iv) InfrustrLrcWre. Good transportation for food crops. as well.
facilities are essential to a successful core-satellite (viii) Social .servicw. Rising income in the
system. Public officials may want to consider project area. combined with an influx of new
linking an existing road building or investment residents. will increase demand for social
program to efforts to expand private food pro- services. Government will have to be prepared to
cessmg in rural areas. There may he oppor- provide more schools and clinics wherever corc-
tunities to get firms to bear part of the cost of satellite farming is set up. Again there may be
infrastructure enhancements, for instance in opportunities to subsidize, or perhaps require,
building a storage facility. the companies to set up such services in the
(v) Lour~s. Government-backed financing is project area.
usually needed to get core-satellite systems It is ironic. but without actions such as these by
underway. Consideration should be given to the public sector. little private sector investment
setting up a special fund that is only available to is likely in collaborative projects with small
agribusinesaes that intend to engage small farmers. Government has to play an enterprising
farmers as outgrowers. This could he an effective role, stimulating corporate interest in core-
way to spend public money. provided the subsidy satellite farming. supplying public resources
is small enough to avoid encouraging socially where the private sector will not, and guarding
uneconomic projects. against socially harmful externalities. Given
(vi) Agricdtural rcwwd~. Public funding will these sorts of public actions. production contract-
continue to be needed for basic agricultural ing schemes may become more common in
research. Opportunities may exist, however, to developing countries, but due to market condi-
get companies to contribute collectively to re- tions, technical considerations, and other con-
search facilities specializing in crops the com- straints. core-satellite farming is unlikely to
panies process. emerge as a dominant model for rural develop-
(vii) Promote food production. Core-satellite ment.

1. Payer (lY75, p. 13X) reports, for cxamplc, that apple production in Ifawaii. while building up capacity
banana growing added only 11.5% to the retail price of in the Philippines and elsewhere.
bananas in 1971. Ripcning and retailing, by contrast.
accounted for SO.Y%. Gras\ margins for middlemen 5. A similar “tomato war” brohc out bctwecn
and retailers also appear larger than for producers. Florida and Mexico within about 15 years of Mexico’s
entering the US market. ‘The Florida producers’ group
2. For a comprehensive list of the advantages and accused the Mexicans of dumping. and although they
disadvantages of contract farming, SW Roy (1972. pp. lost this case in IYXO. further action by the Unlted
5&l]). States seemed likely. Stringent labelling laws and
stricter grading reyuircmcnts arc’ among the protcction-
3. Source materials for the tax btudics were as ist tools available. For the details see Froman (1YXOb).
follows: ALCOSA: Chccci Kr Company (lY77); Kus-
tcrer el al. (1081); Bajio: Burbach and Flynn (lY77, pp. 6. Chccci CyrCompany (lY77, pp. 5660) report that
192-205); Chapare: Amorin (1983); Chontalpa: Fro- the Latin American AgribuGncaa Dcvclopment
man (1981); El Progreso: Truitt (1YXla); Guanchias: Corporation has funded two apparently successful
Truitt (IYXlb); Mum&: Allen (lY81); Thai Farming outgrower rice schemes in (‘cntral America.
Company: Laramee (1075); Tumbi: Agarwal and
Linsenmver (197-I) and Boesen and Mohelc (1979); 7. There are reports of a core-satellite project run by
Zacapa: &l~bcrg(lY74, pp. 16%102); Zamora: Fcder CPC lntcrnational in Pakistan to increase corn produc-
(lY77); Zaria: Development Alternatives. Inc. (1975, tion. The company‘s local subsidiary. Rafhan Maize
pp. F2.3-F31). Products, grinds and processes corn for the local
poultry industry. In 1070, it introduced a contract
4. This can apply to tropical crops. as well. Accord- farming system in which it supplied credit for improved
ing to Burbach and Flynn (1080. p. IYh). both Dole seed, pesticides. and feriilizer to be deducted on
(subsidiary of Castle & Cooke) and Del Monte delivery to the processing facility. Contract farmers
(subsidiary of R. J. Reynolds) arc phasing out pine- reportedly obtain yields twice the national average.
 CAN AGRIBUSINESS HELP THE SMALL FARMER? 1137

Because this cash crop competes with food crops, months the price fell to 18 cents, rose to 45 cents, fell
however, there may have been some undesirable back to 20 cents, and rose again to 45 cents.
effects on local food production. CPC’s headquarters
were unable to provide more information on this 15. It is a common practice for fresh produce to be
project. For a summary, see Lappe and Collins (1977. sold on a consignment basis if the broker is unsure of
pp. 285-287) his supplier, or if prices are very unstable. This exposes
the shipper to additional risks. for example of spoilage,
8. Quality considerations can also play a role. In further price declines, etc. In addition, it encourages
Kenya, for example, labor constraints prevent small- brokers to stress volume rather than price. thus putting
holders from effectively managing more than one acre downward pressure on prices.
of tea. The Kenya Tea Development Authority, a
notably successful public agricultural processing and 16. Few large firms base their investment decisions
marketing agency, uses its licensing power to keep primarily on the availability of host government incen-
farmers below this minimum, thereby freeing land for tives. Long-range strategic factors, including such
other purposes. matters as the current and prospective cost structure in
the host country, the size and growth prospects of local
9. Similar problems hamper government-run cash or overseas markets, and the anticipated responses of
crop projects. See Lele (1975, pp. 27-33). competitors, are probably more important. Negative
incentives seem equally weak. since governments that
10. The discussion below benefits from Ruthenberg discriminate in favor of local companies, do not seem to
(1973). deter MNCs that have a major strategic stake in a given
market. For industry’s view, see Committee for Eco-
Il. Other crops in this category include oil seeds and nomic Development (1981, pp. 35-42).
natural rubber. Agronomic practices seem to affect the
yield of these commodities, not their quality. The same 17. Companies will usually want to work with the
vegetable oil and latex is obtained from good farmers better farmers, irrespective of their size holding. When
and bad farmers alike. Processors of such commodities there is an excess of interested participants, as hap-
have relatively weak incentives to provide producers pened to BAT in Tumbi, contracts are likely to be
with new technology. The outgrower schemes for these rationed to the more progressive applicants. This, in
crops that do exist in West Africa and Southeast Asia turn, can lead to a concentration of land holding, if the
appear to be primarily government-run. participating farmers use their higher incomes to buy
out their less fortunate neighbors.
12. One exception is the Nestle project in Chontalpa,
which was purposely established in an isolated area 18. Horst (1974, p. 56) argues: “The food-processing
(Froman, 1981). The reason behind this somewhat industry never has been what one would think of as a
unusual decision was that Nestle wanted to avoid high technology industry, Many of the basic manufac-
competition from other would-be buyers of milk. With turing processes. go back decades, centuries or even
less perishable crops, whose feasible market area is millenia. Much of the technological progress affecting
correspondingly larger, a remote location would not food-processing originated in other sectors of the
offer the same protection from competitors. economy: government sponsored research, chemical
discoveries, machine design, and so forth.” There is
13. According to Moody’s Investors Services, the 18 some controversy over this point, however, as labor
largest American food processors averaged 10.7% productivity in food processing has been increasing
return on capital in 1981. George (1977, pp. 133-137) rapidly. See United Nations Centre on Transnational
claims their operations in the Third World earn higher Corporations (1981, p. 151).
than average profits. But the evidence for high profits is
inconclusive, according to Horst (1974, p. 120). 19. Most food products can be efficiently processed in
plants costing between one and three million dollars,
14. Fresh tomatoes are a case in point. According to the major exceptions being breweries and distilleries,
Froman (1980b, p. 41) during the first week of January which can cost up to 20 million dollars. See United
1979, Mexican producers received 36 cents per pound Nations Centre on Transnational Corporations (1981,
for an extra large grade of tomatoes. Over the next six pp. 14%50, 158).

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