What is special about

agriculture?
By

Chris Mbukwa
 (a) Agriculture is economically and politically important

Agriculture is our main source of food. Food is not just a commodity – it is

culturally important and politically very sensitive. In theory, an urbanized
country might be able to import most of its food – and some do.
The countryʼs food trade reveals a general upward trend in food imports and exports
in the last two decades. Food exports grew by only two percent in the same
period. (Mwapata, 2021).
However, most countries are reluctant to depend too much on food imports.
Imports require foreign exchange that is needed for other purposes. Moreover,
there is a risk that harvest failures, war/civil conflict, or other factors may restrict
food imports and/or raise their price. If this happens at short notice, it can cause
major political upheavals, as happened in many countries when world food
prices rose in 2007–2008 (Arezki & Brückner, 2011).
Food prices are particularly important for the poor, who must spend a large
proportion of their income on food. For this reason, most governments keep a
close eye on domestic food production, and many promote policies to
encourage it.
(a) Agriculture is economically and politically important

• Agriculture is also the source of some important non-food

commodities, for example, fibers, such as cotton, industrial
inputs, such as starch, and biopharmaceuticals.
• In low-income countries, agriculture and related businesses
(trade, processing and food preparation) are the main source of
employment and economic activity.
• In some countries, agriculture is also a major source of foreign
earnings.
• In Malawi, Agriculture is the main employer, major forex
earner, major contributor to the GDP-Discuss?
(a) Agriculture is economically and politically important
Finally, many cultural and traditional aspects of agriculture are
valued by the wider society, for example, traditional fruit varieties,
a particular type of farm-made cheese, or the beauty of a
landscape created by a patchwork of small farms. This gives
farmers political clout even in high-income countries where
agriculture contributes a relatively small amount to the economy.
An example is France, where agriculture contributed less than 2%
of GDP in 2010 (FAO, 2013a), but where farmers have a strong
political voice (see 1.1.1).
(b) Farms are highly diverse

Compare farming with industry, health, education or roads, and it

immediately becomes apparent that agriculture is a much more
complex sector.
Agricultural policy must deal with everything from tiny irrigated
plots of rice to extensive livestock rearing. Within a single farm,
there may be a variety of farm enterprises – for example, a farm
may produce both vegetables and sheep – with different needs.
A blanket agricultural policy (such as a general subsidy for a
particular crop) is a ‘blunt instrument’ which must be very
carefully thought through if it is not to have unexpected effects on
certain farmers or farm enterprises, or to benefit some farmers
much more than others.
(c) The boundaries of the ‘agricultural’ sector are fuzzy
Agriculture is closely connected to agro-industries and other rural pursuits such as
fishing. In addition, many factors affecting agricultural production (for example, transport)
are normally managed by other sectors.
In this course, we will normally limit the definition of agriculture to ‘farming’ (crop and
animal production, processing and sales), while being aware of the fuzzy boundaries and
the fact that many points are more widely applicable.
What policy areas are covered by the agriculture ministries in the list?
Land, forestry, fisheries, rural affairs/rural development, environment, water and co-
operatives are areas commonly covered by Ministries of Agriculture.
From your previous knowledge, what policy areas that are important for agriculture
are usually covered by other government ministries or departments?
Roads and transport, energy, communications, education, health, social services,
finance, international trade and foreign affairs ... nearly all sectors have some knock-
on effects on agriculture or are affected by agriculture and food. Many of these
Ministries have their own (different) policy objectives, and Ministries of Agriculture may
find themselves in conflict with their colleagues over policy (this is called lack of policy
coherence). For this reason co-ordination between sectors is an important challenge.
(d) Agricultural production depends on the individual decisions of large numbers of
farmers

Agriculture is highly decentralized. Day-to-day decisions which have

an effect on production and sales are made by individual farmers –
for example, what crop to plant and how many hectares, what
inputs to use and when to apply them, when to harvest, store and
market.
This means that agricultural policy must be designed in such a
way as to influence the decisions of a large number of diverse
people.
(e) Farms are geographically dispersed and rural

• Because land and water are essential inputs into agricultural production,
most farms are located in the countryside, where land is cheaper. So in
comparison with industry, farms are geographically very dispersed. Very
few farmers in the world are completely self-sufficient subsistence
producers – most farmers sell at least some of their produce and buy some
of their inputs.
• The agricultural market system therefore plays a crucial role in getting
inputs – such as seeds, fertilizer and veterinary medicines – into farms, and
in getting outputs (agricultural produce) out of farms to where they are
needed, for example, to processing factories or directly to consumers in
urban areas. This can be challenging and costly, especially in low-density
countries with scattered small farms
• High transport costs not only reduce the share of profits going to the
farmer and ‘drive a wedge’ between farm gate and consumer prices, they
may also decrease competition among traders or result in markets being
altogether absent (de Janvry et al, 1991; Suzuki & Sexton, 2005).
(e) Farms are geographically dispersed and rural
• The transaction costs (costs of doing business with) dispersed farms
are often high. Information constraints may prevent the private sector from
providing certain services – for example, individual farm insurance for crop
failure – because it is too expensive for the insurance company to get out to
the farmers’ fields to check the state of the crops and farmers may cheat
(moral hazard) or they may be tempted to take additional risks, such as not
taking preventative measures to control an expected pest attack if they know
that they are insured against loss (adverse selection).
• In low-income, low-density countries, the information problem may be
severe. For example, a farmer may sell her maize to a passing trader for a
low price, and not be aware that she could get a much higher price in the
market only a few villages away. (You will recall that neoclassical economic
models assume that both producers and consumers have perfect information
on prices.) However, improvements in communications, particularly mobile
phones, are gradually overcoming the information barrier.
(e) Farms are geographically dispersed and rural
A longer-term implication of a rural location is that people have more
limited day-today choices and opportunities than people in urban
areas. Nearly all agricultural jobs are hard and low paid, and there are
fewer alternative occupations in the countryside than in towns.
Shopping, education and health facilities, transport and
communications, and cultural diversity also tend to be more limited in
rural areas. For these reasons, many people in all parts of the world –
especially young people – tend to move to towns when they get the
chance, and away from farming. Although a minority of people in all
countries do deliberately choose and appreciate the pleasures of
farming and rural life, worldwide the move is towards urbanization, and
towards reduced – and older – populations in the countryside. The
move towards urbanization has long-term implications for agricultural
policy (Satterthwaite et al, 2010).
(f) Agriculture depends on biology and ecology
Agriculture depends on the growth of living plants or animals, and
their interaction with their environment. For this reason, a farmer
typically has a lot less control over his/her production levels than
a factory owner. While it is possible in some circumstances to
exercise a degree of control over agricultural production – think
for example, of heated glasshouses, or chickens raised in a
highly controlled environment – the vast majority of farming is
greatly affected by external conditions, including interactions with
soil, water, competing species (weeds), pests and diseases. This
has a number of implications, including seasonality, time
sensitivity and risk, and effects on the natural environment.
(g) Agriculture is seasonal and time sensitive
There are few cases where agricultural production can be
continuous all the year round, like a factory. Most of the world’s
farming is dependent on natural cycles of temperature and
rainfall, and there are ‘normal’ seasons for planting, growing and
harvesting in a particular area.
Seasonality has a number of important implications:
• Synchronization of cropping and harvests causes (semi)
predictable variability in availability and price for a particular
crop in a particular area. (As you would expect, prices are
usually at their lowest after harvest and at their highest just
before the next harvest.)
(g) Agriculture is seasonal and time sensitive
• Related to this, storage of agricultural products can be as important
as production. For example, the harvest period for maize might only
last for a month or so, while consumers and processors will require
the maize year round. Storage fills this gap.
• Price expectations, including those caused by agricultural policy and
other factors can have a huge effect on farmer and trader decisions
on what and how long to store. At the same time, decisions on
storage can have a huge effect on availability and demand.
• In rain-fed agriculture, a 2-week delay in the delivery of seeds could
mean an entire year’s harvest lost, in the worst-case scenario. One
of the concerns of agricultural policy is to foster efficient supply
chains.
(g) Agriculture is seasonal and time sensitive
• Labour requirements vary dramatically over the year for many farm
enterprises.
• Land preparation/planting, weeding, harvesting and processing require
relatively high amounts of labour over limited periods of time. This provides
a (low) income for the poorest people, but a headache for farm managers
who have to recruit and manage temporary labour. This is an important
economic reason why family farms – where the family helps out at peak
periods – have remained the predominant form of farm organisation
• Agricultural policy must also take into account the divergent effects on farm
owners/managers and farm labour. To take a simple example, a policy to
subsidize tractors is likely to be popular with farm managers, but may put
farm laborers out of work. It is also common for farmers to take off-farm
employment in a variety of enterprises to maintain year-round income,
which means that links between agricultural and other labour markets are
important.
(h) Agriculture is highly risky
Particularly in rainfed agriculture, which accounts for about 80% of the
world’s agriculture (FAO, 2011b), annual variability in crop yields due to
weather can be tremendous.
As an example, fig below shows national average yields and average
annual producer prices for maize in Malawi, a crop produced primarily by
smallholders. These huge swings can hurt both producers and
consumers, if agricultural policy – crucially, including trade – is not
capable of stabilizing the markets.
In 1992, 2002 and 2005 Malawi experienced famines and received
substantial food aid; in 2007, conversely, the country had a bumper
harvest and exported maize. The policy story is complex, and weather
was not the only influence on yields and prices in Malawi, but for now,
just note the large swings in crop yields per hectare and the opposing
swings in prices.
1.1.4 Average annual yields and producer prices for Malawi maize, 1991—2008

Producer prices not available prior to 1996

Source: unit authors, based on data from FAOSTAT (n.d. b)

(h) Agriculture is highly risky
• Pests and diseases are also a major risk for many crops and farm
animals. An attack of an animal disease such as foot and mouth (cattle) or
Newcastle disease (chickens), or the loss of an ox needed for ploughing,
can potentially bankrupt a smallholder when insurance is not available.
• Most farmers also face huge uncertainty regarding price. The majority of
farmers are price-takers in economic terminology – that is, they are too
small scale to influence the market price they receive for their produce. The
prices of agricultural inputs and labour may also vary in an unpredictable
way.
• Many agricultural products are faced by inelastic demand – that is, a
drop in price does not call forth an equivalent surge in demand. In the
absence of any external policy intervention, this means that a good year
with a bumper harvest (very large harvest) may lead to a crash in prices
and a lower income for the farmer than in a poor year.
 (h) Agriculture is highly risky
• Moreover, in an increasingly globalized world, both input and
output prices may be influenced by factors well outside the
knowledge and experience of any individual farmer – for
example, a sudden increase in the global oil price, a change in a
domestic subsidy paid to farmers in a major production area like
the European Union, a bumper harvest of the same crop in a far-
away country, or a rise in the exchange rate of the national
currency or the dollar.
• Finally, a variety of other external risks and uncertainties can
affect agricultural production and markets.
(h) Agriculture is highly risky
• Bad weather, poor prices and (often) pests and diseases are called covariate
risks, meaning that they tend to strike most or all of the farms in an area at
around the same time. Risks to individual farms and households – such as
illness – are called idiosyncratic risks.
• Decision-making in the face of uncertainty: Farmers must make investment
and management decisions – what crops, how much and when to plant, what
inputs to use, how much to sell and store – based on their expectations of
prices, costs and risks. Many farmers are risk-averse, and therefore invest
less than would be optimal to maximize production and profits. For example, a
farmer may fail to apply fertilizer due to fearing a risk of drought (when fertilizer
would be wasted). The aggregate effect of all these individual farmer decisions
– as well as the risks themselves – can have huge implications for a nation’s
food supply, economic growth and balance of payments, and consequently, for
the survival of the government in power. For this reason, reducing uncertainty
for farmers is often a high-priority task for national policy-makers.
(i) Agriculture has two-way linkages with the
natural environment
Agriculture is estimated to account for nearly 40% of land use and 70% of
freshwater use worldwide (FAO, 2013a).
Agricultural production may contribute to climate change and equally
may be affected by climate change (Nelson et al, 2009; Hertel, 2013).
The economic concept of externalities refers to benefits or losses
incurred by the wider society or environment that are not directly
reflected in private financial costs or profits. For example, pouring old
pesticides into the river may not affect a farmer’s profits, but it will have
costs to others (a negative externality).
One of the challenges for agricultural policy-makers is to design policies
which will align the market signals (economic incentives) for farms and
agro-industries in order to promote positive externalities and minimize
negative externalities.
From your previous knowledge, can you think of ways in
which agriculture might potentially harm the environment?
Agriculture, if not well-managed, may have a harmful effect through:
1. Increasing use of land and water, reducing the amount of forest and wild land in the world
and the ecosystem services that they provide.
2. Reduction in biodiversity.
3. Soil erosion and loss of topsoil from poor soil management.
4. Salinization (increasing salt levels in soil), eg from poor irrigation management.
5. Soil and water pollution, from manures and slurries, fertilisers and pesticides, which
damages ecosystems and human health.
6. Air pollution and emissions of greenhouse gases, for example, methane from livestock
digestion and nitrous oxide from burning and deforestation.
7. Development of pests and diseases resistant to pesticides and antibiotics.
8. Propagation of disease, either from livestock (eg brucellosis) or by creating conditions
which favour disease vectors (eg malarial mosquitoes).
9. Use of non-renewable fossil fuels.
10. Supporting increased human populations that have other negative effects on the
environment (eg through urbanisation).
(j) Gender and social issues are important in agriculture
Farming is not only a job but a way of life, often involving the whole family (even in wealthy
countries), and it usually provides a home as well as a workplace.
The farming household is sometimes treated by economists as a single economic firm (the
unitary household model).
However, there is ample evidence (e.g. Udry, 1996) that men and women frequently control
different assets and make decisions about different parts of the farming work. Women
represent about half the labour force in agriculture in Africa, Eastern and South-eastern Asia
and over a third in south Asia (FAO, 2011a).
Agricultural and trade policy must take into account gender role differences and differential
effects on men and women. Women often face extra constraints in farming, including lower
access to assets, agricultural inputs, education and information, than male farmers. In many
cultures, women traditionally have the primary responsibility for tasks such as food processing
and preparation, child rearing and collecting fuel and water – all activities which are essential to
the rural household economy, although they are often not defined as ‘economically active
employment’ in national accounts (FAO, 2011a).
Women make trade-offs in time between these activities and farming, which means that time-
saving investments in other sectors (e.g. water supply, child care) may have pay offs in terms of
agricultural production.
(j) Gender and social issues are important in agriculture

Another important aspect of family farming is that households may

consume or store much of their own production, and many factors
may influence their decisions to store or sell the surplus.
There may be a fine line between a household being a net
producer (selling more food than it buys) and a net consumer
(buying more food than it sells) (Aksoy & Isik-Dikmelik, 2008).
The poorest farmers may need to sell straight after harvest, to get
money for immediate needs such as school fees for their children.
Farmers with a surplus, on the other hand, may hang on to their
production to get better prices later in the year. This can make it
difficult for national policy-makers to predict levels of marketed
production.
(j) Gender and social issues are
important in agriculture
Finally, the social nature of farming distinguishes it from many
other industries. For example, land is not just an economic input
but may have an important social and cultural value, as well as
providing a place to live and a fall-back occupation for family
members if other jobs fail them.
(k) In lower-income countries, much of agriculture is outside
the formal economy
• Finally, many small farms (and small-scale agricultural traders) operate
outside the formal economy, which means that they are not registered,
taxed and there is poor-quality – if any – information available on their
production, trade and use of inputs including labour. Over 60% of the
global agricultural work force is estimated to be informally employed
(Bacchetta et al, 2009). In poor rural areas, most commercial
transactions (such as sales or hiring labour) go unrecorded; in fact,
many deals take place outside the money economy.
• [A note on terminology: international statistics on the informal economy
traditionally have not included small-scale farms and people who work
on them, although this may be changing (Chen, 2007), so it may be
safer to use the less precise term ‘outside the formal economy’ in
relation to agriculture.]
(k) In lower-income countries, much of agriculture is
outside the formal economy
This has two main implications for agricultural policy planners:
• First, policy measures aimed at the formal agricultural economy may have
little – or a negative – effect on those outside it. For example, it has been
claimed that trade liberalization in South Africa did not reduce poverty
among the unskilled and rural poor, partly because ‘the poor are largely
disconnected from the formal sector’ (Sandrey et al, 2011: p. 6).
• Second, policy-planners (ideally, at least) base their decisions on data.
With some exceptions (for example, India, according to Mishra and
Shankar (2013: p. 19), there are little or no data on small-scale farmers
and agricultural traders available in many government systems, and the
dispersed and remote nature of farms makes data collection costly. This
means that policy-planners and economic modellers may be operating in a
‘data vacuum’ in comparison with some other sectors, for example, with
regard to data on production, sales, and labour.