Modern Agricultural Value Chains and the Future of Smallholder Farming Systems

Smallholder farms continue to play a prominent role in many developing countries. A substantial debate has emerged regarding the future role of smallholder farms as a means to lift rural households out of poverty and contribute to food security as part of modern agricultural value chains. This paper builds a conceptual model to compare household income and total food output under smallholder production versus a hypothetical setting wherein households cease engaging as farm owner-operators, but supply land and labor to consolidated commercial farms. Based on the empirical literature, we calibrate the model to quantify the advantages in accessing working capital and output marketing that can plausibly accrue to large-scale farming operations and offset any labor efficiency decrement compared to smallholder farms. Results show that households can earn more from renting out land and labor into competitive factor markets for a wide range of plausible market conditions. The higher the price premium commanded by and less the loss in labor efficiency on large farms, and the tighter the credit constraints on smallholders, the greater is the income advantage from supplying inputs to large farms over operating small farms. An output advantage also accrues to large farms under similar conditions