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To become a profitable small scale farmer, economies of scale is paramount

Farming a business of scale. Therefore, to become a profitable small scale farmer - Economies of scale is paramount.

 How to become a profitable small scale farmer by developing economies of scales:

I have been on record advocating for adoption of aggregation as a model that can create cost advantages for smallholder farmers. Aggregation presents a lot of solutions that could be the breakthrough to profitability for smallholder farmers.

However, the mandate to initiate this process lies  with the government because aggregation consists of setting up a system of rights and responsibilities among various stakeholders with the government as the general arbitrator and the incentive giver.  Classically, if the government does not initiate the process, smallholder farmers have very little chance to initiate aggregation. But all efforts are not cast in stones, there are still other options that could be explored to make smallholder farming profitable by reducing the cost of production per unit.

Based on real time business analysis, my position has always been that no farmer can make profit from cultivating small piece of land without belonging into a functional supply chain, which is a key factor to reducing the cost of production.
For instance, I had a sit down with a neighbor in my rural home in Laikipia County who is planning to plant wheat on her two acres of land. She outlined all sets of activities involved from land preparation to selling of produce. In a nutshell, this is what she would require to cultivate the two acres:
  • Tractor hire services for land preparation, planting and spraying. In our rural area, one can only procure such services from at least ten kilometres away and worse still, it is hard to get a service provider. Getting a planter is even much difficult, that’s why most people broadcast seeds and march around dragging branches to try and bury the seeds.
  • Combine harvester service: Getting a combine harvester is the worst nightmare for smallholder wheat farmers mostly because combines are not locally available and would cost you a lot of extra money to bring them to your farm. The only available option to many is manual harvesting using a sickle and threshing the wheat manually.
  • Selling wheat is also not a walk in the park unless you have huge volumes that you could sell to millers. For my neighbor, it would take her close to three months to finish selling a 90 kgs bag, mostly by selling small portions of wheat to her neighbors for daily consumption.
At the end of our sit-down, we did some calculations. We found that even if she could achieve maximum yield per acre, her venture would still be a loss-making business due the high cost of hiring mechanization services or due to inefficiencies brought about by forgoing mechanization.

We reflected on many other issues but at the end, I had only one word for her: Go big or call it quits! But I did not leave it there, I gave her several options on how to go-big in order to achieve profitability beyond subsistence.

To achieve economies of scale, small scale farmers can do the following:

To go big, my neighbor had two things to do:
  1. To lease extra piece of land and literally become a large-scale farmer. In the conversation she had exclaimed that she did not have enough capital to lease extra land. This option could not work for her.
  2. To convince several neighboring farmers to shift to wheat farming: This is a very practical solutions financially but of course she was afraid of social resistance that she was set to deal with. And this is the challenge that every investor in small-scale farming must be willing to overcome. Socially agreeing to pull resources together in order to increase the scale of operations. This option would save my neighbor a lot of money because herself and the neighbors would operate as one big unit while still in  their smallholder farms.   In our calculations, we had identified the minimum acreage required to create economies of scale in hiring of mechanization services as well as marketing of the commodity to millers.
She agreed to start consultations with the neighbors, and I am eagerly waiting to get her feedback. If they agree,  all their farms will operate as one big unit while making  requisition of mechanization services as well as delivery to market of their produce. 

In conclusion, this is my general advice to anyone intending to invest in any agribusiness sector: If there are no existing structures of supply chain in your area, always consider the above two options before you go too fast. Becoming a profitable farmer is hard work.“Together you go far, alone you go faster”.

Joseph Wambugu consults on matters agribusiness
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