JP/7/SIMA

JP/7/SIMA

ON THE AGRIBUSINESS SYSTEM APPROACH
TO AGRICULTURAL DEVELOPMENT

Pantjar Simatupang
Director
Center for Agro Socio Economic
Research and Development
Bogor

The agribusiness system paradigm was first outlined by Davies
and Goldberg in 1957, and was declared as the new strategy of
agricultural development in Indonesia in the late 1980s. It was
translated into sectoral policy framework by Bungaran Saragih,
the current Minister of Agriculture.

The true meaning of the agribusiness system paradigm remains
widely misperceived; it is confused with large farm enterprises.

The agribusiness approach is then misinterpreted as a strategy
which focuses merely on promoting large agricultural corporations
to achieve high economic growth and large numbers of exports,
ignoring the small family farms and hence, is no help to the
rural poor. The agribusiness approach is good for achieving high
economic growth but at the cost of the loss of livelihoods of
many apart from environmental destruction (Tejo Pramono, The
Jakarta Post, March 27).

Second, the agribusiness system approach is misperceived as
part of the neo-liberal economic policy which blindly advocates
the free market, ignores agrarian institutions and hence will
fail to address issues such as fairness in division of surplus,
participation and income equity, as well as environmental
protection.

Third, the agribusiness system approach is a misfit with the
present context of Indonesian agriculture. The agribusiness
system is identical with the Dutch colonial policy that promoted
large plantation enclaves, created a dual agrarian structure,
pushed out small family farms and created a situation wherein the
laborers were exploited by greedy capitalists.

This argument further says that as long as small family farms
are still predominant, readoption of the agribusiness system
approach can only repeat the colonial history of pushing out
small family farms and depriving the people of their livelihood.

The basic tenet of the agribusiness paradigm may be summarized
as follows. First, farms, small and large, are profit-oriented
business enterprises. This is why Davies and Goldberg introduced
a new word "agribusiness", agriculture-related business, to
replace the old term "farming".

The agribusiness system approach assumes that even a very
small family farm is actually a profit-oriented business, hence
all government policies must be based on this basic premise.

This premise is now accepted as a universal truth. Policy
wise, it has two important implications. The prime objective of
agricultural policy must be to increase farming profit and thus
farmers' income. Here this implies a policy paradigm shift from
production orientation, adopted during the Soeharto
administration, to farmers' income orientation.

If increasing farm profits, including and especially of the
small ones, is a key to poverty alleviation in rural areas, then
the agribusiness approach to agricultural development is
consistent with this objective. By focusing on increasing
farmers' income, the agribusiness system approach puts the
farmers, rather than officials, at the center of agricultural
policies. The agribusiness system approach is a farmers', or
people-driven approach to agricultural development.

Second, farming is a key link in the chain of the commodity
system, thus farming performance is determined by the commodity
system's performance. A commodity system can be divided into
input suppliers, on-farm, output processors and distributors, as
well as supporting infrastructure and services. The performance
of the farming (on-farm) component depends on the other factors.

Most farming constraints are off-farm, characterized by an
inefficient input supply system (insufficient availability, low
quality, high price of agricultural inputs), underdeveloped
agroprocessing industries and inefficient marketing systems (low
farm gate price), and insufficient supporting infrastructure
(lacking irrigation system, credit availability, agrarian
institutions).

The agribusiness system approach is an integrated commodity
system based on development: "How to get the commodity system
right", rather than "how to get the farming right".

Access to a sufficient size of productive land is indeed a key
to uplift the marginal farmers out of the poverty trap. A
seemingly plausible policy option for this is agrarian reform.
But it is misleading if agrarian reform is said to be
inconsistent with the agribusiness system approach.

Agrarian law is part of the supporting infrastructure or
institutional policies in the above commodity system. Mistakes
would not have been caused by the agribusiness system approach
but in the implementation of the strategy.

The egalitarian Agrarian Law of 1960 is not easy to enforce.
To my knowledge, there has been no egalitarian land reform
successfully implemented in developing countries. Besides
difficulty in gaining political support, its enforcement is
socially sensitive and expensive.

Even if all the available productive land is redistributed
equally among more than 20 million farmers, the average plot
would be less than 0.3 hectares. Land reform will not
significantly reduce poverty and may even increase the absolute
number of the poor.

The simple reason is that the presently large number of
households just hovering slightly above the poverty line and with
land holdings around the average size (0.3 hectares), they would
dip into real poverty because after the land redistribution the
amount of land for each would decrease, while most of the poor
households with below the average size of land holding would
still remain poor because the gains from the land redistribution
would still not be enough.

With present land availability, access to sufficient size of
productive land for all farm households cannot be achieved
through land reform.

There are two alternatives to increase the average size of
land holding: Area expansion through new land development, and a
reduction in the number of farmers through job provision in off-
farm sectors. The latter can be achieved through rural
agroindustrialization and the appropriate strategies, in short,
the agribusiness system approach.

Third, the agribusiness system approach is a logical framework
of agricultural sector policy formulation. It has nothing to do
with ideology such as neoclassical liberalism or capitalism. It
is a positive rather than normative prescription. It should be
judged based on positive, scientific reasoning rather than on
subjective political or ideological orientation.

Fourth, the agribusiness system approach is farm scale
neutral. It does not discriminate against the small family farms
in favor of the large corporations. It is a policy framework
rather then a policy itself, and hence is intrinsically neutral.

Fifth, the agribusiness system approach suits developing
countries where small family farms are prevalent. Small family
farms are mostly single enterprise (farming only) and hence are
highly dependent on the other components in its commodity chain.

Commodity system coordination through the government's helping
hand is vital for small family farms. Large corporations are
vertically integrated or are themselves the commodity chain
coordinator. They generally can manage themselves.

The agribusiness system approach views that small farming of a
particular commodity in a particular area can get moving only if
they are consolidated, and connected with all actors in the
commodity chain, and well supported by public infrastructures.
This can be said to be an industrial agribusiness unit, where all
actors in the commodity chain are unified just like an integrated
industrial enterprise.

A real example of an industrial agribusiness unit is the
poultry business partnership coordinated by Herry Santoso in
Sukamulya Village, Ciamis (Kompas, April 4). Pak Herry gains a
captive market order from McDonald's food chain group in Jakarta
and Bandung which requires a supply of chicken parts with total
quality assurance. He then cooperates with pesantren or Islamic
boarding schools to arrange a convenient and fair business
partnership with some groups of small poultry farmers.

Pak Herry provides all supplies such as feed and medicines,
and hence working capital, as well as market assurance. The
farmers only provide barns and labor for the daily care of their
respective farms. Pak Herry links up with factories of the farm
supplies and hence the chicken production costs are minimized. He
also has a slaughterhouse, and thus the whole chain of the
poultry commodity chain is completely under his coordination.
Without such a coordinated agribusiness system, those small
poultry farmers may not have access to the lucrative McDonald's
market, whereas the McDonald's group, a multinational
corporation, fails to benefit the rural poor population.

A down-to-earth implementation of the agribusiness system
paradigm is the development of local specific industrial
agribusiness units for all prospective agricultural commodities.
This is basically an institutional development of the
agribusiness system.