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.