Agriculture is a risky business because it deals with uncertain factors such as weather and market conditions. This uncertainty can result in variable returns (farm income) to the decisions that farmers make in a particular season. Therefore, farm income variability is a problem which farming household has to deal with. Enterprise diversification is one method of reducing farm income variability.
Future of Agriculture Lies in Diversification
Muhammad Zeeshan Naseer*
Agriculture is a risky business because it deals with uncertain factors such as weather and market conditions. This uncertainty can result in variable returns (farm income) to the decisions that farmers make in a particular season. Therefore, farm income variability is a problem which farming household has to deal with. Enterprise diversification is one method of reducing farm income variability.
Diversification reflects a change in business activities based on the flexible and differentiated response to changing opportunities created by new production technology or markets signals. More specifically, diversification is defined as “change in product (or enterprise) choice and input use decisions based on market forces and the principles of profit maximization.”
The concept of diversification conveys different meaning to different people at different levels. For example, at the national level, it generally conveys a movement of resources, especially labour, out of agriculture to industry and services, a sort of structural transformation. Within agriculture, however, diversification is considered a shift of resources from one crop (or livestock) to a larger mix of crops and livestock, keeping in view the varying nature of risks and expected returns from each crop/livestock activity, and adjusting it in such a way that it leads to optimum portfolio of income.
There are two different aspects of diversification. One is that of planning under an assumption of perfect knowledge and the other is to minimize the variance of an outcome by attempting to put a floor under the income level or by preventing the occurrence of undesirable outcomes. Farmers and farm managers, faced by price and yield variability, may wish to select a combination of enterprises to reduce the variability of farm income.
There are two kinds of diversification at farm level: horizontal diversification and vertical diversification. Horizontal diversification refers to the growing of different kind of crops i.e minor crops, vegetables and fruits along with conventional major crops at farm level by farmers. Vertical diversification occurs when farmers engage them in different value added activities at farm level or adopt some other enterprises i.e livestock, poultry farming and fish farming along with growing of crops at farm level.
At the farm level, diversification represent a change in the underlying characteristics of the farm system such that farm practices and products are more aligned with the social, environmental, and economic contexts, as well as the constraints and opportunities that exist. At the community level, diversification implies establishing a dynamic optimal mixture of farm production alternatives capitalizing on between-farm heterogeneity in terms of resource availability and qualities.
Diversification is a frequently used risk management strategy that involves participating in more than one activity. It has the added advantage of mitigating price risk as well as fluctuations in outputs. The advantage of engaging in different production systems at the farm level depends upon the level of within-farm heterogeneity in soil and land resources, as well as biological and economic factors, such as the possibility of interruption in insect and diseases cycle, the extent of the sustainability effects, and the gains in fuller utilization of resources in the diversified compared to the monocrop production system. Such diversification may be constrained by the skill requirement to manage diverse entrepreneurs. Situations in which rational decision making under an unbiased public policy scenario for different crops and enterprises, taking into account various constraints and opportunities, leads to specialization in certain crops or processing activities at the farm level fall within our conceptual definition of diversification. However, diversification at the community level is likely to result in the diversity of enterprise due to within-community heterogeneity regarding resource distribution and synergies from complementary coexistence of multiple agricultural enterprises, including crop, livestock, fisheries, farm forestry, and horticulture.
Diversification can be accomplished in two quite different methods:
The amount of resources can be increased: Under this system a farmer producing product A with Rs. 15000 of capital and labour might diversify by adding an other Rs. 15000 in order to produce both A and B.
The amount of resources can be held constant while part of them is shifted to other products: if the farmer has Rs. 15000 and is producing A, he can shift Rs. 7500 to B and produce both.
The first system has ramification highly related to the capital and increasing risk considerations. The system is sometimes suggested by bankers who would like to see farmers use more capital while “spreading their risk.” The second system has more widespread application since most farmers have limited capital.
Diversification of agricultural production frequently has been urged as a means of increasing agricultural income and thereby improving agricultural conditions. Many farmers secure relief in times of agricultural distress by turning to the production of new products or by increasing their production of products that previously were relatively unimportant in their farming operations. Most probably the products the production of which is increased are those, which are relatively high in price or are those, which will fit into a particular farm organization with little additional cash expense.
Diversification smoothes the flow of income to the household by reducing both predictable and unpredictable fluctuations. Predictable seasonal fluctuations in income can be smoothed by combining enterprises and activities that generate returns during different times of year. Unpredictable fluctuations, those which create an unexpected loss in income can be reduced by a diversified portfolio of economic activities with variances that are not perfectly correlated. In the absence of contingency markets peasant households diversify by pursuing multiple economic activities in order to maintain a relatively smooth flow of income. There is limited evidence to suggest that households at higher income levels will be less likely to pursue ex-ante risk reducing strategies.
The advantages of diversification to the individual farmer are numerous and are such as to recommend such a policy to most farmers; however the extent of these advantages is conditioned by the number of farmers attempting to secure them. Obviously if any considerable portion of the total number of farmers made similar changes, the price advantage of the particular product would quickly disappear as result of an increased supply of that product. Consequently, greater diversification practiced by a few farmers presents opportunities for them, but greater diversification practiced by all or even a majority of all farmers is an entirely different matter. In other words, greater diversification as a policy to be followed by individual farmer is an entirely different matter from an attempt to improve agricultural conditions in general by greater diversification as a national policy applied to the aggregate agricultural production of the nation.
Diversification of production considered from the stand point of the individual farm, is intended to increase farm income in one or more of the following ways:
By increasing the production of those products that are relatively high in price and which offer satisfactory margins above the cost of production.
By reducing the cost of producing all products of the farm by distributing fixed costs over a larger quantity of products without materially increasing variable costs.
By securing more of the living of the farmer and his family from the farm by producing for home use, those products that are not of major importance in the agriculture of the region but which can be satisfactorily produced in limited quantities.
Crop diversification is intended to give a wider choice in the production of a variety of crops in a given area so as to expand production related activities on various crops and also to lessen risk. Crop diversification is generally viewed as a shift from traditionally grown less remunerative crops to more remunerative crops. The diversification also takes place due to governmental policies and thrust on some crops over a given time. Market infrastructure development and certain other price related supports also induce crop shift. Often low volume high-value crops like spices and medicinal herbs also aid in crop diversification. Higher profitability and stability in production also induce crop diversification, for example sugarcane replacing rice and wheat. Crop diversification and also the growing of large number of crops are practiced in rainfed lands to reduce the risk factor of crop failures due to drought or less rain. Crop substitution and shift are also taking place in the areas with distinct soil problems. There are several advantages of crop diversification, which could be listed as follows:
Comparatively high net return from crops.
Higher net returns per unit of labour.
Optimization of resource use.
Higher land utilization efficiency.
Increased job opportunities
Selecting which crops to produce is one of the most important decisions faced by farmers. Prospective growers must know how to use risk management strategies to select the crops that best suit their needs. One of the most popular approaches to managing risk is to reduce risk exposure through proper diversification. For many agricultural producers this strategy leads to grow a number of crops that differ in their production and/or marketing characteristics. However, methods which lower risk generally reduce expected net returns. Thus, it is important to account for the risk/return tradeoff when designing risk management strategies. In particular, growers often need to decide “how much diversification is enough” to capture most of the potential gains from expanding their enterprise mix.
In Bangladesh, the Agricultural Research Council and other institutions including the Jute Research Institute have worked for efficient use of land and diversification of the farm sector. Cultivation of secondary crops has been proved very helpful in reducing the risk factor for the farmers in major crops. It is reported that secondary crops like maize, millets, potatoes, sweet potatoes, oil seeds, pulses, bananas, ginger and other vegetable crops as profitable dry season crops. These crops can be produced in 90 days and be harvested for ultimate sale in local markets. The per acre yield of such crops is quite high and would be profitable. The fertility of land is retained when leaves of such crops are used as green manures.
In Vietnam a smallholder crop and technical package is introduced through a project, promoting a mixture of farm activities such as investment in rubber, livestock and food crops. Markets for rubber are relatively well established in the country, and with the comparative advantages of lower production costs compared to neighboring countries, small producers have already started to venture into planting rubber trees. The tree-crop is considered environmentally suitable for the degraded, deforested highlands and focus is put on introducing sustainable management practices for production on sloping and degraded lands. Crop and livestock development within the project focus on diverting production from traditional crops such as coffee and rice to horticultural crops and establishing livestock fattening programs using local feedstuff. The government is reforming the financial sector by increasing the emphasis on longer term loans instead of shorter term credit. A directed credit-line is supplied through the project to smallholders to start up rubber-plantations and for crop and livestock development.
Agriculture is the mainstay of economic growth in Pakistan. A large proportion of population depends on agriculture for income, employment and food security. Agricultural performance in the country is improving over time. Besides continuing role of high-yielding rice and wheat varieties in Pakistan, the agricultural growth is also attributed to diversification in favor of high-value commodities. The emerging WTO regime has many wide-ranging and pervasive implications for the agricultural sector. Agricultural diversification can save Pakistan from the onslaught of WTO and we have to search new avenues and crops in this respect. It is expected that implementation of the provisions of WTO’s Agreement on Agriculture (AoA) will facilitate increased market access to Pakistan’s agricultural exports by restricting the agricultural subsidies given by the governments of industrialized countries. Therefore, there is a need of agricultural diversification in order to enhance agricultural exports of nontraditional commodities. Pakistan is diverse in climate, soils and other agro-ecological features. This diversity permits the farmers to cultivate variety of crops, off-season vegetables, cut flowers and rear different species of livestock.
