AGRICULTURAL MECHANIZATION STRATEGY FORMULATION

L.J. Clarke, Chief,

Agricultural Engineering Branch,

Agricultural Support Systems Division

FAO, Rome, Italy

September 1997

Note: The views expressed in this paper do not necessarily reflect the official views of FAO or its Member Countries

PART I - CONCEPTS and METHODOLOGY

Tools, implements and powered machinery, are essential and major inputs to agriculture; it can be argued that they are one of the most important. The term "Mechanization" is generally used as an overall description of the application of these inputs. There are three levels of farm power used to provide an energy source for the utilization of these tools, machines and equipment; manual power, animal draft and motorized power.

The level, appropriate choice and subsequent proper use of mechanized inputs into agriculture has a direct and significant effect on achievable levels of agricultural production, the profitability of farming and the environment. In general, in a situation where the expansion of agricultural land is limited, the application of advanced tools and machines does not, by itself, lead to increased unit yields. However, the full benefit achieved through the use of many advanced crop husbandry inputs such as improved seed, fertilizer, and pesticides, cannot be realized without the use of improved tools. Only under certain conditions, where production increases achieved through the use of other improved inputs has come to its limits, can improved tools and equipment by themselves lead to production increases, cost reductions or improvements in the environmental sustainability of farming. In situations where land is not a constraint, increased farm power can lead to direct increases in production by simply increasing the land area or animal numbers that one man can handle.

In the past, misunderstood concepts and inappropriate selection and use of certain mechanization inputs (mainly tractors and heavy machinery) have, in many parts of the world, led to heavy financial losses and lower agricultural production as well as environmental degradation. Mechanization has often become a burden to the national budget and the farming community rather than being a productive input. This has especially been the case in centrally planned economies, where mechanization was heavily subsidized through the provision of government planned and operated machinery services. Similar models of government provision of services has been tried in many developing countries and has in every case failed.

The development of "appropriate" tools and equipment has also been a favourite subject for development assistance. However, the activities of these projects generally took place in relative isolation in government and university departments and workshops and the resulting prototypes only occasionally found their way into commercial production and onto the market. In virtually every Workshop in University Departments of Agricultural Engineering is to be found a show of improved machines and hand tools which were never developed beyond the prototype stage.

Further examples of misapplied mechanization inputs can be found in many technical co-operation projects, which were mostly planned and implemented with the best intentions but in an uncoordinated way and without due consideration of sustainability and economic aspects. It is an unfortunate fact that only very few mechanization projects can claim to have been completely successful.

Despite its high cost and high profile, mechanization is still only an input like any other such as fertilizer, seed and crop protection chemicals, and is one of a mix of management tools a farmer has available to maximize production and profit. Therefore, in a free market situation, it is inappropriate for governments to have an individual policy on mechanization except as a component part contributing towards the realization of broader agricultural policy. To have a policy to ‘mechanize’ would imply that the introduction and expansion of mechanized inputs is an end in itself, whereas it is only one of a mix of management tools that a farmer uses for the purpose of agricultural production. Government policies on privatization and the market, as well as other policies, will affect the way in which mechanization inputs are made available and will determine the effectiveness of the sub-sector. In a free market economy the amount and choice of mechanization inputs is demand driven, whereas in a planned economy it is supply driven. Mechanization should not be an end in itself and therefore, in a true free choice situation, governments should refrain from making policies which will stipulate by which means or by how much, agriculture will be mechanized. The type and degree of mechanization should be decided by the producer to best suit his business and his own particular circumstances, and the choice of suitable methods will therefore be just one of a number of choices that the farmer has to make. The decision on if, and how to mechanize is often a complicated mix of reasons with economic reasons paramount.

Within a general agricultural policy, governments develop strategies to achieve policy objectives. A strategy on mechanization should be just one of a number of strategies leading to the achievement of overall government policy. AGSE commenced work several years ago in the field of Agricultural Mechanization Strategy formulation and studies have been carried out in several countries in Latin America, Africa, Asia and Eastern Europe. Recently, with the changes occurring due to structural adjustment programmes, the concepts of Agricultural Mechanization Strategies have been further developed and adapted.

The philosophy behind the Agricultural Mechanization Strategy work of AGSE is that national governments should provide the basic conditions for a largely self sustaining development of the agricultural subsector of mechanization within a policy of minimum direct intervention. The purpose of any interventions should be clearly identified and should fall within the objectives of the strategy. However, that does not mean that agricultural mechanization can be neglected in the formulation of national policy. On the contrary, very special attention should be paid to the effects that other policies have on the level and use of engineering inputs in agriculture.

All the parties involved in strategy formulation as well as those parties subsequently affected by it, should be clear about the purpose of the strategy. Strategy is basically a plan of how to move from one situation to a new situation. It is therefore fundamentally important that everybody is clear what the new situation should be.

A typical formulation of Agricultural Mechanization Strategy will be comprised of several logical steps; the first step to be carried out is an overall analysis of the agricultural sector related to farm power inputs as well as an analysis of the existing national farm mechanization situation including national inventories, domestic manufacturing and assembly (tools, implements, tractors etc.), importation of farm tools and machinery, descriptions of farming systems in relation to the use of farm power and their respective changes over time. This should lead to a statement of the existing situation.

Secondly, policy issues which impact on farm mechanization are identified and an analysis of problem areas and constraints is made. This work is generally carried out in close co-operation with officials from the Ministry of Agriculture. Thus an awareness can be created of the implications of political measures on agricultural mechanization and further on agricultural production.

Thirdly, before formulation of a strategy, it is important to define an (ideal) future situation. The resulting strategy will be the definition of the actions required to move from the existing situation to the future situation. This will generally be divided into defining the respective roles of the private and government sectors. This is dealt with in more detail in the second part of this paper.

Finally, the strategy document should clearly define follow-up actions and activities to assist policy makers and planners to carry out the strategy. These follow-up activities generally consist of recommendations on policy adjustment to correct distortions in the sub-sector, investment plans to develop manufacturing, commercial companies and farm mechanization, and definition of government support actions and activities required for the sub-sector.

For all the interested and involved parties involved in mechanization, there are several fundamental requirements for a thriving and sustainable sub-sector. The main groups of directly interested parties are (or should be) in the private sector and are:

• Farmers
• Retailers and Wholesalers
• Manufacturers
• Importers

Virtually all mechanization inputs have to be paid for by the farmer and all have to be purchased or replaced on a regular basis. "Regular" might mean every year for a hoe or it might mean 10 years for a tractor. Also the farmer will often have a requirement for "service". This might mean something so simple as a nut and bolt, or repair of his hoe or a spare handle, or it might mean an oil and filter change for a tractor. On a similar basis, a retailer or small manufacturer (village shop or artisan) has to have access to supplies from a wholesaler; large scale manufacturers will need regular access to supplies and other inputs.

The fundamental requirement for a sustainable sub-sector is a strong linkage between these different parties and that all of them must be able to make a livelihood from their businesses.

If one of these parties is not making a livelihood then the whole sub-sector will be adversely affected. In extreme cases there will be a total collapse. This has unfortunately happened in a number of countries; in others the sub-sector is barely functioning.

The main objective of defining a Mechanization Strategy is the establishment of conditions which will ensure the free and undistorted development and operation of these linkages and the definition of actions which will allow this to happen. The role of government is to define a suitable policy environment as well as provide support activities in order to create these conditions.

Generally speaking, the farmer level should be looked at first with a detailed analysis of the profitability of farming. If the farmer is not making money from his cash crops then he will have no surplus resources to purchase mechanization inputs. It is necessary to identify the major farming systems in each of the regions of the country and the importance of farm mechanization in those systems. The final stage in the preliminary analysis of farming systems is to collate the available statistics and studies for each of the farming systems indicating:

It is important that the existing Farm Machinery and Equipment Supply Chain should be thoroughly investigated, clearly understood and analysed. This will mean an in-depth collection of data about manufacturers, importers, artisanal activity, and national, regional and local distribution and retail systems. The analysis will lead to an understanding of the constraints and problems faced by the different individuals, companies and organizations engaged in these activities.

The farm machinery sub-sector varies substantially between countries. At one end of the spectrum are those countries with very few small- or medium-scale manufacturers, although they may have a significant number of local artisans and craftsmen. These countries rely mainly on imports to provide their farm tool, machinery and equipment needs. In the middle of the spectrum are a group of countries that have a reasonable range of farm machinery available either from an indigenous small- or medium-scale manufacturing industry, or from village-level artisans and craftsmen, or are able to import those items they cannot manufacture. At the other extreme there are countries that are self-sufficient in machinery manufacture and may also be able to export a limited range of items.

Constraints in the supply chain should be identified as well as the reasons for the existence of those constraints. If constraints exist, they will often be caused by the effects of one or more government policies. The identification and recognition of the effects of policy therefore forms an important part of strategy formulation. Special attention should be given to government activities and interventions in the sub-sector, particularly subsidies both direct and indirect and their effects. Other government activities in such areas as training, education, extension, credit, research and development as well as any external interventions (projects, NGO’s, bi-lateral gifts, etc.,) should be identified. From this, a clear picture of the sub-sector and what affects it, should emerge.

The collection of a selected number of general indicators of the status of a country's economy,

and its rate of development is also important. Typical data to be collected would be:

• Population
• Gross Domestic Product
• Wage Rates
• Rural Poverty
• Existing Goals, Objectives and Policies Relating to Mechanization
• Annual sectoral development plans
• Macro-economic framework - planning rules and procedures, foreign exchange regulations, trade regulations, pricing regulations, taxes, levies export and import regulations, quotas, tariffs, estimates of domestic demand or consumption.

Because most developing countries are predominantly agrarian societies, most national development goals, objectives and policies impinge on agricultural development and thus are likely to exert some effect on the sub-sector. A variety of documents should be requested at an early stage in the preliminary evaluation so that an evaluation of the impact of government policies can be made. In particular, it will be necessary to review the medium-term development plan and supporting documents.

In addition to the basic farming systems and the general economic situation, several related items should be examined wherever possible. These include gender issues and environmental issues.

Gender issues. Gender issues should comprise an important part of any study, particularly in connection with farming systems and post-harvest processing. The analysis must include an initial breakdown of the major labour inputs on the basis of whether they are carried out predominantly by male, female or child labour and whether the labour source is the farm family, exchange labour, or hired labour.

Environmental issues. Mechanization can have both positive and negative impacts on the environment although it is the negative ones that tend to be most frequently highlighted. The positive effects include more timely field operations, which will allow farmers to avoid having to work in fields when conditions are poor, more efficient use of water particularly in rice production, and better weed control. At the same time mechanization must be recognized as having potentially negative environmental impacts such as extension of cropping into soils and climates which are not suited to the activity, adoption of land preparation technologies that are easy to implement but result in soil erosion, and promotion of the use of potentially hazardous chemicals for pest control. During the initial study it will not be possible to consider all of the potential environmental issues. However, those relating to specific types of mechanization should be identified, and possibilities for their amelioration considered.

An identification of the various institutions associated with the agricultural sector in general, and farm machinery and equipment in particular should be carried out. A list of the types of institutions and likely available information is:

Credit - formal and informal credit sources for machinery manufacture, purchase and use; credit terms, duration and collateral requirements.

Research and development institutions - agricultural and machinery including universities, regional centres, national centres and international centres; programmes, staffing, facilities, and budgets; crop and livestock conditions, practices, production performance, and research; agricultural engineering research, development, testing and evaluation.

Education and training programmes - courses, student numbers, curricula, staff, facilities, student follow-up, budgets, and development plans.

Agricultural and industrial extension - public and private sector activities, structure of systems, staff numbers and qualifications, contacts with farmers and manufacturers.

Consumer Protection - legislation regarding protection of the consumer from illegal business practices, information dissemination, credit protection etc.

A comprehensive review and evaluation of government policies which impact on the sub-sector should be carried out. This will lead to an understanding of:

• what the government expects to achieve;
• how the government plans to go about it and the time frame for achievement;
• what and how national resources are to be mobilized and what mechanisms are to be adopted to promote their efficient allocation; and
• where, when and how the government's policies impinge on agriculture, in general, and farm power supply, in particular.

To achieve this effectively, current development policies will need to be analysed. This will include laws, rules and regulations that reflect those policies, and particularly those which have an impact on agricultural mechanization. They must also develop an appreciation of the potential for encouraging changes in existing policies. The policy instruments that most frequently need to be considered are listed in part II of this paper.

As has been stated previously, the fundamental requirement for a sustainable sub-sector is a strong linkage between the different parties and that all of them must be able to make a livelihood from their businesses. For those involved in the private sector, an ideal future situation would be:

Farmers: Availability of the widest choice of appropriate farm tools, machinery and equipment at affordable prices as well as access to spare parts and service to allow the farmer to make the best choice available to suit his own business. Availability of credit to allow purchase of these inputs. Availability of information and accessible sources of advice to assist him to make the correct choice and existence of legislation to protect him from commercial exploitation.

Retailers and Wholesalers require a suitable competitive, commercial environment in which to develop their businesses. This involves access to commercial credit for business development and cash flow purposes, a stable market in which to sell their products, access to business development assistance, and removal of any unfair competition from the state.

Manufacturers require access to a stable supply of raw materials at stable prices, access to credit for business development and cash flow, foreign exchange, and good communications, a stable market, contacts with potential overseas partners/licensers, access to market information, assistance with product research and development, assistance with production engineering etc..

Importers require a suitable competitive, commercial environment in which to develop their businesses. This will include access to foreign exchange at undistorted rates, foreign contacts, removal of any unfair competition from the state, marketing assistance, and access to credit for business and cash flow development.

Apart from a future picture of the private sector, other future situations must be specified:

Investment requirements - Farm tools, machinery and equipment are fundamental and essential inputs into the agricultural production process. From an analysis of the current and past situation in the country, it should be possible to make an assessment of the situation regarding the present and future investment in these inputs (e.g. farm tools, farm machinery) and whether the sub-sector is making sufficient investment to ensure future levels of agricultural production. These figures can then be used to prepare investment plans and projects.

In addition to this the Role of the Government will need to be clearly defined. In general the traditional role of government has been in the following areas:

This is dealt with in more detail in the second part of the paper.

In the first part, it is stated:

"Mechanization should not be an end in itself and therefore, in a true free choice situation, governments should refrain from making policies which will stipulate by which means or by how much, agriculture will be mechanized." and,

If the government does not decide on types and levels of mechanization and that the sub-sector should be largely self-sustaining, then one might reasonably ask "What then are the respective Roles of Government and the Private Sector?". There is a generally held misconception, particularly amongst those advocating Structural Adjustment Programmes and who generally have little understanding of the sub-sector and its importance, that governments should adopt a total "laissez faire" attitude to farm machinery, tools and equipment. The belief is that this sector should be left totally to the private sector, and that Governments should pull out of all activities concerned with manufacturing, importation and retailing. In principle this is correct, however, in reality, as soon as Structural Adjustment is implemented, it is seldom the case that entrepreneurs come quickly forward to fill the gap and even if they do, the market can develop in a skewed manner. This is particularly so in situations where government has been heavily involved in these activities and the private sector has been previously discouraged. The development of the private sector requires programmes, incentives and assistance. Therefore, the role of Government needs to be clearly defined.

Therefore an important part of mechanization strategy formulation is the definition of the two sectors: the Private Sector and the Government Sector.

As mentioned previously, there are generally three main groups or levels of interested parties in the private sector;

• Farmers
• Retailers and Wholesalers
• Manufacturers
• Importers

In most free market economies, each of these groups is comprised of small to medium businesses (In this context even the smallest farmer is considered to be a "business" in that he must purchase inputs and sell products, whatever the size of the transactions. Similarly, even the smallest blacksmith is regarded as a "business".). The linkage between the four is of the greatest importance to the successful and sustainable development of the sub-sector. A basic, fundamental requirement is that the "businesses" in each of these groups must be profitable. If farmers are not making money they will not be able to purchase inputs; if retailers cannot sell items at profit then they will not stock them and if manufacturers are not fabricating tools and machines at a price that can be afforded by the farmer, then their business is unsustainable. This may appear to be a simple observation, but the absence of a thriving agricultural machine and tool manufacturing, importing, and retailing sub-sector can often be traced to the lack of profitability in one of these groups. In many countries therefore, a major development goal must be the creation of the linkages between each group and the addressing of issues which affect the profitability of one or more of these groups. The requirements of each group will differ:

Farmer Level
(Farmer in this context means a private individual, a company or an association.)

A farmer or farm business should be able to freely choose the type, size and extent of mechanization inputs from a range of mechanization inputs available on the market. Strategy should be aimed at creating the conditions whereby industry and commerce is able to provide this choice at competitive and undistorted prices and at physical distances which are within farmer’s reach. Apart from the obvious question of farm profitability, there are several issues and strategy components which will have a direct affect on a farmer’s machinery investment decisions.

The existence of sales outlets which are within easy reach of farmers is essential to the development of a successful and sustainable private farming system. Special attention is needed to create conditions so that distributors and small dealers may develop. These commercial units may range from a small, one family shop in a village to a large national distributor for domestically produced and imported machinery. Any foreign or government assistance for financing any farm machinery, tools or equipment should be channeled through a distributor/dealer network and not directly through government. Importers should, in principle, be allowed free access to markets. This will create a wider choice for farmers and create a situation in which the domestic manufacturing industry will be stimulated to produce quality and functionally advanced machinery and tools at competitive prices.

The main issues and strategy components are:

Conditions should be created so that domestic manufacturing may develop. Market conditions, particularly the profitability of agriculture, will determine the extent and technical level of the industry. There needs to be a radical appraisal of domestic manufacturing potential and capabilities so that a realistic picture of a likely future industry can be formed. New companies will develop either through joint ventures, through foreign investment or through local investment. Governments should recognize this by creating conditions for positive developments. Generally the most pressing needs are finance and credit, assistance in setting up joint ventures and assistance in commercial aspects such as marketing, export and business development.

Finance is required for investment and start-up capital, and to finance cash flow and stocking levels. Collateral requirements should be as flexible as possible to encourage small entrepreneurs to take risks in starting up a small business. Development agencies may be able to assist in these business development programmes. Foreign exchange will be required on a regular and constant basis for the importation of raw materials.

Technical Assistance and Advice, particularly for smaller businesses, is required for financial and business planning, marketing, stock control, bookkeeping, contracts and in making contacts for the formation of joint ventures and manufacturing agreements. It may be necessary for governments to set up special manufacturing development programmes.

The development of the private sector requires programmes, incentives and assistance. The sort of assistance required by the private sector is broadly defined above. The government should provide this assistance. The role of Government therefore needs to be clearly defined.

Policy instruments that most frequently need to be considered are:

• Exchange rate policies.
• Policies influencing relative agricultural input prices - direct market intervention to manipulate input prices, tariffs and import restrictions, and input subsidies.
• Policies influencing agricultural product prices.
• Policies influencing farm and non-farm employment - employment and wages policy, migration.
• Land ownership and tenure policies.
• Agrarian institutions.
• Farm power research policy - agricultural machinery research and agricultural sustainability, transfer of farm power technology.
• Agricultural extension policy.
• Infrastructure policy - rural transport and marketing infrastructure, irrigation infrastructure.
• Agricultural financial markets.
• Industry policy.
• Transport policy and motive power.

Policies relating to agriculture can be divided into two groups: those about which there is general agreement on the need for government intervention, and those about which disagreements still remain (Timmer 1991 (Timmer, C.P. (1991), 'The role of the state in agricultural development', in C.P. Timmer (ed.), Agriculture and the State: Growth, Employment, and Poverty in Developing Countries, Cornell University Press, Ithaca, 1-28.).

Policy areas in which it is generally agreed that some form of government involvement is desirable include:

Agricultural research is considered an important and legitimate area for government intervention because of its "public good" characteristics. However, the case for government intervention is less clear in the case of research into large-scale agricultural machinery because of the involvement of private enterprise and the limited market. Agricultural marketing infrastructure also has strong "public good" characteristics, and is seldom confined to exclusive use for agricultural products and inputs. Agricultural marketing infrastructure policies are relevant to agricultural mechanization in that an important element of motive power is the machinery and equipment used to transport agricultural products from the farm and agricultural inputs to the farm.

Policy areas still subject to considerable disagreement include:

Governments have traditionally influenced exchange rates by fixing them at artificial levels or limiting their rate of adjustment, often creating artificial shortages of foreign currency. More recently, governments have been encouraged to relax foreign exchange regulations so that the market can fix the appropriate exchange rate.

Price interventions cover three main areas: agricultural input price policy; agricultural product price policy; and agricultural finance policy. In the last case, the chief price intervention issue is subsidized interest rates in the agricultural credit market. Reasons for price interventions relating to agricultural mechanization depend upon the benefits of either efficiencies derived from correcting existing market distortions to better reflect the true values of agricultural output or input prices, or equity gains from improving the welfare of the rural poor (e.g., greater employment opportunities for landless labourers), which are greater than any resulting efficiency losses.

The key issue in relation to land tenure policy is how it can be used to improve both equity and efficiency. Land tenure policy can have an impact on mechanization by influencing the ability of farmers to make efficient use of certain types of agricultural machinery and equipment.

Agricultural extension has traditionally been considered a role of government. However, it is now being recognized that many governments do not have the resources to provide free extension services to all farmers. While the solution in many developed countries has been to levy a charge, a more workable approach in developing countries may be to pass the extension role to the private sector, including non-government organizations.

There are other policy areas that are not specific to agriculture but which can have a substantial influence on the processes of agricultural machinery and equipment use. These include:

Employment concerns are central to development objectives: levels of agricultural employment are influenced by the substitutability of machinery and equipment for labour in farm operations.

Mechanical innovations stem primarily from the industrial sector: industry policy can influence profitably in the agricultural machinery and equipment industry.

Transport policy is closely linked to marketing infrastructure policy through their mutual concerns for motive power.

Experience with conducting preliminary studies for strategy formulation indicates that the important issues relating to each policy area need to be discussed and clarified with the relevant government agencies. In the light of the discussions, the list of issues may be revised. Once policies are understood, a draft position paper should be prepared and circulated to policy makers and analysts within government service, university departments, etc. for comment. Team members, and not just the policy analyst, should make every effort to meet with these persons and discuss their detailed comments. A revised policy paper should then be prepared as part of the report and discussed in the workshop that terminates the preliminary evaluation.

It is important that governments identify a strategy for the farm mechanization sub-sector and agricultural engineering in general. The expected result of an agricultural mechanization strategy study is that proposals are developed as to how the national government will be able to create conditions that will allow the private sector to develop in order to meet the demands from farmers and other consumers in the agricultural sector and to develop a sustainable system of manufacture, importation, retailing, and utilization. Every commercial unit involved in this chain will have to be profitable for the whole system to develop and flourish. This means that it should have a positive impact on agricultural production and the economy and should not have a detrimental effect on the environment or be against other public interests. The strategy should clearly state the different roles of the government and private sectors. These might include issues related to areas of general public concern such as consumer protection, the environment or safety and other activities which have been identified as not being able to be left to free market forces.