Chapter 3. The rural non-farm economy and farm/non-farm linkages in Querétaro, Mexico - Fernando Rello and Marcel Morales

INTRODUCTION

The objective of this chapter is to improve understanding of the Mexican non-farm rural economy. This objective reflects a growing perception among Mexican researchers and government officials that the rural economy goes far beyond agriculture. Studies from several countries, including Mexico, have shown that sources of employment and income for rural families are varied and that agriculture is no longer the primary occupation or income source of most rural inhabitants. This suggests a need to improve understanding of the structure and dynamics of the non-farm rural economy and its links to the farm sector.

To study the non-farm rural economy adequately, it is necessary to examine the intersectoral linkages established in particular regions and their capacity for generating local employment. Such a study calls for the incorporation of a spatial dimension, and close analysis of the role of intermediate cities and medium and small rural towns in creating and propagating these linkages. Fuller understanding of the linkages and of the dynamics of industrial development in a particular regional and institutional context provides a useful basis for identifying sectoral policies; the Querétaro region was chosen as a case study with this in mind. Querétaro is a dynamic intermediate city that has close links with its hinterland; it lies in the centre of Mexico and is linked with the country’s economic centre, Mexico City. This makes it an ideal location for examining linkages between the farm and non-farm rural economy.

The remainder of this chapter is divided into three sections. The second section provides information on the state of Querétaro, with a description of the geographic and economic characteristics of the region and an analysis of the main characteristics of the agricultural sector, including sources of employment and income for rural families. In the third section, several case studies are presented that examine the variety of linkages between the farm and non-farm sectors and the employment generated by these linkages. In the fourth section, observations are made regarding sector policies directed at rural regions and regional institutions; recommendations for policy intervention are offered.

THE QUERÉTARO REGION

Description of the region

The state of Querétaro is situated in central Mexico. It is divided into 18 municipalities, the most important of which are the intermediate cities of Querétaro and San Juan del Rio, which are population and economic centres. The Querétaro region is the most important region in the state, because it is the centre of economic activity and has high-quality soil suitable for arable and cattle farming (COEPO, 1995). The Mexico-Querétaro highway crosses the region, connecting it with the largest national market, Mexico City, the north of the country and the United States. The region is thus an almost obligatory step in commercial flow between the north of the country and Mexico City. This geographical advantage led to the establishment of important industries in Querétaro, mainly during the 1970s.

In 1980, the total population of the State of Querétaro was 739 605 inhabitants; the growth rate was 4.2 percent during 1970-1980. Between 1980 and 1990 the population growth rate dropped to 3.6 percent; the population had reached 1 051 235 inhabitants by 1990. Table 1 provides a breakdown of the population by size of locality. In 1990, four localities were considered urban and included 46.6 percent of the state population; the city of Querétaro accounted for 36.7 percent of the state population. The population concentration reaches 42.6 percent if it is grouped with San Juan del Rio, the other locality that has more than 50 000 inhabitants. There were 1 420 localities with populations ranging from 1 to 1 999 inhabitants, comprising 37.2 percent of the total population. Of the remaining population, 16 percent are in localities with between 2 000 and 14 999 inhabitants; 4 percent are in the medium towns of Tequisquiapan and El Pueblito, which each have 15 000-25 000 inhabitants. The total population is thus spatially distributed in a manner that is both dispersed and concentrated, reproducing at state level the phenomenon prevailing at national level, where there is only one primary city with substantial economic activity and population.

For the majority of the population in the region, living standards are not high, especially in rural municipalities where levels of employment, health, education and nutrition are low. The standard of living diminishes in proportion to the distance from the Querétaro-San Juan del Rio industrial corridor. At national level, Querétaro was considered to be fairly marginalized by 1990, occupying 14th place out of the 31 Mexican states (CONAPO, 1993).

TABLE 1
Querétaro: population by size of locality, 1990

Source: Querétaro XI Censo General de Población y Vivienda, 1990. Instituto Nacional de Estadística Geografía e Informática (INEGI).

Infrastructure development in the region is concentrated in the municipalities that form the Querétaro-San Juan del Rio corridor. The other main roads in the state link the municipal capitals to the cities of Querétaro and San Juan del Rio. The most important highway axis is thus the section from San Juan del Rio to Querétaro, on the Mexico-Querétaro toll road. It must be emphasized that although this highway links Mexico City with the north and the west, approximately 55 percent of the traffic circulating through this corridor begins or terminates within the state; the corridor does not function only as a thoroughfare (Martner, 1991). Most of the irrigation and water-storage areas are also concentrated in the Querétaro and San Juan del Rio municipalities.

Economic activities

The structure of economic activity in Querétaro is closely connected to the transformations occurring at the national level. The sectoral contribution of the state GDP is characterized by a decline in importance of primary activities - that is, agriculture - and an increase in secondary activities - manufacturing - and tertiary activities - services. In 1970, the primary sector contributed 18.0 percent to state GDP, the secondary sector 36.9 percent and the tertiary sector 45.2 percent. By 1993, the primary sector had declined to only 4.6 percent of state GDP, while the secondary sector maintained its contribution with 36.2 percent and the tertiary sector grew significantly to 59.3 percent. In the primary sector, there has been a decrease in the contribution of crop production and an increase in the importance of animal production. By 1988, crop production accounted for 34.0 percent of agricultural activity; by 1993 it had fallen to 25.8 percent (INEGI, 1996).

In terms of employment generation, in 1990, the tertiary sector generated most employment, with 41.8 percent of the total, followed by the secondary sector with 37.0 percent and the primary sector with 17.9 percent. It should be noted that although the primary sector directly generates only 4.6 percent of the state GDP, it employs a substantially larger proportion of the population. At municipal level, there are important differences in economic activity. The smaller municipalities, including Amealco, Colón, Huimilpan and Marqués, are more dependent on primary activities; the larger municipalities depend on secondary and tertiary activities. As can be seen in Table 2, the location of industrial activity is highly concentrated in a few municipalities, with 75 percent of manufacturing establishments located in three municipalities: Querétaro with 50.3 percent, San Juan del Rio with 14.3 percent and Tequisquiapan with 11.1 percent.

TABLE 2
Main features of manufacturing firms per municipality, 1993

Source: Base de datos municipal, SIMBAD. INEGI.

TABLE 3
Main features of manufacturing firms per economic activity, 1993

Source: XIV Censo Industrial. Censos Económicos, 1994. INEGI.

Table 3 shows further information on Querétaro manufacturing firms by subsector. In 1993, 3 054 firms had been established in Querétaro, providing employment for 60 518 workers. Measured in terms of employment generation, the most important subsectors are equipment and machinery, followed by food, beverages and tobacco and textiles, garments and leather. The first of these is likely to be linked to agriculture through farmers’ purchases of machinery, the latter two by the supply of inputs from the farm sector.

Agriculture in the region

A description of the basic agricultural characteristics of the region is given here in order to put rural producers in context. First, the region includes the municipalities of Amealco, Colon, Huimilpan and El Marques, which together cover 149 500 ha, or 23 percent of the state of Querétaro. Of this area, more than half is cultivated land situated in an extensive valley; 60 percent of the cultivated land is irrigated. Animal production is an important activity, particularly poultry, meat and milk production, in that order. A number of farms and ranches have been mechanized and have made heavy investments in production of animal products. There is also substantial home-based animal production that brings in a complementary income to numerous farm families. Crop and animal production are complementary for these households, because fodder such as sorghum, alfalfa and oats are cultivated for feed, and maize stubble is used to feed home-reared animals.

Table 4 presents information on the crops cultivated in the region. The primary crop is clearly maize, which is either grown alone or intercropped with beans. The crop pattern has been modified over time, according to the evolution of the profitability of different agricultural products, influenced by the market and policy. No historical time series are available of the evolution of the cultivated surface corresponding to the municipalities under study, but there are the agricultural time series for the state of Querétaro for the period 1988-1997. It should be noted that there have been changes in the use of crops; the most notable features of this have been the rise in maize production, although this has been partially reversed in recent years, and the decline in sorghum production. The land area under maize increased because of attractive sale prices, favoured by policy, and because of an increase in maize productivity in irrigated lands resulting from the application of a modern technological package. Barley is another expanding crop with increases resulting from a rise in demand fuelled by the beer industry and rises in productivity. The most dynamic products during the last five years have been vegetable crops.

TABLE 4
Main crops per municipality (cultivated land in ha, 1995-1996)

* Maize intercalated with beans and other crops.
Source: Querétaro VII Censo Agricola-Ganadero. INEGI.

Characteristics of rural households

One objective of this research is to develop a typology of households as a means of identifying the structure and functioning of rural production units. This helps to understand the types of household that are likely to be linked to the non-farm rural economy and the types of linkages that occur. Traditionally, typologies of rural producers have been based on agricultural land ownership. This criterion is insufficient and partial in the present circumstances, however, where only a part of the rural household income comes from land cultivation. This is particularly true for land-poor households for whom agricultural income is a small and constantly diminishing part of their total income. Forming a typology thus requires consideration of the structure of employment and sources of income among rural households. Sources of household income are varied. Several methods can be used to develop a typology. One of these could consist of identifying family sources of income and classifying these according to the relative importance of each source. Another method consists of classifying them according to the availability of natural, human and social capital that provides them with an income from several sources. In this section, an intermediate approach has been taken: households have been classified first according to their natural capital in terms of quantity of land in possession, and then evaluated based on their agricultural practices and sources of income.

To gather appropriate information to classify and evaluate household types, a survey of 285 households in 40 rural communities in the study region was conducted. Households were distributed across the study region as follows: 47 percent in the municipality of Amealco, 20 percent in Huimilpan, 10 percent in Colon, 14 percent in Marques and the remainder distributed between Cadereyta and San Juan del Rio. The survey questionnaire included information on productive resources, technological level, commercialization, access to services, occupations of household members and income sources. The stratification of households was based on land ownership, because the portfolio of productive activities depends on agriculture.

TABLE 5
Typology of producers

Source: Household survey.

A first differentiation of households was made between those that own land and those that do not own land but have access to land through the rental market. The latter constitute the “zero stratum” and represent 4.2 percent of the sample. Within the set of households who own land, there are four strata. The distribution of the 285 producers across strata is shown in Table 5, which indicates that the medium landowner households with 5-10 ha, accounting for 35.1 percent, are the most abundant and own the greatest total proportion of land. There is a smallholder sector that makes up 28 percent of households and 9.8 percent of land with an average of 1.9 ha per household; it coexists with a stratum of large households, 7.7 percent of households and 25.4 percent of land, reflecting the unequal distribution of land prevailing in the rest of Mexico. The average property of this latter group is 18.3 ha per capita, however, which does not represent an high level of concentration of land ownership.

Table 6 shows the characteristics of each household type. With regard to land tenure, the region is eminently ejidal, because more than two-thirds of the land area belongs to this property regime: 88 percent of households possess ejidal lands and 24 percent possess private properties, which suggests that 12 percent of producers combine ejidal tenure with private property. Leasing land is a common practice for 15 percent of households; this frequency has significant variations, however, if the behaviour of each one of the strata is examined. Of non-owner households, 83 percent use the land market to gain an average of 12.4 ha of land. Renting land is also common among households who already have a relatively large amount of land (stratum 4), 32 percent of whom lease an average of 7.4 ha per farmer. The intermediate strata are less likely to rent land, and rent less land. The level of technological advancement is closely related to land ownership: greater land ownership appears to result in more intensive use of modern inputs and machinery. It is interesting to note that the renting producers (stratum 0) have a technological level superior to the average, which indicates that they invest capital to increase the value of the rented land.

TABLE 6
Typology of households and sources of income

Source: Household survey.

In spite of the fact that only 15 percent of the households are tractor owners, there is considerable use of tractors among households of several strata; 56 percent of the households use tractors for preparation of their land. This frequency varies from 41 percent for stratum 1 to 91 percent for stratum 4. Thirty-one percent of households rely on the use of hybrid seed; the evidence suggests a strong positive correlation between the amount of land used, including rented land, and use of hybrid seed.

A high percentage of households own animals and are involved in animal production as a primary or complementary activity. Ownership of animals increased in the period 1992-1997, when the economic crisis in the rural sector worsened, possibly since it was viewed as a safe means of accumulating wealth and an insurance against problems. A number of different types of animals are owned, primarily chickens and cows, although rearing of pigs and sheep is also notable.

Data on household income generation indicates that sources of employment and income vary substantially across households, so much so that virtually no household lives entirely off primary activities. Although practically all households declare their agricultural activities as a priority activity, only about half are crop production and 15-20 percent are animal production. The remaining income comes from a variety of other activities including day labour, commercial activities and salaried employment. The diversity across household types results largely from differences in these off-farm activities. Type 0 households are more likely to be salaried employees or involved in commercial activities. Type 1 households with limited land tend to produce arts and crafts for the market, to have another commercial activity or to be salaried employees. Type 2 and type 3 households obtain income through agricultural day labour; type 2 households are also involved in commercial activities. Type 4 large landholders are involved in a number of off-farm activities, particularly commercial activities.

For all types of producers, off-farm sources of income are important, even for the producers who have more than 10 ha, who in theory could live from agriculture and cattle rearing. This indicates that participation in several sources of employment and agro-industrial and commercial activities forms part of the economic strategies of rural households. The corollary to this observation is that all policies designed to raise employment and rural incomes would tend to further development of productive links and improve rural family members’ participation in different regional markets.

AGRO-INDUSTRY ORGANIZATION AND LINKAGES: CASE STUDIES FROM QUERÉTARO

Evaluating the linkages between the farm and non-farm sectors of the rural economy can be conducted from a macroeconomic perspective, using an input-output matrix, as in Chapter 2, or through case studies, using data collected from surveys and interviews. This section follows the latter approach using information collected from the field on six different agro-industrial systems: maize, cempasúchitl, frozen and processed vegetables, barley and beer, poultry and milk. A case study approach is taken because farm/non-farm linkages tend to be specific to certain agro-industrial systems, and a case study approach is better suited to understanding the details of these systems. This section is divided according to the agro-industrial systems in the region, in each of which the important linkages between producers, agro-industry and the local economy are highlighted. Economic agents that have played a role in forming linkages are discussed as necessary. The data is based on surveys of agricultural producers, as discussed earlier, and extensive field interviews with informants in primary agro-industrial firms and public officials operating in each system.

Maize production system

Maize is the primary agricultural product in Querétaro. It is the basic staple crop for families in the region, an important commercial crop and a major source of fodder for animal production. The Ministry of Agriculture estimates that maize for food and feed represents as much as 30 percent of the total harvest. Although central to household consumption, maize is complemented by other foods including beans, fruits, vegetables, poultry, milk and beef, all of which are produced locally on family plots or on common lands, or imported from local towns and intermediate cities. To speak about a maize system is thus an oversimplification of a complex food-production system of which maize is an integral part. Many of the linkages described in this subsection are the same for a number of other crops; for this reason, this crop production system is discussed in greater detail than the other systems.

Two significant events have occurred over the past few decades that have had an important influence on the maize-production system. First, there have been dramatic changes in the technology and agricultural practices used by farmers. There has been an ongoing transition from a traditional agricultural system based on locally grown seeds, organic fertilizer, animal traction, rainfed corn and traditional knowledge, to a modern agricultural system based on hybrid seeds, chemical fertilizers and pesticides, tractors, irrigated water and technical assistance. This has had a profound effect on the linkages within the maize-production system and far-reaching consequences for the local non-farm sector. Second, the role of the state in Mexico has changed and with it there have been changes in macroeconomic conditions. As in many developing countries, the government has historically played a very active role in agricultural production systems, particularly through the Ministry of Agriculture. Maize was particularly targeted as the primary staple crop in Mexico, so scaling-down of the Ministry of Agriculture and elimination of programmes during 1989-1996 hit maize producers more severely than producers of other crops. These changes occurred at precisely the same time as a difficult transition from rainfed to irrigated maize cultivation, caused by the crisis in sorghum, the main irrigated crop in the region. Liberalization led to the entry of very cheap imported sorghum; internal prices for sorghum collapsed to a point where cultivation was no longer profitable. The shift from sorghum to maize was inevitable, but farmers had not mastered the appropriate technology for cultivating irrigated maize. Over-fertilization, application of too many agrochemicals and wastage of water left yields well below potential and caused problems of salinization and deterioration of the natural productivity of soil. Lack of appropriate technical assistance has been a serious limitation to potential increases in productivity and local incomes.

Against this changing context, the linkages within the maize production system can now be considered. During the 1980s and into the 1990s, the impetus for changes in technological and agricultural practices came from the Ministry of Agriculture and its army of agronomists. At that time, the Mexican state was exceptionally paternalistic and interventionist in the rural sector, using various public institutions and state-owned companies to manage agricultural production. The main public agents influencing the maize-production chain were FERTIMEX, a parastatal with a monopoly on production and importation of chemical fertilizers, BANRURAL, a public agricultural bank that provided the greater part of credit available to small and medium farmers, CONASUPO, a parastatal that purchased the bulk of the maize harvest at fixed prices, and the Ministry of Agriculture, which provided subsidized technical assistance to farmers. The Ministry of Agriculture designed and implemented the agricultural modernization programmes in the region, coordinated other institutions, distributed fertilizer directly to farmers’ organizations, administered fertilizer deposits and ran demonstration and experimental plots. Subsidized credit for maize production was available; CONASUPO represented a secure market outlet. The state dominated the production chain and was linked to farmers through a number of channels.

Throughout this period, demand for fertilizer grew steadily in the region, even after the disappearance of the fertilizer programme. According to the Ministry of Agriculture, half the area devoted to maize was fertilized in 1996; all irrigated maize was fertilized and about a third of rainfed maize used this input. FERTIMEX and its distribution network initially satisfied this increase in demand, but as a result of the financial crisis and policy changes noted above, FERTIMEX was dismantled and its installations and equipment sold to private firms and farmers’ organizations. This created new opportunities for formation and growth of private firms and farmers’ organizations; several fertilizer-distribution firms are now operating in the region.

Interviews with managers of two of these firms revealed interesting information regarding input flows and job creation. Fertilizers are manufactured in large industrial centres outside the region and imported by distribution firms, so there are no direct backward production linkages. Distribution firms are medium-sized and employ an average of ten permanent employees; they also create a demand for transportation services from local firms and contribute to the creation of jobs for truck drivers and mechanics. Their global impact on job creation is not substantial, but it is significant at local level because they are located in small and medium-sized rural towns.

Hybrid seeds are another major component of the technological change that took place in the region: about 30 percent of land under maize is currently planted with hybrid seeds. Expanded use of hybrid seeds occurred during the 1990s, however, a decade after the fertilizer boom at a moment when public technical assistance had declined dramatically. This means that although the public sector played an important role in the dissemination of fertilizers through provision of technical assistance, it had only a minor role in the expansion of hybrid-seed use. Private, medium-sized commercial firms play the main role in introducing hybrid seeds.

Hybrids cannot be grown locally, so they must be bought at the beginning of each agricultural cycle. The continuous and growing demand for seeds is met by agrochemical shops, which distribute seeds produced by large international companies such as Asgrow and Pioneer. Agrochemical and seed shops are a source of employment, especially for skilled labour, because one of their most important functions is to provide advice and technical assistance to customers. Semillas y Agroquímicos San Jorge, for example, a company that serves approximately 3 000 customers and that has subsidiaries in other regions, employs six agronomists and six administrative and sales personnel.

In addition to fertilizers and hybrid seeds, a number of other inputs are linked to maize production. To understand these backward linkages, household heads were questioned as part of the household survey about their primary places of purchase of inputs and machinery, hire and repair of machinery and hire of work animals. Based on these results and other information gathered from the region, the following conclusions can be drawn.

1. Farmers tend to buy substantial amounts of seed and animal feed and substantial numbers of draught animals in the local area. Services, including repair services and hire of tractors and estate cars, are often carried out in the local area. Only 15 percent of respondents claimed to be tractor owners, for example, but more than 55 percent claimed regular tractor use, which suggests that there is a market for hired tractors. The same is true for trucks and estate cars. The production of maize and other crops generates substantial local linkages.

2. Fertilizers, agrochemicals such as insecticides and pesticides, tools and animal feed are purchased in specialized shops located in medium-sized towns, which also provide repair services for tractors and estate cars. Results indicate that medium-sized towns have significant links to agriculture.

3. Querétaro is the main source of major purchases such as tractors (63 percent), harvesters (73 percent) and estate cars (45 percent). Authorized dealers of major machinery brands such as Ford and John Deere are located there. Querétaro is also a main provider of other specialized machinery such as electric pumps.

4. In addition to local dealers of draught animals, regional fairs are an important commercial channel for cattle, draught animals and other inputs. The fairs generally involve substantial local participation and provide a mechanism for linking commercial interests.

In addition to the range of production inputs that provide backward linkages to agricultural production, credit and insurance play an important role in fostering linkages between sectors; such companies directly employ people in the financial sector. Credit for agriculture has fallen dramatically during the structural-adjustment programmes of recent decades. BANRURAL, for instance, used to finance 40 000 ha in Rural Development District 004, which overlaps most of the selected region, but now finances only 3 000 ha. Agricultural insurance coverage by the official insurance company AGROASEMEX has also been reduced substantially. AGROASEMEX prefers not to cover rainfed agriculture; when it does so, its prices are so high - more than 25 percent of the cost of production - that farmers cannot afford insurance. Limited access to agricultural credit and insurance are major problems that may limit backward linkages.

Commercialization of maize is the most important of the forward production linkages from the farm, with approximately 70 percent of the harvest sold in local markets. Households use the remaining 30 percent for food, fodder or seed. During the 1980s, CONASUPO was responsible for purchasing unlimited quantities of maize at a fixed price determined at the beginning of each agricultural cycle, and would generally buy more than 80 percent of the harvest sold. This volume of purchase, made possible by a chain of storehouses located within the region, permitted CONASUPO to regulate the regional price of corn. Scaling-down and elimination of administered prices changed the commercialization pattern drastically. CONASUPO is still buying maize, but to a lesser extent than before, and is now competing with private local and regional grain merchants and with large private industrial companies, which use corn as an input in processing. Importation of foreign corn is increasing and local prices tend to follow international market prices.

A small portion of the maize harvest is exchanged in local shops for food and other consumption goods, but most is sold in the local market. The primary buyers are local and regional grain merchants and CONASUPO, although market shares vary. Information on the regional maize market from the survey of rural households indicates that the largest maize purchaser is private merchants (73 percent) followed by CONASUPO (25 percent). Direct purchases of maize from farmers by agro-industries are still very low, although regional merchants are presumably acting as intermediaries and selling to these companies. Prices paid by merchants are slightly lower than those paid by CONASUPO, but merchants pay immediately and go directly to plots where they collect and transport the harvest, with no extra cost to producers.

In terms of employment generation, maize is cultivated almost entirely with family labour; contracted labour is almost non-existent. When labour needs exceed family labour during certain peak periods, labour is exchanged through traditional mutual help systems. Hired labour is more common in the cultivation of commercial crops than maize and other basic crops. According to this survey, the total workdays of hired labour used in the cultivation of the four main crops by all households interviewed sum to only 3 661; divided by 250, a standard workday per annum for a fixed employee, gives a total of 14.6 workers. This means that in their agricultural activities during 1996, the 286 producing households that were interviewed generated an equivalent of only 14.6 permanent jobs.

Private grain-processing companies, NGOs and farmers’ associations have recently played an important role in fostering linkages within the maize system. MASECA, for instance, a large company that purchases significant quantities of maize to produce corn flour for tortillas, has created an association called the Corn Club, linking the different interests that work in the maize market. MASECA needs a constant and secure flow of high-quality white corn. To assure this flow, it contracts with farmers for a specific number of hectares of cultivated maize. Farmers promise to sell the total harvest to MASECA, and the firm promises to buy the harvest at a specified price.

Production of good-quality white corn, as specified in contracts, requires cultivation of hybrid seeds and the use of a particular technological package; irrigation is also stipulated as an obligation on the part of the producer. To finance this package and avoid any bottleneck caused by credit constraints, the Fideicomisos Instituidos en Relación con la Agricultura (FIRA) trustship of the Central Bank (Banco de México) was established to foster rural development and open credit lines for farmers belonging to the Corn Club. Credit provision is handled by a private bank participating in the scheme, not FIRA, which gives credit directly to farmers at low but not subsidized interest rates and provides agricultural insurance. At the end of the harvest, total production is delivered to MASECA and the firm pays credit and interest back to the bank. As a final step, MASECA pays farmers the value of production minus the credit at the fixed price in the contract. By means of this association scheme, positive linkages are created and the credit, insurance and commercialization problems are solved to the benefit of all participants.

Farmers associations and NGOs also foster and reinforce positive linkages, as in the case of the Unión de Ejidos Francisco Villa. This association was formed by several regional ejidos in 1986; its membership amounts to 2 366 ejidatarios. The association’s primary activity is purchase of large quantities of fertilizer for distribution to members at low prices. Before the scaling-down of FERTIMEX, the union had managed to get a concession from the state-owned company for local distribution of fertilizer. When FERTIMEX disappeared and the fertilizer market was privatized, the Unión de Ejidos, fearing price increases of this vital input, strengthened its role as distributor in competition with with new entrants into the market. The association also entered into an alliance with Comercializadora de Occidente (COMAGRO), a large social enterprise whose main aim is to deliver inputs and services to its members. COMAGRO’s scale of operation allows it to purchase enormous quantities of fertilizer, herbicides and pesticides, and to negotiate favourable prices with large private companies, including multinationals. COMAGRO sells fertilizers to the Unión de Ejidos at low prices, which enables it to compete successfully with other local distributors in the Querétaro region. In the process, COMAGRO provides its members with technical assistance and helps to find finance and market outlets; for example, it signed a significant corn-purchase contract with MASECA on behalf of its members. In this way, COMAGRO contributes to the development of linkages favourable to producers and integrates them with other economic agents.

The Unión de Ejidos Francisco Villa has gone into the insurance business in association with AGROASEMEC, the public agricultural insurance company. When the previous government insurance enterprise ANAGSA was dismantled, the union decided to organize an insurance scheme to protect its members, particularly those with irrigated land and high-cost technological packages. The union’s insurance scheme covers only capital invested in the application of a technological package recommended by a national institute of agricultural research, INIFAP. In case of harvest losses, the union’s insurance scheme and AGROASEMEC cover the costs; the union is, in other words, a sort of intermediary between AGROASEMEC and the farmers.

Cempasúchitl production

Cempasúchitl is an intensely coloured yellow flower that is transformed into flour and used as a pigment by the poultry industry. When added to animal feed, cempasúchitl flour causes chicken skin to acquire a golden colour and egg yolks to be more orange, both of which are attractive to consumers. Chicken consumption has been increasing in Mexico as a result of rising incomes and favourable chicken prices relative to beef and pork. Demand for natural pigments, among other inputs used by the poultry industry, has been growing steadily. Pigments are not produced by the poultry industry itself but by specialized firms, which need cempasúchitl flower and red chilli as basic inputs. In order to ensure a constant flow of input, these firms offer attractive prices and technical assistance to peasants willing to initiate cempasúchitl cultivation.

Spurred by increasing demand for the flower, a number of producers have shifted from maize production to the labour-intensive cempasúchitl production. Total production costs for cempasúchitl are 2.5 times greater than for maize primarily because it is more labour-intensive and because more intensive application of fertilizers and insecticides is required. One hectare of maize can be cultivated using 32 workdays during a six-month cycle; one hectare of cempasúchitl requires 139 workdays in a four-month cycle. Based on average yields of 3 mt/ha for maize and 15 mt/ha for cempasúchitl, maize gives profits of 895 pesos per ha/cycle, while cempasúchitl gives profits of 5 865 pesos per ha/cycle - a significant difference.

Entry into cempasúchitl production is not easy, because it requires irrigation and has high input costs. Credit available from BANRURAL, the main financial source in the region, amounts to only 50 percent of the cost of production, so the remaining production costs have to be financed using savings or other income. This inhibits production by the poorer strata of farming households; poor households may benefit from employment generated by increased production, however. In Santiago Mezquititlan, a low-income region near Amealco, for instance, 600 ha were cultivated in the 1998 cycle, generating a need for 83 400 workdays in four months; most of this labour requirement was met by wage labour from poorer households.

There are two pigment-producing agribusinesses operating in the region, Alcosa and Bioquimex, both of which are located in intermediate cities. Based on interviews of Alcosa staff, the following information regarding linkages was gathered. Alcosa is a medium-sized national firm, with four plants in central and northwest Mexico. The regional plant in Apaseo El Grande, in the vicinity of Celaya, consumes 14 000 tons of flowers each year, which come from some 300 small producers in Santiago, Mezquititlan. A small quantity of flour is imported from India. Contract farming is used in all cases. Contracts specify planting time, quantities to be purchased, prices to be paid, delivery sites, quality of input, supervision, monitoring and penalties. The company does not give credit, but provides flower seeds and offers technical assistance, including how to sow the seeds, prepare the soil, apply fertilizers and insecticides and when to cut the flower.

Alcosa and Bioquimex prefer contract farming to imports so that they can maintain flower quality standards. In the past, the companies relied more heavily on imports, but quality was unsatisfactory. Now they are trying to establish a network of local producers and are increasingly using contract farming. This is in contrast to the case of red chillies, which have a well established national market where both firms purchase their required quantities at prevailing prices on the spot market. There is therefore no need for contract farming. According to Alcosa managers, chilli is a risky crop and farmers are reluctant to sign contracts for it.

The primary local effects of pigment production are through production linkages from firms to farmers, and employment linkages from farmers to labourers. Direct linkages in the intermediate cities are few, but not negligible. Alcosa employs 72 permanent technical, administrative and manual workers who live in intermediate cities or medium-sized towns. Alcosa requires cardboard boxes, bags, stationery and a number of services, which are all produced and provided by establishments in the intermediate cities. In summary, these industries play a very positive role as an employment-generation agent in the intermediate cities and the countryside, particularly important for poor households that depend on wages for a living. Bioquimex, S.A., a much larger firm, employs 150 workers in administrative tasks and 3 120 industrial workers.

A number of other organizations not working directly with the pigment firms are helping to overcome obstacles to entry into cempasúchitl production by facilitating expansion of contract farming and playing a useful role as intermediaries between firms and farmers. Asesoría y Servicios Integrados Agropecuarios (ASIA), for example, is an NGO that provides services and links farmers with input firms, banks and pigment firms. ASIA contacts BIOQUIMEX and obtains information on the firm’s input requirements and willingness to buy a quantity of cempasúchitl at a certain price and date. ASIA then discusses the value of contract farming with groups of peasants; it started as a technical assistance association, so it has developed close and direct relations with them. ASIA also acts as a financial intermediary, channelling public credit to smallholders as part of the contract farming scheme, provides technical assistance and facilitates contacts with input enterprises in order to purchase inputs at a lower price.

Future prospects for the pigment industry are not auspicious. The internal market has arrived at saturation point because of the paralysing effects of the economic crisis on internal demand for poultry products. Exports could be a way out of this difficulty, but a foreign-exchange policy favouring overvaluation of the internal currency is undermining the competitiveness of national firms. Imports of Indian cempasúchitl flower are 15 percent cheaper, although of inferior quality. If overvaluation continues, firms could decide to rely more on imports, cancelling the positive employment linkages described. Technological change and productivity increases at farm and agro-industry levels, supported by a specific industrial policy, will be necessary if linkages are to be preserved and reinforced.

Poultry industry

Poultry rearing, in particular production of chicken meat, has grown by more than 500 percent in Querétaro since 1980. Because of this rapid growth, the value of poultry production in the total value of animal production in the State of Querétaro is 62 percent, according to figures from the Ministry of Agriculture. The value of chicken meat accounts for 83 percent of the total value of meat production from slaughterhouses.

This boom in poultry farming in the State of Querétaro occurred for several reasons. First, the proximity of Mexico City represents a secure market for chicken, which is in increasing demand among consumers. Second, chicken prices have until recently remained attractive, maintaining the high profitability of this activity. Third, there was inexpensive credit available during the 1989-1994 period, which allowed investment in new poultry plants and expansion of those already in existence. These plants were established as a partnership of producers in which partner participation depended on the number of chickens owned.

The economic crisis and peso devaluation that began in December 1994 nevertheless gravely affected the poultry industry. Devaluation increased production costs, because a significant part of these relate to imports, including sorghum, soya, reproductive hens and some equipment. The price of poultry increased at a lower rate and its profitability diminished. The most important factor was the heavy debt incurred by poultry farmers before the crisis began. Interest rates rose dramatically and new credit was unavailable. Poultry farmers could not carry the debt and bankruptcy was imminent.

At this point, the largest poultry company in the state, the transnational Pilgrim’s Pride, bought up all the assets of the Poultry Farmers Union and absorbed their debts. As part of the pact, the poultry farmers signed contracts for six years with Pilgrim’s. According to these, they committed themselves to selling their entire meat production of seven-week-old chickens to the company in exchange for balanced feed, day-old chicks, medication and technical assistance. This has converted Pilgrim’s into a near monopoly. It buys between 85 percent and 90 percent of the chicken meat produced in Querétaro and exercises substantial control over poultry farmers, small and large. At present, the company sells 2 000 tons of chicken meat per week and employs 150 administrative workers and 3 120 industrial operatives. The majority of these live in the city of Querétaro, where the impact on job creation is substantial.

For poultry farmers, the contracts have represented a step backward, particularly in their independence and capacity for future growth. From being prosperous businessmen, they have been transformed into contracted producers for a large company. The contracts nevertheless have advantages for the producers, including a secure market, technical assistance, an adequate supply of genetic material and balanced food and medicine. The primary disadvantage, besides loss of business independence, is diminishing profits. This is because the price paid per kg of chicken meat is closely associated with a “meat-balanced feed” conversion factor, which has to be sufficiently high to allow for acceptable profits for Pilgrim’s, which in turn demands high productivity. The problem, according to the poultry farmers, is that they are reliant on Pilgrim’s for the supply of materials and they have no control over the productive process or price and quality of materials, and therefore no control over productivity and profit.

The poultry industry has important multiplying effects through employment in the region. It is the most labour-intensive animal-production activity and the one that creates the most employment opportunities, although there is a tendency to introduce capital-intensive technology. To calculate the number of jobs directly generated by the poultry industry, the farms have been divided in two types: mechanized farms accounting for 20 percent of chicken production, where one employee handles 40 000 birds, and manual or semi-mechanized farms accounting for 80 percent of chicken production, where one person attends to 12 000 birds. Based on this information and the total chicken figures in the state’s poultry industry, mechanized farms generate 455 jobs and manual farms 6 045 jobs for a total of 6 500.

Poultry activity has expanded throughout the state, but there are three municipalities that constitute the largest proportion of production: Colon, with 33 percent of all poultry, El Marques with 19 percent and the municipality of Querétaro with 15 percent. The most positive effects on employment and indirectly on expense and consumption naturally occur in these municipalities, especially Colon, where there are fewer natural resources. External competition in the context of an open economy nevertheless produces pressures to mechanize production and reduce costs, to which Pilgrim’s contributes greatly. This leads to the conclusion that there will be a deceleration in the creation of jobs in the regional poultry industry in future, although the jobs created are likely to require greater skills and thus provide higher wages.

Frozen and processed vegetables

Production and export of frozen vegetables is a profitable and dynamic business that creates significant employment linkages in rural towns. To understand how these linkages are created, two firms were selected and interviewed for this study. Both produce, freeze and pack vegetables for export - mainly broccoli for the American market - and for the domestic market - primarily carrots, spinach and sweet corn beans. Each uses its own technological and purveyance systems. One firm, Deshidratadora la Cascada, is a medium-sized firm established 30 years ago as a family business, which employs 160 workers and 10 technicians and produces and sells 350 000 kg of processed vegetables each year. Part of its machinery is imported, but the firm’s engineers make other parts on-site. It is a very flexible firm, capable of producing and dehydrating several types of vegetables in order to take advantage of promising niche markets.

Expo-Hort, S.A., located about 25 km from Querétaro City, is a more modern firm. It was established in 1985 as an export-oriented enterprise in the context of a growing American market for frozen vegetables, particularly broccoli. Its very modern freezing machinery is completely imported and represents a substantial investment. The technology used is more capital-intensive than that used in La Cascada, but the firm nevertheless employs a significant 650 permanent workers and 50 administrative and technical employees. It produces a yearly average of US$28 million worth of vegetables, 90 percent of which is broccoli, of which US$10 million worth is exported. Its quality-control rules are strict in order to assure the product quality demanded by the American market.

Neither La Cascada nor Expo-Hort has brand names. They freeze or dehydrate vegetables, which are packed in bags with the brand name of American companies, ready for export and distribution in retail establishments in the USA. In other words, they belong to a chain that begins in Mexico’s agricultural sector and ends in American supermarkets. A smaller part of production is sold to big companies such as Gerber, Campbell’s, Herdez and other large firms operating in Mexico.

Both firms use completely different vegetable provision systems: direct production and contract agriculture. Expo-Hort has chosen vertical integration and produces most of its vegetables directly on privately owned farms or on rented ranches in the states of Querétaro and Guanajuato. The rented ranches are large private properties and not ejidos. Expo-Hort signs multi-year rental contracts with private owners. The firm invest in ferti-irrigation systems on future-rent accounts. When the land is returned to owners, they receive the equipment as part of the rental agreement. The firm selects large private properties to rent, taking into account the availability of water and the existence of good transport networks. In this way, it controls 1 600 ha of land. Only a minor proportion of its vegetable needs are obtained through contract farming.

La Cascada does not own or rent any land. It signs contracts with medium and large private farmers specifying volumes, quality specifications, prices in dollars and delivery dates. In the past, it used to work with smallholders belonging to ejidos but, according to the management, ejidatarios have problems controlling and supplying good-quality vegetables. The firm has gradually improved its list of purveyors of raw materials, who are normally modern farmers capable of controlling the quality of the product and obeying the firm’s stipulation not to use certain insecticides and pesticides prohibited in the USA. They are selected within a range of 100 km of the factory to assure freshness of the vegetables. The managers said they have no supply problems.

Given the two different systems for obtaining inputs, there may be differences regarding employment generation arising from the activities of the two firms. The data collected, however, indicate that there are no substantial differences. Local demand for labour depends on the agricultural technology used, whether by the vertically integrated firm or contracted farmers. In both cases, the technology is labour-intensive. The total amount of labour involved in the cultivation of one hectare of broccoli and other vegetables is between 60 and 80 workdays per cycle in privately owned ranches, hired farms or contract agriculture, which uses more or less the same technological package.

The primary linkage effect of the export-oriented vegetables agro-industry is its demand for rural labour. The local impact of this demand is substantial: each year Expo-Hort creates employment equivalent to 128 000 workdays. The managers calculate that about 3 000 people work temporarily in the fields to produce the raw material used by the firm. They are not permanent but temporary workers, who may be employed for one month or more during the year. The workers come from Chichimequillas and other rural towns in the vicinity, where the direct impact on local income is high and expenditure linkages to local consumption shops substantial. Local transport to provide for commuting between the firm and rural towns also generates employment. In 2001, La Cascada demanded an equivalent of 32 000 workdays, a significant figure, but its impact on the local economy was less because it is spread over a larger territory. Farmers working for La Cascada through contract farming are more scattered and linkages effects are more spatially diffused. The company lacks the critical mass to generate new activities, as is the case in Chichimequillas. The impact on Querétaro City is considerably less. The company is a source of demand for specialized technical and administrative employees, who come from the area, specialized repair services, tools and cardboard boxes.

The case of large agro-industries producing vegetables for the domestic market is interesting and complements the observations made so far. A visit was paid to Gerber, a subsidiary of the multinational firm of the same name. Established in 1958 in Mexico, Gerber has a monopoly on processed infant food, with annual sales worth US$80 million. Growing demand for baby food justified establishment of a new plant in Querétaro in 1967. This intermediate city was selected because of its proximity to Mexico City, the main source of demand, and the regions where fruit and vegetables are grown.

Gerber employs 600 people in its Querétaro plant, including administrative and industrial workers, and its impact on employment is considerable because almost all of its employees live in Querétaro. It is a source of employment and expenditure linkages - salaries are relatively high - but its impact on local input industries is low, because only cardboard boxes and glass jars are purchased there. Its contribution to rural employment is not negligible, because it creates a demand for 17 000 mt of fruit and vegetables each year from Querétaro and other regions in Mexico. Spatial impact is low because its providers are scattered across various regions. Gerber prefers to deal with large-scale farmers, so direct rural impact concentrates only on 80 large producers in all of Mexico. Gerber’s purveyance system is worth mentioning since only two technical employees manage the purchase of inputs from several regions for this large and complex enterprise. The secret seems to be the use of a limited list of very reliable large producers, attractive purchase prices and a sound monitoring system of agricultural production practices such as implementation of agreed rules regarding pesticide use and produce quality. “Working for Gerber has to be a good business for farmers” is the company’s motto.

With regard to establishing and maintaining linkages, vegetable-export firms note the following obstacles:

• inadequate technical services from chemical laboratories checking vegetable samples;

• expensive or poor-quality inputs provided by domestic firms;

• high transaction costs resulting from excessive administrative procedures affecting imports of machinery and inputs;

• old and inappropriate export legislation.

On the other hand, Gerber does not find obstacles in the flows of agricultural raw materials; agriculture practices are linkage-friendly. The main policy recommendation from the firms’ managers was to use fiscal policy to encourage new investments in labour-intensive enterprises in rural areas and towns.

Barley and beer

The beer industry in Mexico has been lucrative and dynamic for several decades and has particularly benefited from its recent successful entry into the international market. Expansion has made it necessary to enlarge the areas of cultivation of raw materials, particularly barley. To this end, the beer industry created an affiliated company, Impulsora Agricola, S.A., that is in charge of promoting and facilitating cultivation of barley and establishment of purchase agreements with producers to secure adequate supplies. Impulsora Agricola is a service company that operates in the Querétaro region and in other regions in the country, supplying the two large brewery groups, Cerveceria Modelo and the Cuauhtemoc-Moctezuma group.

To produce the seed for barley production, Impulsora has established an association with reliable farmers, whom they contract to cultivate barley under strict technical norms, supervised by the company and the Ministry of Agriculture’s National Seed Inspection Service. The seeds are sold on credit, payable at the end of the harvest, to the producers who sign the contract. Farmers who have already worked satisfactorily with Impulsora in the past receive credit at preferential rates of interest. The company has a technology-transfer department to offer technical consultations to the producers free of charge. This service is offered only to groups, with the aim of reducing costs. The contracts specify the purchase of barley at prevailing international prices plus transport charges for importing barley to the plant.

Impulsora works with 300 farmers in the region of Querétaro on an extension of 4 500 ha of irrigated land. The majority are ejidatarios with an average of 4.5 ha per head. The effects on employment in the region are low, because barley is an almost totally mechanized crop and the breweries are situated outside the region. The positive regional effects of the brewery companies are those of offering services and a market to make the barley crop profitable. These services are important in the Mexican context because of the withdrawal of the public institutions in charge of financing and technical assistance and because of the scarcity of these services. The prices paid to the producers are nevertheless not always advantageous, because the profitability of the barley crop is equivalent or inferior to other crops in the region. In this case, the higher profitability of the large breweries does not filter down to the region, and the barley producers obtain very little of the profit generated in this agro-industrial system. This means that the indirect effects on the region through increases in agricultural income and demand for other goods are also very low.

Milk production

Milk production is the second most important activity in the region as measured by value-added and generation of employment. In order to identify the linkages generated by the agro-industrial milk system, a typology of dairy-cow producers has been established, based on information obtained from the Regional Cattle Union of Querétaro. The union is a group of 650 producers owning 35 000 cows. The milk producers have been classified as follows.

1. Technically developed producer using full technology. Cattle are entirely stabled (feed lots); production is mechanized from milking through to preparation of feed mixes for animals. Each farmer has an average of 450 cows; each cow gives 23 litres of milk. There are 45 large cattle farmers who own over half the total cattle stock.

2. Semi-technically developed producer. Cattle are stabled and farmers use mechanical milking, but food mixing and feeding of the animals are done manually. The average number of cows per producer is 100 head; their productivity is 17 litres daily per cow. There are approximately 125 producers controlling about one third of the total cattle stock.

3. Family cattle farmers. Producers combine cattle rearing, agriculture and other activities. Their technical level is very low and they milk by hand. The milk is for their own consumption, sale and production of homemade cheese. They do not have cooling tanks. The average number of cows per producer is ten. The cattle are reared in the farmyard or use communal lands. There are around 500 small cattle farmers representing 15 percent of the total cattle stock.

Dairy producers are linked to other local companies through the purchase of raw materials for feed, including cotton seed, soya paste or industrial waste that comes from food companies based around the city of Querétaro and other intermediate cities. These purchases are relatively low, because large and medium farmers have irrigated lands where they cultivate alfalfa, the main fodder used in the region. Family cattle farmers are almost self-sufficient in fodder and their demand for raw materials is minimal. The purchase of equipment has no regional impact, because the greater part is imported or produced in large cities.

Total employment creation due to milk production can be calculated using cows attended per full-time worker - 40 in technically developed ranches and 30 in semi-technically developed ranches. The former need approximately 500 fixed workers per year; the latter need 415, giving a total of some 915 fixed jobs in the region, a figure much lower than the 6 500 jobs generated by the poultry industry. The fact that some 670 producers and their families are partly supported by farmyard-based milk farming should nevertheless be taken into account.

The sale of fluid milk develops few linkages in the region, because more than 70 percent is sold to the ALPURA company, which is situated outside the region. ALPURA, a company to which the producers belong in their capacity as partners, picks up the milk in their cooling-tank vans and transports it to another state, where it is pasteurized and processed. Another part of the milk is sold to milk-product agro-industries. There are three companies of this type in the region producing cheese and other milk products.

The milk industry in Querétaro and all of Mexico is going through a difficult period as a result of adverse government policies. These policies have limited the expansion of the dairy industry in spite of the fact that the demand for milk and milk products keeps growing. The problem is that the Government sets a maximum price for selling milk to the public, which is fixed at a low level in order to benefit low-income consumers. With the same goal in mind, the government fixes very low tariffs on the importation of milk powder, which is very cheap on the international market. These two measures have reduced the profitability of the milk industry.

This crisis in the milk industry is closely related to the low profitability of the activity. Only producers that are integrated, mechanized and of a certain minimum scale have managed to survive well. Many small and medium producers, particularly the semi-technically equipped, have dropped out of the market. Liberalization and government policies oblige producers to resort to mechanization. Employment generation has decreased as a result of the crisis and will continue to shrink even further in the future as a consequence of capitalization. This means that there is a tradeoff between maintaining low milk prices to benefit urban consumers and maintaining and increasing rural jobs in the milk-producing regions.

Water shortages are an additional problem in Querétaro. Alfalfa, the main fodder, is a water-intensive crop; reduction of the levels of water in the region have caused the production of alfalfa to be reduced by half, contributing to a reduction in the production of milk in the region.

It is worth mentioning that family cattle farmers have survived the crisis better, because milk production is not their only activity and because they operate in a local market where they sell their products of unprocessed milk and home-made cheeses, which are produced at low input prices resulting from self-production of fodder and family labour.

Vertical integration and the linkages between companies are very important for the survival of rural producers, particularly in such a competitive and difficult market. Thanks to the existence of ALPURA, for example, Querétaro’s milk producers can sell their production in the final markets at prices that guarantee their permanence in the market and without investing in the pasteurization and homogenization phases, which have heavy capital requirements. Similarly, ALPURA is a company with capacity to sell in the retail markets in several large cities across the country thanks to its extensive distribution network, which benefits the producers from Querétaro in their role as partners.

When questioned on possible policies for improving the milk industry in the region, the directors of Querétaro’s Regional Cattle Farmers Union indicated the need to have more favourable macroeconomic and sectorial policies, to liberalize the price of milk and avoid flooding the domestic market with imported milk powder through a tariff policy. They indicated the need to make irrigation more efficient and to apply fertilizing-irrigation techniques; to finance these, they suggested schemes of investment with fiscal support and stimulus.

Fostering linkages: summary of the case studies

Given the potential benefits to the creation and development of linkages between farmers and the non-farm sector, this section is concluded with a review of the information presented in the case studies in order to determine how productive linkages have been formed. Table 7 examines each of the relevant markets, noting what changes have occurred within the market and the ‘change agents’ that have played a role in these changes.

The first conclusion that can be drawn is that in almost all cases, the agents forging links have been the agro-industrial companies, quite often in conjunction with public agencies and NGOs. In other words, the changes have not originated in the agricultural subsector, with rare exceptions, but have come from outside, generated by distributors, pigment producing companies, exporters of frozen vegetables, breweries and large poultry and milk firms. This does not mean that the farmers play a passive role. They profit from these opportunities by adopting new agricultural practices and technological innovations and by reorganizing their productive activities. Innovative farmers, who lead the way in altering practices and establishing links, play a fundamental role in these changes; their actions produce positive externalities for other farmers. The fact that the producers take rather than forge opportunities is still a potential weakness, however. This is closely related to the fact that the organizations of rural producers in the region are few and weak.

An extremely important mechanism through which the linkages are established is contract agriculture, with its various modalities. Through contracts, purchase/sale commitments are established and prices, quality and quantity requirements, input provision and other specifications are fixed. It should be emphasized that there are increasingly new forms of agreements, including triangular contracts in which besides the purchasing companies and producers, there are other organizations that facilitate mediation and provide services and public and private financial institutions that bring credit and guarantees. The participation of producers as partners in industrializing and commercializing companies of final products is another interesting mechanism.

TABLE 7
Summary of linkage effects

POLICIES, INSTITUTIONS AND LINKAGES: EVALUATION AND RECOMMENDATIONS

The previous section highlighted the importance of the public sector and other organizations in forging new farm/non-farm linkages and strengthening existing ones. In this section, the focus shifts to examining policies that might facilitate the quantity and quality of productive farm/non-farm linkages. The section begins by discussing the institutional vacuum that has been created by the reforms of the last decade and the effects of this vacuum on farm/non-farm interaction. Other institutions and organizations are then discussed that may be useful in developing linkages. Finally, other policies that are important to promoting linkages are noted.

Institutional vacuum

Politics and public institutions play an important role in the formation of productive linkages and the generation of employment. In Mexico, the change in the model of public intervention in the economy associated with programmes of structural adjustment brought with it substantial modifications in macroeconomic and sectorial policies, in particular in public agricultural institutions. The paternalistic and interventionist policy that had prevailed for several decades was corrected. Guaranteed prices were eliminated, subsidies were substantially reduced, official technical assistance fell into disuse and many public agricultural companies disappeared, while others shrank substantially. These adjustments in economic policy-making left a large institutional vacuum that has not been filled by new public institutions. This vacuum has created an opportunity for other economic agents and organizations to take the initiative and to fill the gap little by little with new economic relations.

One illustration of this situation is the technical assistance that Ministry of Agriculture agronomists gave free to rural producers, which played an important part in the diffusion of new technologies in the region during the 1980s. With the change of policy, this service almost disappeared: only 12 percent of producers interviewed received official technical assistance in 1992, and only 1 percent received assistance from private agronomists. The lack of technical assistance occurred during the six years between 1990 and 1995, and was replaced by agrochemical and fertilizer companies or by agro-industries purchasing raw goods, such as the breweries and poultry companies.

Finally, the Ministry of Agriculture took a step back and initiated the Programa de Asistencia Técnica para Apoyar la Producción de Granos Básicos (PEAT) programme, which consisted of contracting private agronomy firms and companies to replace the official agronomists who had been dismissed. PEAT was very limited, however, because it consisted of offering assistance unconnected with other support such as financing, which impeded the producers from buying the recommended innovations. In 1997, 40 percent of producers had received technical assistance, particularly from private agronomists, a percentage that was still low. Based on survey results, 32 percent of producers claimed that the service had improved in 1997 with respect to 1992, 47 percent said that it was the same and 8 percent stated that it had worsened. Integrating technical assistance such as fertilization, fighting infestations and pests, soil conservation and water handling is an essential activity, which the government has to continue to encourage by perfecting schemes that use private agronomists. Evaluation of these schemes is important; it would be easier for the producers themselves to do this through market mechanisms. With this in mind, it is recommend here that schemes be established in which producers do not receive assistance free of charge, but make a partial payment so that they are prompted to demand efficient service adequate to their needs.

Complementing this, agrochemical shops could be transformed into purchase and technical service centres. A few of these already work in this way, offering high-quality raw materials and technical assistance to producers. With some reforms, these businesses would be ideal places for the diffusion of technology, consultation and training. Through a state-support programme, the technical capacity of these stores could be improved to offer quality services. Agreements could be reached with seed producers, commercial houses and the Ministry of Agriculture to this end. The tasks of the ministry would be to establish agreements, channel support and apply norms and vigilance.

Public agricultural credit fell considerably as a result of the reform process. At present, only one quarter of the producers surveyed are working with credit. Credit destined for purchase of machinery, equipment and installations is practically non-existent. The greater part of financing comes from the state-owned bank, BANRURAL. Only 7 percent of the producers are of the opinion that credit service has improved, however; the rest noted that credit services have worsened or remained the same. Agricultural insurance is an almost non-existent service; only 13 percent of producers interviewed are covered by an agricultural insurance policy. At present, the private banks do not represent an alternative to the public financing system.

Non-farm income earned by households represents one possible source of financing. Some saving schemes have grown up, offering small loan services to satisfy consumer needs and to support some productive activities. The only interesting development in this area has been the creation of the Credit for Administration Programme (PROCREA), put forward by FIRA. The idea is to link credit, technical assistance and commercialization, utilizing the services of integrated firms that have experience of interacting with groups of producers. The cempasúchitl programme, ASIA, is an example. ASIA provides technical assistance and functions as a mediator in purchase/sale contracts. It organizes suppliers and establishes an agreement for flower cultivation and sales to a purchasing company; FIRA opens a line of credit to finance the sowing of 2 000 ha of the flower; ASIA commits itself to giving technical assistance to the producers and offers advances for sowing and cultivation through private banks. At the end of the harvest, ASIA hands this over to the purchasing company and charges the prices stipulated in the contract, discounts the credit, pays the producers and returns the total credit to FIRA after charging the stipulated commission. It is an interesting and successful scheme that should be extended and perfected.

The withdrawal of the state-owned company CONASUPO, the primary grain purchaser in the region, has made room for the return of traditional private grain purchasers who operated in the region before CONASUPO. There is some potential for problems, however: CONASUPO was created in part because traditional purchasers, in some instances, committed abuses against small producers. The large flour company MASECA recently began to establish agreements for purchasing maize with small and medium producers, using a triangular mechanism described before as the Corn Club, in which FIRA also participated. This arrangement clearly benefits the private company and the producers have the advantage of an assured market. None of these forms of commercialization allow producers to negotiate good prices for their products, however. Their weakness in the regional grain market comes from the lack of organization and business experience among producers. Programmes such as this one supported by FIRA might include business training for producers and assistance with organization and management for producer groups.

Institutions and organizations

There are other institutions and organizations that help facilitate the exchange of resources and through which resources are exchanged. They establish connections and new economic relations, contributing to more efficient use of resources. One of these is the land market, which allows dynamic producers and those willing to invest time and resources in the agricultural activity (our stratum 0), to have access to natural capital and make use of land that could lie fallow or be inefficiently exploited. Government programmes that provide clear land titles, such as PROCEDE in the ejido sector, reinforce and help to develop this market; although they are not the primary force behind land transactions, they contribute to land markets by providing more transparency and confidence in agreements. Another important institution that performs a similar function is that of sharecropping. Through share contracts, those who decide to migrate temporarily or dedicate themselves to other activities can obtain income from their land and allow others to use it productively.

Contract agriculture is an extremely important and widely used mechanism for connecting rural producers to firms; it has the flexibility to continue this function in the future. There have been some problems of contracts not being honoured, however, particularly by the companies. To penalize these harmful practices, which create distrust in the institution among farmers, there must be changes in the legal system to make litigation quicker and less costly. Producers need more access to information on their rights, to consultations on their means of recourse and to professional services that help them defend their interests. Finally, forming producer groups of contract farming participants can help shift bargaining power from firms to producers.

Machinery rental represents another local farm-linked market of significant importance to producers with low incomes, because through this they have access to the tractors, reaping machines and heavy vehicles. Without this practice, based on confidence and local social networks, many producers could not utilize these capital goods, because they do not have the financial resources to purchase them. Actions that can facilitate development of this market would assist owners of machinery and renters.

Integrating organizations are important, because they create new links between producers, businesses and public institutions. These organizations have the potential to continue to grow and function as intermediaries by connecting services such as financing, technical assistance and commercial consultations. It is up to the state to promote these, facilitating their functions and utilizing the services that they administer most efficiently and at lowest cost. It would be worthwhile to take advantage of their comparative advantages and include them in rural-development programmes.

The importance of producers’ organizations lies in the fact that they facilitate economic activity through establishing linkages, improving the efficiency of resource use and providing for economies of scale. In the study region, a number of ejido unions have worked to distribute fertilizers and negotiate agricultural insurance schemes for members. Another role of producer organizations is in assisting members to negotiate contracts with firms and facilitate beneficial contractual relationships. While organizations have the potential to play this role, they have tended to be weak and underdeveloped. Strengthening these organizations is ultimately the task of the producers themselves, but the process could be facilitated by the public sector, particularly if organizations are given an important part to play in rural development programmes.

Finally, public organizations and rural institutions play a fundamental role in fostering farm/non-farm linkages, because they contribute strongly to the rules of the game that dictate the interactions among agents. It is worrying that the state at present appears obsolete and inadequate: many of its structures have been inherited from a superseded model of public intervention. Institutional reform is therefore a central requirement of public policy towards the rural sector, a theme that cannot be dealt with in sufficient detail here.

Other policies

A number of activities that link the farm and non-farm sectors are particularly important to the rural economy, as are the firms that use labour-intensive technology and have strong multiplicative effects through their linkages. These firms should be considered strategic; specific programmes should be established to promote their activities, assist their capitalization and, if appropriate, the export of their products. The development and competitiveness of these firms is frequently made difficult because of incomplete sources of services, which raises their transaction costs. This is a fundamental area for design and implementation of policy measures.

Insufficient infrastructure is another potential stumbling block for rural development. In Querétaro, for example, there are not enough roads of sufficient quality for trailers to access producing areas at all times of the year, which raises the cost of transport. There is a shortage of warehouses with ventilators, and crops are frequently stored outside, which results in substantial losses. There is a scarcity of weighing machines, which increases transaction costs. Construction of roads and establishment of public services are an essential aspect of public investment that will foster development and improve linkages.

Finally, public investment in education and health is fundamental, because it reinforces human capital and raises the quality of life in the country. These services become less and less adequate in proportion to their distance from medium cities and proximity to towns and rural localities. The low-income inhabitants of marginal zones, where educational and medical services are insufficient, have to invest their meagre resources to have access to these services.

REFERENCES

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