Can small-scale producers meet large-scale demand?

Can small-scale produce in large-scale?

Consider this conundrum: for enigmatic historical reasons (another post!), for decades since the 1980s, ordinary China’s farmers were given land use rights over small plots of farm land that they could neither buy nor sell. This kept farming small in scale, and meant that agribusiness who wanted access to land were (largely) forced to go through small farmers to do so.

Juxtapose this fact with equally astounding ones. Consider that KFC, which has operated in China since the late 1980s, boasts more than 8,000 restaurants in 1,700 cities throughout the country. And the majority of the chicken (if not all) is sourced from Chinese farmers. Consider that each of the millions of instant coffee sachets that Nescafe sells in China are produced nearly exclusively from Chinese-grown coffee beans. Consider that China each year exports huge quantities of fresh vegetables throughout Asia. Consider that China is one of the leaders in exporting fresh cut flowers. These products are examples, not exceptions.

Meeting the needs of these markets requires access to regular, dependable, standardized production of reasonably high quality. In short, each of these efforts—from chicken to coffee, from vegetables to flowers—necessitates large-scale, industrial-grade production.

And, in China, this large-scale production depends on small-scale farmers.

KFC did not acquire land to allow it to mass-produce chickens in an industrial setting under its control. Nescafe neither owned nor operated huge coffee plantations. The fresh vegetables that China exported were not mass produced on consolidated Iowa-sized farmland. The fresh-cut flowers that China exports were all produced by individual Chinese farmers.

Each of these four examples had one thing in common: they each produced large-scale from small-scale farmers. They achieved many (most? all?) of the benefits of economies of scale, despite the fact that their production was small in scale.

Yet, they each did it in different ways.

KFC’s mode was to sell chicks to individual farmers to raise—the company (and their intermediaries) teaches these farmers how, and lend participating farmers the inputs. Once the chicks are grown, KFC buys them back. This kind of contract farming was the key to KFC’s success.

Nescafe’s operations weren’t even based on contract farming—they simply set up purchasing stations, and promised to purchase the coffee beans from any farmer who showed up with coffee beans. Nescafe also offered education services to any farmer who inquired. Bolstered by the stable market that Nescafe offered, some farmers gradually shifted from growing corn to growing coffee. And a bonus—by investing in simple machinery, these farmers could perform the initial stages of processing, and thus sell their output to Nescafe at even higher prices. The farmers acquired their know-how either from Nescafe, or by working directly on Chinese coffee production areas. Nescafe offered no contracts but nevertheless promised a stable market. In time, farmers produced supplies that allowed Nescafe to produce instant coffee to meet the demand in China.

The pattern vegetable and fresh-cut flowers was similar. Famers slowly shifted to producing to these cash crops. At first, these farmers sold to local markets. Then to middlemen, and then, once their aggregated production became substantial enough, exporters became involved—not in production, but in distributing the produce to far flung markets. Farmers brought their produce—whether vegetables or flowers—either directly to these large-scale distributors, or indirectly, through layers of middlemen. And they were willing to take these risks, and invest the start-up costs, as they were reassured these markets were stable.

In many ways, China is unique. Because of China’s land use rights, Chinese farmers enjoyed a modicum of power—agribusiness needed to go through small-scale farmers to acquire needed agricultural raw materials.

This situation persisted at least from the 1980s to well within the 2010s. The system has changed substantially in recent years. China’s policy on land use rights has loosened. Agribusiness is increasingly able to acquire land for direct production. Producers are scaling up in ways that increasingly resemble the mainstream prescription: large-scale production with high-tech processes.

But for a time at least, China demonstrated that it was possible for economies of scale to emerge from small scale producers. That consolidating farmland was inherently not necessary. And that farmers could access appropriate technology that would allow them to particapte. And as a result, participating farmers could enjoy a stable market for cash crops and other produce.

It was the micro-oriented approach in different forms. Made possible only because of enigmatic Chinese land laws that provided a modicum of power to farmers who were endowed with land usage rights.