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~E TTERWORTH

IN E M A N N
Food Policy, Vol. 20, No. 3, pp. 171-185, 1995
Copyright ~ 1995 Elsevier Science Ltd
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Agricultural commercialization and


diversification: processes and policies

P r a b h u L. P i n g a l i a n d M a r k W . R o s e g r a n t *
International Rice Research Institute, the Philippines, and * International Food
Policy Research Institute, Washington, DC, USA

Agricultural commercialization and diversification involve the gradual replace-


ment of integrated farming systems by specialized enterprises for crop, livestock,
poultry and aquaculture products. Changes in product mix and input uses are
determined largely by the market forces during this transition. Commercializa-
tion of agricultural production is an endogenous process and is accompanied by
economic growth, urbanization and withdrawal of labor from the agricultural
sector. This paper provides a selective overview and synthesis of the issues
involved in the commercialization and diversification process of agriculture,
drawing in significant part from the papers in this volume. Based on an
assessment of the process observed in selected countries, we show that the
commercialization process should not be expected to be a frictionless process, and
significant equity and environmental consequences may occur, at least in the
short to medium term, particularly when inappropriate policies are followed.
However, we highlight that appropriate government policies including invest-
ment in rural infrastructure and crop improvement research and extension,
establishment of secure rights to land and water, and development and liberaliza-
tion of capital markets, can help alleviate many of the possible adverse
transitional consequences.
Keywords: agricultural commercialization, agricultural diversification, property rights,
rural infrastructure

Introduction
Economic growth, urbanization and the withdrawal of labor from the agricultural
sector lead to the increasing commercialization of agriculture. Agricultural com-
mercialization means m o r e than the marketing of agricultural output, it means the
product choice and input use decisions are based on the principles of profit
maximization. Commercial reorientation of agricultural production occurs for the
primary staple cereals as well as for the so-called high value cash crops. On the
input side, commercialization implies that both traded and non-traded inputs are
valued in terms of their m a r k e t value. Commercialization of agricultural systems
leads to greater m a r k e t orientation of farm production; progressive substitution out
of non-traded inputs in favor of purchased inputs; and the gradual decline of
integrated farming systems and their replacement by specialized enterprises for
crop, livestock, poultry and aquaculture products. The farm level determinants of
increasing commercialization are the rising opportunity costs of family labor and

171
Agricultural commercialization and diversification: P.L. Pingali and M.W. Rosegrant

Table 1 Characteristics of food production systems with increasing commercialization

Level of market Household income


orientation Farmer's objective Sources of inputs Product mix sources

Subsistence Food self-sufficiency Household generated Wide range Predominantly


systems (non-traded) agricultural
Semi-commercial Surplus generation Mix of traded and Moderately Agricultural and
systems non-traded inputs specialized non-agricultural
Commercial Profit maximization Predominantly Highly Predominantly
systems traded inputs specialized non-agricultural

increased market demand for food and other agricultural products. Family labor
costs rise due to increasing off-farm employment opportunities, while positive shifts
in market demand are triggered by urbanization and/or trade liberalization.
As economies grow, there is a gradual but definite movement out of subsistence
food crop production, generally in a monoculture system, to a diversified market-
oriented production system. The process of diversification out of staple food
production is triggered by rapid technological change in agricultural production,
improved rural infrastructure, and diversification in food demand patterns. A
slowdown in income-induced demand growth for staple foods is accompanied by a
shift of diets to higher valued foods such as meats, fruits and vegetables. These
dietary transitions are induced by declining income elasticities of demand for
staples as per capita income rise, and by the rapid migration of population to urban
areas.
Initially, diversification implies the addition of other crops and other enterprises
at the farm household level. As the level of commercial orientation increases,
however, one observes mixed farming systems giving way to specialized production
units that are designed to rapidly respond to market price and quality inputs.
Diversification at the agricultural sector level is therefore consistent with specializa-
tion at the farm or unit of production level.
The countries of East Asia are at the high end of the agricultural commercializa-
tion pathway, while Southeast Asia and parts of Latin America are rapidly moving
towards commercialization. The countries of South Asia and much of sub-Saharan
Africa are at the lower end of the commercialization pathway. While the speed of
commercialization differs substantially across continents and countries they are all
moving in the same direction.
The collection of papers presented in this volume describe the processes of
commercialization and diversification; identify the infrastructural and policy con-
straints to commercialization and diversification; and discuss the equity and
distributional consequences of these processes. This paper provides an overview
and synthesis of the issues involved in the commercialization and diversification of
agriculture.

From subsistence to commercial production systems


Food production systems can be characterized as subsistence, semi-commercial and
commercial systems (Table 1). As economies grow, households shift away from
traditional self-sufficiency goals and towards profit and income oriented decision
making, so farm output is accordingly more responsive to market trends. The
returns to intensive subsistence production systems that require high levels of
family labor generally decline relative to production for the market with predomi-

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Agricultural commercialization and diversification: P.L. Pingali and M.W. Rosegrant

Table 2 C h a n g i n g p r o d u c t m i x by rice environments

Level of market Irrigated Rainfed Deepwater and


orientation lowlands lowlands tidal wetlands Uplands

Subsistence - single rice c r o p - single rice c r o p - shifting


systems - subsistence - s u b s i s t e n c e fish cultivation
livestock and production - subsistence
poultry livestock and
poultry
Semi-commercial - i n t e n s i v e rice - single/double - dry s e a s o n - horticulture
systems systems rice c r o p i r r i g a t e d rice - maize, rootcrops
p e r i - u r b a n dry - cattle/small - vegetables
season ruminant
- vegetables production
- dry s e a s o n f o d d e r
crops
+ + + +
Commercial - year round - intensive - intensive aqua- - intensive dairy
systems vegetables poultry culture farming
- horticulture production - cattle r a n c h i n g
- intensive poultry - tree c r o p s
and hog production

nant use of hired labor. The proportion of farm income in total household income
declines as family members find more lucrative non-agricultural employment
opportunities.

Product choice: specialization amongst diversity


Commercialization, while leading to an increase in the diversity of marketed
products at the national level, also leads to increasing regional and farm level
specialization. The case of rice is illustrative of the market and agroclimatic
determinants of diversification and specialization.
Asian rice lands are categorized in terms of toposequence and hydrology into
irrigated lowlands, rainfed lowlands, deep water environments, and the uplands.
The irrigated lowlands by their nature are inherently more market oriented because
of their ability to generate a surplus and because of better transport infrastructure.
Rice monoculture systems in the irrigated lowlands can be characterized as
semi-commercial systems even in slow growing economies. A large share of the
output is marketed and, compared to the other rice environments, a relatively
larger share of the inputs are purchased. Increasing commercialization leads to
both a seasonal diversification out of rice monoculture systems - to include non-rice
crops in rotation with rice - and introduction of specialized enterprises for
horticulture, aquaculture, poultry and hog production (Table 2).
Commercialization can also lead to cattle and small ruminant production in the
rainfed lowlands - taking advantage of seasonal grazing lands - and intensive
aquaculture systems in the deep water and tidal wetland environments (Table 2). In
the deep water environments, the traditional flooded rice crop tends to be bypassed
for a dry season irrigated rice crop using shallow pumps. Wet season rice will
continue to be the dominant source of income for all three lowland environments.
The upland environments change dramatically in response to commercialization.
Upland areas with soils that are relatively less susceptible to erosion tend to move,
with improved market infrastructure, from subsistence cereal and root crop

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Table 3 Substitution of traded for non-traded inputs

Level of market
orientation Power Soil fertility Fodder Human nutrition

Subsistence Animal/human Farmyard manure Crop residues Predominantly


systems home produced
Semi-commercial Motor/animal FYM and chemical Crop residues Home produced
systems human fertilizers and purchased
Commercial Motor Chemical fertilizer Purchased Predominantly
systems feed purchased

production to a variety of commercial enterprises. These include horticulture, tree


crops, dairy and cattle ranching. In Asia, commercial utilization of the uplands has
generally resulted in the movement out of upland rice production.
The extent to which agroclimatic constraints can be overcome, for example
through corrective investments, water control and drainage for rice lands, depends
on the nature of demand elasticities. Investments in land modification and the
expansion of area under a particular crop are profitable where farmers face an
elastic demand for that crop. Urbanization and trade liberalization lead to more
elastic demand for high value non-cereal food products, such as vegetables, fruit,
meat, poultry and dairy products.
At the farm household level, the transformation process leads to the replacement
of integrated farming systems with specialized commercial units. Specialized farms
for cereal crops, horticulture, aquaculture, poultry and livestock products emerge.
Integrated farming systems that include more than one of the above products
generally become infeasible at a commercial scale because of product specific
requirements in technical and managerial skills and infrastructural investments.
The increasing opportunity costs of non-traded inputs also encourage specialization
as discussed in the next sub-section. While the physical size of the farm may not be
a constraint to multiple enterprises, the time of the farmer-entrepreneur becomes
the ultimate binding constraint to multi-output production systems.

From non-traded to traded inputs


The increasing opportunity cost of family labor with the growth in off-farm
employment opportunities lead to a substitution of non-traded for traded inputs
(Table 3). Power, soil fertility maintenance, fodder for farm animals and household
nutrition are the primary activities for which non-traded inputs are used in
subsistence societies. The transformation of these activities during the process of
commercialization is discussed in the following sections.

Choice o f power sources: human and animal versus mechanical


Agricultural operations can be grouped according to the relative intensity with
which they require power, or energy, in relation to the control functions of the
human mind or judgement (Pingali et al., 1987). Operations such as land
preparation, transport, milling, grinding, and threshing are power intensive, while
weeding, sifting, winnowing, and fruit harvesting, for example, are control
intensive operations. Animal power was traditionally used for power intensive
operations while human power is still used for control intensive operations. One
should expect, that as wage rates rise, animal powered technologies will increasing-
ly give way to motor powered technologies. This trend is clearly seen across Asia

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and Latin America, especially with the advent of rental markets for machinery. The
replacement of animal power by machines for power intensive operations is
profitable even in countries with relatively slow income growth. The persistence of
animal draft power in many of these countries is not because motorized power, per
energy unit, is more expensive, but because of policies that impeded the growth of
machines and the provision of rental markets (Pingali et al., 1987). With increasing
commercialization, mechanical and chemical technologies will also substitute for
human labor for the more control intensive operations, such as weeding and
harvesting.

Chemical fertilizers vs farmyard manures


Intensification of land use is only possible with nutrient replenishment to the soil to
sustain its productivity. In subsistence societies soil nutrient supply is replenished
by farmyard manures. Output growth is intensive, commercially oriented food
production systems is not possible in the absence of chemical fertilizer use. There
are several reasons for this: (a) the physical quantities of farm yard manure
required for sustaining soil fertility would make it uneconomical relative to
chemical fertilizers, because of the labor requirements for manure production, the
feed requirements for maintaining the number of livestock required to meet
manure requirements and the high cost of transporting the manure to the field; (b)
on efficiency grounds, high bulk, low value materials - manure, agricultural
byproducts and crop residues - do not repay labor-intensive management simply
because they have such dilute concentrations of useful ingredients relative to
chemical fertilizers (McIntire et al., 1992); and (c) with falling fertilizer prices
relative to labor wages, and with improved transport infrastructure, chemical
fertilizers are the dominant choice for soil fertility maintenance.
Studies comparing chemical fertilizers and farmyard manures have shown that
per unit of nutrients, the yield response to farmyard manures and chemical
fertilizers is similar. In other words, manure does not produce responses different
from fertilizers at equal concentrations when applied with similar methods and
conditions. Moreover, the contention that manures have a cumulative effect and
therefore can replace future fertilizer applications has also been found to be
without an empirical basis (see McIntire et al., 1992, for an assessment of the
literature). From a sustainability point of view there are other technological
alternatives that are cheaper than farmyard manure use. For high intensity
production systems, further promotion of farmyard manure or any other organic
based system for replenishing soil fertility would not be successful.

Emergence of fodder markets


The early attraction of combining crop and livestock activities within the same
enterprise was the availability of cheap fodder for livestock, essentially crop
residues from the farm. Stall feeding of cattle and small ruminants with crop
residues was seen as a means of preventing the over grazing of marginal pasture
lands, especially common access lands. This argument no longer holds due to the
emergence of commercial fodder production and lower transport costs. Livestock
producers no longer need to grow their own fodder, so stall feeding can be
sustained on an economical basis with purchased fodder of higher quality.
The type of diet provided for commercially produced livestock has also changed,
grain, root crop or oilseed based rather than straw based, in response to the
demand for higher quality livestock perceived economies of home grown fodder no
longer exist. Han (1992) documents the growth in the feed industry in Asia with

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increased commercialization of the livestock sector. By the early 1990s, a total of


101 million tons of compound feed was produced in the Asia-Pacific region. China
and Japan are the largest feed producers in the region, accounting for 39 million
tons and 29 million tons, respectively. Feed production is mainly for swine, poultry
and cattle. Commercial feed production is expected to grow across Asia as the
demand for livestock products increases. In Korea, for example, commercial feed
production increased from 100 000 tons in 1963 to 11.5 million tons in 1991, an
increase of 115 times. Farm produced fodder will not be able to compete with
commercially produced feeds as wages increase and transport costs become lower.

Milk and meat for home consumption


As economies grow, the increasing opportunity cost of family labor, and the
increasing availability of commercially produced milk and meat, makes subsistence
production of livestock products uneconomical. Rural societies are no longer
remote self contained units that need to produce all of their food requirements.
Improved transport and market infrastructure makes subsistence food production
non-viable in all but the remotest locations. Northeast Thailand provides a striking
example of changing food consumption patterns in rural areas. In the 1960s meat
consumption was limited to special occasions such as festival, perhaps once or twice
a year. This pattern has changed, in favor of greater purchased meat consumption,
with improved transport infrastructure and increased family income due to seasonal
migration for urban employment (Vaiyasevi and Winichagoon, 1992).

Commercialization and diversification concerns


A number of concerns have been raised over possibly adverse consequences of the
transformation of agriculture through the processes of commercialization and
diversification, including concerns about household welfare, regional income
distribution, market risks and resource sustainability.

Household welfare
Von Braun (1995) argues that the large body of literature claiming that commer-
cialization of agriculture has mainly negative effects on the welfare of the poor was
mostly conceptually flawed, utilizing potentially biased samples and ignoring
confounding factors that influence welfare. Summarizing a series of comparative
studies of selected sites where farm household had recently switched from
semi-subsistence staple food production with low levels of external inputs to
production of more crops for sale in the market or to production with more
purchased inputs, von Braun (1995) finds instead that, with few exceptions,
commercialization of agriculture benefits the poor by directly generating employ-
ment and increased agricultural labour productivity. Both the households that are
commercializing their production and hired laborers receive direct income benefits.
Furthermore, in all but one study site, the increased household income generated
by commercialization was associated with an improvement in nutritional status for
children in the household.
However, von Braun (1995) also cautions that, while commercialization by itself
rarely has adverse consequences on household welfare, commercialization com-
bined with failures of institutions, policies, or markets can be damaging. It is
therefore essential that government policies facilitate the transition to commercial-
ized agriculture in a manner that benefits the poor and does not simply replace
subsistence-related production risks with new market and policy failure risks, which

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may be even more devastating to the poor. Important policy goals should include
avoidance of trade shocks and appropriate sequencing of input and output market
reform. Specific policies to facilitate household adaptation to commercialization
are described in the next section.
Regional income distribution
It has also been argued that commercialization that proceeds in certain regions but
not in others can worsen regional disparities, with lagging regions falling farther
behind as commodity prices drop in the wake of increasing productivity in the
rapidly growing region. The widening productivity gap between commercializing
regions and slower growing subsistence-oriented regions could not only accentuate
relative income differences, but even cause an increase in absolute poverty in the
lagging regions (David and Otsuka, 1994). In the study sites examined in von Braun
(1995), however, indirect income benefits were generated through the increased
demand for goods and services by the direct income beneficiaries as well as by
increased demand for inputs for commercialized agriculture. The wage rate and
employment benefits from commercialization spread to other regions when family
labor is withdrawn from the off-farm labor market, or when hired labor migrates
into scheme areas. The more mobile the labor force, the more the benefits from
commercialization will spread across the economy and other regions (von Braun,
1995). Similar results have been found for the spread of modern rice technology in
Asia (a classic process of commercialization). In a comprehensive cross-country
comparative study, David and Otsuka (1994) found that the differential impact of
new rice technology across regions did not worsen income distribution, due to the
significant indirect effects which worked through labor, land, and product markets.
Interregional labor migration from unfavorable to favorable regions tended to
equalize wages across regions, allowing landless labor and small farmers in
unfavorable areas to benefit also. Landowners in lagging regions were sometimes
worse off, but also partially protected incomes through diversification out of rice.
The key to the interregional spread of benefits from commercialization and
diversification (and resulting reduction in regional disparities) is thus the existence
of well-functioning product and factor markets. Where these markets do not
function well, regional disparities are likely to persist or worsen with region-specific
commercialization. In fact, Delgado (1995) argues that, in many countries in
Africa, the process of commercialization has been hindered by intersectoral and
interregional market rigidities. Unlike the quite open economies of much of Asia.
most African countries are only "semi-open." African economies are semi-open
because transport and other marketing costs often double or triple African export
values, f.o.b. African ports, relative to farm gate prices, and consuming point retail
prices for importables relative to their c.i.f. African port prices. High marketing
costs are a function of structural factors, such as poor infrastructure, large
distances, and the low volume of production; of direct policies, such as those
regulating traders; and of sectoral policies, such as taxation of spare parts for trucks
(Delgado, 1995).
The semi-open nature of many African economies implies that a failure to induce
productivity growth in the non-tradable food crop sector can choke-off an incipient
boom in a commercializing export sector. Since many wage goods, such as staple
foods, are effectively non-tradable, the increased demand for food due to the
export boom will bid up food prices relative to prices of agricultural exports.
Higher prices for food are then likely to lead to higher cost of living for agricultural
workers, given the importance of food in household budgets. Thus, higher relative

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food prices will both tend to raise the labor costs of export crop production and to
discourage export crop production by peasant farmers. Given the structural
rigidities in markets, a lagging sector or region acts as a drag on commercialization
of other sectors or regions. Because of these structural problems, Delgado (1995)
contends that crop- and region-specific government policies have a significant role
to play in providing incentives for commercialization and diversification in many
African economies. Policy implications of these structural rigidities in markets are
discussed below.
Price risk and diversification
Liberalization of domestic markets, through removal of quantitative restrictions on
trade and opening up of economies to internal trade opportunities is often a key
step in starting or accelerating the process of commercialization. However, the
opening of domestic markets also exposes producers to increased risk due to the
greater volatility of world prices. Governments have historically intervened heavily
in domestic markets to protect and stabilize the prices of agricultural commodities,
with the result that domestic producer prices have varied substantially less than
international prices. Quiroz and Valdes (1995) maintain that the welfare costs
arising from agricultural price fluctuations are in fact substantially higher than
usually thought, due to the patterns of price movements over time.
The international price risks of relying on a highly concentrated basket of
agricultural exports is shown dramatically for Africa. Food and beverages typically
account for more than half of merchandise exports in non-oil exporting African
countries. The top three agricultural exports have historically accounted for more
than 80 percent of agricultural export earnings in most African countries, causing
considerable year-to-year instability in foreign exchange earnings. The price risk
inherent in this level of concentration is shown by the 30-60 percent real price
declines for agricultural commodity exports between 1970 and 1994 for sub-
Saharan African countries. This high concentration and resulting price risk has led
to substantial agreement that diversifying the agricultural export base and diversify-
ing the economy across sectors of prime importance to long-run growth in Africa
(Delgado, 1995).
The relationship between diversification and risk is thus crucial in the context of
trade and macroeconomic reform designed to align domestic prices more closely
with international prices. Diversification is often seen as an efficient mechanism for
reducing the impact of risk on producers' welfare. However, Quiroz and Valdes
(1995) argue that diversification of production at the household level is unlikely to
greatly reduce price risk. The prices of agricultural commodities are highly
correlated, because they have common reaction patterns to aggregate, worldwide,
and macroeconomic shocks, so diversification of the crop mix at the household
level is unlikely to reduce price risk. Furthermore, the process of diversification is
itself likely to increase the correlation of prices. On the consumption side, the
increasing flexibility of diets (see above) means that more substitution in consump-
tion will occur, resulting in higher correlations of prices. On the supply side, to the
extent that investments in infrastructure and increased market integration make a
more diversified output mix possible there will be increased substitution possibili-
ties in production, resulting again in higher price correlations. A strategy aimed at
household-level diversification is likely to be self-defeating: the more each unit of
production is diversified, the more positive the correlation between prices, and the
lower the gains to diversification (Quiroz and Valdes, 1995).
However, from the economy-wide perspective, high price correlations of com-

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modity prices may not imply a serious problem, and may actually reduce the risk
faced by either the economy as a whole. Quiroz and Valdes (1995) note that
economies that are net exporters of cash crops and net importers of staples may
benefit from a positive correlation between prices of these product groups. In this
situation, farmers benefit from the positive correlation: a simultaneous decrease in
the prices of staples and the price of export crops will cause the real exchange rate
to increase, and hence, the real price of the staples they produce - denominated in
domestic currency - will not fall by the same magnitude that it would fall by in the
absence of the co-movement.
Given these relationships, the scope for agricultural diversification in response to
economic liberalization is severely limited at the individual producers' level by
co-movement of international prices of commodities (Quiroz and Valdes, 1995).
The probable outcome of trade reform will be an increased diversification in an
economy-wide sense, but not an increased diversification at the unit-of-production
level. The implications of this for agricultural pricing and public expenditure
policies are described in the next section.

Resource sustainability
Intensification of agricultural systems and the substitution of traded inputs for
non-traded inputs, specifically insecticides and herbicides, can lead to significant
environmental and health costs. Pingali et al. (1994) and Rola and Pingali (1993)
have documented the health costs associated with prolonged exposure to insecti-
cides. Pingali and Marquez (1995) provide evidence on the health consequences of
herbicide use. Removal of subsidies on chemical inputs and possibly taxing such
inputs to reflect their environmental and health costs would increase the efficiency
of input use and reduce environmental and health costs. Investments in training
could also help reduce the health and environmental consequences by transferring
to farmers knowledge- and management-intensive technologies, such as integrated
pest management, and integrated nutrient management, for reducing the depend-
ence on chemical inputs.
Crop diversification can directly address serious environmental problems by
providing a break in the monoculture system and improving crop system health. A
non-rice crop in sequence with rice that allows the soil to dry out, and/or enhances
soil nutrient supply or arrests pest build up can improve the productivity of the
subsequent rice crop. Diversification trends could, given the above positive effects,
be compatible with the desire for a more sustainable paddy land use system. It is
important to remember that even with increased commercialization and diversifica-
tion trends, primary staple crops will continue to be important, in relative and
absolute terms.

Implications for research and policy


Government policy has a crucial role to play in ensuring that the process of
commercialization and diversification of the agricultural sector is smooth. Govern-
ments have a difficult task to perform, because on the one hand, continued food
security needs to be assured for populations that are growing in absolute terms, on
the other hand, research and infrastructural investments need to be made for
diversification out of the primary staples. The tendency of Governments to react to
short term 'crisis situations' may be counterproductive in terms of meeting long
term goals of food security and income growth.
The key elements of a long term strategy to facilitate commercialization and

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economy-wide diversification are (1) research and extension to generate productiv-


ity and income-enhancing technologies; (2) economic liberalization, including trade
and macroeconomic reform and deregulation of agriculture; (3) development and
liberalization of rural financial and general capital markets; (4) establishment of
secure rights to scarce resources, including land and water, and development of
markets in these rights; (5) investment in rural infrastructure and markets; and (6)
development of support services, particularly health and nutrition programs.
Research
The primary objective of the research system during the process of commercializa-
tion and diversification remains to generate new technology that improves produc-
tivity and farmer income. In responding to diversification trends, the research
should not shift abruptly from an almost exclusive focus on one set of commodities
to another set of commodities. In addition to the productivity objective, the focus
of research should be to provide farmers the flexibility to make crop choice
decisions and to move relatively freely between crops, Both substantial crop-
specific research and system-level research effort will be required to provide
farmers the flexibility of crop choice. Crop-specific research includes increases in
yield potential, shorter duration cultivars, improved quality characteristics and
greater tolerance to pest stresses. System-level research would include land
management and tillage systems that allow for shifts of cropping patterns in
response to changing incentives and farm level water management systems that can
accommodate a variety of crops within a season. Also important at a system level
are research on the carryover effect of inputs and management practices across
crops, for instance, high insecticide applications, or the effects of intensification in
terms of prolonged water saturation, the build up and carry over across crops of
pest populations, rapid depletion in soil micro-nutrients and changes in soil organic
matter could lead to reduced productivity of rice monoculture systems over the
long term. Given growing populations and income induced demand for increased
cereal consumption there continues to be a strong need to seek higher productivity
levels for staple cereals. The need for increasing the productivity of cereal crops is
higher the greater the diversion of high potential irrigated lands to non-cereal
pursuits.
Although research can assist in providing flexibility in crop choice, research
priorities must still be set across crops - it is not possible to avoid picking
commodities for the future when setting agricultural research priorities. Delgado
(1995) argues that investments in agricultural research systems and extension
systems for productivity growth necessarily are largely commodity-specific. Furth-
ermore, in Africa, because of a greater diversity of environments compared to
Asia, choice of commodity generally implies a choice of region of production within
countries, which in turn implies ethnic and political choices. The corollary is that, in
Africa, unlike much of Asia, even basic research is likely to vary across regions,
implying a more targeted approach to priority setting.
E c o n o m i c liberalization
Ultimately the process of diversification must be consistent with the opportunity
costs of commodities and scarce resources which are reflected in world prices.
While historical protection of staple food prices has had significant social benefits
across Asian countries, there is a need to assess the extent of protection to be
provided in the face of commercialization. Long-term differences between domes-
tic and world prices are costly to the economy. If the domestic price of a commodity

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is lower than the world price, farmers are penalized and incentives to production
reduced. If the domestic price is higher than the world price, consumers are
penalized, and excess productive resources are devoted to production of the
commodity. Moreover, in many countries, the indirect effects of trade and
macroeconomic policies have caused overvaluation of the real exchange rate,
reducing real agricultural prices.
The main components of economic liberalization are a reduction in trade
restrictions (elimination of quantitative restrictions, uniformization and reduction
of import tariffs); an alignment of macro policies (reduction of fiscal deficits,
elimination of multiple exchange rates, easing of exchange controls), and a
liberalization of markets in general, including financial markets, asset markets, etc.
(Quiroz and Valdes, 1995). This reform process opens up international trade
opportunities and provides price signals to guide producer decisions, encouraging
diversification of the economy.

Capital markets
Along with the increased opportunities of liberalization come increased risks. As
described above, agricultural producers will face increased price volatility as
domestic prices are pegged more closely to international prices. Simultaneous
reform to liberalize and integrate capital would reduce the costs of increased price
variability through risk pooling on an economy-wide basis (Quiroz and Valdes,
1995). Financial integration for risk spreading is critical at the rural household level
as well. In order to exploit the income-enhancing potential of commercialization of
agriculture, financial markets must accommodate the increased ability of house-
holds to save and build up productive asset bases and improve human resources.
Rapid development of rural finance systems at the grass-roots level is thus crucial,
particularly since commercialization of agriculture often leads to large lumpy
payments of cash a few times a year. The process of commercialization itself can
provide the critical market size required for efficient, unsubsidized rural banking
with low overhead costs. Effective rural financial institutions assist in the spread of
the benefits of commercialization more widely across the community and region
(yon Braun, 1995).
Property rights
General economic liberalization provides the opportunities for diversification and
commercialization, but also places a premium on flexible farmer response in
allocation of water, land and other resources in response to changing prices,
comparative advantage, and economic opportunities (Rosegrant et al., 1995). If
rights to the basic resources such as land and water are poorly secured and
enforced, these resources can remain locked into inefficient uses. Some of the
worst apparent failures of commercialization cited in the literature, such as
evictions of farmer-tenants, can be traced mainly to poorly defined land rights,
rather than to the process of commercialization itself (von Braun, 1995). Existing
land tenure problems are exacerbated when net returns to land increase
substantially due to commercialization, increasing the incentives to evict tenants.
Secure land rights significantly improve the prospects for commercialization.
Efficient land markets and secure property rights are critical for efficiency and
agricultural growth (Feder et al., 1988; Binswanger et al., 1993). Secure rights to
land create the incentives farmers need to invest in land improvements that
conserve and increase the long-term productivity growth which can be induced by
the start of commercialization. Secure land rights are complementary to policies to

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liberalize and integrate capital markets, because secure rights increase the
probability that farmers can recoup the benefits from long term investments,
thereby increasing their willingness to make them. Because they can act as
collateral to loans, secure land rights also increase lender willingness to offer credit,
leading to easier financing of purchased inputs and land improvements (Hazell and
Rosegrant, 1994; Feder et al., 1988).
Establishment of secure water rights would also increase the potential for
diversification of cropping systems. Large scale diversification of cropping systems
in Asia necessarily involves diversified production in the irrigated lowlands,
because of the importance of irrigation to overall agricultural production. Many
observers have argued that existing irrigation systems constrain diversification
because of the rigid design of infrastructure and inflexible water delivery systems
(World Bank, 1988). Following from these arguments, technology-based solutions
to diversification within irrigation systems are advocated, mainly capital investment
in improved conveyance, diversion, and drainage systems. However, Rosegrant et
al. (1995) argue that a failure to diversify within irrigation systems is fundamentally
the result of incentive failures resulting from centralized allocation of un-priced
irrigation water. Policies that establish secure, tradable water rights and develop
markets in tradable water rights could establish incentives to economize on water
and choose less water intensive crops, particularly in the dry season, by inducing
water users to consider the full opportunity cost of water.
Secure water rights also provide benefits similar to secure land rights,
empowering water users by requiring their consent to any reallocation of water and
compensation for any water transferred; providing the assurance that water users
can invest in water-saving technology knowing that they will benefit from the
investment; and providing incentives for water users to take account of the external
costs imposed by their water use, reducing the pressure to degrade resources.
Establishment of transferable water rights can provide maximum flexibility in
responding to changes in crop prices and water values as demand patterns and
comparative advantage change and diversification of cropping proceeds (Rosegrant
and Binswanger, 1994).
Rural infrastructure
Infrastructural investments play a crucial role in inducing farmers to move towards
a commercial agricultural system. Based on the Asian experience, it is often argued
that the emphasis for infrastructural investments should be on improving general
transport, communications, and market infrastructure, while allowing the private
sector to invest in commodity-specific processing, storage and marketing facilities.
Governments should not preempt private sector decisions by taking a "pick the
winner" attitude towards diversification.
However, as in the case of research, it is often impossible to avoid picking
winners (or at least giving differential support) across commodities. Delgado (1995)
again shows that, in Africa, investment in rural infrastructure is commodity-group
specific, and often commodity specific, because of the three-way correlation among
regions, agroecological zones, and agricultural production. A decision to build a
road in a specific location is also a decision on the mix of products to be produced
and marketed. The priority-setting process is further complicated because infras-
tructural investments take time to implement and demand careful attention to
sequencing. Adjustment of investment strategies to major changes in relative prices
must also be consistent with macroeconomic adjustment objectives. These invest-
ments will include private sector initiatives, but will necessarily be led by

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investment in public goods targeted to specific commodity groups. According to


Delgado (1995), a vision of where market opportunities are likely to evolve is
fundamental to agricultural diversification strategy in Africa.

Support services
In addition to the general policies to facilitate commercialization and diversification
described above, support services can increase the benefits and reduce the
probability of adverse consequences from the process. Foremost among these
support policies are health and nutritional services (von Braun, 1995). Nutritional
improvements are determined by health, as well as to food consumption. Negative
health effects from poor household and community health and sanitation can
dominate potential positive effects of income growth from commercialization.
Increased income and food consumption help to reduce hunger but cannot solve
the problem of preschool children's malnutrition, which results from a complex
interaction of lack of food and morbidity. Health and sanitation in rural areas must
be promoted through improvement of community level health services to fully
exploit the welfare effects of agricultural commercialization (von Braun, 1995).

Conclusions
Commercialization of agricultural systems is a universal and irreversible phe-
nomenon that is triggered by economic growth. While the rate at which the above
transformation occurs varies by continents and by countries within continents, the
direction of change is the same across the world. Structural adjustment and trade
liberalization policies that are currently being implemented in much of the
developing world can be expected to further enhance the speed at which the
commercialization process occurs. Commercialization trends require a paradigm
shift in agricultural policy formulation and research priority setting. The paradigm
of staple food self-sufficiency, that has been the corner stone of agricultural policy
in most developing countries becomes increasingly obsolete with economic growth.
The relevant development paradigm for the 21st century is one of food self-
reliance, where countries import a part of their food requirements in exchange for
diverting resources out of subsistence production. Future emphasis of agricultural
policy ought to be on maximizing farm household incomes rather than generating
food surpluses.
Commercialization of agricultural systems can be expected to lead to substantial
changes in the organization of production. At the regional, national and provincial
levels, product choices could be determined more by a comparative advantage than
by food needs of the particular political/administrative unit. Withdrawal of labor
out of the agricultural sector could over the long term result in the consolidation of
farm holdings and the mechanization of labor intensive operations, especially in the
high potential environments. Increasing opportunity costs of family labor may
result in the emergence of contract farming, either on a whole-farm basis or by
specific operations, such as pest control. Growth in non-agricultural employment
opportunities could also reduce the need to expand subsistence production on
marginal lands.
Agricultural commercialization should not be expected to be a frictionless
process, and significant equity and environmental consequences should be antici-
pated at least in the short to medium term, particularly when inappropriate policies
are followed. The absorption of the rural poor in the industrial and service sectors
has significant costs in terms of learning new skills and family dislocations.

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Commercial systems could also face higher environmental health costs, especially
in terms of higher chemical input use. Higher opportunity costs of labor increase
farmer reliance on herbicides for weed control for rice and other staple food crops
that are currently managed through hand weeding. Insecticide and fungicide use for
high value crops, such as vegetables and fruits, is substantially higher than for
staples and improper use can increase the incidence of pesticide-related illnesses.
Also, where property rights are not clearly established, high value crop production
in the upland environment could lead to higher risks of soil erosion and land
degradation.
Appropriate government policies can alleviate many of the possible adverse
transitional consequences arising from the process of commercialization and
diversification. Important long term strategies to facilitate a smooth transition to
commercialization include investment in rural market, transportation and com-
munications infrastructure to facilitate integration of the rural economy; invest-
ment in crop improvement research to increase productivity, and crop management
and extension to increase farmer flexibility and reduce possible environmental
problems from high input use; establishment of secure rights to land and water to
reduce risks to farmers and provide the incentives for investment and productivity-
and conservation-enhancing technology; development and liberalization of capital
markets to provide liquidity and spread risks as commercialization proceeds; and
provision of support services, including health, sanitation and nutrition to trans-
form the income benefits from commercialization into broader human welfare
benefits.

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