Specialisation and economies of scale or diversification and economies of scope? Assessing different agricultural development pathways

Abstract For decades agricultural development has been led by a modernisation paradigm based on specialisation, intensification and scale enlargement. This model of development model has been supported by means of price support policies and, often, strong central marketing agencies, which had a stabilising effect on prices and significantly reduced market risks for an array of commodities. The economic rationale of this model is based on the pursuit of economies of scale and highly efficient technical production. This model has led farmers to increasing their technical capacity and to neglect activities such as marketing, which was delegated to specialised marketing agencies. In this paper we argue that such specialisation has weakened the economic resilience of farms. Although a high level of specialisation allows farmers to be technically efficient, acquire highly specific production skills and apply the latest production techniques, it also leads specialised farms to be highly dependent on the commodity market(s) in which they operate, increasing their economic vulnerability. As markets have become deregulated, prices of both inputs and produce have become more volatile, often compromising the economic sustainability of these specialised farms. The weakened economic resilience of such farms has been aggravated by the gradual dismantling of producer price support causing an increase in price volatility, which has become a near-universal phenomenon for almost all agricultural produce. Highly specialised farming is now only viable where markets are stable and this requires the existence of effective market agencies and strong inter-branch organisations and/or the prevalence of contract farming. The increasing market orientation of the CAP, the fragmentation and weakening of marketing agencies and – last but not least– the growing societal demand for a more sustainable agriculture have led many farmers to rethink their farm development strategies. They are rediscovering farm diversification as one way of reducing market risks, as well improving the efficiency of the farm's organisation and resource use. Economies of scope emerge when a farmer can use the same input(s) to produce two or more products, and lower the cost of producing them separately. To achieve this end the inputs have to be complementary. By developing cost complementarities between different crops or livestock species, diversified farms can become more efficient than specialised farms. Another way that diversified farms can increase their economic sustainability is to partially produce for niche markets thereby generating a higher added value. A product mix of high quality products, possibly from the same production sector, but aimed at different, specific, market segments can further contribute to increasing the overall profitability of diversified farms. This paper summarises a series of case studies from EU member states and Israel which illustrate how farmers are experimenting with alternative pathways of development based on diversification. It is also shows the challenges they face. These include learning the skills for marketing high value-added farm products, establishing short food chains and the rebuilding supportive social and economic networks. The latter is particularly important when farms are too small to diversify effectively individually. Farms that participate in these economic networks are more able to internalise external economies generated within these networks and develop their knowledge of marketing and production through close cooperation with other farms. In some of the case studies the success of diversification clearly depended on the ability of farms to collaborate and share knowledge especially when new technical capacities for say, introducing crop diversification or intercropping, needed to be acquired. The knowledge involved in developing new crop rotation patterns, knowing about crop associations and combinations of crop and livestock activities was either developed ex novo or by rediscovering traditional knowledge. At the same time training in marketing food products is also a key to successfully shifting from being a specialised farm to a diversified one. Farmers need encouragement in order to work together and share their knowledge and experiences of diversification strategies. To this end policies that support collaborative networks are needed. Policies are also required to help establish and sustain collective marketing initiatives, especially short and direct supply chains. Finally, public support to assure against market risks is very helpful when farmers are entering into new markets. These policies are essential to support the existing processes of change that are occurring at grassroots level which are leading to a new model of farm modernisation. The specific contribution that this paper makes to the rural social science literature is to empirically highlight the limitations of theories about the benefits of economies of scale.