| Livestock Research for Rural Development 13 (3) 2001 | Citation of this paper |
This study examines agricultural development of the coastal irrigation zones in Southern Peru. A historical review gives evidence that the establishment of a dairy enterprise and its extension activities have shaped the agricultural and regional development in the past. The fast expansion of milk production is strongly related to farmers’ propensity for income security independent of farm size. In order to expand the cultivation of agricultural crops, to boost regional development through the generation of additional job opportunities and income, market-oriented policy interventions are necessary that reduce price fluctuations for agricultural crops.
Export agriculture plays an important role in Peru, creating added value and job opportunities and thus boosting the country’s economic development (Figeroa 1992; Revesz 1992). The ongoing deregulation of international agricultural markets encouraged by the World Trade Organization has created even more potential for economic development in developing countries through agricultural production. But in Peru this potential is still largely untapped.
However, there are no reasons why Peru could not take advantage of its export potential, similar to Chile. Along the Peruvian coast, "greenhouse-like" conditions prevail and crops can be grown year-round (Alberda 1984). The production potential of this environment has led to large public infrastructure investments in irrigation with water from the higher-altitude Andean region (Tealdo, 1995). In recent decades, these new irrigation zones have increased cultivable agricultural land in southern Peru by more than 20,000 hectares. Thousands of additional hectares are expected to come under production within the next few years (Fundación José Rodríguez Banda 1993).
De facto past and current agricultural production within the irrigated zones in southern Peru do not concur with the original Government plan for agricultural development in that region. Despite the Government’s intention to augment the production of agricultural crops for domestic consumption and export (República del Perú, 1986), current production in southern Peru is devoted to fodder (Valenza, 1991), and the region has become the most important milkshed in Peru (Gallard and Vallier 1988; Bernet 1998).
This paper examines why farmers have such strong propensity for milk production despite the fact that agricultural crops are more profitable (Cannock and Chumbe 1993). A historical review of the region's development and applications of an economic household optimization model point to factors that most strongly influence farmers’ production decisions, shaping at an aggregated level regional development trends. Based on the understanding of farmers’ production context and decision-making, extension and policy measures are identified that most strongly would boost agricultural and regional development in southern Peru.
Agricultural production in southern Peru has changed considerably over the last 100 years. Until the 1930s, its coastal areas were relatively unimportant for agricultural production compared to the highlands, where wool was produced for the textile industry. The coastal valleys mainly produced cereals for local consumption. As animal husbandry was of secondary importance, only 20% of the total planting surface was used for fodder production. Yet, milk production started to become more important as local manufacturing of textiles caused higher living standards and an increased demand for dairy products in the city of Arequipa (Gallard and Vallier 1988)..
The existence of milk production and the
potential to expand fodder production in the region led to
Carnation's decision to invest in the establishment of the Gloria
milk processing plant in Arequipa in 1939. This provoked rapid
changes at the regional level (Gallard and Vallier 1988), since
higher milk prices paid to farmers by this enterprise led to the
eventual disappearance of most regional cheese makers (Junta de
Acuerdo de Cartagena 1987). At the same time, the profitability
of milk production together with perceived market security and
the provision of regular income provided an incentive for farmers
to gradually replace cereals with fodder production (Carpio, 1987).
This process was supported by Gloria, which quickly expanded its
milk collection system across the entire region[1]
promoting the expansion of alfalfa and the importation of pure
milk breeds from temperate countries (Gallard and Vallier 1988).
To encourage farmers to adopt these new technology components,
Gloria created its own extension service supported by an
enterprise-owned experimental farm inaugurated in 1946 (Fundación
José Rodríguez Banda 1993).
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Map of the project area
Gloria also played a key role in publicizing the region’s potential for development, which led to substantial public infrastructure investments (Gonzales et al 1979). Subsequently, from the 1940s until now, the government has implemented the construction of dams and water channels to irrigate the vast ‘pampas’ — plateaus located between the irrigated river valleys. The implementation of these new irrigation zones has doubled the cultivable area around Arequipa since the 1940s. As irrigation zones have become more important for agricultural production within the region in the last few decades, the river valleys have lost relative importance. The cultivation of alfalfa has sharply increased, for being the best initial crop in newly irrigated areas. Alfalfa not only helps accumulate organic matter in the sandy soil but, as a perennial crop, it also helps farmers avoid liquidity problems during their first years of agricultural production, when investments are high. The expansion of alfalfa was also fomented by the existence of secure market for milk and hay, induced by Gloria’s presence. Altogether, milk production in the irrigation zones has increased rapidly, reaching today around 70 percent of the region’s total milk production (Fundación José Rodríguez Banda 1993).
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Figure 1.
Evolution of the cultivated area in the province of arequipa plus
Lluta district.
Source: Ministry of Agriculture (Arequipa), INEI[2]
agricultural census data of 1961, 1972, and 1993.
Over the last few decades, the cultivation of agricultural crops has also increased, but not as fast as the rising area of alfalfa production (i.e., increase in absolute terms, but not in relative terms). While cereals have lost importance, vegetable crops — particularly onions, garlic, and potatoes — together with fruit and industrial crops have expanded rapidly within the last 30 years, especially on land already under cultivation (Pedraza 1993).
The growth in agricultural production in the region stimulated migration from the highlands to the coastal areas. Hence, the majority of the landowners and the agricultural labor pool, counting nearly 40,000 persons, come from the Andean highlands (Montes 1994). Because growth in the demand for labor is caused mainly by agricultural crops that require vast labor for seed selection, weeding etc. (i.e., less strenuous physical work) — such as potatoes, onions, and garlic — women have gained relative importance, due to their efficient work at lower cost (Montes 1994).
With the establishment of new irrigation zones, the number of landowners in the region has increased; however, farm size has not changed significantly during the last three decades. Eighty percent of all farms in the region are still less than 5 hectares. Small farms still dominate agricultural production and hence the milk market. Eighty six percent of Gloria’s milk providers produce less than 90 liters per day. These farms have a maximum of about 10 dairy cows but collectively furnish around 60 percent of all milk delivered to Gloria. Yet, these regional production patterns may change if farmers in the irrigation zones shift more strongly toward agricultural crops in the future.
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Figure 2.
Development of farm sizes in the province of Arequipa from 1972
to 1993.
Sources: INEI, Agricultural Census data 1972 and 1993
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Figure
3. Milk producers
and delivered milk to Gloria in 1992, in categories of delivered
volume (liters per day).
Sources: Fundación José Rodríguez Banda (1993).
A farm household optimization model was used in this study to anticipate farmers’ production decisions and thus assess future development trends at the regional level. This farm household model, based on linear programming, was specifically built to reflect farmers’ decision-making within varying production contexts (see Bernet et al 2000). In brief, this model maximizes agricultural net income[3] across all user-defined (potential) production options and restrictions. The time frame is one year, divided into four quarters to better account for seasonal variation in production factors and options. Thus, the model’s (optimal) solutions represent production patterns that provide maximum net income within the specified framework in each scenario. By comparing these simulated outcomes to real production patterns, strategies can be formulated that help improve farmers’ income levels. Similarly, the model helps assess how potentially changing factors (eg: prices, limiting production factors) might influence farmers’ income and agricultural production. Most important the model assesses income risk of different production patterns, using a MOTAD (Minimization Of the Total Absolute Deviation) module (Hazell and Norton 1986) to convert historical price fluctuations into expected income risk.
The baseline for the model simulations was the definition of a typical farm within the study region. Majes, the most important irrigation zone, was chosen as the main area for data collection (see Figure 1). Given a planned expansion of 10,000 hectares over the next few years[4], Majes will become even more important for the development of the region as a whole. Moreover, the typical Majes farm, as devised by the Government in the planning phase of the irrigation zone, represents a suitable farm type in terms of size (five hectares; see Figure 2) and production patterns (mixed farming system with a predominance of milk production).
In Majes, a survey of 30 farms was conducted to determine common farm practices, production levels, prices, etc. This information was complemented with other available information on the study area such as previous research studies and site-related statistics (for prices and production levels) to define average production conditions (Diaz 1999). The production context was modified in cases where high standard deviations of certain values indicated big differences between farms (eg: farmer equity, crop prices, milk production, calving interval). In these cases, the application of sensitivity analysis helped reveal the expected impact of these differing factors. Additionally, data from two large farms within another irrigation zone (Santa Rita) were collected to better determine production implications when farm sizes increase over the long-term.
Climatic conditions throughout the region are very favorable (high average temperatures and high solar radiation), enabling farmers to cultivate crops during the whole year (Zipori et al 1982). These conditions allow the growth of a wide range of fruit, vegetable, and industrial crops as well as common fodder and cereal crops. Climatic conditions in Majes are particularly favorable for potato production as tuberization is enhanced by the low night temperatures (between 6 and 15ºC) due to the relative high altitude (around 1400 masl) (Alberda 1984). Both agricultural and fodder crops are embedded in a crop rotation. Each farmer decides the extent of specialization in either crop or milk production. Alfalfa is commonly cultivated for three-year periods and thus restricts crop rotation more than annual fodder crops such as corn.
Farmers, particularly those in Majes, have had good access to extension services due to the involvement of international development agencies, mainly from the European Union, providing research and technical support with respect to agricultural crop and milk production (Proyecto Piloto Majes 1992). [5] Other irrigation zones have benefited mainly from Gloria’s extension service, which provides equally valuable services, at least in the domains of animal husbandry and fodder production (Fundación José Rodríguez Banda 1993). The provision of these services, however, has created certain farmer dependency on the milk buyer, as the costs of these services are directly linked with automatic deductions in milk payments.
Most farmers seek access to any potential form of credit. As equity is one of the most limiting production factors in the region[6], loans are extremely important for farmers. Local banks or other credit institutions provide limited access to credit, and the loan cap varies markedly between farms. Lender trust in the borrower, based mainly on past experience, seems to be as important as a viable mortgage.
In contrast, access to water is generally not a problem, despite the desert conditions. Farmers’ abundant water access and low pricing[7] provoke inefficient water use, particularly in Majes (around 20%) (ITDG and SNV 1993). Access to labor does not pose a problem either, although prices may fluctuate between seasons in response to changes in labor demand and supply, especially during the planting and harvest seasons of vegetable crops (Montes 1994). Most farmers in the irrigation zones hire additional labor to grow labor-intensive crops, since daily wages are relatively low: US$4.8 for men, and US$3.9 for women (as of September 1999). The main restriction is to some extent liquidity, as the workers must be paid at the end of every labor day.
In contrast to most agricultural production areas in Peru, the irrigation zones of southern Peru have the advantage of being well situated, next to the Panamerican Highway. This means that products can be transported easily to the major national markets and ports. While the city of Arequipa is important for purchasing agricultural production factors, Lima is the most important consumer market. Because of the general lack of food-processing enterprises in that region, agricultural products are sold mainly on place to intermediaries (transportistas) who deliver to the national and international wholesale markets (eg: potatoes and onions, respectively).
In contrast, milk is mainly sold directly to the major milk processors in the region, Gloria SA and Laive SA, both located in Arequipa. These enterprises deliver their dairy products to the national market. Since Lima is the primary consumer region, both enterprises run another processing plant near Lima.
Milk collection is mainly in the hands of the dairy processors. Their milk collection routes involve all coastal irrigation zones of the region. In the case of small farmers, enterprise-owned milk cans are used, which are collected by common trucks along the roads. On larger farms, milk-cooling trucks are used, as milk is stored in a cooling tank on-farm until discharge. In Majes, five (subsidised) milk collection centers allow the gathering of 80,000 liters of milk per day from small farmers (45% of the irrigation zone’s total milk supply). This leads to a milk price increase for these farmers in the magnitude of 10%, from around US$0.18 to US$0.20 per liter. However, this milk price is still far below from what large milk producers receive for their milk (US$0.24), yet deliver more than 1,800 liters per day.[8]
Small farmers have no influence on milk prices because of the oligopoly power of milk buyers (Gloria SA and Laive SA). The advantage of producing milk for farmers is short-term income and secure prices, in contrast to agricultural crops whose prices undergo strong fluctuation not only between seasons but also between years (Figure 4.).
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Figure 4.
Development of real farm gate prices for potatoes, garlic, onion,
and milk between 1994 and 1998.
Source: Ministerio de Agricultura – Oficina de Información
Agraria (1994-1998).
Equity is one of those factors that vary strongly between farmers, as it is influenced by both farmers’ individual income and expenditures levels. Larger and more efficient farmers reach in general higher net incomes and are therefore in a better position to accumulate savings and generate more equity in the future (Figure 5).
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Figure 5. Impact of different own equity levels on expected net income and production pattern.
Not considering price and income risk, equity (including access to loans) strongly impacts the production and expected net income of farmers. Given the high investments in crop production, an equity-constrained farmer emphasizes milk production, cultivating a high share of the area with fodder crops (around 75%) and keeping more dairy cattle (around 8) (Figure 5). Expected net income is much lower in this case, attaining only about two-thirds of the maximum net income (US$6,400), which is reached with a crop-oriented production.
Nonetheless, in spite of the dominance of milk production on equity-restricted farms, agricultural crops remain important: 40% of the farmer’s total income is still generated through the production of agricultural crops (eg: potatoes and onions). This clearly shows the higher profitability of agricultural crops than milk. Since agricultural crops require considerable investments, milk production — with its regular income — plays an important role in financing their cultivation.
Risk analysis shows that farmers actually are not in the position to reach maximum income, because a crop-oriented production occasions too high income risk (Figure 6). The maximum income of more than US$6,000, reached mainly with crop production, would entail a deviation in net income that is almost as high as the net income itself. In other words, farmers face tremendous income fluctuations with crop-oriented production. Consequently, this income risk drops when farmers diminish the proportion of agricultural crops on their farm area and increase fodder crops.
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Figure 6.
Relationship between maximum net income and
minimum deviation of net income considering different
levels of own equity and reduced price risk.
Hence, farmers will tend to choose a milk-oriented production pattern in which only about 75% of maximum net income is attained and where fodder crops account for more than 70% of the total cultivated area. This production pattern actually matches the one farmers choose in the absence of sufficient equity, the other major production constraint (A in Figure 6). In this sense, in order to reach the maximum net income level of US$6,000, farmers require more price stability for agricultural crops and sufficient equity (B’ in Figure 6).
Nonetheless, farmers’ individual attitudes toward risk may differ based on the specific preconditions of each farmer and his ability to cope with income shortfalls. Farmers with low expenditure levels and/or the possibility to access "emergency money" are in a far better position to "gamble" with agricultural crops. Thus, a farmer with a 5% probability of losing money (ie: every 20th year) is in a position to choose a crop-oriented production pattern through which, on average, he will attain 90% of the maximum income (Figure 7). Contrarily, a farmer with fixed expenditures, for example $ 2,000 per year, will tend to choose a production pattern for which the probability of financial loss is zero and the probability of not reaching a net income below this threshold level is below 5%. In this sense, maintaining a greater degree of security and precluding the chance of any financial loss has a cost, which is expressed by the fact that only 80% of the maximum net income can be attained in this case.
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Figure 7. Cumulative probability function of different production patterns defined by different net income levels.
Since agricultural crops remain important even under risk-aversion and in the absence of sufficient equity, when most area is cultivated with fodder crops, crop prices and yields are as important for farm income as milk prices. A 30-percent increase in agricultural crop prices leads directly to a 30-percent increase in income (Figure 8). Indeed, this impact on income would be even more significant if less risk were involved in crop production and hence a higher share of the farm area would be cultivated with these crops. In such a case, fodder crops would be largely replaced by agricultural crops as a response to the increased profitability of the latter.
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Figure 8. Response of net income on the variation of prices and management effects.
On the contrary, similar effects would be expected if crop prices
decreased. However, lower crop prices would hardly affect the
production pattern, or the share of agricultural crops on the
cultivated area. Despite lower prices, agricultural crops would
remain more profitable than milk production.
Substantially lower milk prices do not lead to a general substitution of agricultural crops for fodder crops, but rather to the substitution of alfalfa in place of corn and agricultural crops. This same effect also occurs when cows reach lower milk production levels. In sum, within the given context that crop production involves high risk, a decrease in the profitability of milk production leads to an extensification of fodder production, characterized by lower labor and capital requirements, where income risk is drastically reduced. However, the drop in net income is considerable, reaching up to 50% when profitability of milk is very low (Figure 8).
Net income is also influenced — but to a lesser extent — by the quality of fodder management. A 30-percent yield increase in the case of alfalfa enhances net income by 10 percent and, in the case of corn, by 15 percent (Figure 8). In fact, model results indicate a substantial substitution effect between alfalfa and corn, despite the fact that they are always grown together. In general, corn (fresh and silage) gains relative importance over alfalfa when milk becomes more profitable, as a result of higher milk production or milk prices. Indirectly, other agricultural crops also become more important when more corn is grown, for occupying the same terrain within the annual crop rotation. In contrast, when alfalfa, as perennial crop, dominates production and covers more than 65 percent of the area, the cultivation of agricultural crops is constrained by an ineffective crop rotation.
Income varies also markedly with improved herd management, defined by lower mortality rates, shorter calving intervals, and earlier first insemination of heifers. Very good herd management results in an income increase of 25 percent. This is partially attributed to higher income through animal sales, as mortality rates are lower; but more important are the efficiency gains of overall production, strongly driven by the shortening of the calving interval (from 15.7 to 13.7 months). As general calving during the first months of the year coincidences with higher production levels of corn, farmers benefit directly from cost-effective fodder production and indirectly from growing potatoes on this same surface once corn is harvested. Very good herd management or improved milk prices, however, makes milk production still not as profitable as crop production.
Thus far, the study analysis has focused on the typical five-hectare farm in Majes. Therefore, land was considered a fixed production factor. Over the long term, however, land must be considered variable, since successful farmers will tend to acquire more land for agricultural production. The question remains what impact farm size might have on farmers’ net incomes and production, and what implications are expected for the region.
The most important effect of farm size is its impact on farmers’ individual savings capacities. With only three hectares, for example, a farmer will most likely not be able to cover his daily family expenditures. With no money savings at such small farm sizes, farmers are not able to undertake investments which help improve future productivity levels and hence the living standard. Given the fact that one hectare derives a net income of around US$800, farm income and savings improve considerably with each additional hectare (ie: marginal increase in net income exceeds by far marginal expenditures).
Consequently, farmers with abundant land are in a far better position to invest in both on- and off-farm activities to further improve their production and income base. The experience in southern Peru indicates that an increase in farm size often occurs in tandem with a social process that changes the role of the farmer. Owners of larger farms tend to become farm managers who no longer live on the farm and dedicate most of their time to off-farm activities, leaving farm responsibilities to their employees. In this sense, agricultural production must be seen as an important initial activity promoting the development of the other sectors within the region. This process is accelerated by the fact that owners of larger farms are in a much better position to negotiate not only higher product prices on the output side (eg: milk, vegetables) but also cheaper prices for production factors on the input side (eg: feed concentrate, pesticides).
Despite the fact that larger farms have higher income and savings levels, model results show that they do not expand agricultural crop cultivation accordingly. This is attributed to the fact that price and income risk remains equally important on larger farms, as risk increases proportionally with the expansion of agricultural crops. Consequently, the production pattern is the same on large and small farms, unless larger farmers attain better market placement of their produce achieving more price security (ie: lower price fluctuations).[9]
Overall, the most significant change that occurs as farm size increases is a strong shift from family to hired labor. This not only affects on-farm production but also has strong implications for regional development, as the composition of income generation and the demand for infrastructure alter. Moreover, structural differences in expenditures between family and hired labor may hold other important implications for regional development, as well as the size and the proportion of the temporary versus the permanent labor pool. Although this issue is highly relevant regarding the potential expansion and intensification of the irrigation zones in southern Peru, it cannot be addressed in detail here due to the lack of available expenditure data.
By comparing present general production with the model’s results, we conclude that farmers are currently close to optimal production within the given context. The best potential for raising farmers’ income in the short-term lies in further expansion of corn at the expense of alfalfa, leading indirectly to a moderate expansion of agricultural crops grown within the same annual rotation. The latest fast increase in corn and potato production in Majes shows that this process has already started.
As agricultural crops are more remunerative than milk production, and generate considerably more labor opportunities and added value at the regional level than fodder crops, it is important to better exploit southern Peru’s production potential for these crops. A stronger orientation towards export crops would also induce positive effects in other regions. As southern Peru would diminish its production for the domestic market, product prices would increase and producers in other regions would benefit from expanding their production share. This would certainly apply to milk and potatoes, where a strong increase in production, particularly in Majes[10], has strongly affected market prices at the national level. Moreover, the corresponding intensification of production in Southern Peru would create better job opportunities for persons from other regions, especially mountain areas. Such labor demand driven migration from the Andean highlands to the coast is likely to increase farm size in the highlands, which is key for creating better living conditions for farmers, given the small average farm sizes (Bernet and Tapia 1999).
Most crucial for achieving a higher share of crop production in southern Peru is the reduction of product price variability for farmers. Higher price security would also help diminish credit constraints for farmers, as local banks are likely to increase credits to farmers when confronting a more secure production context.
To accomplish more stable prices, large export markets and processing options must be targeted. Successful development and monitoring of the ‘production-processing-marketing’ chain will depend on government interventions that effectively promote capacity- and institution building through which the necessary know-how, to do so, is accumulated. Similar to the case of asparagus[11], the government should play a stronger conveyor role, incentivating the collaboration between producers, processors, traders, researchers, and policy makers to foment their inherent innovation capabilities (Escobal et al 2000).
As milk production at current provides important income for crop production investments — on small and large farms —, cost-effective measures are relevant that promote farmers’ investment capacities on the livestock side (eg: improvements of fodder and herd management). Most beneficial is to promote corn silage production, which not only increases farm profits but also facilitates the incorporation of new agricultural export crops within the crop rotation, ultimately leading to a higher diversification of production and reduced income risk. In any case, milk production will remain important in areas recently transformed to agricultural production, where the growth of alfalfa is needed to develop soil suitable for crop production.
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[1] Distances between the different coastal valleys and the bad quality of some roads resulted in an extensive milk collection system, covering more than 3,000 kilometers per day (Fundación José Rodríguez Banda, 1993).
[2] Instituto Nacional de Estadística y Información.
[3] Agricultural net-income is defined as the difference between the sum of all income minus all costs, generated through agricultural production within a year, corrected for changes in stocks. This measure is equivalent to the value of all own production factors used for agricultural production (e.g. family labor, land, and equity). While agricultural crops are valued with market prices, fodder crops are indirectly valued through milk and meat production.
[4] Initially it was planned to put around 57,000 hectares under irrigation (Tealdo 1995). However, problems at different levels (e.g., financing, management) have caused a considerable delay in executing this project (ITDG and SNV 1993).
[5] The convention between the European Union and the Peruvian government tries to promote the development of the irrigation of Majes. Current interventions focus on the promotion of onion (for export), potato, kiwicha, and wine production. A special mechanization and credit program facilitate better access to machinery (renting) and capital (loans). Five milk collection centers and a dairy breeding farm were also established.
[6] The research experience in Majes indicates how important the access to credits for farmers must be: they tend to take more time for a person and provide better information when farmers perceive a possible link to the credit unit of the Majes project.
[7] The price paid for irrigation water is around US$10 per year per hectare (not including equipment and labor costs).
[8] Own survey information. Prices refer to September 1999.
[9] The fact that larger farms are equally risk averse than small farms is consistent with studies specifically focusing on farmers’ risk aversion (see Binswanger 1980). Also recent experience of sweet onion production in southern Peru confirms illustrates well to what extent large farmers are constrained to expand their crops because of price risk (Lozada 2000). In the case of sweet onions, which are more difficult to store because of its higher sugar content, southern Peru has become a major supplier for the U.S. market between October and February, when domestic supply is short and hence prices are high. Because of this price incentive Southern Peru almost doubled its production between 1998 and 1999. The consequence was that prices collapsed, as this market window is relatively small compared to the increased supply; only 5 percent of all onions produced in Southern Peru are sweet onions, destined for export. Altogether, this experience has shown that crops for export are equally risky than those supplied for the domestic market. In this sense, the importance of milk production was reaffirmed also for bigger farms to secure minimum income, to cover the necessary operational expenditures for both milk and crop production.
[10] High average yields in Majes have led to a recent strong increase in potato production. From 1998 to 1999, the area cultivated with potatoes in Majes increased from 874 to 1,303 hectares.
[11] Peru started to produce and export asparagus in the 1980s. From 1986 to 1996, the cultivated surface of asparagus increased from about 4,000 to 22,000 hectares. With this surface, Peru has reached its production limit also because China has become a strong competitor, producing even at much lower costs. Hence, the foundation of the Peruvian Asparagus Institute in 1998 was an important step forward to gather the different asparagus producers and processors to better monitor the market situation (IPE 1999).
Received 26 March 2001
