Dilemmas of smallholder oil palm farmers in south-western Ghana
This blog utilises the latest research to look at the different choices and outcomes facing small-scale oil palm farmers in south-western Ghana. The authors then examine household participation, transactions and trust, the welfare effects, and the implications of their research on oil palm commercialisation.
This blog is based on APRA Working Paper 43. Access it, for free, here.
Written by Louis Hodey, Kofi Asante and Fred Dzanku
Are there welfare consequences for the choice of oil palm commercialisation models in south-western Ghana? What has material welfare got to do with (the breakdown of) trust in contractual relations between farmers and oil palm companies? To what extent do these factors shape participation at the higher end of the oil palm value chain? We used a cross-sectional household survey and qualitative data from 20 communities in two districts (Ahanta West and Mpohor) of the Western Region of Ghana to answer these questions. The study districts are known for their high concentration of oil palm production activities involving smallholder farmers and the presence of two of Ghana’s ‘big four’ oil palm companies (Norpalm Ghana Ltd and Benso Oil Palm Plantation Ltd). The two districts also fall within the operational area of Building Business on Values, Integrity and Dignity (B-BOVID); a medium-scale oil palm processing company.
Four main oil palm market participation channels were identified in the two districts:
- Selling directly to oil palm buying companies
- Selling indirectly to oil palm buying companies through intermediaries known as buying agents.
- Selling on the local open market (i.e. to market women, food vendors and artisanal and small-scale processors).
- Avoiding selling altogether and instead processing the fruits into palm oil or, less frequently, alcoholic beverages or soap.
What determines households’ participation in the oil palm commercialisation channels?
Key household and community-level factors influence participation in oil palm commercialisation channels in south-western Ghana. At the household level, being a female-headed household, being a couple household, size of land holding, and distance to an oil palm company are significantly linked to the likelihood of own-processing. At community level, the availability of agro-services and a processing mill significantly raises the likelihood of own-processing. The likelihood of selling directly to a company, which is also welfare-enhancing relative to the remaining two options, is positively correlated with the availability of working capital, level of palm fruit output and access to a paved road; but negatively associated with age of farmer, distance to a company and the presence of a processing mill in the community.
Transactions and Trust in Ghana’s Oil Palm Economy
Although the literature suggests there are benefits of farmer participation in global value chains through various contractual arrangements between smallholders and agribusiness companies (Bellemare and Bloem 2018; Wang, Wang and Delgado 2014), our results show that such arrangements have all but disappeared in the oil palm belt of south-western Ghana where two of the four largest oil palm companies operate. This, we found, is because of dissatisfaction with contractual arrangements and a general breakdown of trust between companies, agents, and farmers. While about 60 percent of producers still sell their output to oil palm companies directly or indirectly through agents without formal contracts, the lack of trust in the new relationships as well as the absence of vibrant farmer cooperatives have generated resentment among farmers arising from the belief that they are being exploited by companies and their agents. This is particularly true for those using the services of agents. While the processing of palm fruits into palm oil has been prevalent in most oil palm producing areas of Ghana for several decades, we find that dissatisfaction with selling fresh fruit bunches (FFBs) has led to an increase in own-processing where possible.
Welfare effects of the oil palm commercialisation channels
Our study finds that household welfare outcomes differ for the various oil palm commercialisation channels identified. Indeed, using objective and subjective measures of welfare, it is evident that households engaged in own-processing have the highest objective welfare outcome, while in terms of subjective welfare, those who engage the services of agents are the unhappiest and most discontented. Overall, households selling directly to the oil palm companies and those who process their own output mostly have identical welfare, although there is some evidence that own-processing could be more welfare increasing in ‘objective’ terms. Indeed, while selling directly to a company or doing so through an agent seems to yield identical per capita income, the former channel is associated with significantly higher composite and subjective welfare than the latter. Additionally, although selling through an agent yields higher per capita income than selling to traders, the former group are not better off when multidimensional and subjective welfare is considered.
Way forward for oil palm commercialisation in Ghana
The implications of our results for agricultural commercialisation policy and practice in Ghana are as follows. First, given that own-processing and direct sales to oil palm companies are the most significant welfare-increasing options, these channels could be the target of interventions. Since the presence of a processing facility is the strongest predictor of own-processing, a public-private partnership (PPP) arrangement that provides incentives for modern community-based mechanised processing facilities could boost oil palm processing and possibly enhance household welfare. Second, for those who prefer dealing directly with the oil palm companies, infrastructure development, particularly improved roads, could make this possible and more beneficial as it reduces the cost of transactions. Finally, the formation of strong oil palm-based farmer associations, which we found to be missing in the study areas, could boost the bargaining power of oil palm farmers, and help lower the unit cost required for engaging directly with the companies.
Bellemare, M.F. and Bloem, J.R. (2018) ‘Does contract farming improve welfare? A review’, World Development, 112: 259–271
Dzanku, F.M.; Asante, K.T. Quarmine, W. and Hodey, L.S. (2020) ‘Smallholder Farmers’ Choice of Oil Palm Commercialisation Model and Household Welfare in South-Western Ghana’, APRA Working Paper WS43, Brighton: Future Agricultures Consortium.
Wang, H.H.; Wang, Y. and Delgado, M.S. (2014) ‘The transition to modern agriculture: Contract farming in developing economies’, American Journal of Agricultural Economics, 96: 1257–1271
Cover photo: Oil palm trees overshadowing the landscape behind the Great Hall of the University of Ghana. Credit: Louis Hodey
Please note: During this time of uncertainty caused by the COVID19 pandemic, as for many at this time, some of our APRA work may well be affected but we aim to continue to post regular blogs and news updates on agricultural policy and research.