Feet on the Earth or Head in the Clouds?: The State Plans Our Agricultural Future IV - Is Heavy Regulation of Agricultural Land Justified?

Charles Simkins | May 28, 2015
The first brief in this series set out definitions of agricultural land and outlined the regulatory framework contained in the Preservation and Development of Agricultural Land Framework Bill. The second and third briefs set out the information and state capacity requirements of the proposed system.This brief will consider the justification of the proposed system.
The draft policy document maintains that the proposed system is necessary:
for food security
to ensure that agricultural land remains available and viable for agricultural development through sustainable   use of natural resources
to limit to the minimum the loss of high potential cropping land to non-agricultural uses
to prevent fragmentation of farming units into uneconomical farms
to ensure that land is used optimally
to maintain and increase agricultural output and employment, to promote rural development  and to reduce poverty.
There is a question which the draft policy document neither asks nor answers. Why can agricultural markets not achieve the desired results with a much lighter system of regulation? Or to put it in another way, what are the market failures that the proposed system is designed to overcome?
Well-functioning markets put assets into the hands of the people who can use them get the highest returns from them. The price of land is determined by the net present value of returns to it. This means that someone who can make higher returns than the current owner can bid for the land at a higher price than the net present value of the current owner’s returns, and the current owner would gain by selling at that price. Moreover, there are incentives not to mine farm land, i.e. use it for higher returns in the short run in way that reduces its potential to produce in the longer run. A short term income gain would have to be balanced off against a capital loss.
Market failures in agriculture generally take one or four forms:
Externalities. Both within the farming system and between the farming system and other aspects of the economy. An example of the first kind would be a river that runs through several farms. Upstream farmers can, at no cost to themselves, pollute rivers which then disadvantage downstream farmers. Or forest burning in Indonesia which causes smog in Malaysia. An example of the second kind would be pollutants emitted by, say, power stations which results in acid rain. Externalities can be reduced by State regulation, but they can also by the application of polluter pays principles.
Missing markets. These may vary from land which does not have a market price, e.g. land allocated under tribal tenure, to imperfect credit and insurance markets. Farming is risky, and imperfect credit markets mean that farmers have to have a considerable amount of equity capital to weather adverse circumstances. 
Contractual arrangements. It can be shown that a system of fixed rentals for land lead to economically more efficient outcomes than sharecropping. In the former case, the farmer bears the full implications of his decisions. In the latter case, he does not. On the other hand, sharecropping offers some insurance to farmers.
Desperation. This occurs when the necessities of short term survival lead to mining of land at whatever cost in the future.
The proposed framework addresses only some of these market failures. A wellconducted agro-ecosystem assessment can identify some externalities,, but air and water pollution monitoring is very limited in South Africa. The framework does not deal with missing markets, not does it offer remedies for desperation. And it can have only marginal effects on contractual arrangements.
Moreover, the term ‘optimal’ needs careful consideration. The proposed framework focuses on the physical properties of land and the climate in which it is situated. But from an economic point of view, three other factors play a key role. They are:
World prices.  Optimal (in the sense of profit maximizing) production this year may not be optimal next year, because world prices can and do fluctuate, sometimes wildly. Land and climate characteristics are not sufficient to determine optimal production.
Food security. Properly speaking, food security is a global concern, not a national concern. Nationally, it may make perfect sense to sacrifice some agricultural production for more production in other sectors and trade these other goods for agricultural products. Of course, it does not help that world agricultural trade is heavily distorted, principally by special interests in developed countries. Even so, there are opportunities for gains from trade.
The nature of the farming community. Here we are at the heart of a paradox in South African land policy. On the one hand, a history of colonial conquest, apartheid and segregation have made land a highly salient political issue. On the other, there are indications that interest in farming is limited. Accurate, comprehensive and appropriately interpretable statistics on land restitution are hard to come by, but a Policy Brief published by the Institute for Poverty, Land and Agrarian Studies (PLAAS) in 2014 made a number of points. 79 696 claims were lodged during the first window from 1994 to 1998. Of these, the government claimed that 97% had been settled by 2014, but that many claims had yet to be finalized and fully implemented, or had not been gazette or not settled, amounting to 37% of all claims. The great majority (87%) of settled claims have been urban, with cash settlements in most cases. Most of the claims lodged since the opening of the second window in 2014 have requested cash compensation rather than restoration of land.  When the market research firm IPSOS conducted a nationally representative survey of perceptions of issues the government should tackle, 18% landlessness and land claims. When asked which issues were most important to respondents personally, zero per cent – yes, zero – referred to land.  
It is worth noting that the policy document is ambivalent about small and micro farmers. The draft policy states:
The land reform process, in its current form, is dividing many large farms into smaller, less efficient units           and thus reduces agricultural output. The emerging agricultural sector is then characterized by low                   productivity and a lack of access to markets due to inadequate infrastructure. The failure of a number of           land reform projects due to insufficient knowledge, mentorship and support or without the aptitude to farm         is leading to increased land degradation and continuing food security and poverty.
It is far from clear how the proposed policy and legislation will relate to small and micro farmers.
The government has a marked tendency to propose Rolls Royce policies when financial and skills constraints support no more than a battered bakkie. The draft policy and legislation are a case in point. The policy and legislation should be returned to the drawing board to be made simpler, better adapted to South African conditions and such that the benefits clearly exceed the costs.
Charles Simkins
Senior Researcher