Development of the Capital Service Market in Agriculture: The Emergence of Tractor-Hire Services in Ghana

Abstract

This article examines the role of the capital service market in increasing the use of mechanical technology in smallholder agriculture. Custom hiring services have been essential to the widespread use of agricultural machines in many countries where small farms predominate. In the past, some governments in Africa south of the Sahara (SSA) had attempted to supply agricultural mechanization services when there was no demand for such services. Recently, however, demand for mechanization in SSA has been on the rise. Tractor ownership has also increased considerably among medium- and large-scale farmers, who use the tractors on their own land and also hire them out to others. Using the example of Ghana, we examine the behavior of tractor owners and the role they are expected to play in the development of mechanization in SSA. We use survey data from eight districts in the transition and savannah agroecological zones of Ghana. The survey covered 1,843 farming households, including 408 tractor owners and was aimed at characterizing the transition from smallholder farming to medium- and large-scale commercial farming, including patterns of agricultural-machinery ownership and patterns of demand for agricultural mechanization. First, we analyze the relationships between tractor ownership, farm size, and tractor service provision using correlation analyses. Second, we estimate a tractor service cost function based on the hypothesis that hiring a tractor service is not a perfect substitute for owning one, especially for large-scale farmers. Our findings suggest that providing tractor services significantly increases the rate of tractor use, a precondition for economic use of tractors. Agricultural mechanization service providers are primarily medium- and large-scale farmers. These farmers buy tractors even if they cannot make full use of them on their own farms, and they provide tractor services to fellow farmers. Smallholders' use of these services is quite high. Increasing tractor use is essential to counter any risk that may be associated with owning a tractor. Traveling to a different rainfall zone to provide services or extending tractor use during the postharvest period (e.g., for shelling) can help to achieve this objective. While service provision and markets offer strong potential for the widespread adoption of mechanization, medium-scale farmers in particular will be important for spreading the use of tractors among farmers in SSA. The findings presented here support our belief that mechanization can develop where there is potential for a service market, even under smallholder agriculture.