Secure land rental contracts and agricultural investment in two communal areas of KwaZulu-Natal

Abstract

This study tests the hypothesis that an efficient rental market for cropland is a significant determinant of agricultural investment in the communal areas of KwaZulu-Natal. An efficient rental market creates an opportunity cost for under-utilisation, which tends to transfer resources to more effective users. The efficiency of a rental market is compromised by the presence of transaction costs that reduce returns for both lessees and lessors. Transaction costs include risk arising from a possible breach of the rental contract. Potential losses caused by a breach of contract can be reduced by introducing a credible third-party to witness the contract. Likewise, moral hazard can be reduced by contracting with trusted persons. Data from household surveys conducted in two communal areas of KwaZulu-Natal were used to estimate a regression model explaining levels of investment in crop production amongst tenant farmers. The results confirm that tenants invest more when they contract with friends or family, and if their contracts are formally witnessed by a credible third-party. Interventions that reduce potential losses caused by a breach of contract are therefore expected to promote market efficiency and investment in crop production. In the short-run, the Provincial Department of Agriculture should sanction rental contracts negotiated by lessors and lessees. Ultimately, legal reform that leads to predictable contract enforcement in the communal areas is required to improve market efficiency and levels of investment in agriculture.