Effects of formal credit market and decisions to participate in off-farm activities on agricultural production of Small Farmers in Chile

Understanding how complex the small farmers situation is today is a great challenge, because not only do they face multiple problems, but also there is not a clear public policy concerning how those problems can be solved in the near future, a common characteristic in most developing countries. On the other hand, there is no doubt that more precise diagnosis of the small farmers situation would significantly contribute to improve the public intervention in both the design of new instruments and the adjustment of existing ones.This research focuses on the small farmer s production capacity, recognizing that there are other factors as important as production such as culture, values, poverty, and social networks. We analyzed the multiple factors that can affect small farmers production. In particular, we studied the effects of the formal credit market, the off-farm labor market and production diversification on the agricultural production. To do that, we used a country-wide sample of small farmers collected in 2004 by INDAP, a public institution that provides credit and extension services to small farmers, and we studied different groups of producers, specialized and non-specialized, by conducting econometric analyses. The techniques of Stochastic Frontier Analysis and Switching Regressions Models were the methodological frameworks used to analyze a sample of 835 farmers, and the analyses were carried out based on household models. Additionally, the econometric results took into account the heterogeneity among farmers, and the endogeneity associated with selectivity processes.The main results of this research show that there are different production structures among the production sectors analyzed. The formal credit market plays a role in explaining differences in production levels among farmers both in relative (efficiency analysis) and absolute (regime change analysis) terms. In addition, based on a theoretical framework, we could not find evidence to support the hypothesis of Liquidity in the farmer groups analyzed. On the other hand, in the case of non-specialized farmers, we found that both on-farm production diversification and participation in off-farm activities decrease efficiency among small farmers. Moreover, the results would suggest that, in general, the intervention of public policy has not produced the expected outcomes in terms of production, and the practices of extension, independently of who finances them (publicly or privately), have not been successful in producing changes in production levels. Factors related to localization, irrigation, demographical characteristics and direct decisions of farmers with regard to management on-farm, participation in off-farm activities, specialization on farm, and dependence of on-farm income on total income are key elements to understanding what is going on at the efficiency level.From those results, it has been shown that analytical tools are available to advance towards better diagnosis in small farmers. The challenge is to encourage public and private institutions to use them in order to improve their policies. Finally, it would seem pertinent to investigate in more detail the impact of public policy and extension services on productivity, based on a more systematic and detailed database, a task that in the current institutional-political structure should be led by INDAP in the next few years.