The federal government is to introduce an arrangement that would allow investors and smallholder farmers to engage in commercial farming under joint venture agreements.

The arrangement comes following a study conducted by Panacea Management & Development Consultancy Plc, a firm incorporated in 2012, on the status of commercial farming in four regional states. Financed by the German Agency for International Cooperation (GIZ), the study reveals relationships between investors and rural landholders remain largely "unhealthy". The findings were submitted to the Ministry of Agriculture last December.

“This is one factor that undermines commercial farming's contribution to the economy,” said Alemayehu Gebreselassie, director of commercial investment at the Ministry.

Ethiopia’s commercial farming dates back to the 1960s when large farms were opened in Hawassa, Arba Minch, Ziway (Batu) and Shewa Robit. The expansion of private commercial farms was curtailed in the aftermath of the 1974 revolution, replaced by state farms in the subsequent decade.

Commercial farms account for only five percent of agricultural output. Last year saw 87.4 million quintals of crops harvested from 1.1 million hectares cultivated by commercial farmers, according to a survey published by the Ethiopian Statistics Service. Grains comprise nearly 90pc, while close to half of all commercial farming activities were undertaken in the Amhara and Oromia regional states.

Despite the economic potential of commercial farming, land allocations have been detrimental consequences to rural landholders, thereby impeding progress. The study conducted by Panacea highlights that inappropriate large-scale land allocation has led people to lose access to the natural and ecological resources on which their livelihoods depend. The procedures have also resulted in widespread displacement without adequate consultations, with farmers losing their land or compensation to support their livelihood.

Experts at the Ministry use the new study to develop a guideline, ensuring rural landholders' rights for consent before allocating to investors. The guideline encourages smallholder farmers to engage in joint ventures with investors in commercial farming.

“It'll have the force of a directive to make it mandatory,” Alemayehu told Fortune.

Ministry officials await the approval of a bill that legislates cluster farming before introducing the directive, as the latter is expected to include provisions related to cluster farming, according to the Director. They hope to win Parliament's vote to enact the draft proclamation on cluster farming before the end of the budget year in July.

Land belongs to regional states under Ethiopia's constitution. However, the federal government has been allocating land - on the states' behest - to investors since 2009, using legislation that places plots over 5,000hct under its oversight. The Ethiopian Agricultural Investment Land Administration Agency (EAILAA) was established a year later to facilitate the transfer of farmland.

Adane Tuffa (PhD) is an economist who is also a member of the Agricultural Economics Society of Ethiopia. He observed that giving the federal government authority over land under the purview of regional administrations is one of the significant contributors to the unhealthy relationship between investors and farmers.

Players in the commercial agriculture scene say the flaw is partly responsible for the failure of foreign investors such as the Indian Karaturi Agro Products Plc. The infamous venture began in 2011 to farm export-standard wheat. The company was granted 11,000hct land near the town of Bako, part of a former state farm near the Oromia Regional State; and 100,000hct in the Gambella Regional State but only developed 7,645hct before the venture collapsed in 2015.