This study analyzes the costs, returns, and profitability of smallholder agriculture in Rwanda using a gross margin approach (definitions are provided below) and reveals that over 80 percent of farmers generate positive gross economic margins. However, only around 40 percent achieve positive gross marketing margins from crop sales. This difference is directly attributable to the fact that two-thirds of production is directly consumed by households. The analysis further identifies that farm households allocate about 80 percent of their total crop input expenditures to fertilizer, seed, and hired labor, while the remaining expenses associated with fixed production costs that are almost exclusively related to land rental costs.
Furthermore, per hectare analysis reveals decreasing returns to scale for land size, disputing the notion that larger areas lead to efficiency gains. Instead, for example, smaller commercial farmers of less than 0.1 hectare, comprising 5.5 percent of our sample, sell over 50 percent of their crop value. Despite existing trends, this indicates that commercialization can take place on any size land holdings for relative income gains. Additionally, the study highlights the impact of factors like labor decisions and crop choice can significantly influence economic outcomes.
The findings suggest that smallholder farming remains economically viable in Rwanda, though market participation is somewhat limited. With appropriate support and risk mitigation, farmers of all land sizes can commercialize production, boost incomes, and enhance household welfare by reorienting towards higher-value market crops.