Engaging the Agribusiness Sector in Inclusive Value Chain Development: Opportunities and Challenges
Author(s)
Alliance for a Green Revolution in Africa (AGRA), David Tschirley, Thomas Reardon, Steven Haggblade, Thomas S. Jayne, Saweda Liverpool-Tasie, Titus Awokuse, Milu Muyanga, Michigan State University, Anne Wangalachi, Grow Africa Initiative, Austin Makani, Southern Agricultural Growth Corridor of Tanzania (SAGCOT)
Introduction
African agri-food systems have transformed rapidly over the past two decades. This transformation has featured rapid urbanization, diet transformation, structural change from farm to retail, and impressive farm productivity growth in many countries (AGRA, 2016). This combination of changes has given rise to a huge increase (some 800%, Reardon et al., 2015) in the volumes and value of food marketed through rural-to-urban value chains. Rapid rises in food purchases by rural households has also developed a large food market in rural areas. All of this adds up to major opportunities for smallholder farmers.
To grasp these opportunities, smallholder farmers need to make investments and to shift away from traditional paths, and they must do so while competing with large farms in some locations, rising medium-sized farms throughout the continent (Jayne et al., 2016), and imports. Agribusinesses firms, non-governmental organizations (NGOs), and governments can help small farms address the challenges they face, while also leaving the field open for medium-sized farms and firms to flourish so that the overall food economy develops and modernizes as fast as possible to meet soaring needs in Africa.
This chapter tells the story of that transformation, the prospects and challenges it presents for smallholder farmers, and the ways in which agribusinesses, NGOs, and governments can and do help them in their path.
The Agri-food System Transformation Presents Smallholder Farmers with Opportunities and Challenges to Meet the New Demand: What are their Chances of Succeeding?
The Opportunities and Challenges for Smallholder Farmers from the Transformation
Smallholder farmers have a huge opportunity in the half to two-thirds of marketed food that is not grain. Around the world smallholder farmers thrive in non-grains because many of these crops are not mechanized and do not show economies of scale, so one can earn much on small areas of land with intensive use of labor. Smallholder dairy has also been a success story in areas such as the Kenyan highlands. Non-grains are differentiated products where variations in quality can make a big difference in consumer acceptability and price. Small farms can compete on costs and quality if they invest in production and can market their crop quickly. Those that do not or cannot, will be unable to compete.
Without Outside Assistance, what Prospects do Smallholder Farmers have to Grasp Opportunities and Address Challenges?
Abstracting in this section from assistance that outside agents (firms, NGOs, and government) can give to small farms, what prospects do small farms have, on their own, to meet the transformed food system’s demand?
- Context
Several contextual points need emphasis.
First, the most rapid growth in demand is for products that are “non-traditional” for a smallholder farmer. These farmers would have for a long time been treading the traditional path a subsistence farmer mainly growing grains, while perhaps also producing a bit of meat and milk, and vegetables and pulses to complement the grains. But the situation has now changed in at least wo ways. For one, the service of commercialization itself is now in demand, meaning firms want efficient and predictable delivery of specified types and quantities of product. This service must be bundled with farm production if farmers want to enter in, and stay in, the new markets. In addition, the farm products in most growing demand now are the non-grains—fruit, vegetables, meat, milk, and fish.
Second, there is an additional way in which meeting the huge demand for non-grains will not be business-as-usual for small farms. In general, in the traditional setting cost competition and thresholds to meet were minimal. Farmers sold what surplus they had without having to compete with imports, with smallholder farmers from other zones or nearby countries, or with medium-sized farmers. They did not have to compete for procurement quotas specified quantities of product delivered on an agreed schedule—sought by private processing firms.
Third, a shift by smallholder farmers to non-traditional activities, to a market orientation, to new marketing services such as sorting and grading, and to new products other than basic grains implies a substantial and “disruptive” level of investment by them. Economists call this a “threshold” investment. For example, a smallholder farmer, or an area with many smallholder farmers, or a smallholder farmer cooperative, may want to become a regular supplier of fresh vegetables to an urban wholesaler or a supermarket chain.
Fourth, smallholder farmers (and their competitors, the rising medium-scale farmers, large-scale farmers in some countries, and importers), face a “product cycle”. That is, in a given market, the product starts as a local niche, usually produced by smallholder farmers/gatherers. The second stage is the commoditization of the product from a niche to a bulk product, continuously available at cheap prices, and always achieving a basic level of quality. These are the characteristics we’ve described above, and they make it very difficult for smallholder farmers to compete. In a third stage, the product becomes differentiated, meaning that various qualities or certifications or other variations on the basic commodity theme emerge.
The reality in Africa is that as markets broaden and commoditize, smallholder farmers are exposed to new competition—we can say they are “de-protected”—from multiple directions. It is usually during the commoditization phase of the product cycle that smallholder farmers have the greatest challenge, just on the basis of production and transaction costs. They have a different set of challenges in the third stage with the quality requirements of product differentiation.
- Empirical patterns
Several empirical patterns grow out of these contextual factors. First, wholesalers and processing firms and supermarket procurement units tend to choose sourcing areas based on quality, cost, and consistency of volumes. This, in general, means that the sourcing zones are not too far away or are connected by good roads, have low risk of breaks in supply of the product (so may feature irrigation), and have relatively low costs of aggregating and collecting the product. As the buyers have to make a profit to stay in business, they are driven by relative costs and risks. Barrett (2012) reviewed evidence from processing and supermarket operations in India, Madagascar, Mozambique, and Nicaragua. The author found that hinterland zones and resource poor zones tend to be avoided by procurement teams. That is a fundamental point for our purposes
Second, even “commodity” non-grains (e.g. potato, onion, and other vegetables; cotton, and other cash crops) require substantial threshold investments by smallholder farmers. This is why many studies of supermarket and processor procurement find that it is the upper tier, even of the commercial smallholder farmers, or the medium-size farmers, in favorable or intermediate zones, that tends to participate in these agribusiness sourcing systems (outside of subsidized programs by NGOs).
Third, however, much scope exists for smallholder farmers with some assets and located in advantageous zones to supply the wholesale markets of cities and towns in Africa with commodity products. These markets are less “actively coordinated” than the “modern” markets of large wholesale buyers, large processors, and supermarkets. They do not require producers to supply stipulated quantities of specific quality on a regular schedule. The investment requirements to provide these types of products to these types of markets may thus be within the possibilities of many smallholder farmers who are close enough to towns to deliver the product.
Fourth, contrary to the common perception of stagnant African small farms, external input use has grown rapidly over the past decade (Haggblade, Minten, Pray, Reardon, & Zilberman, 2017; Liverpool-Tasie, Omonona, Sanou, & Ogunleye, 2017; Minten, Reardon, & Chen, 2017; Sheahan & Barrett, 2017). This particularly has been the case for chemical fertilizer and herbicides. Interestingly, fertilizer has frequently been promoted by large-scale public subsidies (Jayne & Rashid, 2013), while herbicide use has been largely driven by private sector research, product development and marketing (Haggblade et al., 2017; Sheahan & Barrett, 2017).
Fifth, some smallholder farmers climb the “value ladder” beyond subsistence farming, into successful commercial farming (Figure 1.6, Chapter 1). An analysis of this is found in Chapoto et al. (2013). They studied the paths to becoming successful commercial smallholder farmers, producing maize, cotton and horticulture, three crops with strikingly different market institutions (strong government support for maize, private contract farming for cotton, and laissez faire for horticulture). They found that only a small minority of Zambian smallholder farmers succeed in transitioning to high-productivity, high-volume commercial agriculture.
Sixth, the above discussion focuses on the paths of and challenges to individual farmers. But the discussion at this point usually turns to what appears to be an “obvious” way out, which is for farmers to form cooperatives so that buyers see them as low-cost sources of supply and input sellers to see them as an attractive market. However, many studies find very few independently functioning farmer cooperatives in Africa. The few that exist are usually connected to donor or NGO initiatives or processing firm relations such as the cooperatives for milk collection centers in Zambia, or for cotton in West Africa (see Tschirley, Poulton, & Labaste, 2009).
The Roles of SMEs and large Agribusiness Firms
We first focus on how private actors are relating to smallholder farmers in Africa, starting with the huge role of SMEs, then consider the role of large firms. The next section considers what governments, donors, and NGOs can do to broaden and strengthen the links between smallholder farmers and these firms.
SMEs have by far the Main Role in Helping Smallholder Farms be Included
MEs in Africa’s agri-food system include tens of thousands that supply most of the services of food processing, transport, wholesale, and retail. The emergence of these firms has been called the “Quiet Revolution” in agri-food systems (Reardon et al., 2015). These firms supply far more of the supply chain services in African than do large domestic companies and multinational corporations. We expect they will continue to do so for at least the next one or two decades. The performance of these SMEs is thus central to attempts to reduce transaction costs for inputs to and outputs from smallholder farmers.
Our claims about the predominance of SMEs can be demonstrated with a few examples. First, at retail, supermarkets hold at most 20% of the overall food market even in countries like Kenya and Zambia, which have recorded the most progress most progress. In most other countries, and especially in West Africa, supermarket shares of overall food are likely in single digits. Thus, easily more than 80% of all the value of food sold to consumers is sold by SMEs and millions of micro-entrepreneurs in the informal sector.
Second, in the midstream, the maize milling market in Dar es Salaam, for example, has been left almost entirely to these micro-firms and to SMEs. This was occasioned by the departure from the business of Bakhresa, the largest grain miller in the country and a regional operator, which decided it could not compete with the influx of MSMEs selling branded maize meal; it remains a huge player in wheat milling, where imports allow large economies of scale. As a final example, Sitko et al. (2017) document the rise of the large-scale grain trade in Zambia, but even there the combined share of national and international large-scale traders was only 11% in 2015. In Kenya the gran market share of large traders rose from virtually nil in 2004 to 38% in 2010 (Sitko et al., 2017).
The Role of Large Food Companies
Africa’s agri-food economy has many things large companies do not like. This economy poses high risks under normal circumstances, along with possibilities of major disruptions (political or natural), and imposes very high costs of operation. Unpredictable policy, including sudden placing or lifting of import and export tariffs or bans, and even restrictions in some countries (e.g. Malawi) on domestic trade, add to the costs and risks and inhibit investment by large companies. Large parts of the potential supplier base, the small farms, lack the assets and access to input markets to be reliable suppliers. Even agroclimatically- and commercially-favored areas and commercializing smallholder farmers face many of these challenges. That is why most processors and supermarkets still use traditional wholesale markets, and depend on the existing supply chains for products from the rural areas when they source locally; it is also why they often source as much as they can from imports or medium- and large-scale farms.
This is a level of basic challenge that will not be solved in a few years, or by just corporate social responsibility (CSR) by the largest firms, or even by the sum of NGOs weighing in to help. The basic challenge means that investment by large firms will be more gradual than in Asia and Latin America or South Africa. Governments in these places prioritized rural infrastructure, reducing transaction costs and risks for businesses wanting to invest. So we start with this challenge for African governments: regardless of what companies and NGOs and donors try to do, high risks and costs will continue to constrain the take-off of large companies sourcing from smallholder farmers until the physical infrastructure is dramatically improved, and trade (both domestic and regional/international) and other policies become more predictable. This challenge may also constrain the blossoming of the other beneficial phenomenon that we observe, the rise and diffusion of medium-size commercial farms serving urban markets.
Despite all these challenges, the sheer size and potential growth of the African market has attracted increasing numbers of large companies. These companies tend to follow two sourcing strategies for raw material (Reardon & Timmer, 2014).
First, they tend not to produce their own, but source it instead from medium or large farms, imports, or smallholder farmers. When doing so, the companies can work directly with the suppliers; this is illustrated in horticulture products sourcing in Kenya by local supermarkets (Neven, Odera, Reardon, & Wang, 2009). An example for grain is direct contracts by supermarket chains with the giant grain miller and importer, Bakhresa, in Tanzania
Instead, if possible, they use dedicated wholesale agents who organize their sourcing from wholesale markets, from farmers large-scale and smallholder, and from import houses (Reardon, Timmer, Barrett, & Berdegue, 2003). An example is Freshmark Systems, part of the Shoprite Group based in South Africa, which handles all the food sourcing for Shoprite supermarkets (Weatherspoon & Reardon, 2003; http://www.fastmoving.co.za/retailers/shoprite-holdings-ltd-2/fresh-produce-197/freshmark-9). These agents are responsible not just for the logistics of the sourcing systems, but also for applying the retail company’s minimum quality standards.
Second, whether the food company sources directly from smallholder farmers or through an agent, under certain circumstances it is in the interest of the firms to resolve “idiosyncratic market failures” facing smallholder farmers. In plain terms, this means that when a particular set of smallholder farmers cannot access needed factors like land, labor, or equipment, or variable inputs like seeds, fertilizer, etc., or credit to buy them, then sometimes it benefits large processors or retailers or even wholesalers to arrange a way for the smallholder farmers to get these inputs (Key & Runsten, 1999).
Other examples include cases where the company engages in:
- the production of inputs (fertilizer and seeds), contract farming of rice, and production of processed foods including milled rice and other foods in Nigeria (Notori);
- the production of raw material input (milk, in contract farming), collection centers and chilling facilities, and production of dairy product in Zambia (Land O’ Lakes);
- the provision of technical assistance, contract farming of greens by local smallholder farmers, and retailing of the greens by a supermarket chain in South Africa (Shoprite, Pick ’n Pay);
- a large pineapple export operation in Ghana, with provision of drip irrigation and seedlings, contract farming, and export (Blue Skies); or
- own production often in an estate, complemented by outgrower production (sugar in many locales, and also tea) In each case a large company serves as the link to the market and sources produce from smallholder farmers in remunerative contract farming arrangements. Smallholder farmers thus do not need their own independent link to the final market
What can Governments and Donors do to Enhance Smallholder Farmer Links to SMEs and Large Agribusinesses?
If SMEs are, now and for at least the next one to two decades, the foundation of Africa’s agri-food system, then they must be at the center of any strategy to promote strong smallholder farmer links to growing agribusiness. At the same time, large companies are increasing their investment in Africa, and the continent will increasingly need them, with their world-class technology and expertise and links to global value chains, if it wishes to continue its growth momentum and raise the living standards of its people. Our argument is that promotion of such investment is simply an important complement to a primary focus on strengthening the SME sector.
For both SMEs and larger agribusinesses, it is crucial to recognize that the foundation for strengthening them and facilitating smallholder farmer links is policy and infrastructure (for this point with respect to SMEs, see Biggs, 2006). Investments in specialized training, building of relationships between firms and farmers, preferential credit access and other “project” activities can be important and must be pursued. But the return to investment in these focused activities will be vastly larger if the policy setting is conducive, and if infrastructure is in place to reduce costs and risks in the system. In the absence of such conducive policy and infrastructure, too much of the project spending will deliver little if any long-term benefit.
Foundations: Infrastructure and Policy
Infrastructure: Beyond the standard refrain of the need for investment in roads, energy, and water, we advance two key propositions about infrastructure investment in the service of inclusive smallholder farmer development. The first is that secondary cities and towns need to be a central focus, for three reasons. First, these urban centers hold about 60% of Africa’s urban population and are growing faster than the larger cities (analysis from citypopulation.de). Second, they are economically and geographically closer to more farmers, generating more poverty reduction than large cities by being an easier “stepping stone” for rural residents moving into the non-farm economy (Christaensen & Todo, 2014); they also provide nearby markets for local production, and for obtaining inputs.
Our second proposition deals with the degraded state of urban marketing infrastructure on the continent. Increasing the efficiency with which urban wholesale markets can receive and redistribute food, their ability to maintain product quality and safety, and the two-way flow of information between these markets and rural farmers, would have major positive effects for smallholder farmers since these farmers are the main users of these markets (Tschirley, Ayieko, Hichaambwa, Goeb, & Loescher, 2009). Currently, urban marketing infrastructure is too often deplorable, with very little new wholesale market construction over the past several decades, even as urban populations have more than doubled and food volumes have increased two to three times.
Policy: The foundational policy element for large firms and SMEs alike is stability and predictability. The importance of these elements may be most obvious for large firms, who are risking potentially large amounts of capital; may have shareholders they have to satisfy; and may not even make an initial investment if instability appears too great. Yet there is no reason to think, for example, that SMEs are more able to deal with the price instability that comes from poor management of production shortfalls or of publicly held stocks, as happens so frequently in Southern Africa (Tschirley & Jayne, 2010).
It may also be the case that instability strengthens the already strong hand of ethnic minorities and immigrant groups against indigenous entrepreneurs by increasing the importance of relation-based transactions to manage risk (Biggs & Shah, 2006; Gadzala, 2009). Rule-based approaches to regional and global trade, in which policy makers and political leaders agree to be subject to transparent decision-making procedures, and to eliminate unofficial controls and charges on traders and transporters in domestic and border trade, remains a pre-eminent need in the agricultural policy arena.
Additional Steps to Strengthen SMEs and their Procurement from Smallholder Farmers
Smallholder farmers, and the traditional markets in which they sell most of their product, are the natural source of supply for SMEs. Most of these firms are too small to source from medium- and large-scale farmers, and likewise are not in a position to import raw material, other than through informal border trade. Promoting active coordination between SMEs and small farms is also likely to have limited success. The result is that strengthening links between smallholder farmers and SMEs essentially involves strengthening the capacity of SMEs to source product, access technology, and access remunerative output markets.
A big problem is that, despite the popularity of programs for direct provision of micro- and small-scale credit and of business development services to SMEs and sometimes to micro-firms—nearly every African country has an agency to promote small-scale industry, and donors have financed innumerable such programs—little is known about the effectiveness of these programs (Cravo & Piza, 2016). Danida (2009, p. 5) captures the situation well, stating that “recommendations are often based on speculation about what would work rather than on evidence of what works”, and that the few evaluations that are done some years after the end of a project “seem to show very different [less positive] results” (brackets added).
The risk of unproductive public investment here is thus very high. And while formal impact evaluation may help fill some of the gaps in information, its usefulness hampered by the fact that good program design is almost always highly context-specific, so generalization is difficult. The best that can be said is that programs need to be sensitive to local context and must pay close attention to cost control, as their cost per beneficiary can be high and benefits low (Haggblade et al., 2007).
Promoting Large-Scale Agribusiness Investment in Africa
Large-scale agribusiness has operated in African agri-food systems for many years. These firms include local large firms, well-known multinationals, “regional multinationals” such as Export Trading Group and OLAM that started in trading and have been moving into processing, and specialty firms of all three types operating in cash crop sectors such cotton and tobacco.
Organized efforts to promote new and broader multinational agribusiness investment in Africa began after the food crisis of 2007/08. In 2009 the World Economic Forum (WEF) held a symposium with international and African companies, governments, foundations, NGOs, and donors, focused on how to align actions of these actors to best provide assistance to emerging relationships of agri-food companies and smallholder farmers. This effort was a foundation for the “Grow Africa” program of WEF, launched in 2011, which promotes company “impact investments” in the region, and attracts NGO assistance for links between companies and smallholder farmers. The New Alliance for Food Security and Nutrition, with similar aims, was launched in 2012, eventually integrated into the CAADP (Comprehensive Africa Agriculture Development Programme) planning process, and appears to share a “leadership council” with Grow Africa to monitor private sector investments against commitments.
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