Building Empowering Value Chains: Integrating Smallholders into the New Opportunities in Agriculture IFAD and WB Presentation to ECOSOC High Level Segment Thematic Debate on Rural Development 3 July 2008

Key Messages The context for agriculture is changing rapidly New opportunities have emerged for smallholders Several key constraints limit realizing these opportunities Innovations in both public and private actions are needed to overcome these constraints There are a number of good examples which can be expanded and scaled up We must ensure that those smallholder families who will not integrate or will do so slowly are not forgetten

I. Rapidly Changing Food Markets Create New Opportunities

High food prices provide an opportunity for producers

Food demand is changing Developing Country Consumption Meat Horticulture Cereals Developing country exports Fruits and vegetables are one of the fastest growing agricultural markets in EAP countries, with production increasing by 7.3 percent a year for fruits and 6.1 percent for vegetables over 1980-2004. During this period 58 percent of the increase in worldwide horticulture production came from China. In Indonesia, the value of fresh fruits and vegetables output doubled during 1994-2004, to become a 10 billion dollar industry almost exclusively for the domestic market. Horticulture Meat Cereals

Supply chains are increasingly integrated… Supermarkets are rapidly dominating food sales worldwide Supermarket supply chains require high levels of coordination between producers, processors and marketing Supermarkets are also targeting the poor, selling cheap food and expanding to relatively small cities Foreign investors are often critical to knowledge transfer

…but smallholder sourcing adds retail value

Increasing demand for environmental services from agriculture While energy use accounts for the lion’s share of GHG emissions in developed countries, agriculture (including livestock waste) and deforestation associated with land use conversion to agriculture account for almost 70% of GHG emissions from developing countries. At the same time, given its dependence on rainfall and other climatic factors, agriculture is particularly subject to the dynamics of climate change

Agriculture is also critical to climate change in developing countries While energy use accounts for the lion’s share of GHG emissions in developed countries, agriculture (including livestock waste) and deforestation associated with land use conversion to agriculture account for almost 70% of GHG emissions from developing countries. At the same time, given its dependence on rainfall and other climatic factors, agriculture is particularly subject to the dynamics of climate change

New technology is “democratizing” information access Mobile technology lowers the hurdle for joining the networks Many developing countries are closing the technology gap Smaller businesses are able to gain benefits of scale in information access

II. Smallholder Sector and Empowering Value Chains

The Smallholder Sector – Why Care? 3/4 of the world’s poor live in rural areas Over 450 million farms are less than 2 has Almost 1/3 of world’s population depend on smallholder farming Agricultural growth is at least twice as effective in reducing poverty as non-agricultural growth For the majority of crops, smallholders are more efficient producers Smallholder agriculture systems, particularly the commercial aspects, are increasingly managed by women

Empowering Value Chains Allow smallholders to seize new opportunities in agriculture by: Increase producer knowledge of market demand and pricing Increase investments from farmers and the other private sector Increase access of smallholders to knowledge, finance, inputs and technology Reduce transactions costs of the producer-processor/marketing interface Increase the share of value added captured by primary producers

Empowering Value Chains: Examples Ghana “grains partnership” between smallholders and private actors (input suppliers, produce buyers) to boost farm-level productivity and secure transactions (maize) Sao Tome and Principe organic cocoa schemes contributed to more than doubling the income to smallholder farmers Yulin watermelons (China): Direct marketing to wholesalers, supermarkets and retailers increased selling price from 1.2 to 3.0 yuan per kilogram and its farmed area from less than a ha to several thousand NorminVeggies (Philippines): Supplies vegetables to fast food, supermarkets and processors. Monthly sales were 80 tons in 2006. Konzum Supermarket (Croatia): Helped small farmer- preferred suppliers to use contracts as collateral with local banks to investment in greenhouses and irrigation

III. Why aren’t more empowering value chains emerging?

Investment climate limits quantity and quality of agricultural investment Poor business climate attracts “extractive” investors and limits development of modern marketing systems Particular problem for countries with small internal markets

Marketing Systems are Inefficient Large number of intermediaries increases costs, risks and losses

Property Rights Need to Work for the Poor smallholder advantages depend, in large part, on tenure security as incentive for farmer to invest

Limited Access to finance Credit constrained use less inputs and earn lower incomes Credit constraint is often associated with risk rationing as well

Under-investment in agriculture and rural infrastructure Agriculture and rural infrastructure’s share of public expenditures have declined significantly

Need to improve efficiency of investment in rural development

Concentration in Agribusiness Sector Concentration widens the spread between world and domestic prices – from 1974 to 1994 this more than doubled for wheat, rice and sugar Developing countries’ claim on value added declined from around 60% in 1970-72 to 28% in 1998-2000

IV. The way forward

Actions to Build Empowering Value Chains Strong facilitation & strengthened legal framework to secure, build trust & reduce costs of transactions General business climate – business licensing, trade facilitation Strengthen land access and tenure security Develop rural financial and risk services Efficient input markets Rural infrastructure Quality, and Sanitary and Phytosanitary Standards Market information Producer organizations in order to help farmers engage on less skewed terms

Bridging the Gap: New Role of the State Drivers Dynamic Roles From financing investments to… Global flow of capital, technology and market access Transparent, predictable investment climate From supplying inputs and buying outputs to… Private sector dominates Input and output markets Regulate input and output quality Including SPS From centralized investment planning and service delivery to… Empower rural communities so investments and services respond to needs and farmers can engage private sector Political and fiscal decentralization and supportive engagement with farmer organizations and other CSOs From agencies working in silos to… Improve coordination for service delivery and avoid duplicating regulations and red tape Mechanisms for inter-institutional coordination

Bridging the Gap: New Role of the Private Sector Drivers Dynamic Roles From vertical integration to… Global sourcing brings political risks Diversified sources of product From focus on cutting supply costs to… Demand for socially responsible production Marketing smallholders From uniform product characteristics to… Increasing importance of “new cultural markets” Encouraging traditional varieties and product diversity From dependence on intermediaries to… Phytosanitary and quality are the new trade barriers Providing farmers with quality inputs and production technology

Farmer associations are critical Morogoro is Tanzania’s main sugar-producing region where the mills owned some large farms but could not adequately supply all their needs. The mills provided farmers with seed cane on credit and the services of tractors for land preparation. Workers from the mill would harvest the cane and take it for processing. These services were deducted from the amount paid to the farmers. The Millers Association, as a monopsony, had considerable power. Not surprisingly, for many years, the relationship between the growers and the sugar millers had been characterized by mistrust. The millers frequently violated their contracts and often delayed payment to the farmers for as long as six months. The Tanzanian Sugar Cane Growers Association (TASGA) emerged to represent smallholders averaging 1.4 ha each - initially had public sector help to organize farmers The ability of TASGA to negotiate effectively eliminated strikes and social unrest. However its importance was not just its role representing farmers. It also conducts various functions: (1) sourcing funds to provide loans to farmers; (2) offering training on improved cropping practices; and (3) promoting better environmental practices. TASGA has grown to include many thousands of farmers and now accounts for about 17,000 ha. of cropland. When the government discussed providing the sugar millers some 30,000 ha of land to grow sugarcane, it was recognized instead that it ought to go to the Association While contract farming coordinates from the market or processing stage of the supply chain towards the farm, farmer associations can provide a similar coordination service from the farm towards the market. This example from Tanzania shows how farmer associations can help to balance the market power of plantation operators and processors for a win-win outcome.

Important Caveat: Many smallholders will not be able to integrate or will do so slowly Areas constrained agronomically (low rainfall) Areas constrained by market access (time to market) Need investments in rural roads, irrigation and other food security measures Need investments in education and health and active labor market policies Safety net programs such as public works

Parting Message: Supporting Empowering Value Chains requires not just a new approach by smallholders and the market, but a significant change in the role and actions of the public sector and external public support

On behalf of IFAD and World Bank Thank you www.worldbank.org/wdr2008 http://www.fao.org/docrep/010/a1200e/a1200e00.htm