Co-operatives - a Key for Smallholder Inclusion into Value Chains

Framework for an Inclusive

Food Strategy
Rabobank Group
 |1

Content
Preface 2 4 The role of producers’ co-operatives in food supply chains 25
4.1 The nature of producers’ organisations (POs) 25
Abstract 4 4.2 Role of producers’ organisations in marketing 27
4.3 Role of co-operatives in smallholder inclusion in value
1 Introduction 5 chains in the South 27
1.1 Aim, scope and outline of the study 6 4.3.1 The nature of co-operatives 27
1.2 The global food security and nutrition challenge to 2050 4.3.2 Basic facts about agricultural co-operatives 27
in a nutshell 7 4.3.3 New opportunities for co-operatives 28
1.3 Towards a new vision for agriculture 9
5 Financing at the bottom of the food production pyramid 32
2 Who will produce the additional food needed to feed 5.1 Financial landscape at the bottom of the pyramid 32
the world in 2050? 11 5.1.1 The financial service gap in the South 32
2.1 Scale and scope of the global food supply 11 5.1.2 The financial landscape - a farmer’s perspective 32
2.1.1 Food production pyramid 11 5.2 Financial services at the bottom of the pyramid 34
2.1.2 Number of farm holdings and average farm size 12 5.3 Financial co-operatives in the South 35
2.1.3 World farm structure 12 5.3.1 Origin and models 35
2.2 Possibilities for increasing food supply 13 5.3.2 Characteristics of credit co-operatives in the South 36
2.3 Macroeconomic implications of transforming the 5.4 A value chain finance approach to sourcing from
agricultural sector 14 smallholders 36
2.4 Regional characteristics and the business case of 5.4.1 Opportunities for agribusiness 36
small-scale farming 14 5.4.2 Design of a value chain finance approach for smallholders 37
2.5 Conclusion 15 5.4.3 The need to involve financial institutions 37
5.4.4 Risk mitigation through value chain finance approaches 37
3 The challenge of smallholder inclusion in value chains: 5.4.5 The role of value chain partners in access to financial
approaches and tools 17 services for smallholders 38
3.1 Breaking the farm-low-income trap 18 5.5 The investment capital challenge of smallholder inclusion 38
3.2 Stratification of small holders 18
3.3 A value chain approach to smallholder inclusion 19 6 Synthesis: framework for an inclusive food strategy 42
3.4 Sourcing strategies steer the way to smallholder inclusion 6.1 Recapitulation of findings 42
into value chains 21 6.2 Framework for an inclusive food strategy 42
3.5 Business models rule the game of inclusion 22 6.3 Concluding remarks 44
3.5.1 Business models for inclusion of smallholders into
value chains 22 References 45
3.5.2 Fair trade model 23
3.5.3 Mapping inclusiveness of business models into value chains 23 List of Rabobank boxes
3.5.4 The concept of shared value for smallholder inclusion Box 1: Marketing and producers’ co-operatives 30
into value chains 24 Box 2: Rural financial development 40

Colophon 50
2 | Framework for an Inclusive Food Strategy

Preface
Global food security is a topic that is on the worldwide agenda of This Rabobank study focuses on the questions: ‘Who will produce
all organisations and institutions that care about the future of our our food in 2050?’ and ‘How to make it happen?’ It is a subject
planet and people. The challenge of doubling the food supply to feed matter that has been researched intensively since the food crisis of
slightly more than nine billion people in 2050 is a gargantuan task 2007-2008. The conclusion has been reached that it will be possible
in an era of ever-increasing food demand and limitations in supply. to produce the additional food the world will need in 2050, but that
The current reality of food security is that approximately one billion it will be a mammoth task that will call for unconventional solutions
people worldwide are still suffering from hunger and malnutrition, and third order changes.
and resolving this issue was consequently declared one of the
United Nations’ ten Millennium Development Goals in 2000. The current large-scale and hi-tech agriculture in developed regions
Rabobank accepts its responsibility in this area and is contributing (North America and the EU) will not in itself be sufficient to produce
to meeting this global challenge. We are, after all, a co-operative the additional food that will be required to meet the increasing food
bank with roots in the Dutch agricultural sector with an aspiration demand. While crop productivity in these regions appears to be
to be a leading international Food & Agribusiness bank. In this UN reaching ceilings and the amount of agricultural land is decreasing,
International Year of Co-operatives, we are working as a partner of they will continue to be a crucial food source and serve as an
the UN to raise awareness of the role co-operatives play in building indispensable source of innovation and entrepreneurship.
a better world in general and feeding the world in particular.
There are multiple ways in which Rabobank contributes to providing Emerging countries, such as China and India, will experience a sharp
access to affordable financial services through our international increase in the demand for food, but will also face increasing
network in developing regions and activities in the global food limitations with respect to land and fresh water. In contrast, large
value chain. reserves of agricultural land are located in South America and Sub-
Saharan Africa.
My observation from the Rabobank watchtower is that the business
paradigm is currently transcending from a traditional narrow profit The hypothesis of this study is that the resolution of current and
orientation towards a more holistic strategy, in which the future imbalances in food supply is virtually inconceivable without
contribution to environmental sustainability and basic standards for tapping into the underused agricultural production potentials of
decent living conditions are incorporated into the ‘return on existing small-scale farms in many developing and emerging
investment’. This is accompanied by a shift in focus from an exclusive economies. There are around 500 million smallholder farms in the
orientation on the business entity’s interests towards recognition of developing world. They account for more than 95 percent of
broader interests in the global community. The latter shift is not a agricultural holdings and support around two billion people.
new development. In fact, it stood at the foundation of the historical These are the producers who feed up to 80 percent of the
co-operative movement. Co-operatives were formed on the basis of population in much of Asia and Sub-Saharan Africa. If the corporate
a common bond, such as that of farmers in a particular region or world is to pursue a global food security agenda, it cannot ignore
consumers who shared a common need. The world community is the role of small-scale farming systems. Moreover, an estimated
currently connected through global markets and information 70 percent of the world’s 1.4 billion poorest people live in the rural
systems and is facing problems that affect people in every corner of areas of developing countries.
the planet. Containing climate change and maintaining peace and
stability have emerged as a new common bond that is felt from Asia
to Latin America.
 |3

The question therefore is: ‘How do we make small-scale agriculture Rabobank has, for example, observed that farmer producers’ groups
in developing and emerging regions, more efficient, market- and co-operatives normally require a graduation trajectory towards
orientated, profitable and environmentally sustainable so that it not commercial finance and will consequently offer successive finance
only contributes to food security but also can spur economic growth instruments as they grow towards commercial scale and maturity.
in developing countries and lift millions out of poverty?’
This study would serve this wider purpose, if actors in the F&A Rabobank will furthermore help smallholders, even more than in the
sector would be encouraged to build elements of its analysis and past, to establish their own local co-operatives as a means of
recommendations into their sourcing strategies and business models. helping to break the farm-low-income trap and to strengthen their
I foresee a distinct role for Rabobank in this regard - not only as links to markets and global value chains.
content provider, as financing provider to food value chains, but
certainly also as content organiser: assisting farmers in developing In addition, Rabobank will accelerate its activities within global food
countries with co-operatives and better access to financial services chains in which we are already extensively involved around the
and participating in the value chains of F&A companies with world. For instance, large agribusiness companies are aiming to
farmers. source commodities in the future from small-scale farms in a
sustainable and socially responsible manner and Rabobank will
The basic premise is that food production must be a business and assist in bridging the gap between local, regional, national and
that value chain approaches can be employed to bring about international stakeholders and large and small-scale enterprises
smallholder inclusion. Smallholders, however, often lack access to within the global food value chain.
affordable financial services, knowledge and education, information,
land, water and fertilizers. They must therefore organise into closely- In summary: Within the new vision for agriculture, Rabobank will
knit producers’ organisations or, better yet, into co-operatives. play a distinct role in connecting the bottom and the top of the food
Co-operation enables them to compensate for the disadvantages of pyramid in the decades to come.
the small scale and fragmentation of the production and to create a
stronger united front.
Piet Moerland
I fully agree with the thesis that true change cannot be imposed Chairman of the Executive Board of Rabobank Nederland
from the outside. As a wise man once said: ‘When change is CEO Rabobank Group
cultivated from within, every tree and every plant will be able to
root itself in its own soil and flourish.’

This study can serve as a stepping stone for Rabobank’s efforts to

address the challenges of including smallholders into the value
chain and sustainable food production more effectively. It also
serves to expand our network and activities aimed at providing
access to rural financial services in developing regions in an
integrated and effective manner in the coming decades.
4 | Framework for an Inclusive Food Strategy

Abstract
In the coming decades, the food world is facing a daunting challenge The food (business) world recognises that ‘business as usual’ no longer
to meet the needs of 9.3 billion people by 2050. Agriculture is not meets the global food requirements of the 21st century and is aware of
only expected to produce more food, but also more raw materials for the need to change course. Private sector partners operating in the
biofuels, biochemicals and fibres. Nearly doubling current agricultural F&A sector have repeatedly demonstrated that they are capable and
production with less resources (land, water and phosphate resources) willing to source from smallholders and take the lead in revitalising
in a manner that is both socially acceptable and environmentally the entrepreneurial farm potentials at the bottom of the pyramid.
sustainable seems to be a gargantuan task. But business cannot do it alone. A multi-stakeholder partnership and
Stakeholders around the world are considering the crucial elements a shift towards a holistic food strategy are essential ingredients for
of a more holistic approach that meets the challenges of food security making it happen.
and responsible management of resources within a framework of The synthesis of this study is a framework for generation of food
inclusive business models. Resolving the current and future imbalances strategies that may help stakeholders along the food supply chain to
in food supply is virtually impossible without tapping into the underused design inclusive and sustainable business models, thus making
agricultural production potentials of small-scale farms at the bottom of themselves ‘part of the solution’ for one of the most pressing global
the pyramid. Taking this as a point of departure, many questions arise issues in decades to come.
with respect to the way the transformation of smallholder agriculture
can be realised and financed.
This study aims to address these questions, and elaborates on Author:
approaches and tools to unleash these underexploited food production August R. Sjauw-Koen-Fa
potentials. Forging and sustaining effective linkages of smallholder Rabobank Nederland
farmers to the market is, however, a challenging endeavour with many Utrecht/The Netherlands
obstacles along the way. Producers’ organisations, in particular
co-operatives, have been identified as crucial instruments to address
these obstacles and to facilitate the process of value chain development
and finance. Solid long-term supply arrangements are not conceivable
unless they guarantee a competitive reward for producers in value
chains, based on fair terms of trade and a long-term collaboration
perspective.
There are various ways to increase food production, such as
improving yield per hectare, cropping intensification, increasing arable
land, reducing post-harvest losses, storage and transport losses,
improving irrigation technology and reversing land degradation.
However, achieving these gains in practice will require an exceptional
level of collaboration among stakeholders in the agricultural value
chain, including governments, companies, multilateral institutions and
civil society organisations, farmers, consumers and entrepreneurs.
 |5

1 Introduction
The food world is facing a formidable challenge to secure the global development. The focus of this study is therefore on the unexploited
supply required to feed the world in 2050. Current global imbalances food production potential of small-scale agriculture in low and
in food supply and demand are set to increase due to a complex of middle income countries2.
factors, including population growth, increasing wealth, dietary Obstacles for linking smallholders to markets and integrating them
shifts to more animal proteins and a rise in urbanisation. Agriculture into value chains do exist. Small farms face major disadvantages
is not only expected to produce more food, but also more raw with respect to accessing modern market supply chains. These
materials for biofuels, biochemicals and fibres. According to the disadvantages include low volumes of produce to sell, variable
Food and Agriculture Organisation, an estimated one billion people quality, high transaction costs, poor market infrastructure and
around the world are undernourished and the world population will limited ability to meet the high credence requirements of many high
grow by more than three billion by 2050. World agricultural crop value outlets. This stands in sharp contrast to conventional business
output must almost double to nourish this growing population and drivers of food supply, such as stringent product standards for
to meet required non-food purposes. There will be acute pressure to quality and consistency, economies of scale, global sourcing and
use less water in order to feed this rising population. Water is at the competition. Bridging these two worlds is a precondition for
heart of the global resource security challenge. As the world is smallholder inclusion. An increasing number of experiences/pilots
heading for a projected 40 percent gap in the ratio of supply and in developing regions with smallholders have been done or are in
demand of freshwater by 2030, water scarcity will have significant progress from various international F&A companies, including
repercussions for agriculture, both agronomical and economical1. Unilever, Nestlé, DANONE, Friesland Campina, Heineken, Cargill,
Moreover, the food sector is becoming more interlinked to other Rijk Zwaan, ADM and MARS. The good news is that an increasing
sectors; an increase in energy prices will, for example, immediately number of case studies confirm that smallholder inclusion has
lead to higher food prices. A continuing threat to global food positive effects in terms of productivity and gross revenues. A first-
security will slow economic growth, disproportionately hit the urban of-its-kind case study of the oil palm industry (Levin, 2012) shows
and rural poor (particularly those in low income countries), strain that smallholder inclusion is not only sustainable, but also profitable.
public finances and raise geopolitical tensions. Agricultural commodity research3 confirms that inclusion of
smallholders in dairy, cocoa, coffee, aqua-culture and horticulture
Various routes exist to increasing food production: improving yields has effects in terms of increasing the number of smallholders,
per hectare, cropping intensification, reducing post-harvest, storage productivity and gross revenues. A number of case studies on
and transport losses, improving irrigation techniques, reducing land business models for smallholder inclusion show positive effects
degradation and food waste. The hypothesis in this study is that the (such as cases prepared for the Seas of Change event4, 2012),
resolution of current and future imbalances in food supply is virtually including business interventions to achieve social impact, financial
inconceivable without tapping into the underused agricultural
production potentials of existing small-scale farms in developing
countries. Around 85 percent of farms worldwide are less than 1 Most countries of the world do not price agricultural water. However, if water attracted
two hectares and this category of farm holdings accounts for about an average global market price of USD 0.10 per cubic meter, water would account for an
80 percent of farmland in many Asian and African countries. estimated 20 percent to 40 percent of the cost of major cereals and meat.
Moreover, smallholders produce up to 80 percent of food 2 According to the list of countries of the Development Assistance Committee (DAC-
consumed locally in these continents. OECD) which are recipient of official development assistance (ODA).
While smallholders have been targeted by government and donor 3 Fact sheets of various commodities, working documents prepared for Wageningen UR
programmes in the past decades in developing countries, they have Centre for Development Innovation, Wageningen (2012).
largely remained outside the domain of self-propelled commercial 4 Source: www.seasofchange.net
6 | Framework for an Inclusive Food Strategy

sustainability and scale (BoP Innovation Center, 2012). However, most Research outline of the study (see figure 1.1):
cases or pilots of smallholder inclusion are supported and subsidised The key elements of the research outline of this study are:
by the public sector and civil society, or are CSR-driven by the
private sector. 1. Identification of new (market) opportunities for increased food
The private and public sectors are increasingly aware of the new production. Chapter 2 aims to answer the question ‘Who will
reality of future global food security, as is reflected in commitments produce the food needed in 2050?’ and how this is likely to be
made at both the WEF (2011 and 2012) and G20 in Cannes (2011). done. The strategic position of smallholders as potential food
It has been concluded that a new vision for agriculture is needed in source is assessed.
order to unleash the underexploited potential at the bottom of the 2. The need to facilitate smallholder linkage to markets, with a view
food pyramid. This new resolve of the food world puts the critical to boost farm income, facilitate farm investments and strengthen
role of agriculture and rural economy as the national breadbasket entrepreneurial initiative in the sector. Chapter 3 deals with this
and engine for sustainable growth on the priority list of the global question in the framework of local and global value chain
developing agenda. development.
This Rabobank study is based on literature study and aims to 3. The process of capacity development of smallholder farmers in a
identify new opportunities for increased food production, with a business approach, which will not be possible unless it is done
focus on smallholder inclusion in the value chain. Most publications, through effective producers’ organisations and farmer
however, focus on an certain aspect of smallholder inclusion and co-operatives. This issue is addressed in Chapter 4, with special
lack a holistic approach that incorporates the role of producers’ emphasis on the still underexploited potential of co-operatives in
co-operatives and financing. This study should be seen as a this context.
contribution to achieving global food security in an environmentally 4. Improving access and creating effective smallholder financial
sustainable and social responsible way by providing a framework for systems by, among other things, exploiting the opportunities of
stakeholder inclusion in value chains. effective farmer organisation (including co-operatives) and the
merits of value chain finance methodology. This is at the core of
1.1 Aim, scope and outline of the study the development of smallholder agriculture, particularly in LDCs.
Last but not least, the investment challenge of smallholder
Changing course: The food (business) world recognises that ‘business agriculture has also been tackled (Chapter 5).
as usual’ no longer meets the requirements of the 21st century. 5. The synthesis of the four components of this study is a framework
The reversal of the long-term decline in real agricultural prices into for an inclusive food strategy, consisting of a set of fundamentals
steep increase, higher price volatility, recurring food shortages and and interventions. Stakeholders of the food value chain could
famine since the food crisis of 2007-2008, as well as slowing growth in incorporate this framework into their sourcing strategies to
traditional supply regions and rapidly changing market conditions, has include smallholders (Chapter 6).
raised awareness for the need to change course. Stakeholders around the
world are considering the crucial elements of a more holistic approach
that meets the challenges of food security and the requirements of In paragraph 1.2 and 1.3, however, an overview of the global food
environmental sustainability within a framework of viable business challenge (Rabobank, 2010) and the outline of the new vision for
models for the long term. Solid long-term supply arrangements are agriculture (WEF, 2011) to drive food production at the Bottom of
not conceivable unless they guarantee competitive rewards for the the Pyramid will be explained briefly as background of the analyses
producers in the chain. While strong producers’ organisations may lead of this study.
to tougher negotiations with chain partners, they are an effective
means to secure adequate farm income, while facilitating growth of
production, yields, product quality and related farm investments.
Therefore, in the long run, effective organisation of smallholder farmers Figure 1.1: Research outline
is not only in the interest of all chain partners, it is a vital condition for
inclusive growth.
Identify new
opportunities for
Heading where?: This study aims to address a number of questions increased food
production
that are considered vital for any attempt to formulate a new food (Chapter 2)
strategy and identify new opportunities for increased food production,
Small-
with a focus on smallholder inclusion in the value chain. The challenge Small- Inclusive holder
holder food inclusion
is how to link smallholder farmers to markets and integrate them into finance strategy in value
(Chapter 5) (Chapter 6) chains
the value chain, and how to do so in a cost-effective manner. Producers’ (Chapter 3)
organisations and co-operatives are identified as crucial instruments to
Producer
address the obstacles observed, and to facilitate the process of value organisation
chain development as well as smallholder finance. The final result of & co-operatives
(Chapter 4)
this study is a conceptual framework for an inclusive food strategy.
 |7

1.2 The global food security and nutrition challenge

to 2050 in a nutshell5 Figure 1.2.1: World crop yields, selected crops,
five-year moving average of YoY change, 1965-2010
Hunger and malnutrition: Since the global food commodity crisis of
Corn
2007-2008 and the continuation of high and volatile food commodity
prices, the theme of global food security has moved to the top of the 8
world’s political agenda. Food security exists when all people, at all
6
times, have access to sufficient, safe and nutritious food to meet their
dietary needs and food preferences for an active and healthy life.’ (UN 4
World Food Summit 1996). Food is, after all, a basic human need and is
2
vital for stable economic development and peace. This is a particular
concern considering that the world is currently on an unsustainable 0
track. There are, in fact, nearly one billion people in the world who do
-2
not have daily access to safe food and suffer from chronic malnutrition.
Many of them are children who run the risk of severe long-term health
problems and stunted growth. Having the right food at the right time

1965

1968

1971

1974

1977

1980

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1986

1989

1992

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2004

2007

2010
would mean well-nourished children who would have a better
opportunity to fully develop their talents and fulfil their potential. Rice

Healthcare costs would decrease and national economies would 5

prosper in the future.
4

Projection food demand 2050: Between now and 2050, the global 3
population is projected to grow from seven billion to more than nine
2
billion people. Approximately 90 percent of this population growth will
occur in Sub-Saharan Africa (one billion or 49 percent) and Asia (900 1
million or 41 percent). In many countries in these two developing
0
regions people spend more than 40 percent of their income on food.
An increase in food prices has consequently had an immediate and
far-reaching impact on these poor households in low income countries.
1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010
This effect will be compounded as growth in income leads to a dietary
transition to more animal proteins6 and more vegetable oil, fruits, Wheat

vegetables and sugar rather than staple food such as roots, tubers and 8
cereals. FAO’s 2006 baseline projections show that by 2050 the world’s
6
average daily caloric availability could rise to 3,130 kcal per person,
representing an 11 percent increase compared to the level in 2003. 4
Migration and urbanisation will also increase, resulting in 70 percent of
2
the population living in urban areas in 2050 compared to 50 percent at
present. This will also have an impact on food consumption patterns. 0
Current worldwide agricultural production will need to increase by
-2
approximately 70 percent (FAO, 2009) in order to fulfil this projected
increased demand for food. However, the basic calculation of caloric
requirements oversimplifies the global food challenge that points to
1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

the need for both a substantial increase in food production and

improvement of domestic agricultural production patterns and Soybeans

international food commodity trade flows in order to meet the needs 8

of growing and changing food demand.
6

4
5 See Rabobank study: ‘Sustainability and security of the global food supply chain’, which
2
was launched on the Duisenberg lecture on the occasion of the annual meeting of the
IMF and the World Bank, Washington D.C., October 2010, (http://www.rabobank.nl/ 0
images/rabobanksustainability_29286998.pdf )
-2
6 Per capita meat consumption is set to rise from 37 kilograms at present to approximately
52 kilograms in 2050 (FAO, 2009). In addition, more grain, water and fertilizer are needed
1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

to produce meat. For example, it takes two to four kilograms of grain and a total of 3,900
litres of clean water to produce one kilogram of poultry. The figures for beef are seven to
Source: USDA (2011)
ten kilograms of grain and 15,500 litres of water respectively.
8 | Framework for an Inclusive Food Strategy

Improving crop productivity: Much of the food crops production to stress conditions including drought, salinity and temperature and
growth has been based on the growth of yields in the past decades. that are more efficient in terms of energy and fertilizer use could give
Only ten percent has been achieved by expanding new arable land. the declining crop yield a new boost into possible ‘Green Revolution.2’
A question to be asked is: ‘Will yield increases continue to be possible system innovations in the supply chain. This requires huge investments
and what is the potential for a continuation for growth to 2050?’ in research, new technologies and marketing.
The ‘Green Revolution’, i.e. the adoption of modern varieties of food Last but not least, other innovative routes to increase food supply
crops witnessed in the 1960s and 1970s was successively followed by include reducing post-harvest, storage and transport losses, land
a period of input intensification and improvements to technical degradation and food waste ‘from farm to fork, and improving irrigation
inefficiency (agronomy), and this has contributed to strong yield techniques.
growth for food crops. The yields of many crops have, however, slowed
down in the past decade around the world from 1.7 percent per Resource constraints: Agriculture is confronted with the fact that
annum in the period 1961-2007 compared to 1.3 percent per annum the earth is running out of vital natural resources such as arable land
during the period 1997-2007 (see also table 1.2.1 on the previous page). (see figure 1.2.2), clean water and some critical nutrients. The existing
This pattern is expected to continue in the future and may nearly halve natural resources are also not equally distributed among countries
the historical growth rate of 1.7 percent per annum to 0.8 percent per (see figure 1.2.3). Other challenges are:
annum (Bruinsma, J., (2009); Fisher, R.A., et al. (2009)). - Environmental degradation (water and soil pollution, desertification
and soil erosion) and the decline of vital ecosystems (rainforest and
In places where yields are near the ceilings obtained on research marine life).
stations, the scope for raising yields is much more limited than in the - Rising greenhouse gas emissions, with agriculture as one of the
past. Despite this, average yields have continued to increase, albeit at largest emitters, contribute to global warming and extreme weather
a decelerating rate. conditions, which have a huge impact on agricultural production.
According to the studies, this slowdown in the yield growth is a - Significant inefficiencies (yield gap and losses) in current agricultural
gradual process which has been on-going. Major food crops’ optimum production and transport and storage, particularly in developing
theoretical crop yield ceilings seem to have been reached or are rapidly countries.
reaching that point. At the same time, empirical evidence has shown
that the cumulative gains in yields over time due to slower, evolutionary
annual increments in yields, have been far more important than
quantum jumps in yields. For example, wheat yields in South Asia that Figure 1.2.2: Arable land per capita (ha use per person)
increased some 40 kg per annum over the period 1961 to 2007, is
projected to grow by an additional 32 kg per annum in the period up
to 2050. The variation in yields among countries, however, is very wide. 0.70
Thus, although the growth of the yields of major food crops is 0.60
expected to slow down, it will remain an important source for 0.50
additional agricultural production in future. First of all, food crop yields 0.40
are technically much lower than the theoretical maximum yield (yield 0.30
gap) due to differences in practices related to the availability of water 0.20
and fertilizer, suitable weather/climate conditions, pests and diseases. 0.10
Secondly, the variation in yields among countries/regions is very wide. 0
For example, the world average yield of cereal is 3.2 tonnes per hectare 1960 1970 1980 1990 2000 2010 2020 2030 2040
Developed countries World Developing countries
(FAOSTAT). By comparison, the yield is 8.1 tonnes per hectare in the
Source: Bruinsma (2009)
Netherlands and 6.5 tonnes per hectare in Western Europe and North
America. This figure is only 2.9 tonnes per hectare in developing
countries and 1.8 tonnes per hectare in the least developed countries. Figure 1.2.3: Water and agricultural land available per capita
Yields of crops do not, however, only differ from country to country, in selected countries
but also within countries themselves and by farms and farm types.
According to IIASA (Fisher, G., et al., 2009), the world average crop yields
could be improved by more than two-thirds to 5.4 tonnes per hectare. 20 100,000
16 80,000
Studies about closing the yield gap (Koning, N.B., et al. (2008); Ittersum, 12 60,000
van, M. (2012)) conclude that theoretically enough food can be 8 40,000
produced to feed the world of nine billion people. The challenge is 4 20,000
how to double food production to 2050. There are, however, many 0 0
constraints in practice such as limited resources, lack of physical
Canada

Australia

Brazil

Thailand
USA

France

Germany

Malaysia

India

Indonesia

infrastructure and capital, poorly-functioning distribution and marketing

systems and environmental and social factors. Good agricultural
Acre per capita (left) Water availability per capita (right)
practices and farm management could contribute to high yields.
Source: FAO, World Development Indicator & United Nations
Finally, the development of new modified crops that are more adaptive
 |9

Strong economic and population growth and urbanisation trends have 1.3 Towards a new vision for agriculture
contributed to put the world’s food and water resources under significant
stress (WEF, 2012). Meeting the future demand for these resources Growing consensus: International forums are becoming increasingly
requires significant investment and integrated policy solutions. aware that achieving global food security will require more than simply
Important trade-offs require coordination among diverse stakeholders. boosting production and processing and selling food around the world
A transformation towards total resource management for sustainable in order ‘to make money’. There is also a growing consensus within the
economic growth is a key challenge of the early 21st century. food world, among both public and private stakeholders, that future
agricultural production and food supply systems must also contribute
Scenarios for moving forward: In order to bridge the food gap to well-balanced food security and environmental sustainability.
between countries and regions, the local food supply chains of The business community has established a framework for a new
individual countries and global food supply chains must be integrated vision for agriculture that was published by the World Economic Forum
into an efficient and smoothly operating global food supply system. in 2011. This new vision for agriculture strives to harness the power of
This will require innovations and major changes with respect to agriculture to drive three core goals: feed the world, protect our planet
regulations, markets, consumer preferences, pricing and measurement and create prosperity (see figure 1.3.1). Its aspirations are high, with
of profit and loss. It is estimated that large investments, totalling more concrete targets for each of these objectives for every decade from
than USD 83 billion per annum (FAO, 2009)7, are needed to improve now on: to increase production by 20 percent, decrease emissions by
current agriculture in developing countries and downstream sections 20 percent and reduce the prevalence of rural poverty by 20 percent.
in order to meet the greater demand for food in the coming decades.
The enabling environment (e.g. food and trade policy, legislation, Multi-stakeholder collaboration: In order to make the new vision
financial system, etc.) for inclusive long-term private investments must for agriculture work in low and middle income countries, robust
be created. Investments must also be made to bring about a ‘Green collaboration among governments (local, national, donors and
Revolution’ in order to improve, among other things, the resource multilaterals), the private sector (local and global agribusiness sector,
efficiency of crops. Plant, animal and food systems will have to be investors and banks) and civil society (NGOs, aid foundations) is required.
adapted to extreme weather conditions, rising temperatures and water Given the complexity of agriculture and the food supply system within
stress conditions. A stop must be put to land degradation and illegal a hyper-dynamic world market, all of the aforementioned parties must
occupation and forestry. work in concert to overcome the critical obstacles that arise at every
stage of the transition of the food value chain. Intensive collaboration
Private sector in the driving seat: All these developments will affect within the value chains should be equitable and fair. The aim is to
the prevailing economic and business models and even the long-term generate markets, choice and benefits throughout the value chain.
strategies and market/competitive positions of companies in the global Each stakeholder in the value chain has a critical role to play and the
food supply chain. Driven by all these fundamental changes, new scale of the challenge will require an intensification of efforts across
markets and business opportunities will emerge. The private sector is the board (see figure 1.3.2 on the next page). In particular, governments
in a position to play a leading role in linking food demand and supply must set the direction for their countries’ agriculture and food supply
in an integrated fashion, while at the same time tackling Millennium policies and play a strong leadership role in the holistic transformation.
Development Goals of the UN now and in the future. But the private Businesses should stretch to innovate and invest, tactically driving
sector cannot do it alone. Success can only be achieved if private and
public stakeholders in the value chain have a common and integrated
long-term, business-oriented viewpoint. Solutions must be more than Figure 1.3.1: Framework for the new vision for agriculture
simply ‘doing more of the same’ or adjusting business-as-usual
approaches and matured technology. We have to think beyond the
boundaries of current agriculture and agribusiness growth strategies, A global agriculture system that harnesses the power of markets
and multistakeholder collaboration to feed the world, protect
business models and interventions to unfold the full potential of
our planet and create prosperity
agriculture in the world to meet global food security. The food world
needs third order changes to make the transformation of the
agriculture and food supply chains possible and safe. New answers
...In

Food Security Environmental

Meet nutritional Sustainability
an

need to be found.
..
all.

demands while Conserve or

en
for

vir

providing affordable enhance the

on

choices quality and

ty

me
uri

across the food quantity of

sec

nta

value chain natural resources;

lly
d

meet the challenges

oo

su

of changing climate
ef

sta
vid

ina
Pro

ble
wa
y

While generating economic growth and opportunity.

Economic Opportunity
Drive rural and national economic development
the globe with well-targeted investments

7 In June 2011, the Global Harvest Initiative calculated that USD 90 billion a year is needed
Source: World Economic Forum (2011)
in investment in developing country agriculture.
10 | Framework for an Inclusive Food Strategy

implementation of the new vision throughout the market. Agribusiness Core elements for implementation: Based on a synthesis of the
companies with global operations can leverage their resources to experiences and best practices around the world (Morocco, Brazil,
engage and strengthen locally-focused enterprises, partnering with Vietnam, Indonesia, Mexico and Tanzania), the most successful ones are
diverse stakeholders to deliver results at scale. Civil society should founded on multi-stakeholder partnerships and have six elements in
mobilise the (local) community to meet its unique social, common (WEF, 2012):
environmental and economic needs. 1. Leadership and alignment across stakeholders.
2. Clear strategic choices founded on market demand and
Conditions for success: Realising agriculture’s full potential as a comparative advantage.
driver of food security, environmental sustainability and economic 3. A concrete investment and entrepreneurship pipeline.
opportunity requires innovative tools for breaking current bottlenecks 4. Enabling hard and soft infrastructure policies and investments
such as inadequate access to inputs, finance and storage. Success of (including capacity building and other enablers).
the new vision for agriculture will depend strongly on the innovative 5. Catalytic financing and risk management solutions.
strength of the agribusiness industry, the long-term commitment of 6. Robust mechanisms and institutions for delivery and durability.
governments, the power of community mobilisation by civil society
and the quality of farmers’ entrepreneurship. The new vision for
agriculture will, however, only work if it is supported by the right policy,
physical infrastructure and market structure. In other words, a holistic
long-term approach is needed in order to break through the
bottlenecks of current agricultural systems with a view to realising the
comprehensive goals of the new vision. A few experiments involving
this type of holistic approach are being carried out in the following
fields of national sector transformation, value chain intervention,
infrastructure corridor and breadbasket areas (WEF, 2011).

Figure 1.3.2: Focus and role of stakeholders in the new vision for agriculture

Set the direction

- Establish and enforce consistent, transparent regulation to attract investors
- Increase funding for agricultural development, especially infrastructure and research
- Ensure rural access to education, healthcare and capital – regardless of gend
- Lead stakeholders in holistic transformations

Public Sector

Innovate and invest Mobilize the community

- Develop and scale interventions that are proven to meet - Actively represent the voice of citizens, communities,
the combine objectives of the New Vision and the environment in holistic transformations
- Increase access to agricultural finance through The Farmer - Train and organise local producer organizations
or

Civil

innovative risk-sharing partnerships - Leverage capital to bridge gaps in the value chain
Sect

- Step up engagement in holistic transformations and reduce risk

So
ate

cie
iv

ty
Pr

Source: World Economic Forum (2011)

 | 11

2 Who will produce the

additional food needed to
feed the world in 2050?
Agriculture not only fulfils the most basic of human needs, it has Agricultural systems range across the globe from capital intensive,
been, and will always be, the basis of human civilization. It is the hi-tech and large-scale systems to low-tech, small-scale and
one sector that can be found in the most remote corners of human subsistence farming systems. Various long-term studies show that in
settlement. It plays an important social role, providing employment the light of growing resource scarcity, combined with the limited
and a way of life. The majority of the world’s poorest and growth potential of existing high yield systems in large-scale
undernourished people, in total approximately one billion people, agriculture of industrial countries, current focus on large-scale
live in rural settings and depend directly on agriculture for their agriculture alone is no longer adequate to tackle food demand in
livelihoods and food. To meet the needs of an ever-growing world 2050. The food world must also tap from other sources such as
population, the world needs to produce 70 percent more food small-scale farming systems of the developing regions.
(excluding non-food purposes) by 2050. Moreover, agriculture is Whether a particular country/region ‘wins or loses’ in the
currently threatened by many factors, including increasing resource globalisation of the food supply system largely depends on where
constraints (land, water, phosphate and energy), land degradation, it is positioned in the process of agricultural transformation and on
water pollution and the effects of climate change. its endowments of resources, such as land, water, phosphate and
In the view of all this the world community is facing a daunting energy. It furthermore depends on the extent to which countries can
challenge with respect to long-term global food security. A global adjust to farming systems in order to create more value by exploiting
scenario for food security confronts all stakeholders with a their competitive advantages. In this view, agriculture and food
complicated web of dilemmas and food policy options. supply systems can act as engines in stimulating the rural revival of
Major strategic options arise: developing economies. However, this requires that farming is
- Local or global food supply system, approached as a business, based on entrepreneurial capacity and
- High or low income countries or emerging economies, attuned to market opportunities/demand.
- Large farms or small-scale farm holdings,
- Family or corporate farms, 2.1 Scale and scope of the global food supply
- Organic or hi-tech farming systems,
- Public or private sector? 2.1.1 Food production pyramid
To find answers we need to examine the nature and potentials of Agricultural farming systems across the globe range from highly
agriculture and its role in and impact on society, ecology and the commercialised large-scale operations to small-scale subsistence
economy. Agricultural systems have strong linkages with resources farming systems (see figure 2.1.1).
such as land use (12 percent of the world’s land surface) and water Subsistence farming is a form of small-scale farming in which all of the
use (70 percent of use of fresh water worldwide). In addition, crops and livestock raised are used to maintain the farmer and his
agriculture accounts for 2 percent of the world’s total energy family, leaving little, if any, surplus for sale or trade.
consumption and 30 percent of global emissions leading to climate Smallholder farms (economically active poor) are partially commercially
change are attributable to agricultural activities, including land use orientated and market driven and provide the main if not sole source
changes and deforestation. Expanding agricultural production to of livelihood for the family. Some of the small-scale farmers are part-
meet demands in 2050 without substantial improvement of the time farmers who combine farming with other sources of employment.
resource productivity will create increasing constraints for food supply. The distinction is in practice gradual because many subsistence farmers
are eager to take up some commercially tradable products in order to
secure cash income.
12 | Framework for an Inclusive Food Strategy

Figure 2.1.1: Farm production pyramid 2.1.3 World farm structure

A range of characteristics can be used to classify agricultural holdings
including land area, labour input, turnover, added value and income.
The heterogeneity and complexity of farming systems around the
Large farm & corporate enterprise
world do, however, make it very difficult to make comparisons between
countries.
Market driven Medium farm enterprises The choice of approach is usually driven in practice by the availability
of international empirical data, namely from the FAO World Census of
Small farm enterprises
Agriculture that is based on hectares per farm holding. The World Bank
Smallholder farms
(2003) defines a small-scale farm as a holding covering less than two
hectares of owned or rented land. This definition also assumes that the
Subsistence
driven Subsistence farms farm family provides the primary source of labour and that farming
constitutes a principal source of income for the family.
Figure 2.1.3 shows the domination (85 percent) of smallholders in
Source: Rabobank Economic Research Department (2011)
the world farm structure. The majority of the approximately 500 million
small farms in the world are located in Asia. China alone accounts for
almost half the world’s small farms. India in turn accounts for 23
Commercial farms consist of small- and medium-sized enterprises and percent of all small farms.
large-scale operations (family farms or corporate). Commercially viable
small-scale enterprises are market driven. In Asia and Africa they In terms of agricultural land, farms of less than two hectares in size
generate significant market surpluses and are powerful engines for account for 15 percent of the total land, while this figure is 27 percent
rural economic growth and for creating jobs for others in both the farm for farms of less than 10 hectares. It should be noted that these figures
and rural non-farm economy. refer to global averages.
The importance of smallholders is better appreciated from a regional
2.1.2 Number of farm holdings and average farm size perspective. After all, the potential for yield increases is far greater in
The global agricultural sector depends on supplies from approximately the South, especially Africa and Latin America. In Asia, nearly 90 percent
525 million farm holdings (Nagayets, 2005) that operate on more than of the farm holdings are smaller than two hectares, accounting for
1.5 billion hectares of land. The majority of the world’s farm holdings approximately 54 percent of the agricultural land. In Africa, these
are located in Asia (88 percent). It is followed by Africa (5.7 percent) and figures are respectively 78 percent and 28 percent. Compared to Asia
Latin America (2 percent). These remarkable differences between the and Africa, Latin America’s farm structure is less fragmented.
continents can be at least partially explained by the variation in When using the 10 hectares threshold for smallholders, the
average farm sizes (see figure 2.1.2). The smallest average farm size is percentage of small holdings in Asia is almost 99 percent of the total
1.1 hectares in Asia and 1.9 hectares in Africa. In contrast, the average farm holdings, operating 85 percent of the farmland. The figures for
farm size in Latin America is 57 hectares. Oceania has the largest Africa are 97 percent and 63 percent, respectively.
average farm size at 167 hectares, which is mainly due to large farm To conclude: The case of small-scale agriculture for food security is
holdings in Australia. North and Central America come in second place particularly relevant for Asia and Africa - the two continents with the largest
with an average farm size of 108 hectares. underexploited potential for yield increase.

8 2000 Census - FAO: Based on 436 million registered farm holdings operating
approximately 1.5 billion hectares of agricultural land.

Figure 2.1.2: Average farm size by region (in hectares) Figure 2.1.3: Worldwide percentages of farm holdings
measured by size (in %)

180 167.2

150 100
108.0 85
120 80
90 60
60 57.1 40
30 15.1 20 12
1.1 1.9 3.7 3 0.05
0 0
under 2 ha

2-10 ha

10-100 ha

>100 ha
Africa

Oceania
Asia

Europe

Central

World
South
America,

America,
North and

Source: 2000 World Census of Agriculture - FAO8 Source: FAO, 2000 census
 | 13

2.2 Possibilities for increasing food supply means including an irrigation/water management system and pest
management plan, as well as a well-functioning distribution, market
Outcomes of long-term food studies9 suggest that world food supply and finance system. This type of farming is more knowledge-based,
could be increased substantially. The various possibilities to increase enterprising, market-driven and capital-intensive. Cropping
food supply include: intensification therefore cannot be put into practice easily everywhere.
Yield increase: Closing the yield gap between regions and small- and
large-scale farming systems represents the greatest possibility for Reducing food waste: Roughly one-third of the edible parts of food
increasing agricultural production. Yields vary widely between produced for human consumption, gets lost or wasted globally, which
countries and regions. The average world cereal yield is 3.2 tonnes per is about 1.3 billion tonnes per year (FAO, 2011). Food is wasted from
hectare (FAOSTAT), compared to an average yield of 8.1 tonnes per initial agricultural production down to final household consumption.
hectare in the Netherlands and 6.5 tonnes per hectare in Western The latter is especially high in medium and high income countries
Europe and North America. This figure is only 2.9 tonnes per hectare where food is thrown away even if it is still suitable for human
in developing countries and 1.8 tonnes per hectare in the Least consumption. In low income countries food is mainly lost during the
Developed Countries. According to IIASA (Fisher, G., et al., 2009), the early and middle stages of the food supply chain; much less food is
average world cereal yield per hectare could be improved by more wasted at the consumer level. Figure 2.2 shows the per capita food
than two-thirds to 5.4 tonnes per hectare. losses in different regions of the world.

New arable land: The potential for the classical route to increased Reducing land degradation: Land degradation (including desertification)
global food production that involves putting new land into production is an extensive phenomenon caused by human activities and natural
has all but been exhausted. While unused or underused arable land still events including climate change. It refers to a reduction or loss of
exists, there are increasing challenges related to environmental biological or economic productivity resulting from land uses or from a
sustainability, land rights and investment capital that must be overcome. process such as erosion, deterioration of properties of soil and long-
It is striking that the potentially available arable land is very unevenly term loss of natural vegetation. There are many causes of land
distributed among regions and countries across the world. Two-thirds degradation, including the pollution of land and water resources,
of all potentially suitable new arable land is located in developing over-extraction of groundwater, deforestation, overgrazing and soil
regions. Some 80 percent of this amount is found in Latin America and salinisation.
Sub-Saharan Africa10. About half of this total is concentrated in just Serious land degradation affects more than 20 percent of world’s
seven countries, namely Brazil, Argentina, Colombia, Bolivia, the arable land (IFPRI, 2011). Rehabilitating land is capital intensive.
Democratic Republic of the Congo, Angola and Sudan. Added to Moreover, preventing the degradation of land would require farmers
this potential arable land is ‘Black Earth’ group, which has been to adopt crucial practices such as land conservation and terracing.
‘rediscovered’ and was once the granary of Europe and the former The implementation of land certification programmes and extension
Soviet Union. In contrast, there is virtually no spare land available for services will be important components of any drive to address land
agricultural expansion in South Asia, the Middle East and North Africa, degradation.
which are regions with the highest population growth. This means that,
even within the relatively land-abundant region, the available arable
land varies strongly by country, both in terms of quantity and quality.

Cropping intensification: Similar to methods for increasing yields per

hectare, cropping intensification has the advantage that no additional
new scarce arable land is needed. In theory producing two staple crops
rather than one annually equals a doubling of the harvest area, but this Figure 2.2: Per capita food losses and waste in different regions
amount is in practice much lower due to agronomical constraints.
Cropping intensification furthermore makes it possible to use water,
fertilizer and agricultural equipment more optimally. Several conditions 350
must nevertheless be met in order to achieve optimum increases in 300
cropping intensities. These conditions include the availability of 250
sufficient inputs such as water, fertilizer and seeds, a farming system 200
that enables optimum control of the growth conditions through 150
100
50
0
Central Asia

Latin America
and Oceania

Africa
North America
Europe

Asia
Industrialized

Subsahara

Southeast Asia
South and

9 According to FAO long-term studies (2009), the additional food needed to feed the
North Africa,
West and

world population in 2050 will require a 9 percent expansion of arable land, a 14 percent
increase in cropping intensity and a 77 percent increase in yields.
10 The estimated amount of potential ‘free’ land for agricultural purposes vary from 450
million hectares to more than 800 million hectares. The difference depends largely on
production to retailing consumer
the criteria, such as uncultivated, unforest, rain-fed, free of land rights) which have been
Source: FAO (2011)
used for assessing the availability of agricultural land by the different sources.
14 | Framework for an Inclusive Food Strategy

2.3 Macroeconomic implications of transforming the Previously mentioned macroeconomic implications should be
agricultural sector taken into account to make transformation of smallholder agriculture
a success.
Transition process: Induced by among others investments, extension
services and technological change, a process of transforming 2.4 Regional characteristics and the business case of
agriculture from its traditional subsistence roots to modernised and small-scale farming
possibly industrialised agriculture can be observed across the world.
These efforts are aimed at reaping benefits in terms of improving farm Regional perspectives: The rapid growth in per capita income,
income and livelihoods, achieving growth of the agricultural sector and growing health consciousness and urbanisation are leading to a shift in
promoting rural development. diet away from staples and increasingly towards high value agricultural
commodities such as livestock and dairy products, fish, fruits and
Macroeconomic indicators: The pressure for change can be assessed vegetables, and fats and oils. The reduction of import barriers in
by comparing the levels and trends in labour productivity in industry industrialised countries and the transformation of the agrifood industry
and services relative to agriculture. When labour productivity in (processing, wholesale and retail) also favours the growth of high-value
agriculture is consistently lower than that of the other sectors, the export products.
position of agriculture in the national economy will decline. As a However, it has been observed that small-scale farming has widely
consequence the number of farms and share of agricultural workers different overall starting positions across developing regions.
will decrease. Average farm size will increase in order to take advantage
of economies of scale. Agricultural workers forced to leave farming will Asia: Small-scale farms in Asia have proven to be resilient over time and
pursue any employment opportunities in other emerging sectors of continue to make a significant contribution to agricultural production,
the economy. Figure 2.3 shows that the employment the agricultural food security and rural poverty reduction, despite the challenges they
sector adds in industrial countries is much lower in relative terms than continue to face with respect to access to the new agricultural value
the applicable percentage for developing countries. Not only the share chain (Thapa and Gaiha, 2011). Small-scale farming in Asia faces a new
of agriculture in the total employment will decline, but also the share context of high-value agriculture that stems from rapid income growth
of the value that agriculture adds to total GDP will fall as the economy and urbanisation, leading to changing dietary habits.
grows and diversifies.
Africa: The challenge for Africa compared to other continents is summed
In countries in which large proportions of the population participate up in the title of the World Bank report published in 2009: ‘Awakening
in small-scale farming and particularly in countries in which available Africa’s Sleeping Giant’. In comparison to other regions, Sub-Saharan
land is scarce, such as China, India and Indonesia, the transition of Africa’s population remains predominantly rural. The agricultural sector
small-scale farms would require absorbing millions of released workers consists mainly of rain-fed low technology, low input and non-
into non-farm sectors in urban areas (relating to urban economy). mechanised small-scale farming. Despite the region’s abundant natural
The feminisation of agriculture in many African and Asian countries is resources, growth has not been commensurate to population growth
amplifying the migration of male members of the household to urban and productivity still lags way behind that of other regions. It has not
areas and non-farm employment. This has large implications on rural achieved the expected output compared to the Asian Green revolution
provisions because access to financial services, and farming knowledge of the 1960s and 1970s (crop yields lag behind).
and technology for small-scale farming needs to be targeted at women
who are traditionally engaged in unpaid family work. Latin America: Small-scale farming in Latin America has a very different
position due to the large average size of the farms measured in
hectares compared to Asia and Africa and the lower overall number of
Figure 2.3: Employment in agriculture (% of total employment)(y-axis); farms. It was estimated that in Latin America there are about 15 million
2007 or indicated otherwise and GPD per capita (x-axis); ‘small-scale’ family farms on 400 million hectares of the land. The main
average 2007-2010
driver of the development in this region is the growing export demand
for agricultural commodities (Pinto, et al., 2011).
50
Ethiopia
45 Role of smallholders: The importance of small-scale farms in the
40 developing world is demonstrated by their large share of total farm
35 households and their sizable share of agricultural production.
Nigeria
30 Ghana Small-scale farms do, however, exhibit specific characteristics and
Tanzania
25 perform multifunctional roles in the context of rural areas and rural
20 India development in developing regions. They are not only food producers
Indonesia
15 China but also sources of employment, providers of ‘eco services’ and
Thailand
10 Costa Rica Turkey guardians of food security in poor and remote areas. These roles
Ecuador
5 Brazil
Korea, Rep.
Italy
UK
France Netherlands obviously vary by country and more broadly by region and differ in
South Africa USA
0 Japan significance during the different stages of economic development.
0 10,000 20,000 30,000 40,000 50,000
Source: World Development Indicators, World Bank
 | 15

Business case of smallholder agriculture: The efficiency of smaller farm sectors thanks to diversification of these countries’ economies
farms has been demonstrated by numerous empirical studies through the years. These opportunities are, however, scarce in
(Eastwood, et al., 2004) that show an inverse relationship between developing countries where growing populations continue to divide
farm size and land productivity. Moreover, small farms typically achieve land holding by the law of succession.
their higher productivity with lower capital intensities than large farms. An exception in the developing regions is China, where average farm
This advantage could, however, evaporate through higher distribution size increased slightly from 0.54 in 2003 to 0.60 hectares in 2008 due to
costs due to post-harvest losses (poor storage and transport facilities) cultivated rental transactions among farms, which accompanied the
and high transport costs (IBRD/WB (2009), Tappa/Ganesh (2011)). large shift of labour into off-farm activities (Deng, H., et al. (2010).
Moreover, small farms face major disadvantages in accessing modern Not only has the number of small-scale farmers been increasing
value chains. These include low volumes of produce to sell, variable over time in some countries, their share of the total cultivated area has
quality, high transaction costs, poor market infrastructure and limited also been rising (Thapa and Ganesh, 2011). This development is
ability to meet the high credence requirements of many high value accompanied by increasing ownership of the land by small-scale farms
outlets. They typically face a tilted playing field in terms of access to land (fragmentation of land ownership). From an economic perspective,
(land market reforms), water (irrigation), inputs (seeds, fertilizers), credit, these trends close to the bottom of the food production pyramid place
technology (mechanisation) and markets (transport storage facilities). pressure on the development strategy of small-scale farming.
In order to prosper over time, small-scale farms need to become The need for larger scale farming differ between types of crops,
bigger (economies of scale) and more modernised. This can be depending on added value. Generally low added value crops such
achieved through investment, knowledge, switching to high value as maize, rice, wheat and sorghum need a larger scale compared to
production and going part-time by diversifying into non-farm sources high added value cash crops such as cocoa, coffee, cotton, vegetables
of income. and fruits.
Figure 2.4 sums up the pros and cons of the business case for small-
scale producers.

Evolution of farm size and implication

While there has been a trend of increasing farm size in industrial
countries, the opposite has occurred in densely populated developing 11 For example India: from 2.3 to 1.3 hectares (1971- 2001); Indonesia: from 1.1 to 0.8
countries11. This difference can be explained by the fact that many hectares (1973-2003); China: from 0.73 to 0.55 hectares (1984-2004); Ethiopia: from 1.4 to
farmers in industrial countries can find alternative employment in non- 1.0 hectares (1977-2002); DR Congo 1.5 to 0.5 hectares (1970-1990).

Figure 2.4: The business case for and against procuring from small-scale producers

For Against

- Smallholders’ comparative advantages (premium quality, access Costs and risks in organising supply from dispersed producers:
to land, etc) - Quantity
- Securing supply in volatile markets, speading portfolio - Quality
geographically, reducing risk of undersupply as well as localised - Consistency
pest and disease problems - Safety
- New business, clients for other products and services - Traceability
(Base of Pyramid) - Compliance with rising standards
- New technologies available (efficient low-scale processing - Packaging
equipment, information technologies for coordination and lower - Loyalty and fulfillment of commitments by farmers
cost traceability) - Negotiation time and costs
- Capacity to ramp up or ramp down production without incurring - Political opposition to commercialisation of peasant agriculture
fixed costs (contract farming)
- Access to donor assistance
- Corporate Responsiblity
- Community goodwill
- Political capital
Source: Vorley, B., et al. (2008)
16 | Framework for an Inclusive Food Strategy

2.5 Conclusion

Considering the limited opportunities to boost food supply, the world

cannot afford to concentrate on one strategy only, and hence a mix of
solutions must be considered to meet the additional food needs in
2050. While the composition of this ‘mix’ will differ by region and
country, the central thesis of this study is that smallholder agriculture in
developing and emerging countries needs to be part of it, not only for
the local but also for the international markets.
There are compelling arguments for this proposition;
1. Smallholder agriculture is the dominant form of the agricultural
system in developing regions on which local communities depend for
their food security.
Approximately 85 percent of all farms worldwide (approximately
500 million) are less than two hectares, while 97 percent of farm
holdings are below ten hectares. These farm categories are classified
as small-scale agriculture or smallholders and in Asia and Sub-
Saharan Africa about 80 percent of the farmland belongs to, or is
cultivated by smallholders. They produce up to 80 percent of food
consumed locally.
2. Smallholder agriculture will become more indispensable as a reliable
food source and a driver of the rural economy as the world is facing
resource scarcity (land, water) and greater price volatility.
In this view, smallholders should be linked to markets and be
integrated into value chains.
3. Integrating smallholders into value chains offers downstream
agribusiness companies an opportunity to strengthen their long-term
sourcing strategy in a globalising food market.
Establishment of new large-scale operations (plantations) is
increasingly curtailed, not only by environmental constraints,
but also by local land right restrictions and growing opposition
in public opinion (outcry over ‘land grab’).
4. Increasing food production by smallholders in developing regions will
reduce the demand for new land including water use. The result is less
deforestation and land use changes which contribute to climate change
through lower GHG emission and nature conservation.
5. The development of smallholder agriculture of (agrarian) developing and
emerging economies can also be a ‘win-win’ proposition for millions of
farmers, improving food security, vitalising rural non-farm economies
and reducing poverty. In terms of saving the planet, however, the future
food challenge can only be met if sustainability lies at the heart of all
development efforts.
Smallholders matter because they exist in vast numbers, mostly in
developing and emerging regions, and because they cast their shadow
over a whole range of development issues. They are the backbone of
rural economies that are home to some two billion people, including
half of the world’s undernourished people and the majority of people
living in poverty.
 | 17

3 The challenge of
smallholder inclusion in value
chains: approaches and tools
Various comprehensive scientific research studies confirm that it While small farmers tend to be risk averse, the challenge is to find
is possible to meet global food requirements by 2050 without entrepreneurial solutions in an approach that does not expose them
extensive cultivation of new land. Most of the additional required to even more risk. In other words, entrepreneurial food chain
food can be realised by improving the low crop yields on existing innovations that increase yield and mitigate risks have the best
agricultural land, especially from many low and middle income chances of being adopted. In an environment with multiple
countries. This food strategy will entail improving small-scale challenges such as increased variability of agrological conditions,
agriculture in Africa, Asia and Latin America because they constitute poor access to services and finance, fluctuating energy prices and
the majority of the farms. poor post-harvest and transport facilities, this is not a task whereby
Agribusiness companies (wholesalers, processors, retailers and small farmers can succeed entirely on their own.
exporters) often prefer to work with large-scale farm operations Small-scale farms do have comparative advantages based upon
for their sourcing. Smallholder farms in low and middle income abundant (unskilled, family) labour and local knowledge. When
countries were traditionally primarily viewed as the domain of labour costs are an important part of the production costs, small-
public sector intervention by governments, NGOs and development scale farming is in a position to compete effectively, which is a fact
institutions, in order to help them ‘escape’ from the poverty base that has been amply demonstrated by smallholder successes in
line. The challenge involves ascertaining how the conventional sectors such as cocoa, coffee, tea, vegetables and fruit. However, as
agribusiness sector’s sourcing perspective and the inclusive food an economy develops and wages increase, the advantages shift to
security perspective can be joined harmoniously. In other words: larger-scale operations that use more capital-intensive technology.
‘How can small-scale farmers be linked to markets or integrated into Compared to large-scale farms, smallholders also have less access
the farm-to-consumer value chains12?’ This requires that traditional to resources (land, water, farm inputs), financial services and
marketing channels based on ad-hoc sales be replaced with information. All this goes hand in hand with fragile market
coordinated trade-links between farmers, wholesalers, processors, relationships. The challenge is how to tap into the advantages of
retailers and others in the value chain. It implies that (agribusiness) small-scale farming through aggregation in a way that makes it
companies working with smallholders must be able to create business possible to benefit more from the economies of scale of large
models that allow them to capture a market network of producers, operations and to comply with high food standards from the
suppliers and consumers, without compromising on high safety and consumer markets and tight delivery conditions.
quality standards and tight delivery conditions. They operate in a
dynamic market characterised by a demand for quality, a need to A two-pronged strategy and market can be pursued for smallholder
reduce risk and transaction costs and, last but not least, critical but inclusion. Firstly, according to the new vision for agriculture, public
sovereign consumers. Suppliers must be ready to provide sufficiently stakeholders should work in partnership with the private sector to
consistent quantity and continuity with respect to supply, create the missing infrastructure, institutions and regulations in
traceability and packaging. order to escape the cost-price squeeze and comply with the
demand for food of high quality. Secondly, farmers must become
organised in sound producers’ organisations (horizontal integration)
12 The concept of value chain was used by Michael Porter (1985) to describe the flow of in order to benefit from the advantages of economies of scale.
value, to help identify functions that add value or subtract value within a firm i.e. This also offers a possibility for farmers to capture more value for
allocation of price paid by consumers to suppliers and primary producers (Cox et al., their products by integrating backward (gaining access to input
2002). Supply chains are the stages that transform a raw material into a finished product supply) or forward in the value chain to create improved access to
or service and deliver it to the end consumer. markets and services.
18 | Framework for an Inclusive Food Strategy

3.1 Breaking the farm-low-income trap - Rural world 1: Globally competitive, embedded in agribusiness,
commodity producers and processors, politically well connected,
Vicious circle: In many parts of the world, especially in Africa, export and technology driven.
smallholder farmers still work the way they did for centuries. Low farm - Rural world 2: Engaged in primary local, regional and national
income, barely enough to meet basic needs of the family, leave little markets, with access to and control over land, multiple and diverse
space for better farm inputs, let alone investments in farm equipment enterprises and undercapitalised.
and irrigation. Moreover, lack of education combined with lack of - Rural world 3: Marginalised even from their local economy i.e.
(market) information, make that many smallholders lack the basic subsistence farmers, fragile livelihoods, limited access to productive
features of entrepreneurship. These factors combined make that for resources, unskilled and uneducated, dependent on low wage
individual farmers it is often extremely difficult to work themselves labour, redundant to global food production systems.
out of this poverty trap. In many countries, fortunately there are a
number of programmes and initiatives that show an escape is possible, It is observed that small-scale farms14 are also active in rural world 1
allowing farmers to produce better and more products, augment their and in particular sectors or crops do so even very successfully. In Asia
income and learn to recognise farming as a business opportunity. and Africa they can be considered the backbone of agricultural
Almost invariably this involves external support for some time by a production. So, the potential small-scale farmers group to be linked to
publicly or privately initiated programme. In other words, it has time the market and integrated into value chains is to be identified primarily
and again been demonstrated that a seemingly vicious circle can very in rural world 2. However, as many case studies of successful POs and
well be broken. producers’ co-operatives have shown, even subsistence farmers (rural
world 3) can be drawn into market-oriented production when they are
Virtuous circle: The central goal of smallholder inclusion is to identify guided and facilitated to do so through their local organisations.
ways and means to break through the low-farm-income trap. Thus the ‘rural world’ classification of the farm sector is useful for
This strategy implies that small-scale producers become economically defining effective and institutional and infrastructural provisions
self-sustaining and small-scale farming is turned into a scalable and (i.e. roads, storage and transport facilities) and market interventions
competitive business, providing food primarily for national and (i.e. information, regulations, services) for linking small-scale farmers
international markets. London and Hart (2010) defined a road map to markets (from rural world 3 to rural world 2) and integrating them
consisting of seven principles to help guide small-scale farmers into global food value chains (from rural world 2 to rural world 1).
through the design, pilot, and scaling stages13. Higher agricultural Figure 3.2 (adapted from Torero, 2011) gives an overview of the three
yields will create higher farm income, which in turn will enable farm categories of farms. The circular arrows in the figure represent the
investments. This way, especially when farming skills are enhanced dynamics of rural development and the institutional linking of the
through some form of extension service and guidance (demo farms), three types of small-scale farmers to markets and value chain partners.
farmers are enabled to set into motion a virtuous circle of farmer and It underlines the fact that current strata are not static. Supply chain
farm development. The challenge is to create value by combining management15 (SCM) can play a key role in linking small-scale farms to
existing productive assets from the small-scale farm sector such markets as an instrument of sourcing strategies of leading chain actors.
as local entrepreneurship, indigenous knowledge and local
embeddedness, and the resources and technological capacity of Between the different ‘rural worlds’ there are marked differences in
larger-scale agricultural sector. terms of market efficiency and a true market access. The market
efficiency gap is the difference between what markets are actually
3.2 Stratification of small holders achieving under current conditions and what they could achieve if

Three rural worlds: Small-scale farms in low and middle income

countries are not a homogeneous group. According to the concept of Figure 3.2: Small-scale farmer heterogeneity
three rural worlds (Vorley, 2002) increasing globalisation and trade of low and middle income countries
liberalisation are leading to increasing differentiation between rural farms,
creating new categories of farms. Using the concept of rural worlds, the
farm sector can be divided into three categories according to level of INTERNATIONAL MARKETS
Low cost areas

Globally Rural
market involvement, access to technology and exposure to risk: competitive World 1
and market oriented
farmers

PROVINCIAL
NCIAL AND NATION
NATIONAL MARKETS

13 1. create market opportunities, 2. craft solutions, 3. orchestrate effective experiments, Local market Rural
oriented farmers World 2
4. manage failures, 5. generate co-mingled competitive advantage through producers’
organisations (POs), 6. leverage and transfer social embeddedness, and 7. enhance
mutual value.
High cost areas

14 Farm size is an asset-based criteria to categorise farm sectors, while the rural world LOCAL MARKETS Subsistance farmers
Rural
criteria are levels of market involvement, access to technology and exposure to risk. AND SELF CONSUMPTIO
ON World 3
15 SCM spans all movement and storage of raw materials, and finished goods from point of
High income small farmers Low income small farmers
origin to point of consumption (the supply chain). The aim is to create net value,
Source: Torero (2011)
building a completive infrastructure, leveraging logistics, APICS Dictionary).
 | 19

markets where working correctly. This gap can be bridged through 3.3 A value chain approach to smallholder inclusion
more private provision of services to small farmers (e.g. guidance on
farm inputs, farm investments and farm practices), facilitated by Create more value in the supply chain: For the purpose of clarifying
effective compensation, and by market-oriented policies and regulation the mechanisms of smallholder inclusion, it helps to make a distinction
that create a level playing field for new entrants. between supply and value chains. A supply chain consists of different
The true access gap, however, refers to public interventions such as stages and actors that transform a raw material into a finished product
roads as well as key institutions that are required for smallholders to for delivery to the ultimate consumer. A value chain approach may be
reach markets even under perfect market conditions. The challenge is distinguished from the supply chain approach by virtue of one or more
to orchestrate interventions to improve market efficiency and market of the following additional characteristics:
access for smallholders in a manner that exploits the potential synergy - The production is demand driven, in other words the consumer or
between them. market preferences are known to producers, and production is
In the new vision for agriculture, the public sector in collaboration organised accordingly.
with private sectors should bridge these two gaps by creating the - The origin and characteristics of production are known throughout
infrastructure and market institutions needed to lower the inclusion the supply chain and consumers can be informed about it through
threshold (a/o transaction costs). Institutions16 in a value chain can play a mechanism of certification or a system of tracking and tracing.
five potential roles in strengthening markets for commodities - Consumers are prepared to pay a premium for products of known
produced, bought and sold by smallholders: 1. reducing transaction origin, based upon credible product information.
cost, 2. managing risk, 3. building social capital, 4. enabling collective These features allow farmers as primary producers to benefit from
action and 5. redressing missing markets. better terms of trade, as exemplified by the fair trade market chains.
Heterogeneity in the smallholder sector implies, however, that only In the full array of food markets, the existence of all three characteristics
the more entrepreneurial smallholders and their organisations are likely is still rather exceptional, especially in markets of staple food. However,
to respond when markets offer new opportunities. Other groups of wherever agribusiness operates on national or international markets,
small-scale farmers may be forced to follow the pathways of farm the benefits of a value chain approach may at least to some extent be
labour and rural non-farm work. In most countries this is reflected in an realised (see figure 3.3.1).
ongoing process of migration and urbanisation. A key factor influencing the linking of small-scale farms to markets
and integrating them into the global food chain is the interplay
between power and profit, i.e. the distribution of costs, risks and
benefits, along a food supply chain. Smallholders tend to be the
weakest link, especially in buyer-driven chains.
The introduction of triple bottom line concepts17 in the corporate
world implies that the term ‘value’ in value chains no longer refers
16 In this context ‘institutions’ are defined as the structure of relations between individuals exclusively to monetary value. Most international actors in the food
within a system of market interactions in which the players include producers, sector have adopted corporate policies to also include the dimension of
consumers and the state (Torero, 2011). environmental sustainability (‘planet’) and fair production and trading
17 The triple bottom line, also known as people, planet, profit (PPP), captures an expanded conditions (‘people’). The new vision for agriculture requires making a
spectrum of values and criteria for measuring organisational (and societal) success: solid commitment to the three PPP dimensions and providing
economic, ecological, and social. consumers with information on this topic will be considered an
integrated component of the corporate strategy and business model.

Figure 3.3.1: A comprehensive value chain approach in food markets

Consumer preferences with respect to quality, environmental sustainability and fairness

Agribusiness Agribusiness

Land, Labour Food retail

Farm Trade & Wholesale

production distribution Processing & trade Consumers

Farm inputs Non food Food service

End markets

Certification labels, tracking and tracing

Source: Rabobank/ERD (2012)

20 | Framework for an Inclusive Food Strategy

Thus a wider interpretation of food value chains and value chain ability to generate a surplus for investments or for payment of interest
development emerges that is more in line with the new vision for on investment loans. Invariably investments are a precondition for
agriculture. It calls for increased transparency towards consumers on increasing land productivity and improving the quality of their produce.
these aspects, implying a solid system of standards as well as ‘tracking As this allows farmers to better compete and serve more attractive
and tracing’ mechanisms such as the certification of cocoa producers markets, a value chain approach is able to set an upward spiral in
which is included in sourcing programmes of F&A MNEs. Future value motion, even in areas that seemed locked in traditions and poverty.
chains will secure a two-way information flow between producers and This transition process can be seen as part of ‘value chain
consumers. The producers are informed about the specific consumer development’ (VCD). It can be driven by a chain actor, a producers’
preferences, enabling them to adjust their production to changes in organisation or an external agency (facilitator). VCD will involve improved
market demand. And consumers want to be informed about the way farming practices, possibly new crops or products, introduction of
environmental sustainability and fairness of the terms of trade have quality standards and farmer organisation. Even though it is often not
been embedded in chain organisation. addressed expressly, appealing to the entrepreneurial competencies of
the farmers involved is an essential part of the VCD process.
The distinguishing feature of a value chain is that feedback loops from Who is driving the value chain development makes a crucial
buyer to seller exist in every stage of the chain. The degree to which a difference with respect to the process of facilitating smallholder
value chain approach can be applied depends crucially upon the inclusion. It may be organised by farmers themselves or their
relationship between the actors in the chain. Their business relationship organisations (producer-driven), by an agribusiness company of the
can be described through five different types for structuring of these value chain (buyer-driven), by governments or NGOs (facilitator-driven)
linkages18 (Wenner, 2006). or by a leading chain actor such as a supermarket group or a
multinational food processing company.
Drivers for value chains: Chain actors intending to work with In a producer-driven model where a farmer co-operative takes the
smallholders may be faced with the question of how to turn a supply lead, the strategic focus is on selling, i.e. the identification of attractive
chain into a value chain. They will want to do this not only in order to markets and the management of product supply to impact sales.
provide their customers with better service, but also in order to create The ‘sourcing’ of raw materials in this model is secondary, as the
more value for primary producers. Almost invariably, it requires a produce from member is already secured through the co-operative set
reorientation of farmers from their traditional ‘product’ orientation (the up. On the other hand, in the buyer-driven model, the strategic focus is
crops they have grown for generations) to a market orientation (what on buying/sourcing, i.e. to make sure that sufficient supplies of
product does the customer want). This demands not only knowledge sufficient quality can be procured. In this model the aspect of selling is
concerning market demand, but also a willingness and ability to secondary, as good market linkages are already in place. In facilitator-
respond to it. A value chain approach opens what has been referred to driven models the two perspectives have to be balanced. Forging and
as a ‘virtuous circle’. The linkage to markets helps generate higher cash sustaining effective linkages of smallholders to the market is a
incomes for farmers (increased gross margins), providing them with the challenging endeavour.
The presence of vertical links does not automatically lead to
increased benefits for primary producers, since such linkages could
18 The instant or spot market where producers come to sell their commodities, a contract have both predatory and symbiotic elements. There is potential for
to produce and buy, known more generally as contract farming, a relation-based exploitative relationships, such as buyers who control the market and
partnership, a capital investment based partnership and vertical integration. price their services unfairly; or producers who sell to competing buyers,

Figure 3.3.2: Organisational model for farm production in value chains (adapted from Miller and Jones, 2010)

Value chain model Driver of organisation Rationale

Producer-driven - Small-scale producers themselves, - Access new markets

co-operatives, associations - Obtain higher market prices
- Large-scale farmers - Stabilise and secure market position

Buyer-driven - Processors - Assure supply

- Exporters - Increase supply volumes
- Retailers - Supply more discerning customers -
- Local traders, wholesalers meeting market niches and interest

Facilitator-driven - NGOs and other support agencies - ‘Make markets work for the poor’
- National and local government - Rural development

Integrated - Lead firms - New and higher value markets

- Supermarkets - Low prices for good quality
- Multi-national companies - Market monopolies
 | 21

breaking contracts they have signed with the firms providing them in situations in which the driver is a large supermarket or wholesaler
with financing. Vertical linkages can, however, be configured to ensure serving mass consumer markets. Their aim is to ensure that inputs,
a maximum flow of benefits to farmers, while facilitating improved production and post-harvest handling will result in products that are
value chain competitiveness. responsive to that demand.
Figure 3.2.2 shows the different models for organising farm
production in the value chain. Each model has specific features and 3.4 Sourcing strategies steer the way to smallholder
perspectives for smallholder inclusion. inclusion into value chains

Within producer-driven value chain models, farmer-based organisations Sourcing continuum: In pursuit of a value chain approach to
such as agricultural co-operatives seek to establish direct links to end- smallholder inclusion, it is important to assess the potential business
markets and act as a driver of value chain development. They provide models against conventional sourcing strategies of actors in the food
technical assistance, inputs, marketing services and access to finance to chain. F&A companies around the world contemplate how best to
member farms. They could integrate forward in the value chain, e.g. by position their business models in response to the structural changes in
establishing processing facilities. Collective action has proven to be an the global food markets. Eleven19 sourcing strategies of F&A companies
important strategy for increasing small-scale producer participation in have been identified in a comprehensive case study conducted by
emerging modern food markets and for generating sustained Rabobank (2011). These sourcing strategies are grouped around three
commercial flows of high-quality products. strategic options20. Rather than suggesting mutually exclusive solutions,
Within buyer-driven value chain models a trader, a processor, a retailer the study presents a continuum of sourcing strategies whereby
or an exporter could be the driver of value chain development. One different combinations of strategic options can be identified
reason for undertaking this development is to make a shift from depending upon local conditions and the risk profile of the
dependency on the traditional wholesale market in pursuit of value, commodities concerned. F&A companies wanting to respond to
improved quality and product assurance. Another is the lack of increased supply risks and price volatility have a range of options.
collective action of producers. Contract farming is the most common They can either reduce the impact by increasing control over sourcing
buyer-driven value chain model. or circumvent exposure by looking for alternative strategies. This trade-
Facilitator-driven value chain models are found in dual agricultural off between risks and efforts can be visualised as a continuum
systems in which developed agro-industry coexists alongside (see figure 3.4).
smallholders who live at subsistence level. Both NGOs and government
agencies provide support to facilitate the integration of smallholders The following sourcing strategies are most likely to be relevant in
into value chains. This is done through a variety of means, such as relation to smallholder inclusion into value chains:
subsidisation of the costs of organising and training farmers and
facilitating access to financial services.
Integrated-driven value chain models feature a particular kind of 19 Investing in land, ‘farmer first’, regional diversification, supply-contracting, horizontal
vertical integration that both connects producers to other actors in partnership, market-based risk management, reliance on brand power, forward
the supply chain - input suppliers, intermediaries, processors, retailers integration, finding niche markets, ingredient substitutions and tolling.
and service providers including finance - and integrates many of 20 Increasing physical control over supply, focussing on market power that is mainly driven
the stakeholders through ownership and/or formal contractual by relationships between chain actors and adapting a company’s internal organisation to
relationships. Vertically integrated value chain models exist, for instance, mitigate supply risks.

Figure 3.4: Sourcing continuum in the F&A sector

Increasing control over physical supply Focus on market power Adaptive strategies

Price volatility and

supply insecurity risk
low high high low

Effort
(operational and
financial)
high low low high

Commodity
high - unique and high value to production processes low - not critical to production processes

Source: Rabobank International 2011

22 | Framework for an Inclusive Food Strategy

Regional presence and supply diversification: One way to ensure Finding niche markets: This strategy of locating niche markets runs
supply is to use multiple suppliers in one region. Another is to establish along the same lines as reliance on brand power. It may, however, be
a presence in relevant production regions with a view to matching more applicable for smaller companies. Negotiating power is achieved
demand and supply more effectively and keeping closer track of crop through selecting a smaller target market in which a substantial share
conditions in order to be able to reduce risks in the event of supply is achieved, rather than through large-scale marketing.
shocks. This strategy involves building and maintaining numerous
relationships, which would obviously require a considerable effort. 3.5 Business models rule the game of inclusion
In the more extreme instances, even capital investments could be
required in order to make diversification strategies successful. 3.5.1 Business models for inclusion of smallholders into
Diversification has become increasingly important for grain and value chains
oilseed companies. A ‘business model’ is a representation of how a company buys and sells
goods and services and earns money. In other words, what it offers to
‘Farmer first’: In some sectors, such as cocoa and beer, companies are whom and how it can accomplish this. In a value chain, agribusiness
actively assisting in the production process by working directly with firms (farm input companies, processors, retailers and wholesale
farmers. Ensuring the quality of supply is a key motive for these players. traders) apply the concept of the business model to the value chain for,
Investments in physical and technological infrastructure are often among other things, sourcing agricultural commodities from or
required in order to make this strategy work. Other companies are delivering farm inputs to producers and/or farmers’ organisations.
trading farm input raw materials for physical delivery of food There are different categories of (legal) business structures and
commodities. Other examples include F&A companies that are providing contractual relationships between buyers and sellers of farm produce
working capital financing for farmers in return for food commodities or that could be deemed relevant for smallholder inclusion (Vermeulen
creating farmer loyalty by providing services such as training. and Cotula, 2010):

Investing in land: Investing in land involves companies or governments Contract farming: This refers to pre-agreed supply agreements
buying the prime production asset of any cropland. Buying up land between farmers and buyers. The agreements usually specify the
makes it possible to exercise direct control over crops and commodity purchase price, or how it will relate to prevailing market prices, and
output, which can be used directly for further processing without may also include terms on delivery dates, volumes and quality. In many
having to deal with any other party in-between. In combination with cases the buyer, which is generally a food processing company,
out-growers, this strategy can facilitate smallholder inclusion. commits to supply upfront inputs, such as credit, seed, fertilizers,
pesticides and technical advice, all of which may be charged against
Backward integration: This strategy involves buying or setting up the final purchase price. There are many types of contract farming
(greenfield) production, logistical or storage assets along the chain. deals, ranging from informal verbal purchase agreements to highly
The reason companies would pursue this strategy is similar to the specified out-grower schemes surrounding large estates.
drivers for investing in land: gaining direct access to farmers/crops and
controlling the quality of commodity output at an earlier stage in the Management contract: This contract refers to the variety of
supply chain. This can currently be seen in the sugar industry, where arrangements under which a farmer or farm management company
some manufacturers have sought to achieve vertical upstream works with agricultural land that belongs to someone else.
integration in order to secure supply. Management contracts may take the form of a lease or tenancy, but
carry the connotation of stewardship, which means managing the land
Supply contracting: Supply contracting is commonplace. Many F&A on behalf of the owner. In order to provide incentives for the farm
companies strike agreements with other companies within the supply management, the contract often includes some form of profit-sharing
chain to ensure the supply of commodities is safe and secure. While rather than a fixed fee.
supply contracting is mainly a business-to-business agreement,
agreements are sometimes made between farmers and companies. Tenant farming and sharecropping: These are forms of management
Recent greater price volatility and fears concerning the sourcing supply contracts in which individual farmers, such as smallholders, work the
have encouraged companies with market power to revisit the terms of land of larger scale agribusinesses or other farmers. In the case of
current agreements to increase the certainty and duration of supply. tenant farming, the usual arrangement is based on a fixed rental fee.
Long-term supply contracts have, for example, become more common With sharecropping the landowner and sharecropper split the crop (or
in an attempt to secure origination, or in other words to lock in supply. its proceeds) according to a pre-agreed percentage.

Forward integration: A forward integration sourcing strategy can be Joint venture: This involves co-ownership of a business venture by two
used if a company believes it cannot achieve a sustainable competitive independent market players, such as an agribusiness and a farmers’
advantage or is unlikely to achieve a competitive sourcing strategy. It organisation. A joint venture entails sharing financial risks and benefits
may work for this company to buy or set up processing assets at a later and, in most but not all cases, decision-making authority in proportion
stage in the supply chain. This is done in order to acquire a larger to the equity share.
portion of the added value of the processed product and to improve
negotiation positions vis-à-vis food distributors. This will in effect
further strengthen market power by locking in additional margin.
 | 23

Farmer-owned business: This is a formally incorporated business more than 50 low and middle income countries participate in fair trade
structure for farmers that enables them to pool their assets with a supply chains. The vast majority of these producers are organised into
view to entering into particular types of business (e.g. processing or co-operatives.
marketing), gaining access to finance or limiting the liability of
individual members. Such businesses are often owned by farmer It has, however, been observed that Fair Trade cannot solve the wide
co-operatives in order to facilitate business transactions. array of problems in global food trade (Hanish, 2009; Vorley and Fox,
The ‘choice’ between different legal business structures and contractual 2004). But the impact of Fair Trade is not only found in market share
relationship models does not come down to a simple either/or decision alone, but also in organisational structures (mainly co-operatives) that
due to the fact that the models overlap and can be combined into benefit and raise consumer awareness of the fair trade movement in
various hybrids. For example, a farmer-owned business can enter into a the North. Agribusiness companies are recognising the potential loss
joint venture with an agribusiness firm (processor, retailer or trader) and of reputation linked with the unfair treatment of producers and are
this partnership can undertake a management contract with a promoting their own labels based on ethical sound production and
specialised provider of farm inputs. In addition, there are often more pricing practices. While some view these as niche markets, there is
stakeholders, including governments, financers, farm services providers evidence that they are growing rapidly in many high income countries
or NGOs, involved in a vertically integrated supply chain. with respect to some commodities such as fruits and cash crops.
Two considerable challenges are evident when seeking to work with This provides smallholders with marketing opportunities, even though
smallholder producers either for domestic retailing and processing or for the demand for Fair Trade-certified products is still relatively small
exporting. The first is organising and upgrading supply from a dispersed compared to the production capacity/supply.
producer base. The second is traceability and quality assurance (Vorley,
et al., 2009). Producers’ organisations, particularly co-operatives, are vital 3.5.3 Mapping inclusiveness of business models into value chains
in any attempt to meet these challenges effectively. Determining whether a business model in a value chain is inclusive
entails assessing how values are shared between producers
3.5.2 Fair trade model (smallholders) and buyers (agribusiness companies). The following four
Fair Trade is an alternative path that includes small producers via farmer criteria can be used for this purpose: ownership, voice, risk and reward
co-operatives. The idea or social movement originated in the 1960s as a (adapted from Vermeulen and Cotula, 2010):
response to developing countries’ dissatisfaction with their terms of - Ownership: of the business (equity shares) and of key project assets
trade. It can be interpreted as an effort on the part of small producers’ such as land and processing facilities.
associations in the South and consumers in the North to contract terms - Voice: the ability to influence key business decisions, including
of production and price directly. Producers are paid a premium above weight in decision-making arrangements for review and grievance
the prevailing local market price. It is a good example of how the and mechanisms for dealing with information access.
advantages of value chain approach can be tapped into for the benefit - Risk: including commercial risk, but also wider risk such as political
of producers in a more equitable fashion. In the early days, Alternative and reputational risk.
Trading Organisations operated across the entire chain and were - Reward: the sharing of economic costs and benefits, including price-
responsible for importing, distributing and selling the products. setting and finance arrangements.
These four criteria are closely interlinked, for example ownership will
The Max Havelaar label was introduced in 1988 in an effort to expand influence voice with respect to undertakings such as a joint venture
the distribution of Fair Trade products to mainstream retailers. The label and a voice in price-setting will affect ‘reward’. Moreover, in practice the
guaranteed that the goods met certain labour and environmental same distribution of the four criteria of a business case may have very
standards. A new international Fair Trade Certification standard was different practical viability and implications in contexts characterised
launched in 2002. Today the Fair Trade labelling system enables by different local conditions (e.g. smallholder’s capacity to engage in
commercial business companies to purchase products from a selection commercial agricultural production within the regulatory framework
of producers in the South and to place a ‘Fair Trade’ label21 on these for the food sector). In other words, there is not a single one-size-fits-all
products in order to allow consumers to make informed choices. contractual relationship model for all proposals for inclusion of
Compared to the total amount of traded goods, the share of fair-traded smallholders.
goods is very small, amounting to only 0.01 percent of all traded goods
worldwide. However, more than 4,000 small-scale producers’ groups in The opportunity to develop self-supporting, longstanding and viable
business relationships with smallholders represents the crucial incentive
for inclusive business. Supply chains will be most robust for smallholder
21 Two sets of generic standards are stipulated. These standards require traders to: pay a inclusion over time when there is a structure in place within the value
price to producers that covers the costs of sustainable production and living; pay a chain enabling implementation of a set of six principles22 to ensure that
premium that producers can invest in development; partially pay in advance at the all chain players are pulling in a similar direction, to structure how these
request of producers; enter into contracts that allow for long-term planning and players will work together and to ensure continuous improvement
sustainable production practices. (Vorley, et al., 2009. b). These principles can serve as a framework for
22 Chain-wide collaboration, new market linkages, fair and transparent chain governance, diagnosing and improving formal trading relationships when
equitable access to services, chain innovations and measurement of outcomes transitioning to a scalable business model for smallholder inclusion in
throughout the chain. value chains.
24 | Framework for an Inclusive Food Strategy

3.5.4 The concept of shared value for smallholder inclusion such as most fair trade purchasing). Instead, it is about expanding the
into value chains total pool of economic and social values (value is defined as benefit
Colours and shades of CSR: The CSR movement, which first took hold relative to cost, not just benefit alone). A shared value perspective
among European companies in the 1970s, encourage companies to focuses on improving techniques and strengthening the local cluster of
consider the impact of their business choices on a range of stakeholders supporting supplies and other institutions in order to increase farmers’
beyond their shareholders (good citizenship with community standards). efficiency, yields, product quality and sustainability. It leads to a bigger
Triggered by activist demands and increasing focus on sustainable pie of revenue and profits that benefits both farmers and the large
development in the 1980s, companies undertook measures to reduce agribusiness companies that buy from them’. This is indeed one of the
negative environmental or social impacts (some moved towards ‘triple original drivers for the formation of agricultural co-operatives.
bottom line accounting’).
Especially since the World Summit on Sustainable Development in
2002, companies active in the F&A sector have been seriously
reviewing their role as partner in the development agenda vis-à-vis
customers and shareholders as part of their corporate social
responsibility policy framework. It expresses a variety of ways including
business principles, a code of conduct, pro-poor charity programmes
and transparent reporting. In relation to the food sector, which is
dependent on natural, human and physical resources, responsible
innovation is increasingly being viewed by companies as a corporate
and strategic necessity for ensuring environmental sustainability.
Agrifood companies use own standards and codes23 as a tool to
promote sustainable development through their supply chains by
influencing suppliers to adopt more environmental and socially
responsible practices.
Many companies have engaged in CSR for defensive reasons, such
as a public relation tool and to reduce reputational risk. A growing
number of leading companies are, however, taking a broader view of
CSR by seeing it as an opportunity to create ‘shared value’ through their
activities and investments and by starting pilots. This motivates these
companies to foster stronger ties with local producers, suppliers and
communities, which can become part of a long-term competitive
advantage for the company by creating more favourable conditions for
sustainable businesses (Genier, et al., 2009). CSR policy, with its
emphasis on labour and environmental standards and supplier codes,
however, has done a poor job of addressing market inclusion and is
often weakly mainstreamed across the business (Vorley, et al.,2009. a).

Shared value concept: The concept that corporations can make real
money ‘at the bottom of the pyramid (Prahalad and Stuart, 2004)
differs from CSR in that it more proactively links corporate profit
to business engagements with the poor, both as producers and
consumers. It was argued persuasively that today’s poor will become
tomorrow’s middle class.
Porter and Kramer (2011) have coined the concept of ‘Creating
Shared Value’ (CSV). In contrast, it recognises that societal needs, not
just conventional economic needs, define markets and social harms
can create internal cost for companies. This concept can be defined
as policies and operating practices that enhance the competitiveness
of a company while simultaneously advancing the economic and
social conditions in the communities in which it sells and operates
(What is good for the community is good for business). ‘It is not about
sharing value already created by companies (a redistribution approach

23 Third parties have developed independent standards and codes consisting of criteria for
environmental sustainability, labour conditions, benefits to local economy/community,
and food safety and quality, later on.
 | 25

4 The role of producers’

co-operatives in food
supply chains
Vertical coordination in a value chain means that the activities of 4.1 The nature of producers’ organisations (POs)
sellers (farmers) and buyers (processor, retailer) must ideally fit
together in order to best meet consumer demand in the global Drivers of collaboration: Farmers in many countries are organised in
marketplace. Weakness of producers’ organisations can often be producers’ organisations with the aim of serving the collective interests
identified as the single biggest obstacle for linking small farmers to of their members. The members’ common interests can include access
commercial markets and their integration in global value chains. to farm input, technical assistance, marketing or processing of their
Other problems observed, such as lack of standards, quality, lack produce and financial services.
of education, lack of extension services and lack of finance are A producers’ organisation (PO) can be defined (World Bank, 2008)
‘secondary’ in the sense that they can be overcome once a strong as membership-based collective organisations or federations of
producers’ organisation exists. The co-operation of producers and organisations with elected leaders accountable to their constituents.
farmers within a value chain is therefore as critical as the coordination Both ownership and control are collective in nature, i.e. members hold
of the chain participants in order to enable small-scale farms to decision-making rights with respect to both the organisation’s activities
respond to emerging opportunities in the global marketplace. and investments. Producers’ organisations are based on the principle
Throughout the recent history of agricultural development, that acting collectively improves the position of their member farmers
co-operatives have been the main institutional instrument for and creates opportunities for growth in farm productivity and income.
organising producers. This is because the co-operative approach The motto is: ‘United we stand, divided we lose.’
builds upon farmers’ values and interests to create more viable
and sustainable methods of agricultural production. Producers’ Typology: Producers’ organisations can be established in a number of
co-operatives consequently constitute an opportunity for corporate forms whereby farmers organise themselves into a formal or informal
businesses to expand their sourcing of quality produce to the vast collective. These range from formal institutions such as co-operatives,
expanses of agricultural lands tilled by small-scale farmers. associations and societies to informal producers’ groups and village
Agribusiness companies and farmers, above all, share a common associations. Informal producers’ organisations are often inward
interest in the food supply chain: ‘To bring a product to the market oriented to facilitate collective actions within the group, while formal
in a viable and environmentally sustainable manner.’ producers’ organisations tend to have an external orientation with a
Corporate agribusinesses can and do work with farmers that have view to organising relationships between the group and the outside
succeeded in organising themselves in a solid organisation and that world. They are rooted in local customs, but are organised on the basis
have demonstrated willingness to attune their mode of working to of economic principles and governed by law (Onumah, et al., 2007).
the market’s needs. This business model will be of growing This legal status enables them to collectively enter into contracts and
importance for smallholder inclusion in emerging and developing arrangements with third parties. For small-scale farmers it is a basic
economies into global value chains. requirement for a business relationship with partners in the value
chain. Producers’ organisations can be local and serve only at village
and inter-village levels, or can operate at regional and national levels as
advocacy or apex organisations and federations.
A number of different types of purchasing organisations have been
developed that are defined on the basis of their function, geographical
characteristics and legal status. According to these functions, producers’
organisations can be grouped in three categories (World Bank, 2008):
- Commodity-specific organisations that provide economic services
and defend their members’ interests with respect to a particular
commodity, such as cocoa, coffee or cotton.
26 | Framework for an Inclusive Food Strategy

- Advocacy organisations that represent producers’ interests, such as products or backward by purchasing and/or producing farm inputs
farm unions. (fertilizers, chemicals and seeds). They can also be solely focused on
- Multipurpose organisations that respond to their members’ diverse selling between producers and buyers.
economic (inputs, credit, processing and marketing) and social needs
(community services), often in the absence of local governments or Functions: Membership of formal and informal organisations and social
effective public services. networks is probably one of the major assets of people, especially
Producers’ organisations serving food value chains can be integrated smallholder farmers, living in rural areas in low and middle income
forward into the value chain by processing and/or marketing farm countries. It is a form of collaboration among producers aimed at

Figure 4.2: Role of producers co-operatives (adapted from Were, 2003)

Role of PO or co-operative Type of services or facilities that support member farmers

i. Reducing transaction costs and - Market information/intelligence systems: Price information, trends in demand, mapping supply
raising gross margins chain participants, etc. This can be performed more efficiently by producers’ organisations.
- Auction and exchanges: A producers’ organisation can create storage facilities and plan the
logistics of transport and trade.
- Grades and standards: The producers’ organisation obtains the information on food standards
and regulations and trains its members accordingly. Certification of producers can only be
achieved efficiently through producers’ organisations.
- Increased gross margins: Improved bargaining power, higher quality standards, packaging,
reduction of storage & transport losses.

ii. Strengthening product - Market contacts: Building up and maintaining contacts with major participants in the food chain
marketing and reducing (traders, processors and exporters).
marketing risk - Aggregation: Producers’ organisations can aggregate sufficient produce to operate on wholesale
markets and negotiate good terms of trade for the farmers.
- Compliance: Facilitating compliance with food safety standards.
- Contract discipline: The risk of side selling (i.e. farmers not honouring delivery contracts) is
mitigated through a producers’ organisation that has strong bonds among its members and
effective sanctions.
- Tracking & tracing: The producers’ organisation should be able to support T&T to ensure food
safety and develop credible branding.
- Risk mitigation products: Forward contracting, crop/weather insurance and futures.

iii. Increasing social capital - Obligations and expectations: Mutual agreement on how joint objectives are pursued and how
individual members are expected to comply with agreed modalities of collaboration.
- Information sharing channels: The producers’ organisation provides both training and extension
services to member farmers and the up-to-date information required for farming operations.
- Social norms: Based on shared values, members agree on ways and means to maintain group
solidarity and on how to overcome individual or collective threats or misfortune.

iv. Enabling collective action - Collective action: Joint or shared investments (harvesting, storage, irrigation and transport),
advocacy (lobby with public sector and civil society), trade missions, demonstration farms, etc.
- Trust: Building mutual trust and transparency to manage joint assets and joint interests without
bias or favour.
- Sustainability: Institutional and financial sustainability based upon credible and accountable
governance and adequate professionalisation of co-operative business.

v. Facilitating access to finance - Facilitation of embedded finance by value chain participants and/or direct finance of farmers by
financial institutions/SACCOs/MFIs.
- Self-financing: Establish SACCO or Co-operative Bank.
- Physical asset collateralisation: Warehouse receipts, repurchase agreements and financial lease.
- Guarantee arrangements: Established between public and private stakeholders in the value chain.
 | 27

obtaining (improved) access to farm input markets, finance and Historical background: The co-operative movement has its roots in
insurance, fostering technological adaption and processing or Western Europe in the mid-19th century. From there it has spread over
marketing their products collectively. In other words, producers’ the world. It was introduced in developing countries in the colonial
organisations form part of the smallholders’ social capital24 that period by the colonial powers who transplanted their own
contributes to their competitiveness through economies of scale. co-operative systems into their colonies and protectorates, such as
These organisations can add value to co-operation among producers in India in 1904 (distribution of credits) and Tanzania in 1932
and chain participants and provide benefits for all parties. (export marketing of cash crops). Colonial governments promoted
Producers’ organisations can play a pivotal role in mitigating the higher co-operatives principally as structures for mobilising rural people,
costs and risks associated with small-scale farming and strengthening facilitating extraction of produce and exploiting natural resources.
of their competitive position. This consequently enables member However, different countries followed different paths, models or
smallholders to improve the economic opportunities for their traditions that were largely determined by their colonial history.
individual business efforts. Develtere (2008) has described these models for Africa as the unified
co-operative model (in former British colonies), the social economic
4.2 Role of producers’ organisations in marketing25 model (in former French colonies), the social movement model (former
Belgian colonies) and the producers’ model (in former Portuguese
There are five areas in which producers’ organisations can play a colonies). A number of indigenous models have also been identified,
dedicated role in strengthening the market position for commodities reflecting the fact that several African countries, such as Ethiopia,
produced by smallholders: 1. reducing transaction costs, 2. managing Liberia and Sierra Leone, developed their own co-operative models
risks, 3. building social capital, 4. enabling collective action, and through local adaption of imported co-operative concepts.
5. redressing missing markets (see figure 4.2, adapted from Were, 2003).
Based upon these five factors and empirical knowledge, examples 4.3.2 Basic facts about agricultural co-operatives
can be given of the main types of services or facilities provided by Significance: The history of co-operatives over the past century has
producers’ organisations that support member farmers. These examples shown their remarkable appeal to people on all continents and their
highlight the relevance of the link between market position, resilience during times of unprecedented growth and globalisation.
investment structure and decision-making rules along the same lines As member-owned institutions operating according to set business
as co-operative pathways. principles and shared values, agricultural co-operatives provide an
organisational framework that has proven its strength with respect in
Data on producers’ organisations in African and Latin American promoting farmers and small entrepreneurs as a self-propelling business.
countries, although fragmented, show there has been a rapid increase It is estimated that at the start of the new millennium there were
in the number of local producers’ organisations in recent decades. approximately 569,000 agricultural co-operatives worldwide (IFPRI/
Estimates are that, in the developing region, about half (250 million) of ICAO, 2002). In high income countries, co-operative F&A businesses
all farmers worldwide belong to at least one producers’ organisation effectively compete with multinational corporations on a global scale.
(World Bank, 2008). Co-operatives are the most widely known formal Like the co-operatives of the past, their present existence in low and
producers’ organisations that provide economic services to their middle income countries has a major impact on rural development in
member farmers, in other words input supply, processing and/or terms of availability and access to provisions that improve the basic
effective marketing of products. conditions of rural populations. These include job creation in the farm
and non-farm sectors, rural market development, enhancement of rural
4.3 Role of co-operatives in smallholder inclusion incomes and improvement of access to financial and social services.
in value chains in the South
Outreach in the South: Co-operatives have been set up by different
4.3.1 The nature of co-operatives socio-economic groups (consumers, producers and employers) and
Principles: A co-operative is an autonomous association of persons in different sectors (agriculture, finance, healthcare and housing).
united voluntarily to meet their common economic, social and cultural Agricultural co-operatives in low and middle income countries not only
needs and aspirations through a jointly owned and democratically
controlled enterprise. The seven principles that co-operatives subscribe
to deal with membership, democratic member control, member
economic participation, autonomy, member education, networking 24 The term ‘social capital’ describes the network of relationships built on obligations or
and concern for community. The first four of these are core principles institutional rights that result in solidarity among people. Coleman (1988) has described
without which a co-operative would lose its identity; they guarantee three dimensions of social capital: obligation and expectations, information sharing
the conditions under which members own, control and benefit from channels and social norms, which when combined facilitate collective action, trust and
the business. The education principle is a commitment to make sustainability. High social capital in a community also leads to better organisation for
membership effective and so is a precondition for democratic control. collective action, improved bargaining power and confidence (Narayan et al., 2000).
The last principle, concern for community, is about corporate These concepts on social capital are of particular relevance to farmer co-operative
responsibility, and it pertains to other concerns that the co-operative membership and yield both economic and social values. They, however, facilitate collective
movement is promoting, such as the prevention of poverty and action and decision-making based on trust and the shared interests of the members.
protection of the environment. 25 See Rabobank box 1 on page 30.
28 | Framework for an Inclusive Food Strategy

play an important role in food production and distribution, but also in domestic demand in middle income and emerging economies for
promoting the participation of women in economic production, which agricultural commodities, in particular high-value fresh and processed
in turn boosts food production and rural development. In India, there food, have stimulated a rapid development of agro-industries27 and
are around 150,000 primary agricultural and credit co-operatives expansion of the supermarket sector (Reardon, et al., 2007). It should be
serving more than 157 million agricultural and rural producers. In the noted that both sectors (national as well as international) are linked
Republic of Korea, more than two million farmers are members of closely to the local farm sectors for their sourcing.
agricultural co-operatives, which represents 90 percent of all farmers in Global food markets were until the start of the 2000s characterised
the country. In Japan, around 90 percent of all farmers are likewise by relatively abundant supply and stable prices. Often the bulk of
members of agricultural co-operatives. In Brazil, co-operatives account appropriable profits occurred in the top of the value chain (retail level).
for 40 percent of agricultural GDP and 6 percent of agricultural business This has provided the opportunity for the rise of worldwide operating
exports. integrated supermarket chains and powerful multinational food
processors. Food markets consequently shifted from producer and
Outreach in the North: Co-operatives have been fundamental to the processor-orientated markets into more consumer-orientated or buyer-
success of family farms in industrialised countries. They have developed driven markets. But in a world of scarcer resources a reverse to more
from village-based into regional-based and national-based organisations seller-driven food markets could occur in future.
that can operate and invest in activities in international markets. In the
United States, dairy co-operatives control about 80 percent of the dairy Response of co-operatives to changing market systems
production and most of the specialty crop producers in California are Industrial countries: In recent decades, both farmer co-operatives in
organised in co-operatives. In France, nine out of ten farmers are developing countries and their Western counterparts have developed
members of at least one co-operative with market shares of 60 percent different strategies to capture emerging market opportunities that have
for inputs, 57 percent for products and 35 percent for processing. In the arisen due to the changing global agricultural marketing system.
Netherlands, the market share of agricultural co-operatives is even In the more developed world, co-operatives have faced increasing
higher with inputs at 52 percent, cattle and pig breeding at 80 percent, competition from large-scale international investor-owned firms in the
pig slaughtering at 53 percent, dairy at 86 percent, sugar at 100 ongoing process of globalisation. Co-operatives have often developed
percent, flower marketing at 95 percent, vegetable and fruit marketing into large enterprises with international operations that are able to
at 85 percent and farm financing at 84 percent. keep up with other participants in the value chains.

4.3.3 New opportunities for co-operatives LMICs: In the developing world, co-operatives are often viewed as
instruments for grouping producers and aggregating their products
Drivers of change for agricultural marketing systems with a view to enabling them to access markets and to make markets
Recent decades26 have seen a significant change in agricultural work for the poor. As such agricultural co-operatives and producers’
economies and global marketing systems in relation to the international associations have become interesting not only for their members, but
commodity trade and globally integrated food markets on both sides also for (international and local) agribusiness companies as a means for
of the globe. The main drivers and phenomena behind these changes strengthening farm production and securing sustainable sourcing.
have been among others the rapid global industrialisation of the food Farmer co-operatives used various upgrading strategies for products,
retail sector, the megacity development and the lifestyle and consumer processes and functions in response to increasing demands and in
preference changes (Hanisch, 2009). pursuit of larger market share. Ruben (2007) identifies several potential
The changing structure of food demand has offered, among other pathways of how co-operatives in six low and middle income countries
things, considerable opportunities for diversification and adding value have adapted internal decision-making rules in order to better take
in agriculture, particularly in developing countries, and led to the advantage of globally integrated value chains. It was concluded that
emergence of new market participants on the international market. the direction of institutional change follows the logic of the contractual
For example, as a reflection of changing consumer demand, the 1990s relationship model between the farmer co-operative and the chain
witnessed a diversification of production in developing countries into participants of the value chain such as joint asset management,
non-traditional fruits and vegetables (FAO, 2007). These changes have, contract farming and preferred supplier regimes.
however, also exposed producers to increased risks in terms of
uncertain access to markets and price instability in the international Seller market: New drivers of change are, however, now emerging. The
marketplace. Moreover, the prospects for continued growth in top three are scarcity of resources, dietary change and greater volatility
of prices. Combined they lead to increasing imbalances in global food
supply and demand. This will prompt agribusiness companies to
26 Prior to the early 1980s, agricultural marketing systems in most developing countries rethink their long-term sourcing strategies in order to avoid supply risk
were characterised by pervasive government interventions which were intended both to and price volatility. Under these conditions, food markets are
minimise the risk of famine and food shortages and to ensure foreign exchange earnings undergoing a number of changes, including making the transition from
and tax revenues from strategic agricultural export commodities (Akiyama, et al., 2001). a buyer-driven to a seller-driven market, a development that benefits
27 In many developing countries, large-scale and formal agro-industries were driven by the primary producers. This is good news for small-scale farmers and their
public sector in the form of parastatals, some of which were formed out of private co-operatives in low and middle income countries where the tide is
enterprises, for example in grain milling and vegetable canning and palm oil processing now turning in their favour.
(Henson and Cranfield, 2009).
 | 29

Risk mitigation potential of co-operatives: Smallholders are risk such as new seeds and pest control. In the new vision for agriculture,
averse, in view of their limited capabilities to absorb shocks. the private sector in general and value chain participants in particular
A co-operative can play a crucial role in mitigating risks associated are now placing themselves in the driver’s seat, not only in terms of
with farming and its links to the food value chain (thus facilitating agribusiness and value creation, but also through direct engagement
external finance). Figure 4.3.4 presents a pathway for mitigation in agricultural production. From this viewpoint the producers’
potential through co-operative organisation in brief. organisations, especially co-operatives, play an important role in the
process of rural transformation, allowing smallholder farmers to capture
Future perspectives: The new drivers of change will induce emerging market opportunities. Doing business with smallholders will
fundamental adjustments to global food systems, which will also call on governments to take on a new role in order to arrive at
herald new opportunities for agriculture as a driving force in rural effective partnerships with the private sector and civil society
development. This requires a transformation towards a ‘new’ agriculture (WEF, 2011). As argued by Phahalad and Hart (2002), corporations
with scarcer resources, dynamic demand, high-value activities and the face a world of opportunity in targeting the approximately 3.7 billion
ability to add value to commodities in agribusiness. The agricultural poorest people, of which a large part is comprised of smallholder
marketing system is changing and new opportunities for scalable farmers, who make up the Base of the Economic Pyramid (BOP).
investments are arising, not only on-farm but also along the supply The co-operative business model can play a pivotal role in unleashing
chain. The big challenge will be to make investments in the agricultural the entrepreneurial potential of and through the BOP itself when
value chain favourable not only for economic growth, but also for linking farmers to markets and integrating them into value chains.
poverty reduction and environmental sustainability.

Innovation: New opportunities will also arise from institutional and

technical innovations. India is a well-known example in this respect.
It is using information technology to extend and link smallholders to
markets and to provide information to farmers concerning matters

Figure 4.3.4: Risk mitigation in a co-operative setting

Co-operative Through guidance,

centralises TA, and common
input supply farm services, risk
and financing, of diseases
or facilitates it and crop failure
are mitigated

Co-operative Farmer’s risk Productions risk Social objectives of

communicates the co-operative
market requirements may offer support
and assist in in case of family
their application Qualty risk Supply risk misfortune.
(GAP, certification) Farmer
co-operative

Price risk Acces to input

Marketing
risks
Market information Farmer’s loyaly
professional trading is strengthening
and forward compliance to
contracting, contracts (avoiding
reduce price risk side-selling)
for farmers
Direct trade contacts
and supply contracts
improve negotiation
power

Source: Rabobank/ERD
30 | Framework for an Inclusive Food Strategy

Rabobank box 1: Marketing and producers’ co-operatives, and produce sufficient volumes of good quality commodities
the view of Rabobank* which can be sold in markets around the world. Product
Rural economic development is one of the main policy issues regulation agreements are needed to maintain and safeguard
for the coming decades. Rabobank thinks that well-managed high quality standards for the commodities as demanded by
and well-developed producer and marketing co-operatives in the markets. Membership should really be voluntary and
developing and emerging markets could contribute to members should possess intrinsic commitment and involvement.
productivity growth in rural sectors and to poverty reduction, For instance, members need to understand that side-selling of
provided that certain critical conditions are met. In addition, their harvest will jeopardise the entire co-operative.
these co-operatives could deliver market improvements and
increases in revenues for farmers. Today, only one third of the According to the co-operative business principle of self-
smallholder farmers in emerging and developing countries financing, membership fees and retained earnings should
takes part in some form of group enterprise. Increasing the constitute the primary source of funding and capitalisation of
degree of organisation could lead to considerable benefits for product and marketing co-operatives. Fee payments are not
many smallholders. 85 per cent of the world’s 460 million farms only important for funding and capitalisation, but also reflect
are small-scale, of less than two hectares. By joining farmers’ members’ intrinsic involvement in the co-operative. Without
interest organisations, they would be able to upscale their such an attitude, there can be no well-functioning co-operative.
production well above household subsistence levels, thereby The entrance fee is generally not a major hurdle to become a
producing marketable surpluses. member. In many cases, the entrance fee equals the world
market price of 40 to 50 kilos of the commodity concerned.
Based on our extensive knowledge and experience, we can
confidently say that the legal and institutional environment Even if farmers are strongly committed to the co-operative
largely determines whether rural co-operative enterprises will enterprise, they may not be able to capitalise their co-operative
prosper or wither. Politically motivated co-operatives cannot adequately. However, a certain amount of investment or
function properly, and will only lead to distortions rather than working capital is needed in most cases to finance the entire
improvements to the market environment for member farmers. business of the co-operative, i.e. the collection, sorting and
Furthermore, in the absence of elementary co-operative grading, handling, processing and storage, packing and
legislation, co-operatives cannot develop into sustainable shipping of the product. In our experience, co-operative capital
organisations. At this point, we have to warn against going is initially based solely on members’ entrance fees and generally
to the other extreme. It is necessary to leave ample scope covers less than 10% of the financing requirement. Without
for members to regulate their own co-operative business. sufficient funding, the co-operative cannot function properly
In many countries, legislation regarding co-operatives is simply and its future viability is threatened. To overcome this hurdle,
enumerative, which is in fact detrimental to co-operative financial institutions need to provide the necessary working
development. We also believe that there is no single most capital and/or investment capital through loans (which can be
appropriate manifestation or form of a co-operative enterprise encouraged in a supportive political environment). They are of
to be defined, because of differences in stage of development, course only willing to do so if co-operatives have sufficient
cultural and historical background and market conditions in financial and non-financial collateral or securities and are fully
each country or continent, all of which are also undergoing and voluntarily supported by their members. In other words,
constant change. co-operatives need to be (or become) creditworthy and
bankable. To attract external finance, co-operative businesses
Producer and marketing co-operatives that operate in a sound need organisational cohesion and management capacity,
legal framework and a healthy market environment should first especially in financial and business planning. We feel that
and foremost aim at economic objectives. Co-operative co-operative enterprises that do not attain creditworthiness will
enterprises simply have to operate as business-like organisations. remain rudimentary organisations that are unable to increase
This assertion implies that member co-operatives should have their members’ income.
or aim to attain a certain scale (in order to have an impact on
the market conditions for their members), and consist of a Governments and donors can play an important role in
mixture of small and medium farmers as well as larger and lowering the barriers for F&A co-operatives to obtain access to
more innovative farmers. Co-operatives primarily directed financial services and to increase their productivity. Even with a
towards the poor or subsistence farmers or small standalone consistent capitalisation policy in place, it takes several years for
co-operatives are fairly likely to fail in the end. We strongly the co-operative to build up a capital base that is considered
recommend therefore that voting rights are assigned to sufficient by banks to provide finance. Government policies
members according to the proportionality principle rather focusing on improving farmers’ income by facilitating the
than the often-favoured one member one vote principle. establishment of producer co-operatives and providing
Member farmers should also have a clear market orientation education need to go hand in hand with the development
 | 31

of adequate financing structures/solutions for co-operatives

and improvement of the general business environment. Hence, co-operative enterprises must pursue a healthy surplus
Available options include (i) the provision of reliable and capitalisation policy and should preferably operate with
information to familiarise people and financial institutions two-tier governance structure in the longer term. Contrary to
with the co-operative business model, (ii) the development of common beliefs and practices, we want to emphasise the
Guarantee Funds, and (iii) direct financial support in the form importance of retaining a significant part of the net surplus
of subsidies or intangible support in the form of education. inside the co-operative in order to facilitate further growth and
The latter two instruments are especially useful in the initial enhance its bankability. A part of the profit should be added to
phase of development of F&A co-operatives, if targeted at the general reserves and another part should be transferred to
improving the efficiency and creditworthiness of the so-called member accounts, which members can withdraw
co-operative. They help to boost the use of new technology from the co-operative when they decide to leave. Finally, larger
in agriculture and can encourage desired developments in F&A co-operatives should be managed by professionals
the agricultural sector. supervised by member control or boards. If all these
prerequisites are met, co-operative enterprises can play an
Guarantee funds are still hardly used to improve access to important economic and social role. With good management,
finance for F&A co-operatives. Rabobank thinks that these healthy profitability and strong capitalisation, they are in a
funds can have a large impact on enhancing the development position to contribute to rudimentary goals like social
of co-operatives, provided that they are properly structured development, housing or education for their members. Indeed,
with an appropriate risk-sharing mechanism between the fund social coherence within society is often a pre-condition for
and the financial institution. When designing the guarantee building up regional and national co-operative networks.
fund, there has to be a well-formulated exit scenario containing
a time path for the realisation of capital targets and a good
track record with the bank. Contributors to such a Guarantee
Fund can be governments, donor organisations, and
international financial institutions. Financial support from
governments and donors should be subject to stringent
conditions and be temporary. The conditions should contain
strong incentives for farmers to make continuous efforts to
develop and capitalise their co-operatives. Receiving external
support should never become a common economic interest in
itself. If so, ‘members’ will lose their motivation and interest as
soon as external funds dry up. Economic principles should be
respected at all times, and donor support should have a clear
exit strategy based on realistic financial projections. Members
and co-operative management should feel the real costs of
assets and contribute to it or be reminded through regular loan
repayments. For small farmers, support to improve productivity
may be necessary, since their farming activities are often not
profitable enough to reach sufficient capitalisation. The
potential benefits of an increase in productivity often outweigh
the advantages of a higher product price resulting from market
power through the establishment of the co-operative.
Intangible support in the form of education and transfer of * Source: Rabobank (2012), ‘F&A Cooperatives and Rural Financial Development in
knowledge therefore makes a lot of sense. Contrary to Emerging and Developing Countries: Great Opportunities and Surmountable
governments in developed countries, many governments in Difficulties’. In this publication Rabobank clarifies and emphasises the important
emerging and developing countries still do not assume serious role that agricultural co-operative enterprises and rural finance solutions in
responsibility for education, the extension of services, emerging and developing economies can play in achieving the Millennium
improving the infrastructure etc. for F&A co-operatives. Development Goals. It is based on Rabobank experience and aims at providing
International donors can play a constructive role in this respect. multilateral organisations, NGOs, policymakers and other stakeholders with a
They can either encourage governments to invest in agronomic practical framework for assessing the viability of F&A co-operatives and rural
training or take up this responsibility themselves when formal finance solutions.
institutions do not function properly.
32 | Framework for an Inclusive Food Strategy

5 Financing at the bottom of

the food production pyramid
The large majority of the population in rural areas in low and middle co-operative approach offers great promise for providing access to
income countries, approximately two billion people, consists of finance for smallholder farmers, and the creation of an inclusive
smallholders and their families. In Sub-Saharan Africa and Asia, financial system that is not limited to urban centres.
more than 90 percent of the agricultural holdings are smallholders,
while approximately 80 percent of the farmland is cultivated by 5.1 Financial landscape at the bottom of the pyramid
smallholders. Producing up to 80 percent of the food that is
consumed locally, they are the backbone of the rural economy. 5.1.1 The financial service gap in the South
Access to affordable financial services is essential in order for Lack of outreach: It is estimated that just over half of the world’s adult
smallholders to meet investment and working capital requirements population of 4.7 billion do not use formal financial services for saving
to unlock their potential. Without investments in new farm assets, or borrowing (Financial Access Initiative and McKinsey & Company,
technology and equipment, these smallholders are not in a position 2009). The large majority of these unbanked people (2.2 billion) live in
to compete, meet formal sector requirements, diversify or increase Asia, Africa, Latin America and the Middle East. Approximately two-
their share in the final value of their products. In many developing thirds of the 1.2 billion people who do use financial services in these
regions, financial market imperfections, such as high transaction regions live on less than USD 5 a day. The study concludes that ‘existing
costs and information asymmetries, are likely to be especially practice shows that it is possible to serve low income populations on a
binding on smallholders that lack collateral, credit history and large scale’. The challenge is to learn from countries and approaches
connections. The absence of affordable financial services in rural where this has successfully been done, as a starting point for initiatives
areas does not only affect smallholders, but also related chain elsewhere. Countries can improve levels of financial inclusion by
partners such as processors and traders. creating effective regulatory and policy environments and enabling the
actions of individual financial services providers (IFC/GPFI, 2011).
The new vision for agriculture exemplifies the growing awareness
in the food business world that the private sector needs to play a Credit gap: Total unmet need for credit by all formal and informal
leading role in unlocking the potential for agriculture at the lower micro, small and medium enterprises (MSMEs) in emerging markets
end of the pyramid. It will require a substantial investment in today is estimated in the range of USD 2.1 to USD 2.5 trillion (IFC and
infrastructure for rural energy, irrigation, post-harvest handling and McKinsey & Company, 2010). It is concluded that approximately
storage, processing and transportation, estimated at EUR 83 billion 70 percent of all MSMEs (365 million to 445 million) in the developing
(FAO) and EUR 90 billion (GHI) annually. In this view, the public world does not use any form of external financing from financial
investment expenditure in agriculture has to be a partnership effort institutions and that another 15 percent is underfinanced. This gap is
involving private stakeholders if the common goal of a food secure equivalent to approximately 14 percent of total developing countries’
world is to be achieved. GDP and about one-third of the current total credit outstanding to
MSMEs in emerging markets globally.
Furthermore, increased attention should be paid to connecting
and improving local and national financial systems and innovative 5.1.2 The financial landscape - a farmer’s perspective
policies for farm financing. Existing commercial banks and Provider: Financing of smallholders in rural markets of low and middle
investment funds usually serve the top of the market, and by doing income countries is undertaken by a variety of institutions and
so, fail to tap into the fortune at the bottom of the pyramid community groups offering financial services, including commercial
(smallholders and other talented poor). If the historical lessons of and development banks, non-bank financial institutions, co-operatives,
co-operative banks in Western Europe are anything to go by, the savings and credit co-operative organisations (SACCOs), postal savings
 | 33

banks, microfinance institutions (MFI), self-help groups (SHGs), village Figure 5.1.2: The farm finance pyramid
savings and loan associations (VSLAs), financial service associations
(FSAs), and even telecommunications providers (mainly providing
remittance services). Input suppliers, traders and processing companies
Sources of farm finance:
also provide financial services through the value chain, such as credit Large farm & corporate enterprises
for inputs and insurance for farmers. Commercial banks
& investments funds
Medium farm enterprises
Chain partners
Challenges: However, compared to the non-agricultural MSMEs, these (trade finance)
Small farm enterprises
rural financial market segment face even more critical constraints that Multilateral finance
limit the availability of financing. Low levels of economic activity and institutions &
development banks Smallholder farms
population density result in dispersed demand for financial services. Chain partners
This, in turn, is leading to high information collection and transaction MFI’s, SACCOs Subsistence farms
NGOs
costs, making rural clients relatively less attractive for market-driven
financial institutions. Other constraints to the sustainable provision of
financial services in rural markets include:
- Weak institutional capacity of community-based rural finance
providers limiting the potential for cost-effective alliances with
commercial financial institutions.
- Limited capital resources for credit and ability to provide non-credit
services such as savings, check clearing, payments and money medium-term and long-term financing. For this reason this segment is
transfers curtail rural finance providers from scaling up access to relatively underdeveloped and has been referred to as the ‘missing
finance in rural markets. middle’ (Oxfam, 2009). It is a crucial segment though, as it consists of
- Weakness in the regulatory environment such as problems with private SMEs as well as producers’ organisations of smallholder farmers
registry systems for land titles and moveable assets limiting and co-operatives that undertake vital business activities such as
acceptable collateral that rural producers may be able to provide. marketing, storage and processing. In terms of finance, the missing
- Seasonality and co-variance of agricultural and farm production middle refers to the gap that exists for farmers in need of loans from
activities, which lower likely margins and increase the risks of such USD 5,000 to USD 500,000. This group has limited access to financial
operations. services because they are often too big for microfinance institutions
Although the constraints to financing of smallholders may vary (MFIs) and too small, risky, and remote for commercial banks.
between countries, they all face higher transaction costs, higher risk
and relatively less attractive returns as compared to commercial urban Key characteristics: Table 5.1.2 on the next page shows the main
banking. Smallholders are therefore often dependent on ‘alternative’ characteristics in terms of farm practice and technology, production
sources of finance28. These sources range from microfinance institutions capacity and the traditional position in the value chain for the five
(MFIs) to rotating savings and credit groups (ROSCAs) and more levels of farms in the above pyramid. The middle segment in this table
formalised savings and credit co-operatives. In some cases, farmers are has been subject to extensive policy debate on agricultural finance
financed by value chain partners such as input suppliers and processors. with recommendations for regulation, supervision and infrastructure.
A recent study (IFC and GPFI, 2011) aims to complement this important
The missing middle: The key characteristics of the various farm process of revitalising agricultural finance, with an emphasis on what
segments in low and middle income countries from a financial point the private sector can contribute to the mobilisation of smallholders.
of view are described in figure 5.1.2. The top of the pyramid features
the mature value chain segment, which consists of large commercial The power of collaboration: If the bottom three categories of the farm
farms and plantation businesses, representing a high share of the finance pyramid find it difficult to get access to finance, how do they
(international) tradable agricultural commodities but a low share of rural manage? For this middle segment of smallholder farms, collaboration
employment/world farm holdings. This part of the value chain is usually in the form of co-operatives has proven to be a feasible institutional
fully commercially financed. The bottom of the pyramid consists of response to the lack of access to finance for individual farmers.
the subsistence farmers and semi-commercial smallholder farms. While the nature of co-operatives differs per region and subsector,
This group is usually served by MFIs and credit co-operatives (SACCOs). the strength of the approach generally lies in a combination of one
Commercial smallholders in the middle segment that are active in or more factors such as creation of storage facilities, enabling
integrated cash crop sectors may get access to finance through value collateralisation of produce to facilitate finance (e.g. by application
chain financing instruments. Some of these medium-sized farmers of warehouse receipt instruments) and capacity to mobilise equity
meet the minimum size requirement in order to appeal to banks. participation of members to leverage debt finance. For the latter,
However, by and large, both segments have difficulties accessing there are various solutions, ranging from linkage to external financiers
formal financing, especially if they produce staple crops such as to the establishment of a member-controlled co-operative finance
cassava, maize, wheat, rice, etc. and even more so when seeking institution (SACCO) or co-operative bank.

28 Financial Institutions with a ‘double bottom line’: Implications for the future of
microfinance. CGAP - Occasional Paper July 2004
34 | Framework for an Inclusive Food Strategy

Table 5.1.2: Key characteristics by farms size

Large farmers Medium-sized Commercial Semi-commercial

smallholder smallholder

Land >500 ha 20-500 ha 2 - 20 ha <2 ha

Labour Skilled labour Combination of family Primarily family labour Family labour
members and external
labour

Technology Fully mechanised Partly mechanised Minimal Low technology. Limited access
mechanisation to know-how.

Resources Formal bank loans and/or Limited access to formal Mainly informal Limited resources (capital, skills,
external capital. Skilled bank loans finance labour, risk, management)
(risk) and management.

Production Fully commercial Largely commercial Partly commercial May produce subsistence or
commercial commodities, with
on-farm and off-farm sources
income

Capacity Good market access, own Reasonable market access Marketing through Limited capacity of marketing,
storage/logistics and access but limited access to market group structures storage and processing
to market information information

Value chain Well-positioned within the Weak position. Stronger in Position depending Often vulnerable in supply chains
value chain cash crops on group strength
Source: adapted from IFC and GPFI (2011)

5.2 Financial services at the bottom of the pyramid variety of initiatives in support of this sector emerged, often as part of
public sector development programmes, or instigated by donors, NGOs
Financial co-operatives: Mutual systems of savings and credit are the and religious organisations. However, it took until the mid-1970s for the
most common response of rural communities to unexpected or term ‘microfinance’ to be coined and for micro-entrepreneurs to be
irregular expenses, whether related to farming, festivities, sickness or recognised as a legitimate target group for organised financial services.
burials. During the colonial and post-colonial period, these systems In the thirty years that followed, a wave of microfinance initiatives
were replaced or supplemented with European, American and spread across the globe. By replacing the concept of collateral with
Canadian models. These types of ‘self-help’ financial institutions group formation and mutual guarantees, credit came within reach of
nowadays exist in many forms, ranging from informal rotating savings people without property. And by bringing these services to the poor
and credit groups (ROSCAs), organised savings and credit co-operatives man’s quarters, the threshold was sufficiently lowered to draw millions
(SACCOs), credit unions to co-operative banks. The strength of these of impoverished people into the realm of financial services. In the now
financial initiatives and institutions lies in the fact that they are savings- widely replicated Grameen model29, clients are part of solidarity groups,
led, which means that their prime objective is savings mobilisation and consisting of cells of some five people, clustered into groups of 20 to
protection. Furthermore, credit delivery is restricted to members and 30 members. Each group member is required to vouch for the
the money they lend out (usually) comes from the savings of their creditworthiness of the others, which provides a soft guarantee, and
members or a broader savings base. A World Bank study (2007) more importantly, a system of mutual support to safeguard one
concludes that ‘Financial co-operatives are significant providers of another’s success. Subtle peer pressure keeps each group member
financial services in rural areas in both developed and developing in line with the broader objectives of the credit programme.
countries. In successful cases, this success is based on a tried and The innovation of group lending sparked a wave of microfinance
tested institutional and business model: democratic, bottom-up, initiatives around the world. The ability of the global microfinance
autonomous, self-financing and savings-based.’ sector to standardise performance indicators and to account for its
achievements through a global reporting system called the
The microfinance wave: What is now referred to as micro-enterprises, Microfinance Information Exchange is remarkable for a young industry.
i.e. small shopkeepers, small farmers, marketers, craftsmen, rickshaw
drivers, etc. traditionally operated mostly behind the veil of the informal
sector. Access to finance, if at all, was restricted to family members, 29 Dr Muhammad Yunus, founder of Grameen Bank and winner of the Nobel Peace Prize for
informal lenders and ‘loan sharks’. During the 1960s and 1970s, a great his work in microcredit, was an early pioneer of solidarity lending during the late 1970s.
 | 35

Farming - still a frontier area for (micro)finance: The financing of Emerging features of agricultural microfinance: Despite the above-
the agricultural sector has proven to be a great challenge, not only mentioned obstacles, many microfinance institutions have proven that
for banks but also for microfinance institutions operating in rural areas. financing farm activities can be viable. A CGAP study identifies ten
The success stories of agricultural microfinance in countries like common characteristics of successful agricultural microfinance.
Bangladesh (Grameen Bank) and India, have been facilitated by the fact A recent UNDP study explores the features of ‘the next phase’ of
that in densely populated regions, it is possible for credit officers to microfinance (Mendoza, 2008). Issues addressed involve improved
reach clients on foot or by bicycle. However, in many other countries, product design, mitigating the cost of capital and distribution and
especially the more sparsely populated areas of Africa and Latin marketing costs. Examples of the latter, leveraging ICT networks,
America, the outreach of MFIs to remote rural areas is still a challenge. include recent innovations on mobile banking, for example in Kenya
Relative to commercial micro-entrepreneurs, small farmers face and the Philippines.
additional uncertainties related to crop yield and crop prices. Lack of
storage facilities force farmers to sell on spot markets (local traders, Mobile farm finance: These services open up possibilities for tailored
village markets) at low prices during harvest time. The gross margins credit and procurement products for farmers, such as the DrumNet
for farmers on staple crops sold on local markets are often very small, facility in Kenya (part of Pride Africa MFI), a technology that helps
hardly allowing additional expenses for interest on loans. Hence small farmers to acquire the inputs needed, simplify credit delivery, and
farmers may be reluctant to borrow, unless the investment financed reduce transaction costs and risks.
improves their gross margin significantly. Relatively larger amounts
required for farm modernisation (tools, equipment, storage, irrigation) Value chain finance approaches: Value chain finance refers to financial
may be well beyond the normal ceilings for microcredit. products and services that flow to or through any point in a value
chain in order to increase the returns on investment, growth and
Gross margin and interest: Another much debated issue in this context competitiveness of that value chain. The successful application of a
is the cost of microcredit. While an interest of 2 percent per month may more holistic finance approach towards the various partners in a value
be quite acceptable for a woman selling tomatoes on a daily basis, it chain, first adopted by large banks in national and international supply
could pose a problem for farmers who have to wait six months for the chains, has created awareness for the potential of this approach
harvest and for payment of their crop. For this reason it is not uncommon towards financing the agricultural sector at the bottom of the pyramid.
for MFIs to lower their interest rates for agricultural credit, often
requiring a degree of cross subsidisation by their non-farm portfolios. 5.3 Financial co-operatives in the South

Implications for MFIs: Finally, in the absence of specific agricultural 5.3.1 Origin and models
finance approaches, the portfolio at risk for agricultural lending may Origin: The history of financial co-operatives goes back to the mid-19th
also work out to be higher than for trade and commerce. Thus MFIs century when pilot projects were undertaken with credit co-operatives
typically face lower yields combined with higher risks, making among rural communities in Germany. Of the two founding fathers,
agricultural finance a more challenging proposition for finance Friedrich Wilhelm Raiffeisen is best remembered for his ground-
providers. breaking work that led to the establishment of co-operative banking
systems in various countries. By the time of Raiffeisen’s death in 1888,
credit co-operatives had spread to Italy, France, the Netherlands,
Emerging Features of Agricultural Microfinance England and Austria. As colonial powers, these countries introduced
1. Repayments are not linked to loan use. the business concept of co-operatives to their colonies. Drawing
2. Character-based lending techniques are combined with technical extensively on European precedents, Desjardins (DID) developed a
criteria in selecting borrowers, setting loan terms, and enforcing unique parish-based model for Quebec in 1901, the so-called Caisse
repayment. Populaire (Canada was a colony of France at that time). In the United
3. Savings mechanisms are provided. States, St. Mary’s Bank Credit Union was founded in New Hampshire by
4. Portfolio risk is highly diversified. French-speaking immigrants from Quebec in 1908.
5. Loan terms and conditions are adjusted to accommodate cyclical
cash flows and bulky investments. Models: Today, various organisational models for networks of financial
6. Contractual arrangements reduce price risk, enhance production co-operatives can be found around the world, its historical roots still
quality, and help guarantee repayment. clearly visible. Networks are the logical consequence of a ‘bottom up’
7. Financial service delivery piggybacks on existing institutional organisation where primary co-operatives join forces in order to benefit
infrastructure or is extended using technology. from shared services, expertise and economies of scale. There are two
8. Membership-based organisations can facilitate rural access to types of models (Klaus Fischer, 2004). On the one hand, there are
financial services and be viable in remote areas. networks in which the entities have relatively weak links and only share
9. Area-based index insurance can protect against the risks of resources to a small extent. In this case, the accent is on the base
agricultural lending. entities while limiting integration to representation, lobbying and
10.To succeed, agricultural microfinance must be insulated from public relations. When resources are shared, this is often done without
political interference. centralisation. Fischer refers to this as the atomised-competitive
network model, like the Credit Unions in the USA. On the other hand,
Source: CGAP - Occasional Paper 11 - 2005 there are networks that are highly interrelated and equipped with apex
organisations, providing significant integration. Sharing of resources is
36 | Framework for an Inclusive Food Strategy

raised to a high level of partnership and the supervision of base units is maturities of savings and credit. Current legislation often makes it
highly integrated. These are referred to as federated networks. virtually impossible to finance term loans for agricultural equipment,
Federated networks can be found in European countries such as storage and irrigation. This means that even if there are market
Germany, France, the Netherlands and Austria. opportunities, they often cannot be seized due to lack of finance.

5.3.2 Characteristics of credit co-operatives in the South30 Building capacity in the South: Co-operatives in developing countries
Models and features: The federated network model is often found in are frequently discussed in terms of their seemingly inherent
countries in Latin America where European immigration was strong weaknesses (voluntarism in the governance structures, prone to
(such as Argentina, Uruguay, Chile and Brazil) and in Central and West political interference, etc). This raises the need for capacity building and
Africa where French, Swiss and Québécois influence is evident. professionalisation. Most national co-operative networks and
In the eight BCEAO countries of West Africa, a new regulatory federations have set up programmes to facilitate the capacity
framework for financial co-operatives has been established, with strict development of associated co-operatives. One of the advantages of
standards for capitalisation, board membership and federated the federated structures of credit and savings co-operatives is that the
structures. As a consequence, mergers take place or smaller second and third tier (regional and national level) can efficiently
co-operatives and federated networks are formed or strengthened. DID organise capacity building and support services for the primary
has been very active in this region for almost half a century with co-operatives. Standardisation, auditing services and joint tools can
technical assistance and capacity building programmes. The atomised greatly facilitate the development of the primary co-operatives. The
model, with a low level of integration, is characteristic of credit unions ‘atomised’ credit co-operatives, on the other hand, are self-standing and
in the United States, English-speaking Canada and Australia before hence need to organise these capacity building processes and product
1992. This model is also found in East Africa and Latin America where it innovation by themselves. However, these types of co-operatives (or
has been encouraged through bilateral American and multilateral credit unions) are often relatively large institutions that are able to
agency aid programmes. afford recruitment of professional staff. For a long-term strategy on
food security, it is important to recognise the prospects of financial
Outreach: A compilation of data of large networks of co-operative co-operatives to become vital actors in the financial system, as many
finance of WOCCU, DID and European co-operative banks, such as co-operative banks have already shown, with great potential for
Rabobank, gives a good idea of the global outreach of the co-operative deepening outreach in rural areas and inherent stability in times of
finance sector in the South. They have substantially contributed to the financial crisis.
development of financial co-operative systems through technical
assistance, soft debt finance, guarantees and equity finance. Together 5.4 A value chain finance approach to sourcing from
they are active in more than 66 countries in Africa, Asia and Latin smallholders
America and have some hundreds of millions of members, benefiting
from either saving services, loans or both. The global outreach of 5.4.1 Opportunities for agribusiness
co-operative financial institutions considerably exceeds that of the Opportunities for sourcing of agricultural produce from smallholders
credit-led microfinance institutions. are greatly expanded when a marriage is realised between two core
elements: a strong producer organisation combined with a value chain
Strengths and weaknesses31: Financial co-operatives are characterised approach. The latter increases returns for farmers and allows for farm
by the urge to keep interest rates low for their member-clients. finance, thus facilitating farm investments. An agribusiness that takes
Historically, this has been a response to exploitation by informal money the lead in this process needs to identify the right trading partners,
lenders who many poor people were forced to depend on. This develop a strategy for increasing value at the bottom, facilitate farm
distinguishing feature is especially important for farmers who, contrary investment and finance and help to reduce risks within the chain.
to micro-entrepreneurs in trade and commerce, are faced with a Value chain finance (VCF) approaches do not depend primarily on
relatively long production cycle and often very small gross margins. As new financial instruments to be applied, as these often include a
opposed to microfinance institutions, low interest rates also imply that traditional array of trade and investment finance tools, but rather on
the capacity for hiring professional staff is very limited and governance the orchestration of different partners in the chain (multi-stakeholder
is highly dependent upon voluntarism. Because of the relatively low approach) and intimate knowledge of producers, products and
yield on credit portfolios, the possibilities for the commercial markets. In many agricultural sectors, financial arrangements with the
refinancing of portfolios are also often limited. Another obstacle in supply chain go back a long time due to the fact that food processors,
financing the agricultural sector is the mismatch between the input suppliers and large commercial farms were often the only source
of credit available for producers. VCF complements traditional finance
and microfinance as it adds the following three crucial elements:
30 See also Rabobank box 2 on page 40. - A focus on competitive agricultural subsectors by tapping into more
31 Large co-operative banks in Europe, the USA, Canada and BRIC countries form the other attractive markets.
end of the graduation spectrum. It is interesting to note that, while large co-operative - Increase in incomes of poor farmers (higher gross margins), thus
banks perform the same functions as commercial banks, there are still marked generating a capacity for farm investments and innovation.
differences. A study on co-operative banks in the new financial system (Rabobank, 2009) - A focus on risk mitigation and reduction of transaction costs through
concludes that financial co-operatives contribute to the stability of the financial sector. collaboration arrangements between chain partners and financial
The retail customer focus and the relatively high credit ratings of co-operative banks also services providers.
point to their beneficial impact on financial stability.
 | 37

VCF often offers solutions in the domain of microfinance (relatively on empirical evidence research emphasises the constructive role
small loans), but can also be applied as a commercial arrangement that foreign direct investment can have in this respect (Vorley and
between two or more chain partners, or carefully orchestrated Fox, (2004)).
arrangements between chain partners and one or more financial
institutions. 5.4.3 The need to involve financial institutions
Investment finance: The ability of chain partners to finance their
5.4.2 Design of a value chain finance approach for smallholders trading partners is limited, and hence the need arises to get financial
How to turn a supply chain into a value chain? Financial services institutions involved. Moreover, for farmers and downstream partners
providers, whether they are MFIs, financial co-operatives or banks, rarely (like processors), working capital finance through trade credit is not
conduct value chain finance on their own. At the bottom of the enough. Finance for investment beyond the duration of the trading
pyramid, value chain development (VCD) interventions are often cycle is what is needed. It was argued (Geoffrey Chalmers, 2006) that if
required to link primary producers (farmers) to value adding markets. chain partners see the need to take a leap forward by introducing new
Invariably it involves the transformation of a local supply chain into a technologies, if they want to incorporate producers who have
value chain that meets the requirements of these new markets. As long remained outside the organised chain, financing from inside the chain
as a producers’ organisation maintains a supply-driven approach, a is not likely to meet the investment needs. In other words, what is
value chain strategy may be difficult to pursue as this calls for needed is a transition from embedded finance within the chain to
adjustment of production to the requirements of new markets. It external finance. In a chain in which initially the primary producers
requires entrepreneurial spirit to venture into new products or crops for were dependent upon embedded finance, the introduction of external
local, regional or international markets. Therefore, the success of a VCD credit lifts up all major functions in the chain. Financing facilitates the
strategy crucially depends upon the selection of the right partners. growth of production activities by each farmer and expansion of the
overall chain when financing begins to flow in from outside the chain
Chain governance: An active trading partner in the chain, such as a in the form of credit from financial intermediaries.
farmers’ marketing organisation or a processing company, can take the
lead in streamlining the value chain, thus providing a degree of ‘chain The virtuous circle: Access to funds from financial intermediaries
governance’. Such a party could also play a role by providing embedded external to the chain improves their situation leading to the formation
finance to suppliers, or to establish a working relationship with a of a ‘virtuous circle’. The idea behind the virtuous circle of external
financial services provider for financing of producers and input financing is that producers can build their creditworthiness with
suppliers. Compared with financial institutions, value chain operators financial intermediaries. This happens when their ensemble of market
possess easier access to information about other value chain partners, relations develops and grows stronger through participation in a
particularly with regards to the willingness and ability of potential modern, organised chain. When farmers receive technical assistance
clients to honour contracts. The creation of a successful value chain is from buyers or when their buyers in some way guarantee purchase of
an act of entrepreneurship. While a facilitator (specialised VCD agency) the product, they improve their standing for receiving loans from
can play a useful role, the detailed design of the value chain strategy financial intermediaries. This means they can obtain or improve
must come from a leading chain partner. In a producer-driven initiative, financing from outside the value chain. The very existence of these
the major challenge is to turn a supply chain into a value chain (i.e. to contractual relationships, whether explicit or implicit, improves
adjust supply to demand in a new market). In a buyer-driven model the producer creditworthiness.
challenge is to identify competitive production areas and to make
products conform to market requirements. Sometimes a professional 5.4.4 Risk mitigation through value chain finance approaches
facilitator is used to link producers and buyers/consumers in a chain. A value chain finance approach offers a set of mutually supporting
Whatever the entrée point, a vital characteristic of a promising VCF measures that, combined, are able to substantially mitigate finance
approach is that a leading chain partner is prepared to invest time and risks, especially when a solid producers’ organisation (co-operative)
resources in the relations with suppliers (primary producers) and off- collaborates with a leading chain partner (Calvin Miller, 2011). The chain
takers higher up in the chain. Sharing of information and building up partner is in a good position to provide guidance to farmers through its
trust is both a precondition and a good test (indicator) for a genuine PO and facilitate better gross margins through improved quality and
VCF approach (European MFP, 2011). direct access to new markets. The case of CEPIBO (see case study 5.4.3
on the next page) in Peru illustrates how risks can be mitigated through
Trade finance instruments: The practice of trade credit by commercial the organisation of producers and linking of finance and marketing
trade partners has always existed as a form of finance alongside formal functions. While agricultural finance in general is often considered high
financial services by banks. Especially in the food chains, which are risk and therefore non-accessible, a consistent value chain approach
handicapped by constraints on agricultural credit and rural finance, it is manages to mitigate risks to a level that makes the chain ‘credit worthy’,
often the only finance instrument available. Financial institutions are even when individual partners (small farmers) are not.
traditionally hesitant to lend to farmers or farmer-based organisations
due to their lack of credit history, high perceived risks and high
transaction costs and monitoring costs. On top of that, there may be
doubts concerning profitability, cash flow and production risks. For
partners in the food chain it is much easier to overcome these
obstacles as they know their trade partners and the trade itself. Based
38 | Framework for an Inclusive Food Strategy

Case study 5.4.3: CEPIBO - Banana farmers in 5.4.5 The role of value chain partners in access to financial
Northern Peru services for smallholders
CEPIBO - Banana farmers in Northern Peru organised in a Facilitate value chain development (VCD): Companies with firm roots
co-operative take up pre-export processing and fair trade in consumer markets, whether by brand recognition or status as trusted
certification. Whereas historically they supplied exporters without supplier, considering sourcing from smallholders, almost by definition
processing, they now do the quality control, washing, packaging are involved in the development of a (local) value chain. In their
and exports themselves, thus almost doubling farm incomes. perspective, the problem is not how to market a certain product, but
rather how to ensure constant and reliable supply of agricultural supplies
Reducing risks in the chain. Value chain finance is deemed that meet their food quality and safety standards. A characteristic of
effective and sustainable when it goes hand in hand with measures traditional agricultural production by small farmers is the relatively low
to reduce risks in the chain. The case of CEPIBO offers a good productivity per hectare. This can differ a lot in comparison to
illustration on how this is achieved: commercialised operations applying Good Agricultural Practices (GAP).
- Production risks: The combination of capacity building for the If global food security is to be realised with gradually reducing resources,
producers through CEPIBO is crucial to ensure year round supply it is vital that productivity is increased with the smallholders the way it
in adequate qualities. is with larger commercial farms. A second issue to be addressed may
- Finance risk: By acting as a financial services provider and trading be the weakness of the producers’ organisation(s) involved. A leading
partner of the farmers, the risk of non-availability of finance is chain partner can help the producers make big steps forward, through
reduced and the risk of non-performing loans is minimised. In relatively cost-effective means. This may involve simple interventions
case of crop failure, the loans by CEPIBO to farmers can be such as product-specific technical advice, chain governance, guidance
extended for one year, with CEPIBO meeting its debt obligations on production standards and strengthening of the producers’
from its internally generated equity capital. organisation or co-operative.
- Marketing risk: The promotion of bananas, in fairs and business In view of the importance of these types of investments, the leading
tours helped the growth of demand for CEPIBO products, chain partner will in many cases access specialised support services from
resulting in a rapid growth of sales. Fixed contracts were the public sector, civil society or private sector specialists. Value chain
established with fair trade importers in Europe. In the local market development is an area par excellence for public private partnership.
it has almost limitless sales opportunities, be it at lower prices.
Thus, an unexpected drop in demand from importing partners Facilitating external finance for farmers (VCF): In terms of activities in
can be absorbed without threatening the sustainability of CEPIBO. the field of chain development, lead partners can play a vital role in
- Price risk: Through direct contacts with importers abroad, CEPIBO facilitating farm financing. While initially, chain partners often play a
has reduced the risk of price fluctuation due to influences at financial role by providing trade credit, it will eventually become
intermediary stages. Despite the inevitable volatility of world- necessary to involve external financiers. As lead partners in the chain
market prices, the ‘Fair Trade’ label helps to secure fair and have already built up a relationship of creditworthiness with one or
relatively stable prices for its members. more banks, they are well placed to facilitate the transition towards
- Quality risks: Improved quality control allows for product direct finance facilities for farmers involved in the chain. Most important
segmentation (top quality at higher prices for export, lower in this process are the unique opportunities that a value chain finance
quality at lower prices for local markets), thus reducing the risk of approach offers in terms of risk mitigation. Timely delivery of inputs and
bulk rejection of export assignments. basic extension services reduce production risks. A strong producers’
- Health risks for farmers: The move to organic farming has been organisation reduces supply risks. Well-established marketing links
strongly motivated by health concerns. Part of the mission of reduce price and marketing risks. The combination of these factors
CEPIBO is to reduce the diseases observed with farmers and makes it possible for chain partners, or banks, or a combination of the
farm workers in the area related to extensive use of pesticides. two to provide financial services. A tripartite agreement between the
These working conditions have been linked to frequently parties involved has proven to be a suitable arrangement to secure the
observed diseases such as infertility, lung cancer, skin cancer commitment of all stakeholders in the process.
and birth defects.
5.5 The investment capital challenge of smallholder
inclusion
Risk of side selling: The most frequently observed obstacle in these
models of ‘embedded finance’ in a value chain is the risk of farmers Scale of investment: Investment is essential for the development and
acting in breach of contracts by selling their produce to other traders, growth of agriculture, especially for small-scale agriculture in developing
thus escaping the credit repayment mechanism. This risk is particularly regions. It requires medium and large long-term investments, such as
high when downstream partners deal with individual farmers. In well- land reclamation and physical infrastructures including roads and
organised producers’ organisations or farmer co-operatives, the risk is transport facilities, energy provision, irrigation, post-harvest handling
greatly reduced if not eliminated altogether. For this reason companies and storage, farm inputs, equipment and equipment to processing
prefer to deal with strong producers’ organisations, especially when and logistics. In 2008, the UN estimated that food security-related
they operate as a legal entity, such as a registered co-operative. investment needs in developing countries ranged between USD 25
billion and USD 40 billion per year up to 2050. A more recent estimate
of the investments in agriculture and downstream sections of supply
 | 39

chains was USD 83 billion, of which USD 11 billion per year in Figure 5.6: Official capital flow from OECD and Development Donor
Sub-Saharan Africa (FAO, 2009), while in 2011 the Global Harvest Countries to Developing Countries (in billion dollars)
Initiative calculated that USD 90 billion is needed annually in the
coming decades.
350
Investment sources: First of all, farmers are the primary investors in
300
their own farm. Their investment does not only include physical capital
(assets such as land, livestock, farm buildings, machinery and 250
equipment), but also family labour and entrepreneurship (including
200 181
management and farming skills). The public sector (national
governments, donors and multilaterals) traditionally invests in land 150
reclamation and reconstruction, and in physical and institutional 121
100
infrastructures for agriculture. However, funding large investments
53
through public finance and development assistance only does not 50
seem feasible. Both donor governments and governments in
0
developing countries have focused more on leveraging investments
’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08
from the private sector.
Private philanthrophy flows More complete CGP philanthrophy flows
The third source for medium and long-term investment capital is the
Private investment Remittances Official flows
private sector, which includes both local and foreign agribusiness firms,
Source: adapted from Hebebrand (2011)
and private and sovereign investment funds.

Trends: Despite the prevailing view that agriculture is risky, investment constitutes investment in agriculture (Global Harvest Initiative based on
in agriculture has been experiencing noted growth in recent decades World Bank and other development indicators). Since private flows to
due to concerns surrounding global food security, the growing world developing countries tend to reflect the interest of investors, a clear
population and rising GDP per capita in low and middle income decrease is visible in times of economic downturn. Some see this not
countries. Other drivers include the switch to biofuels, growing array of so much as a lack of finance, but rather as a lack of sufficient profitable
agricultural investment products (e.g. ‘green’ funds) and a new focus on opportunities in which to invest, particularly in Africa. They reason that
emerging markets in which agricultural assets in developing nations agriculture is an infant industry33 (Palmer, K., 2011). Others argue that
are gaining attraction with investors as an ‘emerging market asset class’. private investments will be undertaken if two conditions are met. First,
Investing in agricultural land is unrepresented in diversified portfolios there must be sufficient opportunities whose expected return on
of many large pension and private equity funds, and is seen as another investment exceeds the return on capital required by commercial
asset class that has the potential of going the route that real estate, investors. Second, investors must be able to raise the debt and equity
private equity, and hedge funds did in the past32. capital needed to fund the investments.

Food security considerations: Another motivation for investors, Agricultural investment funds: Among the many funds that invest in
especially governmental investors/sovereign funds, is the fact that the multi-asset classes, there are a growing number of specific funds whose
increase in global food demand and price increases have endangered investment target in recent years has been the agricultural sector.
(national) food security. These factors have attracted the attention of Investing in the agricultural sector is seen as a possible vehicle for
emerging economies that are largely dependent on food imports due financing agricultural projects in developing countries (Miller, C., et al.,
to lack of arable land and water, and with growing income and/or 2010). These agricultural investment funds look at the capital needs of
population, such as the Gulf Arab States, China, Japan, South Korea and the different partners along the agricultural value chain, taking into
India. These countries have invested in agricultural land to produce consideration investment funds of various types of investors, both
food abroad, mostly in Africa and Latin America, to ensure food security private, public and joint initiatives, and their investment objectives.
for their countries in the future. In this respect, agribusiness is not only a key driver in the agricultural
value chain, but also a preferred avenue for investment into the chain,
Private investment: Figure 5.6 (Hebebrand, C., 2011) provides an especially by international investment funds that can bring debt and
overview of investment capital flows from different sources to equity capital, as well as expertise and market linkages to enhance
developing countries. The total capital flow to developing nations is agribusiness’ growth and returns on investment.
estimated at USD 476 billion in 2008, of which about 10 percent
Role of global players: Examples of different types of investments from
across the F&A supply chain that have served to integrate smallholders
32 FC Business Intelligence (2010), ‘World agriculture investment overview: experts’ insights’, into larger value chains are investments made by transnational
(www.fcbusinessintelligence.com ). corporations (TNCs) or global companies. Given their significant capital,
33 Infant industry by its very nature operates on a small scale and therefore does not technological bases and management skills, these large companies are
benefit from the economies of scale available to international competitors. It lacks the particularly equipped to accelerate agricultural development in
infrastructure and experience: managers and a trained workforce for commercial developing countries. TNCs offer a variety of products and services that
agriculture. can increase food security: advanced inputs and training to use them,
40 | Framework for an Inclusive Food Strategy

improved technologies to reduce waste and increase product quality,

and the finance and marketing abilities to enlarge the number of
markets they can serve profitably. TNCs have been doing business in Rabobank box 2: Rural financial development,
developing countries for many years, providing the bulk of foreign the view of Rabobank*
direct investment (FDI). Their investments, however, tend to focus Rabobank believes that one cannot stimulate rural
on regions that offer the greatest promise of economic returns development and/or producer and marketing co-operatives
(Hebebrand, C., 2011). According to this study, with no expectation of without addressing the issue of rural financial development,
short-term profits, a large number of TNC investments still fall into the which prominently encompasses financial inclusion of people
category of philanthropy or corporate social responsibility, and are in rural areas. Both aspects are intertwined. In the Middle East
implemented through PPPs in which the TNC collaborates with and North Africa, only 18 per cent of the total population has a
governments, foundations and NGOs. bank account, as opposed to 89 per cent in Europe and the
United States. 2.7 billion people are excluded from financial
Investment corridors: Considering that there are approximately services worldwide, implying that they can only pay with cash
500 million smallholders worldwide, it is clear that the size and pace and cannot save in a safe way. This leads to high - transaction -
of investments must be increased. Recent attempts at significant costs, but also impedes economic growth and rural development.
scaled-up, transformative investments in specific regions that have the
potential to be agricultural breadbaskets are the so-called ‘agricultural For many years, rural finance was simply defined as the
growth corridor’ projects. The aim of these projects is to guide public provision of credit to specific target groups, mainly farmers.
and private investments toward specific regions, boosting productivity Governments in developing countries often used their financial
in clusters around existing infrastructure while supporting the creation systems to direct credit to the agricultural sector by setting
of new infrastructure. Two blueprints for this investment approach34 interest rates at artificially low levels, by creating development
are the Beira Agricultural Growth Corridor of Mozambique and the finance institutions to make specific types of loans, or by
Southern Agricultural Growth Corridor of Tanzania. directing existing institutions to lend to this sector.
International donors supported this approach through the
Investment principles: In the new vision for agriculture, public-private provision of funds for credit lines. This led to debt forgiveness
investment modalities, with civil society involvement, should be able schemes on a large scale, which had a negative impact on
to drive sizeable, long-term investment capital in small-scale agriculture repayment discipline in general.
at the scale needed. The Principles for Responsible Investment, an
investor initiative in partnership with the UNEP Finance Initiative and By the early 1990s, it became apparent that this approach was
the UN Global Compact, and any actions that flow from it provide basic not successful. The credit lines had low recovery rates and were
guidelines for achievement of inclusive and sustainable investments in implemented by unsustainable financial institutions. Attention
agriculture. Institutional investors have the duty to act in the best long- shifted from agricultural credit towards a wider range of
term interest of their beneficiaries and are committed to principles financial services, rather than credit only. At the same time,
such as to incorporate environmental, social and corporate governance priority was given to the use of market interest rates and the
issues into investment analysis and decision-making processes, to operational efficiency and financial viability of rural financial
promote acceptance and implementation of principles within their institutions. This policy shift did not mean that the availability of
investment industry and to report on activities and progress towards credit or financial services for the rural sector significantly
implementing the principles. improved. We have seen many financial intermediaries
withdrawing from rural regions or remaining reluctant to grant
loans to the rural population. Sometimes this had to do with
the absence of a good enabling environment for the
34 The blueprints were launched at the World Economic Forum meetings in Davos in 2010 agricultural sector, such as the absence of enforceable land
and 2011. rights, or corruption. This hesitance was also often caused by
the lack of organisation among individual farmers or poor
functioning of the rural co-operative and supply chains in
general (e.g. no enforceable delivery duty, poor governance
and management, low profitability, and bad capitalisation
policies). Currently, many farmers as well as rural co-operatives
are still considered ineligible for banking services, mainly
because they cannot provide financial security or collateral. The
risks are still perceived as too high in many cases. The result has
been financial exclusion for innovative farmers, well-organised
new co-operatives and even good functioning co-operatives.
To encourage banks to service the agricultural sector, Rabobank
is strongly in favour of so-called guarantee funds and/or cost-
sharing policy instruments in specific cases.
 | 41

The development of a well-functioning rural finance system Provided that the process of improvements in the enabling
rests primarily on good policies, encompassing an enabling environment for agricultural development as well as
legal, regulatory and supervisory framework, and a financial urbanisation continues and political interference in the financial
sector and real sector infrastructure. Generally speaking, the sector wanes further, we expect there to be a growing role for
preferred role of the Government is to create a conducive formal banks in rural finance in future. In this scenario, they will
policy environment that enables the private sector to play its be able to base their financial decisions on commercial
role to the optimum extent, while safeguarding the interests of grounds and use modern technologies to reach the rural
all relevant stakeholders from producers to consumers. population with a wide array of appropriate financial services.
Concretely, governments should improve business conditions, Since the majority of the population still lives in rural areas, the
develop vertical integration in the financial sector, and presence of an informal financial sector is important. In the
strengthen links between farmers. These measures will absence of formal banks, SACCOs and informal institutions
permanently increase small farmers’ access to finance. Financial should be assisted to mature and upgrade.
institutions will also be less reluctant to provide long-term
finance to the agricultural sector in stable countries with a Reforming agricultural development banks and encouraging
good enabling environment. Such a stable environment commercial banks to become active in rural finance are crucial
reduces the risks for financial intermediaries to grant long-term factors in modernising rural finance delivery, gradually bringing
finance which is often needed in the agricultural sector, together the informal and formal sides and possibly eventually
especially for increasing productivity. Reliable information is an establishing close linkages. By using available modern
essential ingredient for well-functioning financial sectors. technology, formal banks could skip an evolutionary process
Financial organisations need reliable information about the and reach out to people that currently have to rely on informal
risks and creditworthiness of individual farmers and rural parties or standalone Savings and Credit Co-operatives (SACCOs)
co-operatives. If proper risk assessments are impossible due to directly through mobile banking and agency banking, and
so-called information asymmetries, they will not be inclined to offering a wide range of financial services immediately. This
grant loans and provide financial services. This demands approach has the advantage that there is no need to build
transparent accounting standards, and the establishment of expensive branch networks first, thus avoiding high transaction
independent, competent, and reputable accounting firms and costs. We have also seen that SACCOs united in networks
credit agencies that provide reliable data on the solvency of generally perform better than stand-alone SACCOs. For
small farmers and co-operatives. Hence, the legal environment commercial banks, one option could be to create linkages with
is extremely important for the development of a sound rural both SACCOs and Micro Finance Institutions so as to combine
financial system. the best of both worlds. To ensure a long-term focus by any
type of financial institution on rural areas, both rural and urban
We also want to stress the importance of farmer segmentation clients should be represented in their corporate governance.
for the development of sustainable agricultural finance
solutions. The reason is that only a small group of commercial Over many decades, Rabobank has gained valuable insights,
farmers has direct access to financial services from formal experience and knowledge about rural finance solutions via
banks, while most farmers still belong to the group of Rabo Development and Rabobank Foundation. Though
subsistence farmers lacking sufficient repayment capacity for Rabobank started as a number of small credit co-operatives in
bank loans. The group between the subsistence farmers and the Netherlands more than a century ago, we certainly do not
the commercial farmers consists of farmers with small cash see the establishment of co-operative financial institutions as a
crops (for example, coffee, cotton, or cocoa) with a low annual holy grail to overcome all problems in rural finance. In quite
marketable surplus and so-called ‘emergent’ farmers. This last some countries, a co-operative business model or structure
group have the potential to evolve into commercial farmers, does not work and other ways to go forward are much more
but they first have to overcome shortcomings in both their appropriate. That is why we see various ways to develop rural
financing and farm-management expertise. Rabobank thinks finance, where the suitability and applicability of each
that these hurdles could be overcome by establishing solid alternative depends on many features of the country in
marketing or producer co-operatives with significant question. The main message is that there is no universal recipe.
bargaining power, a joint marketing approach and credible It is wrong to rule out any particular type of financial institution.
zero loss and capitalisation policies. If these conditions are met, It is also unwise to think in rigid structures and to continue
individual members of these co-operatives would not have to dogmatically with a chosen option if this does not seem to
look independently for expensive loans or credit from money work after a while. Flexibility and creativity are needed.
lenders, middle-men and other informal lenders. The producer
co-operative can play a crucial role in facilitating this activity, * Source: Rabobank (2012), ‘F&A Cooperatives and Rural Financial Development in
achieving a better financial outcome for individual members. Emerging and Developing Countries: Great Opportunities and Surmountable
Difficulties’.
42 | Framework for an Inclusive Food Strategy

6 Synthesis: framework for an

inclusive food strategy
6.1 Recapitulation of findings however, food challenge can only be met if environmental
sustainability and social responsibility are integrated in business
This study35 aims to address a number of questions that are considered models for value chains.
vital for shaping new food sourcing strategies and the identification of - Full use of this potential will not be possible unless smallholders are
new opportunities for increased food production, with a focus on linked to markets in a way that boosts farm income, facilitates farm
smallholder inclusion in the value chain. The challenge is how to link investments and strengthens entrepreneurial initiative in the sector.
smallholder farmers to markets and integrate them into value chains, This issue was analysed in Chapter 3 in the framework of local and
and how to do so in a cost-effective manner. Producers’ organisations global value chain development.
and co-operatives are identified as crucial instruments to address the - A second major precondition is an effective process of capacity
obstacles observed, to facilitate the process of value chain development of small farmers in a business-like approach. It was
development as well as smallholder finance. concluded in Chapter 4 that this which will not be possible in a cost-
effective manner unless it is done through producers’ organisations
The key elements of this study are: and farmer co-operatives.
- Identification of new (market) opportunities for increased food - The third essential component in the strategy is the facilitation of
production. In Chapter 2 the strategic position of smallholders as effective smallholder finance. In Chapter 5 it was concluded that
potential food source was highlighted. there is scope for smallholder finance by exploiting the opportunities
Small-scale agriculture is the dominant agricultural system in of effective farmer organisation (including co-operatives) and the
developing regions, on which local communities depend for their merits of value chain finance methodology.
food security. It will become increasingly indispensable as a reliable The synthesis of the four components of this study is a conceptual
food source and a driver of the rural economy, as the world is facing framework for an inclusive food strategy, consisting of a set of
resource scarcity (land, water) and greater price volatility. Integrating fundamentals and interventions. Stakeholders of the food value chain
them into value chains offers downstream agribusiness companies could incorporate this framework into their sourcing strategies to
an opportunity to strengthen their long-term sourcing strategies in a include smallholders (Chapter 6).
globalising market. Moreover, increasing food production by existing
smallholders will reduce the demand for new land including water 6.2 Framework for an inclusive food strategy
use. The result is less deforestation and land use changes, thus
mitigating climate change through lower GHG emissions. The Resolving the current and future imbalances in food supply is virtually
development of smallholder agriculture can be a ‘win-win’ impossible without tapping into the underused agricultural production
proposition, benefiting the livelihood of millions of farmers, potentials of small-scale farms at the bottom of the pyramid.
improving food security and nutrition, vitalising rural non-farm Obstacles to link smallholders to markets and to integrate them into
economies and aiding poverty reduction. For saving the planet, value chains do exist. Small farms face major disadvantages with
respect to accessing modern market supply chains. These
disadvantages include low volumes of produce to sell, variable quality,
high transaction costs, poor market infrastructure and limited ability to
35 The release of this study is timed to coincide with the UN International Year of meet the high credence requirements of many high value outlets. This
Co-operatives 2012 and is a follow-up to the previous Rabobank studies: ‘Sustainability stands in sharp contrast to conventional business drivers of food
and Security of the Global Food Supply Chain’ and ‘Rethinking the F&A Supply Chain, supply, such as stringent product standards for quality and consistency,
Impact of Agriculture Price Volatility on Sourcing’, which were presented at the IMF/WB economies of scale, global sourcing and competition. Bridging these
annual meeting in October 2010 and September 2011 respectively. two worlds is a precondition for smallholder inclusion into value chains.
 | 43

Based upon the findings of this study a framework consisting of a few Help strengthening of producers’ co-operatives and POs: Effective
fundamentals and interventions for generating an inclusive corporate inclusion of small-scale farmers, and strengthening of their farming
food strategy can be identified. This may help stakeholders along the systems is inconceivable without farmer organisation. Chain actors can
supply chain to shape inclusive business models, thus making play a conducive role if the farmers’ organisation is able to communicate
themselves ‘part of the solution’ for one of the most pressing global market requirements to their members and enforce supply contracts.
issues in decades to come. The good news is that a growing number of Seek PPP for transformation and investments: A shared holistic
stakeholders around the world are considering a more holistic development view, a concrete investment plan and long-term
approach that meets the challenge of food security and sustainable commitment of private and public stakeholders are basic requirements
management of resources within a framework of inclusive business for the transformation of smallholder agriculture.
models. The question is: ‘How to make the difference?’ Engage in B2B Coaching: The private sector can play an invaluable role
in linking farmers to markets and integrating them into value chains by
Fundamentals of an inclusive food strategy (see figure 6.2.1) offering farm services and technical assistance required for production
Chain actors and MNEs can make a big difference, when they succeed improvements and growth. Business-to-business coaching provides a
to adapt a number of elements to their sourcing strategies and uniquely cost-effective approach to farm extension, making agriculture
business model. The following key elements may be considered for a more viable opportunity as chain partners have the intimate
shaping an inclusive food resource strategy: knowledge of products and markets required to create more value and
Take leadership in the value chain: A clear market demand and value rewarding opportunities.
proposition for customers are the key drivers of an inclusive food Ensure environmental sustainability: Agricultural practices should be
strategy. A multi-stakeholder partnership and leadership within the environmentally sustainable. The challenge is: agriculture must produce
supply chain are needed to overcome challenges to link smallholders more food with less resources, have less impact on biodiversity,
to markets and to integrate them into value chain. produce less GHG emission and meet the C2C concept.
Ensure farm value creation: Conventional business models can be To achieve these goals it is crucial that local agricultural systems
‘upgraded’ to share value and risks more equitable and fairly along the comply with local environmental sustainability requirements. Moreover,
value chain. Smallholders must be able to support and feed their food losses and waste must also be addressed in this approach. This
families and make investments in their farming businesses for growth. requires improved environmental awareness throughout the chain,
According to this approach smallholder farming needs to become a from farmers to end consumers. In addition, this approach requires
self-propelling business. chain partners to be frontrunners.

Figure 6.2.1: Fundamentals for an inclusive food strategy Figure 6.2.2: Interventions for an inclusive food strategy

Leadership in Value chain

the value chain mapping

Agenda for
Farm value enabling Business
Food security creation environment investments

Fundamentals Interventions
inclusive food inclusive
Strenthen Promotion food
strategy
Environmental farmer investments strategy Access to
sustainability co-operatives in physical farm services
& POs infrastructure

PPP for Value chain Horizontal

B2B coaching transformation finance linkagages

Source: Rabobank/ERD Source: Rabobank/ERD

44 | Framework for an Inclusive Food Strategy

Balanced food security: Local and global food security must be in these gains will require an exceptional level of collaboration among
concert. In this view exploitation of local and global food supply stakeholders in the agricultural value chain, including governments,
systems must be in balance. companies and civil society organisations, farmers and consumers.

Interventions of an inclusive food strategy (see figure 6.2.2 on page 43) 3. To ensure long-term success, the transformation of smallholder
In order to maximise their impact, chain actors may consider to build agriculture should be based on a holistic approach. Interrelations
one or more interventions into their sourcing strategy. and impacts at local and global level, and between the farm and
Value chain mapping: Successful long-term partnerships are based on non-farm sector must be taken into account.
a good understanding of the food chain concerned. A basic food value
chain map36 should answer questions such as: What is the structure in 4. Effective producers’ organisations are a conducive pathway for
this value chain? Who are the key players, and what is the current role smallholder inclusion, since interventions aimed at smallholder
of smallholder farmers? How do products and services reach transformation can be performed more efficiently. Solid long-term
intermediary markets (farmers, traders, processors, retailers) and what supply arrangements are not conceivable unless they guarantee a
channels are available to reach end markets? competitive reward for producers in value chains, based upon fair
Help facilitate farm business investments and attract investments in terms of trade and a long-term collaboration perspective.
agriculture: Farm business investments improve productivity and
product quality, and lower production costs. 5. Co-operatives have proven to be historically the most successful
Create access to affordable farm services: Access to farm inputs and institutional mode of producer organisation, and they still are, even
affordable financial services reduce production costs and improve under conditions of competitive markets and globalisation. Small
productivity. This also includes improved access to land (land tenure farmers are risk averse, in view of their limited capabilities to absorb
system), water and energy in particular for smallholders. shocks. Co-operatives offer unique possibilities to mitigate risks
Facilitate horizontal integration and institutional infrastructure: associated with farming and their links to the food value chain (thus
Producers’ organisations can reduce marketing risk, improve product facilitating external finance).
quality, lower transaction costs and increase bargaining power.
Facilitate value chain finance: Use a valuable chain approach to 6. A value chain approach offers good opportunities for inclusion of
mitigate risk and facilitate access to financial services for smallholders smallholders, as a pathway for symbiotic partnerships within a long-
and other chain actors. term perspective, for mitigation of finance risks, and thus, for access
Seek to promote investment in physical infrastructure: Physical to finance by smallholders.
infrastructure required to connect smallholders more effectively to
markets, such as road, ports, terminal, power grids and IT 7. Corporate business in the agrifood industry increasingly target
communication and information. Investments in storage, transport and smallholder farmers, especially those that have been able to organise
processing facilities, and in sustainable water and energy supply and themselves and attune their mode of working (farming) to the needs
management reduce food losses and secure sourcing schemes. of the market. A new vision for corporate responsibility in the global
Help shape an enabling environment: The private sector should food supply chain is emerging with target setting for rural economic
actively participate in advocating the creation of an enabling growth, food security and environmental sustainability.
environment, including regulations to facilitate land ownership rights
(title deeds) as well as investment in smallholder agriculture and 8. Existing sourcing practices in the F&A sector can well be made
downstream sections of the value chain. This should also facilitate the consistent with an inclusive food strategy, provided a number of
embedding of interventions in a sound regional and sectorial fundamentals (basic criteria) for inclusiveness and appropriate
development agenda. interventions are embedded in the sourcing strategies and business
models.
6.3 Concluding remarks

1. The dynamics of food markets is shifting towards producers, thus

creating a conducive climate for inclusion of smallholders. Various
routes exist to increase food production: improving yield per hectare,
cropping intensification, reducing post-harvest losses, storage and
transport losses, improving irrigation technology and reversing land
degradation.

2. Smallholders form the largest underexploited potential in global

agriculture, especially in Asia, Africa and Latin America. Transforming
the smallholder sector requires a massive effort in terms of technical
assistance, market linkages, farm investment and finance. Realising

36 Value chain analysis - FAO, 2006

 | 45

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 | 47

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48 | Framework for an Inclusive Food Strategy

Rabobank Group global presence

Rabobank Group
(47 countries**)
Argentina Japan
Australia Luxembourg
Austria Malaysia
Bahrain Mauritius
Belgium Mexico
Brazil New Zealand
Canada Norway
Cayman Island Poland
Chile Portugal
China Romania
Curaçao Russia
Czech Republic Singapore
Denmark South Korea
Rabobank Foundation
Finland Spain
(25 countries)
France St. Maarten
Germany Sweden Bolivia Mexico
Guernsey Switzerland Brazil Mozambique
Hungary Taiwan Cambodia Nicaragua
India The Netherlands Colombia Peru
Indonesia Turkey Ecuador Phillipines
Ireland United Kingdom Ethiopia Rwanda
Italy United States Ghana Senegal
India Sri Lanka
Indonesia Tanzania
Rabobank International
Ivory Coast The Netherlands
(30 countries)
Kenya Uganda
Argentina Japan Laos Vietnam
Australia Luxembourg Mali
Belgium Malaysia
Brazil Mauritius
Rabo Development
Canada Mexico
(15 countries)
Cayman Islands New Zealand
Chile Poland Brazil* Phillipines
China Russia China* South Africa
Curaçao Singapore Ethiopia Rwanda*
France Spain Ghana Tanzania*
Germany St. Maarten India Vietnam
India The Netherlands Ivory Coast Zambia*
Indonesia Turkey Mozambique*
Ireland United Kingdom Paraguay*
Italy United States Peru *) Partnerbank

Situation at 30 June 2012

 | 49

Global presence Rabobank Group

Operating Rabobank and its subsidiaries (including Sarasin**), Rabobank Group
has a presence in 47 countries, including the Netherlands. Rabobank International
has a presence in 30 countries, boasting 655 foreign places of business.
In addition, Rabo Development has non-controlling interests in seven partner
banks and several advisory projects. Finally, Rabobank Foundation supports
projects in 25 countries. The countries in which Rabobank holds non-controlling
interests or is involved in projects have been disregarded in the list of 47 countries
of Rabobank Group.

For more information on Rabobank International branches and offices, including

address and contact details, please visit www.rabobank.com.

**) The sale of Sarasin was completed in July 2012. Rabobank Group has no longer had a presence in
Oman, Qatar and the United Arab Emirates since July as a result.
50 | Framework for an Inclusive Food Strategy

Colophon
The report ‘Framework for an Inclusive Food Strategy. Co-operatives Contact address
- a key for Smallholder Inclusion into Value Chains’ is a joint publication Rabobank Nederland
of the Economic Research Department and Directorate Co-operative Economic Research Department
and Sustainable Business of Rabobank Nederland. The launch of the Postbus 17100, 3500 HG Utrecht, the Netherlands
report coincides with the UN International Year of the Co-operatives
2012, which aims to highlight the contribution of co-operatives to Art direction and design
building a better world. Borghouts Design, Haarlem, the Netherlands

Author Copyright
August R. Sjauw-Koen-Fa ([email protected]), Senior Economist No part of this publication may be reproduced in any form, by print,
of the Economic Research Department of Rabobank Nederland. photo print, microfilm or any other means without written permission
of Rabobank.
The author wishes to acknowledge the support and contribution of
Joost de La Rive Box, independent micro and small enterprise financing Disclaimer
and development expert. He would also like to thank Dirk Duijzer, Neither Rabobank nor other legal entities in the group to which it
Wim Boonstra, Pierre van Hedel, Ben Valk, Elise van Driel, Marian van belongs, accept any liability whatsoever for any direct or consequential
Veenendaal, Roy Haan, Michael de Groot, Theo Timmermans, Bouke loss arising from any use of this document or its content or otherwise
de Vries and the late Gerard van der Heiden. A special word of thanks arising in connection with this document.
is extended to the reviewers: Bärbel Weiligman, Ruud Huirne,
Gilles Bouwmeester, Gerard van Empel, Carl van der Hamsvoort, Date
Rudy Rabbinge and Louise Fresco for their comments. October 2012
Co-operatives - a Key for Smallholder Inclusion into Value Chains

Framework for an Inclusive

Food Strategy
Rabobank Group