Building Empowering Value Chains Integrating

Building Empowering Value Chains: Integrating Smallholders into the New Opportunities in Agriculture IFAD and WB Presentation to ECOSOC High Level Segment Thematic Debate on Rural Development 3 July 2008 Key Messages       The context for agriculture is changing rapidly New opportunities have emerged for smallholders Several key constraints limit realizing these opportunities Innovations in both public and private actions are needed to overcome these constraints There are a number of good examples which can be expanded and scaled up We must ensure that those smallholder families who will not integrate or will do so slowly are not forgetten I. Rapidly Changing Food Markets Create New Opportunities High food prices provide an opportunity for producers Nominal Grain prices 1998-2008 Nominal Price $US/ton 700 600 500 400 300 200 100 0 19 98 20 00 20 02 20 04 20 06 20 08 Rice (a) Thai 5% brokens FOB BKK Fob BKK Wheat (b) Canadian No1 Western Red Fob Thunder Bay Corn (c) US No. 2 Yellow Fob Gulf Ports Food demand is changing Kcal consumption/capita/day (1981=100) 250 200 150 100 50 0 1981 1984 1987 1990 1993 1996 1999 2002 Developing Country Consumption Meat Horticulture Cereals Developing country exports 350 Value of exports (1980=100) 300 250 200 150 100 50 0 1980 1990 Horticulture Meat Cereals 2000 2004 Supply chains are increasingly integrated… 70 60 50 40 30 20 10 0 China Indonesia Philippines Thailand Share of supermarkets in total food sales Annual growth rate in supermarket outlets • Supermarkets are rapidly dominating food sales worldwide • Supermarket supply chains require high levels of coordination between producers, processors and marketing •Supermarkets are also targeting the poor, selling cheap food and expanding to relatively small cities •Foreign investors are often critical to knowledge transfer …but smallholder sourcing adds retail value Increasing demand for environmental services from agriculture Agriculture is also critical to climate change in developing countries New technology is “democratizing” information access    Mobile technology lowers the hurdle for joining the networks Many developing countries are closing the technology gap Smaller businesses are able to gain benefits of scale in information access II. Smallholder Sector and Empowering Value Chains The Smallholder Sector – Why Care?       3/4 of the world’s poor live in rural areas Over 450 million farms are less than 2 has Almost 1/3 of world’s population depend on smallholder farming Agricultural growth is at least twice as effective in reducing poverty as non-agricultural growth For the majority of crops, smallholders are more efficient producers Smallholder agriculture systems, particularly the commercial aspects, are increasingly managed by women Empowering Value Chains  Allow smallholders to seize new opportunities in agriculture by:      Increase producer knowledge of market demand and pricing Increase investments from farmers and the other private sector Increase access of smallholders to knowledge, finance, inputs and technology Reduce transactions costs of the producerprocessor/marketing interface Increase the share of value added captured by primary producers Empowering Value Chains: Examples      Ghana “grains partnership” between smallholders and private actors (input suppliers, produce buyers) to boost farm-level productivity and secure transactions (maize) Sao Tome and Principe organic cocoa schemes contributed to more than doubling the income to smallholder farmers Yulin watermelons (China): Direct marketing to wholesalers, supermarkets and retailers increased selling price from 1.2 to 3.0 yuan per kilogram and its farmed area from less than a ha to several thousand NorminVeggies (Philippines): Supplies vegetables to fast food, supermarkets and processors. Monthly sales were 80 tons in 2006. Konzum Supermarket (Croatia): Helped small farmerpreferred suppliers to use contracts as collateral with local banks to investment in greenhouses and irrigation III. Why aren’t more empowering value chains emerging? Investment climate limits quantity and quality of agricultural investment Days to Start a Business 80 70 60 50 40 30 20 10 0 EAP ECA LAC MENA OECD SA SSA Days for Export Process 40 35 30 25 20 15 10 5 0 EAP ECA LAC MENA OECD SA SSA •Poor business climate attracts “extractive” investors and limits development of modern marketing systems •Particular problem for countries with small internal markets Marketing Systems are Inefficient • Large number of intermediaries increases costs, risks and losses Property Rights Need to Work for the Poor 0.05 Vietnam 0.04 Avg annual agric. growth 1990-2002 0.03 India Phillipines 0.02 Venezuela 0.01 Thailand Indonesia Rep of Korea 0 -0.01 Columbia -0.02 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 Share of holdings < 3 ha • smallholder advantages depend, in large part, on tenure security as incentive for farmer to invest Limited Access to finance • Credit constrained use less inputs and earn lower incomes • Credit constraint is often associated with risk rationing as well Under-investment in agriculture and rural infrastructure 60 50 40 30 20 10 0 1980 1990 Africa Asia 2000 Latin America 2002 • Agriculture and rural infrastructure’s share of public expenditures have declined significantly Need to improve efficiency of investment in rural development China India Thailand Vietnam Uganda Ranking of Returns to Agricultural Production Agriculture R&D 1 1 1 Irrigation 5 4 5 Education 2 3 3 Roads 3 2 4 Telecommunications 4 Electricity 6 8 2 Health 7 Soil and Water Conservation 6 Anti-Poverty Programs 5 Ranking of Returns in Poverty Reduction 2 2 2 6 7 5 1 3 4 3 1 3 5 4 8 1 6 5 7 4 1 4 3 2 1 3 2 4 Agriculture R&D Irrigation Education Roads Telecommunications Electricity Health Soil and Water Conservation Anti-Poverty Programs 3 4 1 2 1 3 2 4 Concentration in Agribusiness Sector   Concentration widens the spread between world and domestic prices – from 1974 to 1994 this more than doubled for wheat, rice and sugar Developing countries’ claim on value added declined from around 60% in 1970-72 to 28% in 1998-2000 Market share of four largest input suppliers 70 60 50 40 30 20 10 0 Agrochemicals Seeds 1997 2004 Biotech IV. The way forward Actions to Build Empowering Value Chains          Strong facilitation & strengthened legal framework to secure, build trust & reduce costs of transactions General business climate – business licensing, trade facilitation Strengthen land access and tenure security Develop rural financial and risk services Efficient input markets Rural infrastructure Quality, and Sanitary and Phytosanitary Standards Market information Producer organizations in order to help farmers engage on less skewed terms Bridging the Gap: New Role of the State Drivers Global flow of capital, technology and market access Dynamic Roles From financing investments to… Transparent, predictable investment climate Private sector dominates Input and output markets From supplying inputs and buying outputs to… Regulate input and output quality Including SPS Empower rural communities so investments and services respond to needs and farmers can engage private sector From centralized investment planning and service delivery to… Political and fiscal decentralization and supportive engagement with farmer organizations and other CSOs Improve coordination for service delivery and avoid duplicating regulations and red tape From agencies working in silos to… Mechanisms for inter-institutional coordination Bridging the Gap: New Role of the Private Sector Drivers Dynamic Roles Global sourcing brings political risks From vertical integration to… Diversified sources of product Demand for socially responsible production From focus on cutting supply costs to… Marketing smallholders Increasing importance of “new cultural markets” From uniform product characteristics to… Encouraging traditional varieties and product diversity Phytosanitary and quality are the new trade barriers From dependence on intermediaries to… Providing farmers with quality inputs and production technology Farmer associations are critical        Morogoro is Tanzania’s main sugar-producing region where the mills owned some large farms but could not adequately supply all their needs. The mills provided farmers with seed cane on credit and the services of tractors for land preparation. Workers from the mill would harvest the cane and take it for processing. These services were deducted from the amount paid to the farmers. The Millers Association, as a monopsony, had considerable power. Not surprisingly, for many years, the relationship between the growers and the sugar millers had been characterized by mistrust. The millers frequently violated their contracts and often delayed payment to the farmers for as long as six months. The Tanzanian Sugar Cane Growers Association (TASGA) emerged to represent smallholders averaging 1.4 ha each - initially had public sector help to organize farmers The ability of TASGA to negotiate effectively eliminated strikes and social unrest. However its importance was not just its role representing farmers. It also conducts various functions: (1) sourcing funds to provide loans to farmers; (2) offering training on improved cropping practices; and (3) promoting better environmental practices. TASGA has grown to include many thousands of farmers and now accounts for about 17,000 ha. of cropland. When the government discussed providing the sugar millers some 30,000 ha of land to grow sugarcane, it was recognized instead that it ought to go to the Association Important Caveat: Many smallholders will not be able to integrate or will do so slowly      Areas constrained agronomically (low rainfall) Areas constrained by market access (time to market) Need investments in rural roads, irrigation and other food security measures Need investments in education and health and active labor market policies Safety net programs such as public works Parting Message: Supporting Empowering Value Chains requires not just a new approach by smallholders and the market, but a significant change in the role and actions of the public sector and external public support  On behalf of IFAD and World Bank Thank you   www.worldbank.org/wdr2008 http://www.fao.org/docrep/010/a1200e/ a1200e00.htm