A common fear is that, when smallholder farms become part of companies’ value chains, their food security may be compromised. If the harvest fails or the buyer steps back, the argument goes, the farmers will have worked in vain and their families will be worse off.
Such risks are real, but there are opportunities too. Properly done, smallholdings’ inclusion in value chains offers good opportunities for fighting poverty and improving food security. Allowing poor farmers to take part in commercial business can give rise to new micro, small and mid-sized enterprises and generate employment.
Companies can – and should – source various crops as well as fish and livestock from smallholders. At the same time, they can help the farms to boost their output by providing inputs such as seed, feed or fertiliser or facilitating access to irrigation systems or machinery. Commissioned by GIZ on behalf o Germany’s Federal Ministry for Economic Cooperation and Development (BMZ) we co-authored a guide on the matter. It was published by GIZ in November 2012. This essay is based on the case studies and expert interviews it contains.
In order to do successful business with smallholders, corporate managers need to understand their livelihoods. Smallholders face many risks, including bad weather, pests, diseases and volatile prices. At the same time, they usually lack access to crop insurance and other up-to-date instruments for managing risks.
In times of crisis, smallholder families can only rely on their savings, sell their meagre assets or borrow money. Since a single shock can throw entire families into destitution, they tend to avoid risks and try to diversify their business. Therefore, they typically grow crops, raise animals and often collect forest produce too. Moreover, they tend to rely on a broad variety of crops and have a preference for traditional land races that do not yield much. The advantages, however, are that these plants require little input and fit both the local climate and regional food habits.
By definition, smallholder farms are mostly small. If poor rural people own land at all, they often have only a few hectares and animals. Smallholders typically practice a mix of commercial and subsistence farming. Staple crops and vegetables are grown for personal consumption on some plots, while other plots are used to produce goods for regional markets.
Basically, the families do all the work themselves, and all family members are involved. They also work as day labourers, run small shops or do handicrafts. It is quite common, moreover, for some family members to migrate to urban areas in search of work in seasons when they are not needed on the farm.
For good reason, smallholders tend to be conservative and risk-averse in their economic activities. Even when prices for export goods are high, they are likely to keep growing subsistence crops because they neither have the necessary information nor do they trust the volatile world market, because they do not know how to meet corporate standards, or because they shy away from investing in certification measures. The point is that smallholders cannot afford to simply maximise profits, their main concern is to manage risks with the little means they have at their disposal.
If managers take these things into account, they can design value chains that benefit all partners involved. There are convincing examples of business interests and food security being made mutually re-enforcing.
Some 20 million people in sub-Saharan Africa depend on cotton farming directly or indirectly. For a long time, however, the international textiles industry hardly sourced this important commodity from Africa. The main reasons were low productivity as well as poor and ineffective marketing and distribution systems.
COMPACI is making a difference (see D+C/E+Z 2011/12, p. 472 f.). This initiative is funded by the Bill & Melinda Gates Foundation and Germany’s Federal Ministry for Economic Cooperation and Development (BMZ). It involves private-sector companies as well as civil society organisations. COMPACI aims to boost the competitiveness of African cotton production and improve the livelihoods of smallholder farmers in Benin, Burkina Faso, Cote d’Ivoire, Malawi, Mozambique and Zambia. The objective is to increase smallholders’ income by 45 % and local food production by 15 %.
COMPACI teaches smallholders sustainable agricultural practices, including the selective and safe use of pesticides or the application of organic fertiliser, for instance. Crop rotation, which is about growing different crops on the same land in different seasons to enhance a field’s fertility, is taught too. Moreover, smallholders are supported with microcredit for investments (including for livestock).
A related initiative is run by the Aid for Trade Foundation. It owns the CmiA label. The letters stand for “Cotton made in Africa”. Only cotton that is produced according to strict criteria for environmental, economic and social sustainability is marketed with this label. The Foundation guarantees the certification of all criteria. It cooperates with various partners including retailers (such as Otto Group, Rewe and Tchibo), fashion brands (such as Tom Tailor, Puma, S’Oliver) and non-governmental organisations (such as the World Wildlife Fund (WWF), Welthungerhilfe and NABU, an environmental group in Germany). Obviously, the Foundation cooperates with African cotton producers and traders too.
CmiA license fees are reinvested in COMPACI. So far, more than 450,000 smallholders have been taught up-to-date skills. In the six African countries concerned, 320,000 smallholders have increased their income by up to 40 %. Expansion to other countries is under consideration.
Jain Irrigation Systems
Jain Irrigation Systems Ltd. (JISL) is an Indian company that sells micro-irrigation systems to smallholders. The management of JISL understands that clients can only afford micro-irrigation systems if the investments raise their productivity and if they get access to reliable marketing channels. Accordingly, the company’s approach to doing business with its specific target group is three-pronged and covers the entire value chain:
- JISL provides customers with equipment, technical advice and relevant input such as seed and fertiliser.
- The company offers training in productivity matters as well as credit to facilitate the purchase of relevant inputs.
- It buys the fruits and vegetables that its clients grow and processes them into food products for marketing purposes.
Thanks to JISL, many farmers have boosted their production. Net incomes have risen by as much as $ 1,000 per acre, depending on the crop. At the same time, irrigation can contribute to increasing the yields of the subsistence farming which they do too. A smallholder’s investment in a JISL micro-irrigation system normally pays off within a year. For farms with less than five hectares of land, the Indian government subsidises the investment.
CleanStar Mozambique (CSM) is a joint venture of the Danish biotech company Novozymes and the New York-based venture-capital firm CleanStar.
CSM helps smallholders to practice environmentally friendly and even restorative agroforestry where environmental damage has already been done. The system involves a mix of multi-purpose crops and trees, including cassava. Since smallholders typically lack access to high-quality seed and other commercial input markets, CSM supports them in this respect. The farmers normally have limited knowledge of sustainable techniques for avoiding soil depletion and deforestation, so CSM provides specific training. As the farmers typically do not have access to markets, CSM buys their produce, processes the food and markets it. Good prices ensure that farmers keep expanding their business. Of course, the families consume some of the food they produce themselves.
CSM has set up processing factories near smallholder communities, and organises the transport of goods. The company sells processed products like high-quality fortified cassava flour, soybean meal for animal feed and ethanol-based cooking fuel to low-income consumers in urban areas.
As the three examples show, inclusive business models offer opportunities to all parties involved. Intelligent supply-chain design and management can contribute to food security, both by boosting incomes and by increasing availability of food.
There are more opportunities for improving nutrition of course. For example, companies can contract smallholders to grow especially nutritious crops, such as the bio-fortified orange-fleshed sweet potato, and bring them to market. Other options are to process by-products, crop rotation with legumes or combining fish and rice farming. Finally, companies can integrate information about health and nutrition in the training of smallholders and they can support access to sanitation, clean water and health care.
Establishing inclusive, pro-poor value chains requires determination. The local specifics and constraints must be assessed diligently. There must be benefits for all parties. Strengthening smallholders’ voice and capacities is a prerequisite for making business relations durable and equitable. Continuous monitoring and the periodic evaluation of business results are useful too. It will help to understand the benefits and how they are being shared, and it will contribute to further develop the scheme
Christina Gradl is managing director of Endeva, an independent research institute specialising in business and development issues. She would like to thank Juliane Schmidt at Endeva, Christina Kükenshöner and Christiane Ströh de Martínez at the development consultancy joyn-coop and Till Rockenbauch and Diana Hollmann at GIZ for their contributions to this essay.