Bringing Smallholders into The Global Market
Investing in smallholders has the most immediate impact on poverty reduction and employment in Africa, but how can larger businesses bring smallholder development into their business models?
Smallholder farmers produce the majority of Africa’s food, and the sector as a whole is responsible for the greatest number of jobs in the continent by far. At the same time, they carry the greatest burdens, often lacking access to skills, training, inputs and finance. As most are also dependent on rain-fed agriculture, they are vulnerable to climate change. Individual shocks—sudden expenses, failed crops or sickness—can very quickly send smallholders into a cycle of poverty that can be hard to break. Because of the sheer number of smallholder farmers in Africa, even marginal improvements in their fortunes can have massive development impacts. Research from the World Bank shows that growth in agriculture is on average twice as effective in reducing poverty as any other sector.
Development institutions and government bodies are increasingly trying to rethink their approach to smallholders, who have historically been seen as a development challenge, rather than an opportunity for economic growth and job creation. Instead, many institutions are now viewing smallholders as entrepreneurs and trying to fix their challenges of finance and access to markets.
As Don Seville, Co-Director at the Sustainable Food Laboratory, says, the history of agricultural development has generally shown that smallholders gradually consolidate for efficiency.
“When you look at the livelihood conditions of a coffee farmer with half a hectare, or a tea farmer working on half an acre, it’s really hard to see how they make a living and professionalise,” Seville says. “I think a lot of people look at that and say, in the long term it’s hard to imagine how you make a living on anything less than five or ten hectares of production.”
Industry and development actors have, however, come to terms with the reality that smallholders have few other choices.
“It’s not like there’s great jobs for people to leave agriculture for. So… our job right now is to help everybody who wants to be a farmer to improve things to get to the level of commercial profitability and reliability to improve things,” Seville says “It may not be enough that their kids want to continue farming, so we might see consolidation in the next generation. But for now, we have a landscape where we have a lot of small scale farmers where poverty and food security are acute, so let’s just focus on making improvements where we can.”
As a recent study by Bain & Company and Acumen shows, smallholders are often slow to adopt technologies and innovations that could dramatically improve their yields, and hence their livelihoods. Cereal yields in sub-Saharan Africa are around half the global average, while fertiliser use per hectare is around 10 per cent of the global average. Adoption of advanced inputs, seeds and techniques is also slow.
Bain profiled firms that have successfully driven technological and commercial transformation in smallholder farmers, including Juhudi Kilimo, Sidai and the One Acre Fund in East Africa and the Global Agri-Development Company in Ghana, and determined that “four A’s” determine whether or not smallholders will adopt new technology—awareness, advantage, affordability and access. Farmers need to know about a product, see clearly how it will benefit their business, and be able to get hold of it cheaply and reliably.
“We are really finding common challenges that [companies] face operating in this environment of smallholder agriculture. They are targeting and dealing with a customer segment that is arguably the most challenging customer segment ever. They have very low purchasing power — less than $4 per day. Some living under $2.5 per day,” says Vikki Tan, head of Bain’s global development practice.
“This is often in environments where [farmers] have been doing the same thing for generations, so these things truly are new to them, and they have to change their behaviours to do something new.” Added to that are the infrastructure challenges of doing business in remote rural areas, which add cost and make it hard to scale interventions and commercial services for smallholders. “There is a real lack of proven business models in an environment that is obviously one of the most complex to operate in,” Tan says.
Although the successful companies that they studied occupy different roles along the value chain, from inputs to marketing, aggregation and finance, all demonstrated a certain mindset in dealing with smallholders, says Sasha Dichter, head of innovation at Acumen.
“What is extremely important is the type of interaction, and talking to the farmer as a customer,” he says. “What is common among the firms is not the form that they take, but the ones that were most successful, even the ones that weren't exactly using this language, they were using these ‘four A’s' in how they were communicating the value to customers, and they are building repeatable models.”
Both Dichter and Tan believe that a vital factor in scaling these successful social enterprises will be linking into the supply chains of the major multinationals.
“We are seeing an increasing number of global corporations who are much more serious about their supply chains and the business imperative of really getting them right, and really integrating smallholder farmers,” Dichter says. “We’re seeing a lot more proactivity on their part, and nuance in terms of their understanding of what it takes to make it work, and realising that it's not easy.”
However, he adds, it is important to remember that there are many farmers who are unlikely to be able to link into supply chains in the near future, and will continue to work at a very local or subsistence level.
“I think [linking with supply chains] would be a big part of the endgame, but it would be ignoring the people who have been ignored for too long, who are stuck on smaller and smaller parts of land,” he says. “here are ways for them to drastically increase their productivity and their income, and really to raise the tide for these economies if we can get this agricultural sector to be more productive.”
For multinationals, there are commercial and moral rationales for working with smallholders, Seville says. For companies that depend on consistency, quality and security of supply, there is a clear imperative to make sure that suppliers can continue to invest in their crops. There is, he says, a genuine short-term supply concern amongst, for example, chocolate makers, who face shortages if cocoa farmers can no longer make a living. There is also a reputation risk issue, as stories about child labour and unsustainable working conditions could harm brands.
“For the chocolate companies it was their concerns about child labour which drove them to begin to get engaged and to realise that you can’t regulate away child labour, because it’s driven by a poverty issue.”
From there, it was a short step to realising that they needed to think more holistically about their interactions with their supply chains. This is deepening their engagements, Seville says. Many are realising that simply increasing the amount of money that smallholders receive from a single cash crop is not enough to address the underlying issues of poverty.
“It’s not like we’ve solved how to make the value chains work better, but we are really realising that in many circumstances, for smallholders a single crop isn’t enough to break the cycle of poverty,” Seville says.
“There need to be diversified markets for farmers: local markets, regional markets, local crops. But there’s a limit to how much it makes sense for a cocoa company to invest in that. There’s a limit to how much they can justify. There’s an opportunity now for people to do more partnerships with local government, with other buyers, which more look at the farm from a holistic perspective, and to look at some of the infrastructural investments in transportation, etc, which are needed to bring farmers out of poverty.”