18 December 2012

Africa: Commercialising Smallholder Production

editorial

Smallholders can play a role in delivering food to meet growing demand, but a proactive business mindset will be needed to link producers to consumers

Smallholder farmers can play an important role in meeting growing food supply challenges. In fact, they already provide up to 80 percent of the food produced in sub-Saharan Africa. But there is a need for improved skills in financial management, marketing and business to turn agriculture from a subsistence or low-yield activity into a viable business proposition.

Across Africa, the Caribbean and the Pacific regions, product marketing is still largely informal, quantities supplied are not always consistent and a lack of access to credit is a perpetual problem. Add to this the problems of poor infrastructure, unproductive growing techniques and a lack of technology across many countries, and it is clear why so many smallholder producers are caught in a low-yield trap: less produce means less cash, which reduces their appetite to invest or take production risks.

Of course, smallholders are entrepreneurial; they depend for their livelihood on their own efforts. But they are also at the mercy of exogenous factors, be those weather, price changes or infrastructure. Farmers are risk-averse when it comes to adopting new technologies and techniques because they have no margin for error. However, efforts are being made to change that.

In Ethiopia, the Agricultural Transformation Agency has sought to demonstrate new technologies at farmer training centres; patches of land on which farmers are shown modern planting techniques and are able to practice on small comparison sites. This enables them to see first hand the effects of new methods before taking the gamble of trying the techniques on their own land.

"Using the services given by the development agencies, we are planting in a row with reduced seed rate and also using transplanting," says Engida Kelkile, an Ethiopian farmer of tef - a local cereal - in Debrezeit, a city in the Oromia region. Another farmer working in the same plot, Worko Mojo, says he called in to participate in the scheme of his own volition. "What I see here, I apply on my farmland," he says. Yield has increased two- to three-fold.

These smallholders argue their living conditions are improving, and that the gaps between rural and urban living standards are starting to narrow. "Even in the urban population, there are many people living below the level of farmers," says one agricultural extension officer. "We have a good house compared to urban people," another farmer adds.

Might these improvements help encourage young people to go into agriculture? It is a challenge, the farmers admit. "Our agriculture is labour-intensive; it needs you to work to the maximum, not like in offices. It is dirty work, you don't have a lot of machines," says Mr Kelkile. "Youngsters want clean work."

Mechanisation could change that. "If we use machinery and our agriculture is less labour-intensive, youngsters will come," he argues. "We will have to bring back the youngsters with a better way of working."

Across the continent in Sierra Leone, smallholders are also picking up skills in business and marketing via farmer-based organisations and agriculture business centres. These bodies provide support with inputs such as seeds and fertiliser and the opportunity to pool money together to purchase equipment and to sell produce in bulk. Leaders of the group receive business training, which they take back to the farm families in their local areas.

"We're learning methods on how to make a profit. We've learned how to do a SWOT analysis," says Saika Fornia, an ABC leader from the Kenema District in the eastern part of the country.

Consumer preferences

In some contexts, marketing knowledge is insufficient. While there is demand for milled rice in Sierra Leone, for example, it does not seem to be encouraging the private sector. "They don't process it because they don't know people want it, so it's a Catch-22," explains Francis Bereaa, regional manager for the African Foundation for Development in Sierra Leone (AFFORD-SL), a business-focused NGO.

In Ethiopia, marketing knowledge is growing. Around 75 percent of Ethiopian tef goes to market, with the rest consumed by the farmer and his or her family. Tef farmers are responsive to consumer preferences. Some have begun to prioritise growing white tef, for instance, for which demand is higher.

Further up the value chain, market preferences are also being recognised. Hailu Tessema is managing director of Mama Fresh Injera, which processes a traditional Ethiopian bread made from tef. The company's name signals its global ambitions. "We picked Mama Injera because we are thinking of an international market. All people call their mother 'mama'. It's easy to catch! And everyone loves his mama. So Mama Fresh Injera loves everyone," he laughs.

From the company's premises in Cherkos, an outskirt of Addis, Mama Fresh Injera supplies major hotel chains including the Sheraton and the Hilton. The company has seen marked export growth to the US, Sweden, Canada and Israel.

Established in 2003 as a micro enterprise, it is an encouraging example of the ability of actors in the value-added chain to move to scale. Today the company has 135 employees, mostly women, and had revenues of 16 million birr in 2011 ($881,439). The Ethiopian government assisted the company in its growth drive with a $200,000 award, part of the 'Ethiopian Competitive Facilitator' initiative. Mr Tessema proudly displays pictures in which he is bestowed with awards from Meles Zenawi, the former prime minister, and the mayor of Addis Ababa.

A well-managed workforce and organisational know-how are also critical to break into international markets.

"We put an office in each chiefdom, along with drying and fermentation facilities...almost everything needed to grow, process, bag, market, transport to Freetown and ship," says Medgar Brown, managing director of Balmed Holdings Ltd, an indigenous Sierra Leonean trading company that has morphed into a full-scale grower, processor and packager of cocoa, coffee, cashew nuts and most recently, pineapples.

Mr Brown notes that having all the processes close to the fields allows for the enhanced traceability needed for the various fair trade certifications, a key stamp for many developed market consumers.

But while some producers look to rich market exports, it is worth noting that a high growth rate in Africa, and other emerging areas, means producers can look to meet regional demand first. "The domestic market here in Ethiopia, especially with its growing population and changing tastes and demand from the urban centres, offers a huge opportunity for smallholder farmers," says Khalid Bomba, CEO of the Ethiopian Agricultural Transformation Agency. This is a helpful dynamic for the likes of landlocked Ethiopia, where many goods are exported by ship from Djibouti, a three day truck journey away.

That said, local and regional agricultural markets are often dysfunctional in Africa, affecting perishable produce, as well as inputs such as fertiliser. Farmers in Africa, and in landlocked countries especially, pay far higher prices for fertiliser than farmers in most other developing regions, pushing up other costs. In coastal Sierra Leone, high petrol and diesel costs - at about $5 a gallon ($1.05 per litre) - drive up the price of trade. One agribusiness group at Nongowa, for instance, sells a single 50-kilogram bag of fertiliser for 117,250 leones ($27), which includes a base cost of 87,000 leones ($20) and 2,500 leones (58 cents) for transporting each bag slightly under 200 miles from Freetown.

Employment

Stakeholders are also focusing on job creation via agri-processing, and some companies are achieving employment outcomes even in modest value-added activities. In one bean processing plant in Nazret, in the Oromia region of Ethiopia, the employment benefits of international value chains become apparent. In this business, which supplies the multinational company ACOS Italy, women sift and sort the beans, weeding out dust, grass, stones, and identifying beans that are off-colour, stained or of deficient quality while men operate the fumigators and lug the heavy sacks around the buildings.

For the female workers, pay is modest - around 600 birr ($33) a month - but they get free schooling for their children, subsidised food, medical insurance and a pension. In the canteen, where a television quietly hums in the corner, they pay 5 birr per meal, as compared to around 15 to 20 birr on the open market.

Back in Sierra Leone, Balmed Holdings, has an impressive employment impact. The company has developed a block farming system in which it leases land directly from local landowners and employs the local youth to tend to the crops on it. Sixty percent of the market price of cocoa is divided into thirds. The first third goes to the landowner, who doesn't have to do anything but allow the youth to care for the crops. The second third goes to pay the youth who toil the land and receive meals, adult literacy classes and business training from Balmed. The final third goes to the company to cover costs, as Balmed pays for processing, marketing and shipping. The company has planted 1,500 acres using this model and is looking to expand by another 1,000 annually going forward.

Partnerships

Partnerships will prove central if value chains are to be transformed. NGOs are emerging as key agents in supporting agricultural producers and are delivering business management services through coaching programmes. They can also be trail-blazers. "NGOs are well placed to try out new approaches and experiment and when their initiatives work they can be taken up by the private sector," says Larry Attipoe, a value chain specialist at SNV Netherlands.

Private sector players are providing business services too. Sustainable Management Services is one firm which conducts farmer training to improve yields. However, over time, the setup may need to evolve as a subsidy is still provided.

"We hope that we will get to the stage where farmers are willing to pay modest sums for the extension services," says Thomas Delbar, assistant manager at ECOM, a multinational that funds farmer training from its trading margins, and subsidises the activities of Sustainable Management Services. "Ultimately, there can be no free lunches."

Large companies also need to change how they look at the smallholders' place in the supply chain. Incorporating large numbers of dispersed producers without incurring high transaction costs is testing. However, as demand for food increases, businesses in the food and beverage sector are faced with the challenge of expanding their supply base.

Aware of constraints to land, water, growing seasons and productivity, more and more multinationals are forming synergies with smallholders, often through contract farming schemes which offer control over supply and quality, and reduce production and transaction costs. In some cases, smallholder-based production is rewarded by governments with excise tax breaks.

Brewers, which require large amounts of agricultural raw materials, are noteable in this space. In Africa, Diageo, the world's biggest drinks company by sales, sources about 50 percent of its raw materials locally - a 10 percent increase since 2007. It aims to increase local sourcing to 70 percent. Its competitor SABMiller, meanwhile, procures inputs including barley and sorghum directly from 20,000 smallholder farmers in Africa, and aims to increase local sourcing of raw materials to 50 percent over the next two years.

"Many of our smallholder farmers have previously been subsistence farmers and by creating market opportunities for subsistence farmers in our value chains, we are able to increase their productivity, allowing them to... generate an income for the first time," says Andy Wales, senior vice president of sustainable development at SABMiller.

The company pioneered the smallholder sourcing approach with the launch of Eagle Lager in 2002. Using locally grown sorghum instead of more expensive imported barley, Eagle Lager today accounts for over 30 percent of the market in Uganda and supports 9,000 smallholder farmers.

Last year SAB became the first brewer to produce commercial-scale beer from cassava. Named Impala lager and brewed in Mozambique, the venture created new employment for 1,500 smallholder farmers. "This has the potential to be developed in many other markets around Africa, where cassava is the most widely-grown, but least commercialised, crop," Mr Wales points out.

SABMiller's success will be dependent on its local value chains, he argues. "Beer is a local business and our success is inextricably linked to that of the communities in which we operate. So we work to build value chains that drive economic growth and stimulate social development. By doing this, we can generate long-term returns for our business while also creating wealth for our local communities."

Like its rival, Diageo is also building contract farming models that connect local smallholder farmers with large, dependable commercial markets. This year, the group has signed memorandums of understanding for a scalable barley farming project in Ethiopia and a sorghum value chain project in Tanzania.

Other companies have played a more controversial role. When Walmart announced its acquisition of South African retailer Massmart in 2010, concerns regarding the undercutting of local producers abounded. However, the US retail giant won regulatory approval of its $2.4bn deal in March 2012 with the consensus that there was value for South African suppliers in accessing a global supply chain for the first time.

Walmart is now introducing a direct farming project in South Africa. The scheme has been a success in India and other emerging markets, bringing more locally grown food into the group's supply chain, reducing input costs, and raising farmer profits, the group argues. Massmart aims to source 30 percent of its fresh produce from smallholders through the project, it says - a number that would require 1,500 farmers to be connected to the group's value chain by 2016.

It is not only consumer goods groups who are involved. Machinery makers are also eyeing opportunities on the continent. With only 10 percent of cropped land in Africa prepared by tractor, and only 4 percent of land irrigated, there are major openings. US-based Agco Corp., the world's third-largest farm equipment maker, is responding to this with plans to invest $100m in Africa over the next three years.

For many emerging regions, the Green Revolution has been elusive for decades. Working together, businesses, governments and agricultural producers across the Africa, the Caribbean and the Pacific could deliver the agricultural renaissance their populations need.

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