Creating Resilient Value Chains for Smallholder
Lead Authors: Gordon Conway, Imperial College London
Contributing Authors: Ousmane Badiane, Katrin Glatzel, International Food Policy Research Institute, Erik Chavez, Samrat Singh, Imperial College London
In this chapter, we first discuss the value of value chains and how they can benefit from resilience. We follow this with a detailed analysis of the risks and resilience of different components of the value chain. We conclude with a discussion of the business of resilience.
The Vulnerabilities of Smallholders
Eighty percent of African family farms are smallholdings, with a farm size of less than 2 hectares (IFAD, 2012). Most are subsistence farmers living a precarious existence: farm families are often large, one or two adults and several children of various ages. Often living in the compound of the home are grandparents and members of an extended family.
Inevitably, they are chronically hungry and the children under 5 years old lack essential micronutrients, such as vitamin A, iron and zinc. As a consequence, they grow up physically and mentally stunted. In sub-Saharan Africa (SSA), average stunting rates are often over 40% (Global Panel on Agriculture and Food Systems for Nutrition, 2016). This is a shocking statistic. The cost of undernutrition to African economies in terms of lost national productivity is estimated at 11% of gross domestic product (GDP) annually (IFPRI, 2016).
The Value of Value Chains
During the Green Revolution in Asia in the 1960s and 1970s, value was pushed from the base of the cereal value chain, deploying the new short-strawed wheat varieties. Now it is pulled from the top by urban demand that encompasses not only more staple food, but also a greater variety of foods, especially more nutritious foods.
As a result, African smallholders not only need to produce more efficiently, but also to contend with far more complex and competitive markets. Growing specialization, rapidly changing consumer preferences, and increasingly intricate technical specifications place significant demands on the average smallholder. Institutional and technical innovations, including better access to input and output markets, and enhancing rural–urban linkages constitute key components of future agricultural transformation strategies.
For smallholders, such as Lindiwe, a successful agricultural and livelihood transformation depends on the effective and inclusive integration of smallholder farmers in value chains. Such integration, up and down the value chain, can lead to:
- Increased accumulated productivity and value
- Increased diversity in the chain
- Reduced risks and greater resilience
The Dynamics of Resilience
Resilience, like sustainability, is one of those terms that means all things to all people (The Montpellier Panel, 2012). In the context of this report, resilience is the capacity of an agricultural value chain and its elements to withstand or recover from stresses and shocks and thus bounce back to the previous level of growth and development.
A stress can be defined as a regular, sometimes continuous, relatively small and predictable disturbance, for example the effect of growing soil salinity or lack of rainfall or indebtedness. Such stresses or chronic crises are directly damaging, but sometimes slowly culminate to cause a shock or acute crisis.
A shock is an irregular, relatively large and unpredictable disturbance, such as is caused by a rare drought or flood or a new pest outbreak, or when slow onset disasters pass their tipping points and become extreme events.Many stresses and shocks are interlinked, for example, energy and input price volatility, extreme weather events and climate change, growing scarcity of natural resources and poverty and inequality. Because African communities are becoming more densely populated and increasingly urbanized, value chains are increasingly more complex and fast moving. As a consequence, minor adverse events become amplified, and the threats are multiplying in frequency and scale.
Strengthening Resilience in Value Chains
Resilience can be strengthened in many different ways, and at different levels in the value chain, through political, economic, sociological or technological interventions. For example, drought can be countered by building irrigation systems, through agro-ecological technologies such as conservation farming and by breeding new crops or livestock that are tolerant of or resistant to drought. Resilience can also be strengthened through more open trade policies to facilitate trans-border access to food. Some approaches are expensive, some more affordable.
Risks and Resilience
Resilience and sustainability of the value chain depends on research and development at the base of the chain that focuses on the development of the innovative practices and technologies of sustainable intensification.
In simple terms, “agricultural intensification” results in greater amounts of output, whether of food produced, the income generated or the nutrition received by subsistence farmers themselves or consumers of farmers’ agricultural produce. Yet this will have to be met under conditions of decreasing amounts of available land area, reduced water availability, and a warming climate. Horizontal expansion of cropland through deforestation and conversion into agricultural land is undesirable, if we are to conserve biodiversity and reduce greenhouse gas emissions.
Financial crises Financial crises occur at different levels, from the global to the national to the individual household. Whatever the level, the consequences for smallholder livelihoods and food security can be severe.The global crisis from 2007 to 2008, triggered by a crisis in the US subprime mortgage market and developing into a full-blown international banking crisis, was considered to be the worst financial crisis since the Great Depression of the 1930s (Eichengreen & O’Rourke, 2009; Eigner & Umlauft, 2015; Pendery, 2009; Temin, 2010). Some developing countries that had seen strong economic growth saw significant slowdowns. For example, Kenya slowed from 7% in 2007 to only 3–4% growth in 2009 (Masha, 2010).
As a result, some 100 million people were added to the global list of chronically hungry and the crisis has had a continuing, damaging effect as grain prices have remained high.
Bank Crises Only a minority of African smallholders has access to the financial services that would enable them to purchase the inputs they need for profitable production. Unfortunately, the willingness of banks to provide credit to farmers has remained limited across SSA.
Moreover, they often require upfront cash collateral of 20–50% which acts as a disincentive for smallholder farmers. One solution, acting as a partial substitute for the collateral, is that a bank receives a guarantee against loan default repayment risk in exchange for a guarantee fee.
Nigeria was the first country in SSA to develop a Credit Guarantee Fund for the agriculture sector. The scheme, set up in 1977, is funded jointly by the central government and the Central Bank of Nigeria. It allows banks to recover up to 75% of the principal in case of default as well as the equivalent of the interest lost from defaulted loans. The operational costs of the Fund are covered by the interest. From 1997 to 2015, the proportion of Nigerian bank loans made to the agriculture increased from 0.7% to over 5% (Central Bank of Nigeria, 1990).
Even when loans are obtained, African farmers face a variety of risks. The most important is the loss of crops due to adverse weather events such as droughts or hail during crop growth. Such risks can be managed through different strategies ranging from risk avoidance, mitigation of risk, to the transfer of risk. A farmer can decide not to grow a crop in a given high risk area.
Reduction of drought risk can also be achieved through investment in irrigation infrastructure. However, when such investments are prohibitive or not physically possible, the transfer of risk through financial instruments such as insurance, derivatives or bonds can provide a useful solution that diminishes and smoothes the risk exposure of smallholder farmers and supply chain partners. Here, we focus on the different forms of agricultural insurance that can be deployed to reduce the risk of supply chain disruption.
Types of insurance
The act of purchasing insurance can be defined as agreeing to incur a small and quantifiable loss to prevent the effects of a large and disruptive loss. A risk is characterized as insurable if the premium paid is sufficiently small in comparison to the value of the asset insured. While a variety of agricultural risk transfer solutions are available across the supply chain, here we focus on the risk of crop production loss that farmers incur and is the first cause of supply chain disruption.
Examples of different forms of African crop loss insurance:
- Large-scale financing, Nigeria: A loan guarantee mechanism set up as a crop loss insurance that triggers a payout to banks in order to mitigate input loan default risk from smallholder farmers. As mentioned above, the share of loans to agriculture in Nigeria jumped from 0.7% to 5%, two years after the introduction of the programme in 2005.
- Malawi country level (Sadler & Mahul, 2011): In 2008–2009, Malawi was the first low income country to adopt a weather derivative instrument. Using a set of 23 weather stations managed by the national meteorological agency, a national “maize index” was designed to act as a proxy of national maize production driven by precipitation. It allowed the country to receive an immediate payout of up to US$4.4 million as soon as the index fell below 10% of its historical average. The World Bank acted as intermediary between the country and the international reinsurance market while the premium paid by the Malawi Government was financed by the UK Department for International Development
- Large scale insurance—Africa Risk Capacity Ltd (African Risk Capacity, 2016): This company developed an index insurance-based design to compensate governments in case of large-scale droughts. It was designed to quantify the loss in real time and enable the rapid disbursement of a payout so enabling governments to proceed to humanitarian relief actions in a timely fashion. It has been supported by the World Food Programme (WFP) and the African Union.
- Microfinancing—ACRE/Syngenta (Syngenta Founda-tion for Sustainable Agriculture, 2017): The Syngenta Foundation launched an index-based micro-insurance scheme in Kenya and Rwanda that has reached over 300,000 smallholder farmers. It was introduced by the Kilimo Salama programme as a form of credit enhance-ment mechanism to facilitate the purchase of inputs
Management The quality and amount of food that African farmers produce directly depends on the health and fertility of the soils on which they farm. But soils and land will degrade if they are not managed appropriately. Soil will erode through the action of wind and water and will lose its structure and nutrients; essential physical, chemical and biological processes will be damaged and fertility reduced. As a result, the productivity and quality of both natural vegetation and crops will be reduced and the livelihoods of farm households damaged.
Better soil management
Land degradation and soil fertility decline in Africa are deeply complex, with intertwining and cyclical causes. Without stemming the causes, farmers will continue to make the same choices, even at the expense of their future well-being. Thus, conventional means of soil management often cause more harm than good, while organic approaches are sometimes too demanding of labor, reliant on scarce or unavailable inputs and insuficient to produce the yields required to achieve local or global food security. The solution is to combine the best of organic and conventional approaches in a way that is environmentally appropriate and sustainable.
Integrated Pest Management
African farmers can sometimes wake up in the morning, walk to their fields and discover that their crops are almost totally destroyed, or their livestock are sick and dying. They may have lost the basis of their livelihood and be reduced to prolonged poverty and hunger. Such threats are numerous and ever-present.
The Nature of Climate Smart Agriculture
Governments, development agencies, the private sector and farmers need to increase the resilience of their agricultural systems to withstand, and to adapt to, climatic stresses and shocks. As with other risks there are no magic bullets and a truly resilient approach has to integrate a range of different technologies, tools, and processes. Central to this approach, known as climate smart agriculture (CSA), is that where possible and when tailored to specific agro-ecological zones and farming systems, adaptive actions can generate mitigation co-benefits (IPCC, 2014). In the face of intensifying climatic stresses and shocks, policies that both reduce the risks posed by climate change and enhance the resilience of the agriculture sector and farmer livelihoods are ever more important.
What can farmers do?
Farmers throughout Africa are already adapting to climate change. When visiting a village and asking the farmers whether the climate and weather is changing, they will say “yes!” And if asked how, they will have a clear sense of what is happening. And if asked if they are doing anything about it, they will say, “yes of course!” And they will tell you what they are doing.
Farmers faced with the threat of drought may buy one of the new drought tolerant maize varieties, or if they are a rice grower may plant a flood-tolerant variety if flooding is likely. They may try out the technique of conservation farming, or plant a greater diversity of crops. Some mulch may be found to apply to their crops or they may even construct a terrace on the contour across their field to prevent erosion. More generally, they may invest in a more diverse livelihood so that other sources of income will offset the losses from drought or flooding.
Many forms of adaptation rely on the informal sector. Governments can help by creating links to the formal sector and by providing skills, knowledge, and access to markets. Resilience is a family affair involving both men and women and, as they grow older, the children. Attempts to enhance livelihoods must take this wider holistic and more long-term approach.
Policies to stabilize prices
Price volatility is an international event that requires international action. Currently, most policy decisions appear to be panic responses, with little attention to program design and potential market consequences. There appears to be no systematic thinking behind determination of optimal food stocks. As is now evident, food markets must not be excluded from the appropriate regulation of the banking and financial system, as the staple food and feed markets (grain and oil seeds) are now closely connected to the speculative activities in financial markets.
Integrated markets and trade
The causes of production variability are such that an entire region is less likely to be affected than individual countries. Moreover, fluctuations in national production tend to partially offset each other, so that such fluctuations are less than perfectly correlated. For most African countries, national production volatility is considerably higher than regional level volatility. The only exceptions are the Democratic Republic of Congo (DRC) and to a lesser extent Côte d’Ivoire (Badiane, Odjo, & Jemaneh, 2013). Consequently, expanding cross-border trade and allowing greater integration of domestic.
Market integration and trade raise the capacity of domestic markets to absorb local price risks by:
- Enlarging the area of production and consumption, thus increasing the volume of demand and supply that can be adjusted to respond to and dampen the effects of shocks.
- Providing incentives to invest in marketing services and expand capacities and activities in the marketing sector, which raises the capacity of the private sector to respond to future shocks.
- Lowering the size of needed carryover stocks, reducing the cost of supplying markets during periods of shortage and hence decreasing the likely amplitude of price variation
The Scope for Cross-Border
Trade There is considerable scope for exploiting the less than perfect correlation of volatility patterns across countries. Despite the recent upward trends, the level of intra-African and intra-regional trade is still very low compared with other regions. Intra-African markets accounted only for, on average, 34% of the total agricultural exports from African countries between 2007 and 2011 (Badiane et al., 2014). Among the three regional economic communities (RECs), SADC had the highest share of intra-regional trade (42%), and ECOWAS the lowest (6%). The COMESA share of intra-regional trade was 20% (Badiane et al., 2014).
Yet, contrary to conventional wisdom, countries in all three regions exhibit sufficiently dissimilar patterns of specialization both in production and trade that should allow higher levels of trans-border and interregional trade. A series of indicators conrm that signicant scope exists to expand trade in this way, if major obstacles impeding the movement of goods and raising the cost of trading across local markets are addressed (Badiane et al., 2014).
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