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Agriculture and Value Chains

Preview

SANREM is a leader in agricultural value chain development in sub Saharan Africa and works with leading national, regional and international organizations in addressing value chain challenges especially in the agricultural sector. We work with governments in the region to consolidate farmer producer organizations efforts in channeling their output to profitable markets. We also work with other value chain players like financial institutions, input suppliers, transporters, quality control agencies and warehousing entities to ensure that farmer produce arrives to the consumer with the highest quality. We have worked with leading organizations like EcoAgriculture Partners, USA, USAID, DFID, World Bank, Eats African Community, African Development Bank, ASARECA, Action Aid, HIVOS, UNDP, FAO, CCAFS of the CGIAR, Bioversity International and others in transforming lives and livelihoods in countries like Kenya, Uganda, Tanzania and Ethiopia where we are currently running various agriculture development and natural resource management projects. In our work, we partner with leading agriculture research institutes in the region and also with CGIAR institution to ensure that technology development in agriculture reaches smallholder farmers so that they can benefit from modern agriculture and commercialization on their smallholdings.

SANREM’s value chain (VC) analysis and development can improve the living conditions of the rural population and contribute to food security in the region. The key elements are in our value chain analysis are: the knowledge of a sub-sector which will gradually be building up among the stakeholders, the confidence created among them and the resulting dynamics. The two main challenges consist in involving the stakeholder so that they appropriate the analysis tool and then in finding the right entry point for the analysis. This is the condition for this kind of exercise to be directed towards its goal – first and foremost the eradication of poverty, in accordance with the principal objective of our cooperation – whilst remaining rigorous in processing the information.

What we do

In working with farmers and stakeholders across the value chain, SANREM undertakes the following activities:

  • Undertake value chain development in crops and animal enterprises across sub Sahara
  • Undertake capacity building in value chain development for farmers and academic institutions
  • Undertake midterm, final, impact evaluations in agriculture value chain development projects
  • Link farmers in local, national and regional markets and work with quality assurance standards to ensure that farmers produce high quality products for premium markets
  • Assist farmers to join producer groups and cooperatives and adding value to their products

What is a Value Chain?

A ‘value chain’ in agriculture identifies the set of actors and activities that bring a basic agricultural product from production in the field to final consumption, where at each stage value is added to the product. A value chain can be a vertical linking or a network between various independent business organizations and can involve processing, packaging, storage, transport and distribution.

Table 1: Traditional / modern value chains in food systems

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SANREM realizes that Agricultural Value Chains (AVCs) have become very important in determining countries’ trade competitiveness in a globalized world. In Africa, where agriculture is the backbone in many economies, SANREM envisions they are important not only in enhancing export competitiveness, but also in developing sustainable agricultural systems, alleviating poverty and promoting financial inclusion, especially of the rural poor. In our analysis we have concluded that developing countries are expected to be the leading source of demand growth for agricultural products in the next few decades. In the developing world in general, and particularly in SSA, demand for food is expected to grow significantly in the future and require more resources for three main reasons:

First, population is increasing faster than in any other region. Currently estimated at 925 million, SSA’s population is forecast to reach 1.2 billion in 2025 and 2 billion in 2050. By 2050, one in five people in the world will live in SSA, by 2100 one in three up from one in 7.6 currently – according to forecasts by the UN (Medium-fertility variant).

Second, incomes are rising steadily. SSA’s average GDP per capita is forecast to increase by around 30% between 2010 and 2030, by 80% between 2030 and 2050. This drives an increase in food demand per capita but also a diet change away from basic staples and grains as the growing middle class is seeking higher-value foods such as fruits and vegetables, meat and dairy products.

Urbanization is happening fast, this is the third reason why demand for food will increase. Urbanization further contributes to changing preferences towards animal proteins and processed foods. Today, around one-third of SSA’s population lives in urban areas; by 2035, it may be half. The fastest growing population and the highest rate of urbanization in the world, together with a growing middle class, will drive a surge in food demand in SSA.

  Key participants and other key components in AVC

SANREM has identified five main components to consider in VC analysis, as depicted in the figure below. These are the actors directly providing inputs, producing and distributing the product; the relationships and embedded services between these actors; the markets, the financial, general and specialized services coming from sources external to the production and distribution chain, and the enabling environment, including tax and trade policies and regulations

Figure: Finance flows within the value chain

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Primary Producers/Farmers: The primary producers/growers in AVCs are very important actors and their position in the chain becomes the key driver to determine the sustainability of the VCs. Majority of farmers in African countries are single cash crop farmers supported by some food production, or vice versa. However, there are also specialized chain actors, who are able to produce quality cash crops for the AVC. Others may be multi-activity chain farmers, who are not only involved in production process but also in other activities of VC like grading, primary processing, and local marketing. The best actors are the market lined producers, who perform multiple activities (in terms of marketing, transport, production and processing), but such farmers are very few in developing economies

Agri-Input Dealers are crucial to the AVCF as they not only provide seeds, pesticides, fertilizers and farm equipment (machinery) to farmers but also act as extension arms providing technical information to the farmer. This is a crucial input in the VC and its capacities and quality will determine to a large extent the quality and quantity of the end-produce. Just as with any other small trader, this player will be driven by the profit and a desire to increase sales volumes. Capacity building on this tier will ensure that the farmers get the right advice. In case of small holders, this tier may have to be supported by the aggregator (processor) to ensure that the farmer gets the right quantity and quality of inputs.

Agri-Processing Companies play a major role in adding value to the agri-commodity and in many cases will link up with wholesalers or retailers to market the product. Agri-processing companies can be small scale enterprises or can even be large corporations having multi-country operations.

1.      Enhancing Value Chain Productivity

Competitiveness is determined by the productivity (value per unit of input) with which a firm or value chain uses its human, capital, and natural resources. Productivity depends on the value, uniqueness, and quality of a product, in addition to the efficiency with which it is produced.

a.      Assessing strategic productivity

The primary means of increasing value chain productivity is by choosing appropriate markets and products and by adding new product features and service components that enable companies to increase the value of their product and, hence, its price. This “strategic” or “market price–related “productivity can be as important as “operational” productivity in determining competitiveness.

When evaluating a value chain’s strategic productivity, the key questions to consider are:

  1. Which product segments are currently being offered by the companies in the chain? Do they represent the full range of segments that could be offered? Do they represent the highest-value segments in the industry?
  2. Which markets are currently being served by the companies in the chain? Do they represent the highest-value markets?

b.      Assessing operational productivity

A second way to improve value chain productivity is through operational productivity, improved technology, manufacturing, and service processes within specific segments of the value chain. By introducing new technology that improves processes and management systems, key players in the value chain can lower their costs and raise the productivity of their businesses and the value chain overall.

The following questions are useful in evaluating the operational productivity of a specific segment of the value chain and developing strategies to enhance it:

  1. How do our costs compare to the price for the product indifferent markets (that is, which markets are profitable to serve based on the current cost structure)? Are we excluded from competitively serving key markets because of our cost structure?
  2. How do the costs of the value chain compare to other competing value chains?
  3. What are the key trade-offs between cost and quality for the product?
  4. Who is in control of the cost drivers?
  5. What are the opportunities for lowering costs without compromising quality?

c.       Assessing the quality of supply chain management

Focusing on supply chain management in terms of costs of raw materials, transportation logistics, communications, and information technology aspects of the chain that have generated great efficiencies in manufacturing, retailing and other industries is a third way to fully understand the underlying drivers of competitiveness.

When evaluating the supply chains, SANREM considers the following key questions:

  1. Is the relationship among buyers and suppliers in the value chain cooperative or adversarial?
  2. How effective is the flow of information along the value chain (market trends, changes in price, external cost pressures)? How aware are the producers of the downstream market dynamics of the industry (market trends, demand conditions, pricing)?
  3. How sensitive is the overall cost structure to the cost of raw materials?
  4. How do logistics services affect the cost of raw materials and intermediary products?
  5. What is the availability of supporting services (financial, logistics, administrative) across activities in the value chain?
  6. How long does it take for a product to go from initial production to end-market? How does this compare with competing value chains?

d.      Assessing human resources across the value chain

The next driver of value chain productivity is the quality of human resources available for the chain to tap. This may involve enhancing motivation, management, and training at the firm level, both by upgrading the overall education system and through utilizing specialized institutes. Upgrading the technical and management skills of an entire value chain requires close cooperation of the firms along the chain and the supporting government and academic institutions.

The following questions can be considered when assessing the level of human resources across the spectrum of activities in a value chain:

  1. What incentives are present to encourage firms to invest in the technical and management skills of their employees? Do firms have difficulty retaining trained talent?
  2. What supporting educational services are available to firms locally to increase the skill levels of their staff? (industry certifications, IT training, technology application)
  3. How well do the academic institutions know the needs of industry? Is the curriculum aligned with the specific skill requirements of the industry?
  4. Are there industry standards for industry skill levels? Do the academic institutions teach to these standards?
  5. How do the skill levels of the value chain’s workforce compare to competitors along key skills categories?

 

e.       Assessing the business environment

The quality of the business environment ultimately serves agate-keeping function, and often a negative one. Productivity increases are achieved at the firm and value chain levels by improving the quality of business strategy and operations for example, by forming new partnerships with international firms in their value chains that provide access to markets, technology, finance, and know-how.

 

Constraints for Developing Countries on Value Chain Upgrading

  1. Market Access and Market Orientation: Quality demands, internationalization and market differentiation have led in developing countries to the emergence of distinct food sub-systems with specific quality and safety requirements, leaning on different market channels, e.g. local, national and international markets. Market access is dependent on technological capabilities of producers, available infrastructures, bargaining power and market knowledge and orientation.
  2. Resources and (physical) Infrastructures: Getting access to markets is not a sufficient condition for developing country value chains to be able to sell their products. Supporting infrastructures, resources including knowledge and capabilities are conditional for these chains to be successful. Typical constraints faced by companies in developing countries include lack of specialized skills and difficult access to technology, inputs, market, information, credit and external services (Giuliano et al. (2005). These factors enable or constrain value chain upgrading
  3. Institutional Voids: Regulative institutions encompass legislation and government regulations and policies that companies can use and/or have to comply with. Developing countries are often characterized by institutional voids, defined as “situations where institutional arrangements that support markets are absent, weak or fail to accomplish the role expected from them. Government legislation, regulations and policies can constrain value chain upgrading, amongst other ways by setting trade barriers for production materials and production technology, by limiting the flow of information, national as well as international, by imposing unfavorable taxes and by denying infrastructural investments that would benefit value chains.

 Women in Agricultural Value Chain Development

1.      Gender inequalities in modern agricultural value chains

In modern value chains, men are concentrated in higher status, more remunerative contract farming since they generally control household land and labour, while women predominate as wage laborers in agro-industries. Women  workers  are  generally  segregated  in  certain  nodes  of  the  chain (e.g. processing and packaging) that require relatively unskilled labour, reflecting cultural stereotypes on gender roles and abilities. Segregation and the casual or temporary nature of contracts limit women’s opportunities to acquire new technical and entrepreneurial skills, increasing the risk of redundancy if their jobs are automated or if men are favored in technical training.

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Table: Employment in sample Agricultural Value Chains

2.      Women farmers and entrepreneurs face higher entry barriers than men in modern value chains

Women  nearly  always  have  less  access  than  men  to  assets,  credit,  services, markets and information on new technologies,  consumer  preferences and  export  trade  requirements.  This reduces their chances of entering into contract farming agreements. Small  producers,  especially  women, are  often  excluded  from  higher  value domestic and export markets because they  lack  the  transportation,  cold stores,  processing  facilities,  communications and information. While cooperatives and producer organizations are increasingly providing these services, relatively few women are members because of costs or social constraints.

3.      Women farmers and entrepreneurs in traditional value chains

Although men are increasingly moving into food crops as returns to export crops fall, women often remain the main drivers of traditional value chains in local markets for fresh or processed foods such as vegetables, fruits, grains, tubers, dairy products and fish. As the returns are often low and all producers need support to increase productivity and incomes, women are in particular need as they tend to have poorer access to inputs, extension and markets.

Interventions  to  improve  productivity  and  income  in  some  value  chain nodes  can  increase  workloads  for men or women. Problems can arise if women’s workloads are increased but the benefits (income) go to men.

4.      Women need special support to participate in value chain development

The time women spend in productive work can impact negatively on child care, health  and  nutrition,  and increase the incidence of child labour and  children  dropping  out  of  school to  take  over  their  mother’s  domestic or  care  work,  unless  labor-saving equipment  and  child  care  facilities are introduced. Women’s  market  access  is  often restricted  by  lack  of  child  care  or sanitary facilities in market places and cultural  limitations  on  travel  outside their communities.

Addressing Challenges of Women in AVC through Policy Options

To ensure that rural women and their communities benefit fully from value chain employment opportunities, a combination of measures should be considered by governments, international agencies, the private sector and civil society:

1.      Create an appropriate enabling environment to promote agricultural value chains with a focus on the poor

Integrate  gender  equality  goals  into the  provision  of  core  public  goods including  rural  infrastructure,  an improved  investment  climate,  better natural  resource  management,  and the design and enforcement of labour legislation in the agricultural sector. This should also include improved women’s access to land (e.g. preferential treatment in land titling or land reform programmes), and raise awareness on women’s customary or legal rights to inherit, buy or use land.

Introduce affirmative action for women  workers and entrepreneurs (jobs, training,  credit,  child  care,  representation in  decision-making  processes,  legal rights  to  own  property  and  engage  in legal acts without a male relative’s signature, fiscal or other incentives).

2.      Promote good practices

Analyze on-going changes in existing and emerging value chains at  local, national and international level, and their gender impacts on farmers and workers (including power relations governing relative returns at  each  node),  and  identify  policies/ actions to improve gender equality.

3.      Foster women’s participation in producer and worker organizations and decision-making processes

Provide  incentives  to  enhance women’s participation in producer and worker  organizations  and  capacity building  training  for  women  leaders, taking account of their workloads and cultural constraints. Involve  women  in  farmer,  worker,  •        home-worker  or  micro-entrepreneur study  groups,  provide  them  training in technical and negotiation skills, and help them to network amongst women and with men. Women’s cooperatives should be strengthened through  support  to  improve  the development,  branding,  quality  and marketing  of  their  products,  labour standards and price negotiation.

Specific policies

a.  Reduce gender inequalities in modern agricultural value chains: Introduce and enforce legislation against gender discrimination, sexual harassment and gender wage ineqaulities.

b.  Reduce entry barriers for women farmers and entrepreneurs in modern value chains: Improve women’s access to land, technology, knowledge and certification of product quality and safety, markets, price information, credit and insurance to enhance their ability to work as contract farmers

c.  Improve women’s returns in traditional value chains: Improve small farmers’ productivity and product quality through better training, technologies, inputs and storage, with special attention to women.

d.   Reinforce agricultural transformation with social strategies: Improve social policies to protect poor farmers and workers, especially women, from the negative effects of market liberalization and privatization

Agricultural value chains in Sub-Saharan Africa: From a development challenge to a business opportunity

RECENT STATISTICS

Agriculture holds the key to broad-based economic growth, poverty reduction and food security in Sub-Saharan Africa (SSA). This is due to the importance of the sector for SSA economies, the extent of rural poverty and the dependence of 50 million small farms on agricultural incomes. It is well documented that growth generated by agriculture in SSA is several times more effective in reducing poverty than GDP growth in other sectors.

Agriculture is still the backbone of many African economies, generating 25% of GDP on average in SSA – and much more in many countries. The broader agribusiness sector is estimated to account for close to half of GDP. Developing the sector is also central to economic diversification in several SSA countries, e.g. Angola and Nigeria.

Agricultural development lags behind in SSA. While overall GDP grew at over 6% annually between 2001 and 2008, agricultural GDP grew at 3.4%. In a global context, SSA is the only region which has failed to improve agricultural productivity, due to various reasons including under-investment, poor infrastructure, insecure land tenure, unfavourable price policies and weak institutions.

Agriculture has huge potential in SSA. The region has vast amounts of uncultivated land – close to half of global availability, untapped water resources and large scope for improvements in inputs to increase yields. Boosting African agriculture is also seen as a way to fulfil increasing global demand.

Import dependency is growing in spite of this potential. In 2011, SSA imported USD 43 bn worth of agricultural commodities while exporting USD 34 bn worth, with obvious consequences in terms of ability to generate foreign exchange and vulnerability to global prices.

Developing smallholder agriculture is key, given the predominance of small farms and their efficiency when taking all inputs into account. Agribusiness companies increasingly partner with smallholders for the benefit of both. Unlocking SSA’s agricultural potential also requires governments’ commitment and investments, closing the infrastructure gap, facilitating trade and improving financing as well as skills and technology.

SSA is also attractive as a fast-growing consumer food market. Urban food markets are set to quadruple and the food and beverage markets to reach USD 1 trillion by 2030. The region’s biofuel market is also growing. There is increasing investor interest in SSA along the whole food supply chain, given its untapped potential for both domestic sales and exports in more conducive macroeconomic and political contexts.