Adolfo Brizzi, DirectorPolicy & Technical Advisory DivisionIFADBeijing, July 9, 2012
Market System Construction and Value Chain Development for
Smallholder Agriculture
Agriculture is back with a revenge
If global food supply is threatened it will come to dominate policy and political agendas
Tyranny of the short term: did we need to wait for a global crisis to realize the importance of food security ? Benign neglect had reached its limits
Re-look at structuralissues in the context ofnew integrated Ag/RD policies
Measuring the global challenge:Some facts (1)
1b rural people live <$1.25/day most are food-insecure 2b people in LDC derive income from small-scale agriculture Poor people spend 60-80% of their income on food Food availability may need to double to meet 2050 needs but
productivity stagnates Agriculture is mostly a smallholder business Ag. growth is twice as effective to reduce poverty than other
type of growth
resolving smallholder agriculture is the closest proxy to reducing global poverty
0
5
10
15
20
25
30
35
700
750
800
850
900
950
1969- 1979 1990- 1995- 2000- 2005- 2010
%
-Population under-nourished in LDC
millions
Food remains imperfectly tradable (shallow markets, distortions, time lag to respond, weather-dependent)
Basic food consumption is inelastic to food prices and consumer income
Capacity to grow is determined by– The size of the human stomach i.e. demographic growth– The possibility to trade with the biggest possible market– Substitution to higher value food
Decades of low prices have created a situation where– Business is marginally profitable– Governments treated Agriculture as a public good:
subsidize and protect farmers – High import tariffs, distortionary policies– Little incentive to invest in higher productivity
Measuring the global challenge:Some facts (2)
More liberalized sector. Global trade much easier
Private sector on the move. Profit is no more a bad word.
Bottom of the pyramid: the largest untapped potential for market-driven agriculture developmentConsiderable efforts to mobilize and organize producers
along value chainsAg. & Environment: friends & foes.
One needs what the other one wants to protect (water, soil, forest)
Measuring the global challenge:New paradigms (1)
Biofuels. New legislation in OCDE countries. Food, fuel, forest trade-offs. More pressure on food supply
Climate Change and Ag., victim and culprit. The search for compromises and win-wins
New consumption patterns towards protein-rich food will require more grains
Measuring the global challenge:New paradigms (2)
India & China: Per Capita Consumption in Kg
0
100
200
300
400
500
600
700
800
INDIA 1993 INDIA 2007 CHINA 1993 CHINA 2007
New Context for AgricultureOpportunities & Challenges
Are high prices the new tipping point for the revival of the agriculture sector ?
Agriculture is a business
Land (water) Grabbing
Million hectares and percent
Total area apt for rainfed agriculture
% exploited Irrigation Potential
% irrigated
Latin America Caribbean
1066 19% 78 24%
Sub-Saharian Africa
1031 22% 39 13%
East Asia 366 63% 111 68%
South Asia 220 94% 142 56%
Middle East & North Africa
99 87% 43 65%
Source : OCDE et FAO (2009). Tableau tiré de Vindel, B. et P. Jacquet, Agriculture, développement et sécurité alimentaire, dans Jacquet, P. et J.H. Lorenzi, Les nouveaux équilibres alimentaires mondiaux, PUF-Descartes & Cie, 2011.
The consumer – producer debate
High Prices and Volatility
Source: Roach, S. (2010), « What explains the rise in food price volatility », IMF Working Paper WP/10/129, figure 1, p. 3.Non weighted average of the prices of wheat, rice, maize, palm and soya oil. Price in dollars, deflated by the US consumption price indexes
A blessing and a curse. Needs careful evaluation at country levelWho wins & who looses. But not only “static” assessmentsCountry agriculture potential. Import/Export status.
Rural/urban
Risks of unrest
Safety nets
Price policies
Role of storage
Export Bans
Exchange ratesPrice Volatility 1885-2009
Price transmission
Source : Food Security Portal (www.foodsecurityportal.org), november 2011
MAIZE Domestic Prices (US$/KG)
RICE
Historic opportunity to reduce poverty through market-driven agriculture development
Large countries need to feed themselves
The case for protection and subsidies is less compelling
Import tariffs down world-wide,new chance for trade talks ?
Globalization provides unleashed trade opportunities
New technology push, innovation
Private sector on the move entering new ag. markets and value chains
Time to revisit some of the Government policies
Social policies and safety nets for consumers will allow price trickle down to producers
Market driven agriculture through PPP for smallholders
Fortune at the bottom of the pyramid (BOP)
• BOP: The biggest untapped potential for market-driven agriculture Low cost, low profits, high volume
• When you are poor, reaching scale is the best hope to access opportunities, become a market (consumers and producers), economy of scale, efficiency, reduced transaction costs, bargaining capacity, access to services
• Organize the tail-end of the value chain• Demystifying poverty and profits• Scale will enhance private companies’
ability to access BOP markets
The Need for Collective Action
The power of scale
The supply side (both public and private) cannot be made more efficient in helping the poor unless it’s in the context of an
organized demand side
Transforming a large pool of poor people into a vast untapped market with much reduced transaction costs
Where are we coming from
Public Sector
Private Sector
Communities
Intermediaries of all sorts
Predominant Public Sector
Disinterested Private Sector
Disorganized Smallholders
High transaction costs
We need a new model:PPP with a “P” for people
Smallholder Sector
Public Sector Private Sector
Becoming a market and leveraging more competition, access to banking, markets, etc.
Demand for governance & accountability
Devise regulatory framework and incentive mechanism for PPP
Rethink public sector intervention and find better ways to deliver services
Attract private sector andlink their business modelwith development objectivesalong supply chians
People Sector
Public Sector Private Sector
Institutions of the poor
Bridge the viability gap
Agriculture is a business, but for the private sector to work with smallholders it costs more. We can help bridge the viability gap.
On the demand side:– create a new market. BOP, People Sector, scale, collective action.– Demonstrate creditworthiness of our clients to banks/MFIs, leverage
remittances
On the Supply side. If “people sector” scale is not enough (transaction costs too high), devise an incentive mechanism to attract the private sector.
– Subsidizing private goods through matching grants not a solution.
– Better to finance (semi) public goods as part of matching grants, but associated to the private sector business plan, along value chains.
– Design matching grants competitively and look for leveraging private sector money as co-financing
Public SectorDevelopment monopoly ?
• Mostly supply-driven and top-down• Local innovation and home-grown solutions can be inhibited• Public sector performance in delivering services is mixed• Imbalance between supply and demand
Poor people are seen as “beneficiaries”, not clients Dispensing favors rather than facilitating access to
services by the poor Accountability is upwards rather than downwards Entrenched vested interests
Where is the private sector ?
The private sector is on the fence– Crowded out by public sector, policy
restrictions, red tape– Poor infrastructure – Not interested in poor, uneducated,
dispersed producers– Lack of scale and quality (norms and standards)– High transaction costs, risky business and low returns
– In some cases the private sector came, but no competition, easy to collude (farmers with no bargaining power)
THE PEOPLE SECTOR
Strategy:• Gaining Voice • Reaching Scale
How: 1. The software: Organize institutions OF the
poor (vs. institutions FOR the poor)
2. The hardware: Put productive assets in the hands of poor people and provide opportunities for income generation
The softwareSocia l Mobi l izat ion and Ins t i tut ion Bui lding☞ Groups organized around a strong common purpose
(savings & loans, joint economic activities)☞ The nature and the quality of the initial grouping
determines the graduation model☞ Strong inclusion and (self) targeting methodology –
Mutual trust against risks of elite capture☞ Scale creates a market and crowds-in the private sector
☞ Social agendas (disabled, HIV/AIDS, domestic violence, alcoholism, caste)
☞ This is not about money
The hardware (assets)
Access to productive assets ☞ Software first, hardware second
☞ Income generating activities, own
savings and group inter-loaning to demonstrate
creditworthiness and crowd-in MFI and Banks
☞ The grants vs credit debate But also groups as financial intermediation.
Recycling grants into loans
☞ Give communities access and management authority over natural resources (land, forest, fisheries, water)
The graduation model
Affinity-based
Savings and Loans
Activity-based
Assets/marketing
Resource-based
Irrigation, Watershed, forestry
FranchisingRetailing
Commodity Cooperatives Federation of
User Groups
Marketing services
Banking Savings &
Loans Coops
Different levels of associative and federative tiers
TradeCommunity enterprises
Institutions firstMoney second
Going to Scale
BanksMicrofinanceInsurance Co.
Service Providers
People Sector Institutions
Money and InfluenceAgri-businessInput suppliers
Service ProvidersInsurance/warehouse
Control over nat. res. (land, water, forest, fish)Sustainable Use/finance
Agri-business
Self-help groups federation model (Andhra Pradesh)
SHGs SHGs SHGsSHGs SHGs
-
-
Self-Help Group
Village Organization
Sub-District Federation
District Federation
40006000
200,000400,000
150200
10-15
• Savings and loans• Monitoring group performance• Micro-credit planning• Household investment plans
• 2 from each Self-Help Group• Support SHG• Manage credit lines/grants to SHG• Social action/village development• Marketing/identifies jobs for youth
SHGs
• 2 from each Village Organization• Supports VO / audits VOs• Links w. Governments• Link w. financial institutions• Links w. markets and private s.
• 2 from each sub-district Federation• Interface with markets• Franchising and Insurance• Maintain MIS/IT systems
22
1100
34850
809800
The Power of Scale
• Self-Help Groups formed in all villages of AP (saturation strategy)
• ~9 M rural women, ~90% of poor rural women, ~40M people• Own funds (savings + interest earned on inter-loaning):
$790M• Cumulative credit from formal institutions since 2000: > $
2.7B • Repayment rates in excess of 95%• Revival of the rural banking business• SHG: FROM: not daring to enter a bank
TO: having become one of the best clients.Cost (over 8 years): $10/beneficiary $40/woman (household)Leverage (scale-up) each $1 raised $10
Procurement Centers (PC) and Trade•Federations operate the retail end of the value chain, particularly backward integration through village procurement and service centers •Reduce transaction costs between dispersed farmers and the market through product aggregation and collective buying•Used as franchises for agri-businesses•Developing a network of low-cost service providers and paraprofessionals i.e. jobs
Youth Employment
Scale for Innovation
• Large pool of unemployed youth in villages• Federations as temp agency + moral guarantee• Economy of scale, low transaction for training and
recruitment through one entry point• Greatest demand: security sector, retail, services,
health centers, repair shops, computer data entry, construction.
Scale for Innovation
Franchising for Life/Disability Insurance Scheme•Access BOP market through franchising and retailing insurance policies at least cost.
•Federations collect premiums from members,fill forms, verify claims, maintain MIS, issuecertificates of insurance, make payments, link upwith Insurance Comp. for re-insurance, web-based claim transaction
Reaching out through ICT* Communities’ web portal. Post aggregate info on available products (quantity, norms, specifications) & job seekers.* Private sector establishes business linkages directly with federations. Increased market access and competition* ICT provides quantum leap away from costly intermediation for large-volume low-cost products & jobs
Scale for InnovationSmart Cards for Banking and SS benefits
• More efficient way to deliver public services (social security, pension/wage payments, safety nets, etc..)
• Each Fed. identify the beneficiaries of Gov. SS programs, calculate the benefits, prepare payment lists, fill the forms, etc..
• Commercial banks (under MOU with the Government) train the Fed. and provide the financial infrastructure (mobile phone, smart cards, card reader, printer).
• Beneficiaries receive payments from banks through their branchless organization and make contributions
• Shift the banking system to smart cards and branchless banking• New opportunities: mobile banking
Thank You