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

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5

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700

750

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850

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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

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300

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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

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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

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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