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3. Markets

Possible policy indicator questions: Markets

  • Does government direct its support for improving smallholder farmers’ market access towards domestic markets, rather than to focus primarily on export markets? For example:

    • Are any measures in place to boost local demand and strengthen the market for local smallholders’ output?
    • Are any preferential public procurement policies in place which prioritise smallholder producers?
  • Are buyers encouraged and incentivised to source from smallholder farmers? Is explicit provision made in such incentive packages for targeting women farmers and other vulnerable groups?
  • Does government provide any specific support to smallholder farmers to strengthen their bargaining position in dealing with agribusiness and other corporates, for example through public extension services that include modules on contracts and rights, or facilitating the development of and access to private sector providers of similar services?
  • Are smallholders supported in group certification and adherence to international market standards?
  • Does the government use all the legal and negotiating tools available (ie anti-dumping measures, import tariffs, trade negotiations) to reduce the impact of international trade rules and agricultural policies that reduce returns to smallholder farmers through distorting local prices (such as developed country export subsidies; import tariffs on processed foods; production incentives that lead to over-supply/dumping)? 

87. In considering ways to support smallholder farmers, the focus has tended to be on the supply side and ways to increase production.  But being able to sell their output and ensuring adequate returns is often an even more critical issue, and as serious a challenge, for Africa’s smallholders.  Farmers need to have an entrepreneurial mindset, thinking from the outset about what they will sell, to whom, and when; but they also need more support from both the public and private sector to access those buyers and optimise their returns. This section considers some of the demand-side factors impacting on smallholders.
 
88. Markets available to smallholder farmers have changed rapidly and dramatically during the past two decades; this process is ongoing (IFAD 2010).[1] At the regional and national level, urban demand for agricultural products is increasing strongly as populations and incomes grow, particularly for high-value products. The rising prominence of supermarkets in Africa and increasing interest from both national and multinational corporations in inclusive supply chains present smallholder farmers with new marketing opportunities, but also fresh challenges. Those who manage to become part of these new agricultural supply chains are faced with increasingly stringent quality and safety standards (this problem is even bigger for producers of niche, export-oriented high value or specialised agricultural products); while their weak bargaining position could leave them exposed to exploitation through unfair prices or non-fulfilment of contractual agreements, with little recourse to legal justice.
 
89. Although there are many cases where export markets have delivered impressive returns to smallholder farmers (such as for coffee farmers in Rwanda – see Boudreaux in World Bank 2010), the growing consensus is that, especially for smaller producers, the focus should be on producing for local and regional markets rather than export markets.[2] Export markets are expensive to enter, with certification being particularly costly and time-consuming, and more risky due to greater competition.  Several studies show that only limited numbers of predominantly better-resourced smallholder farmers benefit from supplying export markets while the majority of smaller farmers are excluded from these markets (see for example Jaffee 2011). 
 
90. For those smallholders that do have scope to participate in export markets, government can facilitate their access to those markets by supporting group certification and adherence to international market standards (Vermeulen and Cotula 2010). Growing into export and other high value niche markets, such as organic produce, also requires a supportive policy environment.  The case study from Guruve in Box 5 illustrates how a weak policy environment can prevent farmers from taking advantage of opportunities in these fast-growing markets.   
 
91. Significantly, domestic and regional markets dwarf export markets both in terms of their size and their projected growth: while African agricultural exports are forecast to increase by 80% to US$20 billion by 2030 from US$11 billion in 2000, Africa’s urban food market is already much bigger than that and is expected to triple over the same period, growing from US$50 billion to US$150 billion (Wiggins 2012).
 
92. There is also strong evidence that producing staple crops has a greater impact on growth and poverty reduction than export crops.  IFPRI’s 2012 study of 10 African countries’ agriculture strategies found that, although export crops typically have higher value and growth potential than food crops, in several countries food staples are more effective at generating economy-wide growth and reducing national poverty. Tanzanian livestock, Mozambican roots, and all staple foods in Nigeria, Uganda, and Zambia were found to be more effective at generating economic growth than those countries’ export crops (Diao et al 2012).  Their findings also suggest that growth driven by staple crops generally reduces poverty to a greater extent than growth driven by export crops: in Rwanda, growth driven by maize or pulses was found to be 30-60 % more effective at reducing poverty than export-driven growth. The authors do point out that the difference in poverty reduction is smaller when export crops are grown by small farmers. Among the reasons cited for export-led agriculture’s lower contribution to growth and poverty reduction is the fact that it involves the export of raw materials, which do not generate income from processing agricultural products; hence promoting export agriculture may make it difficult for a country to develop labour-intensive manufacturing and services. Incorporating this kind of domestic downstream processing is crucial if export crops are to provide a meaningful platform for rural and national development.
 
93. There are many advantages to smaller farmers in producing for local markets, including the fact that poor infrastructure, which has such a big impact on their transaction costs, is less of a barrier. However, it is important to manage production so as not to overwhelm local demand.  Access to warehousing and storage facilities, and to credit to tide farmers over so that they need not sell their output immediately, can help farmers optimise the timing of their sales (CAFOD 2011).
 
94. It is also worth noting that during the recent economic crises, those countries with strong domestic markets (such as India) fared far better than those with weaker domestic markets. Small businesses are the predominant businesses that operate in local markets – buying, selling and investing locally, thus helping shield the entire local economy from the effects of an international shock.
 
95. Governments can offer a range of incentives to boost domestic demand and to encourage procurement from smallholders. Vorley et al (2009) cite the Social Fuel Seal in Brazil which provides the downstream biodiesel industry with incentives to source their feedstock from smallholders and family farmers, in the process helping improve the equity of the “biofuels revolution”.  Other options include requiring supermarkets to provide adequate space in their shelves for small-scale farmers’ products (Vorley et al 2009).
 
96. Preferential public procurement policies could create further demand for smallholder output.  For example, Brazil’s ‘Family Agriculture Food Procurement Programme’ which forms part of the Fome Zero (‘Zero Hunger’) campaign launched in 2003 by President Lula, aims to ensure a stable market price for products from small-scale farmers, including through buying local food products for government feeding programmes or for local food banks. Despite initial reservations the Fome Zero programme has been widely hailed as a success – World Bank estimates suggest it helped raise 20 million people out of poverty between 2003 and 2009 – and some regard it as a model for achieving food security globally (Oxfam 2010a).
 
97. Public procurement from smallholders could also be encouraged through Home-Grown School Feeding (HGSF) Programmes. A study by the WFP finds that such programmes have delivered proven benefits to farmers in middle- and higher income countries, where institutional capacity is strong and domestic markets are more developed - in China, the National School Milk programme increased the incomes of Chinese farmers by US$400 per cow – but there is very little information of how these programmes would fare in low-income countries with vulnerability to food insecurity, constraints to food production, low institutional capacity and thin or volatile food markets (WFP 2009). Ghana’s HGSF was set up in 2005 and while the programme delivered strong early benefits in terms of school attendance and food security, the benefits to farmers were initially less evident (WFP 2007).
 
98. Purchases from humanitarian agencies provide another promising new market for smallholders.  The World Food Programme (WFP) is the world’s largest humanitarian agency and a major staple food buyer. More than 75% of the US$1.1 billion worth of food bought by WFP in 2012 was sourced in developing countries.  The Purchase for Progress (P4P) programme aims to optimise the developmental gain from WFP’s procurement footprint by buying increasingly in a “smallholder-friendly” way. Whereas WFP usually procures food through large competitive tenders, P4P is allowing it to test new procurement methods that would be more beneficial to smallholders, including buying directly from farmers’ organisations through direct and forward contracts or modified, smallholder-friendly tenders[3]. Progress has been impressive: by January 2013, 814 farmers’ organisations representing more than one million farmers (of which 500,000 are in Ethiopia) have been identified to participate in P4P, with contracts already agreed with 360 farmers’ organisations.  However P4P contracts are made with producer organisations, which means that the most marginalised farmers who do not belong to farmers’ groups will not be reached; and despite an ambitious target of 50% female participation the P4P progress reports acknowledge that it has been difficult to reach that target in several countries and “(e)nsuring that women not only participate in P4P, but benefit economically, is challenging especially where women are not the head of households.”
 
99. A growing number of multinational commodity buyers are establishing “inclusive supply chains” which specifically target smallholder farmers.  Linking with companies can deliver many benefits to smallholder farmers beyond providing a guaranteed buyer for some or all of their output, including increasing their access to inputs, technical advice and training and, in some cases, financing; companies may also invest in physical infrastructure which have benefits beyond the smallholders directly engaged in their value chain. Oxfam (2010b) cites examples of successful inclusive supply chains implemented by Unilever, Cadbury, Costco, Coca-Cola, Marks&Spencer, SABMiller, Sodexo, Sysco, Tate&Lyle and The Body Shop. Governments can take steps to encourage and incentivise companies to source from smallholder farmers.  Explicit provision should be made in such incentive packages for targeting of women farmers and other vulnerable groups.
 
100. There is a wide range of collaborative arrangements between large-scale investors and local small-scale farmers, including different forms of contract farming, joint ventures, tenant farming and sharecropping, management contracts and new supply chain relationships.  Some models involve large-scale farming but with close connections to local small producers; others bypass commercial producers and bring smallholders directly into the value chain (Vermeulen and Cotula 2010).
 
101. Inclusive agricultural value chains are complex and ensuring that they deliver benefits to both farmers and businesses is a challenge. Vermeulen and Cotula (2010) highlight the problem of information asymmetries, and of unequal bargaining power, particularly on land rights, which increases the risk of smallholders finding themselves in situations where their returns from integration into the value chain are not optimised.  Based on their extensive study of various business models that include smallholders in the supply chain, the authors suggest that the extent to which farmers share in the value generated by the chain depends on four factors: ownership (for example of land or processing facilities), voice (the ability to influence key decisions), risk (including production and market risk) and reward (the sharing of economic cost and benefits). Their review concludes that no one model is perfect: what works best for smallholders while still being attractive to investors is very much context-specific, and is contingent on tenure, policy, culture, history as well as on biophysical and demographic considerations. It is also worth bearing mind, as mentioned in the section on access to credit above, that only a small group of farmer are likely to be in a position to participate in agricultural value chains.
 
102. A lot of emphasis is being placed on the opportunities for smallholder farmers presented by contract farming. Whilst examples do exist where contract farming has resulted in increased net revenues for farmers, Conway (2012) finds that unsuccessful schemes outnumber the successful ones. Crucially, evidence suggests that contract farming could have an exclusionary rather than inclusive impact as better-resourced farmers tend to capture the contracts, with poorer farmers working as labourers on the contracted farm, and those farmers and communities who do not participate in the contracts becoming further marginalised (Conway 2012).  Equally worryingly, Vermeulen and Cotula (2010) find that contract farming tends to shift land access from women to men, as men are more likely to sign contracts for cash crops with agribusiness.
 
103. It may be possible to avoid some of these problems by contracting with producer associations rather than individual farmers.  Conway (2012) cites the example of Nando’s contracting with the Nyabumba United Farmers group in Uganda to supply it with potatoes, which has enabled the group’s members (60% of whom are women) to move from subsistence to commercial farming. Governments can provide support by facilitating the formation and efficient running of inclusive farmer groups – this is discussed in more detail in Pillar 5.
 
104. Government can also take steps to protect smallholders in their dealings with corporates, in recognition of their weak bargaining power.  Vorley et al (2009) provide an example from Australia, where a supplier ombudsman with an independent regulatory role to oversee the way in which powerful buyers such as supermarkets engage with their suppliers, has been established. Support could take the form of funding for extension services or facilitation private sector providers of similar services which could provide training on contracts, terms, negotiating skills, rights and legal recourse.
 
105. International trade policies and practices can damage African smallholder farmers’ scope for accessing markets through distorting local prices for agricultural produce and limiting local producers’ capacity to compete.  These include developed country export subsidies; tariffs on processed foods; and production incentives that lead to over-supply. Farmers’ interests would be well served by efficient implementation and monitoring of international measures aimed at addressing these issues, including trade defence measures such as anti-dumping measures. Governments should continue to engage in advocacy to reduce the scope for harming smallholders through such policies.

Box 5. Lack of policy support means Zimbabwe’s organic farmers lose out

ASFG member GardenAfrica has been supporting smallholder farmers in Zimbabwe’s Mashonaland East province in producing for the organic market.  Feedback from supermarket buyers indicates strong demand for organic products, but several obstacles are restricting farmers’ ability to scale up their production to take full advantage of this potential high-value domestic market and constraining their capacity to reach for export markets in the future.

Zimbabwe currently lacks an agriculture policy, and its CAADP framework makes no mention of organic agriculture, which is affecting support for more diverse service delivery and input supply to farmers interested in entering this market. With no official policy to promote organic farming methods, NGOs are stepping in to support farmers with more diverse approaches to production.  This is having a negative effect on extension officers who are already demotivated due to a lack of training, mobility and support.  And tertiary education has been slow to develop modules in sustainable agriculture for agriculture colleges, resulting in a lack of appropriate training in conservation and organic farming for future extension officers.

In addition, the Department of Trade currently makes no distinction between organic and conventional trade.  Hence there is no official trade data to support anecdotal evidence of strong demand for organic produce.  Until the Department recognises and enforces a formal division, supermarkets have no incentive to ensure that the produce on their ‘organic’ shelves is actually from certified organic sources or to properly track their sales.  Furthermore, until organic produce is formally recognised as such, any potential premium for fully certified produce is unlikely.

All of these policies (or lack of them) conspire to constrain the organic value chain and its actors.  Many other countries are experiencing strong growth in their organic sectors for export, but the lack of policy recognition of the existence of a domestic organic market in Zimbabwe is affecting the level of support for organic value chain actors, and limiting the sector’s scope to gain in experience and strength and access lucrative export markets. 

Farmers are also disadvantaged by inflexible international policies.  Current IFOAM (International Federation of Organic Agriculture Movements) regulations dictate that land must be ‘in-conversion’ for 2 years before organic certification is possible – irrespective of the level of synthetic inputs used.  Soil analysis of 32 sites on communal lands in GardenAfrica’s project region shows no signs of carbamate or organo-phosphates, which is not unexpected given that communal smallholders have not had access to, or could ill afford to use, fertilisers, pesticides or herbicides.  Although the land is chemical-free, farmers still need to wait 2 years before they are eligible for IFOAM certification. These regulations were designed for Europe and North America where there is a history of high usage, and are poorly suited to African smallholder farming conditions. The high cost associated with such a long conversion period acts as a disincentive to farmers considering converting to agro-ecological farming in order to capitalise on growing organic demand.


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[1] IFAD Rural Poverty Report 2011 contains a detailed chapter on the impact of restructured markets on smallholder farmers. Available at http://www.ifad.org/rpr2011/report/e/rpr2011.pdf, page 11 onwards.

[2] See, among others, Diao et al (2012), Jaffee et al 2011, Mitchell & Coles (2011) and Shepherd (2007).

[3] More information is available at http://www.wfp.org/purchase-progress/overview.

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