Poverty reduction through local markets and supply chains

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Poverty reduction through local markets and supply chains:

a positive step towards sustainable development in Africa

Dr P S SahotaExecutive Director

Nexus Aid [email protected]

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Opening thought

“We are both strong believers in the need for substantial aid flows to the world’s poorest countries. We believe equally strongly in the public sector’s role in providing essential services and infrastructure…but we believe that private investment must be the main source of income growth & job creation in poor countries, as it is in industrialized nations…(we need to) identify specific measures that work to unblock the private sector’s potential…when the business potential of the developing world is unleashed, the benefits will be more than economic.”

Paul Martin (PM of Canada) & Ernesto Zedillo (former President of Mexico)

Co-chairs of the UN Commission on the Private Sector & Development which produced the recent report Unleashing Entrepreneurship: Making Business Work for the Poor

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SocialSocial

EnvironmentEnvironment

EconomicEconomic

EnvironmentEnvironment

SocialSocial

EconomicEconomic

Sustain-ability

SocialSocialEnvironmentEnvironment

EconomicEconomic

Agreed Agreed Arguable

Agreed Arguable Arguable

Puzzles Problems Messes (wicked problems, a system of problems)

Formulation

Solution

1

2

3

Evolution of the sustainability agenda

ComplexityUncertaintyStructured/semi-structured/unstructured

Levels of integration

Millennium Development Goals

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puzzle

puzzlepuzzle

mess

problem problem

problem

Sustainability – an alternative conceptualisation

social

economicenvironment

Sustainability

Sustainability is concerned with unpredictable futures and this future perspective to sustainability opens up a Pandora's box of uncertainty.

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A

Low uncertainty

(needed information is known and available)

B

Moderate uncertainty

(constant need for new information)

C

Moderate uncertainty

(information overload)

D

High uncertainty

(not known what information is required)

(A system of problems,

wicked problems)

Rate of change Low high

Low

Complexity (number and diversity of the elements)

High

puzzle

problem mess

Uncertainty – decision making contexts and problem solving

(Based on Duncan, 1972; Hatch, 1977; Mintzberg, 1990).

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A B

C D

God exists God does not exist

Pascal

believes

in God

Pascal does

not believe

in God

No problem

No problem

Pascal’s WagerIn a more general sense the wager addresses situations in which there is a decision

that involves a large potential risk and that must be made on the basis of incomplete

evidence.

The environmental equivalent of Pascal’s Wager is the Precautionary Principle

No problem

Serious trouble

at the

Pearly Gates

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It is an approach to environmental policy that has been adopted in principle by the European Commission and has the support of many environmental organizations.

Essentially, it holds that the environment should not be left to show harm before action is taken to protect it, because by then irreparable damage may have been done

As a precaution, it’s safer to behave as if the problem is real and serious from the outset.

The precautionary principle

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Smallholder farmers face three main sets of challenges as they operate their farm businesses.

Productivity

Market Access

Efficiency

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CHALLENGE #1: Smallholder farmers are typically operating their farms at very low levels of economic productivity.

Productivity

Market Access

Efficiency

Farmers are often growing the wrong mix of crops in their farms, or only growing subsistence crops.

Farmers are unaware of proper growing techniques.

Farmers are unable to purchase the required inputs to grow high quantities of top-quality produce.

RESULT:

Disappointing harvests of the wrong crops.

Thanks to K Mutiso

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CHALLENGE #2: The current system of produce distribution and sale is inefficient.

Productivity

Market Access

Efficiency

Small farm produce often changes hands 3 or 4 times on the way to the consumer.

Transportation is slow, costly, and wasteful. Communication is person-to-person.

Logistical processes are a major hurdle.

RESULT:

Potential profits drained from all participants, particularly the farmer herself.

Thanks to K Mutiso

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CHALLENGE #3: Smallholder farmers are unable to access the right markets at the right time.

Productivity

Market Access

Efficiency

Farmers operate in information-poor environments regarding prices and market outlets.

Farmers are unable to aggregate their produce at levels required to access the largest markets.

Opportunities to exploit are created for brokers, resellers, and other intermediaries.

RESULT:

Limited choice of market outlets and disappointing net prices.

WE HAVE TWO PARTICULAR MARKETS – EXPORT AND LOCAL

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Challenges in export markets

• EurepGap standards

• Dependency syndrome

• Lack of marketing knowledge/ market access

• Middle-men and brokers

• Poor decision making processes and information access

• Breakdown of trust between exporters and farmers etc.

• Being “survivors” rather than looking at farming as a “business”

REQUIRES A

CULTURAL C

HANGE

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The EUREPGAP standards are particularly difficult for the smallholder to meet.

Has the farmer completed a risk assessment for food safety, operator health, and the environment?

Is the EUREPGAP registered product traceable back to and trackable from the registered farm where it has been grown?Has an internal, annual

self-inspection been documented and recorded?

Have soil maps been prepared for the farm?

Does the farmer participate in substrate recycling programmes for substrates where available?

Is organic fertilizer stored in an appropriate manner, which reduces the risk of environmental contamination?

Has an annual risk assessment for irrigation water pollution been completed by a laboratory?

Have systematic methods of prediction been used to calculate the water requirement of the crop?

Have all the crop protection product applications been recorded with product name, crop name, date, and reason for application?

Is application equipment calibrated and verified on an annual basis?

Is surplus application mix disposed of according to national law?

Is the farmer able to provide current evidence of annual residue testing, traceable to the farm?

Is a documented action plan in place if maximum residue levels (MRLs) are exceeded?

Are crop protection products stored in a fire-resistant, well-ventilated, well-lit, and secure location?

Is all crop protection product storage shelving made of non-absorbent materials?

Are keys and access to the crop protection product store limited to workers with formal training in the handlng of these products?

Does disposal of empty crop protection containers occur in a manner that avoids exposure to humans?

Are empty containers rinsed with an integrated pressure-rinsing device?

Has a hygiene risk analysis been performed for the entire farm?

Do farm workers have access to toilets and hand washing facilities nearby?

Is the source of water used for final product washing potable or declared suitable by the competent authorities, through a competent laboratory?

Are breakage-safe lamps in place above the sorting, weighing, and storage areas?

Is a documented waste management plan in place?

Are first aid boxes present in the vicinity of all workers?

Are safety and emergency procedures visible within 10 metres of the crop protection product store?

Protective clothing is available for all farm workers?

Protective clothing is cleaned after every use?

Source: EUREPGAP Checklist Version 2.0 Jan-04

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Why local consumer markets?

Dumping of produce that is outside supermarket specifications or is surplus to

programmes becomes common practice. As a result market wholesalers are

increasingly left trying to earn a living selling secondary quality products to the

remaining independent retailers kiosks and street market traders.

Rapid changes in our approach to work and leisure have significantly altered our

eating patterns and attitudes towards food. Increasing availability of cheaper food

in real terms, rising standards of living, growing female employment, the rise in

single person households, shrinking household sizes and increasing importance

of leisure activities have brought about major changes in consumer habits.

The emergence of self-service supermarkets has changed the face of grocery

retailing. These s/markets were quick to recognise the trends as they emerged and were

often instrumental in pioneering change. They purchase in large volumes and deal directly with suppliers. Through ‘pile it high and sell it cheap’ the superstores dominate the retail sale of food and have diversified and expanded their product ranges,

incorporating greater quantities of perishable foods, including meat, fish, fruit and

vegetables.

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Why local consumer markets?

It is anticipated that in the long term the trend towards eating out of the home will

increase. As catering matures and the catering sector becomes more organised,

improvements in supply chain efficiency are needed to reduce costs and deal with

environmental issues such as waste management.

The rapid expansion of fast food outlets and sandwich bars has provided cheap food to office and factory workers in the last few years. More meals are provided by the institutional sector such as prisons and hospitals in line with their growth in occupancy. However, it is the continuing increase in disposable income, leisure activities and single person households that have driven a significant change in the consumption of food.

Coupled with increased tourism, catering has become a significant and growing sector of the supply chain. Although large groups of hotels and fast food restaurants conduct much of the business, there is a major increase in small and medium sized enterprises (SMEs).

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Distributors

Wholesalers

Retailers

Small Plot Farmers

Large Plot Farmers

Farm gate Brokers Local Brokers Central Brokers

Processors

Exporters

Large Retailers

DistantConsumer

Retailers

Wholesalers

Distributors

Market & Other FeesTransporter

Large Institutions

LocalConsumer

Local RetailMarket

Re

tail

Dis

trib

utio

n

Typical traditional food chain between farmers and various markets.

Today, smallholder farmers are retaining a low percentage of the wholesale value of their farm produce.

Informal

Market

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Traditional food supply chains exhibit

the following key characteristics:

1. Business relationships within the supply chain are often framed in win-lose terms, with resulting levels of inter-organizational mistrust. Relationships are constructed as competitive, even adversarial, whereby each company seeks to buy as cheaply and to sell as expensively as possible.

2. Farmers/ranchers (and fishers) are treated as interchangeable (and exploitable) input suppliers, often operating in restricted markets or under short-term contracts where risks are usually born by producers

3. Benefits/profits from the selling of final food products are unevenly distributed across the supply chain, with food processors and marketers usually receiving a disproportionately higher share.

4. Operations are increasingly located and coordinated on a national a international scale, with food production, processing, and marketing sited according to short-term economic gains for those parties who dominate the chain.

5. . Traditional food supply chains can handle both undifferentiated (commodity) and value added” food products

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Values and value added

The words “value” and “values” are also used to characterize the nature of certain business relationships among interacting food business enterprises, rather than any attribute of the product itself. In general, this collection of relationships is known as a “supply chain”

The terms “value” and “values” are used in different ways when referring to food production and food business networks. “Value-added” is used to characterize food products that are converted from raw product through processes that give the resulting product an “incremental value” in the market place.

An “incremental value” is realized from either higher price or expanded market.

“Value-added” is also used to characterize food products that have incremental value in the marketplace by differentiating them from similar products based on product attributes such as: geographical location; environmental stewardship; food safety; or functionality.

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Value based supply chains

A food supply chain is a network of food-related business enterprises through which food products move from production through consumption, including pre-production and post consumption activities. Typical links in the supply chain are: (i) Inputs, (ii) producer, (iii) processor, (iv) distributor, (v) wholesaler, (vi) retailer and (vii) consumer.

When these relationships are expressly based in an articulated set of values, they are becoming known as “values-based supply chains” or, more succinctly, “value chains”.

Some in the agri-food business community use the term “value chain” to focus on supply networks that deal with food products given incremental value through processing and/or attribute differentiation.

In other words the term “value chain” embraces both the characteristics of the business relationships within a food supply network, and product differentiation.

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Value based food chains differ from

traditional food supply chains in the

following important ways:

4. Operations can be effectively located and coordinated at local, regional, national, and international scales.

1. Business relationships among “strategic partners” within value chains are framed in win-win terms, and constructed on collaborative principles that feature high levels of inter-organizational trust. (“Strategic partners” are those businesses that significantly add value to food products and/or to supply chain performance. It is possible that not every business “link” in the chain is a “strategic partner.”)

2. As producers of differentiated food products, farmers/ranchers (and fishers) are

treated as “strategic partners” with rights and responsibilities related to value

chain information, risk-taking, governance, and decision-making.

3. Commitments are made to the welfare of all strategic partners in a value chain,

including fair profit margins, fair wages, and business agreements of

appropriate duration.

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• Value chains make commitments to the welfare of all strategic partners in the chain, including fair profit margins, fair wages, and business agreements of appropriate extended length

A summary

These food value chains are distinguished from traditional food supply chains by

• the combination of how they operate as strategic partnerships (business relationships)

• how they differentiate their products (focused on food quality & functionality and on environmental & social attributes).

•Value chains have the capacity to combine scale with product differentiation, and cooperation with competition, to achieve collaborative advantages in the marketplace

•Value Chains emphasize high levels of performance and high levels of interorganizational trust

•Value Chains emphasize shared values and vision, shared information

(transparency), and shared decision-making among the strategic partners

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Farm gate Brokers Local Brokers Central Brokers

Market & Other FeesTransporter

23%

9% 3%

Improvements here will result in higher

incomes for smallholder farmers.

+

Local consumer markets

“entrepreneur – farmer partnerships”

Farmer GroupsFarmer Groups

Farmer Groups

Producers of meat, fish,

and eggsProducers of meat, fish,

and eggsProducers of meat, fish,

and eggs

Regional Logistics Centre

Processors Waste Management

Consolidation of products

Distributors

Wholesalers

Retailers

Fa

rm I

np

uts

Re

tail

Dis

trib

utio

n

Retailers

Wholesalers

Distributors

Supermarkets

High-end catering

Middle-sector

of catering

General Public

(formal and informal

markets)

Large Retailers

Large Institutions

FruitsFruits

FruitsFruits

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Advantages of setting up local

consumer markets and value chains

Re: The sustainability agenda

ECONOMIC

SOCIAL

ENVIRONMENTAL

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ECONOMIC

SOCIAL

ENVIRONMENTAL

The local population can be supplied with a variety of food products (cereals, vegetables, fruits, fish, meat, eggs) of high quality.

This quality does not only refer to the nutritional value of the products, but also to food safety: chemical residuals control, sanitary quality, storage and handling care. In fact, these aspects refer to the same requirements which the EU attaches to the import of its food.

By the developing local markets, economic activities that add value and income to the farmers, wholesalers, traders and other economic agents will be enhanced.

In fact, the value created in the entire supply chain will stay in the region and therefore be a real engine for economic prosperity and poverty alleviation.

Advantages of setting up local

consumer markets and value chains

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ECONOMIC

SOCIAL

ENVIRONMENTAL

The increase of local production will provide opportunities to people to use their land and work in the countryside.

It will create work in various ways and therefore will reduce unemployment and people hanging around in the city without any useful purpose in their lives.

These measures are there to protect the interest of the public. The Kenyan people have the right to enjoy the same qualities as the EU inhabitants.

An improvement in the quality of food consumed by ordinary Kenyans will also contribute to the health of the population, reducing sickness and health care costs.

Advantages of setting up local

consumer markets and value chains

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ECONOMIC

SOCIAL

ENVIRONMENTAL

The chain management approach creates different opportunities to reduce the environmental effects of the production, distribution and consumption of products.

Improvements can be made by the way agricultural products are produced through the: (i) use of proper methods of production, (ii) limiting of the use of chemicals, (iii) prevention of soil degradation, and (iv) implementation of proper waste management strategies.

In respect to storage and transport, different benefits can be achieved both in terms of emissions and waste. Here, the following order is valid: (i) prevention, (ii) reuse and recycling, (iii) controlled incineration (possibly with reclaim of energy) and (iv) controlled landfill (protecting people’s health and preventing leakages to groundwater).

Advantages of setting up local

consumer markets and value chains

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Way forward

Farm gate Brokers Local Brokers Central Brokers

Market & Other FeesTransporter

23%

9% 3%

Improvements here will result in higher

incomes for smallholder farmers.

+

Farmer GroupsFarmer Groups

Farmer Groups

Producers of meat, fish,

and eggsProducers of meat, fish,

and eggsProducers of meat, fish,

and eggs

Regional Logistics Centre

Processors Waste Management

Consolidation of products

Distributors

Wholesalers

RetailersF

arm

In

pu

ts

Re

tail

Dis

trib

utio

nRetailers

Wholesalers

Distributors

Supermarkets

High-end catering

Middle-sector

of catering

General Public

(formal and informal

markets)

Large Retailers

Large Institutions

FruitsFruits

FruitsFruits

MULTIDISPLINARY RESEARCH

PILOT STUDY

WASTE MANAGEMENT

FOOD PROCESSING

MARKET ANALYSIS

QUALITY CONTROLS

ENVIRONMENTAL IMPACT ANALYSIS

ENTREPRENEURSHIP

TRAINING IN BUSINESS MANAGEMENT

SOCIO-ECONOMIC FACTORS

entrepreneur

SOCIO-POLITICAL FACTORS

ECONOMIE

S OF S

CALE vs

ECONOMIE

S OF S

COPE

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RECOMMENDED APPROACHThe consideration of farming as a business requires an action plan that includes the following chapters:

• Development of a marketing plan: which products will be grown, potential

client identified and a logistic plan designed.• An initial review conducted that takes stock of the existing capacities and

agricultural practices; gaps identified as far as environment, social and

economic sustainability are concerned and a remedial program designed.• An institutional plan of action drawn up.• The development of an investment plan.• A stepwise schedule directed at getting the sales through the company

started at an early date.•A training program for sustainability.

This plan leads both to an implementable business and a pilot for further action and up scaling.

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Closing thought:

“I am enormously distressed that 200 million Africans remain hungry and malnourished…we Africans are the ones who must act to meet our food and nutrition needs in a sustainable way…The only way to stimulate and sustain measures to ensure food security, is to make access to markets possible. Agricultural production is only for three purposes: subsistence, commercial or as a hobby. Food production for subsistence only is not sustainable because you cannot feed the stomach only when you have no clothes, no shelter, no income to send your children to school and pay for medical bills…Engaging in Agriculture as a hobby is only sustainable for the rich and idle. Therefore, you cannot talk of sustainable food security without speaking of commercial agriculture, which means market access.”

Uganda President Yoweri Museveni (2003)