Agricultural value chains encompass the flow of products, knowledge and information between smallholder farmers and consumers. They offer the opportunity to capture added value at each stage of the production, marketing and consumption process. Smallholder farmers need to better engage with value chains in order to gain added value for improving their livelihoods, whilst reducing their risks and increasing their resilience.
As value chains differ considerably across countries and products, more research is needed to identify the optimal configuration enabling smallholder farmers to gain a greater share of their value and assume fewer risks. If agricultural value chains are to offer pro-poor opportunities for growth, then those markets in which smallholders can have a ‘comparative advantage’ need to be identified and the producers actively assisted. Smallholders with a strong social network can draw upon their social capital to strengthen their position within a value chain. For example, an effective producer organization or cooperative can help smallholder farmers increase their bargaining power by helping them enter into high-value supply chains and provide support for acquiring information on market prices and requirements.
Governments can support the development and coordination of value chains. Investments that incentivize greater productivity and the ability to capture a higher value include transport infrastructure; energy for processing, chilling, drying, or and packaging commodities; research and extension services in new storage, processing and packaging technologies; and education and training in product marketing. Perhaps the most critical role of governments is establishing systems of laws, regulation and governance, which set rules for fair and competitive markets for farmers, marketing agents and processors, and permit farmers to secure land and property rights.
Whilst most smallholders participate in local value chains, increasingly multinational companies are playing an important role in developing value chain opportunities for smallholder farmers. For example, Unilever has made a public commitment to source more raw materials from smallholder farmers, helping to improve their agricultural practices and thus enabling them to supply global markets. Another major global food manufacturer, Nestle aims to create value for their shareholders and develop direct relationships between farmers and cooperatives through their Farmer Connect programme.
Given the economic importance of agriculture in many African countries, improving the functionality and the accessibility along the whole agricultural value chain can bring multiple benefits for smallholder farmers. Participation in well-functioning value chains can offer job opportunities, services and connective infrastructure linking to wider markets. Rapidly growing global food markets can help to expand these benefits and share value across value chain participants. In some instances participating in a well-functioning value chain brings farmers not necessarily higher prices or incomes, but a more stable, resilient and predictable income.
More than 80% of the value in the global food industry is in ‘value-added’ components ranging from sorting, cleaning and packaging for fruits and vegetables to processing and branding foods and beverages. Some of these value-added activities require skills, financing and scale, but simpler changes can also capture higher value. These activities can provide a way for farmers to expand and access higher-value national, regional or international markets. They can also provide greater employment opportunities, especially for women who are particularly active in food processing.
Contract farming allows farmers and buyers to better coordinate their efforts which allows for a degree of assurance ameliorating some of the main areas of risk: price, quality, quantity and time of delivery. Although farmers have benefited from contractual agreements, there is substantial evidence that the smallest farmers are often unable to enter formal arrangements.
Cooperatives have also come back into favour with donors and NGO’s as a way to facilitate smallholder participation in a particular part of a value chain (such as production, post-harvest handling or marketing), or control entire chains. However, larger cooperatives may require a hierarchical system to be put into place for effective coordination. As cooperatives are typically based on voluntary membership, joint interests and participatory decision-making, imposed hierarchical structures can prove challenging.
In recent years there has been a shift that focuses greater attention on staple and other food value chains, where small-scale producers, especially women, tend to be more active. If social capital is built among resource-poor women, they can engage in economic activities that will improve their livelihoods. Some initiatives in Burkina Faso and Senegal show that when women pull their resources together and receive adequate support and accompaniment, they can engage in higher value markets (such as the cosmetics markets), increase their control over several stages of value chains and even become involved in the coordination of the value chain.
Whilst agricultural value chains offer new income earning opportunities, they can also create barriers to market access for smallholders. In some cases, the concentration of market power at specific points in the value chain reduces the incomes of other actors, particularly those exposed to high levels of risk such as smallholder farmers and women. To reduce the risk borne by those at the base of agricultural value chains, more work is needed to identify the types of markets where smallholder farmers can have a ‘comparative advantage’ and identify the types of support that will enable them to harness greater value.
Support may come in the form of interprofessional associations or ‘innovative platforms.’ These are private bodies, recognised by the state, which group together upstream and downstream partners of the same commodity along a value chain. They aim to make the value chain more efficient by identifying and overcoming bottlenecks. They are a form of bridging capital (links across communities) that offers a way to deal with the multiple stakeholders – farmers, traders, processors, input and credit suppliers, insurers, policymakers and researchers – involved in a commodity value chain.
Participating effectively in agricultural value chains requires multiple forms of support such as improved access to credit, insurance, or education. For example, value chain finance (the flows of funds to and among the various links within a value chain) can help smallholders access credit for expanding their farming operations and value-added activities. Typically, value chain finance systems allow borrowers to benefit from higher lending at better terms and obtain loans that reflect the cash flow pattern consistent with their producing, processing or trading activities. Such interventions are growing in popularity with donors as a means of promoting economic growth and poverty reduction.
There are extensive opportunities for value chain interventions within Africa, through upgrading, deepening and expansion. Upgrading value chains refers to moving value chains in a new direction, such as towards new customers, adding operations, or increasing efficiency. This may be achieved by building infrastructure for water storage, conservation and irrigation; establishing local seed and fertiliser companies to improve productivity and improve a customer base, or stimulate microcredit or microinsurance.
Deepening value chains involves addressing gaps such as unmet market demand or seeking opportunities for vertical and horizontal integration, greater specialization, and the expansion of services. This may involve the formation of associations or cooperatives providing opportunities for fragmented producers or businesses to combine their resources to add value.
Expanding value chains involves the growth of trade for the urban retail sector. This may be achieved through joint ventures that share the risk of incorporating new elements into the value chain or investing in new technologies, particularly in fresh produce preparation, packaging, and the establishment of logistics centres.
Informal and regional markets are growing faster or as fast than global value chains (GVCs), as the GVC approach targets the most well off farmers, better able to meet the quality and quantity standards.