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CHAPTER 2 Food Security and a Holistic Finance for Rural Markets

Doris Köhn[1] and Michael Jainzik[2]

Investments in agriculture, particularly in smallholder agriculture in developing countries, are regarded as critical for meeting the food demands of a growing world population.[3] Improvements in agricultural finance, mainly in providing investment credit to farmers, are widely regarded as an important approach to stimulate production.[4] While this is certainly true, it is only part of the story. Agriculture-related physical and market infrastructure have been widely neglected in the discussion despite their immense relevance for making food available in developing countries – and as a precondition for farmers to produce at all.

In this chapter, we describe the investment and financing needs of every step in the food production and distribution chain: from farm to fork, from pasture to plate, or from barnyard to belly. Take your pick.

1 Commercialisation of Farming as an Opportunity

The global economic framework for agricultural production has changed significantly in recent years. Most importantly, after decades of stagnating commodity prices, prices for agricultural produce, processed as well as non-processed, have significantly increased and are expected to increase further. Population growth and increased demand for high-value food products – particularly in the big emerging markets – are the underlying factors that indicate a continuing challenge.[5] This higher price level for agricultural goods that is likely to continue implies the opportunity for higher income for farmers in particular in developing economies since it promises higher economic returns for agricultural production.[6] Thus, investment in agriculture and modernization of production are rewarded. Indeed, they are more attractive today than they have been for many years.[7] At the same time, investments in agro-processing and related trade activities may become economically more attractive, which should boost investments.

However, these investment potentials in agriculture face two major bottlenecks: a lack of adequate infrastructure that connects agricultural production with markets, and a lack of finance for these investments. The lack of finance is not only a bottleneck for private investments in primary agricultural and processing, but also for the connecting infrastructure, both private and public.

We will explore these hurdles for agricultural production to reach consumer markets and to gain its full potential, and we will highlight the respective roles of the financial sector.

  • [1] KfW, Director General Africa and Middle East.
  • [2] Director KfW Office Windhoek.
  • [3] The term “food security” is used loosely in this article. We do not refer to all dimensions of the 1996 World Food Summit's comprehensive definition of food security as “Food security exists when all people, at all times, have physical and economic access to sufficient, safe and nutritious food to meet their dietary needs and food preferences for an active and healthy life”.
  • [4] See for instance Doran, et al. (2009).
  • [5] See for instance Chao-Béroff (2013).
  • [6] “Small-scale farmers will not invest in boosting production beyond their personal needs unless there is something in it for them”, Gouillou and Matheron (2011), p. 68.
  • [7] Although the authors believe that these incentives are generally positive and necessary to increase agricultural output to feed the world's population, on the flip-side of the expected higher returns of agricultural production there are obviously negative effects, too. Apart from potential ecological problems resulting from intensified production, the large-scale acquisition of fertile land by commercial investors may be the most prominent one. There are several reports, that such large-scale acquisitions have lead to the expulsion of small-scale farmers, and government and development financiers need to respond to such developments. This discussion shall not be deepened here. As a starting point for reading, we suggest Oxfam International (2011) and Deininger and Byerlee (2011). See also landportal.info/landmatrix, a project to maintain a public online database on large-scale land deals.
 
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