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4 Small Farmer Participation in Value Chains

The claims mentioned earlier in this chapter about the exclusion of small farms from value chains were based on limited empirical evidence. New empirical evidence from a variety of countries shows a largely consistent and much more nuanced picture. The studies generally confirm the main hypotheses that transaction costs and investment constraints are a serious consideration in these chains, and that processing and retailing companies express a preference for working with relatively fewer, larger, and modern suppliers. However, empirical observations

Table 1. Smallholder procurement in Sub-Saharan African export supply chains

Source: Maertens et al. (2009)

also show a very mixed picture of actual participation in value chains, with many more small farms being contracted than claimed initially. Table 1 summarizes this for a selection of countries.

Hence, the recent literature shows that small farmers are indeed “excluded” in some value chains and in some countries, but that this is far from a general pattern, and that small and poor farms are included in value chains to a much greater extent than expected ex-ante based on arguments of transaction costs and capacity constraints.

Some studies show there is variation in the nature of contracts and value chain finance going to different farm structures. For example, in case studies of dairy processors, investment support for larger farms include leasing arrangements for on-farm equipment, while assistance programs for smaller dairy farms include investments in collection units with micro-refrigeration units (World Bank, 2005).

Some studies find that within the “small farm” group it is the (relatively) richest and most educated that are included and that the poorest are being excluded (Maertens and Swinnen, 2009). However, even this is not an undisputed general conclusion. Other studies show that the poorest may be included, and some countries (e.g. China) even show that the “horticultural revolution” (associated with simultaneous dramatic growth of modern retail investments and urban demand for horticultural products) is associated with a pro-poor bias in the supply chain (Wang et al., 2009).

4.1 Small Farmer Inclusion and Governance

An important aspect of the growth of modern value chains is the governance and industrial organization of these supply chains. In particular, as mentioned earlier, there is much evidence that vertical coordination is widespread in high value chains, often as an institutional response to overcome problems of local market imperfections. With investors and food companies facing important problems of sourcing high quality produce on the supply side and high consumer standards on the demand side, vertically coordinated systems have emerged to control standards by suppliers and to provide suppliers with inputs and management advise. Vertical coordination varies from integrated (large) farms managed by food companies to extensive contracting arrangements with smallholders.

The rise of contracting, far from leading to the exclusion of poorer farmers, is shown to improve access to credit, technology, and quality inputs for poor, small farmers that heretofore were faced with binding liquidity and information constraints due to poorly developed input markets. Studies have found extensive evidence of input provision through interlinked contracts – in the form of inputs, credit, bank loan assistance, technology, and management advice, etc. Minten et al. (2009) and Maertens and Swinnen (2009) find that due to increased vertical coordination in newly emerging value chains between buyers and poor, small farmers in African countries, such as Madagascar and Senegal, poor rural households experienced measurable gains from supplying high-standard horticulture commodities to global retail chains.

However, this is not always the case. For example in China, Wang et al. (2009) found that while rising urban incomes and emergence of a relatively wealthy middle class were associated with an enormous rise in the demand for fruits and vegetables, almost all of the increased supply was being produced by small, relatively poor farmers that sell to small, relatively poor traders. Despite sharp shifts in the downstream segment of the food chain toward modern retailing (there has been a rapid increase in the share of food purchased by urban consumers in supermarkets, convenience stores, and restaurants), marketing and production are still organized by traditional methods.

In general, a wide variety of models of value chain development have emerged, with variations both across countries and across sectors, reflecting different commodity and market characteristics, resource constraints, etc. For example, in parts of Africa where access to land is ample and easy, large-scale farms have been set up in some cases. In other cases, where land is already used by smallholders and land pressure is strong, contracting systems have been set up. Comparative advantage of small versus large farming systems, associated with different types of commodities – such as extensive grain growing versus intensive, high-quality vegetable production systems – have also led to different chain models. We will document and explain these changes and the models that have emerged in the final section of this chapter.

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