In Search of a Chain Reaction

Agricultural value chains linking farmers, traders, processors, retailers, and consumers are growing fast. How well can these value chains raise poor people’s incomes—and improve their health and nutrition?

Photo of truck on road with panorama of mountains

Hauling goods to market in Peru. Source: © 2005 J. Banning/Panos

In the late 1990s, a vast gulf separated poor farmers in the northern Nicaragua province of Jinotega from the potential market represented by the country’s leading national supermarket chain, La Colonia. The farmers grew meager quantities of cabbage, lettuce, and tomatoes that brought them hardly any income. More than three-quarters of the province’s population was living on less than a dollar a day. What they really needed were good seeds, better irrigation, and a reliable market for their goods.

Meanwhile, La Colonia was having its own problems. It imported fresh produce from neighboring countries, but this arrangement was expensive and slow. When it arrived at La Colonia, the produce was often wilted, bruised, or rotting. What the supermarket chain needed was a good local supplier of fruits and vegetables.

Enter TechnoServe, a nongovernmental organization (NGO) with lots of experience connecting farmers to markets. Techno-Serve helped the farmers start a cooperative and obtain financing so they could buy better-quality seeds. Advisers helped the farmers carry out safety and quality-control measures that would meet the supermarket chain’s stringent standards. The farmers started planting high-quality seeds, improved their irrigation system, and staggered their plantings to increase harvests. Soon they were selling lettuce and other produce to La Colonia, and other buyers as well, including a distributor for Walmart. In 2008, the cooperative’s revenues were US$300,000, and the farmers, whose incomes have risen significantly, can now afford to send their children to school, an expense that was previously out of reach for them.

This is an agricultural value chain in action. It is simply a supply chain that has been designed to add and retain value at each step along the way, from production to final sale, with the ultimate goal of meeting consumers’ demand.

“Population is increasing, incomes are increasing, demand is booming,” says John McDermott of IFPRI. “There are lots of opportunities, and someone is going to meet this demand. We want to ensure that poor people will benefit, whether they are farmers or input suppliers, service providers, or market agents.” So IFPRI, along with a large number of partner institutions in the Consultative Group on International Agricultural Research (CGIAR), is launching two new research projects that will examine, among other things, how value chains can be designed to improve not only poor people’s incomes, but also their health and nutrition.

Value Chains on the Rise

Agricultural supply chains are nothing new, but in the 1980s the concept of a value chain arose as people started to pay more attention to the value added at each stage of the supply chain, from the input suppliers and farmers to the traders, processors, retailers, and consumers. And the concept has attracted increasing attention as a way of thinking about, and implementing, agricultural development.

“It’s a holistic way of analyzing problems,” says Andrew Shepherd of the Technical Centre for Agricultural and Rural Cooperation (CTA). “In the past donors would go into a developing country with a production person, or a postharvest person, or a marketing person. The value chain approach gets people thinking about the whole chain and emphasizes the need for production to be related to what consumers want to buy.”

In the past there has been a heavy emphasis on increasing production as part of agricultural development. But there is a problem with that approach, and value chains may provide an answer. “If farmers produce twice the potatoes, the price may fall in their local market,” says Maximo Torero, director of IFPRI’s Markets, Trade, and Institutions Division. “So how can they add value in a way that links them to markets and helps them make more money?”

Modern value chains are becoming more common in developing countries, especially in Asia and Latin America. IFPRI’s Bart Minten attributes this growth to two factors. First, the growth of cities means more people now buy their food instead of growing it themselves. Second, rapid economic growth has put more money in people’s pockets, increasing their demand for more diverse, convenient, high-quality foods. Instead of growing just a few staples and surviving on a monotonous diet of rice, maize, or cassava, they are now buying meat, milk, cheese, bread, tortillas, crackers, canned fruits, frozen vegetables, fruit juices, and soft drinks.

To meet this demand, modern retail has swept into the cities of many developing countries. In India, for example, the sales revenues of modern private retail stores—such as supermarkets—grew by 49 percent a year from 2002 to 2009—five times faster than gross domestic product (GDP). The supermarket revolution is also occurring in other countries in Asia, Latin America, and, to some extent, Africa.

These retailers need to procure large quantities of consistently safe, high-quality food from somewhere, and to get it they are imposing standards that have implications all along the value chain. “This has led to rapidly increasing flows of marketed, higher-value agricultural products,” says Minten. “More producers and more consumers now depend on the functioning of these value chains.”

A Money-Making Proposition

For farmers, getting in on a value chain can reduce much of the uncertainty and frustration of farming. Large buyers like supermarkets and wholesalers can offer a reliable market for output and secure access to inputs like seeds, fertilizers, and pesticides. They also often provide credit and farming advice that can help farmers produce more valuable crops.

And the bottom line? “Most research seems to indicate that farmers who supply these modern value chains indeed have higher or more stable incomes,” says Minten.

PepsiCo has set up contracting arrangements with small farmers in Mexico to produce maize for the company’s snack products; in the first three years of the project, yields and farmer incomes have increased significantly. PepsiCo is also working with hundreds of Mexican smallholder farmers who grow sunflowers for sunflower oil. “We’ve committed to buy 100 percent of their crops for the next seven years,” says Beth Sauerhaft, PepsiCo’s director of global environmental sustainability. “We have a partnership with lenders to provide financing to these farmers, and the Inter-American Development Bank is guaranteeing a certain amount of these loans. And we’re also committed to technical training.”

Other major multinational corporations are also taking steps to incorporate small farmers into their value chains as a way of helping to meet demand in developing countries. In 2010 Unilever announced it would buy 20 percent of selected dehydrated vegetables from small farmers and incorporate 500,000 small farmers into its supply chain by 2020. Walmart has announced that it wants to reach 1 million small farmers in China, training them to farm sustainably and increasing their incomes by 10 to 15 percent. It plans to sell US$1 billion worth of food from small and mid-sized farms in emerging markets like China.

Despite the attention garnered by these global corporations, they won’t be able to absorb the millions and millions of small farmers and traders in developing countries any time soon. In fact, most of the value chains that involve small farmers are relatively small-scale, local efforts—for example, a small dairy farmer transports his milk to a nearby cooperative that processes it and sends it on to be sold at a local milk bar. “While it is true that the biggest monetary value addition will come from higher-value foods sold in supermarkets,” says IFPRI’s McDermott, “the vast majority of poor people will need to start by getting involved in informal markets and over time graduate up as these markets evolve and get more sophisticated.”

The income and employment benefits can spread farther along the supply chain, going beyond the farm. Modern value chains can provide jobs in food packaging and processing in rural areas. Beans can be made into bean flour, potatoes into potato chips, maize into tortillas; fruits and vegetables can be differentiated into different qualities at different prices. “Even simple sorting and packing can provide employment,” says Mark Lundy of the International Center for Tropical Agriculture (CIAT).

Getting a Foot in the Door

It’s a great opportunity for small farmers—if they can break into the value chain.

Because supermarkets and wholesalers need large quantities of high-quality products, delivered when promised, they tend to seek relationships with farmers who are already well endowed with land, education, and assets, like irrigation. In many ways, this preference is understandable. Small farmers produce small quantities, and it’s expensive to arrange individual transactions with them.

In addition, small farmers are generally not accustomed to meeting stringent quality and safety standards, and they may find the technologies needed to meet these standards—such as equipment for drying crops or refrigerating livestock products—unaffordable. “For individual farmers, it’s very difficult,” says Andrew Shepherd of CTA.

TALLYING UP THE SCORECARD

A new tool from IFPRI helps prioritize value-chain projects

To help aid donors direct funding to the most poverty-reducing and economically sustainable projects, IFPRI has developed a “scorecard” system that is currently being applied to agricultural value-chain projects in a pilot program in Central America. Here, Manuel Hernandez, an IFPRI researcher, and Maximo Torero, director of IFPRI’s Markets, Trade, and Institutions Division, describe how it works.

Donors typically want their projects to be both effective (in this case, to reduce poverty) and economically sustainable (so the project won’t collapse when donor funding ends), but they often rely on qualitative or subjective criteria to decide whether potential projects will meet these goals. Our scorecard applies a more objective, quantitative approach to both goals. First, we evaluate the project’s sustainability using the latest developments in statistical modeling. Our data-driven method can more accurately model the risk of whether the project will succeed or not based on specific project characteristics and external factors, such as the education and experience of beneficiaries and the probability of crop failure. Then, the projects that meet the sustainability threshold are ranked in terms of their potential to reduce poverty based on how well the projects reach geographic areas with high poverty and low market access and how many direct and indirect beneficiaries they serve.

With the help of two sponsors of the pilot program—the Office of the Multilateral Investment Fund of the Inter-American Development Bank and the Austrian Development Agency—we have so far assessed more than 50 projects using the scorecard, and 9 have been selected for funding. The projects, located in El Salvador, Guatemala, Honduras, and Nicaragua, represent a total investment of about US$1.7 million and will have nearly 6,000 beneficiaries—half of whom are women—who live in high-poverty areas. The projects support a wide range of agricultural products and markets, including coffee, chocolate, tropical fruits, and vegetables.

Our task now is to evaluate the projects and assess how well the scorecard has identified activities that are likely to be poverty-reducing and sustainable. Looking ahead, we hope to extend the scorecard approach to other types of projects and other regions around the world to help donors ensure the effectiveness and sustainability of their investments.

Pippa Chenevix Trench, who worked on these issues as an IFPRI research fellow, points to the way around this small-farm problem: “You need collective action to bring together small farmers who produce for these markets,” she says. In other words, you need to organize small farmers in such a way that they act as one large entity—just as the produce farmers in Nicaragua did.

“Institutional arrangements become important,” says John McDermott. “You need service hubs—they might be cooperatives or some other institution. They can provide loans, inputs, information, and market opportunities. They can lower costs and improve services to the poor. These institutions help link millions of small farmers and other poor people to functioning value chains. In Kenya it has been estimated that there is one job along the dairy value chain for each of the 3 million improved cows.”

TechnoServe and similar NGOs can help get the process started by showing what kinds of farmer arrangements have worked elsewhere and identifying other problems that keep small farmers from participating in value chains. It could be, for example, that farmers have poor seeds or breeds of livestock, lack farming or storage equipment, use too little or too much fertilizer, or follow less than optimal farming practices.

Cooperatives are not the only solution, however, says Derek Baker of the International Livestock Research Institute. “With a cooperative, you need a lot of formal organizational structures. They commit people to various courses of action and ways of dividing benefits. There are other less formal approaches,” he says. For instance, informal groups of farmers may share a truck or funnel their products to a large local farmer who can get them to market.

The International Potato Center (CIP) is working to help small-scale Andean farmers enter value chains for new potato products. Because not all value chains work to the benefit of small farmers, CIP is developing a “poverty filter” to determine which types of potatoes—such as small varieties that require harvesting by hand—will give small farmers a long-term competitive advantage.

Even poor, illiterate farmers are able to participate, with the right support. For example, IFPRI researchers are working on a project with CARE to strengthen dairy value chains in Bangladesh. The project helps small dairy producers afford to buy high-yielding breeds of cattle that can produce much more milk than traditional breeds. It helps the producers organize themselves into groups, and it trains them in how best to feed and care for the cows. “It has taught the farmers how to grow fodder, when to feed the cows, and when to go to the vet,” says IFPRI Senior Research Fellow Agnes Quisumbing. “It teaches them how to function in a very complicated production system and ensure the quality of milk production, even if they are illiterate.” Then the project helps build ties between small producers, small dairy collectors, and small processing plants.

IFPRI researchers are also evaluating how well the project meets the needs of women, who traditionally do most of the work associated with dairy production. When women do the work but don’t reap the benefits of value chains, they may participate only half-heartedly. “We know from other value chain projects that when they don’t address the issue of gender,” says Quisumbing, “it can jeopardize the project’s success.”

Food That’s Safer…?

Besides raising farmers’ incomes, building agricultural value chains can make it easier to produce safer food.

Although hunger in developing countries gets the headlines, unsafe food kills more people. In 2008, according to the World Health Organization, more than 1.6 million people worldwide died of diarrheal diseases—in many cases resulting from unclean food and water.

Demand for safe, high-quality foods is on the rise in developing countries, so large buyers like supermarkets and agrifood businesses have set food safety standards that farmers and other actors along the value chain must meet. In fact, improving food safety requires working along the whole value chain—farmers can’t improve food safety by themselves.

To better understand the value-chain approach to food safety, IFPRI is starting a program to study how best to control aflatoxin, a fungus byproduct that appears in some food crops, especially maize and peanuts, and can cause serious liver diseases, including cancer. “A producer in Kenya can do everything to reduce aflatoxin in maize, but if the trader leaves the maize on the back of his truck in the rain, all that effort is lost,” says Trench. “Any action taken has to be supported all the way through.” This means training people all along the chain, from the farmers to the retailers, in how to keep food safe.

In Kenya and elsewhere, milk marketing agents have formed associations to collect milk from small farmers, process it, and sell it to distributors or supermarkets. ILRI and partners have looked along the dairy value chain to identify the points where food safety risks are greatest and then worked to fix these, says John McDermott. The fixes can be quite simple: washing hands, wearing clean clothing, cleaning the milking area, straining the milk to remove contamination, and using easy-to-clean metal containers instead of plastic ones.

…Or More Nutritious?

Just as food safety can be one of the “values” produced by a value chain, so can nutrition—but if adding nutritional value costs producers money, there may be trade-offs between economic value and nutrition. “We want to explore whether it’s possible to add nutrition to the value chain without affecting economic value for the different participants in the chain,” says Marie Ruel, director of IFPRI’s Poverty, Health, and Nutrition Division.

How important is including nutrition in value chains? Won’t people in developing countries automatically improve their nutrition as they make more money? “Although increasing incomes usually do lead to improvements in nutrition,” says Ruel, “it takes too long to improve nutrition that way. We need to do more to ensure that additional income translates into nutrition benefits.” One way to do that, she says, is not only to educate people about the value of nutritious foods, but also to improve their access to such foods.  That’s where the value chain can help.

By studying the value chain, it’s possible to determine where to add nutritional value or avoid nutritional losses. Then, says Maximo Torero, “nutrition becomes an attribute that farmers can charge for. This requires both improving the nutritional content along the value chain and creating consumer demand by providing information on the benefits of this new attribute.”

But will poor people pay a higher price for more nutritious food? Although researchers are still studying this question, it appears that in some cases people will pay more. For example, HarvestPlus, a program that breeds vitamins and minerals into staple food crops, has developed a biofortified orange-fleshed sweet potato that has more vitamin A than the white and yellow sweet potatoes typically eaten in many African countries. The program distributed sweet potato vines to 10,000 households in Mozambique and Uganda and at the same time worked to raise awareness among farmers, traders, and consumers of the nutritional benefits of the orange sweet potatoes.

The market for orange sweet potatoes had to be created from scratch, using road signs, murals, promotion days, and radio programs and advertisements. When the orange sweet potatoes reached the market, the light orange variety earned a 17 percent price premium and the deep orange a 54 percent price premium over white or yellow sweet potatoes (for more on the spread of orange sweet potatoes, see the story on page 3).

The inclusion of nutrition in value chains is still at an early stage and may offer significant potential for growth. CIAT’s Mark Lundy says, “If biofortified varieties are of interest to farmers and show nutritional benefits, can’t we get a major food processor to use these crops in processed and fresh food products targeted to low-income consumers?”


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The Private Sector Can’t Go It Alone

The rising consumer demand for higher-value and processed-food products in developing countries has opened up a sizable new opportunity for private-sector companies. But private companies and small farmers often can’t meet this need and build thriving value chains without input from other actors, such as NGOs and governments.

NGOs with experience in setting up value chains can provide the sort of guarantees of quality and reliability that buyers like wholesalers or supermarkets rely on. Julio C. Montealegre, TechnoServe's country director in Nicaragua, says, “We help reduce the perceived risk. Before we started, supermarkets were comfortable buying produce from Costa Rica. Changing suppliers is a big commitment—not a one-time thing. We help ensure quality and consistency of delivery.”

Beth Sauerhaft of PepsiCo says, “Partnering with NGOs that are known to growers and consumers may add a certain degree of trust from these groups. And they can help ensure that different players or impact points in the value chain are accounted for—whether the small-scale farmers, rural communities, or the environment.”

Governments also play a critical role in setting appropriate policies, making contracts enforceable, and building infrastructure such as roads. “No exporter is going to buy from farmers who are down at the end of a dirt road,” says CTA’s Andrew Shepherd. In some countries, such as Colombia, governments themselves have taken the initiative to promote value chains in certain products.

Aligning the Incentives

Value chains are no panacea for the problems of small farmers. Worldwide there are about 500 million small farms, which are home to about 2 billion people. Only a small fraction of them are involved in modern value chains. CIAT’s Lundy points out that to be suited for value chains, farmers must be able to grow commercial crops, and CTA’s Shepherd is doubtful whether the poorest people have what it takes to participate. “The very poorest people have no assets or financing and limited education. They are not an attractive proposition for companies to work with,” he says.

Nonetheless, ILRI’s Derek Baker points out that small farmers have an important competitive resource at their disposal: their own labor and that of their families. “There are conditions under which smallholders can be competitive,” he says. “It comes down to, ‘Can cheap labor be used well?’”

There is still much to learn about how to engage poor farmers and rural people in value chains, and it can be difficult to translate lessons learned from one value chain to another. Products and local conditions vary widely, so it often seems as though each value chain must reinvent the wheel. To help find broad lessons for developing value chains, IFPRI researchers and their partners across the CGIAR will look at the big picture, bringing to bear their experience in studying specific commodities and in conducting large-scale surveys at different points along the value chain and across different types of producers. “This will give us a quantitative assessment that is representative of what is happening in different value chains on farms of different sizes in a certain country,” says Maximo Torero. The findings should help set priorities in promoting value chains, especially those targeting small farmers.

“The most important thing any project can do,” says Montealegre, “is to align the incentives of the various actors: the farmers, the supermarkets, the processors.”

  • Amy Angel

    A really great overview of this initiative. The modelling attempts for successful project are fascinating. Where can we learn more about this?

  • Anonymous

    Agree this is a great overview on the subject of value chains and how to get more small-scale food producers and processors and sellers participating in the 'higher value chains' coming about due to the rise of supermarkets in developing countries. etc. Thank you for covering the subject so well and in such detail. (My eyes usually glaze over when 'value chains' are mentioned--not this time!)

  • M Winslow

    Excellent overview. Just a few comments.

    "In fact, most of the value chains that involve small farmers are relatively small-scale, local efforts—for example, a small dairy farmer transports his milk to a nearby cooperative that processes it and sends it on to be sold at a local milk bar."

    In perhaps the mother of all developing-country value chain examples, Dr. Verghese Kurien led a movement that organized more than ten million smallscale producers to make India the world's largest dairy producer:
    http://witblog.icrisat.org/?p=711

    You've mentioned maize aflatoxin work; here's also a success story told by the CEO of the National Smallholder Farmers' Association of Malawi - opening peanut export markets to the UK:
    http://www.youtube.com/watch?v=VnpWjF5Jgtc

    Another of Ethiopia creating a strong export value chain for chickpea:
    http://www.scientificamerican.com/article.cfm?id=chickpea-revolution