1. Market System Construction and
Value Chain Development for
Smallholder Agriculture
Adolfo Brizzi, Director
Policy & Technical Advisory Division
IFAD
Beijing, July 9, 2012

2. Agriculture is back
with a revenge
If global food supply is threatened it will come to dominate policy
and political agendas
 Tyranny of the short term: did we need to wait for a global crisis
to realize the importance of food security ?
 Benign neglect had
reached its limits
 Re-look at structural
issues in the context of
new integrated Ag/RD
policies

3. Measuring the global challenge:
Some facts (1)
950 35
millions
 1b rural people live <$1.25/day 900
30
most are food-insecure 25
850
 2b people in LDC derive income 20
%
15
from small-scale agriculture 800
10
 Poor people spend 60-80% of their Population under-nourished in LDC 5
750
income on food 700
-
0
1969 1979 1990 1995 2000 2005
- - - - - 2010
 Food availability may need to double to meet 2050 needs but
productivity stagnates
 Agriculture is mostly a smallholder business
 Ag. growth is twice as effective to reduce poverty than other
type of growth
resolving smallholder agriculture is the closest proxy to
reducing global poverty

4. Measuring the global challenge:
Some facts (2)
 Food remains imperfectly tradable (shallow markets,
distortions, time lag to respond, weather-dependent)
 Basic food consumption is inelastic to food prices and
consumer income
 Capacity to grow is determined by
– The size of the human stomach i.e. demographic growth
– The possibility to trade with the biggest possible market
– Substitution to higher value food
 Decades of low prices have created a situation where
– Business is marginally profitable
– Governments treated Agriculture as a public good:
subsidize and protect farmers
– High import tariffs, distortionary policies
– Little incentive to invest in higher productivity

5. Measuring the global challenge:
New paradigms (1)
 More liberalized sector. Global trade much easier
 Private sector on the move. Profit is no more a bad word.
 Bottom of the pyramid: the largest untapped potential
for market-driven agriculture development
 Considerable efforts to mobilize and organize producers
along value chains
 Ag. & Environment: friends & foes.
One needs what the other one wants
to protect (water, soil, forest)

6. Measuring the global challenge:
New paradigms (2)
 Biofuels. New legislation in OCDE countries. Food, fuel,
forest trade-offs. More pressure on food supply
 Climate Change and Ag., victim and culprit. The search for
compromises and win-wins
 New consumption patterns towards protein-rich food will
require more grains
India & China: Per Capita Consumption in Kg
800
700
600
500
400
300
200
100
0
INDIA 1993 INDIA 2007 CHINA 1993 CHINA 2007

7. New Context for Agriculture
Opportunities & Challenges
Are high prices the new tipping point for the
revival of the agriculture sector ?

8. Agriculture is a business

9. Land (water) Grabbing
Million hectares Total area apt % exploited Irrigation % irrigated
and percent for rainfed Potential
agriculture
Latin America 1066 19% 78 24%
Caribbean
Sub-Saharian 1031 22% 39 13%
Africa
East Asia 366 63% 111 68%
South Asia 220 94% 142 56%
Middle East & 99 87% 43 65%
North Africa
Source : OCDE et FAO (2009). Tableau tiré de Vindel, B. et P. Jacquet, Agriculture, développement et sécurité alimentaire, dans
Jacquet, P. et J.H. Lorenzi, Les nouveaux équilibres alimentaires mondiaux, PUF-Descartes & Cie, 2011.

10. The consumer – producer
debate

11. High Prices and Volatility
A blessing and a curse. Needs careful evaluation at country level
Who wins & who looses. But not only “static” assessments
Country agriculture potential. Import/Export status.
Rural/urban
Risks of unrest
Safety nets
Price policies
Role of storage
Export Bans Price Volatility 1885-2009
Exchange rates
Source: Roach, S. (2010), « What explains the rise in food price volatility », IMF Working Paper WP/10/129, figure 1, p. 3.
Non weighted average of the prices of wheat, rice, maize, palm and soya oil. Price in dollars, deflated by the US consumption price indexes

12. Price transmission
MAIZE Domestic Prices (US$/KG)
RICE
Source : Food Security Portal (www.foodsecurityportal.org), november 2011

13. Historic opportunity to reduce poverty
through market-driven agriculture
development
 Large countries need to feed themselves
 The case for protection and subsidies is less compelling
 Import tariffs down world-wide,new chance for trade talks ?
 Globalization provides unleashed trade opportunities
 New technology push, innovation
 Private sector on the move entering new ag. markets and value
chains
 Time to revisit some of the Government policies
 Social policies and safety nets for consumers will
allow price trickle down to producers
 Market driven agriculture through PPP for smallholders

14. Fortune at the bottom
of the pyramid (BOP)
• BOP: The biggest untapped potential for market-driven
agriculture Low cost, low profits, high volume
• When you are poor, reaching scale is the best hope to access
opportunities, become a market (consumers and producers),
economy of scale, efficiency, reduced transaction costs,
bargaining capacity, access to services
• Organize the tail-end of the value chain
• Demystifying poverty and profits
• Scale will enhance private companies’
ability to access BOP markets

15. The Need for Collective Action
 The power of scale
 The supply side (both public and private) cannot be made more
efficient in helping the poor unless it’s in the context of an
organized demand side
 Transforming a large pool of poor people into a vast untapped
market with much reduced transaction costs

16. Where are we coming from
Predominant Public Sector
Private
Sector
Public Sector Disinterested Private
Sector
Intermediaries High transaction costs
of all sorts
Communities
Disorganized Smallholders

17. We need a new model:
PPP with a “P” for people
Devise regulatory
framework and incentive
mechanism for PPP
Public Sector Private Sector
Rethink public sector Attract private sector and
intervention and link their business model
find better ways to with development objectives
deliver services along supply chians
Smallholder Sector
People Sector Becoming a market and
Demand for governance & leveraging more
accountability competition, access to
banking, markets, etc.
Institutions of the poor

18. Bridge the viability gap
Agriculture is a business, but for the private sector to work with
smallholders it costs more. We can help bridge the viability gap.
On the demand side:
– create a new market. BOP, People Sector, scale, collective action.
– Demonstrate creditworthiness of our clients to banks/MFIs, leverage
remittances
On the Supply side. If “people sector” scale is not enough (transaction
costs too high), devise an incentive mechanism to attract the private
sector.
– Subsidizing private goods through matching grants not a solution.
– Better to finance (semi) public goods as part of matching grants, but
associated to the private sector business plan, along value chains.
– Design matching grants competitively and look for leveraging private
sector money as co-financing

19. Public Sector
Development monopoly ?
• Mostly supply-driven and top-down
• Local innovation and home-grown solutions can be inhibited
• Public sector performance in delivering services is mixed
• Imbalance between supply and demand
 Poor people are seen as “beneficiaries”, not clients
 Dispensing favors rather than facilitating access to
services by the poor
 Accountability is upwards rather than downwards
 Entrenched vested interests

20. Where is the private sector ?
The private sector is on the fence
– Crowded out by public sector, policy
restrictions, red tape
– Poor infrastructure
– Not interested in poor, uneducated,
dispersed producers
– Lack of scale and quality (norms and standards)
– High transaction costs, risky business and low returns
– In some cases the private sector came, but no
competition, easy to collude (farmers with no
bargaining power)

21. THE PEOPLE SECTOR
Strategy:
• Gaining Voice
• Reaching Scale
How:
1. The software: Organize institutions OF the
poor (vs. institutions FOR the poor)
2. The hardware: Put productive assets in the
hands of poor people and provide opportunities for
income generation

22. The software
Social Mobilization and Institution Building
☞ Groups organized around a strong common purpose
(savings & loans, joint economic activities)
☞ The nature and the quality of the initial grouping
determines the graduation model
☞ Strong inclusion and (self) targeting methodology –
Mutual trust against risks of elite capture
☞ Scale creates a market and crowds-in the private sector
☞ Social agendas (disabled, HIV/AIDS,
domestic violence, alcoholism, caste)
☞ This is not about money

23. The hardware
(assets)
Access to productive assets
☞ Software first, hardware second
☞ Income generating activities, own
savings and group inter-loaning to demonstrate
creditworthiness and crowd-in MFI and Banks
☞ The grants vs credit debate
But also groups as financial intermediation.
Recycling grants into loans

24. The graduation model
Franchising
Community
Retailing Trade
Marketing enterprises
Banking Commodity
Savings & services Cooperatives Federation of
Loans Coops User Groups
Different levels of associative and federative tiers
Affinity-based Activity-based Resource-based
Irrigation,
Savings and Loans Assets/marketing Watershed, forestry

25. Institutions first
Money second
Money and Influence
Banks Agri-business Control over nat. res.
Microfinance Input suppliers (land, water, forest, fish)
Insurance Co. Service Providers Sustainable Use/finance
Service Providers Insurance/warehouse Agri-business
Going to Scale
People Sector Institutions

26. Self-help groups federation
model (Andhra Pradesh)
• 2 from each sub-district Federation 200,000
• Interface with markets 400,000 District
• Franchising and Insurance Federation
• Maintain MIS/IT systems
22
• 2 from each Village Organization
• Supports VO / audits VOs
• Links w. Governments 4000
• Link w. financial institutions 6000 Sub-District
• Links w. markets and private s. Federation
-
1100
• 2 from each Self-Help Group
• Support SHG
150
• Manage credit lines/grants to SHG 200 Village
• Social action/village development - Organization
• Marketing/identifies jobs for youth
34850
• Savings and loans
• Monitoring group performance S HG s S HG s S HG s S HGs S HG s S HG s Self-Help
• Micro-credit planning Group
• Household investment plans 10-15 809800

27. The Power of Scale
• Self-Help Groups formed in all villages of AP (saturation
strategy)
• ~9 M rural women, ~90% of poor rural women, ~40M people
• Own funds (savings + interest earned on inter-loaning):
$790M
• Cumulative credit from formal institutions since 2000: > $
2.7B
• Repayment rates in excess of 95%
• Revival of the rural banking business
• SHG: FROM: not daring to enter a bank
Cost (over 8 years):
TO: having become one of the best clients.
$10/beneficiary
$40/woman (household)
Leverage (scale-up)
each $1 raised $10

28. Scale for Innovation
Procurement Centers (PC) and Trade
•Federations operate the retail end of the value chain, particularly backward
integration through village procurement and service centers
•Reduce transaction costs between dispersed
farmers and the market through product
aggregation and collective buying
•Used as franchises for agri-businesses
•Developing a network of low-cost service
providers and paraprofessionals i.e. jobs
Youth Employment
• Large pool of unemployed youth in villages
• Federations as temp agency + moral guarantee
• Economy of scale, low transaction for training and
recruitment through one entry point
• Greatest demand: security sector, retail, services,
health centers, repair shops, computer data entry,
construction.

29. Scale for Innovation
Franchising for Life/Disability Insurance Scheme
•Access BOP market through franchising and
retailing insurance policies at least cost.
•Federations collect premiums from members,
fill forms, verify claims, maintain MIS, issue
certificates of insurance, make payments, link up
with Insurance Comp. for re-insurance, web-based claim transaction
Reaching out through ICT
* Communities’ web portal. Post aggregate info on
available products (quantity, norms, specifications) & job
seekers.
* Private sector establishes business linkages directly
with federations. Increased market access and
competition
* ICT provides quantum leap away from costly
intermediation for large-volume low-cost products & jobs

30. Scale for Innovation
Smart Cards for Banking and SS benefits
• More efficient way to deliver public services (social security,
pension/wage payments, safety nets, etc..)
• Each Fed. identify the beneficiaries of Gov. SS programs,
calculate the benefits, prepare payment lists, fill the forms, etc..
• Commercial banks (under MOU with the Government) train the
Fed. and provide the financial infrastructure (mobile phone,
smart cards, card reader, printer).
• Beneficiaries receive payments from banks through their
branchless organization and make contributions
• Shift the banking system to smart
cards and branchless banking
• New opportunities: mobile banking

31. Thank You