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Building resilient systems in developing markets

Building resilient systems in developing markets

Seeds of Change: How farmer-allied intermediaries are building inclusive and resilient food systems in Africa

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Building resilient systems in developing markets

This article originally appeared in the Nov. 18, 2022 issue of The Economist

The effects of climate change, the covid-19 pandemic and the war in Ukraine are exacerbating food insecurity and threatening livelihoods around the world, underscoring the need for more-resilient food systems. In 2021 hunger affected 278m people in Africa, 425m in Asia and 57m in Latin America and the Caribbean, according to the United Nations Food and Agriculture Organisation. While Asia is home to the greatest number of undernourished people in the world, Africa is where the prevalence is highest. One in five people, or 20% of the population, experienced hunger in 2021, compared with 9% in Asia and less than 2.5% in North America and Europe. There’s an unprecedented urgency for an overhaul of food systems in developing markets, especially Africa, whose population is poised to nearly double to 2bn over the next two decades.

Agriculture is a main driver of Africa’s economy. In sub-Saharan Africa, agriculture, forestry and fisheries account for over 15% of GDP and more than 50% of employment. Smallholder farmers produce some 80% of food in the region, but their incomes and productivity are often low; many subsist on less than $5.50 per day and crop yields are generally 25-40% of what they would be in a typical developed market. By 2050 higher temperatures, longer dry seasons and unpredictable rainfalls are forecast to reduce these already low yields by another 10%.

“Transforming food systems in developing markets requires a multi-dimensional approach that not only improves food and nutrition security, enhances farmer livelihoods and fosters gender and youth inclusion, but also enables small- and medium-sized food businesses to grow and create jobs, and sets farmers on a path towards climate adaptation and resilience,” says Vikki Tam, global head of Bain & Company’s Social Impact Practice. “There’s an added complexity in developing markets to make domestic food systems robust and resilient, and it often starts with an agricultural and economic transformation.”

Agricultural productivity improvements can advance local food security and farmer livelihoods—as long as farmers also receive fair prices. But productivity gains alone are not enough to drive a wider economic transformation. For this, output markets need to develop, and the economic value associated with activities beyond the farm gate must increase. Private enterprises become an important force for the economic development and transformation of a country, further improving farmer livelihoods and creating jobs while providing more affordable nutrition for the local population. This “value addition beyond the farm gate” is an estimated 50% lower in some African countries compared with their developed counterparts. What’s more, net food imports have risen 400% since the early 2000s, and they are projected to rise to $110bn by 2025 if little is done to improve productivity and increase local value addition.

The “hidden middle”: A new approach to food-system transformation

Historically, much of the attention has focused on farmers and improving their productivity. Yet, to adequately address food security for the world’s fastest growing population, equal attention needs to be paid to how widely, efficiently and safely food is distributed locally, as well as its affordability and nutritional quality, Ms Tam says. More emphasis needs to be placed on the firms in the middle of the supply chain that connect farmers to markets, such as aggregators, processors and vertically integrated brands. In Africa these “midstream” firms—80% of which are SMEs—are often excluded from mainstream policy and investment programmes and are therefore referred to as the “hidden middle” by the Alliance for a Green Revolution (AGRA).

Some companies in this “hidden middle” can play a pivotal role in anchoring Africa’s local food systems. In a 2019 report Bain termed these essential companies “farmer-allied intermediaries” (FAIs). The defining feature of FAIs is their commitment to source from commercially oriented smallholder farmers in a way that strengthens the farmers’ capacity and enhances their livelihood. This intentional approach helps farmers collect fair prices, connect to markets and even gain access to critical inputs such as seeds and fertiliser on credit, while getting training to adopt tools and practices to boost production in an environmentally sustainable way.

"India’s dairy sector transformation took four decades. We don’t have decades to similarly transform food systems in Africa, but we can leverage more effective multi-stakeholder collaboration and innovation to accelerate the pace of change."

Vikki Tam, Global Head of Bain & Company’s Social Impact Practice

Grande Demam, a dairy processor in the northern Tanzanian city of Arusha, is one such FAI. In early 2020, as the spread of covid-19 halted travel around the world, demand for Grande Demam’s products for hotels and restaurants nosedived, with revenue declining by 70%. Its 20 employees’ hours and wages were cut in half, and the company had just two months of cash on hand.

With funding and expertise from Dairy Nourishes Africa (DNA), a public-private partnership dedicated to accelerating the growth and resiliency of dairy systems in east Africa, Grande Demam was able to adapt its business and continue to support the livelihoods of hundreds of its smallholder farmer suppliers. Grande Demam was one of DNA’s pilot programmes, highlighting how farmer-allied processors can be linchpins for local dairy transformation.

DNA was founded by the Global Dairy Platform (GDP), a pre-competitive consortium of global dairy companies focused on sustainable agriculture, and implemented in partnership with Land O’Lakes Venture37 and Bain & Company. DNA and advisors from GDP member companies provided agricultural and business advisory support. Land O’Lakes Venture37 trained farmers on good husbandry practices that improve yield and sustainability, while Bain supplied consulting support to shift Grande Demam’s business model and product portfolio to serve local consumers. Grande Demam’s annual revenue grew 30% after stabilising and accelerating the business. It pays its 800 smallholder farmers a 25% premium above the government minimum price.

“We took the learnings, and working with the Tanzania government, shared it broadly with other processors,” says Jay Waldvogel, senior vice-president of strategy and international development at Dairy Farmers of America, and GDP’s director. “Our pilots have proven that you can create a really sustainable model of change if you can partner with a processor who is committed to farmers and can effectively grow demand.”

For the processors and their linked farmers working with DNA during the first year of the pilot, production rose 25%, representing an increase in average productivity per cow per day from 7.1 to 8.9 litres. What’s more, the intensity of on-farm greenhouse-gas emissions declined by 18% through adoption of sustainable intensification practices such as feed optimisation and conservation.

“Farmer-allied intermediaries, when scaled up, are linchpin firms,” Ms Tam says. “In Africa, these businesses play a disproportionately important role in making food systems work. The question is how do we scale up more of these businesses—particularly those with high growth potential—so that they can become national and regional champions that feed local populations and serve as anchors for resilient local systems.”

Enabling environment: Government support and co-ordinated financing

Enterprises that are intentionally farmer-allied often face higher costs of doing business, at least in the near term, which makes it more difficult for them to scale up in challenging environments. For FAIs to grow profitably, they require a strong enabling environment—the availability of affordable financing, supportive policy, a regulatory framework and infrastructure investments.

Insufficient access to capital is often cited as the biggest obstacle to African agricultural intermediaries’ growth. In sub-Saharan Africa alone, 83% of agricultural SME financing needs—some $74.5bn—remains unmet. And even what credit does exist is not always affordable, with interest rates of 15-30%. The capital gap extends to equity as well. Of the estimated $6bn in impact capital, on average, deployed to sub-Saharan Africa each year between 2013 and 2018, less than 1% went to agricultural SMEs in the “hidden middle.”

More co-ordinated public and private financing and the use of risk-sharing mechanisms such as credit guarantees, interest subsidies, first-loss vehicles and technical assistance facilities can unlock greater amounts of capital. Blended financing—the use of catalytic capital from public or philanthropic sources to increase private-sector investment in sustainable development—can be an important tool. Today, agriculture represents only 15% of global blended-finance transactions. According to a recent report by SAFIN and Convergence, allocating 20% of existing agriculture official development assistance funds towards blended finance could mobilize an additional $13bn annually—a six-times leverage factor.

Government backing is a crucial component to help accelerate the transformation. In India, for example, broad government support for smallholder farmers and SME dairy processors—such as by organising co-operatives, providing extension services, investing in the infrastructure necessary for a cold chain, and facilitating access to credit by granting priority lending status to the dairy sector—has helped significantly expand the private sector. Indian milk production increased from 66m tonnes in 1995 to 191m tonnes in 2019, and the number of dairy processing plants grew from roughly 700 in 2002 to more than 3,000 in 2019, of which nearly two-thirds were privately owned.

Dodla Dairy is one of the Indian dairy sector’s biggest entrepreneurial success stories. Dodla sources from more than 220,000 smallholder farms and has developed a farmer-allied engagement model, subsidising farmer access to high-quality agricultural inputs and linking farmers in need of financing to collaborating banks. Farmers who work with Dodla have incomes twice as high as the average Indian smallholder farmer and get yields that are up to 25% higher than the national crossbred average.

“Giving a kid a glass of milk or giving somebody a cow is a short-term solution,” Mr Waldvogel says. “You have to focus on strengthening the dairy sector for long-term resilience, nutrition security, economic prosperity and environmental sustainability.”

FAIs, however, aren’t limited to just the dairy sector. There are similar approaches in other crops as well, such as fruits and vegetables in Kenya and maize in Nigeria. African governments appear to be stepping up to create long-term solutions. For instance, at the culmination of the 2021 UN Food Systems Summit, 25 African countries presented national strategies for transforming their food systems amid calls for greater sustainability, climate resilience, inclusivity and nutrition. Moreover, in November 2021 the World Bank approved a $570m multiphase programme to improve food-system resilience in west Africa, promoting local value chains and managing agricultural risk in the region.

“India’s dairy sector transformation took four decades. We don’t have decades to similarly transform food systems in Africa,” Ms Tam says. “But we can leverage more effective multi-stakeholder collaboration and innovation to accelerate the pace of change.” Unlocking the full transformation potential of agriculture through high-potential farmer-allied intermediaries may just be the key for building more resilient, inclusive, sustainable and healthy food systems in Africa.



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