This article is Chapter 4 of Bain’s report on Africa’s critical agricultural intermediaries. Explore the contents of the report here or download the PDF to read the full report.
In countries that have progressed beyond subsistence farming and where a sizable number of commercially oriented smallholder farmers exist, significantly more emphasis and funding should be directed toward the profitable scaling of farmer-allied intermediaries. We have seen farmer-allied intermediaries serve as the linchpin of value chains, enabling farmers to access markets and improve their livelihoods in sustainable ways. As smallholder farmers do better, rural poverty declines. Farmer-allied intermediaries also bring profits and economic activity beyond the farm gate. They create jobs. They help make affordable, nutritious food available for Africa’s growing population.
Farmer-allied intermediaries come in different forms, sizes and stages of maturity, but two things are consistently true: There are far too few of them, and those that do exist are not able to grow fast enough.
Agriculture is a system, and for farmer-allied intermediaries to grow profitably, a wide array of actors will need to come together to support them and help amplify their impact.
Capital and other support must be tailored to help farmer-allied intermediaries that have already achieved threshold scale accelerate their progress and impact—and must incubate early-stage enterprises so that they can grow and meet thresholds for bank lending and investor interest.
It is not easy to optimize smallholder farmer impact and financial returns simultaneously, nor is it easy to achieve other goals, such as delivering affordable food to local, largely low-income populations. The decision to continue sourcing from smallholder farmers, even as an intermediary scales, requires resolve and a conscious commitment to stay farmer allied. This may negatively impact the interests of other stakeholders, including those of financial investors looking to meet near-term investment goals, buyers and end customers demanding the lowest price possible, and workers deserving fair wages and professional growth. Funders and corporate buyers, when not sensitized to the complexity of these trade-offs, may inadvertently exacerbate tensions for the entrepreneur and encourage business choices that weaken an intermediary’s farmer-allied orientation.
Our time horizons for change also seem to have shrunk. The duration of development grants has generally become shorter, frequently five years or less. Some patient capital impact investors don’t seem all that patient either, looking to return capital to investors and potentially exit investments after 3 to 5 years rather than the 7 to 10 (and sometimes longer) that are often required. If actors in the development ecosystem are serious about large-scale agricultural transformation in sub-Saharan Africa, timetables must be collectively reset. Patience in this case is not about compromising on performance or condoning mediocrity; it is simply recognizing the hard work to be done and what it actually takes to change systems and build vibrant industries.
Governments play a particularly crucial role in changing the system conditions that will enable farmer-allied intermediaries to thrive.
Early-stage impact investors’ poor returns in agriculture are, to a large degree, a by-product of operating in sub-Saharan Africa. Poor infrastructure, including irrigation, storage, roads, logistics, cold chain and electricity; relative scarcity of technical and management talent; minimal farmer organization and low farm productivity; challenges in accessing affordable financing; and unpredictable policies and regulations—these all add to the cost of doing business, starting a spiral of dampened returns, lower capital flows and stunted growth.
Governments are in a unique position to address many of these challenges and change the operating realities of these businesses. India’s dairy sector illustrates the impact that multidecade government commitment can have on the progress of a vibrant industry through infrastructure development, farmer organization and training, rural financing, and priority enterprise lending to the agricultural sector.
Such large-scale successes are all too rare. In 2003, the African Union created a set of strategies and goals for agricultural transformation, food security and prosperity called the Comprehensive Africa Agriculture Development Programme (CAADP). Sixteen years later, the great majority of African governments have yet to meet the CAADP goal of spending 10% of their budget on agriculture. In 2017, only 3% of total government expenditure on the continent was directed toward agriculture.
Ethiopia is an exception that provides compelling evidence of how government resolve and persistent investments could dramatically alter the trajectory of a country’s agricultural development and, in turn, economic growth. Ethiopia grew GDP between 7% and 13% annually from 2008 to 2018, faster than any other country in sub-Saharan Africa. It is one of the few countries on the continent to consistently exceed 6% growth in agricultural output, the threshold established by the African Union as necessary for agriculture-led economic development, achieving between 5% and 17% growth per year between 2004 and 2015.
Central to this success is how the government has prioritized the agricultural sector’s transformation, including the creation of the Ethiopian Agricultural Transformation Agency (ATA) as a critical, strategic enabler of that transformation. Over the years, ATA has designed and overseen a comprehensive program of initiatives and interventions that improve smallholder farmer production and productivity.
For example, launched in 2012, the Ethiopian Soil Information System aims to map soil types across the country to inform fertilizer policy and recommendations with the intent of significantly increasing crop yields. To date, it has collected hundreds of thousands of soil samples using remote sensing satellite technology and other state-of-the-art techniques, and it created 22 regional soil-type maps with associated fertilizer recommendations. The TIRR package (which stands for teff, improved seed, reduced seed rate and row planting) was introduced in 2011 to reduce the amount of seed sown by smallholder farmers by 90% by planting much smaller quantities of improved varieties of teff (a critical staple in the Ethiopian diet) in rows, thereby reducing weeding labor and allowing for intercropping of pulses. In just four years, the intervention was estimated to have reached 2.2 million farmers, increasing their yields by up to 70%. Commercial Farm Service Centers is another project to increase access and use of inputs. Operating across 20 woredas (or districts) in Oromia, Amhara, SNNPR and Tigray, the project aims to serve more than 175,000 smallholder farms as a one-stop shop for high-quality inputs, including fertilizer, seeds, agrochemicals and veterinary drugs, as well as a training resource on agricultural technologies to increase farmers’ yields and the commercialization of their output.
More recently, ATA has increased its programmatic focus on enabling agricultural commercialization and market development. Introduced in 2015 to 2016 and focused on priority crops across the four major agricultural regions in Ethiopia, the Agricultural Commercialization Clusters initiative has more than doubled the national marketable surplus of these crops by providing inputs and extension services to smallholder farmers and coordinating efficient aggregation and transport of their produce to end markets. A pilot project aims to provide smallholder grain farmers (maize, wheat, teff) with sufficient and reliable storage capacity in specific geographies by constructing modern warehouses and mobile storage units with capacities of between 500 and 3,000 metric tons. The pilot has increased the quantity of high-quality grain available to be marketed through formal channels.
These programs build from a foundation of farmer support. Ethiopia famously has one of the highest ratios of public extension agents per smallholder farmer; at approximately 1-to-500, it is 2 times that of Kenya, 3 times that of Malawi, and 5 times higher than Tanzania.
Whether the ATA model is relevant to or replicable in other sub-Saharan African countries can be debated. But the ATA experience has reinforced two important lessons.
- Large-scale smallholder agricultural transformation can only happen when there is explicit recognition at the highest levels of government that such transformation is crucial not just to lifting smallholder farmers and their communities out of poverty but also to the broader growth of the economy through ag-related industrialization and commercialization.
- There is a need to build and strengthen government capacity in the planning and implementation of interventions that target key bottlenecks at the farmer, enterprise and enabling ecosystem levels and that build on capabilities across public, private and social sectors.
Governments have the opportunity to catalyze financing, too. They can do so through policies that encourage commercial bank lending for SME working capital and asset financing. They can pursue import, export and tax policies that stimulate local production and processing. Tax incentives that reward local sourcing, for example, can help create large-scale demand sinks for crops from commercially oriented smallholder farmers and enable the commercial viability of farmer-allied intermediaries.
But while governments can do a lot, they are just one actor in the system. Foundations, bilaterals and multilaterals are uniquely positioned to catalyze and fund large-scale, long-term and integrated value chain development efforts. These institutions provide critical philanthropic funding that enables the creation of “commons” benefits—namely, things no profit-seeking firm or investor has the incentive to deliver. These include training farmers on good agricultural practices that improve productivity and environmental sustainability, farmer aggregation and organization, providing first-loss guarantees to encourage lending or investment, and offering technical assistance to accelerate an intermediary’s growth and path to profitability. If these programs put farmer-allied intermediaries at their center, in time, more lenders and impact investors will become interested in supporting them.
Impact-first investors (including DFIs) must provide sufficient patient capital to help farmer-allied intermediaries build their repeatable models and signal to debt providers that these businesses have financial backers. Commodity traders and food and beverage corporations can provide large, secure demand and price premiums based on quality, helping intermediaries scale and become commercially viable. Over time, this serves companies’ business interests, too, by helping them to better manage supplier risk, increase employment in the countries where they operate, and optimize tax incentives for local sourcing. Banks have the greatest amount of capital, and that is what is most required to facilitate the flow of agricultural goods. Working closely with bilaterals, multilaterals, foundations, DFIs, impact investors, and corporations will help banks better understand and share the structural risks of lending to agricultural intermediaries. Nongovernmental organization implementers and technical assistance providers can increase their focus on strengthening the capacity of farmer-allied intermediaries. For maximum impact, they should be expansive in their program design and engagement of other important actors in the system, and they should be assertive on the length of time it truly takes to transform value chains.
Across this broad system, actors must more conscientiously align on their target outcomes, actions and capital deployment. When it comes to transforming smallholder agriculture, no single actor or initiative, no matter how brilliant or groundbreaking, can on its own deliver long-lasting impact. Too often, funders and implementers succumb to the “not invented here” syndrome, choosing to design and launch new initiatives rather than build on and coordinate with what’s already working on the ground. Coordination and collaboration have to become the norm rather than the exception. This is all the more so because the appropriate catalyst or specific form of collaboration will differ depending on the value chain dynamics of the crop involved as well as the stage of development of the relevant financing and enterprise ecosystem.
Collaboration can be notoriously difficult. Success will require an honest alignment around the ambition and outcomes to be achieved and the respective role each organization can and should play. It will require building and managing partnerships across sector and organizational boundaries, rigorous project management, and agile adaptation that evolves based on what works and what doesn’t.
Finally, it will take vigilance to remain focused on the needs of those we are trying to support—the farmer-allied intermediaries and the farmers with whom they work.