Editor's Choice March 2013: smallholders, finance and a very big gap

This report upset my plans. Last month’s choice was an agriculture report so this month should not be. But since reading Catalysing Smallholder Agricultural Finance 2 weeks ago, I have had umpteen times when I have referred to its findings in conversations and plans. So if it’s that useful, I should share it.

The headline finding of a $450 billion gap in agricultural finance for farmers is not actually what interests me. A figure with so many zeros is of course a good way of attracting attention of serious bankers to this neglected market. But while speaking to audiences who may not often prioritise smallholders, it is also very useful to those of us that do.

What percentage of the world’s smallholders do you think are selling into international value chains? They are the farmers that we hear about - whose products reach Olam, Unilever, Walmart, Starbucks or Kraft. But – and I cannot now forget this – less than 10% of the estimated 450 million smallholders are currently incorporated into export value chains.

So what do the other 90% and can we help them? There are several excellent typologies and tables in the report, but a good starting point is this categorisation of agricultural chains. Two categories encompass the 10% of smallholders, while the 90% who do not produce exports are either in ‘organised local staple’ chains or in ‘un-organised local staple’ chains.

The clearest recommendations for boosting farmer access to finance relate to the easiest 10%. Three 'growth pathways' for finance are identified: replicate and scale existing models such as those used by social lenders; extend beyond short-term trade finance to cover longer term investment; and finance out-grower schemes of multinational buyers. It's a useful analysis of recent progress and outstanding gaps in attempts to upgrade these global value chains. Social investors such as Root Capital, and producer organisations that can aggregate farmers and finance are key actors.

Addressing the financing gap of the other 90% is tougher, and the report does not have clearly mapped solutions. But two growth pathways highlight the issue and gives good pointers: either alternate points of aggregation are needed where finance can be provide because producer organisations may not exist, or lacking any aggregation, finance needs to be provided directly to farmers. Not surprisingly, this section calls for innovation and donor support, as the business case is currently far from made.

The report is written by Dalberg sponsored by Citi Foundation and Skoll Foundation. It is choc full of diagrams, tables, aggregations and comparisons, so anyone in agriculture or finance will find a diagram that works for them.

The analysis made me think hard about our own portfolio of inclusive business projects. I wondered if we are working only with the 10%? Certainly BIF and IAP support initiatives with export value chains, ranging from Guinness in Nigeria, to start-ups exporting groundnuts or mango puree from Malawi and moringa from Zambia. In the latter cases, the fact that the product is ultimately exported does not improve farmers access to finance yet.

Most agribusinesses in the two portfolios are not exporters. The farmers' client is a domestic processor or retailer: AACE Foods (Nigeria) and Sylva Foods (Zambia) sell to domestic consumers, as do Pabna Meat and Shiblee Fisheries in Bangladesh. They tend to be setting up sourcing arrangements with farmers and fishermen who are trading on local markets and are not in outgrower schemes. Where they have found producer organisations, such as a Ginger Cooperative now supplying AACE, it can work well but in other cases they are forming direct links with farmers, buying via middlemen relying on NGOs, or evolving the kind of hybrid outlined by my colleague Georgina. Finance is indeed a challenge, as discussions among many players in Malawi highlighted. The tight categorisations of a report don't always fit, but the questions it raised about the pathways that can be used to drive finance into the chain proved useful. I hope you too find the analysis and prompts in this report useful for assessing which farmers can be reached and how finance can be accelerated.