Time to focus on markets, not just productivity

Focusing on productivity rather than markets is akin to putting the locomotive behind instead of in front of the agricultural value chain. Recent research by ACET emphasises poorly functioning markets as a key bottleneck to economic transformation.

by | Mar 29, 2018

Traditionally, agricultural policy has tended to focus on productivity – mainly on improving yields – rather than on markets. But if we think of markets as a locomotive, or as a driver of transformation, it is clear that markets can move the whole value chain, if they work properly. However, we have good evidence that markets are not working adequately in Africa. This explains the loss of competitiveness.

Africa is importing $68 billion worth of food a year because our agricultural value chains have not been able to respond to local market demand. This suggests that more emphasis needs to be placed on the functioning of local markets in order to boost the response from other parts of the value chain.

Let’s look for lessons in the successful market penetration of gari, a popular West African fast food prepared from dried, grated cassava. Why has cassava been able to maintain its competitiveness in the food economies of West Africa relative to other traditional crops, such as sorghum and millet, which have lost their market share to wheat and rice?

Changing food needs

Part of the reason that wheat and rice have performed better in the marketplace is that they are better able to respond to the changing needs in food markets due to urbanization. People, especially working women, want foods that are easier to prepare and more convenient to use. Therefore, the emphasis of individual buyers has moved from the foodstuffs themselves to ready-to-eat food products.

In this regard, cassava has lent itself to significant innovations. Its popular by-product, gari, is a ready-to-eat food for the urban poor. A newer innovation is packaged fufu flour, which targets the emerging middle class. While such innovations in the cassava value chain have made cassava competitive even as markets have changed, sorghum and millet have not seen much product innovation and have therefore become neglected.

If we can put greater emphasis on addressing markets from a policy and research perspective, we will not only reduce our food imports but also start driving rural transformation. This is because addressing urban markets, which have demands in terms of product variety and quality, necessarily means upgrading other parts of the value chain, for example processing and logistics, and creating crop breeds more amenable to addressing diversity and other challenges.

Bigger markets attract investment

Trade and industrial policy should be coordinated with agricultural policy. In this regard, the newly launched African Continental Free Trade Area provides an opportunity for bigger markets and therefore incentives for attracting investments in processing and upgrading logistics and upgrading agricultural value chains in general.

If markets were to become the centrepiece in thinking about the commodities driving agricultural value chains, then agriculture would be put in a position to power transformation. This was the subject of ACET’s recently published second African Transformation Report (ATR2): Agriculture Powering Africa’s Economic Transformation, which will be presented in Addis Abba in April, as part of a series of launch activities.

Nevertheless, the fact that markets are crucial should not be taken to mean that policy should focus solely on markets. The key to market success is being competitive in pricing, but price competitiveness depends on achieving a high level of production. So it’s about having the right products at the right prices. Having the right product is about understanding the market and being able to identify products that the markets wants, while having the right pricing is both about being productive and being able to develop a product suitably. Therefore the debate about productivity belongs to a context of supporting products that the market wants.

And as ATR2 pointed out, there are other critical bottlenecks that need to be addressed if agriculture is to drive economic transformation. In addition to markets, three key bottlenecks are the need for land tenure reform, the need to strengthen agro-processing sectors, and the need to upgrade skills and get the youth interested in farming.

What is needed is an agricultural ecosystem that would ideally have a mix of farmers including small-scale, medium-scale and even large-scale farmers. This ecosystem is crucial because increasing productivity, which is a necessary but not sufficient condition to be competitive, depends on technology, alongside technological inputs such as improved seeds and fertilizer, together with research.

Technological diffusion

But having technology is also not enough. It has to be diffused to farmers, but this hasn’t happened much. In spite of the many technologies developed, African farmers, especially smallholders, have not adopted them. Hence the importance of an agricultural ecosystem in which players can bring in technology that benefits the entire system.

Very large-scale farmers, for example, can bring in frontier technologies because they have the capacity to access technologies and experiment with them. Medium-scale farmers can obtain technology from large-scale farmers and in similar vein, knowledge can also flow from medium to small-scale farmers. Thus the ecosystem makes it easy for technology and know-how to be diffused across the whole farm system.

We are seeing this kind of specialised ecosystem developing in the dairy sector in Kenya where large-scale farmers have tended to focus on breeding, which is highly tech-intensive. Medium-scale farmers tend to focus on raising dairy cows, while smallholders are moving towards a focus on milk production, which they do by buying milk cows from the medium-scale farmers.

Thus the importance of having a mix of farmers is to create an ecosystem in which all the players together help in the diffusion of technology and also in the development of specialisation. As we’re seeing in Kenya, diffusion and specialisation are both key in improving technology.

Beyond product markets, input markets must also work properly. This has been a challenge because of the predominance of fake or counterfeit inputs such as fertilizer and seeds. This has deterred most especially risk averse small-scale farmers from adopting modern technologies or inputs.

While ideally governments through regulation should be able to curb these practices, the reality is that there is a very large number of input distributors, and resource-constrained governments have very limited capacity to regulate them.

Business challenges and innovations

This leads us to another key piece in completing the puzzle, namely the importance of innovations in business models. Let’s look at a few examples, such as the use of franchising as an umbrella for distributing inputs. One way of looking at franchising is as a self-policing model. Since a franchise provides a seller a means to protect the brand, there is little likelihood that a franchise holder will try to sell fake products. An interesting East African example is Farm Shop, which brings small Agrovet shops under one umbrella, brands them and provides support in terms of quality control.

Another innovation that is crucial concerns the ‘first mile’ transport challenge. This is crucial because the distance from the farm gate to the nearest market usually represents the highest cost for farmers who have to transport small quantities along bad roads. And in Ghana, we’ve seen that the adoption of motorised tricycles is solving the first mile problem.

An additional challenge worth studying is that of post-harvest losses, which is also stimulating interesting innovations and relatively cheap solutions including hermetically-sealed bags. Sealed from the air, pests cannot survive in these bags long enough to feed on crops held in storage.

Perhaps the biggest challenge is to transition smallholder farmers from subsistence to a business orientation, and two further innovations are worth discussing. The first has to do with the risk averse behaviour of farmers who are so poor that even small losses can be devastating, while the second has to do with market intermediation.

The first question then is how a risk-averse mindset can be changed into a business-oriented mindset that is willing to take risks. This is where insurance comes in, and we’re starting to see interesting insurance products such as index-based insurance products being tried.

Here, farmer to farmer peer learning appears to be decisive. The importance of demonstration has long been understood. However, it appears that farmers are more likely to adopt an innovation that has been demonstrated successfully by a neighbouring farmer, as has been observed in the rice sector in Uganda and Tanzania.

Market intermediation

Secondly, creating market information systems that can help farmers understand what the market wants and reducing information asymmetry is an important aspect of market intermediation innovations being observed. ICTs are being deployed successfully, as in the case of Esoko, based in Ghana, which provides market information.

Another crucial area is the role of middlemen. While the conventional logic is that middlemen are the bogeys of the agricultural system, under closer scrutiny this does not really bear testimony. Our studies indicate that while middlemen in some cases may be exploitative, for example cheating on weights, in general they provide many useful services to farmers and take significant risks in aggregating quality control and solving logistical challenges. More crucially we’ve seen cases where middlemen have been instrumental in introducing new varieties. For example, the introduction of NERICA (New Rice for Africa) in Benin was largely driven by a middleman.

Middlemen are more trusted in terms of their knowledge. Farmers know that if a middleman advises them about a product, it will sell in the market. Middlemen understand markets better than extension workers and are therefore crucial players.

An important role played by middlemen is to finance farmers. ACET studies show that 70 percent of rice farmers in northern Ghana obtain their financing from these traders. The reason middlemen are able to extend credit and secure repayments is that they have crucial knowledge of farmers and can tell who is creditworthy or not. This makes them efficient players in credit markets. Indeed, lack of information on creditworthiness is the greatest challenge in lending to farmers. Middlemen are in effect walking credit bureaux that know who can pay and who can’t pay. This makes them potentially important channels to route finance to farmers and warrants a careful rethink of the role of middlemen.

Youth employment

Looking ahead, Africa’s greatest challenge is that of youth employment. Agriculture is seen as a means to tackle this, however, the problem of access to agricultural land makes this in itself a challenging project.

“With innovative business models, it is possible to create a franchising system in which youths can provide all kinds of services from ploughing land to spraying crops.”

Meanwhile, all across Africa the middle class in the cities are acquiring vast amounts of land. In Kenya, Zambia and Ghana, such landholdings are approaching close to 50% of the land. This represents an opportunity for two reasons. The first is that these landowners have resources to invest in agriculture. The second is that they are commercially orientated by definition, having bought the land in the first place.

Many have emerged as town-based telephone farmers relying on their phones to manage their farm affairs remotely with disastrous results since a lack of effective supervision means they are easily cheated by contractors.

“With innovative business models, it is possible to create a franchising system in which youths can provide all kinds of services from ploughing land to spraying crops.”

But this is where an opportunity emerges for the youth to provide farm services to people who have land but are unable to farm it adequately. With innovative business models, it is possible to create a franchising system in which youths can provide all kinds of services from ploughing land to spraying crops. They can provide a key piece in the transformation of the agricultural landscape by building a crucial medium-scale farmer group that is missing (the “missing middle”), while at the same time creating opportunities for the youth.

Written By

Dr. Julius Gatune

Senior Research & Policy Advisor

African Center for Economic Transformation (ACET)

March Issue

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