Agriculture remains the best opportunity for the estimated 1.5 to 2 billion people worldwide living on small farms to work and trade their way out of poverty. Studies show that growth generated by agriculture is up to four times more effective in reducing poverty than growth in other sectors.  Linking smallholders with well-functioning markets (ranging from local ‘street markets’ to formal global value chains) plays a critical part in long-term strategies to reduce poverty and hunger.  At the same time, including smallholders in supply chains offers companies a chance to diversify and increase resilience in their supply base, while also appealing (through labeled products or corporate reputation) to ethically-motivated consumers and ensuring legitimacy in developing country markets.

While the potential benefits are great, organizations also struggle with the challenges of linking diverse and fragmented smallholders to formal markets – and there are real barriers and risks that must be addressed.  Small-scale producers in developing countries often operate in areas with inadequate infrastructure (roads, electricity, and irrigation). They lack access to skills and services (training, credit, inputs), and are highly dependent on favorable weather. Their lack of uniformity and scattered locations require creative solutions to aggregating production.   But when properly organized, and where needed investments are made, smallholder farmers can participate effectively and efficiently in formal supply chains.  Under the right circumstances, they are able to reap important benefits and are able to manage their risks even in highly demanding markets.  The cases shared on this website showcase some strategies for achieving these outcomes.

Top-Down or Bottom-Up?

Efforts to link smallholders to markets may be initiated by companies (and their partners) to better understand or improve existing supply chains or to start sourcing in new areas with new smallholder produce or products.  Alternatively, these efforts may be led by farmer organizations, often in collaboration with non-profits or other market facilitators.  While these starting points differ, ultimately two “worlds” – the world of diverse small farmers and the world of formal markets – need to connect for a successful sourcing relationship.

From research (see Think Big Go Small or LinkingWorlds: New Business Models for Sustainable Trading Relationships for more detail) we have seen that trade with small-scale producers tends to be more durable and beneficial where there is:

• Chain wide coordination to help identify and proactively address issues, and to build trust through the chain.
• Effective market linkages through intermediaries (traders, cooperatives, and processing companies, etc.) that can aggregate production from diverse smallholders, be a hub for key services, and ensure the quality and consistency needed for formal markets.
• Fair and transparent governance where price structures, quality standards, production practices, and purchasing practices are communicated openly, clearly, and in a timely manner.
• Sharing of cost and risks that can include supply chain risk-management schemes, micro-insurance schemes against bad weather, and shared investments to improve the functioning of the chain.
• Equitable access to services such that smallholders have access to technical expertise, business training, inputs such as fertilizers and high-germinating seed, and appropriate financing.

There are a number of ways in which companies, or those working with farmers and companies, can create or improve market linkages.

Understanding existing supply chains

One potential starting place for companies is to assess their existing supply chains and determine whether they already engage small-scale producers.  This is an important step for understanding how existing purchasing practices work through the value chain and where improvement or expansion opportunities may be.  Companies can engage in this process through a variety of tools:

• A poverty footprint study can help show the contribution of a supply chain to economic development, from supply to distribution.  See the Unilever Indonesia Case for a story on thisapproach.
• Value chain analysis can hold a “mirror” up for the participants in a supply chain, helping them understand the current functioning of the chain and allowing them to document commercial performance and social impacts.  This exercise is useful for identifying both successful features and gaps that need to be addressed.  See The Juan Francisco Project: Costco and CIAT’s exploration ofGuatemalan Green Beans for a story on this approach.
• Developing performance indicators can help supply chain participants track how well participation in trade impacts small-scale producers.  SeeIndicators of Poverty and Hunger in Coffee Supply Chains for the story of how Green Mountain Coffee used performance indicators to better understand poverty and hunger impacts in their supply chains.

Expanding or creating new sourcing opportunities

For companies looking to create sourcing arrangements with small-scale producers, or for farmers and their development partners working to connect with more formal markets, it is important to understand what kind of investment is needed to achieve the quality and consistency of production and processing required – and to ensure that the trade is likely to have net benefits for the producer as well as for the purchasing company.  Benefits for producers can include overall income gains, access to financing, stable prices, long-term trading relationships, improved food security, health benefits, and so forth.

A project seeking to have development impact might look at building gains for existing suppliers, creating new opportunities for more marginalized producers (fewer assets, fewer trading options, etc.), working explicitly with women, or creating off farm jobs.  Making the supply chain work often requires investing in upgrading the capacity of producers and processors to meet the quality and consistency standards and adapting practices in the trading relationships to the needs of smallholders.  Development impact can be further increased by investing in sustainable livelihood strategies that complement the primary crop(s) of the value chain such as additional products for the local or formal markets, markets for other quality grades, women’s economic opportunities, service provision or value-added businesses, and household health and nutrition.  These investments can improve annual cash flow (and cash flow consistency), food security, risk management, and sustainable farm management. 

See Sourcing Gender: Gender Productivity and Sustainable Sourcing Strategies or Gender in Agroenterprise for ideas on increasing impact by targeting the participation of women, and Under What Conditions Are ValueChains Effective Tools for Pro-Poor Development? for a research summary on increasing development benefit through value chain investments.

While development benefits may be the focus of smallholder sourcing efforts, it is important to remember that actual investment and trading decisions will come from various stakeholders and will be based on their own goals, perceptions, and the market opportunities before them.   

1. Identify the opportunity

Why would a company want to source from small-scale farmers?  Answering this question can be an important first step in identifying new opportunities for smallholders.  Typical motivations for “lead firms” (the firm defining the product for a market and setting the standards in the chain) may include:

• Developing and marketing “ethical products,” which can be a profitable strategy in some US and EU markets.  This may involve either a third-party certification or an internal company program.  See The Body Shop and Community Trade for a case study example and ASDA Smallholder Certified Flowers as an active projectexample.
• Creating new supply sources can be an important to diversifying production sources and thereby hedging against risk – while also improving a company’s overall reputation for social responsibility.   See White Pea Beans in Ethiopia, Frozen Vegetables in Guatemala, and Oxfam/Unilever Smallholder Sourcing in Azerbaijan as active project examples.
• Creating local sourcing programs to supply growing markets in developing countries, which can reduce costs and build legitimacy.  See Developing Business Enterprises and Linkages With Small Farmers in Sri Lanka, Unilever: Building a Black Soy Bean Supply Chain in Java, Indonesia, and Sodexo Madagascar: Creating Linkages Between Local Producersand the Mining Sector as case study examples.

Alternatively, a development organization may start by identifying a community that it would like to assist, and then look for market opportunities that farmers in that community can benefit from.  This “bottom-up” approach still requires a strong understanding of the requirements of formal markets, but its fundamental goal is to help a specific farmer community. See Choosing an Entry Point for a detailed discussion of this approach and useful set of checklists.  For a case study example of the process, see Identifying Market Opportunities in Burkina Faso.

2. Analyze the Feasibility

After identifying an opportunity, and before deciding to implement a new program, it is critical to conduct a careful feasibility study looking at the market, farm, and household in order to build both the business case for buyers and the development case for farmers and NGOs.  Key questions that might shape such an analysis include:

• Is the offer attractive to the producers?
• Are the risks to the company, smallholders and other affected parties manageable  (e.g. climate change, changing consumer preferences, currency movements)?
• Can the crop be grown efficiently and cost-competitively in this particular region and by this set of farmers?
• What investment is needed at farm and processing levels to meet required volumes and standards?
• What could be the scale of impact (i.e. number of producers involved)?
• What is the potential to invest in complementary markets and products to reduce risks and promote sustainable farming practices?

3. Design and implement the smallholder program

Once the business case has been tested, it is time for the detailed design work and implementation.  Participatory approaches -- designing collaboratively with external and internal partners -- help build ownership over the program. Key steps include:

• Establishing the value proposition and testing it across internal corporate divisions (e.g. marketing, operations, supply chain management).
• Upgrading the enterprises along the chain, based on identified needs, to improve productivity and meet requirements for production and post-harvest handling.  In some cases, this may involve supporting the formation of new organizations near the level of the farmer; see, for example, Fostering Agribusiness Development Centers in El Salvador and Savings Groups and Marketing Centers in Tanzania.
• Adapting or designing business models through the trading chain to ensure effective intermediaries, access to services, clear buying practices, and risk management. See Think Big, Go Small for examples of this.
• Managing partnerships and attracting co-investment to overcome structural barriers and performance issues, to enable smallholder interests to be represented and to improve the social/environmental performance of the chain.
• Ensuring the corporate culture supports partnership, with incentives for buyers that are aligned with creating long-term stability in supply chains.
• Improving the "enabling environment" around identified gaps, contributing to improvements in sector wide conditions such as regulation, infrastructure, services through participation in multi-stakeholder forums and policy advocacy where appropriate.  See Lessons on Facilitating Participatory Market Mapping Workshop for stories on mapping and addressing the full market system as part of a change project.

For organizations starting at the farmer community level, design and implementation may involve a value chain analysis that starts with a proposed crop and maps out the demand and requirements for that crop, along with any particular challenges that may be involved.  For a case study that details this process, see Value Chain Analysis: Potatoes in Ethiopia.

4. Measure outcomes

Measuring outcomes and acting on those measurements to improve performance of the supply chain is important for long term success.  For example:

• Assessing progress regularly: reporting back, discussions across the supply chain, and a collaborative approach to identifying and solving problems.  Ideally this includes commercial performance (productivity, acres, quality, consistency/reliability) livelihood performance (number and gender of beneficiaries, improvements in income, assets, and/or food security) and ecological performance – (soil, water, climate/energy, etc)
• Drawing up an exit plan: prepare to move out of the market without damaging smallholders if market forces change. 

For a case study that outlines a typical process for structuring relevant metrics and collecting field data – along with some typical challenges encountered along the way – see Monitoring Progress in East Africa.

There are a number of guides and tools on this site to support companies, NGOs, and farmer organizations as they work to build value chains that are inclusive of smallholders. LINK Methodology: A Participatory Guide to Business Models that Link Smallholders to Markets is a great place to start.

LINK Methodology:A Participatory Guide to Business Models that Link Smallholders to Markets

ABSTRACT

Agriculture is a source of livelihoods for an estimated 2.5 billion people globally, provides jobs for 1.3 billion smallholders and landless workers and, as a result, has enormous potential to reduce rural poverty.

Yet agribusinesses are usually built around a small number of large-scale suppliers, ignoring that small-scale producers manage 85% of the world’s farms. Smallholders are excluded from modern agribusiness channels due to a lack of access to services, high transaction costs and poor infrastructure which combine to increase the perceived risks and costs associated with purchasing from large numbers of dispersed producers. While successful examples of smallholder inclusion into modern supply chains can be found, these remain the exception rather than the norm. Facilitating more of these successful partnerships is the goal of the LINK methodology.

READ MORE

 

Integrating small-scale producers often takes investment in partnership – through supply chains and across sectors where actors have different priorities.  For some stories and tools about building partnerships for action, you may want to look at Innovations for Healthy Value Chains

One of the dimensions of assessing the desirability of an investment in a supply chain from a development perspective is to assess the potential for pro poor impact.  Selecting Pro Poor Value Chains: A Useable Framework provides a nice adaptable framework for looking at the various aspects of a supply chain that contribute to chance of success and breadth of potential impact for a supply chain.  

If you are working with a producers group on their market access strategy, Catholic Relief Services has prepared a good guide for participatory strategy development:  Participatory MarketChain Analysis for Smallholder Producers

Because the success of a value chains may also depend on a positive enabling regulatory environment and a network of services to support farmers and business, it is important to also look at the market systems.  Participatory Market Systems Mapping can bring public and private market actors together to address blockages and exploit opportunities through increased coordination and collaboration.  It looks at three components – the market chain actors and their linkages, the business and extension services and input provider that support the market chain’s operations, and the infrastructure and policies, institutions and processes that create the enabling environment.

If you are working with a producer group to build capacities for success in commercial markets, you may want to look at the Catholic Relief Services “Five Skill Sets” approach: Building Farmer Capacity.

If you are working to assess the impact of participating in value chain on the livelihood of smallscale producers, you may want to look at some new impact evaluation approaches developed by CATIE:  Assessing the Impacts of Certification Systemson Rural Poverty: A Case of Organic and Fair Trade Certified Coffee in Nicaragua.

If you are a nonprofit or farmer group working to build market relationships with a retailer, you may want to look at:  Public Interest in Private Label: How new relationships between NGOs and Retailers can help build trade to benefit the developing world's small scale farmers.

If you are looking for an overall process guide for working with small scale producers to reach out to markets, check-out the toolkit From Agriculture to Agroenterprise, produced by Catholic Relief Services which offers a step-by-step approach to designing and implementing market-oriented projects that can generate additional income for smallholders.