Three Lessons for Creating More Sustainable Smallholder Supply Chains
The sustainability of smallholder supply chains is top of mind for corporate leaders in the food and agriculture sectors, whether they are consumer-facing companies or suppliers and exporters of tea, cocoa, coffee, hazelnuts, meat, dairy, palm oil, and many other crops and products. Ensuring the long-term supply of high-quality and sustainably produced crops is a fundamental pillar of the future competitiveness for all companies operating in these smallholder sectors.
But despite increasingly coordinated efforts, most smallholder farmers still do not earn a living income and do not have the means to apply modern agricultural practices. Few farmers have access to financing and crop insurance. Children are often in the fields, doing hazardous work, instead of in school. In many regions, smallholder farming has devastating effects on the environment, driving deforestation of tropical forests, encroaching in protected landscapes, or contributing to water stress and pollution. In the years ahead, climate change will affect many of the geographies where smallholder farmers grow their crops, making resilience an urgent topic.
FSG has worked closely with numerous food and agriculture companies to address these sustainability challenges and to help focus investments on the most effective approaches to creating shared value. We have also studied a number of success stories from different sectors to understand how companies have successfully initiated fundamental change on key sustainability issues. Our work has helped us distill 3 key insights that we hope can trigger a shift in how companies invest in the sustainability of smallholder value chains and accelerate change.
1. Focus certification programs on key environmental and human rights issues, as well as providing reliable and independent sustainability data
The growing commitments by companies to source a large portion, if not the totality of their supply, as “certified sustainable” in the near future, is a major success. However, it is unrealistic that certification schemes will address all the sustainability challenges in smallholder supply chains experience. And while certification has never been designed to do so, there is a lack of explicit communication on what sustainability outcomes certification guarantees and what it does not. The economics of an average smallholder farm show that the amount of investment required to improve farm profitability to deliver a living income far surpasses the additional income generated by certification premiums and the incremental productivity from improved agronomic practices, typically targeted by certification packages for smallholders.
In this sense, both companies and certification bodies should make sure that certification schemes focus on delivering on a few specific and achievable fundamental environmental and human rights issues. This does not mean certification organizations should not be concerned with living income, education, and community resilience, but rather they should take on the role of the provider of reliable and independent data on these sustainability issues. They will create more impact by increasing transparency on effective interventions by companies and NGOs and the actual progress achieved in the field than by trying to deliver improvements themselves.
Field to Market in the United States provides baseline and improvement data on a set of sustainability issues to all actors in the agricultural value chain from farmers to retailers. The data helps inform sustainability investments by the various actors. In parallel, Field to Market publishes benchmark data on national-scale trends to help with performance comparison. Farmers and companies can build claims around improvement and impact data that Field to Market generates independently. The whole process increases transparency and efficiency for sustainability investments.
While operating in a very different and more complex context where the collection of reliable field data will be costly, companies and certifiers in smallholder supply chains can still learn from the Field to Market example and try to leverage technology to increase transparency on the state of sustainability issues, as well as improvements within their value chains.
2. Invest in targeted modernization
Smallholder supply chains are characterized by 2 important aspects that influence how companies tend to invest in farm modernization. Due to small landholdings and low productivity, there are lots of smallholder farmers within a typical company’s value chain. Most manufacturing and retail companies do not have dedicated suppliers, and for exporters, long-term investments in dedicated supply chains are very risky due to price fluctuations and a need for flexibility with regard to varying demand. As a consequence, most sustainability investments aim to maximize the number of farmers they reach, reducing the average dollar amount available for each individual farmer. Investments are rarely anchored in long-term supply agreements, as both farmers and buyers operate opportunistically to sell at the highest price or increase or reduce volumes flexibly.
These practices conflict with a number of realities. First, not all farmers are equally equipped to modernize their farming practices, increase productivity, and move from subsistence farming to operating a small business that generates a living income. The second is that, in order to achieve such a transformation, farmers often need to invest more than 3-4 times the amount of money that is typically channeled via sustainability investments. And these are not one-off investments. They need to be repeated annually over a period of 5 years, sometimes even 10 years. In some countries and sectors, smallholders operate such small patches of land that it is impossible for them to move out of poverty simply by doubling or tripling productivity. In such cases, there needs to be a fundamental rethink of the current farming and income models. In Ghana, EMFED Farms operates an innovative farming model. They offer professional farming services to cocoa farmers that operate very small patches of land. The company has a team of agronomists and workers that rejuvenate or manage the farms professionally. Cocoa farmers get paid based on a crop-sharing agreement. Once professionally managed, the farms often quickly increase productivity, leading to the higher incomes for farmers, while being able to pursue alternative income opportunities.
The key insight for companies is that they need to focus their investments when they aim to achieve a real modernization of the smallholder farming model. There are multiple ways to achieve these shifts, but they tend to require higher investment volumes, longer-term partnerships, and careful selection and prioritization.
In September 2018, Mars announced its new “Cocoa for Generations” strategy where it recognizes the need to differentiate between “responsible cocoa” work that re-focuses certification on a number of fundamental requirements for all farmers supplying cocoa to Mars, and “sustainable cocoa” work with selective and targeted investments in farm-model innovation.
3. Build partnerships to overcome barriers in the ecosystem
Transforming smallholder agriculture requires changes at various levels in the ecosystem wherein farmers operate. Doubling or tripling productivity levels isn’t possible if farmers do not have access to high-quality planting material, fertilizer, crop protection, effective agronomic training, and for some, irrigation technology. Farmers will not be able to invest in their farms if they don’t have access to credit, and lenders will not give farmers credit if they do not have sufficient collateral. If land tenure is not regulated or if farmers are exposed to severe weather conditions without access to crop insurance, they may also not want to invest in their farms and move towards more professional farming models. Depending on geography, lack of public infrastructure may be a major barrier for farmers to access storage facilities and avoid post-harvest losses.
Companies need to anticipate these ecosystem barriers and identify the most effective ways to overcome them. This often requires up-front investments in mapping barriers in the local ecosystem and making the case with local actors for changing the conditions that hold them in place. Most of the time, there are numerous potential partners and co-investors that have an interest in transforming smallholder agriculture in a specific location. However, mobilizing them requires a clear articulation and quantification of the future value of the transformation for all actors and initial investments in coalition-building and the partnership process.
The Farm to Market Alliance in East Africa is a great example of such ecosystem investments. It is a cross-sector collaboration spanning the World Food Program, IFC, Grow Africa, the Alliance for a Green Revolution in Africa (AGRA), Yara, Rabobank, Bayer, and Syngenta. The Alliance brings together off-takers of crops and aggregators and connects them to farmers to create long-term supply agreements. The contracts reduce the risk for financial services companies to provide credit to farmers. With access to credit, farmers are able to invest in high-quality farm input to increase their productivity and incomes. All actors co-invest in farmer agronomy, post-harvest handling, and storage training to ensure that farmers can deliver on the supply agreements and are able to pay back the loans that they receive. Prior to the launch of the FTMA, the initiating partners commissioned the development of a detailed business plan for reaching 100,000 farmers. The study estimated the future value that could be created by targeted interventions. It articulated how the investments would over a timeframe of four years create a multi-million dollar market for farm input and financial services providers, deliver millions in savings through operational efficiencies to off-takers, and most importantly deliver tens of millions of dollars in additional incomes to farmers.