Untapped opportunities in value-chains

Farmers, government, and banks should be using agricultural value chains to better manage risk for players and increase food security. Globally, farmers, agribusinesses, governments, and financial institutions are beginning to see that the value-chain holds vast untapped opportunities for strengthening agricultural development and, therefore, for increasing food security.

“The way in which people and organisations interact with the food chain is undergoing a profound shift,” says Standard Bank, Head of Agribusiness, Nico Groenewald.

“It’s essential, therefore, that farmers understand that they are a link in a much larger series of activities than simply beneficiating the basic product that leaves the farm. The ultimate pay off of the value chain should be agriculture-for-development. It’s a natural but so far unexploited cycle that starts with the farmer, through primary production, and that, ultimately, benefits the farmer again – along with everyone else in the country.”

The World Bank stated in 2008 that agriculture ‘continues to be a fundamental instrument for sustainable development and poverty reduction’. Since that time, other aspects of agriculture have evolved in the direction of sustainable development but the potential within the agricultural value chain has yet to be fully explored.

“This is beginning to change and, to participate in the benefits, farmers need to take the trouble to understand how the chain works now as well as the ways in which it will evolve,” Groenewald explains.

One area to keep an eye on is value chain finance. Banks have always taken a risk averse approach to the range of variables involved in agricultural operations, the unpredictability of the impact of weather on primary production, and the equally difficult to predict fluctuations in prices.

As a result, the need for industry players to access finance, secure sales, procure products, reduce risk, and increase efficiency has been met via conservative means that are either internal or external to the value chain. Internal mechanisms involve players offering one another finance, usually in the form of an input provider offering a farmer terms or a lead firm advancing funds to a market intermediary. External mechanisms take the form of loans and insurance products from banks.

“Both the internal and external options address value chain needs in a fragmented and sporadic way and tend to be exclusive of smaller or inexperienced operators,” says Groenewald. “Certainly, they don’t meet the needs of the modern agricultural value chain.”

Consumer expectations

In response to changes in consumer expectations and environmental and human rights concerns, the agro-food sector is moving to models of production and marketing based on demand rather than on producer-defined agricultural goods. The sector is also adapting to a global, liberalised, and compartmentalised marketplace with little seasonality and high product diversity. Food safety and traceability requirements and higher quality standards coupled with the enforcement of basic environmental regulations are driving new operational approaches.

In addition, there is an accelerating concentration of control in the sector – with globalisation, economies of scale, and ever increasing vertical and horizontal integration enabling multinational and other interconnected agribusinesses to dominate.

“As usual, opportunity is built into change,” says Groenewald. “The fact that value chains are becoming more coherent and interdependent gives banks the confidence to expand financing options, proactively aim for improvements in financing efficiency and repayments, and help consolidate value chain linkages among participants in the chain.”

Ideally, however, farmers should not be dependent on other players in the value chain, including the banks, to help them exploit the opportunities that are inherent in the chain’s evolution. “When one considers that, out of the average shelf price of R30 for a bottle of reasonably good wine, the grape farmer gets only 52 cents, it becomes very clear that the primary producer, on whom everyone in the chain depends, is in the least favourable position,” says Groenewald.

“By understanding their chain up and downstream, farmers can find ways of getting a share of the value add processes. Or, at least, of supplying more than one value chain. “This doesn’t mean that farmers need to become economic or finance specialists. It does mean staying aware of opportunities – and requiring your industry body to keep you up to date on the implications of shifts in the chain. What you should aim for is to use the value chain for your own development, knowing that if you develop, so will the value chain. All of which will make you more sustainable and turn agriculture into a vehicle for real transformation,” Groenewald explains.