Department of Agricultural, Food, and Resource Economics Feed the Future Innovation Lab for Food Security Policy

EXECUTIVE SUMMARY

Over the five years of the implementation of the Food Security Policy Innovation Lab (FSP), the “upstream” and “downstream” teams under the global component Engagement in Global Policy Debates on Food and Nutrition Security developed a complementary and largely consistent “story” about the promises and challenges facing smallholder farmers, small entrepreneurs, and consumers in rapidly changing agrifood systems. This report tells that story and lays out a policy and programmatic agenda, including needed new research, based on what we have learned.

A common set of drivers is generating broadly similar patterns of agrifood system transformation across the developing world and generating a rapidly changing mix of risks and rewards, for farmers, entrepreneurs, consumers, and policymakers. There is much good news in these developments. Yet smallholder farmers and small and medium enterprises (SMEs) need to learn new skills and behaviors if they are to prosper, consumers need new knowledge and understanding to make choices that result in safe and healthy diets, and policymakers need to decide how to deal with big new challenges even as old ones continue to demand their attention. This synthesis paper brings together the lessons learned from FSP “upstream” and “downstream” research over the past five years to help guide these decisions. It presents a conceptual framework and characteristics of key changes taking place in agrifood systems in developing countries, their implications for income and employment opportunities throughout the system, and the policy responses needed to effectively promote the interests of smallholder farmers, small and medium enterprises, and consumers in these transforming systems.

Conceptual framework for understanding agrifood system transformation

Agrifood system transformation needs to be understood as a subset of the structural and rural transformation of economies. Once agrifood system transformation starts, it can become self-reinforcing if public policy and investments remain conducive to private investment, being pulled by downstream demand from urbanization and diet change, facilitated by behavioral change and investment in the midstream and downstream, and fed by the upstream through intensification, commercialization, and diversification at farm level.

We can think of a transformation from a traditional stage through a transitional stage and finally to a modern stage. This transformation can be seen at one place over time as incomes and urbanization rise. It can also be seen at one time over different places, for example in cities versus rural hinterlands. Included in this idea is that transformation varies over products, with the general pattern that staple foods can be marketed all over a country through traditional and early transitional value chains, while perishable products cannot. Associated with these stages is the empirical regularity of the J-curve of firm consolidation. This starts with moderate consolidation in the dualistic systems that prevailed prior to the structural adjustment of the 1980s. With reform, the transitional stage of transformation generates a highly competitive structure (the bottom of the J) as many thousands of micro, small, and medium firms enter following reform. Over time, as economies of scale force smaller players out, the modern stage is characterized by much greater firm consolidation.

Opportunities and challenges from patterns of change

The transitional stage is the boom time for off-farm employment
Most of Africa, South Asia, and some of Southeast Asia lies in the transitional stage of transformation. Diets during this phase shift from grains and other staples to more perishable and processed foods, unleashing a wave of structural change. Rural-to-urban food value chains emerge. The urban share in the food market (by value) is high, at 50 to 70 percent. Production of non-grains grows rapidly. Input use rises, along with demand for farm services. Traders invest in more storage, including cold storage, making supply to the market less seasonal. Consumers during this phase purchase staples primarily in processed form, and entirely new ultra-processed foods and beverages begin to be widely available and heavily promoted by food companies. Expenditure on food prepared and consumed away from home skyrockets, and concerns about food safety begin to emerge. Off-farm labor in marketing and processing and food preparation rises rapidly, especially among women. Supermarkets spread fast, though their share of total food retail remains small. Small- and medium-sized firms still dominate, but larger firms start emerging.

This is the boom stage for employment opportunities in small and medium enterprises and to a lesser extent in wage employment in the agrifood system (the bottom of the J-curve) and in more remunerative and commercially oriented farming. Yet it is also during this stage that the competitive landscape begins to change in important ways for farms and firms. Overall, the number of opportunities is falling at farm level (even as new and much more attractive opportunities arise for some) and rising rapidly after the farm. At both levels, new skills need to be learned and old ways of doing business need to change if smallholder farmers and micro-, small-, and medium-scale enterprises (SMEs) are to take advantage of these opportunities and grow their incomes.

Labor is moving off the farm, but farming remains crucial
FSP made two major contributions to analysis of the structure of employment in low-income countries. First, it pioneered the use of employment data from the World Bank’s Living Standards Measurement Surveys (LSMS) to quantify laboring full-time equivalents (FTEs). This enabled a much more accurate description of where households allocate their labor effort and showed that farming’s labor share was substantially lower than had been previously thought. Second, FSP disaggregated the distribution of nonfarm labor into labor off the farm but within the agrifood system, and labor that took place entirely outside the agrifood system, then into segments of the post-farm agrifood system. This approach provided the first window on the role of the full agrifood system, farm and post-farm, in employment. Various analyses using these methods showed that farming had a high starting share in employment but would see its share fall steadily, that employment in the post-farm agrifood system would grow rapidly but from a small base, and that employment outside the agrifood system would capture the largest single share of new employment. It also showed that female employment was especially high in the post-farm agrifood system and confirmed this sector’s very rapid growth during the transitional stage of transformation.

As transformation proceeds, farming, food, and the agrifood system slowly cede their primacy in the economy to activities with little or no connection to agriculture. A focus on the agrifood system is nonetheless important for two reasons. First, it continues to be a major employer of people in developing countries and will remain so for several decades; and the productivity of farming and the broader agrifood system is a key driver of real incomes and productivity in the rest of the economy. Finding ways to spur productivity growth in the agrifood system and to promote adequate supplies of diverse, safe, and nutritious foods for consumers is thus a central task in ensuring strong and healthy overall economic growth.

Do food imports pose a threat to job growth in Africa’s agrifood system?
FSP pursued two strands of inquiry on this issue: (1) trends in net cereal imports, and (2) trends in food imports as a share of total food expenditure. While both found that per capita imports were rising, they differed in their assessment of the threat this posed. Here, we suggest that whether or not food imports are “too high,” Africa needs increased productivity and targeted public- and private-sector investments in its agrifood systems from farm to retail. Moreover, few if any would argue that trade barriers should be used to minimize imports.

Changing diets bring great benefits along with new and serious challenges
Income growth, facilitated by the drivers discussed above, is combining with urbanization and globalization to transform diets across the developing world in similar directions. Another contributor is increased rural population densification, which has led to increasingly urban characteristics in rural consumption. The change is unfolding broadly across and within countries and is penetrating all income levels, driving rapid change among African households that are still below the international poverty line (Figure 3; see also Tschirley et al. 2015a). This means that enormous pressure is being brought to bear on food systems to respond to these dynamics now, not at some point in the future.

Diets are changing in four ways. First, they are becoming more purchased. For example, in rural areas of East and Southern Africa, 40 to 50 percent of the value of all food consumed by rural households was purchased in 2010. In rural Nigeria and Bangladesh, this share is around 70 and 80 percent, respectively. Second, diets are becoming more perishable, as predicted by Bennett’s Law, which states that as incomes rise, people begin to eat more nutrient-rich, animal-sourced foods. Animal-sourced foods and fresh produce now make up about half of all food consumption (by value) in rural Africa, two-thirds in urban Africa, and three-quarters in urban Asia. Third, diets are becoming more processed. This can simply involve a change in the form in which a traditional final product (e.g., maize meal in Eastern and Southern Africa or chapatis in India) is acquired rather than a change in diet per se. Purchasing in processed form saves time and hard labor for women. But as transformation advances, consumption of ultra-processed foods also rises. These foods are entirely distinct from traditional staples, and are created using multiple ingredients, food additives, and often chemical rather than just physical processing. Fourth, more foods are being prepared and consumed away from home. This category consistently shows an income elasticity of demand well above 1.0 and is experiencing vertiginous growth in all countries studied.

This diet change has two broad implications: (1) dramatic growth in agribusiness opportunities, discussed further below, and (2) a rapidly changing mix of nutritional challenges. The early stage of transformation brings improvements in nutrition, with rapid falls in child underweight and stunting. This stage also greatly reduces the burden of food preparation on women by making basic processed staples far more available. However, overweight and obesity tend to rise rapidly as a country moves from the traditional into the transitional stage. Changes in the food environment can promote unhealthy dietary behaviors, especially among youth. The unhealthy foods driving this dynamic include locally produced “junkfoods” and some traditional foods prepared away from home—like fried meats and carbohydrate-heavy dishes. Recent research, including by FSP, links these consumption trends to negative nutritional outcomes in Kenya and Tanzania.

These changes in diet are rapidly shifting the mix of nutritional challenges that countries face. For example, in Tanzania between 2009 and 2015, for every 100 households that had problems of underweight or stunting, the number with problems of overweight or obesity rose from 40 to 80. At the same time, micronutrient deficiencies persist, even among those who are overweight, due to the poor nutritional quality of many processed foods and beverages. The result is a “triple burden” of malnutrition.

Change in structure and behavior in the midstream and downstream generates real benefits while creating new concerns
Supply chain configurations change in three ways during transformation. First, they lengthen spatially and temporally, allowing food to be sourced from increasingly distant locations and stored for longer periods. Second, rural–rural supply chains emerge and become more complex and longer due to rising reliance on markets in rural areas. Third, urban–rural and rural–urban–rural supply chains emerge. Urban–rural chains arise to distribute imported foods (or locally produced foods such as bread made from imported wheat) to rural towns and villages.

Consumers see three main benefits from these changes. First, seasonality of food supply declines as food (including imports) is sourced from broader geographic areas. Second, consumers see lower real prices as firms throughout the agrifood system increase their scale of operations, driving own costs of production, while competition typically remains strong enough to transmit these cost reductions to consumers. Third, the diversity and convenience of foods increases greatly, as firms experiment with products to meet consumer demand and generate profit.

For entrepreneurs, the major benefit of these transformations is the rapid growth in demand for value added products, which drives a comparable increase in the number of micro, small, and medium enterprises in logistics, processing, and packaging and distribution. Farmers also benefit from a general improvement in market access due to improved public infrastructure and private investment in input supply and in output trading at scale that reduces costs to farmers.

These changes also bring new challenges. Beyond the nutritional changes discussed above, two main concerns arise. The first is food safety, driven by supply-side and demand-side factors. The second concern relates to the rate of consolidation at different levels of the system, which we refer to as the J-curve. Larger firms employ much less labor per unit output, so a too-rapid rate of consolidation (that is, the exit of micro, small, and medium firms) will decrease the contribution that the agrifood system can make to employment growth.

Farm structure change poses big challenges for smallholder farmers, but also fuels technical change and productivity growth
Policy changes, urbanization, growing incomes, and the continuing effects of the commodity price surge of 2007/2008 have made farming a more attractive commercial opportunity in Africa. At the same time, the record on investor-owned large farms in Africa is exceedingly poor. The result has been a dramatic increase in the number of medium-scale farms, defined as farms of between 5 and 100 hectares. Nearly all such farmers are nationals of the countries they are farming in. The share of national cultivated farmland under medium-scale farms has risen since 2000 in most but not all of the countries where nationally representative farm data are available. This investment appears to be most common in countries with relatively abundant land, and evidence suggests grains and oilseeds are the major focus of these farms.

Agricultural policy reforms facilitated the emergence of this group of farmers. Key policy reforms in the 1990s removed restrictions on private movement of food commodities across district borders and ended government grain marketing parastatals, which encouraged major investment in commercialized farms, marketing, processing, and retailing. When world food prices suddenly skyrocketed, these reforms enabled thousands of small, medium, and large farms and private firms to respond rapidly to profitable incentives.

Closely associated with agricultural policy reform is the development of agricultural land markets in Africa. Unlike 20 years ago, land sales and rental transactions are now legal, even in most areas of customary tenure. Agricultural policies have also become more favorable to the interests of medium- and large-scale farms. Most national farmers’ unions and lobbies support policies that raise food prices, encourage the conversion of customary land tenure to statutory tenure (to promote access to land through market transactions), and promote input and credit subsidy programs that are open to bigger farms.

We identify three channels through which these farms are likely to bring new sources of capital and know-how to African agriculture. First, medium-scale farms have drawn investment from large-scale grain wholesalers, injecting needed capital into the system and increasing the number of assembly traders sourcing farm commodities deep in rural areas. By attracting private investment in grain trading around them, these medium-scale farmers have improved input and output market access conditions for surrounding smallholder farmers. Second, smallholders in areas with a high concentration of medium-scale farms are significantly more likely to rent mechanization equipment for land preparation than smallholders in other areas. Third, rural areas with a high concentration of medium-scale farms have significantly higher farm and nonfarm incomes. Medium-scale farm households tend to spend more money in the local economy, creating off-farm employment opportunities for rural people formerly dependent on subsistence farming.

At the same time, the rise of medium-scale farms probably led to the increasingly unequal distribution of agricultural land in Kenya, Ghana, and Zambia over the past 10 to 20 years. FSP research finds that current Gini coefficients of land ownership far exceed those of most Asian countries in the 1980s, raising real questions about the prospects for smallholder-inclusive agricultural growth in countries where this is happening.

Smallholder farmers face major challenges competing in this new environment; well under half are likely to prosper as farmers over the next two decades
Considering the dynamics of transformation that we see, and based on several attempts to categorize African smallholder farmers by level of and capacity for further commercialization, we suggest that well under half will be able to prosper as farmers over the next decade or two. Among those who fail to do well, some will leave farming for more attractive off-farm opportunities. Others will remain in low-productivity farming with minimal off-farm engagement and will need safety nets to ensure their food security and help the next generation escape from poverty. Those who do prosper are much more likely to produce non-grains (that is, products with high-value and less land-intensive value chains, such as dairy and fresh fruits and vegetables) rather than grains, since the latter show economies of scale in production; the rising medium-scale farm sector is already moving into the grain sector with some force. In order to thrive, smallholders will have to adopt new attitudes and learn new skills to engage with farming as a business.

Policy responses to assist smallholder farmers, small entrepreneurs, and consumers in transitioning agrifood systems
This report focuses on a policy agenda for transitional agrifood systems, since most countries in Africa, South Asia, and some of Southeast Asia are in this stage. It emphasizes four overarching points. First, no policy or program will fundamentally alter the transformations taking place; however, they can nudge the changes toward more inclusive and healthy directions. This amounts to a socially informed business approach that “goes with the flow,” while maximizing positive effects and managing negative ones.

Second, SMEs and smallholder farmers are natural partners. Tough each will be declining over time, a gradual rather than abrupt transition is in the interest of both and is the only approach conducive to inclusive transformation.

Third, the foundations of any effective approach to helping smallholders, SMEs, and consumers, are policy and infrastructure. Getting these right is the only way to ensure a return on other, more targeted investments.

Finally, helping those on the margin who might be able to prosper to actually do so, and protecting those who are unable, requires targeting different elements from a portfolio of approaches to different kinds of people. New data tools, especially global GIS databases and geo referenced household datasets, are making this more feasible.

Infrastructure, policy, and targeted support for smallholders, small enterprises, and consumers

Infrastructure: Beyond the standard recommendation for investment in roads, energy, and water and sanitation, this report makes two recommendations regarding infrastructure. The first is to prioritize secondary cities and towns. These urban centers are home to large shares of the total urban population and are closer and more accessible than large metropolises to rural residents. And in most transitioning countries, secondary cities have little food marketing infrastructure and thus provide an opportunity to “get it right” from the beginning. The second broad recommendation regarding infrastructure is to substantially improve urban wholesale markets, including with new ownership and management models to facilitate more efficient and equitable urban access to rural farmers.

Transparent and predictable policy: Broad policy recommendations focus on the need for transparency and predictability, and a far greater commitment to more open regional trade. Bureaucratic procedures for registering businesses and accessing public permits and services should be streamlined and transparent. Land law should be clear and take into account the special assistance smallholder farmers may need. Food safety and quality standards need to be clear and transparently enforced. Regulations on plant-protection chemicals, fertilizers, and seeds should be based on the latest science and uniformly enforced. Across the board, regulatory approaches need to recognize the continued informality of a considerable amount of economic activity and facilitate improved performance in both formal and informal systems.

Targeted assistance at farm level: Targeting programmatic assistance at farm level involves a spatial dimension combined with an ability to determine household-level capacity. There are data tools to help with this and they should be used. Because classification is never perfect, requiring some level of financial or in-kind buy-in from farmers as a condition of participation can help to increase a program’s effectiveness.

Commercialized farmers need two kinds of assistance: (1) in strengthening their ability to engage with private-markets for inputs, farm services, finance, land, or outputs; and (2) in expanding productivity and scale of operation through intensification or extensification to drive down the cost of operation. Smallholders who show the potential to become commercialized need the same things, but perhaps more intensively and with a modest, limited-time subsidy. The question is how to move from a situation where input subsidy programs are the cornerstone of agricultural development to a holistic program of sustainable productivity growth. Doing so will include raising public investment in agronomic research and extension programs to enable farmers to use fertilizer more efficiently; reconsidering targeting guidelines to achieve more equitable development impacts; and greater political will for ensuring that the subsidies go to the intended beneficiaries. Smallholders trapped in unsustainable and low-productivity farming because of tiny, degraded farms and have minimal off-farm engagement need safety nets to ensure their food security and possible second-generation escape from farming.

Targeted assistance for SMEs: Despite their popularity, little is known about the effectiveness of programs for direct provision of micro- and small-scale credit or business development services to MSMEs. The risk of unproductive public investment is thus high, leading to two recommendations. First, policy can be improved with collateral registries and secured-transaction laws that enable banks to lend to small entrepreneurs using movable assets as collateral. Tanzania is currently considering such legislation, in part due to efforts by FSP together with other programs financed by the United States Agency for International Development (USAID).

Second, targeting is as important for SMEs as it is for smallholder farmers. Spatial filtering can be done similarly to how it is done for farmers. The difference in targeting is that nonfarm SMEs are commercialized by definition, and predicting success on the basis of other characteristics is quite difficult. The best predictor is size: very few micro enterprises ever rise beyond the level of survival strategies for poor people. With a size cutoff and buy-in requirements in place, direct assistance such as training in technical and managerial skills, assistance in navigating regulatory requirements, credit guarantee funds and other measures to ease access to finance, and investment in agroprocessing clusters stand some chance of generating a positive payoff in terms of successful businesses, expanded efficient output, and increased employment. However, attention must always be paid to cost, as this can be high while the benefits are low. Providing these services to a cluster of similar firms is likely to be more effective and less costly than working with individual firms.

Developing policy and investment packages to promote the development of promising value chains involves stakeholder engagement, detailed policy proposals, and important tradeoffs.

Consumer-focused policies: Inclusive economic growth and programming help to reduce stunting and underweight. The challenge now is to maintain economic growth and programmatic commitment to drive these problems out of existence.

Much less is known about how to stem the tide of rising overweight and obesity. This is an applied research area that needs greater attention, with an emphasis on adequately describing rapidly changing food environments, linking them to consumer food behavior, and testing approaches to modifying that behavior.

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