Engaging the Private Sector

Agricultural Sector Perspectives

Challenges of Agribusiness and Agro-industries Development

Twentieth Session

Brings to the attention of COAG a number of pertinent issues relating to agribusiness and agro-industry trends for consideration and comment Seeks guidance on the priority that FAO should give to agribusiness and agroindustry development

Developing Country Consumer and Market Trends
Diets include more fish, meat and dairy products, as well as fruits and vegetables Export diversification into non-traditional fruits and vegetables Long-term decline in agricultural commodity prices likely has not ended Prospects for food manufacturing greater than for primary commodities Tremendous regional disparity in formal sector agro-industry value addition

Organizational and Institutional Changes
Growing concentration at all levels, particularly in retail and processing Enterprises are getting larger as firms seek economies of scale Private sector standards for food quality and safety

Organizational and Institutional Changes
Increasingly, exchange is arranged through contracts More specialized procurement channels and dedicated wholesalers Changes in the retail sectors of developing regions have been particularly notable

Efficiency and Growth Benefits
Agro-processing enterprises are increasing demand for farmers’ products Exporters and agro-processing enterprises are furnishing crucial inputs and services Agro-industries are stimulating market induced innovation Domestic and export systems are becoming more mutually supportive

Risks for Small Farmers, Traders, Processors, Retailers
Small farmers have difficulties meeting agro-industry standards and contractual requirements Traders and marketers in local markets are being squeezed by specialized procurement practices and certified products

Action Areas
Agro-industry and Value Chain Programmes Enabling Environments Industry Standards and Requirements

Enabling Environments

Identifies five top priorities, including Strengthen public sector cooperation with the private sector Strengthen and support the development of commodity, location, industry and/or profession based associations

Agro-industry and Value Chain Programmes

Specific strategies, programmes and interventions should be undertaken by the public sector to support the creation, improved coordination and upgrading of specific agro-industries and agricultural value chains

Why Governments are Supporting Value Chain Development
Help ensure that progress being made in one part of the value chain is not negated by poor performance in other parts of the chain Absorb some of the high transaction and information costs as well as risks that often discourage potential lead firms from developing value chains Help ensure fair governance in value chains

Why Governments are Supporting Value Chain Development
Improve the performance of value chains targeted to domestic markets that might not alone attract private investment Ensure that the management competencies and technical expertise of private sector firms are directed at benefiting small farmers and processors

Millennium Development Goal 8 global partnership for development Help ensure that agro-industries are rule-based and non-discriminatory, and include a commitment to good governance, development and poverty reduction

Actions to Help Smallholders in Value Chain Development
Strengthen the capacities of farmers to understand and meet the timing, quality and safety requirements of processors, exporters, importers and retailers Facilitate and support farmer organizations and producer alliances Reinforce business services to small farmers and processors

Actions to Help Smallholders in Value Chain Development
Build the capacities of chain participants to innovate, diversify or exit as markets change Provide advisory support on contracts negotiation and compliance

Industry Standards and Requirements

Optimize impacts and improve fairness of industry requirements
Public sector dialogue with the private sector about standards Investments in physical facilities, laboratories, equipment, and other kinds of infrastructure Reinforcement of institutions charged with responsibility for food safety, control of frauds, animal health, and plant health

World Development Report 2008: Agriculture for Development

Strategic Assessments

With globalization, institutional innovations, new biological and information technologies, and changing agro-ecological conditions, opportunities present themselves for a new agriculture, with new challenges Agriculture can be the engine of growth and poverty reduction in agriculturebased countries

Elsewhere agriculture has growth opportunities and poverty-reducing potential in sub-sectors with a comparative advantage Capitalizing on the best that tradition and modernity have to offer in constructing agrarian institutions for a market-driven agriculture is a promising road ahead for smallholder competitiveness

Findings Relevant to Work on Linkages and Value Chains

Following structural adjustment, the private sector emerged only slowly and partially mainly serving commercial farmers but leaving many smallholders exposed to extensive market failures, high transaction costs, and service gaps

Strengthening farm-to-market linkages has improved the livelihoods, incomes and food securities of rural and urban households About half the agricultural area in remote regions has good agricultural potential but lacks institutions and infrastructure to integrate into the wider economy

Specialty markets for coffee, cocoa, tea, and cotton (organic, gourmet, fair trade) offer an alternative higher priced market, but they account for a small share of the global market Diversification into horticulture, livestock, and other high value crops offers considerable potential for employment generation and productivity growth

Balancing flexibility in hiring for employers and basic protections for laborers has been elusive

Supply chain development is profoundly changing the structure of production and wholesale marketing in developing countries Analysis of the impact of modern procurement systems on small farmers is limited; the available evidence provides a mixed picture

Recent studies of contract farmers show that they have significantly higher incomes than other farmers Both anecdotal cases and broader research lend evidence to support the “standards as barriers” perspective Some studies find that smaller processing firms are left out of the supply chain, with medium-sized and large processors preferred for long-term contracts

The costs of agricultural trade policies are now as high from restrictions to SouthSouth trade as they are from restrictions to South-North trade Just a handful of countries such as Brazil, Chile, China, Guatemala, and Mexico dominate nontraditional agricultural export markets

A large share of public spending has provided private goods (input and output subsidies) and services at high cost Great scope remains for improving the efficiency of public resources to increase investments on high-priority public goods

Statements Relating to Public– Private Sector Cooperation

Chapter 5 Bringing agriculture to the market Chapter 6 Supporting smallholder competitiveness through institutional innovations Chapter 7 Innovating through science and technology Chapter 9 Using labor markets as pathways out of rural poverty Chapter 11 Strengthening governance, from local to global

Bringing agriculture to the market

The government and the private sector can help farmers expand and upgrade their range of assets to meet the new requirements of supermarkets and other coordinated supply chains

Commodity exchanges offer a fast and low-cost mechanism for discovering prices, for trading, and for resolving contractual disputes

Public-private efforts to promote collective action and build the technical capacity of farmers to meet the new standards Joint extension by supermarket field staff and government extension officers – technical assistance to improve product quality and safety and accredit and assess the supply potential of small producers

Addressing the export challenges of sanitary and phytosanitary standards requires joint public and private efforts in policy, research, and management Specialty markets - there will be a need for agreement on a common standard and improved coordination among the organizations promoting these standards

Institutional innovations

Many newly developed innovations have the character of a public good, because innovations by one lender may be quickly adopted by another This justifies public support for promising start-ups and pilot experiments to enable them to reach scale and become financially viable within reasonable time periods

Financial services
Mobile phones – m-banking, pay for purchases transfer funds; reduces transaction costs Branchless banking—stores, gas stations, and input providers to reach rural customers at low cost Rural leasing - providers need to run profitable enterprises but they benefit from access to government and donor funds to jumpstart their operations

Financial services
Value chain finance - financial intermediation through interlinked agents (input suppliers or output processors) Credit ladders - the key is a mechanism for credit and saving histories and credibly signaling them to the next level of the financial market

Several approaches being tried to adapt index insurance to diverse conditions In some cases targeted subsidies may be warranted for variable costs and prove less costly than ex post assistance Assemble information that can be employed in index-based insurance public good that can improve the efficiency of markets and reduce costs

Input markets
Because public interventions in seed and fertilizer markets have so often failed, attention is turning to new approaches to establish sustainable private-sector-led input distribution systems

Input markets
Vouchers - redeemable with local agrodealers strengthened effective demand for inputs and increased sales—and profits— of private distributors Seed supply - partnerships between public plant breeding programs and private seed producers

Innovating through science and technology

Given the global role of the private sector in R&D and in value chain development, public-private partnerships (PPPs) offer much potential and are proliferating

A dynamic system of innovation comprises private business, farmers, processors, regulatory bodies, and public R&D organizations operating in partnerships, networks, or consortia Networks of researchers, input suppliers, chemical companies, and farmers – for participatory research to adapt technologies to local conditions

Negotiate reduced restrictions on private sector imports of technologies and high regulatory barriers to the release of new technologies

Make public funding for R&D contestable, and open to private firms to implement the research, usually with private cofinancing Establish a “purchase fund” or prize to reward developers of specific technologies Competitive funds - co-finance both R&D and the pilot testing of innovations, usually in partnership with private actors, whether farmers, processors, or other agri-businesses

Coordinating bodies or consortia – to facilitate coordination along value chains Mixed public-private systems involving farmer organizations and nongovernmental organizations and public agencies contracting-out extension services

Labor markets

Labor intensity of high value agriculture can generate employment through public-private partnership programs

Labor contracting schemes - reduce the volatility of employment for agricultural workers Localized agro-based clusters - producers interact regionally to better compete; create linkages with local services and industries and enhance the demand for labor beyond farming

Strengthening governance

The government and the private sector can help farmers expand and upgrade their range of assets to meet the new requirements of supermarkets and other coordinated supply chains

Public Sector Actions
Coordination - when farmers or processors are working in an isolated or disconnected way, or when complementary investments are not made by others at different stages in the supply chain

Public Sector Actions
Contracting out - suitable for functions that require public finance but not necessarily public provision

Public Sector Actions
Public-private partnerships - go beyond outsourcing, creating joint responsibilities for financing and providing agricultural services and infrastructure

Thank you