Agricultural value chain

The agricultural value chain concept has been used since the beginning of the millennium, primarily by those working in agricultural development in developing countries. Although there is no universally accepted definition of the term, it normally refers to the whole range of goods and services necessary for an agricultural product to move from the farm to the final customer or consumer.

Background

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Value chain representation

The term value chain was first popularized in a book published in 1985 by Michael Porter, who used it to illustrate how companies could achieve what he called “competitive advantage” by adding value within their organization. Subsequently the term was adopted for agricultural development purposes and has now become very much in vogue among those working in this field, with an increasing number of bilateral and multilateral aid organisations using it to guide their development interventions.

At the heart of the agricultural value chain concept is the idea of actors connected along a chain producing and delivering goods to consumers through a sequence of activities. However, this “vertical” chain cannot function in isolation and an important aspect of the value chain approach is that it also considers “horizontal” impacts on the chain, such as input and finance provision, extension support and the general enabling environment. The approach has been found useful, particularly by donors, in that it has resulted in a consideration of all those factors impacting on the ability of farmers to access markets profitably, leading to a broader range of chain interventions. It is used both for upgrading existing chains and for donors to identify market opportunities for small farmers.

Definitions

There is no commonly agreed definition of what is actually meant by agricultural value chains. Indeed, some agencies are using the term without having a workable definition or definitions and simply redefined ongoing activities as “value chain” work when the term came into vogue. Published definitions include the World Bank’s “the term ‘’value chain’’ describes the full range of value adding activities required to bring a product or service through the different phases of production, including procurement of raw materials and other inputs”, UNIDO’s “actors connected along a chain producing, transforming and bringing goods and services to end-consumers through a sequenced set of activities”, and CIAT’s “a strategic network among a number of business organizations”.

Without a universal definition the term “value chain” is now being used to refer to a range of types of chain, including:

• An international, or regional commodity market. Examples could include “the global cotton value chain”, “the southern African maize value chain” or “the Brazilian coffee value chain”;
• A national or local commodity market or marketing system such as “the Ghanaian tomato value chain” or “”the Accra tomato value chain”;
• A supply chain, which can cover both of the above;
• An extended supply chain or marketing channel, which embraces all activities needed to produce the product, including information/extension, planning, input supply and finance. It is probably the most common usage of the value chain term;
• A dedicated chain designed to meet the needs of one or a limited number of buyers. This usage, which is arguably most faithful to Porter’s concept, stresses that a value chain is designed to capture value for all actors by carrying out activities to meet the demand of consumers or of a particular retailer, processor or food service company supplying those consumers. Emphasis is firmly placed on demand as the source of the value.

Value chain methodologies

Donors and others supporting agricultural development, such as GIZ, DFID, ILO, IIED and UNIDO, have produced a range of documents designed to assist their staff and others to evaluate value chains in order to decide on the most appropriate interventions to either update existing chains or promote new ones. However, the application of value chain analysis is being interpreted differently by different organisations, with possible repercussions for their development impact. The proliferation of guides has taken place in an environment where key conceptual and methodological elements of value chain analysis and development are still evolving. Many of these guides include not only detailed procedures that require experts to carry out the analysis but also use detailed quasi-academic methodologies.

Linking farmers to markets

A major subset of value chain development work is concerned with ways of linking producers to companies, and hence into the value chains. While there are examples of fully integrated value chains that do not involve smallholders (e.g. Unilever operates tea estates and tea processing facilities in Kenya and then blends and packs the tea in Europe before selling it as Lipton, Brooke Bond or PG Tips brands), the great bulk of agricultural value chains involve sales to companies from independent farmers. Such arrangements frequently involve contract farming in which the farmer undertakes to supply agreed quantities of a crop or livestock product, based on the quality standards and delivery requirements of the purchaser, often at a price that is established in advance. Companies often also agree to support the farmer through input supply, land preparation, extension advice and transporting produce to their premises.

Work to promote market linkages in developing countries is often based on the concept of “inclusive value chains”, which usually places emphasis on identifying possible ways in which small-scale farmers can be incorporated into existing or new value chains or can extract greater value from the chain, either by increasing efficiency or by also carrying out activities further along the chain.

Agricultural value chain finance

Agricultural value chain finance is concerned with the flows of funds to and within a value chain to meet the needs of chain actors for finance, to secure sales, to buy inputs or produce, or to improve efficiency. Examining the potential for value chain finance involves a holistic approach to analyze the chain, those working in it, and their inter-linkages. These linkages allow financing to flow through the chain. For example, inputs can be provided to farmers and the cost can be repaid directly when the product is delivered, without need for farmers taking a loan from a bank or similar institution. This is common under contract farming arrangements. Types of value chain finance include product financing through trader and input supplier credit or credit supplied by a marketing company or a lead firm. Other trade finance instruments include receivables financing where the bank advances funds against an assignment of future receivables from the buyer, and factoring in which a business sells its accounts receivable at a discount. Also falling under value chain finance are asset collateralization, such as on the basis of warehouse receipts, and risk mitigation, such as forward contracting, futures and insurance.

The use of ICTs in value chains

Information and Communication Technologies, or ICTs, have become an important tool in promoting agricultural value chain efficiency. There has been a rapid expansion in the use of mobile technologies, in particular. The price of ICT services is falling and the technologies are becoming more affordable to many in developing countries. Applications can support farmers directly through SMS messages. Examples include iCow, developed in Kenya, which provides information on the gestation period, on artificial insemination of the cows, and on how to look after them. Applications such as M-Pesa can support access to mobile payment services for a large percentage of those without banks, thereby facilitating transactions in the value chain. Other applications have been developed to promote provision of crop insurance through input dealers, for example.

ICTs are also being used to strengthen the capacity of extension officers and NGO field staff to reach farmers with timely and accurate information and, at the same time, help capture data from the field. The Grameen Foundation’s Community Knowledge Worker (CKW) programme is an example. Farmer representatives are trained to use ICT applications on a smartphone to provide agricultural information and extension support. Most market price information is now delivered to farmers via SMS. Further along the chain, technologies offer considerable possibilities to enhance traceability, which is particularly relevant as certification grows in importance. Where necessary many exporters can now trace consignments back to individual farmers and take necessary measures to address problems. Finally, systems such as FARA’s eRails are also supporting agricultural researchers through data collection and analysis and access to up-to-date research publications.

Enabling environments

As with all agricultural growth, two things appear essential for successful value chain development: creating the right environment for agriculture and investing in rural public goods. An enabling environment implies peace and public order, macro-economic stability, inflation under control, exchange rates based on market fundamentals rather than government allocation of foreign currency, predictable taxation that is reinvested in public goods and property rights. There is a positive correlation of agricultural growth with investment in irrigation, transport infrastructure and other technologies. Governments have a responsibility to provide essential goods and services, infrastructure, such as rural roads, and agricultural research and extension. Value chain development is often constrained by corruption, both at a high level and at the ubiquitous road blocks found in many countries, particularly in Africa. Many measures to improve value chains require collaboration between a wide range of different ministries, and this can be difficult to achieve.

See also

• Agricultural marketing
• Agricultural diversification
• Contract farming
• Value chain

External links

• Contract farming resource centre
• “Making the connection” Value Chain Conference
• Fin4Ag Agricultural Value Chain Conference, Nairobi, July 2014
• Rural Finance Learning Center