The importance of improving smallholder agricultural development has received more attention recently from development agencies and academics alike, and therefore there is consensus that improving market access and loan acquisitions for smallholders will lead to increased income and food security – which further leads to poverty alleviation.
In recognition of this, development practitioners have shifted their focus from supply-based programmes to demand-driven ones wherein farmers can produce for markets instead of trying to market what they produce. Despite this realignment, farmers in developing countries still face numerous marketing constraints – including those that raise marketing costs and those that increase the risks associated with commercialisation.
Market interventions, such as collectives, are often proposed as key strategies to deal with market failures. Rural incomes will increase if farmers are linked to markets through a rise in both farm and non-farm incomes stimulated by an increase in the sale of farm products, consumption and returns to labour. Yet, availability of market opportunities and loan acquisition schemes seems to elude many smallholder farmers. The availability of market opportunities and loan acquisitions is an important factor in smallholders’ decisions to invest in their agricultural activities.
Without a clear outlet for produce, smallholders are less likely to make expensive investments in securing and gaining market opportunities for their farm produce. In seeking for marketplaces and best market prices for their harvests, smallholder farmers face grave concerns in gaining access to price-information. Without accurate information on price mark-ups, smallholders with loose connections to value chains, local traders and middle-men are likely to be offered lower prices for their harvests.
Also, better marketing opportunities evade smallholder farmers based on their low productivity and production volume, as well as the geographical isolation of farms. Sometimes, like when smallholder farmers are approached with classified information on an emerging price mark-up to be due at a later date, a need for liquidity forces many smallholder farmers to sell immediately even though prices may be at their lowest at that particular instant.
Likewise, liquidity constraints also affect value chain actors who participate in tight value chains. Smallholder farmers sometimes side-sell to other parties outside the chain if off-takers do not pay its farmers immediately upon delivery. Nevertheless, the challenge of improving market opportunities and loan acquisitions can only be overcome through digitising value chain financial systems via creating and digitising trading platforms; and introducing digital invoice discounting and assessing post-harvest financing by digitising warehousing receipts.
- Creating and digitising trading platforms
Smallholders far from markets incur high transportation cost in delivering their crops to their target markets. High cost incurred by farmers reduces revenues of smallholder farmers. In some cases, smallholders don’t even make profits due to many contingencies that may rise when transporting goods to final consumers. For example, spoilage and other losses incurred between procurement and delivery to the buyer can also lead to lower revenues.
Additionally, there is always the risk that a deal will fall through because franchisees are unable to source a sufficient volume from their smallholder suppliers. Even for agribusiness chain actors, lack of information on their suppliers and the high expenses incurred on aggregating produce of unknown quality from smallholder famers makes establishment of chain links very difficult. These information asymmetries and logistical constraints make both agribusiness firms and smallholder farmers rely solely on middlemen to act as intermediaries in chain processes.
However, relying solely on intermediaries may not be that efficient. Sometimes middlemen may be prone to minimising prices they pay for smallholder farmers’ farm produce and maximise prices they get from agribusiness firms. Also, pressing needs for liquidity makes smallholder farmers accept whatever prices they are offered by middlemen – even when they are previewed to price information. Creating digital trading platforms helps link smallholders with a wide range of smallholder farmers. This helps build transparencies in a chain system and further adjust flat incentive rates for middlemen.
For example, cloud-based digital platforms can be created to negotiate deals with smallholders through a network of local traders. However, it is arguable deciding against digital trading platforms because commodities can never be digitised. Therefore, there is still demand for middlemen to transport logistics from point of sales to consumers. Middlemen may likely squeeze their margins into pricing, and these might create procurement issues.
With this challenge looming, creating digital online platforms will help smallholders communicate to consumers on price information. Also, quality control measures and volume of products can be communicated to smallholders through the platform, so that goods delivered to buyers will meet requirements of the buyer for smooth and efficient cohesion of value chain processes and value chain actors respectively.
- Introduction of digital invoice discounting
One of the major challenges facing aggregators and processers is selling farm produce outside a chain system. Smallholder farmers argue that they are forced to side-sell some of their products due to liquidity, logistic constraints and delays in being offered payments for their goods. As indicated earlier, smallholders may be willing to accept immediate payments for their goods when offered lower prices for the yields.
This issue of side-selling can be minimised by an appreciable level through the introduction of invoice discounting. Invoice discounting prompts quick payments from aggregators and processors. Not only that, smallholder farmers can access loans from non-financial and financial institutions based on monies owed for crop deliveries. However, accessing loans from both financial and non-financial institutions based on an existing contract doesn’t confer creditworthiness on smallholders.
Without formal records, institutions offering loans may not be able to access the creditworthiness of farmers. Digitisation of invoicing and production systems by providing information on sales systems, quality of products, as well as providing information on both smallholder farmers and agribusiness firms, bridges the information gaps that made smallholder farmers unable to obtain loans from financial service providers.
For example, introduction of cloud-based technology platforms with local traders allows actors in a chain to digitise records used for securing invoice discounting services from financial service providers on behalf of suppliers. After approval, loans can be sent to smallholder farmers. This can help address smallholder farmers’ urgent need for liquidity.
However, the disadvantage of taking up digital platforms is they can be difficult to acquire and implement – coupled with lack of capacity in managing those platforms. Also, there will also be cases where financial service providers won’t trust creditworthiness of smallholder farmers – even though there may be readily available data giving insights into the creditworthiness of farmers – and may request for formal contractual relationship as a prerequisite for lending. Therefore, formal contractual relationship should exist between smallholder farmers and trusted agribusiness firms and/or buyers for a particular timespan in order to facilitate processes involved in securing loans for farm expansions etc.
- Digitising warehousing receipts
During harvest-times, prices of farm produce are very low because of the numerous farmers harvesting their crops. Due to excess of supply, farmers are forced to sell their crops at relatively low prices. Also, urgent needs to meet liquidity demands often pose a threat to profit maximisation. Introduction of digital warehousing receipts helps in addressing the liquidity needs of smallholders.
For example, smallholder farmers can access post-harvesting financing with digital warehousing receipt. Also, farmers can safely store their products to be sold for higher prices later. Digital warehousing receipts further provide proof of ownership that a commodity or crop stored for a fee belongs to a particular farmer.
A warehouse receipt system can help farmers secure financing from financial service providers by using the value of their stored crops as collateral, which in turn frees them to seek the best market opportunity for their harvests. However, digital warehouse receipts require high quality storage machinery and accurate data systems on quality and quantity of crops being sold. Nevertheless, employing innovative warehouse receipt systems helps in using more rudimentary storage facilities near smallholder farmers in order to obtain digital receipts that allow smallholders to access post-harvest loans from financial service providers.
However, the only challenge with a warehouse receipt – be it digital or otherwise – is market risk. Because digital warehouse receipts centre on storage of products for price surges, volatilities in markets may lead to low prices – and this may reduce value of crops and further endanger financial service providers when loans are already approved and given out. Therefore, financial service providers should implement innovative strategies when they are faced with this kind of situation. For example, forward contracts can be implemented in a chain link for protection against risk.
BISMARK AMEYAW is a researcher, a market researcher and an editorial board member of Cillans publications. He is currently a doctoral researcher in economics and management. He writes, teaches and consults on management and econometric issues. He serves as an editorial board member and is a reviewer for a number of international journals. His research interests are energy and agriculture economics and management. You may contact him through E-mail:[email protected] or [email protected].
By Bismark Ameyaw l thebftonline.com l Ghana