Figure 12: Total Rural Populations and Poverty Gap at $1.90 a Day
Note: This map illustrates the prevalence of below $1.90 per day poverty in rural areas.
Source: Adapted from World Bank Data (online), 2015, “Rural Population (% of total population),” (Washington, DC: World Bank Group), http://data.worldbank.org/indicator/SP.RUR.TOTL.ZS; and ibid., “Poverty gap at $1.90 a day (PPP 2011) (%),” map (Washington, DC: World Bank Group), http://data.worldbank.org/indicator/SI.POV.GAPS.
2014 FAO Campaign Commitment
“FAO has launched a research initiative to identify and up-scale innovative financial arrangements that make inclusive agricultural investments feasible…motivated by mounting evidence of important structural changes in agricultural value chains…in response to a rapid increase in the global demand for agricultural products.”
— Eugenia Serova, director, Rural Infrastructure and Agro-Industries Division, Italy
The Campaign Commitment from FAO includes:
- training public and private financial service providers in Africa, Latin America, and Asia, aimed at mainstreaming value-chain finance analysis in their processes as a way of improving their ability to serve the agricultural sector.
Map the locations of where the world’s poorest live and you quickly see that 75 percent live in rural areas. And three-quarters of this group depend on agriculture for their livelihoods. As seen in figure 12, there is a relationship between smaller rural population (yellow countries) and smaller $1.90 a day poverty gap.
Given this data, it is evident that strengthening agricultural value chains can be a powerful strategy to develop strong partnerships and distribution systems that increase productivity and growth while helping mitigate some of the risks that often keep smallholder and subsistence farmers in poverty. “The State of Food and Agriculture 2015” report, compiled by the Food and Agriculture Organization (FAO) of the UN, makes the connection between agriculture and rural poverty clear: “Extreme poverty is disproportionately concentrated in rural areas, and the rural poor are more likely to rely on agriculture than other rural households, especially in sub-Saharan Africa. It is the poor’s reliance on agriculture for their livelihoods and the high share of their expenditure on food that makes agriculture key to poverty and hunger alleviation interventions.”
Making agricultural value chains work for smallholder farmers requires coordinated actions among many actors in the value chain, shown in figure 13.
Figure 13: The Rural Model
Source: Opportunity International, n.d., “Financing Smallholder Farmers to Increase Incomes and Transform Lives in Rural Communities,” map (Oak Brook, IL, USA: Opportunity International), 4, http://opportunity.org/content/News/Publications/Knowledge%20Exchange/Financing-Smallholder-Farmers-Opportunity-International.pdf. Figure used with permission from Opportunity International.
Financing plays a key role in many parts of the value chain, including:
- Credit for farmers to purchase improved seed, fertilizer and other inputs, allowing them to multiply productivity.
- Credit post-harvest for farmers that store their produce in order to sell when prices are higher.
- Credit for input suppliers to bring in improved seed, fertilizer and other inputs.
- Savings facilities that allow farmers to have money to invest in the next crop cycle and pay household expenses until the next harvest.
- Insurance that helps farmers mitigate the risk of crop failure.
- Payment systems that deposit funds to the farmers account when her crops are sold.
Financial organizations can also help smallholder farmers increase their incomes by negotiating better prices for them from buyers and exporters. Information and communication technologies (ICTs) can also be harnessed to increase farmers’ incomes. Having information available by phone on prices, varieties, growing techniques, and financing options helps farmers make better decisions about crops, inputs, and markets.
According to the World Bank, “agriculture is a source of livelihoods for an estimated 86 percent of rural people (2.5 billion people) and provides jobs for 1.3 billion smallholders and landless workers…Cross-country econometric estimates show that overall GDP growth originating in agriculture is, on average, at least twice as effective in benefiting the poorest half of a country’s population as growth generated in nonagricultural sectors.” A study by Dalberg Global Development Advisors estimates the demand for finance from smallholder farmers at almost $450 billion worldwide, with less than 2 percent of this being met by current sources. 
Women, especially, face constraints in being able to access agricultural finance and services. According to Farming First, “women account for 60 to 80% of small holder farmers and produce 90% of food in Africa and about half of all food worldwide. Yet in sub-Saharan Africa, only 15% of landholders are women and they receive less than 10% of credit and 7% of extension services. Policies that address gender inequalities could, conservatively, increase yields on women’s farms by 2.5% to 4%.”
A project organized by World Vision Tanzania, which included Vision Fund, MicroEnsure and Farm Care, provided a set of services for smallholder rice farmers, for example, access to improved seed, training in cultivation techniques, and negotiations for the farmers as a group to get better prices. The 5,095 farmers involved increased their yields by 37 percent and received increased prices of 76 percent, leading to an overall income increase of 142 percent. In addition, 537 of these farmers received loans tied to crop insurance that allowed them to increase their plot sizes. These farmers received an additional 62 percent increase in their yields over and above the increase received by the other farmers.
A rigorous study by the International Food Policy Research Institute of Grameen Foundation’s Community Knowledge Worker (CKW) program in Uganda found that arming a farmer in each community with a cheap smartphone put an encyclopedia’s worth of locally relevant agricultural information in their hands. This basic service increased the application of two good farming practices by more than 28 percent, compared to control villages nearby that did not have a CKW program.
Value-chain actors are finding new ways to break with the traditional loan models to provide affordable financial tools that are increasingly tailored to crop and production cycles. One Acre Fund has developed an approach they term “Market in a Box,” which provides asset financing by delivering inputs on loans bundled with training and access to storage facilities. One Acre Fund’s approach offers loans to joint-liability groups of farmers’ as tangible goods, such as improved seeds and fertilizer, which ensures that the loan is invested in productive assets and reduces the risk for the lender. In addition, they offer more flexible loan terms, at times requiring interest-only payments during the season and principal repayment after the harvest. This model allows farmers to make payments more closely aligned with their cash flows, while allowing One Acre Fund to support their claim of a 98-percent repayment rate organization-wide in 2014.
Other value chain approaches focus more on providing technical support and training to improve outdated farming techniques. Opportunity International’s (OI) value-chain strategy uses innovative practices that allow for household profiling and GPS mapping to determine the location and land area available for farming to determine with greater accuracy the appropriate amount of inputs needed.
OI’s program in Nicaragua, “Del Campo al Mercado” (From the Field to the Market), is an example of a value chain that has created strategic alliances giving business solutions to small holder farmers. OI forms “nuclei,” or groups of small producers, whom they provide with training and facilitate the sale of their product beyond the local market. The key is having good technical trainers who can then train the head of each nucleus. Appropriate training and new techniques can help mitigate some of the risk that comes with soil erosion resulting from intensive and poor farming practices and climate change.
The agricultural industry is currently responsible for around 30 percent of the world’s carbon emissions as a result of poor farming practices, deforestation, and growing demand for animal protein in people’s diets. Smallholder farmers manage vast lands that represent more than 80 percent of farms in Africa and Asia, and account for 60 percent of agricultural land use worldwide. Providing access to organic fertilizer and “climate-smart” seeds, and improving irrigation and land-use techniques can address growing issues of water scarcity, harmful land use, and greenhouse gas emissions, while improving the quality of the harvest. By delivering a better and more valuable product through strong agricultural value chains, farmers can exponentially increase their productivity and income, and reduce their impact on the environment.
Extreme weather and increased climate change has increased the risk to smallholder farmers. Thus, making crop, area, and weather index-based insurance, and the like, is essential to helping farmers protect themselves against crop losses and devastating shocks. International Labor Organization’s Impact Insurance Facility 2014 Report estimates that around 4 billion low-income people remain excluded from appropriate insurance products, and this has spurred a movement to integrate index insurance schemes within the agricultural value chain. Unlike traditional insurance policies that are paid out based on losses, weather index-based insurance can ease the immediate constraints farmers encounter by disbursing payments automatically, based on the agreed rainfall threshold to which the crop has been insured, adjusted for the cropping season. Data from weather stations in the area are compared to historical records to provide context of the risk and determine when payment is due. This reduces costs and lowers premiums by eliminating the need for long, complicated claims processes, where claims agents must assess the losses which can be subject to moral hazards on both sides.
These types of insurance products act as safety nets from adverse weather and, when integrated into a value chain, can facilitate access to credit. MicroEnsure, a private insurance company and global leader in providing weather-index insurance products, worked with the International Finance Corporation, World Vision Tanzania, Vision Fund Tanzania, and Farm Concern to provide weather-index insurance—bundled with a loan and a mandatory flood insurance policy—to farmers in Tanzania. The partners identified improved paddy seeds and connected farmers with companies in developing markets that allowed them to sell their rice in aggregated groups for a higher price.
Entering a larger, more competitive market can be daunting to smallholder farmers who lack knowledge and experience. When looking at mitigating market risks, it is essential to understand the threats that farmers face post-harvest. At this point in the value chain, storage facilities and market pricing support is crucial for increasing yields and income while reducing waste.
FAO estimates that around one-third of the food in the supply chain is either lost or wasted at the farm, during storage and distribution, or in households. Appropriate storage facilities and improved distribution centers can reduce post-harvest losses. Good warehouse operators can facilitate market access for farmer cooperatives and increase their opportunity for a better price by allowing them to store their crops for an extended period of time until market prices improve.
Some value chain improvements work to integrate ICT platforms, including mobile phones, in order to provide market information, facilitate transactions, and link value-chain actors. Mobile technology has the potential of reducing risks to farmers by providing access to price information, disease, and meteorological data, and information on growing and marketing practices. At the same time, it also allows developers to capture information that can support further innovations.
Grameen Foundation does this with its aforementioned CKW program, which started in Uganda and has now spread to Ghana, Colombia, and Guatemala. Through this program, it supplies one farmer in each village with access to a smartphone pre-loaded with an app that searches for “data- and location-specific information related to farming and product marketing.” By supporting poor farmers who have limited resources to leverage in a competitive market, these ICT platforms can help them increase gains, especially the farmers who traditionally receive below-market prices for their crops.
Financial service providers: Investigate local product value chains, work with organizations of smallholder farmers, and provide savings, credit, and payment facilities for them. Provide credit to input suppliers and storage facilities to improve access to seeds, fertilizer equipment, and warehouse receipt financing. Work with the government, international agencies, and insurance companies to develop ways to bundle crop insurance with input loans. Negotiate with buyers to gain improved prices and marketing opportunities for smallholder clients.
Government agencies: According to the Agricultural Finance Support Facility, developed by the World Bank and the Gates Foundation, in order to expand agricultural finance, government needs to:
- develop country specific diagnostics and strategies segmented that include smallholders;
- develop a coherent legal and regulatory framework that intersects both finance and agriculture;
- design effective government support mechanisms, including investments in irrigation systems and weather stations;
- strengthen financial infrastructure such as credit bureaus and asset registries; and
- build the capacity of financial institutions and their clients.
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Table of Contents
- Executive Summary
- Where’s the Map?
- Global Data Show Diverging Paths
- Integrated Health and Microfinance
- Saving Groups
- Graduation Programs
- Agricultural Value Chains
- Conditional Cash-Transfer Programs
- Digital Finance
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