Five reasons why companies and small-scale farmers are not in business together

It is predicted that by 2050 the world will have an additional two billion people and food production will have to increase significantly as a result. According to a report by the German Agency for International Cooperation (GIZ), small-scale farmers will be crucial in feeding this growing population.

Smallholders farmers and big companies often find it difficult to do business together.

Globally, 500 million small-scale farms currently feed around two billion people. “Integrating these farms into value chains not only promises to provide new sources for agricultural products, but will also enable smallholders to purchase better inputs and raise investment levels, thus creating market opportunities for input providers,” argued the report. “Inclusive agribusiness practices thus create business growth opportunities for smallholders and companies alike.”

While it would be mutually beneficial for companies and smallholders to do business together, they frequently find it difficult to enter into productive commercial relationships, with both sides often lacking trust and access to the other.

The report has identified five structural challenges that need to be addressed, and understood, in order to improve this business relationship for both parties.

1. Lack of market information

With market research and consulting firms being scarce or non-existent in rural areas in developing countries, it can be difficult to get up-to-date market information. From the company’s side, it can be difficult to obtain vital information on smallholder markets, whether they are selling to, or sourcing from, smallholders. Companies selling products to small-scale farmers do not know what they want, how much they are willing to pay or how to market their products to these small-scale farmers. Companies sourcing from smallholders are often also not aware who is selling what, at what price and where.

“Smallholders also face difficulties accessing up-to-date information on issues such as market prices for their products, weather forecasts, potential business partners beyond the local level, available inputs, modern production and marketing technologies, and agricultural practices,” added GIZ’s report.

With more and more small-scale farmers gaining access to mobile phones, the situation is improving in many African countries. However internet access is still low and many small-scale farmers are illiterate, making access to necessary market information challenging. According to the report, in the world’s most underdeveloped countries, only 53% of small-scale farmers over the age of 15 are literate.

2. Lack of skills

Due to the lack of access to market information, small-scale farmers are commonly unaware of up-to-date agricultural practices and post-harvest management techniques. While subsistence agricultural practices are generally passed down from parents, in order to be part of a larger value-chain “certain standards need to be fulfilled in terms of general, and crop specific, agricultural practices, and in terms of management,” according to the report.

Small-scale farmers generally lack business skills like cash-flow management, accounting and the ability to engage in strategy development, and typically have minimal formal education, if any. “Companies consequently struggle with the lack of capacities possessed by their smallholder business partners,” continued the report. “However, they often lack the skills and resources to provide the required training and education themselves.”

3. Insecurity and risk

Typically, the business relationship between a small-scale farmer and a company is drenched in insecurity, making it difficult for one to trust the other, enter into long-term commitments and take additional risks. The income of small-scale farmers is characteristically low, insecure and irregular, and the majority of developing countries usually only offer limited insurance coverage and social safety nets needed to absorb losses of a failed harvest or an unexpected fall in prices.

“Less than 5% of people with low incomes have access to general insurance coverage, and even fewer to agriculture-related policies,” the report pointed out. Small-scale farmers also risk theft of livestock and produce.

Markets in rural areas are also mostly informal, and contract-enforcement support systems – like the police or courts – are also generally unavailable, time-consuming or unreliable. Contracts therefore often have to be based on trust.

Companies also lack the formal means to enforce contracts with small-scale farmers, and bureaucratic and formal processes for gaining operating permission usually create long delays. In addition, these companies can also face political risks in some countries. According to the report, “business regulations are often patchy, administrative systems are inefficient, and legal insecurities exist in areas such as the requirements and procedures for exporting agricultural products, or for registering a product for sale on the local market.”