Small Farmers, Big Retailers: Are New Sourcing Strategies a Path to Inclusion?

16 Pages·2016·0.68 MB·English

GLOBAL FOOD & AGRICULTURE
Small Farmers, Big Retailers:
Are New Sourcing Strategies
a Path to Inclusion?
By Hope Michelson
February 2016
Executive summary higher incomes for farmers, more resources for
farm investment in new technologies and assets,
> Rapid urbanization, population growth, and rising
and a pathway out of poverty. A number of large-
incomes in emerging economies are changing local
scale food retail companies also see the new sys-
and global food systems. Among these changes is
tems as a double win, beneficial for the bottom line
increased demand for food in cities that is afford-
and prudent for good relations with regional and
able and safe. As developing nations liberalize their
national governments. To explore these issues, this
markets and open their economies to foreign direct
report looks at the horticulture sourcing activities of
investment, international capital has been flowing
Walmart in China and Nicaragua and their impact
on an unprecedented scale into the agrifood sector
on smallholder farmers.
to meet this demand. A key feature of these invest-
> Direct sourcing from farmers does not mean pur-
ments is the transformation of agricultural market-
chasing at the farm gate. Intermediaries in retail-
ing systems—the services and activities involved in
led supply chains are not eliminated and may
bringing an agricultural product from the farm to
include nongovernmental organizations (NGOs)
the consumer.
and private intermediary suppliers. The objectives
> Large retailers increasingly have dual objectives and resources of market intermediaries in retail-
within these new, retail-led agricultural marketing led supply chains are crucial to determining which
systems: 1) increasing efficiency, traceability, and farmers participate and how they benefit from
coordination as well as 2) creating value along the participation.
food supply chain. Companies aim to accomplish
> New retail-led agricultural markets can also exacer-
these goals by sourcing “directly” from farmers. bate inequalities between rural regions with profit-
> The opportunity for these developments to ben- able market opportunities and regions without such
efit small farmers in the developing world has advantages. And even amid all the demonstrated
and potential benefits for participating farmers,
appealed to regional and national governments
some risks remain.
in Asia, Africa, and Latin America as a strategy for
fostering rural prosperity. New agricultural market- > As these retail-led agricultural marketing systems in
ing systems with more direct sourcing could mean emerging economies continue to develop, govern-
THE CHICAGO COUNCIL ON GLOBAL AFFAIRS - 1
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ments, NGOs, and companies can benefit from the supermarkets or other supermarket supply
experiences and examples to date. These lessons chain buyers follow NGO projects (and NGO
can help guide policy and practices moving for- supply chain subsidies) when the NGO relocates
ward in order to maximize the benefits to farmers to a new region or a new group of farmers.
and help realize the opportunities these systems
> Farmer investment in productive assets during
offer for increasing food security and reducing
the supply relationship is likely to improve
rural poverty.
household welfare in lasting ways, especially
once the supply relationship ends.
For governments
> Given high rates of exit from supply chains,
> Road access and water supplies for agricultural
NGOs should consider the implications for small
production are critical determinants of farmer
farmers of an abrupt cessation to a retail-led
participation in new supply chains, a fact that
supply relationship.
may exacerbate rural inequality.
> Infrastructure development can serve as a > Water and road access are critical for participa-
tion. Investments by NGOs may bring more mar-
means to facilitate greater supply chain partici-
ginal farmers into the retail-led supply chain,
pation among small farmers.
but these farmers may struggle to continue to
> Maintaining small farmer access to land and
participate in the market without NGO support
credit is important to ensure that small farmers
and subvention.
participate in new markets, especially women.
> Investments in the traditional market system Introduction
may also offer a pathway to increasing small
Rapid urbanization, population growth, and rising in-
farmer outcomes. These investments could
comes in emerging economies are changing local and
include expanding credit opportunities for rural
global food systems. Among these changes is increased
traders or investing in traditional wholesale and
demand for food in cities, including perishable goods
wet markets by improving the condition of mar-
such as fresh produce, that is affordable and safe. As
ket buildings, storage, and water and sanitation.
developing nations liberalize their markets and open
For companies their economies to foreign direct investment, interna-
tional capital has been flowing on an unprecedented
> By paying farmers a purchase price between an
scale into the agrifood sector to meet this demand.
agreed-upon minimum and maximum, compa-
A key feature of these investments is the trans-
nies can provide farmers with a measure of pro-
formation of agricultural marketing systems—the
tection against the price volatility that vexes the
services and activities involved in bringing an agricul-
traditional horticulture market.
tural product from the farm to the consumer. These
> Price stabilization/insurance afforded to small activities include everything from planting, growing,
farmers by supermarket buyers has been associ-
and harvesting food to storing, processing, trans-
ated with increased small farmer investment in
porting, advertising and selling it. The objectives of
production scale and farm assets.
retail-led transformation of agricultural marketing
> Firms should be aware of opportunities to systems include increasing efficiency, traceability, and
design sourcing strategies that encourage the coordination as well as creating value along the food
participation of women in supply chains. For supply chain. One way companies increase traceability
example, employing female extension officers or and create value is by reducing the number of inter-
buyers could be an appropriate and impactful mediaries in the supply chain and sourcing “direct”
way to involve more women farmers. from farmers.
But who will benefit from this improved efficiency
For NGOs
and value creation? How will the new food marketing
> Projects designed to build farmer marketing systems impact food security and the world’s rural
capacity may prove to be a zero-sum game if poor, especially small farmers, millions of whom
THE CHICAGO COUNCIL ON GLOBAL AFFAIRS - 3
depend on agriculture for their livelihoods—either as ples are contextualized within the broader research on
producers or laborers? small farmers and participation in retail-led agricul-
The opportunity for these developments to benefit tural supply chains. The lessons from this paper can
small farmers in the developing world has appealed help policymakers better understand and respond to
to regional and national governments in Asia, Africa, ongoing transformation of agricultural markets.
and Latin America as a strategy for fostering rural
prosperity. New agricultural marketing systems with
The transition to retail-led agricultural
more direct sourcing could mean higher incomes for
marketing systems
some farmers, more resources for farm investment
In many of the world’s economies a major transition
is under way, with rapidly transforming agricultural
New agricultural marketing systems with more
marketing systems coexisting with more traditional
direct sourcing could mean higher incomes for some
farm-product supply chains. In traditional systems
farmers, more resources for farm investment in new
there are normally numerous middlemen, or inter-
technologies and assets, and a pathway out of poverty.
mediaries, between the farmer and the consumer. For
example, in a traditional marketing system a farmer
in new technologies and assets, and a pathway out of sells to a local buyer. The buyer then sells to a trader
poverty. A number of large-scale food retail companies in a regional retail or wholesale market. Invariably, a
also see the new systems as a double win, beneficial large and varied set of traders and other entrepreneurs
for the bottom line and prudent for good relations participate in these wholesale markets, selling to retail
with regional and national governments. However, markets and small shops.
the risks and limitations of the new systems must also In a traditional marketing system with spot markets
be understood. in which commodities are bought and sold through
For the promise of new agricultural marketing cash transactions for immediate delivery, market
systems to be realized, policymakers and companies intermediaries can provide important and sometimes
must understand their true impact in practice. With complex logistics and services. For example, interme-
food supply chains transforming rapidly, practices diaries can aggregate product and move it long dis-
adopted at this early stage can have a major impact on tances and handle credit and quality grading along the
which farm constituencies benefit and how. Moreover, supply chain.
national and regional governments would do well to Even so, traditional supply chains in agriculture,
anticipate which farmers and other entrepreneurs especially for horticulture, are relatively costly in the
along the value chain are less likely to prosper from local economy, with heavy expenses for coordinating
these new market opportunities and understand the buyers and sellers, acquiring goods, and moving them
effects, positive and negative, on participants who
drop out of these new arrangements.
Retail-led marketing systems not only reduce the
To gain insight into these questions, this report
number of middlemen between the “farm gate”
looks at the horticulture sourcing activities of Walmart
and the consumer, but increase coordination and
in China and Nicaragua and their impact on poor,
traceability—and value creation—creating a “value
smallholder farmers. Like many retailers, Walmart has
chain” instead of simply a “supply chain.”
been moving into food markets in Africa, Asia, and
Latin America and is actively engaged in transform-
ing agricultural markets in the developing world. The around. The supply chains also result in indirect and
scale of Walmart’s operations and the similarities of haphazard relationships between the farmer at one
its activities to the strategies of other companies make end of the chain and retailers and consumers at the
Walmart a useful case study for shedding light on how other. With little to no interaction between them, com-
poor producers will be impacted by broader transfor- munication about production practices and product
mation of the agrarian sector. Specifically, this report variety and quality is limited.
addresses the production and sale of fresh fruits and To circumvent the challenges of these traditional
vegetables for domestic markets, though these exam- systems, retailers, exporters, and processors seek to
4 - SMALL FARMERS, BIG RETAILERS: ARE NEW SOURCING STRATEGIES A PATH TO INCLUSION?
Figure 1
Traditional and retail-led supply chains
Local buyers Regional buyers Wholesale market buyers Retail market
Traditional
supply chain
Farmers Consumers
Retail-led
supply chain
Intermediary Supermarket
(NGO, private company, or farmers' organization)
The Chicago Council on Global Affairs
purchase directly from farmers or from a single desig- moved more quickly in these regions. Sub-Saharan
nated intermediary who takes on the work of aggregat- Africa is the newest site of retail-led agrifood market-
ing and coordinating the supply. Retail-led marketing ing transformation. Despite differences in timing and
systems not only reduce the number of middlemen scale, most developing countries have experienced
between the “farm gate” and the consumer, but fundamentally similar transitions. In particular, the
increase coordination and traceability—and value fragmented networks of small firms that emerged with
creation—creating a “value chain” instead of simply a the global wave of economic liberalization in the 1980s
“supply chain.” Instead of working with the farm gate have increasingly coalesced into more coordinated
buyer and other intermediaries, the farmer often sells and efficient chains supplying a range of domestic and
to a supermarket directly or through a farmer organi- global retailers.
zation operating as a sole additional agent.
Retail-led supply chains value reducing interme- Retail-led agricultural marketing and
diaries and “buying direct” from farmers for six pri- smallholder farmers
mary reasons:
Retail-led agricultural marketing in the developing
> lower overhead world encompasses food sourcing for a number of
> fewer delays markets, including export markets, in-country domes-
tic retail markets, and processing markets. For small
> better assurances of product safety and quality
farmers lacking in capital and experience, domestic
> greater transparency and accountability in the markets generally offer the most realistic opportunities
supply chain because these markets tend to be characterized by less
stringent quality controls, phytosanitary standards,
> better coordination with farmers
and transport and payment risks than export markets.
> enhanced public image
In addition, horticulture production can be an area
There is considerable variation across regions in the of opportunity for small farmers in developing coun-
development and speed of transformation of agricul- tries—provided that they can achieve access to credit,
tural marketing.1 Retail-led transformation of agrifood transport, appropriate technologies, and training—be-
systems in the developing world originated in the cause it tends to be labor intensive rather than land
wealthier countries in Latin America and East Asia in intensive. Since small farmers rely primarily on their
the 1980s. Though the trend began somewhat later in own family for labor, they may be able to compete with
China, Southeast Asia, and South Asia, changes have larger operations that have to pay for costly supervi-
THE CHICAGO COUNCIL ON GLOBAL AFFAIRS - 5
Box 1 land. The degree to which small farmers benefit from
increases in land prices will depend on local land
Women farmers within retail-led tenure rights.
agricultural marketing systems The downsides for companies sourcing from small
farmers are cost and risk. Small-farmer sourcing can
Research on the role of women in recent retail-led market- be relatively expensive if a buyer has to pay the costs
ing opportunities finds some instances in which women of the transaction (negotiating the quantity, quality,
participate. But in general, women have been found to
and price; setting up the logistics of purchasing and
have little direct participation in new retail-led market-
payment). In addition, small farmers may not have the
ing opportunities, largely due to limited access to land
and credit. 2
A less explored determinant of women’s participation
As retail-led agricultural marketing systems
in these markets is what the firm or intermediary involved
develop, policymakers must better understand the
prefers. An NGO may have program objectives that include
reaching female small farmers, or a firm or intermediary challenges and opportunities they present.
company may find it easier to work with men exclusively.
In some cases, women may work as hired labor, picking,
capital or production scale to consistently reach con-
cleaning, and packing produce. Research suggests that
tracted quantities or quality standards that food com-
when households adopt contract farming, there is a con-
current change in production strategies within the family panies require.4 Additional costs for buyers include
that shifts farm labor and resources.3 The implication is the overhead of establishing and managing a sourcing
that women in households that begin to sell into retail-led system and confirming and maintaining relationships
supply chains are likely to be affected whether or not they
with numerous small farmers. This supplier cost-risk
are the primary agricultural decision maker in the house-
tradeoff is a persistent tension in the transformation of
hold. In some cases women will benefit from these shifts,
agricultural supply chains in the developing world.
but the net impact will depend on the degree of bargain-
ing power women have within the household. As retail-led agricultural marketing systems
develop, policymakers must better understand the
challenges and opportunities they present. Six key
sors. Small farmers may also be relatively attractive
observations explored in this paper are critical to this
partners for retailers because they lack the bargaining
understanding.
power of larger-scale farm operations, which tend to
have greater access to alternative markets and fewer > Retailers design supply chains to minimize market
intermediaries. However, intermediaries in these
concerns about defaulting on contracts.
retail-led supply chains are not eliminated com-
The transformation of agricultural markets also
pletely and may include NGOs and private interme-
affects medium-sized and commercial farmers. In
diary suppliers.
addition, even small farmers who are not direct partic-
> The objectives and resources of market intermedi-
aries in retail-led supply chains are crucial to deter-
For small farmers lacking in capital and
mining which farmers participate and how they
experience, domestic markets generally
benefit from participation.
offer the most realistic opportunities.
> Road access and water supplies for agricultural
production are critical determinants of farmer
ipants will likely be impacted through labor and land
participation in retail-led supply chains. This may
markets. For example, those who make their living
exacerbate rural economic inequality.
as laborers can benefit from the increased demand
for skilled, year-round agricultural labor to support > Farmers can benefit in a range of ways from partic-
production and postharvest packing and cleaning for ipation in new retail-led supply chains, including
retail-led supply chains. Increased demand for land through lower transaction and transport costs and
by farmers in the supply chain who want to expand agreements that reduce market price volatility (rel-
production could increase rental and sale prices for ative to the traditional market).
6 - SMALL FARMERS, BIG RETAILERS: ARE NEW SOURCING STRATEGIES A PATH TO INCLUSION?
> Even so, new retail-led supply relationships require Infrastructure in the countryside is rudimentary, and
that farmers assume new risks, including payment there is considerable variation in the land area of indi-
default and transaction fulfillment risks. vidual farm operations. China, on the other hand, is an
emerging world power with a massive population and
> High rates of dropout/voluntary exit from sup-
the world’s second largest economy. It has been under-
ply chains further confirm that new markets are
going rapid development, has a rapidly growing mid-
currently benefitting only a subset of farmers in a
dle class, and has by far the largest urban population
given region.
in the world. With a strong centralized government,
China has a record of ample resources for investment
Walmart in China and Nicaragua
and a well-developed infrastructure.
In the context of global agricultural transformation, Walmart entered Nicaragua in 2005 when it pur-
the innovations and impact of Walmart loom large be- chased a stake in the Central American Retail Holding
cause of the sheer scale of the company's wealth and Company (CARHCO), the region’s largest supermarket
operations. Walmart is the world’s largest company in chain. After Walmart purchased a controlling stake in
terms of revenues and also the world’s biggest retail- 2006, the chain has since grown rapidly in Nicaragua
er. In 2015 Walmart was operating 11,526 stores in 28 and the rest of Central America. By 2015 Walmart had
countries. In its food supermarket operations, Walmart become the largest retailer in Nicaragua and Central
recently reported direct purchase arrangements with America, with 695 stores in the region.11
farmers in Costa Rica, Nicaragua, Honduras, Guatema- In China, Walmart was among the first foreign
la, El Salvador, Mexico, India, China, and Brazil.5 supermarkets to begin operations after the central
The sourcing strategies adopted by Walmart in government opened up to foreign investment within
these countries resemble strategies of other interna- specific circumscribed economic zones. Opening
tional retailers and of existing domestic retail chains. its first store in Shenzhen in 1996, the company ini-
For example, Carrefour—the fourth largest retail group tially established itself throughout China’s southeast.
in the world in terms of annual revenues—reports Thanks in part to a liberalization of China’s investment
sourcing products directly from Chinese farmers policies, Walmart had 416 stores across China by 2015.
through farming cooperatives since 2007 and repre-
senting nearly 1.2 million farmers in 2015.6 Tesco, the
Direct sourcing from farmers does not
second largest global retailer by revenues, has a similar
mean purchasing at the farm gate
direct sourcing program.7 Such direct sourcing is not
confined to supermarket retail buyers. Nestlé reports Though differences between Nicaragua and China
direct sourcing for coffee and milk, and Unilever are dramatic, the similarities are instructive. First,
claims to directly source palm oil, cocoa, cashews, in neither country is “direct purchasing” by Walmart
and other products from farmers located in 19 coun-
tries across the world.8 Moreover, Walmart’s impor-
tance in American international food policy is already Box 2
clear: Walmart has become a major partner of the US
Food safety and supply chains
Agency for International Development (USAID) in its
Feed the Future program under a Memorandum of in China
Understanding ratified in 2013.9
To better understand this massive global undertak- Recent food safety crises have given a special urgency to
ing, two nations—Nicaragua and the People’s Republic supply chain transformation among retailers in China.
Companies are working to gain greater control over their
of China—serve as useful case studies. Although the
own sourcing to protect their operations and brands from
challenges and opportunities are quite different,
additional problems and scandals. The central Chinese
important and instructive parallels are nonethe-
government has enacted policies over the past two de-
less clear.10
cades to promote vertical integration and coordination in
Small both in land area and population, Nicaragua agricultural supply chains and initiated a program in 2008
has only one major urban center (Managua) and a to encourage retailers to establish direct relationships
low per-capita GDP (US$1,800 per capita in 2014). with growers.12
THE CHICAGO COUNCIL ON GLOBAL AFFAIRS - 7
generally a direct transaction with the farmer. Instead, new marketing opportunities and how farmers benefit
a small array of institutions—much reduced from the from that participation.
traditional market structure—operate between the Nicaragua and China showcase the role that inter-
farmer and the retail buyer. These actors may include mediary institutions can play in determining which
NGOs, farmer organizations, and new specialized small farmers participate and the terms (contractual
wholesalers or supply companies. requirements, risks, and remuneration) of that partic-
For example, Walmart in Nicaragua sources horti- ipation. Even though NGOs and NGO-assisted farmer
culture from small farmers through its own dedicated
wholesaler, which manages farmer relationships and
New intermediaries have enormous influence on which
logistics and works directly with growers on quality
farmers participate in new marketing opportunities
standards and crop planning. In this way Walmart pur-
and how farmers benefit from that participation.
chases from individual farmers, but also from farmers
working in associations, often with the assistance
organizations act as intermediaries in Nicaragua, while
of NGOs who facilitate technical training and help
private, well-capitalized supply companies play this
aggregate production. Several of the NGOs involved in
role in China, some of their roles are similar—coordi-
the Nicaraguan Walmart supply chains were funded
nating production schedules and varieties with farm-
through a USAID project established in 2006 to build
ers, sorting for quality and private label standards, and
the capacity of small farmers in the region.13
selling products that do not meet standards into the
China’s vast land area and the extreme fragmenta-
traditional market system.
tion of landholdings are two factors that increase the
Though these intermediary institutions often go
cost and complexity for a multinational of sourcing
unnoticed in analyses and policy initiatives related to
directly from farmers and farmer groups. Furthermore,
small farmer participation in transforming agricultural
international NGOs of the sort that have facilitated
markets, these midstream actors must be recognized
small farmer participation in other countries are
and better understood. Below are some examples of
largely absent from rural China. Instead, Walmart
the specific ways that supply chain intermediaries
China relies on a group of important new actors—
impact small farmer participation in new retail-led
third-party Chinese supplier companies.
markets in Nicaragua (as NGOs) and China (as private
These companies either source from small farmers
supply companies). Despite similar roles, these actors
through contracts or employ small farmers on supply
have different motives for participation in retail-led
company farms or through supply company sub-
supply chains, and these differences also inform the
leases of aggregated land. These new, well-capitalized
outcomes. Intermediary supply companies are profit
and geographically diversified intermediary compa- driven, with a measure of regard for local political real-
nies handle logistics and supply chain management ities and complexities. NGOs, on the other hand, may
for Walmart, including relationships with farmers. be motivated to reach the poorest of their constituents
Understanding how these new retail-led supply chain or may be responding to pressures from their funders
intermediaries operate and how they identify and to reach a target number of farmers or achieve a speci-
compensate farmers will be critical to understanding fied project scale.
agricultural transformation in China.
NGOs pick winners and subsidize their
participation
Intermediaries that remain play a
As noted, NGOs are playing an important role in Nic-
central role in determining farmer
aragua’s supply chain transformation. Research has
outcomes
found that NGO involvement is instrumental in bring-
The intermediary institutions that remain in retail-led ing small, capital-constrained farmers into the new
supply chains have been insufficiently studied given system. In addition, farmers working with NGOs in
their central role. Perhaps not surprisingly, existing Nicaragua have limited experience with horticulture,
research suggests that these new intermediaries have as most of the NGO-affiliated farmers had previously
enormous influence on which farmers participate in cultivated maize and beans.14 New supply chains are
8 - SMALL FARMERS, BIG RETAILERS: ARE NEW SOURCING STRATEGIES A PATH TO INCLUSION?
nonetheless willing to source from such small and re- Supply intermediaries selling to Walmart in China
source-poor farmers when NGOs are involved because have organized production in two primary ways.
NGOs subsidize the high costs of transacting with such First, companies are using a wage-worker model in
farmers and mitigate some of the risks through train- which the company aggregates land by renting it from
ing, product aggregation, transport or credit. municipal governments and villages and hiring farm
One complication of NGO involvement, however, workers, sometimes imported from other regions of
is that when NGO funding or project cycles end and China, to do the farming. Second, they use a sublease
NGOs move on to other communities or activities, model in which they rent land from local farmers or
the costs of sourcing from the farmers who had been village leaders and then rent the land back to farmers
working with the NGO rise. In Nicaragua, Walmart through fixed-price rental or sharecropping contracts.
buyers have been found to withdraw after a few sea- In some cases the company leases the land back to
sons and move on to other locations, in some cases the same farmers from whom the land was rented. The
following the new project activities of the NGO.15 result is that the farmer subsequently rents a different
plot, a bigger plot, or a plot on which the company has
Because the retail-led market sector is at a nascent
made improvements or investments such as green-
stage in Nicaragua, few other supermarket or other
houses or irrigation. In other cases, however, the land
nontraditional market buyers exist to purchase from
is leased to farmers who are new residents in the area
these small farmers once Walmart relocates. As a
or actively recruited and relocated by the company.
result, small farmers in these abandoned regions
The supply company may combine these models,
often return to selling into traditional markets. This
using both a wage worker and a sublease model on the
is not necessarily bad from a farmer welfare perspec-
same farm. While this sort of farm operation—involv-
tive, as farmers may return to the traditional market
ing land consolidation and a range of production
with new technologies or marketing experience that
models—is new for agricultural produce and new in
could change the quantity, quality, or timing of their
China, it resembles models for sourcing production
sales. There is insufficient research, however, on this
for processing studied in Latin America in the 1980s
topic. The Nicaraguan experience suggests that NGO
and 1990s.17
investments in small farmer training and capacity
In a few cases and for a limited number of crops,
building do not necessarily lead to durable post-NGO
supply companies have reported purchasing relation-
supply relationships between small farmers and
ships that do not rely on land consolidation—contract
supermarkets.
farming or outgrower schemes—purchasing from
farmers cultivating their own individual family plots.
Supply companies in China identify and
Nevertheless, sourcing relationships involving land
manage relationships with farmers and
consolidation were found to predominate in a 2014
farm workers
study of Walmart’s fresh fruit and vegetable sourcing
Intermediary supply companies sourcing fresh pro-
in China.18 The details of these land and labor arrange-
duce in China face special challenges in securing suf-
ments matter, as they determine who manages farm
ficient year-round quantities due to the fragmentation
production, investment, and profits and ultimately the
of Chinese landholdings. Small landholdings limit the
impact on small farmers.
amount that each farmer can supply. To help reduce
the costs of sourcing, produce supply companies in
Road access and water supplies are
China selling to Walmart and other supermarkets have
important determinants of farmer
begun to work with groups of farmers rather than
participation
transacting with a host of individual farmers. Recent
research finds that supply companies are intimately Participation in retail-led supply chains is limited to
involved in the process of organizing land and labor small farmers with particular geographic and agro-
in farm communities, though companies vary in the ecological endowments. These include altitude and
degree to which they have moved to aggregate land climate, proximity to major roads that allow easy
and the degree to which they manage agricultural transport to retail outlets, and availability of water re-
production.16 sources to support year-round (or at least off-season)
THE CHICAGO COUNCIL ON GLOBAL AFFAIRS - 9
production of produce. Farmers with the access to supply chains in China. Intermediary companies pro-
finance to support capital investments in necessities vide year-round supplies of produce in two important
like irrigation, greenhouses, and transport may also be ways. First, they ensure year-round supplies through
able to participate. geographic diversification in sourcing, establishing
In 2008 nearly all farmers supplying supermar- farms in the north and the south. Second, interme-
kets in Nicaragua lived within one kilometer of the diary supply companies make investments in pro-
country’s primary road.19 While NGOs played a role in duction technologies that support out-of-season
establishing sourcing relationships in communities horticulture such as irrigation and greenhouses and
near the northern border that are further away from
the centralized sorting and packing facilities in the
Participation in retail-led supply chains is limited
center of the country, these locations still had good
to small farmers with particular geographic and
access to the primary road network. This critical point
agroecological endowments, proximity to major roads,
is often overlooked by policymakers and researchers—
and availability of water resources—or to farmers with
not all farmers will participate in new retail-led market
the access to finance to support capital investments.
opportunities because participation is conditional on
geographic endowments that distinguish winners from
then rent plots back to farmers for cultivation or bring
losers, at least in the near term.
in farm workers as labor. This is a critical difference
Location and access to water and infrastructure
between China and Nicaragua. In China, the well-cap-
are also crucial to farmer participation in retail-led
italized private intermediaries make the capital invest-
ments needed for retail-led supply chains rather than
Box 3
the farmers themselves.
Small farmers and communications Given the importance of geography and water to
supermarket supply chains and farmer participation
technology
in both Nicaragua and China, it is clear retail buyers
will favor regions where agriculture already tends to
Much as roads enable small farmers to access retail-led
be more profitable because of access and resources.
value chains by reducing transportation costs, mobile
phones and other forms of information communications Retailers setting up supply chains are unlikely to favor
technology (ICT) facilitate market access by reducing in- building such systems in regions with longstanding
formation costs. Farmers depend on many types of infor- infrastructure, resource, and climate challenges. New
mation, for instance price information to identify the best retail-led agricultural markets therefore may actually
sales opportunities, and weather information to adjust
exacerbate inequalities between rural regions with
their agronomic practices. Research shows that under the
market opportunities and profitable options and
right conditions, access to ICT can improve the efficiency
regions without such advantages.
of agricultural produce markets, reduce price volatility, and
increase farmer income.20
Access to ICT is especially important for small farmers For participating farmers, retail-led
attempting to sell their produce to retail-led supply chains.
agricultural market transformation
Unlike traditional buyers, big retailers require products in
can increase productive assets and
precise quantities that meet specific quality standards.
Orders can be subject to last minute changes. When these reduce poverty
changes are not communicated in time, the results can be
A retail-led marketing system’s impact on rural pov-
devastating. ICT is a tool to avoid such losses since farmers
erty depends on a number of factors, including the
with mobile phones and similar devices can quickly and
cheaply receive order updates. Increasing access to ICT source of and the ownership of the investment in land,
among small farmers can thus be an invaluable tool in technologies, and other productive assets. Research
profitably linking small farmers to big retail. As with access in Nicaragua established that involvement in supplier
to water and roads, living in areas with good cellular phone contracts with Walmart increased small farmer pro-
network access is likely to determine farmer participation
ductive asset stocks.21 One interesting aspect of this
in retail-led supply chains. Those without access may
is the impact of reduced price volatility for farmers
be left out.
rather than higher sale prices. While there is evi-
10 - SMALL FARMERS, BIG RETAILERS: ARE NEW SOURCING STRATEGIES A PATH TO INCLUSION?