Challenges and Prospects of Smallholders’ Value Chain in Ethiopia

Challenges and Prospects of Smallholders’ Value Chain in Ethiopia Organized by Woord en Daad and Help a Child Hotel Silver Springs, Port Bell Road, Bugoloobi, Kampala, Uganda October 3-5, 2012

Introduction • Ethiopia is the second most populous (over 85 million) country in Africa; • Gross Domestic Product (GDP) per capita 360 USD; • 85% of the population depend on agriculture (farming and livestock rearing) for their livelihoods; • Agriculture is the mainstay of the Ethiopian Economy; • Agriculture is predominantly subsistence and backward; • The present development strategy is to transform agriculture from subsistence to small-scale commercial farming while at the same time promoting large scale commercial agriculture.

Agriculture in the Growth and Transformation Plan • The broad objective of agriculture and rural development (ARD) in the five-years (2010/11 – 2014/15) is: • to achieve accelerated and sustained growth that contributes to poverty reduction on the basis of outstanding results and experiences gained from the implementation of the programs hitherto as well as to pave the groundwork for the attainment of the MDGs by 2015.

In the GTP agriculture is: • One of the seven growth pillars of Ethiopia’s strategy for sustaining the rapid and broad-based growth path hinges on; • Considered as a leading sector in development and a major source of growth; • To be transformed to high growth path in order to: • Ensure the food security challenge of the country; • Curb inflationary pressure; and • Broaden the export base of the country.

Agriculture and Rural Development Strategy • Agricultural Development–led Industrialization (ADLI) has been a long term development strategy in Ethiopia. • Specifically, the present five-year plan agriculture strategy includes: • Increasing effort to support the intensification of marketable farm products -both for domestic and export markets, and by small and large farmers; • Shifting (from traditional crops farming) to produce high value crops, a special focus on high-potential areas; • Facilitating the commercialization of agriculture;

Agriculture Strategy ……. • Supporting the development of large-scale commercial agriculture where feasible; • Promoting commercialization of smallholder farming to continue as the major source of agricultural growth; • Strengthening transparent and efficient agricultural marketing system; • Increasing investment in marketing infrastructure; • Giving priority for expanding small scale irrigation; • Giving attention to medium and large scale irrigation to the extent possible; and • Expanding water shade management and to carry out effective water and moisture retaining works to better cope with the challenges of climate change.

Policy Directions Fundamental policy directions focus on: • Scaling up productivity of labor and land, agricultural research, extension etc.; • Applying different strategies for different agro ecological zones, • Promoting specialization and diversification; • Strengthening agricultural marketing system (modern agricultural marketing system like the marketing practiced through ECX will be made to continue with strength); • Applying modern agricultural technologies for increased production and productivity; and • Encouraging private sector to increase its share of investment in agriculture.

Some Key Challenges to Agricultural Development • Productivity in land, labor, and above all capital has remained low despite increased ‘agricultural extension services’; • Since smallholders’ farming depends on availability of rain, the erratic and increased unpredictability of rain have made farming practice difficult (access to water through irrigation schemes are at the early stage); • Direct private investment both in production, processing, and marketing agricultural commodities is still very small and beneath the critical minimum; • Information on prices hardly reaches smallholders and thus they are unable to capture urban markets by making sure supply is better able to meet consumer demand;

Key Challenge …. • Though rural women play key role in agricultural development, efforts exerted so far for their economic emancipation via access to education and information are inadequate; • Greater long-term agricultural productivity can hardly be possible since the government, the smallholders and other economic operators involved all have not started sitting down at the negotiating table in the genuine effort to fairly redistribute the fruits of growth; • Of course, export sector performance is weak; and • Above all, direct competition with more competitive North where farming sector is highly advanced and remains highly subsidized.

Agricultural development is also about market development • In Ethiopia, agricultural development is designed, among other things, to: • Promote pro-poor growth – the concept that economic growth, if it occurs in the right way, can reduce poverty; • Achieve economic growth and food security objectives; • Increase the production and productivity of farming activities; and • Strengthen the agricultural support markets that supply farmers and help farmers sell and process products. • Market development, in this context, is one of many pro-poor growth strategies that helps generate economic growth, which benefits everyone, including the poor (smallholders).

Market Development • Market development refers to initiatives: • that stimulate the market system –farmers, farmers organizations, businesses, relationships, policies, and institutions - to better engage and channel benefits to all actors including smallholders and small enterprises. • include programs that • Help farmers sell to higher-value or higher-volume urban or export markets; • Help the informal sector learn more about how to operate businesses and how to advocate for their right to do business; and • Help smallholders and small enterprises gain access to information, infrastructure, skills, inputs, or technology. • Market development approaches, in this context, are often applied to developing small-scale farms, agricultural processing, agricultural marketing enterprises.

Understanding Value Chain • Some common strategies that are considered market development include Value Chain Development, the core issue of the workshop; • Value chain: • Is a key framework for understanding how a product moves from the producer to the customer; • Describes the full range of activities required to bring a product or service through the different phases of production, including physical transformation, the input of various producer services, and response to consumer demand; • Includes the vertically linked interdependent processes that generate value for the consumer.

Value Chain is: • An economic system by which chain actors jointly and harmoniously function for mutual benefits; • The set of businesses, activities and relationships involved between producers, processors, traders, and distributors in creating a final product (or service) – from raw material (for instance wheat production) through final market (for instance bread); • A business model for a particular commercial product that improves the performance and competitiveness using a particular technology and a particular way of coordinating production and marketing.

Food safety regulations Standardization Trade agreements Contract enforcement Taxes and customs Sanitary control Stakeholders in VC are categorized as follows Business Buyers Farmers’ Unions Farmers’ Coops/FMOs Input suppliers Consumers Farmers Research centre Banks Inspection agency Extension agent Business services Accountant ICT Irrigation Transport Source: Ethiopian Learning Alliance

Is Value Chain Approach Important in Ethiopia? • The answer is BIG YES! • Value chain development is a process, not a one shot intervention, that should start now or continue developing where basic conditions are fairly fulfilled; • Products of traditional farming are increasingly loosing local market opportunities let alone big national and international markets: • There are clear evidences where local products have already lost their competitiveness in price compared with high-quality imported products in their respective local markets (e.g. edible oil);

Value chain approach encourages smallholders to: • shift from their traditional farm products to better quality products the market demands thereby earning increased income; • get organized around common interest and gain advantages from economies of scale to be created as the result; • create synergy among different actors to control traditional markets and entering new markets and increase sales volume, reduce transaction cost (search for information, travel to market, time to sell, etc.) and increase margin of profit; • help attain increased quality control and standardization due to the fact that food is becoming a more complex product and public health concerns are increasing;

Value chain approach also helps Ethiopian smallholders to: • Get general business advantages from • Specialization (differentiation of service, product quality, increase reputation, etc.,) in high potential products thereby getting consumers’ confidence; • The Joint identification of interventions that address bottlenecks and strengthen the whole chain; • Increased competitiveness of all the chain members to gain better profit or income while consumers’ needs are also better satisfied.

Some Challenges to Value Chain Development • Value chain concept and practice are new to smallholders (limited experience); • Identification and analysis actors, and creation of relationships between them is quite time taking and costly; • Where value chain initiatives have taken place on pilot basis, some chain actors question its sustainability; • Weak or absence of market infrastructural facilities poses strong challenge to value chain development initiatives;

Challenges to Value Chain….. • Targeted value chain market sometimes offers less price than traditional spot markets for an unanticipated factors creating doubts about its viability; • Potentially threatened redundant market actors who will be laid off in the process of chain development may become adversarial to the process; • Only few organizations are engaging in the value chain development process compared to what should have been done; • Competence of value chain facilitators should be given due attention.

Conclusions • The Ethiopian Economy is dominated by smallholders agriculture for the livelihood of about 85% of the total population, but the sector is largely subsistence, backward, and less market oriented; • Government development strategy and policy direction provide priority for the sector development; • The prevailing situation in Ethiopia is such that very few markets may work well for the poor. But in many instances, the prevailing markets leave smallholders out or trap them in exploitative situations, calling for a new market system that fairly benefits poor farmers;

Conclusions • The government’s comprehensive approach to smallholders agriculture development includes marketing, an approach aimed at making market work for the poor including the smallholders; • The prevailing policy direction and development strategies are fairly conducive for the promotion of value chain development. But efforts so far exerted to value chain development is very limited; • More educated youth and more active workforce do not have access to land, water, and other means of production. Transforming traditional farming practice and traditional spot market into modern farming and value chain market system is certainly not an easy intervention.

Recommendations • Organizing smallholders into groups should be based on the collective interests of each and every member considering the most promising unifying factors, such as supply of inputs; the collection, processing, and marketing of agricultural products; credit-savings schemes; price bargaining and more others; • Farmers’ organizations (such as independent coops and unions) should assume economic responsibilities representing and negotiating actively on behalf of their members, and jointly resolve problems revolving around collective issues and be able to gain economies of scale; • Technical and legal assistance should be given for managing smallholders groups (such as coops, unions, similar farmers’ organizations) who share common economic interests in the development of value chains;

Recommendations • An institutional and legislative framework should be reviewed with a view to allowing groups or associations to express themselves, perform their activities independently, and federate on their free will; • Further engage the government to broaden the enabling environment through developing detailed market regulatory directives and guidelines (taxation, protection, price stabilization, etc) that facilitate the well functioning of market system to generate economic growth, benefiting everyone, including the poor. • Smallholders should acquire the necessary skills and bargaining powers to act as key chain actors in agricultural marketing;

Recommendations • Specifically, the leaders at every levels should be trained, informed and responsible farmers who can dialogue with the political power as well as with other economic players. The training may range from functional literacy through the management of the groups’ funds to commodities’ market analysis; and also includes farmer – to – farmer exchanges within in the country and beyond where relevant; • Continuous capacity building to partners (facilitators including NGOs, service providers) in terms of training, coaching and discussion and Knowledge sharing ;

Recommendations • In addition to technocratic approach that views capacity only as lack of skills or knowledge, due attention should be given to smallholders motives, attitudes, incentives, etc. and less preaching and more dialogue on market system development that benefits all actors; • Context matters! Throughout market development program design and implementation, it is important to consider the social, cultural, religious, physical, economic, political, and environmental context of the target population, and how these factors affect the value chain development that aims to benefit the smallholders;

Many Thanks

Challenges and Prospects of Smallholders’ Value Chain in Ethiopia