A panacea for improved livelihoods

DRAMATIC increases in yield reduced the real prices of corn, wheat and rice by more than 75% over the period 1950-2000. The declining emphasis and investment on agricultural research and development (R&D) since the 1990s in many developing countries can be attributed to complacency induced by cheap food. However, strong global economic growth over the period 2003-2007 increased the demand for energy and raised the price of crude oil. Changes in relative prices encouraged investment in technological innovations to convert crops into ethanol and biodiesel. After decades of relatively cheap food, world food prices started to rise sharply in 2007, tracking a steep increase in crude oil prices (Figure 1). The ensuing food crisis triggered mass protests and food riots. Large countries with transition economies panicked and introduced strategies like ban on exports or introduction of export taxes that threatened both markets and long-term food security. However, in 2008, oil and food prices started to slip – but this downturn was not driven by expectations of increased food production but rather by expectations of reduced demand for commodities as jobs lost in the wake of the financial tsunami dragged down household incomes.

This has introduced a new dynamic into the poverty problem. In future, food expenditure could account for a larger share of poor consumer income not only in times of economic recession but, paradoxically, also in times of global prosperity when energy prices rise and crops earn more in bio fuel than in food markets. This new dynamic has added to the vulnerability of poor consumers, many – if not most – of whom depend heavily on agriculture and natural resources for subsistence and income. Not surprisingly, the World Bank (2008) has promoted agriculture to the top of its development agenda – a position that it lost 25 years ago after decades of patchy results. Along with this new emphasis on agriculture have come a focus on agribusiness and the role it could play in alleviating poverty. Agribusiness needs to occupy a prominent place in development thinking if meaningful numbers of smallholders are to capture higher returns in this new economic environment. Particularly increased emphasis on innovative thinking and research is required on how these smallholder producers can be effectively linked to markets through both vertical and horizontal coordination. Agribusiness can be defined as “all market and private business-orientated entities involved in the production, storage, distribution, and processing of agro-based products; in the supply of production inputs; and in the provision of services, e.g. extension or research.” In other words it refers to a chain of businesses which are directly and indirectly involved in the production, transformation and supply of agricultural products. Production may include individual growers, ranchers or dairy farmers; large, fresh produce growers, packers and shippers; aquaculture; forest product companies; ornamental plant producers and so on. Small scale agriculture and agri-business development is of uppermost importance for the developing countries like PNG. The high demand for food and bio fuels in the world has led to increasing food prices, which affect especially the poorest, who are unable to produce food for them.

On the other hand, the price increases can also stimulate agricultural production as l ong as supply constraints are addressed and value chains from ‘farm to fork’ work smoothly. Agri-business is demand driven economic development that in the right context acts as a strong driver for poverty reduction. It begins with effective demand for agricultural products that is transmitted to the commodity chain for sources of agricultural production. Since demand in a competitive market place is usually based on desired quantity and quality of goods, response to this demand in a competitive marketplace requires the supply side to respond with an increase in the efficiency of production at lower unit costs. This efficiency is the result of factors such as better technology, better farming practices, and increased human capital. Then these factors lead to production of the quantity and quality of goods sought in the market – production results in sales, which in turn results in increased farm household income – multiplied in many households. This increased income, which puts more money in the hands of rural consumers, results in increases in rural purchasing power. The resulting rural purchasing power represents another source of effective demand for goods in marketplace. The most important of these goods is what economists call non-tradable goods, essentially perishable food and locally produced and consumed goods and services.

The demand for these goods leads to expansion of rural enterprises and services because in a competitive environment rural enterprises make necessary investments and organisational changes to more efficiently produce the goods being sought. At the household level, the net impact is increased income; at the rural economy level, the net impact is increased enterprises, income and jobs. Agribusiness support is considered to be a part of a country’s economic development concept and is targeted towards the creation of jobs and income in mainly rural areas. In many rural areas the agricultural service and trade sectors are often the only alternatives that offer job opportunities. In the absence of governmental trade monopolies and the declining importance of governmental provision of agricultural services, the prospects for new business opportunities seeking to fill the vacuum appear promising. To combat food insecurity in the future, the benefits and incentives created by higher food prices must reach the smallholders. One of the key challenges of ‘agribusiness for development’ is to increase smallholder returns and incentives by improving their market choices through some degree of vertical coordination, whether this done through informal market chains, global commodity chains or high-value chains, such as top-end supermarkets and niche markets that value credence attributes.

Successful vertical coordination is particularly challenging in high-value chains that require regulated quantity and quality, and asset-specific investment to meet consumer preferences in niche markets. In these chains in particular, horizontal coordination is required to achieve size economies, and to manage shared resources. This suggests a poor understanding of the factors that limit the performance of informal supply chains and global commodity chains, the conditions needed to sustain alternative high-value chains, and what these more formal chains offer and ask of smallholders and intermediaries. In particular, policy-makers and development practitioners need to think beyond traditional cooperatives to promote market access, and beyond user groups to manage common pool resources.

Sources: IGC (2009); EIA (2009).