How small businesses are driving growth across African agriculture

A new report from the Alliance for a Green Revolution in Africa (AGRA) finds that millions of small- and medium-sized enterprises (SMEs) source directly from millions more smallholder farmers across Africa South of the Sahara. These SMEs, often led by women, include food processors, wholesalers, and retailers. SMEs provide a range of services, from transport and logistics to the sale of inputs such as fertilizer and seed to farmers. Their activity is driving a “quiet revolution” across African agriculture, connecting smallholder farmers to commercial markets at an unprecedented rate.

IFPRI’s Bart Minten and Rob Vos contributed to the first three chapters of the report, which pokes holes in the common conception of stagnant African agriculture and food sectors. Instead, the report finds a vibrant agri-food sector, especially in distribution, processing, and procurement and logistics. Many small- and medium-sized enterprises are channeling food from farms to households and creating employment for millions in this middle part of the food system which is not “missing” but “hidden” and often ignored by policy makers.

AGRA’s 2019 Africa Agricultural Status Report (AASR) finds that, overall, only about 20% of the volume of food consumed in Africa fits the conventional notion of subsistence agriculture—food consumed directly by the farming households that grow it. The majority of what Africans eat flows through private sector value chains managed by SME businesses that purchase commodities directly from smallholder farmers and then process, package, transport, and sell food products to the urban and rural consumer.

SMEs also play a large, growing, and vital role in markets for inputs like fertilizer and seed, as well as farm machines and pesticides.

“All this represents a profound turnaround from mere decades ago,” said Thomas Reardon of Michigan State University, a lead author of the report. “There has been a ‘quiet revolution’ in agrifood private sector value chains linking small farmers to burgeoning urban markets and growing towns in Africa. This has spurred farmers’ participation in food and farm input markets.”

“SMEs are the biggest investors in building markets for farmers in Africa today, and will likely remain so for the next 10-to-20 years,” said AGRA President Agnes Kalibata. “They are not a ‘missing middle,’ as is thought, but the ‘hidden middle,’ ready for support and investment to thrive further. Today, we bring them out into the light.”

AASR finds that traders, truckers and processors constitute about 40% of the total gross value of the agri-food system in the region, equal to the share coming from farms. Retailers constitute the remaining 20%.

Changing conditions have set the stage for the growth of SMEs. Among these changes are: Increases in farm productivity that make more raw material available; initial government investments in infrastructure such as roads; rapid and massive urbanization; diet changes with rising demand for processed food; and rising investments by the entrepreneurs themselves. (See below for examples of the impact of SMEs, especially when supported by government infrastructure investments and policy.)

Compared to SMEs, and contrary to popular belief, the report shows that large enterprises play a relatively minor role in directly supporting small-scale farmers. For example, only about 5% of rural farmers are directly linked to large firms through contract farming. Nonetheless, with proper support, large African businesses, including supermarkets and large processors (which now comprise 10%-20% of the agri-food economy), present a huge opportunity as they are likely to play an expanding role in how farmers access credit, markets and will ultimately impact employment and rural incomes.

The report identifies other pivotal changes in African rural economies. It notes that although 70%-80% of people in rural Africa work on their own farms, this work is often part-time, and comprises only 40 % of total labor time in rural areas.

Meanwhile, 60% of rural labor time is spent off the farm, and about 40% of this non-farm labor time is in agri-food system work such as wholesale, logistics, processing, and retail (through both self-employment and wage labor). SMEs are the key employers in this sector, intertwined with rural family farmers. This interdependence makes their survival and growth even more crucial, with women and youth particularly benefiting.

Policy recommendations
Although the growth of SMEs in the “hidden middle” of agrifood supply chains has been profound, the report notes that progress has often taken place despite large barriers, and that much more can be done to foster the growth of SMEs.

“Africa’s agri-food system is dynamic, but that does not mean all is well,” said IFPRI’s Vos. “Efficiency gains and employment opportunities are missed where infrastructure is poor, access to finance is difficult, and smallholder farmers face obstacles in accessing markets. Policies should not so much focus on ‘fixing’ the hidden middle, but on enabling SME processors and distributors to thrive and improve infrastructure so that all farmers can connect to the downstream of the supply chain.”

Processors, wholesalers, and logistics firms in particular face major constraints that drive up the cost of doing business. Excessive costs for equipment and energy, inadequate infrastructure, especially of roads and wholesale markets and mobile phone connectivity, and some financial and credit restraints, make it difficult for SMEs to compete with imported goods that cost less to produce. Outdated laws and regulations also inhibit business growth.

“We live in a global market,” Kalibata said. “Our job today has to be to ensure that these SMEs are grounded enough to provide the right kind of support to family farms; and to be competitive so that they can survive and thrive in an increasingly interconnected and global market. Their success will determine the future of agriculture and food security in Africa.”

The policy recommendations laid out in the report stress that governments and donors should not “reinvent the wheel” by duplicating the work of the private sector. Setting up state-supported or subsidized businesses, even in remote areas, would crowd out grassroots entrepreneurs. Instead, the key is to create conditions that make it easy for businesses to establish, develop and grow. Given this, the AASR calls for several key policy actions:

- Public investment in infrastructure focused on priority needs: Building wholesale markets and roads, improving ports and extending electrification and broadband coverage. Infrastructure investments that benefit the spontaneous clustering of SMEs have the most impact, greatly supporting the ease of doing business.

- Policies and regulations that reduce transaction costs and policy risks. SMEs most frequently invest in growth when favorable policies and infrastructure are in place. Such policies include cross-border trade liberalization, reduction of double taxation and regulations to reduce corruption. It is also essential to reduce bureaucracy, especially in areas such as registering new fertilizer products, approving new improved seeds or levying taxes on primary inputs that make the cost of access so much higher.

- Governments have a responsibility to protect SMEs and consumers from substandard products , be it farm inputs like seeds, fertilizers, and pest and disease control products or food products going to the market. Advancing and enforcement of appropriate policies and regulatory instruments to guide the SME landscape in agriculture is the critical role that governments must play. This will protect farmers’ investments, expand the use of quality seed and fertilizer, increase output, protect consumers and will increase the ability of SMEs to compete for regional and global markets.

“The past ten years have shown that rural agrifood SMEs have soared when the right infrastructure and policies are in place,” Kalibata said. “We can propel their flight. The majority of our family farmers; mostly small-scale and women entrepreneurs have everything to gain.”

Examples of SME impact
SMEs often spontaneously cluster around cities and towns. Especially when supported by government investments in infrastructure they have a profound impact, as the following examples reveal.

The maize-feed-chicken system in Nigeria
This system has developed rapidly in Nigeria, where consumer demand for chicken is strong. In 10 years, the volume of chicken feed increased by 600%, from 300,000 to 1.8 million tons. Boosted by government investments in roads and wholesale markets, tens of thousands of maize traders, truckers, feed and flour mills and warehouse operators get the maize produced by roughly 8 million farmers to end consumers. Some 85% of this work is carried out by SMEs, many women-led.

Flour milling and processed food variety in Tanzania
An inventory of processed foods on sale in Dar es Salaam found 487 different items of processed maize and other flours, packaged rice, dairy products, juices, and poultry; 80% came from Tanzania and other African countries; 20% from outside Africa. Of hundreds of maize flour milling SMEs surveyed in Tanzania, 85% started in the past ten years and two thirds have their own brands, showing a basic shift from buying maize flour loose from the market to purchasing packaged brands.

Teff in Ethiopia
In the past, consumers bought teff as a grain, cleaned and milled it and then prepared enjera (a type of bread) at home. Now, consumers buy teff flour or ready-made enjera, driving a nearly 50% increase in teff mills, enjera-making enterprises and retail outlets. This explosion of growth has involved farmers, wholesalers, truckers, retail shops, and mills. Wholesale marketing of teff has surged, and the number of trucks transporting teff increased by 70%-80%. Government investments in roads and cell phone coverage has helped fuel these changes, with cell phone coverage going from zero in 2005 to 100% coverage in wholesale markets today.