Supporting the Hidden Middle: How Enabling Midstream SMEs Can Strengthen Agri-Food Value Chains

Small and medium enterprises (SMEs) in the midstream of agrifood value chains—wholesalers, logistics, and processors—play a critical role to food security and value chain transformation. These enterprises help keep food supplies affordable and stable, provide employment and income for millions of rural and urban workers, and improve food quality and safety for consumers. However, in South Asia, Africa south of the Sahara (SSA), and other developing regions, SMEs often don’t play a role in the food system transformation conversation. A recent paper published in Food Security examines the important role midstream SMEs play in a variety of food security indicators and what governments, donors, private sector food system stakeholders can do to increase attention to and investments in this critical value chain node.

The authors argue that while food security discussions often frame midstream SMEs as stagnant or even missing in developing regions, these enterprises are in fact incredibly active and growing quickly. Between wholesalers, processors, and logistics, SMEs touch around two-thirds of the food consumed in developing regions. Hence, the problem lies not in these SMEs’ stagnation but in the fact that they are most often overlooked in food security and value chain policy.

The paper draws on 37 survey-based studies on midstream SMEs, as well as the farmers and retailers they work with, in agri-food value chains South Asia, Africa, and Latin America over a period of 15 years. The studies covered 10,400 SMEs, 5,700 retailers, and 17,600 small and medium farmers. The authors found that the majority of agri-food value chains in SSA and South Asia are in the “transitional” stage of transformation, between traditional production and fully modernized food systems. This stage is characterized by spatially long value chains that are fragmented and dominated by SMEs. These transitional value chains also rely mainly spot markets and labor-intensive technologies and are beginning to adopt public quality standards.

Within these transitional value chains, midstream SMEs benefit both rural and urban populations in a number of ways. Midstream SMEs can help small farmers commercialize and shift to higher-value products by providing important input and output pathways. One example is the establishment of cold storage facilities in rural areas; this enables farmers to engage in the production of high-value fruits and vegetables with less fear of loss before the produce reaches the market. SMEs also provide more efficient transport from rural to urban areas, reducing transport costs and passing those lower costs on to consumers.

Midstream SMEs also contribute around 20 percent of overall rural full-time employment, which is more than the share of employment from farm wage labor. They also provide important sources of rural labor for marginalized populations—specifically youths and women—in many areas. In urban areas, midstream SMEs contribute around 25 percent of full-time employment, with similar high rates of employment for youths. These employment rates are likely to continue to increase as midstream SMEs modernize and achieve higher production capacity.

In addition to providing direct employment, midstream SMEs were also found to provide higher incomes through branding and product differentiation. They also often provide important agricultural services such as combine harvesting, marketing, and training.
 

On the consumer side, in addition to lowering food prices by reducing transport costs and food waste, midstream SMEs can help ensure a stable supply of safe, high-quality, nutritious foods.

In addition to uncovering these important and beneficial impacts of midstream SMEs in developing regions, the authors also found that given proper enabling conditions, SMEs emerge and grow rapidly and organically. Examples of such enabling conditions include well-functioning wholesale markets and good roads. For example, In Addis Ababa, Ethiopia, SMEs in the teff value chain have nearly tripled in number and total volume of teff distributed over the past decade; as they grew, these SMEs invested in increasing their own capacity, driving down transport costs. The authors found that while direct government action did not play a role in these SMEs’ growth, government investment in wholesale markets, roads, and electrification did play a critical role in enabling SMEs to invest in themselves and meet rising demand.

This finding has important implications for future value chain transformation policy in developing regions. Rather than focusing on providing services that SMEs already themselves provide or on attempting to organize SMEs into formal groups, governments, development practitioners, and private sector actors should instead focus on improving infrastructure and removing constraints—such as demand for bribes, confusing or redundant government regulations, and lack of education regarding safety standards—that organically growing SMEs currently face.