Life can be hard for a smallholder farmer. The International Fund for Agricultural Development (IFAD) estimates that there are 500 million smallholder farmers worldwide – usually working on plots of land smaller than two hectares – producing about 80% of the food consumed in Asia and sub-Saharan Africa. Despite this, smallholder households are often some of the poorest in the world, a fact which is causing the children of smallholders to abandon their farms in search of better opportunities in cities. This shift contributes to two very real risks. First, food security. the UN estimates that the global population will reach 9 billion by 2050 and consume 60% more food. And second, rising urban poverty.
For these reasons, it is imperative that smallholder farming becomes a much more profitable and sustainable venture; this is the goal that we at Kennemer Foods International, together with the Philippine Government, have been working on for the past five years. Based on our experience in driving the growth of the Philippine cacao industry, here are some of the key ingredients necessary to dramatically reduce poverty among smallholder farmers:
1. Comprehensive credit, guarantee and insurance policies geared towards smallholder farmers
The average coconut farmer in the Philippines earns approximately $450 a year from one hectare of land (gross revenue). This translates to roughly $1.26 a day, for a household of 4-5 people. Given this situation, it is almost impossible for a smallholder farmer to adequately provide for the needs of his or her family, much less to make the necessary investments into newer or better farm inputs and technologies in order to improve yields. Without access to affordable – and more importantly, patient – capital, smallholders cannot break the cycle of low farm productivity and low income.
Unfortunately, credit is either very costly or not available at all for the majority of smallholders: most banks in the Philippines refuse to lend without collateral. However, due to a bureaucratic agrarian reform process, many farmers do not even hold the titles to their land. To help address this gap, the Philippine Government has created the Agricultural Guarantee Fund Pool, which guarantees up to 85% of the loan principal – allowing private sector lenders to collateralize loans through the payment of guarantee fees. Smallholders must also contend with the risks of bad weather, pests and disease; in light of this, the availability of crop insurance helps to protect both the farmer and the creditor. The Philippine Crop Insurance Corporation provides insurance for a wide range of crops, and mitigates the impact of these risks.
This combination of credit and operational risk-mitigation products makes it possible for smallholders to tap into the resources of the formal banking sector, and invest for the future.
2. Loans not just for working capital, but for farm establishment and rehabilitation
Often, creditors are willing to lend farmers money for one harvest cycle, but not for much longer than that. Our team’s visits to hundreds of farms across the Philippines reveal that most smallholder farms are at least 50 years old, and have not been significantly upgraded since. In order to increase yields and productivity over the long run, investments into new planting materials, fertilizers and irrigation systems are often required. But these investments tend to be quite sizeable and may take several years to be fully repaid. Which is why we need more appropriate and “patient” capital for smallholder farmers.
When we first started our contract growership programme at Kennemer Foods, there were no loan products available for high-value, long-gestating crops like cacao. Luckily, we were able to work with Landbank of the Philippines to develop the CACAO 100 Program, which provides loans of up to seven years for the establishment of new cacao plantations. Critically, a grace period on principal and interest is also provided, in consideration of the lower productivity of a newly established farm in the first few years. This programme has helped to foster a new generation of Filipino cacao farmers, channelling millions of dollars into the countryside.
3. High-quality (not free) planting materials, farm inputs and technical support
Free or low-cost planting materials and fertilizers might sound like a good idea, at least initially, but these can actually be harmful to smallholder farmers if they are of poor quality, or otherwise poorly suited to the area’s soil and weather conditions. High-quality planting materials and farm inputs are quite literally the ingredients for a good harvest, especially when combined with hands-on technical support from trained staff, who can teach farmers about the latest and best agronomic practices. The focus should be on quality, not cost.
4. Availability of an assured market for all produce – not just the best
Farmers need to be able to sell all their produce, not only those products that meet the quality requirements of multi-national buyers. For a farmer earning just a few hundred dollars a year, the cost of transportation and logistics can be considerable. There are few things worse for a smallholder than to spend hours of his or her time and tens (if not hundreds) of dollars to deliver produce to a buyer, only to have most of it be rejected on the spot. Often, it takes a few years before smallholder farmers can deliver the majority of their products at a consistently high quality, so along the way, a market needs to be available to buy all their produce. This requires multiple types of players, both high-end and lower-end.
5. Presence of local entrepreneurs to drive implementation and connect the dots
Without parties to keep an eye on the big picture – driving the coordination, development and delivery of the ingredients mentioned above – it is unlikely that smallholder farmers will be able to adopt new crops and modern farming practices efficiently and at scale. Our firsthand experience at Kennemer Foods indicates that local enterprises can indeed be an effective force for change: working hand-in-hand with the public sector, organizing and channelling resources to smallholders, and in the best of cases, even shaping the trajectory of an entire industry. With some creative thinking, collaborative partnerships, and a great deal of hard work, a brighter future is now within sight for thousands of Filipino farmers.
The authors are part of the 2016 class of Schwab Social Entrepreneurs.
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