Extending the smallholder value‑creation frontier: a business perspective on food security

Paul T.M. Ingenbleek, Olawale Rotimi Opeyemi, Dorothy Kanorio Murugu, Cobus Oberholster, and Lucas E. Urbano

Introduction

Agribusiness is perhaps the most neglected field in academic research relevant to food security. Because of its direct importance to people’s well‑being, food production has a central interest for policy‑makers. The availability of food at affordable prices provides a stable basis for many government regimes (e.g., Russell, 2022). Perhaps for this reason the role of business in achieving food security is often seen, at best, of secondary interest in agricultural development projects. New technologies to improve food security are developed by publicly funded research institutes or publicly funded scientific projects and then shared with farmers through government‑led extension organizations. This picture hardly changed when “the market” became the main philosophy for organizing food systems in the 1990s (Poole, 2010). When business does play a role, it is often referred to as the “private sector”, thus again emphasizing the distinction between public and private investments.

Notwithstanding that many businesses are privately owned and have a profit objective, there is a dearth of knowledge on what business is, and what it can contribute to food security. Such knowledge is now more important than ever. Given the complexity and urgency of Africa’s “food security conundrum,” which is “how to provide cheap, nutritious food to feed the growing urban and rural populations while creating incentives to stimulate increased agricultural production” (Giller, 2020, p. 1, see also Giller & Andersson, this volume), the investments and adaptive actions of companies are now needed more than ever. This chapter aims to shed light on the question how current social, economic, and cultural developments in Africa create opportunities for agribusiness to create value, and whether or not that value will contribute to food security.
Central to our approach is that we see businesses as value‑creating entities (e.g., Porter, 1985; Hunt, 2000). This approach brings us to the concept of the inclusion frontier of smallholders, indicating the point after which value creation gets the upper hand in a farm, thus making it de facto a farming business (Teklehaimanot et al., 2017).

In the following, we first explain some basic elements of businesses as creators of value. We then describe the emerging market opportunities to create value in urban and peri‑urban areas.
This is followed by a section on the smallholder value‑creation inclusion frontier and a section that discusses the opportunities to extend the frontier. This chapter finishes with some concluding comments.

Going beyond “the private sector”: businesses as value‑creators

From a classic business theory perspective, a business is an organizational unit that includes all business functions (such as procurement, inbound logistics, production/processing, selling, and outbound logistics), thus enabling it to create value for a particular target market (Porter, 1985).
Companies can consist of multiple businesses, or even of divisions that each include multiple businesses. The idea that they create value means that healthy businesses create products and services that their customers value to an extent that exceeds the costs for developing, producing, and delivering the products and services. Thus, by creating value for its customers, the business also creates value for itself and can make a profit and/or achieve other (social) goals.

In this regard, it may be surprising that agribusiness is typically defined as “all those business and management activities performed by firms that provide inputs to the farm sector, produce farm products, and/or process, transport, finance, handle or market farm products” (Downey & Erickson, 1987, p. 6). This definition emphasizes production rather than the creation of customer value, which also requires more creative tasks like business development, the discovery of customer preferences, new ways of defining markets, and new product development. Shultz and Edwards (2005, p. 57) therefore offer an alternative definition which is more in line with mainstream business theory. They define agribusiness as “the market‑oriented sustainable orchestration of food, fibre, and renewable resources”.

The term “market‑oriented” indicates a business culture that puts the creation of customer value first. A market‑oriented business typically acquires and shares insights about customers and uses these in strategic and operational decisions. Because these businesses better understand what customers value, they perform better in their target market then competitors (Kirca et al., 2005). Competition is thus not necessarily a matter of price competition, but rather a continuous struggle for competitive advantage. Businesses that experience disappointing financial returns from their market start to question whether their competitors may offer customers more value than they do, or perhaps the same value but at less cost. They subsequently start to make investments in the resources from which they can improve their market position. If their attempt is successful, their market position and performance will increase. As a result, competitors will likely experience a decrease in the financial returns from their market, leading them in turn to make investments and improvements. This continuous process increases the living standards of consumers, fosters innovation, and generates economic growth (Hunt, 2000).

Before the frontier: the vibrant urban food market

The process described above, by which businesses struggle to obtain a position of competitive advantage on the market leading to increased living standards for consumers, is increasingly recognizable in urban areas on the continent. Demographic growth is the main driver of the growing demand for food (see van Wissen, this volume). Increasing urbanization concentrates this demand in relatively smaller areas that attract businesses in different parts of the food system. As compared to the rural areas, the distribution and marketing costs in cities are significantly lower, simply because a truck or an advertisement will reach more people.

Rising incomes, for at least some part of the population, create emerging and floating middle classes that change their lifestyles and eating habits (e.g., Chikweche & Fletcher, 2014).
The response of businesses is that they jointly create a larger assortment of foods for the urban consumers, including for example convenient pre‑packed and ready‑to‑eat foods, social status‑increasing food from international brands, or foods highlighting cultural heritage and tradition (cf. Baba Daouda et al., 2020). Typical product categories that grow are dairy, meat, fresh foods, and vegetables (especially when provided with consistent quality and with lower safety risks). Western, Chinese, Indian, and Japanese foods are gaining traction in restaurant chains across Africa, and gradually also more imported African specialty foods can be found. In a country like Ghana, consumers become more aware of supporting local business. Food safety is also becoming a competitive element because most African countries lack the institutions to secure food safety for the entire food system. A recent study among consumers in and around Nairobi showed that food safety is also a factor for which consumers are willing to pay higher prices (Chege et al., 2021).

Marketing channels are increasingly becoming a mix of traditional open‑air or otherwise informal markets and street vendors, new and upcoming retailing formats like supermarkets and corner shops, out of home like fast food, restaurant, and catering businesses, as well as online and offline takeaways. E‑commerce revenue in Kenya in the food and personal care markets, for example, increased from 9 million US$ in 2017 to 79 million US$ in 2020 and is expected to increase even further to over 177 million US$ in 2025.

Accessibility also depends on perishability, with more perishable products requiring better access than products that can be stored for a longer time, as well as whether products are fresh or processed/packaged (with processing plants located at strategic locations to reach cities and be in reach for supplies). On the supply side, businesses will probably look for locations close to, or at least well‑accessible to, cities where they will apply more intensive farming systems to cover the costs of the increasing prices for land. In general, these developments will lead (depending on the agroecology) to farming models in peri‑urban and urban areas that are larger and more intensive, relatively close to the market and with short supply chains. Besides being a source for the local market, such production centres can supply export markets, including other markets in Africa. The 40,000+ ha Del Monte pineapple plantation in Kenya, which is the largest exporter of agricultural produce from Kenya, is one example.

Notably, a process of competition leads to positive outcomes only when institutions are supportive (cf. Acemoglu & Robinson, 2012 and Kikulwe & Wesseler, this volume). With increasing speed, institutional development may be unable to keep pace with value creation by businesses.
Competition among businesses may evolve to a process in which competition focuses on access to scarce strategic resources, such as access to distribution networks, transporting companies, top locations for new stores, and scarce supplies of produce (especially during seasons with bad harvests). When institutional support is not widely available, businesses may compete for permits, subsidies, tax exemptions, etc. This favours companies that use bribes and have close relations with policy‑makers and politicians to get the upper hand. Under such conditions, the process of competition does not benefit the customer, but other stakeholders (Hunt, 2000).

Taking the warning of the need for institutional support into account, we conclude that business has the potential to contribute to food security. It can potentially contribute to all dimensions of food security, including availability of food (production and distribution), access to affordable food, utilization (nutritional value and food safety), and stability (long‑term sustainability of production and processes) (Zamudio, Bizikova & Keller, 2014).

The smallholder value‑creation inclusion frontier

The distant rural areas in many African countries are a far cry from the vibrant urban markets in the very same countries. This has consequences for food security. The unreached rural consumer is most vulnerable to food and nutrition insecurity, especially due to poor last mile distribution arrangements and the skewed focus on the urban consumer (Fraval et al., 2019).

The more remote, the fewer companies and institutions are present to provide inputs and support services, or to purchase farm produce. These contexts are sometimes referred to as “thin” markets, because few companies are active in the context (e.g., Dorward et al., 2009).
Without a sense of pressure and with scant customer feedback, these companies usually experience little incentive to develop a customer focus. With an internally oriented production focus, their products and services may miss easy opportunities to create value. They may refrain from supplying all their agro-dealers in a constant way, thus creating high uncertainty for farmers to make decisions on what to plant for which potential market. The inputs available may be a profound mismatch with what the smallholder clientele want or need to buy (for example, think of fertilizers offered in large bags not affordable for a single farmer, while a farmer who buys also on behalf of the rest of the community is suddenly confronted with complex financing and distribution tasks). Such thin markets are usually less attractive in terms of purchasing power and greater transaction costs. It is unlikely that many new businesses will enter such markets in the coming years (consider, for example, markets in the Sahel where political instability makes the conditions to do business more complex; also see van Dijk & Djindil, this volume). As a consequence, smallholders may be reluctant to produce for the market and will focus more on providing food for their own families.

As the differences between these two contexts are sharp, we speak of a ‘smallholder value creation frontier’, which distinguishes the main focus of the smallholder farm either as a means to create value or as a means for subsistence. Comparable distinctions have been made in the literature distinguishing substantive (driven by profit or social goals) and subsistence entrepreneurs (who do business out of necessity) (e.g., Babah Daouda et al., 2019; Sridharan et al., 2014). In reality, the distinction is less “black and white” as it may seem. The existing literature offers several segmentation studies of smallholders, usually dividing them into groups with different degrees of commercialization. While farmers close to the urban areas are likely to have the best connections to buyers, inputs, and institutions, in the most remote places such connections may be entirely absent. In between, there are different “shades of grey” (e.g., AGRA, 2017).

Smallholders can create value for different target groups. First, they can play a role as out-growers to larger commercial farms who use smallholders to increase their production capacity, preferably with a long‑term focus on training them in providing the appropriate qualities and increasing quantities. Second, smallholders can create value as specialized suppliers, because their region is particularly suitable for and experienced in certain fruits and vegetables that are demanded by specific consumers (Ingenbleek, 2019). One example is Kersting’s groundnut (Macrotyloma geocarpum), a legume that is consumed in Benin mostly on special occasions such as Christmas (Babah Daouda et al., 2020). Third, they can create value as local food suppliers to farmers that are fully commercialized and no longer use their land to provide food for their own families. Fourth, as member of a farmer group they can contribute to the production of specific staple or other crops, marketed by the group in specific value chains. The cropping and marketing decisions are then mostly made at the group level.

The smallholder value‑creation frontier is not stable, but it shifts when selling to markets becomes either more or less attractive to smallholders. There are both pull and push factors that can extend the frontier. Pull factors include a growing demand for food, leading to higher prices and traders exploring new areas to find the produce that they seek. Hounhouigan and colleagues (2020) report for example that traders from Lagos started turning up in Northern Benin seeking soyabean and other products for animal feed because the supplies within Nigeria were insufficient to satisfy the growing demand. Push factors include a growth of supply. An increased supply may lead to lower prices that make a product attractive for traders to purchase and then explore new markets for it. Sixty‑four percent of food consumed in Africa is handled by small‑and medium‑sized traders, food producers, processors, transporters, and marketers (AGRA, 2019). As the search of new markets is an inherent aspect of the traditional African marketing system (Ingenbleek, 2019), these actors also actively engage in the search for new products.

Babah Daouda et al. (2019) report that high yields of Kersting’s groundnut in the south of the country led traders to explore markets further north where they promoted the crop as a speciality for religious ceremonies, and consumers started to adopt it for Ramadan.

When the value‑creation inclusion frontier can be extended, it can also be contracted. Companies often ask smallholders to supply timely and at a standardized quality level (Neven et al., 2009). A longitudinal study in Kenya showed that sustaining market linkages is not guaranteed once they are established. The study showed that a substantial number of smallholders dropped out after they initially connected (Fischer & Qaim, 2012). Rejections of offered produce may lead to disappointment with smallholders and sometimes even a resentment against the market system (Jaffee et al., 2011). Hence, for food security, it is important to understand the factors that contribute to an extension of the smallholder value‑creation frontier.

Extending the inclusion frontier

Business can contribute to extending the “inclusion frontier” in several ways. First, it can play a role as a value‑chain developer. The Beninese company Sojagnon, for example, works on the professionalization of providers offering inputs for soyabean to smallholders. At the same time it builds capacity among processors in terms of packaging, branding, pricing, and distribution. Because processors communicate their preferences to the smallholders as well, they create an opportunity for smallholders to increase their income (Hounhouigan et al., 2020). The value chain is also important to increase the commitment of companies at the consumer end of the chain, like retailers and brand manufacturers. Because these companies are eye‑catching they may easily be held responsible for food safety and social issues in the value chain. In a
well‑functioning chain, certification and assessment will be easier to apply than in a sector with short‑lived transactions at arm’s length.

Second, from the point of logistics, value chains can work in two directions: they help to aggregate produce from farmers, but can also bring consumer products and agricultural inputs back to farming communities. Given the adaptability of traditional African marketing systems (Ingenbleek, 2020), it is likely that once more farmers become integrated with markets (and thus also increase their expendable incomes), food providers will also be more likely to find their way to these currently too‑often excluded consumer groups.

Third, many value chains lack a logical party to undertake the role of orchestration, a gap that could be addressed through Information and Communication Technology (ICT) platforms.
A recent study showed that ICT platforms are departing from their typical roles of providing only price and other information, hoping that the market mechanism will solve all other problems. They increasingly move towards roles in which they coordinate among different chain members and stakeholders, providing matching services for all members so that the functioning of the chain as a whole improves (Ayesiga et al, 2023).

Fourth, to increase yields as well as quality, the adoption of agricultural inputs by smallholders is often essential. New promising evidence from Ethiopia on the uptake of seed, fertilizers, and rhizobium inoculants showed that while the simple availability of each of these products led to an uptake of just above 10%, the bundling of the products in the right quantities within one box already saw an improvement. The main leap in purchasing came however when farmers were also offered an output market contract, so they could be certain that if they invested in inputs they had a buyer for the produce, as well as a microloan that pre‑financed their purchases thus bringing relief to immediate cash constraints. The addition of these two services to the bundle led to a purchase rate of nearly 80% (Abetu et al., 2023).

Fifth, innovations in rural financing help to remove capital constraints of smallholders (think of mobile banking which has a strong impact on social inclusion, particularly of women) (Ouma et al., 2017). An important underlying problem is that financial institutions see agricultural land as collateral for the loans they provide, something that they perceive as risky which makes them reluctant to provide the necessary loans. Value chain financing is a transaction and relationship‑based assessment based on the health of the entire system, and not just on the individual borrower or agricultural producer (Oberholster, 2018). This includes, for example, contract farming, lease and management contracts, tenant farming, and share cropping (Sudha & Krui-jssen, 2011). More market‑driven systems with stable relations are thus seen as less risky and rewarded with higher loans to scale‑up and lower interest rates (Stone et al., 2012).

Finally, to prevent farmers from becoming disappointed about their participation in the market because they do not understand the actions of their buyers and suppliers, trainings in marketplace literacy may be needed (e.g., Teklehaimanot et al., 2017b). Previous studies have shown positive effects of marketplace literacy trainings on related outcomes in terms of smallholder well‑being (Viswanathan et al., 2021).

Conclusion and final thoughts

We provide a business perspective on Africa’s food security “conundrum”. The rapidly growing demand in Africa’s cities for quality food, safe food, and more diverse food creates new opportunities for value creation for businesses at different stages of the food system. These opportunities can also benefit the smallholders that currently operate beyond the smallholder value creation‑inclusion frontier. By including smallholders in the value‑creating networks, they become more attractive customers to food companies, which again may help to improve food security in the rural areas. Seizing the rapidly emerging opportunities requires agribusiness managers that can see beyond the production roles of their companies and that can think and act in the spirit of value creation.

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