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Prepared by

Forum for Agricultural Research in Africa (FARA)

NSF 1/3: Advocacy and policy

Ministerial Policy Brief Series Number 5, May 2011

Input market initiatives that support innovation systems and agricultural value

chains in Africa1

1. This brief is a summarized version of a wider study on ‘Input Market Initiatives that Support Innovation Systems and Agricultural Value Chains in Africa.’

2. Professor of Agricultural Economics, Institute of Statistical, Social and Eco-nomic Research (ISSER), University of Ghana, Legon, Ghana

3. Executive Director, Forum for Agricultural Research (FARA), Ghana.4. Director, Advocacy and Policy, FARA.5. Regional Policies and Markets Analyst, FARA.

Wayo Seini2, Monty Jones3, Emmanuel Tambi4 and Gbadebo Odularu5

Introduction

African agriculture has not performed as well as expected. As such Africa is the only region of the world where per capita food production has been declining over the past three decades. Some of the factors militating against agricultural development in Africa include, inter alia, inadequate investment in agriculture; limited access to credit by smallholder farmers; high cost and unavailability of inputs such as fertilizers and improved seeds; inadequate use of modern technologies; inefficient agricultural input markets; and the absence of a conducive policy environment. In particular, the use of improved agricultural inputs is very low in Africa and has remained largely static over the last 25 years, with particularly low usage in smallholder food crop and livestock production systems.

This policy brief reviews some of the recent related literature on the subject, identifies the input market supply and demand drivers, reviews the current policies and programmes for promoting input market initiatives in Africa, documents the constraints and strategic options from input market initiatives on innovation systems and agricultural value chains in Africa and discusses an enabling environment for their implementation.

Current Literature

The current literature on input market initiatives in Africa focuses on fertilizer, seeds, pesticides and, to a lesser extent, irrigation. The main features on the literature on subsidies are the case for and the problems with subsidies. The case for subsidies includes increased agricultural productivity in the process of agricultural development (Ellis 1992); allowing farmers to access purchased inputs such as seeds and fertilizers at lower cost; reducing the disincentives to adoption that result from farmers’ cash constraints; and, raising farm incomes particularly where farmers are being taxed in other ways through export tariffs and low fixed domestic prices (Dorward et al. 2008). Problems with subsidies include costs of input subsidies are very difficult to control; targeting input subsidies to particular types of farmers is very difficult, with problems of diversion and leakage; artificially low prices may lead to overuse of inputs, or the adoption of input-intensive more than more economically efficient labour-intensive production methods (Dorward 2009).

The role of subsidies in input marketing in the successful Asian Green Revolutions has also been widely discussed in the literature. The implementation of a subsidised credit-fertilizer-extension programme (Masagana programme) was a key part of the Green Revolution in the Philippines (Djurfeldt et al. 2005). The importance of government role in the Asian Green Revolutions was particularly demonstrated in the Indonesian case with the establishment of BULOG (Badan Urusan Logistic). BULOG developed and implemented a comprehensive rice policy that benefited both consumers and producers and maintained appropriate price relationships both within Indonesia and international rice markets (Mears and Moeljono 1981). Djurfeldt et al. (2005) regard the Green Revolution in Asia as a state-driven, market-mediated and small-farmer based strategy to increase the national self-sufficiency in food grains in a string of Asian countries.

The conventional wisdom in the 1960s to the early 1980s was for African countries to indulge in large scale (universal)

Ministerial Policy Brief Series: No.5, May 20112

agricultural input subsidies as a major feature of agricultural development policies. Lack of growth in agro-input business, particularly fertilizers, has been largely on past governments’ over-involvement in the production, importation and distribution. These issues became the target of policy reforms in the agricultural sector, particularly from the mid-1980s, when most African countries adopted structural adjustment programmes (SAPs). The ultimate goal of policy reforms was liberalised agricultural input markets. In most countries in Africa, reforms followed a similar pattern: deregulation of input prices; phasing out of input subsidies; transfer of procurement (import) and distribution of inputs to private dealers; and, divestiture of state-owned agricultural enterprises ( Seini et al. 2005; Zohir 2001)

Demand and Supply Drivers of Agricultural Input Markets

The demand and supply of agricultural inputs are influenced largely by changing and often interrelated factors: population and economic growth; agricultural production; prices; and government policy. These changes manifest themselves in the global macro-economic factors, the agricultural context, income growth and dietary change, bio-fuels, additional agricultural land cultivated, and technology. They are the main drivers of both agricultural input demand and supply. In addition, changes in technology are crucial in the supply of agricultural inputs.

Differences in the state of agricultural input market development between countries and regions of the world can sometimes be explained or illustrated by the intensity/quantum of consumption/usage of agricultural inputs per unit of land. Table 1 shows the levels of fertilizer (nitrogen) usage in regions in the world. Clearly, fertilizer consumption in Africa is comparatively very low. The FAO (2008) projects that the situation will not change much in the short run as Africa will account for less than 3% of world fertilizer consumption by the end of 2012.

Table 1: Regional fertilizer (Nitrogen) consumption, 2008

Region N fertilizer (%)

Africa

Europe

America

Asia

Oceania

3.4

14.1

19.8

61.4

14.1

Source: FAO Rome (2008): Current World Fertilizer Trends and Outlook to 2010/11.

Current Policies Programmes

There has been a lot of new thinking on policies and programmes to promote efficient input market initiatives in Africa. The new thinking in input market initiatives arise fundamentally from increased questioning by African politicians, NGOs and some policy analysts about the failure of liberalised policies in supporting broad based agricultural development, particularly sustainable intensification of staple food crop production (Dorward 2009).

Thus, the concerns expressed by various stakeholders have led to the potential for input subsidies to deliver a wider range of policy objectives than those formerly recognised in the conventional wisdom. These policy objectives, as espoused by Dorward (2009) include: short term private input market development; replenishment of soil fertility; social protection for poor subsidy recipients; national and household food security; and, meeting broad based political demands.

Some of the current policy issues are reflected in current programmes in all sub-Saharan African countries, notably Ghana, Nigeria, Zambia, Kenya, Malawi and Ethiopia. The common feature in all the current programmes is the role of government and the involvement of private sector operatives. Private companies import the fertilizers and other inputs under government tender. The distribution is done through a government agency (as in the cases of Ghana and Nigeria), parastatal input suppliers (as in the case of Malawi), cooperative societies (as in the case of Zambia) or through private agro-input dealers (as in the case of Kenya).

A number of innovative approaches are also involved in these new programmes: starter pack, targeted input, demonstration plots, millennium villages and inputs for assets. A commonly occurring feature of the innovative approaches are subsidies on the inputs involved and the use of vouchers to pursue the twin objectives of agro-input dealer development and increase d producer access to and use of inputs, as well as food security among poor subsistence farmers.

Constraints and Strategic Options

According to Dorward (2009) the major challenges faced by the different products in the broadly suitable agro-ecological areas in Africa include: technical challenges to increase productivity and stability, though the nature and extent of these challenges and opportunities vary between products and contexts; underinvestment in public goods provision (technical research and extension, market and institutions) particularly for staples where prices and value chain profits are limited; and, uncertainty and variability in global commodity prices as they affect input and output prices. This affects all commodities.

Kelly et al (2003) stress the need for profitability of technology in expanding the use of inputs to zones and farmers where

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there is a reasonable expectation that their use is both financially and economically profitable. They then categorise both the demand and supply side constraints into three broad issues: knowledge and skills constraints; financial constraints; and, risk issues. Strategic options for promoting efficient input market initiatives in Africa, particularly Sub-Saharan Africa (SSA) are related to the three broad categories of demand and supply side constraints.

Farmer Knowledge and Skills

Three strategic options can be identified for this group of constraints, namely, the SCODP approach, rural agro-dealer networks and Research-Commerce Linkage to Test Input Demand.

The Sustainable Community-Oriented Development Project (SCODP) to increase input use among poor farmers in Nyanza Province of Kenya by promoting fertilizer and seed provides a major strategic option for this category of constraints. The SCODP approach includes: raising farmers’ awareness of modern inputs; participatory input testing; blending and packaging of fertilizers into affordable mini-packs; and the use of SCODP distribution network.

Rural agro-dealer programmes increase retailers’ knowledge and decrease suppliers’ risks. Therefore, an increasingly popular innovative strategic approach to agricultural input promotion focuses on ‘rural agro-dealer networks’ (Kelly et al 2003). An absence of policy reversals or government interventions that cripple private sector incentives is critical in the development of agro-dealer networks.

Regarding the research-commerce linkage to test input demand, ICRISAT undertook a pilot programme with Seed Company of Zimbabwe (SeedCo) to improve the company’s knowledge of potential demand for OPV maize seeds, and recognized the importance of addressing the affordability constraint at the farm level.

Financial Constraints

Five main strategic options are identified for reducing financial and affordability constraints. They are: reducing the package size; building farmer associations; group lending; interlinked markets in transition; and out-grower schemes.

Small packages of inputs appeal to farmers in general and to smallholder farmers in particular for various reasons. For example it makes it possible for them to experiment with new seed varieties without making a major financial commitment.

The logic behind the association building approach is that collective action has the capacity to reduce farm-level transaction costs for potential input suppliers and output buyers. The approach is an attempt to foster the development of ‘bottom up’ associations characterised by self-selection and self-management.

An approach to microfinance for rural farmers which has gained popularity among NGOs, in particular, and donors in Ghana is the group lending scheme which is quite similar to farmer associations. The rationale for group lending is to reduce transaction costs to the banks as well as the borrower, and to enhance repayment rates. Loans are accessed by groups of farmers (10-20) but disbursed to individuals within the group who are solely responsible for repayment.

Interlinked markets permit exporters or processors to use farmers’ expected harvests as collateral for seasonal input credit. The system is expected to be mutually beneficial: farmers get credit for yield-increasing inputs while buyers can lock-in potential supply.

The out-grower scheme started in Ghana as a pilot with the rational to reduce cost of borrowing to the bank and borrower, and enhance loan recovery and increase access of smallholders to modern agricultural inputs and out put markets. The bank identifies a successful large scale farmer (Nucleus farmer) through whom credit is provided to a number of small scale producers (out-growers).

Reducing Risks

African smallholder farmers are often reluctant to use new inputs because of both production and price risks that can render input use unprofitable in a given season or threaten food security. It is reported that risk averse behavior on the part of SSA farmers, has been found to account for fertilizer application rates that are, at least, 20% below economically optimum rates (Binswinger and Sillers 1983).

Most of the strategic options discussed above addressed the risk issues in some way. These include:

• small packs that reduce the monetary outlay necessary for input use, thereby reducing the size of potential losses;

• rescheduling of credit to reduce farmers’ risk of having to pay for the negative consequences of production risks in a single season;

• input quality control to reduce the risk of farmers purchasing ineffective inputs;

• donor-funded credit guarantees to provide a bridge between banks and farmer associations, thus reducing the risk to banks and potential input suppliers and encouraging them both to enter the market and expand distribution networks;

• agro-dealer programmes that provide a donor-distributor risk-sharing mechanism that encourages distributors to offer credit to new input retailers;

• the SeedCo buy-back scheme that encourages small retailers to participate in testing the market for improved OPVs because they do not need to worry about the risk of carry-over stocks; and

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• contract enforcement in Ethiopia that reduced the risk of default and contributed to sustainable funding of an input credit programme.

Enabling Environment for Strategic Options

Dorward’s (2009) classification of development opportunities and constraints facing African farmers by ecological zones implies that these strategic options are country specific. Besides, the behavior of private operators in the input markets will vary from one country to another. Thus the successful implementation of the strategic options will depend on the creation of a fovourable enabling environment in each specific country. It is particularly pertinent to address issues pertaining to the challenges and factors that confront smallholder farmers in accessing input markets, the organisation of input markets, the role of education and the specific roles that governments and private sectors need to play in creating the enabling environment.

Conclusion and Policy Recommendations

This brief has documented the current policies and programmes which are targeted at promoting input use and input market development in Africa and lessons learned from other parts of the world, particularly the Asian Green Revolutions. Thus, it concludes that African governments have a very important role to play in promoting the expansion of input use beyond the initial adopters. Governments need to invest in basic public goods in order to create an enabling environment that will stimulate farmers to intensify agricultural production and the commercial sector to efficiently supply improved inputs. Governments in Africa need to be firmly positioned at the driver’s seat if they are to drive agricultural development in a market-mediated manner for the smallholder food producers to deliver Africa’s own Green Revolution.

ReferencesBinswinger H and Sillers DA. 1983. Technological priorities for farming in sub-Saharan Africa. World Bank Research Observer 3, pp.81-98.

Dorward A. 2009. Rethinking agricultural subsidy programmes in a changing world. Centre for Development, Environment and Policy, School of Oriental and African Studies (SOAS), University of London. Report prepared for the Trade and Markets Division, Food and Agriculture Organization of the United Nations (FAO), Rome: April 2009.

Dorward A, Hazell P and Poulton C. 2008. Rethinking agricultural input subsidies in poor rural economies. Future Agricultures: Briefing.

Dorward AR, Chirwa E, Boughton D and Kelly VA. 2007. Evaluation of the 2006/7 agricultural input supply programme, Malawi Interim Report, Imperial College, London: March 2007.

Djurfeldt G, and Jirstrom M. 2005. The puzzle of the policy shift – the early Green Revolution in India, Indonesia and the Philippines. In: Djurfeldt, G., H. Holmen, M. Jirstrom and R. Larssson, eds: The African food crisis: Lessons from the Asian Green Revolution. CABI Publishing. Cambridge MA, USA, and Oxen, UK. pp.43-63.

FAO. 2008. Current world fertilizer trends and outlook 2011/12. Food and Agriculture Organization (FAO) of the United Nations. Rome.

Kelly V, Adesina AA and Gordon A. 2003. Expanding access to agricultural inputs in Africa: a review of recent market development experience. Food Policy 28. Elsevier Ltd, pp.379-404.

Mears LA and Moeljono S. 1981. Food policy. In: Booth A and McCawley P, eds: The Indonesian economy during the Soeharto era. Oxford University Press, Kuala Lumpur.

Seini AW and Nyanteng VK. 2005. Smallholders and structural adjustment in Ghana. In: Djurfeldt G, Holmen H, Jirstrom M and Larsson R, eds: The African Food Crisis: Lessons from the Asian Green Revolution. CABI Publishing, Cambridge MA, USA, Oxen, UK. pp.43-63.

Zohir S. 2001. Impact of reforms in agricultural input markets on crop sector profitability in Bangladesh. Bangladesh Institute of Development Studies. January 2001.

Prof Monty P JonesExecutive Director

mjones@fara-africa.org

Forum for Agricultural Research in Africa (FARA)

PMB CT 173Accra, Ghana

Tel: +233 302 772823Fax: +233 302 773676

www.fara-africa.org

Dr Emmanuel N TambiDirector, Policy and Advocacyetambi@fara-africa.org