Marketing and the rural poor

Learning note (draft)

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This draft Note relates to KSF3: Alignment of design features with IFAD Strategic Objectives and lessons learnt; analysis and results framework
Version: January 2008

Core issues

Accessible, transparent and remunerative markets are necessary to raise incomes and improve livelihoods of the rural poor. In developing countries, agricultural markets rarely meet these needs. Direct state involvement in marketing has seldom brought improvements and proved costly, prompting changes in the marketing systems from parastatals to the private sector.  But the response of the private sector has been slow and the challenge -- to provide stable and remunerative prices to small producers – remains.  Although the consensus still favours a stronger role of the private sector in marketing, the core issues have not been resolved.

• The Government policies are at times governed by a need to keep urban prices low. Policies on food aid, imports of subsidized foods or trade further expose small farmers to unfair market competition and undermine local markets to the detriment of the small producers.  This issue of leveling the playing field for the smallholders remains.
• Despite the transition to a greater role of the private sector in marketing, there is no clear consensus on the appropriate role of the government and the private sector in providing remunerative prices to the small farmers.   The real purchasing power of rural producers has fallen due to the removal of subsidies and declines in farm-gate prices of food crops and basic commodities, either through rising technical efficiency of production, or because of uncontrolled competition from subsidised sources in developed countries. The marketing institutions and the framework in most countries have yet to adequately address this issue.
• Poor access to markets. Lack of competition among traders in rural areas contributes to monopolistic trading practices to the detriment of the poor and small producers. The development of micro-, small- and medium- enterprises (MSMEs) to facilitate the access of the poor to markets and enhance competition in rural areas is further constrained by a number of factors, which, inter alia, include lack of finance or the adequate availability of Business Development Services (BDS) to facilitate and guide the development of MSMEs. Moreover, such services are proving hard to sustain in rural areas and the ability of the poor to pay for them remains suspect.
• Inadequately structured farmers associations or other similar forms of jointly-owned organizations that could interface with traders or could undertake marketing. These institutions either do not exist, or where they do, the organizations remain handicapped by: (a) low quality of, and inexperienced, management; (b) undercapitalised financial base; (c) limited access to capital; and (d) poorly paid staff. These constraints inhibit their ability to compete in the open market or adapt to changes in the marketing environment.
• Stringent quality demands that add to costs of small producers without additional remuneration.  These are demanded by private sector buyers and are often backed by increased state regulation of food safety, origin and trading standards.
• High transaction costs that affect the viability of the supply chains. Restricted physical access, transport services and market infrastructure in many rural areas, coupled with low volume of production that is often scattered, adds to the already high collection and transport costs, especially in remote areas. The supply chains in these areas are long with many intermediaries, which, of necessity, limits the amount that can be paid to smallholders. 
• Limited bargaining power of the producers and the lack of marketing credit often forces smallholders to sell produce just after harvest when the prices are low. This linked to asymmetric market and price information also hinders smallholders from realising remunerative prices for their produce.

Key tasks for design and review

Project or programme support can conveniently be divided into four main categories: policy adjustment, capacity building, infrastructure and diagnosis of value chains.

• Policy. Adjustments to policies, regulatory frameworks and incentives are prerequisites for more efficient markets but practical progress could require alliances with other like-minded donors and discussions with Government. Progress could be slow. Designers should judge what is achievable and work within this framework.  Funding may cover:
  1. training and studies for marketing reforms to provide level playing field for smallholder produce.
  2. strategic studies to defend markets and margins of national producers and traders in the face of the ‘supermarket revolution’ and globalisation or subsidised exports from developed countries; and
  3. dialogue leading towards agreement on revised future public and private sector roles in rural marketing. 
• Capacity building and provision of finance.  To facilitate the operation of agreed policy and regulatory changes and enhanced participation of smallholders/disadvantaged groups in rural markets, the following may be necessary:
  • Creation, training and support to producer associations/MSMEs to improve the bargaining power of small farmers.
  • Promotion of MSMEs to facilitate access to markets.
  • Capacity creation for provision of Business Development Services.
  • Measures (including temporary fiscal incentives or subsidies if appropriate) to promote growth and diversity of trade in agricultural inputs and outputs and ensure gender and social equity in benefits.
  • Technical innovation in agricultural products and processing; market research and promotion for new products.
  • Investments in market information gathering and dissemination, including mass media, fax, telephone and real-time computer access systems.
  • Provision of finance for marketing and processing.
  • Where appropriate, strategies for up-stream distribution and market penetration.
• Infrastructure. ‘Hard’ items such as rural access roads, transport facilities and market infrastructure are likely to be the largest cost items in marketing projects. However they risk becoming white elephants unless the policies, incentives, and necessary human resource development is ensured for their effective use.
• Diagnosis of Value Chain. Marketing proposals based on interventions in the value chain should include overviews of the main market actors and institutions; commercial practices; prices, price structures, trends and movements; marketing costs; local strengths, weaknesses, constraints and opportunities. Investment budgets should also provide for monitoring, evaluation, periodic reviews and mechanisms for on-course adjustments during implementation.

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