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From coconuts to hair oil: partnering producers and value chains

24 August 2018

©IFAD

Coconut oil has become a fashionable commodity among trendy western consumers in the past few years. Celebrities rub it in their hair or on their skin, bake with it, or drizzle it on their salads.

Like cocoa and coffee, two longstanding favourites in Europe and North America, coconuts are supplied from tropical plantations, and the producers are often smallholder farmers.

But great distances and fragmentary information flows separate producers from consumers. That’s why market power has long resided with the big trading companies and food processors that bridge the historic gulf between producers and the western markets for their products.

But it doesn’t have to be that way. Rising demand for both commodities and niche products produced by smallholders in developing countries can offer a route from poverty to prosperity for rural communities.

That’s why IFAD has developed formidable expertise in building value chains that connect smallholder farmers with western markets and share the benefits more equitably. Today, thanks to our public-private-producer -partnerships (4Ps) smallholder cocoa farmers in São Tomé and Príncipe supply chocolate makers in Europe. And coconut oil from Pacific island farmers is bought across Europe.

Partnerships of this sort remove risk for smallholder farmers. Once they have secure access to markets, they can afford to invest in better production technologies, innovation, services and building-up knowledge.

IFAD increasingly invests in projects that are market-driven and help improve value chains. We take particular care to work with private sector companies, because they are increasingly the driving force in agribusiness and rural development.

The 4P approach sets out to identify mutually beneficial business arrangements which can provide smallholders with a fair share of the benefits. The private sector contributes finance, business expertise and market access, sharing costs and risks.

The 4P approach generally works best with cash crops that are suitable for export, such as cocoa, coffee, bananas and tea. These are easier to work with because the chains are already very structured to supply existing or expanding international markets. Some of the international companies involved are large, and have not only technical capacity but the ability to pre-finance production or invest to remove production bottlenecks.

IFAD has also achieved some notable successes with food crops, though these value chains can be more challenging. In Senegal, for example, we have developed platforms in which all those involved in the value chains for millet, sesame and rice (including producers, transporters, wholesalers, financial institutions and input suppliers) can meet and discuss common issues and business opportunities.

If it is to succeed, the 4P approach needs an enabling regulatory environment. If a country’s policies and regulations are unhelpful to private sector investments it will be difficult to persuade companies to commit the necessary resources.

If law enforcement is weak, the private sector will be reluctant to engage with farmers, as companies are unwilling to shoulder the risk of contracts going unenforced.

Likewise, if trade policy favours cheap imports that squeeze out domestic production, there may be limited incentive to engage.

So we have to explore all of these factors and facilitate a policy dialogue in the countries where we work before committing to a value chain project.

In brokering 4Ps, public funds may need to be used strategically to create incentives for the private sector to engage with producers. This is often linked to the provision of some public goods or services that reduce transaction costs and mitigate some of risks for the private sector.

For instance, if you want to reach out to remote communities, you need to ensure public infrastructure and transport links are adequate. Otherwise the private sector may not be interested.

IFAD staff have often been directly involved in brokering 4P deals. This process is extremely time-consuming, because we have to align the interests of different stakeholders and build trust between them.

Sometimes project staff or service providers can act as brokers. This was the case with a recently-completed IFAD-funded grant where we partnered with the SNV Netherlands Development Organisation.

Today, we have a total of approximately 40 projects that have adopted the 4P approach, in around 30 countries.

Some of our successes are in Asia, including Vietnam, Sri Lanka, Indonesia and China. In Africa, in particular in East and Southern Africa, there is a strong interest from the governments of Uganda, Tanzania and Rwanda, among others, to develop 4P value chains. But we need to do the groundwork to develop local capacity and create a more conducive business environment.

We are excited about the potential for expanding the 4P approach. As we monitor the results, document the lessons learned and promote knowledge-sharing within and across regions, increasing private sector engagement with small producers and farmers will help create jobs and develop resilience for these communities.