Category Archives: Agriculture

The Hult Prize: Food Security in Urban Slums

A few weeks ago, I competed in a social enterprise business plan competition called the Hult Prize.  The competition is ambitious in scale and scope, giving a broad mandate to competitors and rewarding the best ideas with the chance to win $1 million in seed funding.  This year’s challenge was developing a solution to the problem of urban hunger by 2018.

The catch is that the business needs to be scalable and financially sustainable.  The product or service needs to be culturally relevant enough to be useful, while culturally agnostic enough to work anywhere.  It needs to address the root cause of urban hunger, facilitating access to nutritious food at affordable prices.  With those marching orders, we went to work.

My team consisted of some seasoned industry veterans.  Aleem Ahmed spent three years at LEK Consulting before moving to Western Kenya to implemented a clean water program for Innovations for Poverty Action, and later Ethiopia to work with the Agriculture Transformation Agency.  Ahmed El Mahi had a stint as a trader in London before sourcing investments in Mali for D.Capital, Dalberg Global Advisors’ impact investing arm.  Caroline Mauldin spent four years at Accion International, one of the largest microfinance organizations in the world, before heading to the State Department to write speeches for senior officials in the Obama Administration and and set up the super cool Open Government Partnership.   We are all MBA students at the MIT Sloan School of Management, and the other three are picking up a Masters of Public Administration from the Harvard Kennedy School along the way.  Our team was stacked, and it was great to work with such an accomplished crew.

After tossing around a couple of dead-end ideas – including one proposed by me around vitamin-enriched flavoring packets – Aleem first proposed the idea of “slum meal plans.” When you dig down to the root cause of hunger in the urban slums, the availability of food is not necessarily the issue.  Generally, there is enough food to go around in most countries (with the exception of places plagued famine, like Somalia in 2011).  The problem is that food is expensive to purchase in small quantities.  We started to think about why this was the case, and came to the conclusion that there were two problems: finance and distribution.

On the financing side, people in the slums have irregular income that can be volatile throughout the month.  It is common to hear about people living on less than $2 per day.  But one of the most interesting insights to come from the research into the financial lives of the poor came from a book called Portfolios of the Poor.  After analyzing financial diaries collected from people living in slums in South Africa, Bangladesh, and India, the authors realized that income fluctuates wildly from week to week, and the poor use a variety of informal financial instruments to smooth consumption.  From this realization came their central conclusion:

“The poor are as diverse a group of citizens as any other, but the one thing they have in common, the thing that deines them as poor, is that they don’t have much money. If you’re poor, managing your money well is absolutely central to your life—perhaps more so than for any other group.”

So we took this as a starting point and applied it to the problem of food consumption.  What if we could construct a micro-savings program that could allow people to put money away for food when they earn income, in order to buy food when they don’t?  There are plenty of mobile-based savings platforms that exist around the world.  Safaricom, the East African telecom that developed M-Pesa, recently released M-Shwari, a savings platform that has seen swift uptake among the poor.  Our idea was to use a food-oriented savings account to take advantage of what is called an “illiquidity preference” – putting cash where you don’t have have instant access to it in order to prevent it from being spent on unnecessary purchases.  In order to incentivize people to join, we would need to offer some sort of discount or loyalty program.  To that end, we started to the think about distribution.

The second part of the equation is what we called the distribution problem.  Disparate suppliers outside the cities and fragmented vendors and retailers in the slums makes achieving economies of scale for any product, let alone food, difficult.  On a per-unit basis, people in the slums pay more for basic goods than their comparatively wealthier counterparts.  If we could develop a network of food vendors in the slums and effectively become a wholesaler of certain products, we could potentially shrink the existing margins between supplier and customer.  We could then distribute a portion of the savings to our customers, and reinvest the remainder in growing the business.

And with these two components, our idea took concrete form.  We called the idea M.yala – taken from the name of a town in Western Kenya and the Arabic word for “Let’s go.”  We spent weeks putting together our presentation and practicing our pitch.

On the day of the competition, we went head to head with 46 teams from schools around the world.  We were selected as one of four semi-finalists, and invited to present to 18 judges and 300 spectators.  Unfortunately, we just missed winning the regional final.  But there is a great team from Hult San Francisco that will be competing at the final round at the Clinton Global Initiative in October, and we wished them the best of luck.

All in all, it was a great experience.  Best of luck to all of the other competitors, and hopefully one of them makes a dent in the problem of urban hunger.

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Technology Sea Changes: Re:Char and Kiva Zip

Product design is all the rage in poverty alleviation, and has been for the past few years.  By applying the principles of lean manufacturing and waste minimization to the challenge of designing products for people living on less than a dollar a day, we can now create stripped-down products at a fraction of the cost.  But product design is only one small component of the process.  The two other challenges in bringing these products to market – financing and distribution – are just as critical to solve.

Meeting with an NWTF client who purchased a solar lantern

There are plenty of companies and organizations that are trying to develop great products at a very low cost.  Cookstove companies are racing to the bottom, trying to engineer alternatives to inefficient clay stoves at the lowest possible price.  The Engines and Energy Conversion Laboratory at Colorado State University partnered with Envirofit, a manufacturer of clean cookstoves, to design the most efficient-burning stove possible.  Dozens of solar companies offer lanterns, water heaters, radios, and mobile phone charging stations.  These off-grid energy products provide an energy source to the billions of people living without access to electricity.  In just about every industry, from sanitation to transportation, companies are redefining low-cost manufacturing.

Unfortunately, building the products is only part of the solution.  Actually getting those products out to the customers, many of whom live in remote rural areas, can be a challenge.  Similarly, creating a viable financing solution that allows for payment in installments is going to be more difficult when most customers do not have a bank account, let alone a credit card.  Fortunately, technology is changing the game in a fundamental way, bringing solutions to these problems that most people never dreamed could be possible.  And one company, in particular, represents a great example of how companies are leveraging the technology boom in low-infrastructure countries (H/T to Jon Evans for the term).

Re:Char is a company based in Western Kenya that sells “climate kilns” to convert biomass to biochar.  To deal with the financing problem, it is using crowdsourced, peer-to-peer lending via mobile money to provide a source of credit to its customers.  And to solve the distribution problem, the company built a “shop-in-a-box” – essentially a 20-foot shipping container with a laser cutter and 3-D printing apparatus – to bring the manufacturing process close to home.

When I was living in Nairobi, I met some folks from Kiva who were piloting a super-secret initiative called “Kiva Zip.” They were experimenting with the possibility of allowing lending directly to borrowers (as opposed to through microfinance institutions, which is how most business is conducted).  The ubiquity of M-PESA, the mobile money platform in Kenya, made it possible to send money to people in the most remote parts of the country for a small fee per transaction.  Kiva Zip needed partners on the ground that could pre-vet certain borrowers and provide a steady stream of investments.  These partners ultimately became known as “trustees,” and Re:Char became one of the first organizations to sign up.

Re:Char staff and customers on Kiva Zip

Today you can go online and lend $25 to a Re:Char customer.  In this loan, Helen of Makokha Farm lives in Bulimbo, Kenya.  She needs $100 to buy a biochar kiln and additional inputs.  Four Kiva members each lent $25 to Helen to fulfill the loan.  Those four individuals used PayPal, an online payment platform, to transfer the money to Kiva.  Kiva then transferred the money to a bank account in Nairobi, where it was then added to an M-PESA (mobile money) account.  The $100 was then transferred to Helen’s M-PESA account.  She received an update on her phone telling her that the money had arrived, and she went to the local M-PESA agent to withdraw the funds.  She (likely) then used those funds to buy biochar kiln from Re:Char.  And, today, she is in the process of paying them back over the course of the next year.

Kiva Zip is an experimental program and there is certainly no guarantee that it will be successful.  Of the seven $100 loans Re:Char has endorsed, only one is currently paying on-time.  This is the danger of doing direct lending without a physical presence on the ground to ensure timely payment.  But, to me, this is less significant than the broad implications something like Kiva Zip has for the financing of small purchases around the world.  If the Kiva Zip pilot fails, Kiva will learn and adapt.  But the rubicon of direct-lending through the Internet and mobile money has been crossed.  This is a great example of utilizing technology to solve the problem of financing.

In the next post, I will talk about Re:Char’s “shop in a box” and the implications it has for manufacturing and distribution in low-infrastructure countries.

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What Do I Think of Agriculture Development? Pt. 3

The following is part three of a three-part post on agriculture economic development.  Read part two here.

Aid, as I have discussed in this blog, is one of the three D’s of foreign policy: defense, diplomacy, and development.  It is the hearts in the phrase “winning the hearts and minds.” Being so, the work is certainly not borne entirely, or even at all, out of altruistic motives.  Instead, it is one way of winning sympathy and gratitude from people whose governments we need to provide favorable trade agreements and ally with us against our enemies.  In East Africa, for example, Uganda has moved up in stature with the U.S. government for its willingness to send troops and lead AMISOM – the UN peacekeeping mission in Somalia.  Al-Shabab is one of the more pressing threats in the eyes in the U.S. state department, given its ability to operate freely in the lawless country and its track record for recruiting disaffected youth from American cities like Minneapolis.  Kenya, on the other hand, is viewed as relatively weak, as its military has done little in the region, save invade Somalia six months ago and fail to take full control of the key Al-Shabab stronghold in Kismayo.  When a country scratches the back of the U.S., it is more likely to scratch back in the form of government-to-government aid and development funding through mechanisms like the Millenium Challenge Corporation (MCC).

With this in mind, it is no surprise to me that foreign aid – particularly within the agriculture sector – is ineffective.  The incentives are completely misaligned.  In the zero sum game of global commerce, a stronger domestic agriculture sector in a country dependent on imports from the U.S. will adversely affect our own farmers.  If donor countries really wanted to end food insecurity once and for all, it would be relatively simple: eliminate import tariffs on African agriculture products, end agriculture subsidies for maize and other crop productions, and regulate commodity speculation more closely.  I am not necessarily advocating any of these things, and I understand why they exist.  I’m just saying that it would work.  Instead, the most important thing about these projects is that every single piece of literature, sign, poster, or whatever else have the following words displayed prominently: “From the American People.”

Aside from the fact that agriculture is a global business and donor countries must look out for their own interests above all else, the execution of agriculture development projects is generally poor.  I once had a discussion with some friends in Ghana about looking at the impact of projects like ours on the hospitality sector.  I wouldn’t be surprised if 25% of the $30 million allocated to the project I worked on went to hotel rooms.  With per diems of $100-150 per day, people could do a lot of damage with very little oversight.  This frivolous attitude toward spending was a bit troubling in my mind, particularly since the young field staff were required to ride motorbikes, which resulted in the death of one person and multiple broken bones to others, some of whom were good friends of mine.

Most of the emphasis in these projects seems to be on placating congress more than anyone else.  The monitoring and evaluation department called the shots most of the time, demanding that the field staff just “get the numbers.”  In other words, if congress says to train 1,000 farmers, then go train 1,000 farmers, regardless if that is in the best interest of the people being trained.

I have one particularly vivid memory of arguing fiercely with the head of one of the sub-contractors responsible for the horticulture segment of the project.  I said that we were wasting our time by working with small-time juice processors and needed to focus our attention on the big guys.  He insisted that working with small processors – none of whom had the business acumen, capacity, or capital to scale – was the only way.  After we reached an impasse, he walked inside and brought back a piece of paper, which he slammed down on the table in front of me.  It was a list of the indicators and targets given to him by ACDI/VOCA, which ultimately came from USAID and the U.S. Congress.  All of them pointed to helping the small guys.  “In this world,” he said, “there is what is, and there is what should be.  Until someone starts paying me for what should be, I am going to give them what is.”

That, for me, summed it all up.  It wasn’t as if this man did not get it.  He knew that what we were doing didn’t make any sense.  It is just that his financial incentives were not aligned with doing what works.  So, unfortunately, he has to do what doesn’t work.

That moment represented the turning point in my opinion of government aid projects.  I detailed my frustrations in a post comparing the emphasis on stats to that of the police department in the TV show “The Wire.” From then on, I began looking for something new.  I wanted to return to something more organic and grassroots, where people were motivated and given the freedom to be creative and proactive.  I decided that Kenya – more specifically, Nairobi – was the place where I could find all that.  So I booked a flight, quit my job, travelled around Ghana for a month, boarded a plane, and set out to become inspired again.

In the next few posts, I will talk about my thoughts on education, social enterprise, and the contrasts between East and West Africa.

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What Do I Think of Agriculture Development? Pt. 2

This is part two of a three-part post on agriculture economic development.  Read part one here.

In the previous post, I explained my experience working in agriculture.  In this one, I will talk more generally about the challenges of agriculture economic development in general.

Needless to say, the challenges are great, as I have written about before.  And, while I feel the idea of market facilitation has merit and has seen some successes, particularly in cash crops like coffee and cocoa (differentiated from staples, like rice and maize), where the markets are ready to handle any volume that comes from the farmers.  But, on balance, I think that the forces affecting agriculture markets are complex and global in nature, and the problems cannot be simplified to a lack of communication between buyers and sellers.

It is true – communication is a major impediment to efficiency in developing world agriculture markets.  That is why many companies, like Esoko in Ghana and M-Farm in Kenya – are leveraging the penetration of mobile phones to close the knowledge gap between buyers and sellers.  These companies offer subscription-based services that allow farmers to check prices in various markets around the country, preventing them from being ripped off by middlemen.  They also allow the juice manufacturers, as an example, to communicate order sizes directly with their farmers.  This creates a more efficient system, but does nothing to really address the underlying factors influencing these markets.

First of all, agriculture is truly a global industry.  In the United States and other developed nations, agriculture production is highly subsidized, where large industrial farms are actually paid to produce more than they can necessarily sell on the open market.  When the government explicitly agrees to purchase the surplus, there is little incentive on the part of the farmers to manage their farms according to market demand.  Much of the excess corn in the country is either utilized for biofuels and, to a lesser extent, food aid.  What’s more, industrial agriculture farms are able to leverage incredible economies of scale, in the form of mechanization, irrigation, and bulk-buying of inputs.  These two factors allow large-scale farms to produce at far lower costs, rendering smallholder farmers – which comprise the bulk of the poor in Africa – uncompetitive in all but the local markets.

I once caught a ride back from a citrus stakeholders’ meeting in the central region of Ghana with a pineapple grower and importer of fruit-fly traps from India that protected mango trees from the insects that decimate the crop.  My friend Mark, who worked with Engineers Without Borders Canada, knew them from his work with mango farmers in the Eastern Region, and he finagled a ride back to Accra for us.  We were working on three hours of sleep after partying with a group of Canadian journalists and he promptly fell asleep in the back seat, leaving me to carry on the conversation for the two-hour ride.

Some rice millers I visited in Ghana

At one point, I asked him what he thought of organizations like mine and USAID in general.  He had a tendency to use me as the embodiment of the aid industry in general, and told me that I was the like the defense lawyer for the criminals.  In other words, here I was, trying to improve the competitiveness of the agriculture sector when my government, or, more generally, the entire industrial-agriculture complex, was responsible for creating the problem in the first place.  I thought that his characterization, while a bit harsh, had some merit.

I stayed in a hotel room for $150 a night to try to work with undercapitalized rice millers on behalf of the U.S. government, only to see this advertisement next to the trading post.

In the next post, I will discuss my other criticisms of foreign aid for agricultural development.

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What Do I Think of Agriculture Development? Pt. 1

This is part one of a three-part post on agriculture economic development.

After the better part of a year working for Negros Women for Tomorrow Foundation (NWTF), a microfinance institution in the Philippines, I decided to head west again – specifically, to West Africa.  In late 2010, I moved to Ghana to work with TechnoServe, a non-profit specializing in market-driven solutions to economic development.  This is really just a fancy way of saying that TechnoServe recognizes the importance of competitive markets in creating jobs for people living on less than a few dollars a day.

My mandate was a bit nebulous at first (and for the bulk of my time in Ghana).  I was seconded to another organization – ACDI/VOCA – on a $30 million USAID project called ADVANCE (an acronym standing for Enhancing the Agriculture Chain in Ghana, or something like that).  The project was a bit dysfunctional, having undergone substantial personnel changes when I arrived (the Chief of Party and Technical Advisor – the equivalent of the CEO and COO – either quit or were fired after being significantly at odds with one another over the direction of the project.

The methodology of the project was something called “Market Facilitation,” a relatively new and trendy approach to catalyzing positive change in the agriculture sector.  For a much more detailed overview of what it is, my good friend Mark Brown with Engineers Without Borders Canada has a great overview at his blog, Kulemela.  But I will give the quick and dirty.

In the past, most projects were unsuccessful because they were both short-sighted and unsustainable.  They were short-sighted because the interventions focused on supply rather than demand.  In other words, development agencies would provide fertilizer and tractors and other implements to improve yields for smallholder farmers.  Yet, without simultaneously improving the infrastructure and building the market for the higher product volume, increased crop yields actually had the adverse affect of driving down prices, as there was nowhere to sell the surplus except for the same markets as before, which now had greater leverage in negotiation.   And it was unsustainable because, once the funding for the project was complete, the gravy train would grind to a halt, and the tractors would sit in a garage somewhere – if they were lucky – broken-down and rusting away into oblivion.  And a butterfly flaps its wings.

The logical response to these failures was to focus not on the production side, but rather the markets.  Work with the buyers to develop their capacity to handle greater volumes, and they, in turn, will invest in suppliers to handle increased demand.  Assisting a maize aggregator (a term for the middleman buying and selling the product) to get a loan in order to purchase an tractor-mounted maize sheller (a device that removes the kernels from ears of corn) which not only create an alternative source of income for them, allowing them to buy more maize from more farmers, but it will also save time by eliminating manual shelling.  This is an example of a win-win situation that benefits the entire market in a sustainable way.

Market facilitation, specifically, tries to catalyze these connections.  For example, on one side, a Swedish jatropha company in the northern part of Ghana has 40 tractors that it uses only during the planting and harvesting season, leaving them idle for the remainder of the year.  On the other, a group of aggregators buying maize and soyabeans from more than 1,000 farmers needs tractors to prepare the lands for planting.  Connecting these two entities in a mutually-beneficial business relationship creates a sustainable partnership, where the jatropha company earns additional income from maximizing utilization of its equipment, while the aggregators solve their tractor problem.  In another example, a large juice manufacturer needs a reliable source of pineapples, mangoes, and citrus to keep its factory running at full capacity, while groups of small- to medium-sized farmers have no market for their products, other than the local “market women” – the aggregators who purchase for domestic sale.  By connecting the two groups, the juice manufacturer can establish lasting partnerships, supplying farmers with inputs in exchange for a guarantee of the final product at a fixed price.

It is an elegant idea that works well in theory, but less so in practice.  For one thing, relationships between buyers and sellers in these agriculture markets are notoriously plagued by years of mistrust.  On this blog, I put up a guest post from Mark of EWB detailing this problem.  The juice manufacturer says it needs twenty tons of pineapples, and then, when it comes time to purchase, scales back due to capital constraints and only buys ten tons, leaving the farmers with the remainder rotting on their farms.  And, because of poor management, the manufacturer fails to pay the farmers for three months, leaving the farmers in the lurch.  On the other side of the coin, the manufacturer provides fertilizer, seeds, and equipment to the farmers on credit in exchange for a guarantee of their products.  But, come harvest time, the farmers find a better deal elsewhere and sell their crops to someone else, leaving the manufacturer out thousands of dollars and without produce for its factories.  These are the realities of dealing in these markets.

In the next post, I will explain my thoughts on market facilitation.

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Yes to Industrial Agriculture in Tanzania

Agrisol, an American agriculture company, is considering investing $100 million in purchasing and developing 325,000 acres of farmland in Tanzania.  This development has raised the ire of the Sierra Club, an environmental group that is concerned with the impact on the smallholder farmers that will be displaced by project and the inequity of repatriating money out of the country.  They are concerned that the move amounts to a land grab – developing land in Tanzania to the detriment of Tanzanians.   From the East African:

Opponents charge that the deal amounts to a “land grab” that would result in the displacement of 160,000 refugees from Burundi, some of whom have lived on the land for 40 years. “Very productive smallholders” would be replaced by “large mechanised farms” growing genetically modified maize to be used as biofuels in developed countries, says Anuradha Mittal, a researcher with the California-based Oakland Institute.

The company denies that it plans to grow crops for biofuel production. It adds, however, that “as crop production increases over time, excess crops that are not needed for valued-added food products could become available for other uses.

Agrisol says its $100 million investment over the next 10 years is intended to produce staple crops and livestock that “will help stabilise local food supplies, create jobs and economic opportunity for local populations, spur investment in local infrastructure improvements.”

I have somewhat strong feelings about agriculture developments like this one.  When I was working in Ghana, I was involved with the rice sector, and spent a lot of time trying to understand why West Africa imports more rice as a share of consumption than most regions in the world.  I asked my boss at the time – a veteran of African agriculture who cut his teeth in the soybean industry in Zambia – what Ghana needs to eliminate its dependence on rice imports from Thailand, Vietnam, the U.S., and other countries.  “Give me 125,000 hectares of irrigated land near Lake Volta,” he said, “trucks to transport the rice south to Accra, a warehouse in Tema for storage, and I will feed of all of Accra.”  In other words, economies of scale.

The Sierra Club might say that this is also tantamount to a land grab.  But, unfortunately, the reality of the rice sector in Ghana is that large-scale industrial farming is essential to substituting the rice imports from around the world.  The fact is that people in Ghana will eat rice.  It is not a staple like maize, cassava, or yams, but, as the country has increased in socioeconomic status, the demand for rice has increased.  In the early 80’s, the country produced 100% of its rice – about 80,000 tons per year.  After a structural adjustment program imposed by the IMF decimated the industry, local rice production atrophied, leaving the vacuum to be filled by the U.S. and, ultimately, Southeast Asia.  The rice that was imported – jasmine long-grain – quickly supplanted the local variety, and people developed a taste for rice from the outside.  Unfortunately, smallholder farmers were unable to bring jasmine long-grain to the seed – either due to regulatory issues or cost – and could not compete.

Today, most Ghanaians in Accra, the capital city, would take some rice imported from Thailand over local rice any day. One day I went to the field with Andrew, the rice guy on the team.  We went to see a subsidiary company of an American agribusiness that had set up an industrial rice mill outside of Accra.  They had 1,000 acres and a large industrial mill that produced nearly impeccable rice with little breakage, as compared to the small local mills.  While there, we heard about another Brazilian operation that planted 1,000 acres of jasmine long grain.  They were fairly industrialized, supported by the Brazilian government agriculture organization, and had remarkably high yields, compared with local smallholders.

The smallholder rice farmers, on the other hand, were farming by hand and had limited access to irrigation.  They could often only plant one season per year instead of two, due to the fact that they couldn’t access the abundant waters of the Volta River.  As a result, the local variety of rice grown was often milled in small mills with poor equipment that broke the rice into small pieces and commanded a much lower price at the market than the imported variety, or the Brazilian crop for that matter.

This, for better or for worse, is the reality. Brazil pioneered the revolution in agriculture that Africa would do well to replicate.  The Economist had an article two years ago about Brazil’s admirable approach to farming titled “How to Feed the World.”  Here it discusses the innovation:

Brazil has followed more or less the opposite of the agro-pessimists’ prescription. For them, sustainability is the greatest virtue and is best achieved by encouraging small farms and organic practices. They frown on monocultures and chemical fertilisers. They like agricultural research but loathe genetically modified (GM) plants. They think it is more important for food to be sold on local than on international markets. Brazil’s farms are sustainable, too, thanks to abundant land and water. But they are many times the size even of American ones. Farmers buy inputs and sell crops on a scale that makes sense only if there are world markets for them. And they depend critically on new technology.  As the briefing explains, Brazil’s progress has been underpinned by the state agricultural-research company and pushed forward by GM crops. Brazil represents a clear alternative to the growing belief that, in farming, small and organic are beautiful.

That alternative commands respect for three reasons. First, it is magnificently productive. It is not too much to talk about a miracle, and one that has been achieved without the huge state subsidies that prop up farmers in Europe and America. Second, the Brazilian way of farming is more likely to do good in the poorest countries of Africa and Asia. Brazil’s climate is tropical, like theirs. Its success was built partly on improving grasses from Africa and cattle from India. Of course there are myriad reasons why its way of farming will not translate easily, notably that its success was achieved at a time when the climate was relatively stable whereas now uncertainty looms. Still, the basic ingredients of Brazil’s success—agricultural research, capital-intensive large farms, openness to trade and to new farming techniques—should work elsewhere.

These last three ingredients are what the Agrisol investment could potentially bring to the agriculture sector in Tanzania.  As much as the Sierra Club would like to think that “very productive” smallholder farmers could bring about this kind of revolution, 160,000 smallholders cannot compete with one 160,000 acre farm (or a 325,000 acre one for that matter).

And the problem of food insecurity in sub-Saharan Africa will continue to be a problem without the innovations of industrial agriculture.  People will certainly be displaced.  But the Tanzanian economy, hopefully aided by woefully-lacking good governance, can capitalize on this investment to produce much of the food for the region.  In doing so, it, along with its people, will become richer in the process.

So when organizations like the Sierra Club oppose such investments, I understand where they are coming from, but my realipolitik radar starts to register abnormal activity.  To denounce the benefits of industrial agriculture, which clearly provide huge benefits in the form of cheaper food, more efficient supply chains, better seed varieties, higher yields, employment, and tax revenue, seems impractical.

In a perfect world, cooperatives of smallholders could function perfectly and produce the same yields as the Agrisols of the world.  Unfortunately, we live in a world where economies of scale simply offer better results.  So I support the company’s acquisition of 325,000 acres, for better or for worse.  But hopefully for better.

Wal-Mart (Does Not) Come to India

There is a fierce debate going on right now in India about a new piece of legislation that that will allow multi-national corporations to operate as joint ventures in the country, owning up to 51%.  And a week ago, the Indian government backtracked and announced that it would not pass the legislation after all.  It is worth examining the potential pros and cons.

There has been no shortage of voices from the left and right commenting about whether or not this is a good thing.

On the one hand, there is no question that everything, from food to clothing, will be cheaper as a result of companies like Wal-Mart entering the country.  Huge multi-nationals have the economies of scale and capital to invest in efficient end-to-end supply chains that ensure that the crops don’t rot on their way to point-of-sale.  In the existing system, middlemen – also called traders, “market ladies,” or aggregators – insert themselves into the inefficient supply chains and take a piece of the margin, which is ultimately passed onto the consumer.  So the advent of a retail giant like Wal-Mart, which has the scale to develop large-scale commercial farms and negotiate with farmers’ cooperatives to fund the harvest in exchange for the yield will be a good thing.

Productivity will undoubtedly increase as farmers invest in fertilizer, irrigation, and good agricultural practices (GAPs).  The cost of food will decline across the country and fewer people will go hungry.  Inefficient farmers may end up going under as larger farms become more dominant, but they – along with everyone else in the country – will be paying less for food as a result of this increased productivity.

The American Enterprise Institute details other advantages to farmers:

Farmers, who comprise 60% of India’s workforce, could be one of the biggest beneficiaries of Wal-Mart and other large retail chains entering India. Currently, farmers depend on the traders at the local warehouses to sell their produce. Adding an additional competitor, particularly one that will value quality and will have the ability to pay more in the absence of middlemen, will help farmers get better deals.

While farmers get only a fraction of what their produce sells for on the market, consumers end up paying unnecessarily high prices and have limited choice because of the middleman’s cut and the fact that 40% of India’s fruits and vegetables are lost each year to wastage. Retailers like Wal-Mart will cut out middlemen and create modern cold storage systems and supply chains for produce that will help check India’s double-digit inflation.

Critics of the legislation feel that the introduction of massive big-box retailers will eliminate a source of employment for the millions small business-owners who sell fruits and vegetables at independent shops called Kiranas.  But Rupa Subramanya of the Wall Street Journal explains why this fear may actually be unjustified:

The principal fear in India regarding the potential entry of Wal-Mart is that it will wipe out the “kirana” stores, the Indian equivalent of “mom-and-pop” stores in the U.S.  An estimated 33 million people or 7.3% of India’s workforce is employed in the unorganized retail sector, which includes the kirana stores, and only 5% of the retail sector is organized.

So are these fears well-founded? Research suggests, probably not.

A much cited study by the Delhi-based Indian Council for Research on International Economic Relations looks at the effect organized retailing has on the unorganized retail sector. It shows that, on average, when an organized retailer opens, the kirana stores nearby generally lose about 23% of their sales in the first year, but are back at their original sales figures within five years.  About 1.7% close down every year, but, even in the medium to long run, traditional retailers will still control 85% of the market, according to the study.

This is a difficult question, but I find myself siding with the laissez-faire crowd on this one.  I have seen firsthand the inefficiencies of a highly distributed agriculture sector that lacks large retailers.  I have seen the lack of investment in productivity and the crops rotting in the markets.  Consolidation, within reason, is a good thing because it creates economies of scale where there are none.  And, in the end, most of the country ends up ahead.

Unfortunately, the Indian government caved to popular sentiment and backtracked.  In an article titled “Wal-Mart’s India Delay Means Politics ‘Killing Farmers'”, the impact is discussed:

The global chains were likely to invest in trucking and distribution systems in India, where government estimates show 40 percent of fruit and vegetables rot before being sold because of the lack of cold-storage facilities and poor transport infrastructure. Farmers will have “assured business” if foreign companies were allowed to invest in multibrand retail, said Pratichee Kapoor, associate director for retail at Technopak Advisors Pvt.

India reversed its decision amid protests by the opposition and its allies that had forced repeated adjournments of parliament. Opposition parties argued that the move would wipe out the jobs of small shopkeepers, who dominate the country’s retail sector.

Rajan Bharti Mittal, managing director of Wal-Mart’s wholesale partner Bharti Enterprises, in a statement yesterday called the government’s reversal an “unfortunate” decision. The policy change would have brought “farmers better realization for their produce as well as better prices for the consumer,” he said.

It is a shame.  But I suspect we will see this change sometime in 2012.  If India is to truly be a global power, it needs to not only modernize its food production and distribution, but also provide a modicum of confidence for foreign investors.  But we will see.

Develop Economies’ Music Recommendation

Trust and the Invisible Hand in Agriculture

The following is a guest post from Mark Brown, an agriculture value chains specialist with Engineers Without Borders Canada working in Ghana.  The post originally appeared on EWB’s blog, Untapped Markets.

Market Facilitation is about fostering new relationships between businesses in agriculture. In sub-Saharan Africa much of the business that takes place happens “informally”. Informal business is any business activity that it is not overseen by the government. These activities are not taxed or regulated. They are also not legally binding. As the businessplace in Africa becomes more productive, the flow of goods will increase and require a higher degree of predictability. Farmers need to know how many tonnes of produce their markets will consume before a given season begins; processors need to make sure that they have an appropriate supply of incoming product that will not overwhelm their storage or production capacity or undersupply their output markets. As businesses in agriculture forge new formal relationships, it is of paramount importance that they know that their business partners are committed to buy or sell increasingly predictable volumes. A memorandum of understanding (MOU) is the typical guarantee that businesses make with each other to ensure that they can know in advance where produce will flow. Since market facilitators are constantly linking up agricultural business actors and facilitating their agreements to increase production, they often find themselves facilitating the signing of MOUs. MOUs are useful, but they need to be used carefully, because at the end of the day, any business relationship is ultimately about trust.

An important attribute to MOUs is the fact that they are not forged in stone.  They are not always honoured. It can be extremely hazardous to a business relationship if MOUs are recklessly ignored. It is also hazardous if fears of the repercussions of default keep a business from sharing their challenges with their partners. Both of these pitfalls can happen if an MOU is introduced to a business relationship that lacks trust between the partners.

Lacking Trust, Ignoring Responsibilities and the realities of legal recourse

In one instance in my experience, a market facilitator helped an aggregator arrange for pre-financing of her outgrowers to help them boost their yields. It seemed like both sides were going to benefit immensely. The aggregator required a loan and it would be extremely easy to pay back the loan with the amount of increased yield that she was about to purchase. The farmers were going to have new interest free access to inputs  for their farms. The aggregator was not well acquainted with many of the new outgrowers who she pre-financed but they did sign an MOU with her. At harvest time many of the farmers “side-sold” to another buyer who was paying a higher price. The aggregator lost a lot of prefinanced money and had to delay payment for the product from the farmers who did supply her. In reality, the legal cost – both in actual legal fees as well as time lost from work – of taking several different farmers to court is debilitating to a business and proved to not be cost effective for her. The MOU was there, the farmers defaulted and it was not worth it for her to take legal action. In the next season, she will have to focus more on engaging outgrowers that she knows that she can trust.

Fearing Repercussions and Hiding Difficult Realities

In another example, a newly opened fruit factory contracted its outgrowers to supply fruits according to a schedule in higher volumes than the year before, their business was growing. The MOUs went out to the farmers for their specific volume and the season looked promising. What the factory had not accounted for was some logistical barriers in their production. When these came into effect, fruits started piling up and soon their storage facilities were overwhelmed. When this happened, the agreement had to be breached. The problem was, the factory was intimidated by what was going to happen if all of their outgrowers decided to take legal action against them through their legally binding MOU. Instead of informing the outgrowers and having them leave the fruits on the trees and encouraging them to seek alternative markets, they kept quiet. Trucks full of fruit began arriving at the factory and the factory workers began issuing bogus excuses why the fruits had to be rejected, citing poor fruit quality. Farmers were furious and with the fruits already harvested, it was not easy to find a ready market. Many of the farmers lost vast amounts of fruit and even more farmers lost their trust in the company. Only two farmers took legal action, but this was a case where honesty and a warning that the MOU had to be broken would have been more constructive. If there was more trust between the farmers and the factory, this probably would have happened.

MOUs vs. Trust

In the first case, dishonest business behavior went unpunished because legal costs were too high. In the second case, fear of legal action actually caused the dishonest business behavior. In both cases, there was a business actor that did not trust their business partner – they trusted an MOU. MOUs are useful for agreeing to transact predictable produce volumes. They are capable of specifying what an agreement is between two business partners that trust each other, but it is not capable of formulating the trust between two partners.

Fewer Farms, Bigger Farms

The realities of another food crisis. (Photo Credit: Foreign Policy)

Right now, the world is in the midst of a food crisis.  Some might contend that we never fully recovered from the food crisis of 2008, but what is certain is that food prices are rising.  The reason for the spike is open for debate, but some combination of a growing demand due to population growth, an increase in the frequency of extreme weather events (floods in Pakistan, the Moscow heatwave, etc.), an expanding middle class with a growing taste for meat and dairy, global trade policy, commodity speculation, agribusiness  and ethanol lobbying in developed countries, and other factors are likely to blame.

Global warming was another issue.  Over the last two decades, economists and climatologists have been contemplating the effects of global warming on food production.  The consensus was that, while climate change and the corresponding shift in weather patterns would have an adverse impact on agriculture in certain regions of the world, a rising temperature could actually open up new pockets of arable land.  The one bright spot of climate change was that the increased amount of carbon in the atmosphere would actually improve crop yields.   Unfortunately, that hypothesis proved to be overstated, at best, and quite possibly downright wrong.  It turns out that a warmer world, despite what the computer models may say, is not good for food production.

The amount of research dollars devoted to finding new drought-resistant seed varieties and better, cheaper fertilizers is leaving the world less prepared for the adverse effects of global warming on agriculture production. The success of the Green Revolution beginning in the 1960’s caused food prices to fall year after year for decades.  With the world assuming that the food problem had been solved, the limited number of development dollars went to researching other global problems, name solving public health issues like HIV/AIDS, tuberculosis, and malaria.  Testing new varieties and growing conditions takes time, counted in years, not months.  In response to a problem where time is of the essence, we are not moving fast enough.

The Economist recently had a special report on the feeding the world.  The articles were thought-provoking and alarming.  The precarious situation the world finds itself in should galvanize a stronger response from the developed world, but it doesn’t.  As food prices increase, the people who are hit the hardest are those spending the highest percentage of their annual income on food.  So, for people living in the developed world, a dramatic increase in the price of wheat and maize is a minor dent in their overall spending.  For the rural farmer who is spending 60% of his income on maize, it is the difference between three meals a day and two.  For this reason, the 2008 food price crisis led to riots in some countries and was hardly acknowledged in others.  For the 100 million people driven into extreme poverty as a result of the spike in staple crop prices, the prospect of another food crisis in 2011 is likely terrifying, particularly if they understand the challenges in feeding nine billion people over the next half-century.

The Economist is quite expensive in Kenya, unless you buy an old copy from the street newsstand vendors.  Yesterday I picked up the issue following the one with the special report on food from March 19th, 2011, and perused the letters in response.  One response from Chris Haskins of the House of Lords stood out:

SIR – Regarding the future of food (Special report, February 26th), there are two additional factors to existing and new technology that will raise farm output significantly. Large tractors and combines have transformed agriculture in the developed world, enabling far more land to be cultivated and crops to be harvested at speed, which reduces the loss caused by weather. Sixty years ago my father needed six men to grow 100 acres (40 hectares) of crops. Today my son can farm 1,000 acres with one man.

Agriculture in the developing world could also be transformed by this existing technology, but there needs to be fewer and bigger farms to make use of large equipment and to raise the collateral to invest. That means far fewer rural workers, and controversial social consequences.

New technology, such as satellite mapping, will enable farmers to identify wide variations of soil quality across every field and to adjust their equipment to apply their seeds, fertilisers and chemicals precisely at varying rates, depending on the fertility across the field. This makes great economic and environmental sense.

This is a controversial position, but one with which I happen to agree.  Large-scale commercial farming offers economies of scale that drive down the cost of production through mechanization, irrigation, and the consistent application of GAPs (good agricultural practices).  In northern Ghana, it is difficult to offer mechanization services profitably to smallholder farmers because, frequently, the plots of land are not contiguous, meaning the tractor has to travel longer distances to serve the farmers, increasing fuel costs and adding to the per-acre cost.  Not to mention, smallholder farmers often don’t have the resources to remove all the stumps and stones from their land, which, if run over by a tractor, will destroy it.  The cost of importing replacement parts into the country is high, which is why if you go to northern Ghana, you will see tractors gathering rust on the side of the road.

Zimbabwe was once called the “breadbasket of Africa” due to its massive agricultural output.  The commercial farms operated by the predominantly white settlers were highly efficient, with yields that might rival other parts of the world.  After Robert Mugabe redistributed the land during his controversial land reform program, farm output fell.  Now, Zimbabwe can hardly feed itself, causing many Zimbabweans to migrate into neighboring South Africa to find work.  Say what you will about colonialism, but Zimbabwe’s agricultural prowess was once the envy of Sub-Saharan Africa (SSA).

The last point about Mr. Haskins letter I’d like to address is his call to reduce the number of farms and farmers – a move with “controversial social implications.”  So much money is invested in helping farmers in SSA improve production and increase profits.  FAAB – “farming as a business” – programs are designed to get subsistence farmers to think about their input costs and yields as components of a rudimentary profit-and-loss statement.  Is this really what the subsistence farmer trying to make enough to feed his family really needs, wants, or cares about?

In Ghana, an exasperated colleague lamented the fact that, unlike in other places she’d worked in Africa, including Kenya, Mozambique, and South Africa, farmers in Ghana were lazy.  Instead of transplanting rice by hand, or individual planting soya bean seeds in rows, Ghanaian farmers were content to broadcast the seed, throwing it haphazardly into the soil.  The result is higher seed costs and lower yields.  My Canadian friend and I were listening to her, and after she left, I asked what he thought.  He’s been living in Ghana for the better part of three years, working with the Ministry of Food and Agriculture and living in the rural communities with farmers.  Maybe it isn’t that farmers in Ghana are lazy, but rather that smallholder farmers anywhere, be it in Africa or the rest of the developing world, don’t actually want to be farmers.  They are farmers because they have to be farmers, and farming all they know.   Maybe they would prefer to draw a salary from working on a large-scale commercial farm – a steady salary, unlike the lump sum payment they get for their crop at harvest time.  I don’t know, but it’s a question that is worth debating.

I agree with Mr. Haskins.  Fewer farms and larger farms are the answer.  It is a controversial position because, in the past, laborers on commercial farms have been mistreated, and land ownership is is incredibly important for a family with very few assets.  Yet farmers could still lease the land to large commercial operators and earn income that way.  There are ways around these cultural barriers.  I once asked another colleague how make Ghana rice competitive against the Thai, Vietnamese, and U.S. imports.  “Give me 200,000 acres below the Volta Dam with the full irrigation and three growing seasons, a warehouse in Tema (the port) and I’ll feed all of Accra.” Unfortunately, 200,000 farmers, each with an acre of land, will probably never come close to feeding all of Accra.

Sub-Saharan Africa, 2020.

A Lesson about Statistics in Development from David Simon

David Simon, the creator of the greatest television show ever made, The Wire, is interviewed by Bill Moyers in Guernica magazine.  The topics vary, but one particular answer to a question about the relevance of “facts” in understanding the nature of a problem – or the progress and impact of the solution – resonated with me.

One of the themes of The Wire really was that statistics will always lie. Statistics can be made to say anything. You show me anything that depicts institutional progress in America: school test scores, crime stats, arrest reports, anything that a politician can run on, anything that somebody can get a promotion on, and as soon as you invent that statistical category, fifty people in that institution will be at work trying to figure out a way to make it look as if progress is actually occurring when actually no progress is. I mean, our entire economic structure fell behind the idea that these mortgage-backed securities were actually valuable, and they had absolutely no value. They were toxic. And yet they were being traded and being hurled about, because somebody could make some short-term profit. In the same way that a police commissioner or a deputy commissioner can get promoted, and a major can become a colonel, and an assistant school superintendent can become a school superintendent, if they make it look like the kids are learning and that they’re solving crime. That was a front-row seat for me as a reporter, getting to figure out how once they got done with them the crime stats actually didn’t represent anything.

I have not spent long in the world of development, but I have had a chance to understand the mechanics of this world.  I believe that my own project-  one that has taken an innovative market facilitation approach to agriculture economic development – is making the right moves.  But through conversations with career development workers who have been part of the system for a long time and have seen how the sausage is made at the highest levels, I have found that the same principle largely holds true in the world of aid and development.

Typically, the way it works is that governments allot a certain amount of money to be used for development in countries chosen based on the strategic interest of the donor in the country and the broader region.  Aid is often used as a carrot to gain leverage in a country.  For food aid (much is which is necessary in certain cases), developing countries serve as a repository for food surpluses from the donor country.  The other day someone told me that a certain affluent Asian country (not China) is obligated to purchase rice from other countries as part of a WTO agreement.  This country is self-sufficient in rice and is an exporter itself, and the rice farmers in that country would be very angry if imported rice from other countries was brought in and sold to consumers.  So this country buys rice from other countries, as part of its obligation, and then ships it to developing nations, flooding the local market with cheap, low-cost rice.  In doing so, the local rice farmers become uncompetitive serving the domestic market, and are forced to sell at a loss or switch to another crop.  As the cycle continues, these recipient nations become more dependent on foreign food aid, as opposed to moving in the direction of self-sufficiency.  In addition, the local consumers gain a taste for imported rice, which may or may not be readily available or even well-adapted to local growing conditions.  The end result?  Dependency.

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