Strength of Relationship 4/5
- Strong relationship between driver and outcome variables
- Results are consistent across analytical models used
- Few limitations regarding sample or indicator
Contrary to our initial perception, our data shows that the
We believe that this can be attributed to four main reasons:
Nature of the market Enabling environment Scale and organization Positioning to farmers
Keep reading to find out more.
Understanding the crop and value chain dynamics on investment
A widely-shared perception within our sector, and a strong hypothesis we had when developing our first Learning Framework in 2019, is that costs to serve smallholder farmers were higher in cash crops and/or tight value chains than in food crops and/or loose value chains. We expected
Both the mean and median service delivery cost per farmer is over 250% higher in food crops than in cash crops, and over 300% higher in loose than in tight value chains. These differences hold when taking into account the modelled impacts of all other drivers: the triangulation of results using machine learning shows that with all else held equal, models active in food crops or loose value chains have a higher-than-average service delivery cost per farmer, with the opposite being seen in cash crop or tight value chains.
Link to other outcomes
When looking at the relationship between crop type (food/cash) and value chain organization (loose/tight), and the other two outcomes that we analyze in Insights Hub (Direct Cost Recovery and Farmer Value Created), we find that:
Direct Cost Recovery, fascinatingly, the much higher cost (or investment) per farmer in food crops and loose value chains are mirrored by higher cost recovery percentages in those same value chains. In food crops, median and mean cost recovery are 78% and 69%, respectively, compared to 7% and 30% in cash crops, while for loose versus tight value chains the corresponding figures are 74% and 63% versus 7% and 32%, respectively. Click here for more details on these analyses
Farmer Value Created, we find no appreciable differences between food versus cash, or loose versus tight value chains. Click here, for more details these analyses
Diving deeper: what do we think explains these results?
From our experiences analyzing and supporting a wide range of companies, we believe that the higher service delivery cost per farmer and higher direct cost recovery in food versus cash crops and loose versus tight value chains, are explained by the following reasons:
Nature of the market– More fragmented and competitive markets require more investments into farmer services to secure supply. Enabling environment– Less availability of goods and services provided by other actors – such as governments – requires heavier investments into farmer services by the private sector in food crops and loose value chains. Scale and organization– Better organization of farmers and businesses allow for more efficient service delivery in cash crops and tight value chains. Positioning to farmers– Companies in food crops or loose value chains are often smaller in size with less geographic sourcing diversification. This creates a closer relationship to and dependence on farmers in a particular community and incentives higher investments in these farmers and communities.
Clicking on each of the preceding reasons provides a longer overview of our thinking, including more supporting qualitative and quantitative insights.
Implications: what does this mean for you?
Based on our findings till date on this topic, we see the following implications for different audiences:
- Benchmark your current service delivery cost per farmer against comparable peers. Are you over- or under-investing?
- Reflect on whether you are operating in a tight or loose value chain, and how this influences the way you could strengthen your farmer base and, therefore, grow your company.
- If you are operating in a loose value chain and the context (incl. land ownership), crop and value chain allow you to consider a block chain model, read examples of block farm models that we have analyzed.
- In case you are currently investing relatively little per farmer, consider whether you can increase this investment in a way that can demonstrably create value for farmers as well as for you.
- Consider using or building your data on farmer and/or farmer organizations to allow you to segment these, and tailor your interventions (and associated service delivery cost per farmer) to the specific needs and capabilities of each segment. These will help you manage your costs where the upside potential is limited, while allowing you to increase the service delivery cost per farmer, where the upside is larger.
- As the investment needs for inclusive business models in food chains are higher, your investments are needed. These can be related to food security, which is further under threat due to climate change.
- There is a perception within the sector that food crops (without a global market) and loose value chains (with no or less contractual offtake agreements with farmers) are riskier for investors. Based on the insights in this section, as well as the parallel section on
Direct Cost Recovery, we believe these perceptions are not fully justified, and you might want to consider increasing your footprint in food crops and/or loose value chains.
- Use the Data Explorer to benchmark the companies currently in your portfolio, and work with your investees in understanding (and potentially addressing) those differences for improved financial and impact performance. Reach out to us so we can conduct a more detailed portfolio analysis of your investees and/or pipeline and create comparable insights and identify relevant investment opportunities and risks.
- Acknowledge the key role the private sector plays and can play to improve smallholder farmer markets and think about possibilities to work together. How can you support the private sector in making their investments in smallholder farmers to be larger, smarter and more impactful? For instance, through targeted subsidies, relevant research, supportive regulatory environments and complementary interventions.
- Continue to (financially) support the private sector to develop and refine inclusive business models that are commercially viable and scalable, provided there is a keen interest from the companies themselves and a willingness to invest resources (time and finance)
- Work with private sector companies to analyze how the inclusivity of their business models can be further increased. Subsidies might be required in the start-up phase in an underdeveloped area or to promote female and young farmers.
- Smaller companies (often involved in food crops in looser value chains) that are based within their communities have the potential to create a lot of value for the farmers and form a foundation for more inclusive and empowered local economies, where there are local opportunities not only for farming, but also for the various goods and services surrounding farming.
- Recognize that service delivery in food crops can be more complex and expensive than for cash crops, while food crops have important food security and local economic development considerations. Consider targeted interventions to support and develop in particular these models.
- Understanding the market gaps and most-impactful entry points, based on a more nuanced understanding of what it takes to serve farmers in food and loose value chains. This can allow you to make smarter decisions on the type of providers to support, for what type of activities and with how much subsidy (e.g., support scale up of private sector providers working in loose value chains to drive down their costs, improve direct cost recovery and become more attractive for commercial funders), or even reconsider other market-level funding activities that might be more efficient and effective (e.g. working with local government to provide a minimum but consistent level of services whose cost can be absorbed by government budgets in the long term).
- Benchmark and better manage the performance of your grantees. Our insights can also help inform M&E requirements. Consider using some of the same metrics we use in a standardized way to allow for more benchmarking in the future
- Consider also focusing on food crops, and not just cash crops. Signs are that this pays off in terms of reaching farmers with relatively low income levels, and the impact made on farmer level.
- Assess why direct cost recovery from offered services is low. Are the services offered relevant? If the market is still too underdeveloped or the farmers need support to be ready for receiving certain services from the private sector, consider how you can provide such support.
- Consider the advantages loose value chains can have when designing technical assistance. There are more solutions than just having off take secured via tight value chains.
- We believe there is a lot of potential for learning as companies most frequently engage peers within their own value chains. We believe that support organizations, such as ourselves, can play an active role in showcasing and operationalizing learnings across different types of value chains, and bringing companies into contact with others that they might not normally meet.
Reflections on data limitations and next steps
The Insights Hub is a living document that we are constantly updating with new data, new analysis, validation by our partners, and more. For the results on this page, we would like to emphasize the following:
Major caveats and limitations of our current approach
Although we believe our analyses and insights offer a solid set of insights that can already be used to inform decision-making, there are a number of caveats that we wish to be open about.
A small number of block farm models are outliers both conceptually and practically Absolute service delivery cost per farmer may not be an optimal way of comparing across value chains The classification of models into either food or cash, and loose or tight, is partially subjective
Next steps that we have planned to update these findings in the near future
Incorporation of other service delivery cost per farmer lenses Organize learning exchanges across food and cash crops, and loose and tight value chains Revisit the categorization of food/cash and loose/tight Develop a deep dive analysis into block farms
Suggestions for additional research by our peers and partners
More research into how donor funding is allocated across different types of value chains