Private Investment in Agriculture: Why it's essential, and what's needed | Sustainability

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Massive investment in agriculture is desperately needed to help fix the broken food system. Private sector investment can play a vital role in delivering inclusive economic growth, environmental sustainability and poverty reduction. However, in order to do so, it must be adequately regulated and should adhere to some key principles, such as focusing on local food markets, working with producer organisations and respecting the rights of small-scale producers, workers and communities.
  OXFAM DISCUSSION PAPER 25 SEPTEMBER 2012 Oxfam Discussion Papers   Oxfam Discussion Papers are written to contribute to public debate and to invite feedback on devel- opment and humanitarian policy issues. They are ‘work in progress‘ documents, and do not nece s-sarily constitute final publications or reflect Oxfam policy positions. The views and recommendations expressed are those of the author and not necessarily those of Oxfam. For more information, or to comment on this paper, email the authors at and   PRIVATE INVESTMENT IN AGRICULTURE Why it‘s essential, and what‘s needed   By Erinch Sahan and Monique Mikhail Leyla Kayere, 76, in Mulanje, Malawi, said ―we pool our labour to cultivate large pieces of land. That way we can grow more and attract better cu stomers.‖  (Abbie Trayler-Smith/Oxfam GB)   Massive investment in agriculture is desperately needed to help fix the broken food system. Private sector investment can play a vital role in delivering inclusive economic growth, environmental sustainability and poverty reduction. However, in order to do so, it must be adequately regulated and should adhere to some key principles, such as focusing on local food markets, working with producer organisations and respecting the rights of small-scale producers, workers and communities.  2 Private Investment in Agriculture: Why it‘s essential, and what‘s needed   WHY INVESTMENT IN  AGRICULTURE IS ESSENTIAL The food system is under strain from intensifying pressures. These pressures come from a changing climate, ecological degradation, population growth, rising energy prices, rising demand for meat and dairy products, and competition for land. What global leaders — in governments and business — are beginning to understand is a truth that small-scale producers have understood all along: investment is needed urgently, and on a significant scale. This investment needs to come from both the public and the private sectors. Each has a critical role to play. While support for agriculture (particularly large-scale support) in developed countries has continued at significant levels, in developing countries there has been under-investment in agriculture by both the public and private sectors. 1  There is a need to increase investment that not only promotes production in a way that ‗does no harm‘, but in a way that ‗does more good‘. What must be achieved through ‗positive agricultural investment‘ is inclusive economic growth, environmental sustainability and long-term poverty reduction. Private investment of all forms has the potential to make a positive impact. However, investing in small-scale producers, particularly women producers, is especially important. This is because the 500 million small farms in developing countries support almost two billion people, which is nearly one third of the global population. 2  Yet it is these very same small-scale producers who are the most food insecure — due to lack of access to the markets, land, finance, infrastructure and technologies enjoyed by large farms. 3  There is, therefore, an opportunity for public and private investment to make a substantial positive impact on the livelihoods of small-scale food producers. Such investment, when delivered inclusively and sustainably, can be catalytic in driving innovation, job creation, and in generating inclusive economic growth. 4  Indeed, growth in small-scale agriculture has twice the effect on the poorest as growth in other sectors. 5  It is important to note that the majority of private investment in small-scale agriculture is made by small-scale producers in their businesses.  6  The investments of small-scale producers should be complemented by investments by national governments, donor governments, international financial institutions, research institutions and private sector actors. There are key roles for public investment, particularly in providing services that support the poorest and least ‗market ready‘ small -scale food producers, with whom companies currently have little incentive to engage. The public sector also has a critical function: to set the right policies to regulate investment such that it ‗does no harm‘, and the right inc entives to encourage investment that ‗does more good‘. This is why the private sector cannot replace the public sector in agriculture. Yet, while the lack of public investment is striking and is a key barrier to creating a just food system, agriculture is inherently a private sector endeavour. Thus the lack of private investment, both large and small, is also cause for alarm, and is the focus of this discussion paper.  Private Investmen t in Agriculture: Why it‘s essential, and what‘s needed  3 PRINCIPLES FOR POSITIVE INVESTMENT IN SMALL-SCALE  AGRICULTURE Private investment in small-scale producers can be particularly positive, but only when ethical and sustainable business principles are followed. The fair trade movement for instance has demonstrated that it can be socially and economically beneficial to invest in small-scale producers in a positive way. Often there is a strong business case for following such principles; in other situations, they require some effort and cost by investors to ensure small-scale producers, workers and communities benefit from the investment. This includes confirming that investments do no harm, principally by ensuring respect for human rights. It is not philanthropy that makes investments positive, but the principles inherent in the core business model. Oxfam itself is an investor who has tried to make small-scale producers a focus of many of its investments. Government investment into small-scale producers is also key to both attracting more private investment in small-scale agriculture as well as improving the impact of any such investment. From Oxf  am‘s work aimed at encouraging private sector investment that supports small-scale producers around the world, certain principles have emerged as essential to securing a positive investment impact. Some of these are explored below, starting with two points on crops and market selection: staple food crops, and local markets. 7   Invest in staple food crops ã  Demand for food is growing across developing countries ã  Small-scale producers can improve incomes by focusing on food crops ã  Diversified cropping leaves small-scale producers less vulnerable The first step towards achieving inclusive and sustainable investment in agriculture is selecting the right markets. Demand for food is growing across developing countries. This market growth provides a great opportunity for small-scale producers to increase their incomes. In Africa, the consumption of food staples (cereals, roots and tubers, and traditional livestock products) accounts for the greater part of agricultural output, and by 2015 consumption is projected to reach double 2006 levels. 9  This level of growth in market potential is unmatched by any other sector; modelling by the International Food Policy Research Institute confirms that small-scale producers could double or triple their incomes if they were to capture a larger share of the growth in staple food markets. 10  The alternative to growing staple food crops is producing higher value crops (often for export), such as cotton. This approach has been given much emphasis by development providers over the past few decades. It has been shown to raise the incomes of some small-scale producers in higher-income countries in Asia and Latin America, where they were able to engage in markets on fair terms. 11  Unfortunately, this has rarely been the case for small-scale producers in many countries, and has generally helped only those small-scale producers who are already better off. For instance, in Ethiopia, studies have shown that focusing on improving productivity of food staples has a greater impact on poverty than increasing the production of In Tanzania, Oxfam is  partnering with Katani Ltd, a sisal processing and marketing company seeking to expand its supply chain by linking with more small-scale  producers. Katani purchases  processed sisal, and  provides training and loans to rural micro-enterprises that do the processing. Its investment allows the micro-enterprises to buy  processing machines and sisal from local producers. This seeks to increase the incomes of 16,500 small-scale producers by 25 per cent. 8     4 Private Investment in Agriculture: Why it‘s essential, and what‘s needed   high-value products. 12  Private investment that focuses on the production of food staples often provides the best opportunities for reducing poverty and improving food security in less developed regions, particularly in Africa. Further, with climate change already increasing weather volatility and sometimes decimating small- scale producers‘ harvests, it is essential that small-scale producers diversify their production rather than focusing solely on a single crop. Diversification leaves them less vulnerable to changes in local weather patterns or pest infestations that may decrease yields in a particular crop. It also provides a buffer when low harvests caused by droughts or floods elsewhere result in massive food price spikes. For example, growing ‗orphan crops‘ 14  like tef, the staple grain in Ethiopia, can bolster resilience. Tef is highly valued in communities, helps retain biodiversity, and often shows higher productivity on marginal lands. 15   Invest for local and regional markets ã  Most small-scale producers cannot access international markets ã  Dependence on international markets is a danger for small-scale producers ã  Local and regional markets are growing Not only is it essential to support the production of staple food crops, it is important to value local and regional markets, as these are the markets upon which most small-scale producers depend. International markets can be a good source of income, skills and information for small-scale producers, and have been linked to reductions in poverty in producer communities. 17  However, because of factors such as poor logistics and the large up-front investments needed to meet quality requirements, these international markets are beyond the reach of the vast majority of small-scale producers. 18  The current trend of bringing small-scale producers into existing value chains generally involves only the top 2  – 10 per cent of small-scale producers. Most producers are marginalized and excluded from formal markets; pastoralists in arid regions are particularly alienated due to the nature of their production. For example, just 2 per cent of maize producers in southern Africa dominate the maize market. 19  Even when small-scale producers can access international markets, dependence on them can be a serious concern, largely because such producers lack the financial buffers necessary to withstand changes in weather, market or financial conditions that may suddenly shut them out of the export value chain. It is, therefore, critical that any investments that bring small-scale producers into international markets allow them to diversify their income. Further, local and regional markets for food staples, livestock and horticulture are all growing across the developing world. 20  In Africa, the value of domestic and regional markets for food staples alone is worth more than $50bn annually. This is considerably more than the value of total international agricultural exports, and will grow along with  Africa‘s population and economy. 21  Small-scale producers are typically in a better position to compete in these markets, partly because of the high logistical costs that make it expensive to import agricultural products. 22   Nigerian farmers can  produce and deliver soybeans to Ibadan, a local city, at 62 per cent of the cost of imported soybeans 13  Plenty Foods, a Sri Lankan company, adapted its business model to work with  producer organisations. This allowed its supply base to become stronger and more reliable. The company decided to shift from engaging directly with individual producers to working with farmers’ groups. Plenty Foods facilitated access to finance, insurance and seeds, and increased the number of farmers it reached. These changes also stimulated local economic development by building areas of expertise in service provision within communities. 16   
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