Applications for Agribusiness Supply Chains

The global food industry has undergone significant structural changes in recent years that have created opportunities for smallholder farmers in developing nations. The inclusion of these smallholders in agribusiness supply chains offers significant opportunities as well as challenges. ICTs can aid smallholders in taking advantage of opportunities and mitigating some of the challenges, as discussed in this module.

Smallholders in the Global Food Industry: A Complex Relationship

The global food industry, with over US$ 4 trillion in annual retail sales (Gelhar 2009), comprises agribusinesses of varying sizes. The largest are multinational corporations that operate internationally. In this module, “agribusiness” refers to a wide range of private companies:

• Retailers such as supermarkets or convenience stores (Walmart, Carrefour, ITC Choupal Fresh)
• Food processors and manufacturers (Nestlé, Kraft, Unilever)
• Input suppliers who produce fertilizer, seed, pesticide, irrigation equipment, and farm machinery (Bayer, Syngenta, Monsanto).
• Producers that may be smallholder farmers, cooperatives, or corporate farming entities.
• Wholesalers, traders, and other intermediaries in a supply chain that connect retailers or processors to producers (ADM, Bungee, Cargill, Olam).

In recent years, following deregulation of the food industry in many developing nations (Reardon et al. 2009:5) and the lowering of trade barriers in developed ones (World Bank 2008), private, market-driven agribusinesses have replaced state-supported entities. On the demand side, an increasingly urban population worldwide requires food to be delivered farther and farther from the farm; with rising incomes and changing preferences, this population also demands higher levels of food safety, quality, and traceability.

Changes in the informal supply environment have accompanied changes in the broader industry. The entry of large, private, often international agribusinesses from the formal economy has caused fragmented, informal suppliers to consolidate and formalize. To meet supply requirements arising from changing demands, agribusinesses often prefer to source through lead farmers or farmer cooperatives or directly from individual farmers. The alternative—purchasing from wholesale markets—can pose difficulties, be inefficient, and most important, cost more. When sourcing from wholesale markets, agribusinesses have little quality control, face uncertainties in supply and price, and lose the ability to trace products (which consumers increasingly demand).

When farmers are insulated by layers of intermediaries, it is difficult to communicate to farmers what items or quality levels the market demands. Reducing the number of intermediaries (“disintermediation”) allows companies to reduce, deploy their market power more directly to garner lower prices, and improve quality control.

Direct procurement and improvements in production, transport, and supply-chain technologies make it possible to source competitively from vast numbers of suppliers and increase the relative importance of factor costs such as labor and raw materials. Companies looking to economize move production to places where factor costs are lower, which presents an enormous opportunity for farmers in developing countries (World Economic Forum 2009).

“Commercial supply chain”refers to a supply chain in which a private agribusiness is sourcing agricultural produce from farmers or selling products to farmers in accordance with a profit-seeking business model. “Supply chain” typically refers to the set of buy-sell interactions as goods flow from raw materials through production to the final retailer where consumers can buy them. “Value chain” generally refers to the whole ecosystem of players involved moving from the retailer backward to the producer. These terms are often used interchangeably, and a special distinction is not made in this module. Such chains can be of various types (see figure 10.1).

Although participation in commercial supply chains presents an opportunity for smallholders to attain higher incomes (between 10 and 100 percent; see World Bank 2008:127) and reduce poverty, these outcomes are not certain unless other important factors are addressed. For example, actual income changes depend on the crop, the time needed for farmers to learn to produce the crop more efficiently, and the quality and other standards required. Changes in income may not be sustainable unless accompanied by improved practices such as postharvest handling or risk management

INNOVATIVE PRACTICE SUMMARY
Virtual City’s AgriManagr Builds Better Supply-Chain Links with Farmers

Virtual City is a private Kenyan technology startup founded by entrepreneur John Waibochi in 2000.⁶ The company had its beginnings in e-commerce but shifted its focus to developing software applications that manage supply chains, knowledge, and customer relationships. In response to a perceived market opportunity, Virtual City developed its AgriManagr software.

AgriManagr Builds Trust Among Supply-Chain Partners

The AgriManagr software is used by collection centers to manage the process of buying agricultural produce from farmers (figure 10.5). The application runs on mobile phones or PDAs.

Figure 1 The AgriManagr System