Let’s say that investing in agriculture and particularly in agribusinesses that source from smallholder farmers is not a walk in the park. If it were, investors would be putting their money there instead of investing in infrastructure or renewable energy. However, the business case seems quite straightforward: the global population is going to increase by around 2 billion people in the next 30 years and the arable land and agriculture labour force are not going to increase. So, what do we need to do if we want to feed the world and make smallholder agriculture more efficient and worth investing into? The answer is: we need to better understand current and future challenges, the opportunities we need to capitalise on and identify the evidence gaps we need to address to reduce the perceived risk of investing in smallholder agribusinesses.
During the CASA programme’s inception phase, we conducted a survey of 25 investors and investing support stakeholders. We interviewed a wide range of impact investors, development finance institutions, commercial banks, donors and even intergovernmental organisations to get a full picture of the key constraints, opportunities and evidence needs for promoting investments in agribusinesses and smallholder farmers globally.
The three top constraints we identified in the survey are:
- There is a limited number of “investable” agribusinesses for the amount of funds available;
- Smallholder farmers have lower productivity levels than bigger farmers, which makes them less competitive; and
- There are numerous gaps in infrastructure and value chains, which present a challenge to commercialisation.
The three main opportunities that could contribute to promoting additional investments in smallholder agribusinesses are:
- Investing in agriculture support services (e.g. irrigation) and improving infrastructure, which can benefit the agriculture sector and have less intrinsic risks than direct investments in agriculture;
- Incubating and supporting early stage businesses with donor funding and technical assistance to increase the pipeline of investable agribusinesses; and
- Supporting shareholder services like aggregation and mechanisation initiatives to de-risk investments and improve efficiencies.
The main evidence gaps identified through the survey are:
- Need for case studies and examples of profitable and impactful business models that can be replicated in other geographies and value chains;
- Need to develop a map of stakeholders, investments and potential investees per country, which would help reduce the time and resource needs for assessing new investment opportunities; and
- Crop and country specific data on productivity and impact, which would also help assess investment opportunities.
Despite the widespread agreement on the key issues, we also identified divergent opinions, like: inappropriately applied grants and donor subsidies create uneven competition for commercial investors and can harm value chains, while less commercial investors emphasised the importance of these subsidies for de-risking their investments. There was agreement among investors that technical assistance should be used appropriately and not to finance operations, while this observation was not mentioned by investment support stakeholders. Additionally, having a minimum ticket size was mentioned by investors as a critical factor, while this was not such a priority for investment support stakeholders.
“inappropriately applied grants and donor subsidies create uneven competition for commercial investors and can harm value chains”
One of the main priorities emerged from this survey, and with the aim of achieving additionality of existing investments, would be to produce a map of investors, types of investment and support service in specific countries, as well as a list of investable agribusinesses. This resource could potentially be co-financed and shared by investors targeting smallholder agribusinesses, which would help them reduce the time and cost needed to identify direct and indirect investment opportunities. New partnerships with on-the-ground networks combined with technical assistance, incubators, and grant funding would also help reduce some of the current risks related to investing in smallholder farmers and agribusiness.
These findings confirm our assumption that investing in smallholder agribusinesses is not a walk in the park, but it is also not a walk in the unexplored jungle. I would say that, to some extent, it is like walking in Times Square blindfolded without knowing that everyone else is blindfolded too. By cooperating and walking together, investors and investment support stakeholders will be able to better find a way to de-risk their investments without bumping into each other. In this way, they will also contribute to making agriculture more efficient and ready to feed the 2 more billion people that are to come.
For more information about the findings of the survey, read our Research Brief.
Commercial Agriculture for Smallholders and Agribusiness (CASA) is a flagship programme financed by the UK Department for International Development (DFID), which seeks to increase economic opportunities for smallholders to step and trade into growing commercial markets. The programme aims to increase investments in agribusinesses which source from smallholder farmers and to generate new evidence and research that amplifies the case for doing business with smallholders.