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Subsidies Without a Value Chain Formula is a Flop

Source: Thomson Reuters Foundation - Wed, 7 Nov 2012 11:12 AM
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Investing money on farm subsidies for smallholder farmers may not have any meaningful impact, if the donor agency does not develop a proper value chain for the expected farm produce beforehand.

According to David Ruchiu, an agricultural economist, donors are most likely to waste their money if they invest in smallholder farmers without understanding social dynamics of the communities, and without analysing potential enterprises within the farming units. This, he said has led to collapse of several programs most of them operated by governments.

“It is a tricky affair. This is because the smallholder farmers are socially oriented, and for that reason they need social solutions to their problems. On the contrary, funding is mainly an investment solution. Yet many funders are not aware that they must first invest in understanding the social dynamics of the beneficiaries,” said Ruchiu, also the head of Farm Concern International  – Sub-Saharan Africa region.

The orgnisation is a Non-governmental organisation that strengthens agricultural trade and enterprise among young farmers.

His views are shared by Gary Toenniessen, the managing director for Foundation Initiatives at the Rockefeller Foundation, a donor agency.

“The biggest mistake is to give subsidies as charity, where we give for example seeds to farmers instead of creating a market or a seed delivery chain that is sustainable. Sometimes we do it simultaneously, where we are trying to create a market say for seed, and at the same time another donor is giving seeds free of charge, thus destroying the market. We cannot compete with a give-away project, which is apparently not sustainable,” said Toenniessen.

He said that in case of giving subsidies to farmers, then it must be ‘a smart subsidy. “A smart subsidy is a subsidy that builds the market, rather than destroys the market,” he said.

In the same vein, Jane Karuku, the President of the African Green Revolution Alliance (AGRA) observes that subsistence farming should not be seen as an acceptable way of life. Instead, governments and the private sector organisations must invest in the development of agribusiness – which in turn completes the value chain for sustainability.

She shared views that smallholders can increase their income only if they are better integrated into competitive markets and have post-harvest opportunities to add value to their produce. Yet, the value added produce can only make sense if there is ready market.

Within the Sub-Saharan Africa region, Malawi can be cited as a successful example, where donor agencies, through the government, have managed to triple food productivity by offering farmers direct subsidies on farm inputs.

However, the African Development Bank reports that there might be a problem in terms of sustaining the farm input subsidy programme which started in 2005.

“As such, the program has a similar effect to a consumption subsidy where there is a clear welfare gain in terms of food security but without a means to pay for it,” says AfDB in a brief known as ‘Towards Sustaining Malawi’s Farm Input Subsidy Program’.

According to the document, the current challenge for the Government of Malawi is how to sustain the subsidy programme in terms of meeting the foreign exchange and fiscal requirements over the short to medium term in order to maintain the input intake and increase productivity.

“As it stands, the farm input subsidy program does not have a mechanism either to recoup the program cost or replenish the foreign exchange that it consumes,” reads the brief.

According to the experts at the Arusha forum, there is therefore a need to complete a value chain, where farmers can find a way of generating income from the would-be subsidy programs.

“Just as key leaders have suggested in this forum, I agree with them that we should stop thinking of agriculture as a development project, and start thinking of it as a business which employs millions of small scale farmers,” said Toenniessen.

He observed that one of the most important things is for the governments to create policies that will enable private institutions to serve small scale farmers better, and in some cases to form partnerships.

However, a group of smallholder farmers in Kenya have overgrown the need for subsidy or charity by investing in simple and locally available technologies, thus creating the value chain for the produce.

“Our group is known as Operation Mwolyo Out. Mwolyo in the Akamba community of Eastern Kenya means food aid,” said Bishop Titus Masika, the head of the program and a church leader of a local church known as Christian Impact Mission.

Just almost three years, the community which perpetually depended on food aid due to the perennial droughts in the semi-arid area has become food secure, and they are now exporting food to the capital city Nairobi and high value horticultural produce to the UK market.

“Depending on free things had made us slaves who could only survive on donor assisted programmes. But since the year 2010 when we met as a group of agricultural and marketing experts from this region, we managed to identify the major problems affecting our people, and how to solve them using local solutions,” said Masika.

‘Operation Mwolyo Out’ has a membership of 3000 small scale farmers from Yatta location, where the programme supports farming on just one acre of land.

Elsewhere, Ruchiu gives an example of the pre-independence British leaders in East Aftica, who managed to built a cash crop economy within countries and regions using smallholder farmers.

“Farmers used to grow crops for a market that was controlled by colonial authorities, and this was sustainable because the value chain was complete,” he said. “By the time of independence, we inherited a country where smallholder farmers were already making some little income from tea, coffee, pyrethrum among others,” he added.

He further refers to the dairy industry in Central Kenya, where there is investment that focuses on value chain. “In this area, banks have invested in smallholder farmers in conjunction with milk processing companies, so that farmers can borrow loans in form of dairy cows, and sell the milk to the factories to repay the loan,” he said.

To Ruchiu, such a method of investment will be more sustainable than when farmers are given cows free of charge.

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