Food and agricultural systems in developing countries and economies-in-transition are undergoing profound changes. Along with rising per capita incomes, technological advances, trade liberalization and urbanization, the role of the private sector is expanding, smallholder farming is becoming increasingly commercialized, and agribusiness and agro-industry are playing an ever more important role in socio-economic development. Food retailers and manufacturers are relying increasingly on specialized procurement channels and dedicated wholesalers, and setting new standards for food quality and safety. Food is being "pulled" into formal sector retail outlets, such as supermarkets, rather than grown for sale in local markets.
An FAO report to the Committee on Agriculture (COAG) says "the changes in agrifood systems have significant implications for growth, poverty and food security". On the positive side, agribusiness is responding to strong consumer demand for high-value commodities, processed products, and pre-prepared foods. At the same time, expanding markets offer farmers new value-addition opportunities, compared to primary production, and exporters and agro-processing enterprises are furnishing crucial inputs and services to the farm sector.
But, FAO says, benefits are not automatic and will not be shared by all. Particularly at risk are small scale farmers, faced with increasingly strict agro-industry standards and contractual arrangements, and small scale traders, processors, wholesale markets and retailers, who must compete with large food suppliers and manufacturers. Governments, therefore, need to create enabling conditions for agribusiness investment that also enhance the livelihoods of rural and urban communities that might be disadvantaged.
Despite policy reforms, the business environment in many developing countries is still far from conducive to agribusiness and agro-industries. Many countries continue to have complicated business regulations, ineffective enforcement of property rights, inadequate commercial services and infrastructure, and weak information systems. Among priorities for policy reform and institutional strengthening, FAO identifies legal and regulatory frameworks that define rules and determine rights and obligations with respect to resources, assets, and business operations.
A key challenge, FAO says, is to address trade-offs between agro-industry development and poverty and food security objectives: "Rapid development could displace small farmers, processors, stores, and traders who depend on traditional marketing and distribution channels at a pace which does not allow enough time to create alternative opportunities". Action is needed to expand non-farm rural economic activities and to compensate those displaced from agriculture by increased commercialization and industrialization. Governments also need to review institutional mandates - particularly of ministries of agriculture - for influencing, regulating and supporting private investment in agribusiness and agro-industry.
Many governments have launched programmes to support development of specific agro-industries and value chains by strengthening business linkages, reducing transactions costs and improving market intelligence. In China, for instance, FAO is helping the Ministry of Agriculture develop sweet sorghum production and transfer it for use in livestock farming and processing industries. FAO identifies several strategies and interventions to ensure that benefits are extended to smallholder farmers and small agro-enterprises. For example: public-private partnership in research and dissemination of research results can improve technologies available to the small scale sector, while capacity building can help farmers meet new quality and safety requirements.
However, industry standards also place small scale producers and agro-processors at a disadvantage because these suppliers typically cannot produce large volumes of homogeneous, high-value produce. Even when they can, agribusiness firms often see extending traceability and certification systems to small holders as a burden. FAO says governments can play a role in optimizing the impacts and improving the fairness of industry standards and requirements - for example, by investing in quality-testing infrastructure, strengthening food safety agencies, and building public-private alliances to strengthen participation by small-scale producers.
"Coherent vision". The trend toward increasing concentration, vertical coordination and contracting in agriculture worldwide will almost certainly continue, says the FAO report. Sooner or later, governments will need to rebalance agricultural policies, institutions and services to focus on agribusiness and agro-industry development. But few governments have a coherent vision for the sector, and coping with the complex challenges it creates exceeds the capacity of most public sector agencies.
To support agro-industries and value chains, options include linking small farmers with commercial farmers, exporters or agro-processing firms in long-term relationships, initiatives that improve the capacity of small farmers and small agro-enterprises to participate in chains for high value products, and innovative mechanisms to link public funding with private sector resources.
The report says FAO has a potential role to play in helping developing countries respond to the challenges. It proposes strengthening of FAO's expertise and capacity in the sector, action to support agro-industry and value chain programmes, joint activities with UNIDO and other UN agencies, and the organization of a Global Agro-Industries Forum to review issues, clarify strategies and build partnerships.
Read the full FAO report to COAG on Challenges of agribusiness and agro-industries development (PDF, 121K)
See also in Spotlight: Environment and agriculture, Reconciling livestock and environment, and Coping with water scarcity
Get the full list of COAG documents
Published April 2007