:: World Food Day/TeleFood 2006 - Information Note
Investing in agriculture for food security
The whole world will profit
Agriculture may have become a minor player in many industrialized economies, but it must play a starring role on the world stage if we are to bring down the curtain on hunger.
Yet foreign aid for agriculture and rural development has continued to decline. From a total of over US$9 billion per year in the early 1980s, it fell to less than US$5 billion in the late 1990s. Meanwhile, an estimated 854 million people around the world remain undernourished.
Only investment in agriculture – together with support for education and health – will turn this situation around.
Most of the world’s farmers are small-scale farmers. As a group, they are the biggest investors in agriculture. They also tend to have inadequate or precarious access to food themselves. If they can make a profit with their farming, they can feed their families throughout the year and reinvest in their farms by purchasing fertilizer, better quality seed and basic equipment.
Small producers face many obstacles beyond their control: lack of credit, insecure land tenure, poor transport, low prices and poorly developed business relations with agribusinesses – to say nothing of natural factors such as drought, flood, pests and disease.
Agribusiness is the umbrella term for the local, national or international companies that handle or transform the farm produce as it is passed up the long supply chain to the consumer. These businesses typically invest their own capital in transportation, processing, wholesaling and retailing, selling commodities such as rice and wheat, high-value crops like vegetables and niche products such as cut flowers. Supermarkets are becoming the biggest players in national and regional food supply chains, setting grades and standards and even making cross-border supply chains work.
If the supply chain works well with fair returns on investment for everyone, the first link – the farmer – earns enough money to feed his or her family and to re-invest. Employment created by the many businesses in the supply chain enables still more people to live a decent life. Hunger declines and quality of life improves.
However agribusinesses in developing countries face problems: lack of good roads, railways and market infrastructure, absence of recognised grades and standards, weak legal structures for enforcing contracts, and the practical difficulty in developing business arrangements with large numbers of small-scale farmers.
A new model for cooperation between the public and private sectors in rural development is evolving. The model includes new ways to (1) bring together producers and agribusiness, (2) establish and enforce grades and standards, (3) improve the investment climate for agriculture, and (4) provide essential public goods such as rural infrastructure.
One major problem for processors and traders is getting enough quality farm produce in the first place. In this, the public sector can help by promoting cooperatives and "outgrower" schemes, both of which can grow crops or raise livestock to order. Cooperatives are already important players in agriculture. The public sector can support them with legal safeguards, management and business training, and by encouraging the private sector to assist cooperatives in areas such as market information and production technologies. Outgrower schemes – subcontracting arrangements in agribusiness – are enjoying a revival. Companies often provide technical assistance, materials and/or financing to local farmers to help them grow a particular product that the company agrees to purchase at a later date. Outgrower schemes can create local employment and improve farmer incomes.
Governments need to enact and enforce rules and regulations that create a safe and predictable environment for private investors. Take grades and standards, for example. Buyers and consumers of produce – in both developed and developing countries – are increasingly demanding high-quality food produced to rigorous standards of size, colour and shape. The more detailed and widely-known the standards are, the easier it is for all the players in the sector to conform.
Any person or business with money to invest, including a smallholder, must decide where to invest the money. If returns on investment are better in another sector – such as land speculation or a small business in town – then an investor will logically put his or her money there.
Public policy and public investment can create an attractive climate to make agriculture a good investment – one where there is good governance and transparent public administration, where there is macroeconomic discipline and stability, and where there is political stability. On the other hand, cumbersome tax systems coupled with inefficient or corrupt tax administrations are amongst the greatest obstacles to investment and entrepreneurship. Lack of support for rural finance, venture capital and microfinance starve agribusinesses of the nourishment they need to flourish.
Labour markets, land tenure security, and food safety are the responsibility of government and are critical areas examined by would-be investors, both domestic and international. If they are weak, or if they are not clear and fair, investors will go elsewhere or invest in sectors judged less risky than agriculture.
Investment in infrastructure in rural areas, especially in water, roads, power and communications, has a crucial role in kindling agricultural growth. If countries get these conditions right, dramatic benefits to agriculture and poor rural households can be expected.
The public sector in many parts of the developing world has been slow to respond to the changes that globalization has brought to markets. Investment in building the capacity of governments to help their small farmers and to encourage private investors is money well spent.