The following is a conversation between Vikki Tam, Head of the Social Impact Practice at Bain & Company, and Denver Frederick, the Host of the Business of Giving.
Denver: In order to feed and employ the fastest growing population in the world, a new approach is needed for agricultural development in Africa. This has been a focus of Bain & Company who recently came out with a report titled “How Farmer-Allied Intermediaries Can Transform Africa’s Food Systems.” And here to discuss it is Vikki Tam, the Co-Author of this report and the Leader of Bain Social Impact Practice.
Welcome to The Business of Giving, Vikki!
Vikki: Hi, Denver! It’s great to be here. Thank you for having me.
Denver: My pleasure! So how serious is food insecurity in Africa compared to developed markets, Vikki?
Vikki: Very serious. There is a food security index, and what you see in Sub-Saharan Africa is about a score 40/100, and that’s actually half of the level that you see in more developed markets such as North America. So you can see that there’s a huge gap between Sub-Saharan Africa and the developed world. But I think it’s also helpful to define what food security actually means. There are three dimensions to food security: the availability of food, and that includes how widely, how efficiently food is distributed; there’s the affordability of food; then there’s also the safety and nutritional quality of food.
So when we say that there is a food insecurity problem in Africa, we’re referring to all of those three dimensions, and all of those three dimensions have actually been exacerbated by the recent COVID crisis.
Farmer-allied behaviors are intentional… those farmer-allied behaviors are what is going to be crucial to really tackling the poverty problems we see in rural Sub-Saharan Africa, while providing more nutritious, more affordable foods to the growing populations of Africa.
Denver: Oh, I bet they have. A farmer-allied intermediary, and that’s the subject of this report, it’s a different kind of middleman. Tell us what it is and how it works.
Vikki: Well, let me start again by also defining what a farmer-allied intermediary means. It’s a bit of a new term in the sector, I would say, although the activities, the behaviors of the firms that we talk about here are not necessarily new. A farmer-allied intermediary is really a firm that sits in the middle of these food supply chains. They could be a processor, an aggregator, a vertically-integrated brand. They strategically source from commercially smallholder farmers, and they do so in a way that actually strengthens their capacity, helps them realize their production potential, and enhance their livelihoods, and importantly, connect them to markets.
Farmer-allied behaviors are intentional, and so we landed on this term. We actually toyed with a different terminology before and ultimately decided that calling them “farmer-allied intermediaries” is actually the most accurate because those farmer-allied behaviors are what is going to be crucial to really tackling the poverty problems we see in rural Sub-Saharan Africa, while providing more nutritious, more affordable foods to the growing populations of Africa.
Denver: The report states that the biggest challenge that these intermediaries face is access to capital. Why is that the case? What makes it so difficult?
Vikki: Well, the most direct answer to your question is that a lot of these companies are in what we call the “missing middle.” The missing middle is a term that has been coined really for a number of years now or even a decade, and it refers to a segment of companies that have outgrown micro-financing that’s typically tailored for microbusinesses, but they are too small for more commercial lending or commercial investing. So they’re in the middle, and they’re underserved by lenders and investors. But that’s the most direct and most superficial problem, and that’s often the number one thing that these companies would say is the biggest problem. But I think the access to financing challenge is masking a whole host of complex, interrelated challenges.
We talk about how hard it is to even just build a business that is viable and profitable and scalable. So you actually have to define or design a repeatable business model that’s well-adapted to the specific value chain dynamics that you’re playing in, because whether you are a cashew processor or whether you’re a maize mill, the economics of that value chain, the characteristics of that crop will look very different, and that means that your margin potential is different.
So you have to design the right business model that will allow you to realize as much of that margin potential as possible. So number one, it’s hard to build that business because of the complexities of those different value chains. Number two, besides financing, you actually need access to expertise — technical expertise, operational expertise, financial management expertise — and that expertise is not always easy to come by.
But I think the challenges also go beyond what it takes to build those businesses. One of the most important challenges and the biggest challenges is how hard it is to secure sufficient quantities of the inputs you need; the products you need in the quality you need at the price you need. So, as a processor, you can be sourcing from traders and/or farmers, farmer cooperatives. With traders, you have the issue of traceability. You don’t know whether the honey has been adulterated with sugar, and you don’t know whether water has been added to the milk. If you’re sourcing from smallholder farmers, then you’re dealing with a very fragmented and dispersed group of suppliers. And so, you’re right off the bat signing yourself up for a higher cost of sourcing model.
The farmers may not have the skills needed to produce at the productivity level you need, so generally, we’re looking at 20% of the productivity that is achievable among smallholder farmers. You may need to provide them access to inputs on credit in order to help them raise their productivity, and so it actually takes investments to source from smallholder farmers. So, again, it’s a higher cost model.
On the other hand, you also have to address demand challenges. So whether your markets are export markets or local markets, you have to figure out: How do I reach my customers? If it’s a local market, you have to figure out: What’s the right distribution model? The right sales and marketing channels? You may have to deal with very ingrained consumer preferences. I’ll give you a quick example. In many countries in Sub-Saharan Africa, there’s still a strong perception that raw milk is better for you and it tastes better. And there are VAT taxes on processed milk so it’s also more expensive. So, you have those demand challenges.
And last but not least, you’re dealing with just broader challenges in the operating environment. Anything from infrastructure challenges, hard to access cold chain, electricity that’s unreliable, and you have to think about putting in your own generators, to regulations and policies, to difficulty accessing the right packaging or even business support services such as accounting and legal. All of those things are combining to just make it very hard for these businesses to be profitable and to grow.
Denver: The whole ecosystem. I wanted to pick up on what you said a moment ago about the missing middle. I believe about $6 billion in impact capital has been deployed to Sub-Saharan Africa. Do we know how much of that is going to that missing middle?
Vikki: Yes. So, in our research, we actually looked at a lot of that impact investing data, and the number that you quoted, that’s an estimated volume of impact capital per year that’s deployed between 2013 and 2018. What we found was that less than 1% of that capital has gone to agriculture companies in the missing middle, and a lot of the farmer-allied intermediaries would be in that missing middle. And so that’s the sort of equity investing gap, if you will. But there’s also a debt gap because these companies not only need equity investment but more importantly, they need working capital. They need the money to invest in CapEx, and an early report by Dalberg has actually cited an $80 billion credit gap for agricultural companies under $15 million.
So there’s both a debt gap and an equity gap, and I would say there’s even a grant capital gap because most of the grant capital that has gone into agricultural development historically, we’ve estimated about $40 billion in the last two decades, has really gone to the upstream side in raising farmer productivity. And that’s, of course, important, but again, I think what we’re seeing here is the need to pay a lot more attention to these companies who are sitting in the middle of the value chains.
Denver: I’m an early-stage intermediary, Vikki. Do I have to think about making a trade-off between impact and financial returns?
Vikki: Yes. That’s the short answer, and I’ll give you a more thought-through answer. If you are an early-stage company that intentionally invests in your smallholder farmer suppliers, then as I mentioned earlier, you will be incurring a higher cost model. Structurally, they are just costlier to serve because they’re dispersed in rural areas, and the roads may not be good, so it’s harder to reach them. Many of them need access to inputs — whether it’s seeds, or fertilizers, or credit — in order to be productive. They need more than inputs; they also need training in good agricultural practices and environmentally sustainable agricultural practices.
And so, if you are clear in your intent to help them realize that production potential, then you need to find ways to invest in those things. And that’s going to add to the cost of doing business. So that’s one dimension which drives the cost, at least in the near term. Now, of course, you could argue that if I strengthen my supplier base and make them more loyal to me, isn’t that good for me in the long term? Of course, it is. But again, if we’re talking about in the near term… what it takes to build out those farmer relationships, it is going to create more costs for you.
There’s another dimension that really drives your ability to realize returns, particularly in the early stage, and it’s the value chain you play in. I talked to this a little bit earlier, which is different value chains will have different profit potential. You could have a cash crop that is serving the export markets, and those export markets are growing. For example, cashews is an example. Macadamia nuts is an example. It’s a tree crop, so it’s not like you can have multiple harvest per year necessarily. There’s a lot of value addition potential in that commodity. A value chain like that would be very different from, let’s say, more staple crops such as maize where the margins are a lot lower. So which value chain you play in will also have significant impact on your ability to realize returns.
And then last but not least, I think it’s always helpful to really, again, recognize that it’s hard to build these businesses. You have to build these businesses in the early stage, and you have to figure out the right business model. You have to figure out how to engage with your smallholder farmers, how to reach your customers. How do we use technology in the right way that really would lower your costs, but also allow you to innovate on your customer proposition or your farmer proposition? That’s a lot to think about. So, in the early stage of building a business, you often really do find those real trade-offs between impact and returns.
Denver: And speaking about these chains, boy, there is very little agricultural processing that takes place in Africa. Why is that the case?
Vikki: Very good question. First of all, it is important to recognize that there are food processors in Africa. They do exist. The challenge is that they are subscale; they are unprofitable, and they struggle to grow. And it is not uncommon for you to find food processors that are operating at 20%, 30% of the capacity in terms of utilization. So really that’s the problem we’re talking about.
I really go back to some of the things I said earlier. Why is there so little of it? Why is it that the economic value that’s captured beyond the farm gate in Africa is half of what you see in more developed markets? It goes back to: It’s really hard to access affordable financing. It’s hard to find the necessary talent — from operational to management to finance to technical talent — to really help grow your business. And you have the upstream challenges of sourcing from smallholder farmers, downstream challenges of reaching your customers, and all the operating environment challenges of infrastructure and regulatory policy, ease of accessing even accurate data and support services, and the lack of proper trade associations. All of those have just created a really challenging operating environment for these businesses.
Denver: Yes. I can see that. Maybe, to provide people with a better understanding of how this all comes together and works, you could walk us through one, perhaps Dodla Dairy, which happens to be in India and which you cite in your report. Tell us how that all comes together.
Vikki: Yes. Happy to. There’s a reason why we profiled an Indian company and the dairy sector in India when we’re writing a paper about Africa–
Denver: That was going to be my next question.
Vikki: I’m preempting that question. Well, and the reason is that the India dairy sector is really a hugely successful example of the development of a sector, and we have not yet seen that in Africa. What that example illustrates is really what it takes to truly catalyze a sector.
Now, just to give a very quick overview of Dodla Dairy, it is one of the largest, maybe even the largest private dairy enterprises in India with $250 million in revenue, working with over 200,000 smallholder farmers. And it has had real impact. The farmers that supply to Dodla make two times the income of the national average, and waste has gone from 30% to 1%. So it is a company that has managed to scale. It has managed to be profitable. It has attracted significant investment, including from the TPG Rises of the world, and it has a real impact on smallholder farmer livelihoods. So it’s been a very successful business.
Now, it’s been successful, obviously because of how well-designed that business is. And in the paper we talked about this– what we call the capillary sourcing model where they’re able to reach all of these 200,000 smallholder farmers in various states, and make sure that there are milk collection centers that are easily accessible by the farmers, and how all of that is transported to chilling centers and ultimately, processing centers and then distributed to the local market. So it’s a beautifully-designed model enabled by technology.
It’s also a very high smallholder farmer engagement model. Right now, again, you could argue that, of course, it has to be because 70% of the dairy in India comes from smallholder farmers. Yes, but nonetheless, I don’t think that is something that can be taken for granted. I think this is a company that clearly recognizes that its own business interests are intricately tied with the interest of the smallholder farmers, and it has intentionally invested in their capacity and their livelihoods. It provides training to these smallholder farmers. It extends inputs on credit, provides subsidies. It helps connect them to bank financing. It pays them on time and regularly every 11 days. There’s a lot of transparency to the pricing. And so, again, there are investments made in making sure that farmers are loyal to the processor, but are also providing them the quantities and quality of milk that they need.
Now, having said all of that, I don’t think we would see the success that we profiled, and we certainly won’t be seeing the growth of the broader sector — again, Dodla is one of many other private dairy processes that have proliferated in India — we won’t be seeing that if the government, if the Indian government, has not really invested in growing that sector. And that transformation is really decades in the making, starting all the way back in 1970 when they launched what came to be called “Operation Flood,” and there were a lot of things that were done as part of that multi-decade effort.
It starts with just linking the milk sheds to the appropriate consumer markets. There is a lot of investment made on organizing the farmers and also training the farmers. There was investment in building up the rural infrastructure, importantly on electrification. So we have that cold chain, and importantly is what the government has done in catalyzing rural financing to make sure enough capital is flowing to these kinds of companies. And so again, I can’t emphasize enough, that was decades in the making, and without the work and the investments that the government has made, I think you would not really be seeing such a vibrant dairy sector in India.
…we made that deliberate commitment to work with these leading social pioneers and do it in a way that’s very similar to how we work with our corporate clients, which is on a multi-year, enduring basis… and to make sure we are supporting them not only through pro bono work but also through other ways such as externships or collaborating with them on IP.
Denver: Well, it gets back to what you said before. It’s the ecosystem, and without it, this becomes even a doubly hard climb. When doing this work, who are the nonprofit and the other partners that you work with?
Vikki: Great question. We have worked with a number of what I like to call the leading social pioneers in the space, and our work with them has really informed a lot of the thinking that you see in the paper. So, well, a little bit of background. Bain made a $1 billion commitment. We just added $100 million to it a few months ago. But back in 2015, we made a $1 billion commitment to invest pro bono consulting in the leading social pioneers over 10 years, so it’s a 10-year commitment.
The idea was to really work with these leading social pioneers in education, in economic development, and in the environment. And again, recently we added racial equity and social justice. These are organizations that are highly effective, highly innovative. They really have pioneered change models that work. But nonetheless, they don’t have access to world-class strategic consulting in order to reach their full potential, and the only way to work with them is to do that work on a pro bono basis. And so, we made that deliberate commitment to work with these leading social pioneers and do it in a way that’s very similar to how we work with our corporate clients, which is on a multi-year, enduring basis… and to make sure we are supporting them not only through pro bono work but also through other ways such as externships or collaborating with them on IP.
And so a number of the clients we’ve worked with in economic development are folks like Acumen, TechnoServe, Root Capital, Partners in Food Solutions, Land O’Lakes Venture 37, and also the Ethiopian Agriculture Transformation Agency where, among other things, we actually helped them establish a first-of-its-kind agribusiness accelerator platform, which actually reflects a lot of the ideas that we wrote about in the paper. So our experience with them, and just being able to see the work they do, has informed a lot of the thinking in this paper.
Denver: What a great group of people that is! Sticking along those lines, what role has philanthropy and patient and blended capital played to help and support the growth of these intermediaries? And what more do you hope to see done in this regard?
Vikki: If you look at the ecosystem that we talked about — and again, we need to make that whole ecosystem work — and the reality is you need different kinds of capital in different parts of those value chains, and they need to come together in the right way.
So I mentioned earlier that a lot of the philanthropic capital has gone upstream to work on farmer productivity, and that continues to be necessary. What we’re suggesting is those farmer suppliers to these farmer-allied intermediaries, we need to figure out a way to make sure that they are getting the support they need, and again, that will continue to rely on philanthropic capital.
More philanthropic capital also needs to go to supporting the intermediaries themselves in terms of capability building. As I mentioned from financial, operation, management, technical expertise, all of that will take philanthropy. But importantly, philanthropy also plays a key role in catalyzing more commercial capital.
There’s a reason why not enough capital has gone into the sector because investors and lenders are frankly just acting rationally. I talked about many of the challenges that these firms face. Some are very systemic risks. Agriculture probably has some of the biggest systemic risks any sector could face. You’re talking about the weather, the pestilence. The climate crisis has exacerbated many of these systemic risks.
Aside from the systemic risks, you also have firm-level risks, all the things we’ve talked about. The challenges of sourcing and the challenges of accessing expertise to build these businesses. So what we hear from a lot of investors — and we’ve done a survey of about 50 impact investors in the agriculture space — is it’s not that these companies don’t exist; they’re there, but they’re not investible or they’re not bankable. So how do we address… how do we structure capital in a way that actually offloads some of these systemic risks from more commercial lenders? And that really is where philanthropic capital can come in.
You can do it in different ways, but one of the ways is through credit guarantees. Another way is through what we call first-loss vehicles. So it is essentially a grant facility that combines with more commercial capital, but it absorbs the risks that are inherent in those investments as the name connotes– first loss. And TA facilities, grant facilities that are tied to the capital where you’re providing capability building supports to the businesses, is also a way of offloading risks.
All of that has to be philanthropically funded, but it’s a means to an end. It’s to unlock many millions, if not billions, worth of more commercial capital. We need a lot more subordinated debt, soft debt, more affordable debt, and we also need a lot more impact investing, equity capital going into the space.
…smallholder farmers produce 80% of the food in Africa, yet most of those smallholder farmers live on under $5.50 per day. And so, the people that are producing a lot of the food are living in poverty… that’s a sad irony, and COVID has made that worse.
Denver: Nothing like impact-first capital and hopefully, a little bit of proof of concept to bring that other capital in. I’m sure the answer to this is not good, but what has been the impact of COVID-19 on these intermediaries and those enterprises in the missing middle?
Vikki: Your guess is very correct. It’s not good. COVID has exacerbated all of the upstream, downstream, midstream challenges that we have been talking about. So you think about, on the upstream side with the smallholder farmers, they have had challenges accessing markets because of the market disruptions, the demand disruptions, and the supply chain disruptions. They may not be getting paid by their processors. At the same time, you have border controls and currency fluctuations that have made some of the inputs that are imported much less affordable. And so you would see smallholder farmers that have had to sell some of the assets such as livestock or take on additional debt. So you’re seeing those.
So the poverty situation in rural Sub-Saharan Africa has been exacerbated and, but wait, this is one of the sad ironies, is that smallholder farmers produce 80% of the food in Africa, yet most of those smallholder farmers live on under $5.50 per day. And so the people that are producing a lot of the food are living in poverty. So that’s a sad irony, and COVID has made that worse.
And then if you look at the consumer side of things, first of all, even pre-COVID, an average consumer already spends almost 50% of their disposable income on food, and food prices have further increased with COVID, again, because of supply disruptions. Pre-COVID, we’re already seeing 300 million malnourished people in Africa. Again, that has gotten worse.
So all the dimensions of food security that we talked about earlier — availability, affordability, nutrition, and quality — all of those dimensions have deteriorated as a result of COVID, and this has hit the lowest income populations, the poor, especially hard. And again, with market disruptions, with informal markets being closed, with informal businesses being closed during the height of COVID, a lot of these low-income populations find themselves not having the income that they used to have while food prices have increased. So again, these forces were converging to just create real problems in just their being able to afford food, let alone nutritious foods.
And then you look at the middle of the supply chains, and many of these farmer-allied intermediaries that we’re talking about, they are finding it hard to pay farmers. They’re finding it hard to pay their workers or to keep their workforce. And when you have disruptions in the downstream markets, whether it’s through closures of hotels, restaurants, again, informal markets but also the closure of schools, many of these processors find that all of a sudden, their products have nowhere to go.
And so, in a recent survey that our partner TechnoServe has done, they actually found over 60% of these processors have struggled to deal with these COVID challenges, and they’re really struggling with liquidity, with working capital. A quarter of them are downsizing workforce. Jobs could be getting lost. So a lot of the progress that we’ve seen in growing the food processing sector over the last decade, that progress could be set back for years, if not decades. So you’re really seeing the impacts of COVID playing out across the board.
I think they are the linchpins for transforming food systems, and if we can have more of these companies achieve profitable scale while staying farmer-allied, we’re going to see a whole range of positive outcomes.
Denver: My goodness. Well, let me close with this, Vikki. These farmer-allied intermediaries have been overlooked for such a long time, and boy, you have brilliantly outlined the very real challenges they face. What gives you confidence that they will ultimately succeed and be the key to transforming agriculture in Africa?
Vikki: Well, you leave the hardest question for last, Denver.
Denver: It’s the way I am.
Vikki: I will say that I want to be confident, and I consider myself a cautious optimist, so I will choose to be optimistic here. I think they, as we wrote in our paper, I think they are the linchpins for transforming food systems, and if we can have more of these companies achieve profitable scale while staying farmer-allied, we’re going to see a whole range of positive outcomes.
Many of the SDGs that were outlined, from enhancing farmer livelihoods and addressing rural poverty, to providing nutritious, affordable foods to consumers and addressing hunger, to creating jobs, which are so sorely needed by the young people in Africa and also for women…. And importantly, too, as we grow out the businesses beyond the farm gate, you are expanding not only jobs with that economic value creation beyond the farm gate that we’ve been talking about, and that industrialization and commercialization of agriculture is going to really propel the economic development of the country and really help transform the economies.
Now, we have seen positive evidence of that when it does happen. We have seen what has happened in India dairy. We have seen what has happened in building out the coffee sector in East Africa, or cashews in parts of West Africa. So we’re seeing those examples of success. We’ve seen what has happened in Ethiopia when you have the Ethiopian government and importantly, the Agricultural Transformation Agency really, really committing to agricultural transformation and building out that implementation capacity– working with the private sector, working with the social sector to really not just improve the smallholder farmer productivity and production, but also to foster the commercialization of agriculture. And you see how they have grown their economies year on year, really on the back of agricultural transformation.
So we’re seeing their successes, but there needs to be a great deal more commitment and a lot more aligned and coordinated action, and we also need a lot more money. So, if you’ll allow me, I’ll just reiterate some of the things that really are needed. We need a lot more attention. And I hope this is part of getting to that goal, is to raise a lot more attention around these firms and how we need so much more funding going to these firms, so much more support going to these firms. But we also need governments to step up. That’s a big deal.
I know that we talk about our work with leading social pioneers and many of them are NGOs, but I cannot underestimate or underemphasize the important role that governments play in enabling all of this, in creating the right operating environment. And we need far more governments in Africa to live up to the commitment they made back in 2003 with the African Union, the CAADP, which is the Comprehensive African Agriculture Development Program, where they spend 10%, where they commit to spending 10% of their national budgets on agricultural development. And we are falling far short of that. It’s close to 3% and certainly under 5%. So that needs to happen, and that’s not easy. But I hope that more attention is going to be placed by governments on agricultural development.
And we need a lot of these actors coming together in a way that’s far more aligned and coordinated. And when I say actors, I’m referring to not just funders, not just governments, but also the NGO implementers, the corporations who are so crucial to providing what we call the local demand sinks for the outputs of these processors. And universities. So all of these actors need to align their actions so that collectively we say, “This is the target outcome we want in terms of helping more farmer-allied intermediaries scale.”
And then what are the different types of capital that are actually required along these value chains? And what are the different kinds of capability building supports that are actually required at different parts of the value chain, and how do those come together? So that one plus one truly equals five. And that kind of coordinated action is hard. That’s the way I’m] answering your question; so I’m optimistic, but there’s a lot of work to do.
Denver: And with all these actors and particularly government, it would be well-served if they had a longer time horizon.
Vikki: Oh, absolutely.
Denver: The report is “How Farmer-Allied Intermediaries Can Transform Africa’s Food System.” It’s a great report. Can people get this online? And if so, how can they access it, Vikki?
Vikki: Absolutely. You can go to bain.com. You can go onto Google and literally type in Bain Farmer-Allied Intermediaries Report, and it will take you right to the microsite that we have, and you can read it online. And there’s also a PDF that’s available.
Denver: Well, thanks, Vikki, for a very interesting and informative conversation. It was a real delight to have you on the program.
Vikki: Well, it’s great to be on. Thank you again for the opportunity, Denver.
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