Most of the world’s poor continue to depend on agriculture for their livelihoods—either farming their own land or working land owned by others.  Nonetheless, we live in a rapidly urbanizing world and food systems are changing to meet the demands of urban residents for safe and affordable fresh produce.  In emerging economies, international capital is moving into the agriculture and food retail sector as nations liberalize their markets and open their economies to foreign direct investment. One key feature of these investments is retail-led transformation of agricultural marketing systems—the elimination of intermediaries to increase traceability and coordination among buyers and farmers, and also to create additional value along the supply chain.

Agricultural marketing systems with shorter supply chains—that is, with fewer intermediaries and more coordination between the farmer and the final product retailer—could translate into higher incomes for farmers and increased farmer investment in agricultural and marketing technologies. In addition, small farmers might plausibly compete in these markets under conditions related to access to capital, roads, and sufficient water because of the efficiency of family labor relative to hired labor. This possibility has excited governments, nongovernmental organizations (NGOs), and international institutions working in the area of agricultural and economic development. In addition, numerous large-scale food companies see purchasing directly from farmers as a double-win, both beneficial for the bottom line and a means of improving relations with regional and national governments.

But who will benefit from this improved efficiency and value creation in agricultural marketing systems in the developing world, and how will they benefit? Who will be left out? What are the effects of these market transformations on traditional marketing institutions and traders in developing countries? Small Farmers, Big Retailers: Are New Sourcing Strategies a Path to Inclusion?, a new research brief released today by the Chicago Council on Global Affairs, addresses one issue of central importance in the rapid evolution of world agriculture and world agricultural markets:  how will the retail-led transformation of food marketing systems within developing countries impact rural poverty and food security?

To gain some insight into this broad question, the brief focuses on recent developments in China and Nicaragua. Though these settings are quite different from one another, patterns emerge that could figure significantly in the way that poor farmers will be involved in the transformation of the agrarian sector. 

This research focuses on the intermediaries that do remain in retail-led supply chains in the developing world. The brief describes the implications of recent research that suggests that direct sourcing from farmers does not mean purchasing at the farm gate: intermediaries in retail-led supply chains are reduced considerably relative to traditional markets but not eliminated altogether, and may include NGOs and private intermediary suppliers. The objectives and resources of these market intermediaries are crucial to determining which farmers participate and how they benefit from participation.

For example, in Nicaragua, a group of multinational NGOs plays a critical role in organizing production, transferring technology, and securing credit for small farmers supplying Walmart Centroamerica. In China, the critical intermediaries are a relatively new group of large, geographically diversified private companies emerging to handle logistics, cold chain, and sourcing for Walmart China and other large retailers in the country.

Whether an NGO, a private company, or a farmer organization, the intermediaries that remain in retail-led supply chains in developing countries sourcing from small farmers play an important role; they aggregate and organize small farmer production and marketing and coordinate or supply transport, cold chain, and storage. Small farmers need some way of aggregating and coordinating their dealings with big retail if they are to participate in these new supply chains. If a large retail buyer incurs a fixed cost for negotiating, purchasing, and paying each supplier the costs of transacting with a host of individual small farmers can become prohibitive; moreover, small farmers may not have the capital or production scale to consistently reach contracted quantities or quality standards that food companies require. This supplier cost-risk tradeoff is a persistent tension in the transformation of agricultural supply chains in the developing world and the institutions and actors that arise to solve it will shape the evolution of agricultural markets and production across the developing world.

The transformation of agricultural markets in the developing world through the rapid rise of supermarkets, exporters, and other retailers with significant downstream market presence is an important development for economies and agriculture across the world. But we must understand the true impacts and the true potential to impact poverty and food security both within and across countries. Policies adopted at this stage will influence who benefits and who is left out of these processes.