There are around 450 million smallholder farmers on earth who are currently close to the point of general subsistence. They live on less than US$2 per day and farm on about 1-1.5 hectares of land where they generate enough income and food to meet their basic needs. With this land, they typically grow cereals (rice, corn, wheat); vegetables (potato, cassava, onion); tree crops (cocoa, coffee, mango); pulses (mung bean, chickpeas); and/or nuts (cashews, peanuts). 

Finding solutions for these farmers means finding solutions that engage one-third of humanity in addressing food security, climate stability, biodiversity conservation and rural employment. There are four key impediments to these farmers becoming profitable producers of food and agricultural products:

  1. Lack of access to credit and finance – an estimated $450B financing gap for smallholder farmers around the world. Finance is needed to access improved tools and technology, to smooth and normalise income, to enable better market access.
  2. Lack of connection to markets – less than 10 percent of smallholder farmers are aggregated into producer or other organisations that effectively connect them to markets. Smallholder farmers are often reliant on local middlemen that take a high margin and often offer low value to farmers. Major barriers to the rural poor participating in formal markets are: low farm gate prices, insufficient focus on high value crops to meet market demand, high input costs and poor productivity and yields.
  3. Lack of diversification – most smallholder farmers lack the knowledge and resources to diversify, and are not taking advantage of unused/under-utilised land and/or resources to diversify risk. Often growing crops that have been grown for generations, often unsustainably.
  4. Lack of access to inputs and agronomic training – Most smallholder farmers achieve less than 40% of the yields of model farmers due to poor use of inputs and outdated farming practices.

Given the impediments that farmers face, the challenge of exiting poverty is complex and multi-faceted. Business for Development is tackling one of the most complex and intractable development challenge on earth: solving poverty amongst smallholder farmers. 

Business for Development’s creation of the Long-term INclusive Commercial (LINC) enterprise model was driven by the market dynamic of growing demand for smallholder farmer produced commodities.  This has necessitated companies engaging directly with farmers to lift and secure their supply of critical ingredients.  A LINC structure facilitates these objectives by aggregating fragmented groups of smallholder farmers and addressing the needs of both farmers and the related company.

Market forces are leading food and agribusiness to reconsider their value chains and traditional modes of farmer engagement, particularly in developing markets:

  1. Growing global demand for agricultural commodities requires more farmer productivity and closer engagement with farmers to achieve long-term security of supply.
  2. Consumers are concerned about farmers benefiting equitably in the value chain.
  3. Public policy in developing markets is placing pressure on companies to localise crop production and preserve the benefits of increased productivity within those communities.
  4. Climate change and positive consumer pressure is forcing better use of limited land and natural resources, requiring more sustainable agricultural practices to be promoted and implemented by food companies in their procurement decisions. 

WHAT IS LINC?

Business for Development believes that solving smallholder farmer poverty will require equitably connecting those farmers with local and global value chains. Otherwise the four impediments that keep these farmers trapped in subsistence will continue. To connect farmers to markets on an equitable basis will require trusted intermediaries as well as sustainable and scalable business models that generate sufficient wealth amongst these farmers to enable a pathway out of poverty.  If such connections can be made, farmers can exit poverty on a long-term, inclusive and commercially sustainable basis. 

Business for Development’s LINC enterprise is a unique fusion of “for purpose” social business model and the “for profit” inclusive business model.   It creates a farmer owned social business which interfaces with private sector partners who are pursuing inclusive business engagement with low-income communities.

As propounded by Nobel Peace Laureate Mohammed Yunus, a social business has the following essential features:

  1. Business objective is “for purpose” (in case of a LINC, it is to overcome poverty), not profit maximization. In LINC terms, the social business often seeks to at least double income and take farmers out of poverty on a long-term sustainable basis.
  2. Financial and economic sustainability.
  3. Capital is sourced from donors and social investors. Social investors get back their investment amount only. No dividend is given beyond investment money.
  4. When investment amount is paid back, company profit stays with the company for expansion and improvement (in case of a LINC, the social business is ideally 100% farmer owned).
  5. Gender sensitive and environmentally conscious.

According to United Nations Development Programme (UNDP), an inclusive business has the following essential elements:

  1. Human development impact: an inclusive business model contributes to human development by increasing poor people’s incomes, or improving their access to basic goods and services. An inclusive business often reaches underserved markets which cannot be reached by conventional business models.
  2. Commercial viability: an inclusive business model can receive start-up funding from different sources (including grants) but it must be designed to break-even and become self-sustainable over time.
  3. Environmental impact: at a minimum, an inclusive business model does not have major negative environmental impacts and, at best, contributes directly to environmental sustainability.
  4. Potential for scale (i.e. expanding regionally, reaching deeper into poor populations, or extending its activities) and replication (by others in the same region/sector).
  5. Innovation: many inclusive business models employ new solutions, being based on an innovative product, process or business model, as well as new ideas that can excite and inspire others.

A LINC ensures that a for-purpose mission is maintained always and buffers the farmers against the for-profit commercial intentions of the inclusive business market linkages on both input and offtake sides of the supply chain.

HOW LINC ADDRESSES THE SDGS?

To achieve Sustainable Development Goals (SDGs) 1 “End poverty in all its forms everywhere”, the world will need to enable 700 million people to work and trade their way out of poverty. About 75% of the world’s extremely poor people live in the rural areas and are dependent on agriculture and so the best way to overcome poverty is to make farming profitable. Studies confirm that business growth generated by agriculture is up to four times more effective in reducing poverty than growth in other sectors.

As Bill Gates, Chairman of Gates Foundation has said, “Helping the poorest smallholder farmers grow more crops and get them to market is the world’s single most powerful lever for reducing hunger and poverty”.  SDG2.3 target looks to double farmer income, as the world seeks to end poverty and hunger under the SDGs, it is clear a concentrated focus on improving the livelihood of smallholder farmers is essential.  The work of Business for Development in catalysing inclusive business market linkages and building LINC social business enterprises is entirely focused on combating poverty and hunger amongst the world’s smallholder’s farmers.

BUSINESS CHALLENGES

An inclusive business requires a fundamental change to the way a company undertake its business either in part or in whole. It requires support from external agencies to build knowledge and capacities and requires internal champions that can manage internal changes in processes and thinking.  The key challenges to successful implementation of inclusive businesses, where communities are engaged a supplier include:

  • Balancing perceived risks against long-term value generated through a program. Companies often face internal challenges of balancing the risks of new, untested markets and suppliers and the perceived length of time to extract meaningful profits, against the imperative to maximise its use of resources for profit generation. 
  • There is often a hesitation among large corporations to be seen to profit from their engagement with the poor, because of a lack of knowledge and awareness as to how an inclusive business can empower communities in need and due to the need to manage negative perceptions, often incorrectly propagated by NGOs to the media.
  • Building trust with communities that are perhaps wary of corporate intentions and see inclusive business as a cover for-profit generation.
  • Perceptions of inadequacy in terms of local capacities and infrastructure and an inability to bridge seemingly vast differences in skills required to engage with the formal market and those skills and resources that are resident in a community.

LINC STRUCTURE

The LINC has been developed and piloted by Business for Development as a model for inclusive business that address the challenges inherent in forming inclusive business value chains and enhances the mutually beneficial outcomes for both, the community, partner companies and other stakeholders.  

The LINC structure recognises that farmers and food companies have mutual benefit in growing their businesses together. The LINC model seeks to achieve this through creating an independent, financially sustainable social business that can grow to scale over time.

PRINCIPLE ACTIVITIES

A LINC trades commodities from a group of farmers to a Company.  The LINC either pays dividends in profits to the farmers and/or reinvests into farm development and community programs. The model is scalable and grows through engaging new farmers.  New farmers are free to join the LINC as providers with the same rights as existing farmer suppliers.  The model is also designed to be sustainable, with a LINC securing its funding through a margin on sales, negating the need for ongoing benevolent funding.

POTENTIAL BENEFITS TO FARMERS & COMPANIES 

The diagram below illustrates the potential benefits to farmers and companies through engaging in a LINC structure.

On the one hand, smallholder farmers need to generate strong business growth, maintain ownership of their farm (and “beneficiary” ownership of their participation in the LINC social business), maintain security and predictability of market demand. To achieve such outcomes, farmers need access to better tools and training, credit, improved quality of inputs.  Their community may also need improved social infrastructure.  The LINC seeks to provide all these benefits, and when profitable, the social business will invest profit in either further capitalising the business, business expansion, or investment into critical social infrastructure.

On the other hand, inclusive business market partners also seek to generate strong business growth, expand into new markets, and reduce their supply risk and/or cost.  In order to achieve these outcomes, the LINC social business supports the inclusive business market partner its increased sales or supply of produce, improved supply chain efficiency through disintermediation of non-essential middleman margins, improved quality, and a long-term partnership based on mutual benefit.

GOVERNANCE & OWNERSHIP 

The governance of a LINC ensures business growth for both the farmer and the food company.  A LINC is typically structured as a company with shares (non-dividend paying) held by a trustee or custodian on behalf of the community and has a constitution requiring all surplus profits generated to be deployed in social and community programs.

A LINC Board comprises farmer representatives, to facilitate farmer voice in decision making, commercial experts from the food company, who bring the skills need to build a sustainable business, agricultural advisors, who oversee the LINCs effort to address farm productivity and NGO representatives, who bring cultural, social and gender expertise.

DIFFERENTIATING LINC FROM OTHER STRUCTURES 

In describing the potential benefits of a LINC, it is important to distinguish it from other structures.  A LINC is different to:

  • An NGO, because it doesn’t use recurrent donations, but rather grows from a seed capital base, like a normal business.
  • A co-op, because the buyer and social investors are part of the governance structure. 
  • A trader, because it doesn’t exist to make a profit but instead to build farmer productivity.
  • Direct procurement, because it seeks to create intentional mutual benefit

A LINC has particular relevance in a developing market context where inherent differences in the power and resources of smallholder farmers relative to more sophisticated end markets that offer higher margins, requires a supportive intermediary to serve and represent farmer interests in those markets for their direct long-term benefit.

The LINC sits between prevalent approaches.  On the one end, you have the approach of trying to establish fiercely independent farmer organisations which, which can struggle to succeed over the long-term without ongoing support.  At the opposite end, there’s the approach which leaves it up to the companies to develop their own farmer support programs with some catalytic support from donors and a common platform to share best practice, overall strategy, advocacy, and metrics.  This latter approach, however, while improving productivity levels, doesn’t always help to organise the farmers which would allow for more co-ordinated reinvestment back into the community. 

LINC looks to bring the best of both approaches together, helping to establish and mentor farmer organisations over the long-term in running a business, while giving it ongoing access to markets and technical support from the private sector parties that are there to stay.  This additional benefit of helping to capture the savings from better supply chain co-ordination and giving the farmers themselves the power to determine how those savings are reinvested back into the community.

ROLE OF STAKEHOLDERS

The Inclusive Business seeks to represent a collaborative effort between civil society, government, the private sector and farmers with a view to delivering improved on-farm and community outcomes.  As seen from the Kwale Project diagram, there are a plethora of stakeholders which need to be engaged when developing an inclusive business.

Farmers 

The LINC approach to farmer and community engagement and project design is intended to be participatory with a view to:

  • Building relevant, market oriented skills that are value by farmers, community and markets. This includes:Targeted training programs, field services, training materials and providing access to appropriate crop inputs.
    • Transferring key knowledge, skills and technologies from the private sector to seed best practices in training programs and the activities.
    • Building the capacities of local Departments of Agriculture and Investment through their active participation in the program.
    • Building the capacities of local NGOs to share knowledge and skills with other communities in which they operate.
  • Creating market ready communities that can readily access formal, high value markets, through:
    • Formation of a LINC structure in the form of an Inclusive Business that can bridge farmer to customer, in a socially inclusive and economically empowering framework.
    • Actively mediating and negotiating relationships with key private sector partners (input, offtake) and government to ensure that farmers achieve the best outcomes from those markets on an equitable basis.
  • Developing the capacities of local farmers to improve their productivity, agronomy knowledge, understanding of market and capacity to represent themselves over time in those markets.
  • Creating linkages for farmers and communities beyond traditional value chains in order to build an eco-system of support, including:
    • Improved links with Department of Agriculture & Investment and other government departments with the capacity to influence government policy through the assistance of credible implementation partners.
    • Strengthening collaboration with NGOs, local authorities and government that can support additional community endeavours over time.
    • Creating stronger linkages to local and regional markets, through generating additional volumes that can service multiple end markets.

Funding Sources

While structured as sustainable commercial enterprises a degree of initial investment or patient capital is required to support initial engagement and commercial activities in support of LINC enterprise formation.  Potential funding sources for seed capital, which are typically aligned with the social outcomes generated from a LINC enterprise, include multilaterals, benevolent host, philanthropist, CSR, donor agency, social investors.

Off-take partner

Depending how deep they want to be as part of the LINC, off-take role is not only buying commodities but

  • Provide training e.g., Olam and LDC both bought respective commodities, but because of their knowledge in commodities could assist with farmer training to increase yields.
  • Extension services, agronomic expertise, guidance of agricultural practices & technologies.
  • Commit to long-term off-take agreement.

Government

Business for Development consults with Government which tends to range of Ministers and Government agencies, principally the Department of Agriculture but also the State Government.  The key themes that are reviewed:

  • If the empowerment of smallholder farmers through a socially and economically inclusive model is relevant to government, particularly if it is forming policies to drive sustainable agricultural investment.
  • What laws and policies are in place to facilitate the development of an Inclusive Business.
  • How can the Department of Agriculture assist and support the inclusive business e.g. extension service support; identify and provide access to farmers and build co-operation and support within State Government and relevant local authorities.

NGO’s

Programs can be designed with NGOs that are engaged at the commencement of the project, with a focus on farmer and vocational training, social programs, the environment and education.  They can undertake baseline social assessments before interventions and work in partnership to track improvements. These NGO partners can then devise and implement culturally appropriate high social impact initiatives to improve the wellbeing of farmers and their communities.  Business for Development invites NGOs to work alongside other partners and the broader project team to capture lessons arising from activities and to assist in disseminating this to other agencies, government and the broader community.   

 

KEY SUCCESS FACTORS

Creating an inclusive business takes various strategic stages which are important to recognise so that project costs are not blown out. Typically, a project will not succeed unless the following elements are achieved:

  • Mission: It is important to ensure you have the right value proposition that works for all the stakeholders involved. That you have selected the right crop in the right country to have the strongest outcome.
  • Model: If the mission is right, but the way you work towards achieving the mission is cost ineffective or inefficient then the model is unlikely to succeed.
  • Management: You need to ensure you have the right people who are passionate about the project, have the capacity to execute, and can think outside the box about systems to solve unique problems.

Over time, Business for Development has developed a due diligence checklist to ensure minimum standards are achieved to build the IB. These are checked monthly to ensure the project is on track. Questions look at both social and business aspects:  

  1. Is there a clear statement of mutually agreed intentions which cover both commercial and social objectives of the project?
  2. Is there active and sufficient community voice expressing their approval, co-creation and ongoing participating in the project?
  3. Does the project have commercially viable, scalable potential to positively impact at least a thousand low-income beneficiaries as measured by the SDG’s?
  4. Does the project bring the targeted beneficiaries up to a level of income well above the extreme poverty level of USD$1.25 per day to at least USD$3 per day, a standard income recognised as minimum for a sustainable livelihood?
  5. Is there a clear and deliberate focus on women’s economic empowerment?
  6. Do the poor own a legal entity which empowers them to negotiate equitably with the commercial client, own productive assets and use surplus funds for broader social impact?
  7. Is there sufficient mitigating protection for the targeted low-income beneficiaries against the repercussions of project failure/exit of the commercial partner?
  8. Does the project have a local NGO/development partner that works to protect and promote the interests of the targeted beneficiaries, and that is able to objectively monitor and measure development impact?
  9. Is the market opportunity long-term in nature (min 10-year period)?
  10. Does the project represent a new approach to business for the company, enabling it to access and serve markets in ways not previously achieved?

Other Key Lessons:

  • Creating an IB takes time, you need to carefully manage a partner’s expectations and make sure they are comfortable and going through certain decision gates.
  • Consider having many partners, especially in off-take, so that the IB does not rely on one buyer.
  • When building an agribusiness, consider how long it will take to get to the first income. With our Ironbark Citrus project, it took 4 years before the farmers received an income. This is too long for most farmers, so also consider other crops that can be derive an income.
  • This is not a development program – it is a business. The farmers need to feel throughout the design and development of the project that they are the owners, and they need to make it work. Otherwise, once you leave the project will fall over.
  • Same with off-take partners, they need to understand the dynamics of the project and be involved so that it succeeds once Business for Development stops being the project managers.