By S. Gustafson  (published on December 12, 2021)

This blog apprear originally on FoodSecurityPortal.ORG 

 Photo credit: UNICEFEthiopi/2020/NahomTesfaye

As Ethiopia’s population has become increasingly urbanized over the past decade, more and more households have come to rely on markets, rather than their own farms, for their daily food needs. This dependence means that well-functioning agri-food value chains have become increasingly vital to food security for much of the population. The onset of the COVID-19 pandemic raised serious concerns about the resilience of these value chains; while Ethiopia never closed its borders or imposed full lockdown measures, efforts to contain the virus still had the potential to disrupt the agri-food system and negatively impact food and nutrition security. A new series of working papers from IFPRI’s Ethiopia Strategy Support Program (ESSP) examines how two important value chains – the dairy value chain and the vegetable value chain – fared during the pandemic.

The studies draw on in-person survey data from February 2018 (for dairy) and February 2020 (for vegetables) and phone survey data from June and September 2021 (for dairy) and March 2021 (for vegetables). Comparison of these data allowed the authors to examine how value chains have responded and adapted to the COVID-19 pandemic. The authors used a cascading survey approach to collect and analyze data across the entire value chains, from rural and peri-urban producers to wholesalers and urban retailers.

Overall, Ethiopia’s dairy value chain appears remarkably resilient to the impacts of the COVID-19 pandemic and the associated containment measures imposed by the government. While nine percent of dairy farmers stopped engaging in the dairy value chain between February 2018 and June 2021, this decline can be attributable to rising feed prices, and potentially to a lack of access to credit and extension services, rather than to the pandemic’s impacts. Similarly, while 36 percent of milk wholesalers reported that they stopped trading dairy products within the study timeframe, they attributed this decision to increased competition within the sector and limited supply of milk and butter from rural areas, not to COVID-19. While a small number of urban retailers cited the pandemic as at least one of the reasons they stopped selling dairy products, the study found that the quantity of dairy products traded actually increased between 2018 and 2021.

Milk prices have risen steadily and significantly in Ethiopia over the past three years, matching the general high inflation seen in the country. Between 2018 and 2021, however, milk prices remained relatively stable (0.92 USD/liter in 2018 compared to 0.91 USD /liter in 2021). In addition, the amount that farmers received from the final retail price rose slightly during that timeframe. The dairy sector also did not experience a rise in post-harvest losses (as measured by quantity of milk wasted) during the pandemic.

While slightly more mixed, impacts of the COVID-19 pandemic on Ethiopia’s vegetable value chain also appear minimal. Farmers’ main concern was rising input prices; these price increases, rather than the pandemic itself or related containment measures, largely drove production decisions.

At the wholesaler level, the pandemic had more direct effects. At the start of the pandemic, the major wholesale vegetable market in Addis Ababa, the capital, was moved to the outskirts of the city to allow for more effective social distancing. Many surveyed traders reported that this relocation more negatively impacted their business than the pandemic itself. Between February 2020 and March 2021, most traders saw a loss in both number of clients and volume of vegetables traded, and the majority of these traders cited the relocation of the market as the cause.

Urban retailers also reported negative impacts from the relocation of the wholesale market. In addition, two-thirds of retailers said that they had fewer choices when it came to transportation of goods from wholesale markets than they did prior to the pandemic; while the majority of these cited the market relocation as the reason for this, 19 percent stated that it was due to the pandemic itself.

The study found significant volatility in vegetable prices throughout the study timeframe. The price of many key vegetables in household food baskets, such as onions, rose at the start of the pandemic, and many farmers initially responded by ramping up production to benefit from the increased prices. This in turn resulted in an oversupply in the Addis Ababa market, which drove farm gate and final consumer prices back down. All value chain actors—farmers, wholesalers, and retailers—reported that this price volatility was a major concern for them in the long term. It is important to note, however, that prices and price movements vary among the different vegetable crops. In addition, the volatility seen during the survey period cannot be attributed to the COVID-19 pandemic with any certainty, as the vegetable value chain in Ethiopia is generally characterized by a high degree of price volatility.

Post-harvest losses along the vegetable value chain also varied by crop. The largest losses were seen for tomatoes (11.5 percent, while the lowest were seen for onions (2.6 percent). In addition, where these losses occurred also differed widely. Tomatoes saw the highest losses at the retail level, while nearly all of the losses for cabbage occurred at the wholesale level.

Overall, the ESSP surveys suggest that important agri-food value chains in Ethiopia remained generally resilient in the face of the COVID-19 pandemic’s direct impacts.

Citation: Hirvonen, Kalle; Habte, Yetmwork; Mohammed, Belay; Tamru, Seneshaw; Abate, Gashaw Tadesse; and Minten, Bart. 2021. Dairy value chains during the COVID-19 pandemic in Ethiopia: Evidence from cascading value chain surveys before and during the pandemic. ESSP Working Paper 160. Washington, DC: International Food Policy Research Institute (IFPRI). https://doi.org/10.2499/p15738coll2.134764

Citation: Hirvonen, Kalle; Mohammed, Belay; Tamru, Seneshaw; Abate, Gashaw Tadesse; and Minten, Bart. 2021. Vegetable value chains during the COVID-19 pandemic in Ethiopia: Evidence from cascading value chain surveys before and during the pandemic. ESSP Working Paper 159. Washington, DC: International Food Policy Research Institute (IFPRI). https://doi.org/10.2499/p15738coll2.134768

By Alan de Brauw (published on November 17, 2021)

 Photo credit: World Bank

Several constraints limit the ability of smallholder farmers in low and middle income countries (LMICs) to reach their production potential. One such constraint is access to formal finance; smallholders and other agricultural value chain participants frequently cannot access credit necessary to invest in new crops or technologies and deal with risks and shocks and/or savings products necessary to safely carry wealth from harvest to planting. A combination of new technologies, markets, and government priorities in several Southeast Asian countries suggest that new opportunities are emerging to overcome these long-standing challenges to expanding agricultural finance.

Yet new technology will neither fully eliminate barriers to increased production nor improve resilience against shocks if farmers lack markets for additional output or if financial providers lack sufficient information to assess potential clients, supervise loans, and address risks. As such, incorporating digital technologies into existing models of whole-of-value chain agricultural finance, or agricultural value chain finance (AVCF), is a potentially attractive approach to increase smallholder farmer returns, financial viability, and resilience and improve livelihoods.

 AVCF blends relational contracting with more formal contracting observed in modern value chains. A standard AVCF scheme allows a formal lender (e.g. a bank) to lend to a single enterprise (e.g. a processor), which then buys crops from individual farmers. The relationship between the enterprise and farmers acts as a substitute for more formal collateral provided by the farmers. The enterprise can more effectively monitor and screen farmers while providing the individualized loans that banks find too costly to make, and the bank retains the ability to make a formal loan to an enterprise under standard terms and conditions.

In the IFS4Ag project, we have studied the necessary conditions for AVCF to work and how government policy and action in three countries—Indonesia, Myanmar, and Viet Nam—affects the potential of AVCF to help alleviate credit and liquidity constraints among farmers, thus limiting their potential. Here, we describe the level and method of government involvement in credit markets in the three countries, examining how this involvement may affect the quantity and quality of smallholder credit. We conclude with some simple recommendations to improve the climate for AVCF.

Credit markets, not just agricultural credit markets, tend to be regulated by governments. Governments typically play the role of ensuring that financial institutions carefully track deposits, charge the interest on loans that they state beforehand, and maintain reserves so that they continue to be solvent. They also regulate entry into financial markets. Governments do not just regulate credit markets; in fact, in all three countries studied in the IFS4Ag project, many or all of the largest banks are government-owned. State-owned enterprises also play an important role in each economy.

Since agricultural credit markets are even thinner than credit markets in general, governments often use further regulations or interventions to attempt to increase the agricultural credit supply. These interventions can be categorized as the establishment of agricultural banks and interest rate regulations. Collateral regulations can also play an important role in helping or hindering AVCF.

Agricultural Banks

One way several countries have intervened in rural credit markets is by establishing an agricultural bank, with branches in rural areas to lower the transaction costs of serving farmers. In fact, each of the countries in our study has or had an agricultural bank. In Myanmar, the Myanmar Agricultural Development Bank and Myanmar Economic Bank have combined to play that role in the past. In Viet Nam, the agricultural bank is the Viet Nam Bank of Agriculture and Rural Development (VBARD). In Indonesia, there is not currently an agricultural bank, but Bank Rakyat Indonesia (BRI) was set up as an agricultural bank.

While agricultural bank branches reduce transaction costs to establishing bank accounts or obtaining credit, they have several potential drawbacks.

• Agricultural banks are often the only bank in a rural area. In the absence of other regulations, theoretically a credit monopoly will decrease credit supply and increase equilibrium interest rates. As a result, these banks may not offer credit terms much better than the informal money lenders often present in rural areas.
• ·Similarly, agricultural banks need not offer market-level interest rates on savings, therefore reducing incentives for rural residents to establish bank accounts, particularly given the spatial dispersion of villages.
• Finally, if, and when agricultural banks are privatized, they maintain that monopoly position.

So although agricultural banks are a useful way to improve credit access in rural areas, they may not be a panacea for agricultural credit.

Interest Rate Regulations

All three countries in the IFS4Ag study have policies affecting interest rates in ways that affect agricultural credit markets.

• In Myanmar, all loan interest rates by commercial banks are capped at 13 percent when collateralized and 16 percent when not for loans of up to MMK 10 million ($7610). Microfinance institutions can lend at 28 percent. Commercial banks largely find these rates too low to make profitable loans, so most agricultural lending is by MFIs or cooperatives.
• In Viet Nam, VBARD and the Viet Nam Social Bank for the Poor (VSBP) are both mandated to make agricultural loans at below market interest rates; VBARD charges 1 percent per month and VBSP 0.7 percent per month, significantly lower than the non-state-owned commercial banks. In fact, according to the 2018 VHLSS survey, 65 percent of all loans to the poor are made by VSBP and another 15 percent by VBARD.
• In Indonesia, the government makes agricultural credit more affordable through subsidies to banks on Kredit Usaya Rakyat (KUR) loans. KUR loans are subsidized by the government and borrowers are charged an interest rate below the market rate (6 percent). The government then pays the difference to the bank. The structure of KUR loans makes them less market distortionary than interest rate ceilings for agricultural loans because banks continue to receive the market interest rate. However, KUR loans are not targeted to agriculture or agricultural businesses, and the majority of KUR loans go to non-agricultural businesses.

Collateral

Restrictions on collateral remain a challenge for agricultural lending in all three countries. There are several good reasons for this:

• Land Policy: In Myanmar and Viet Nam, all land is owned by the government, and farmers therefore only have land use certificates that can be used as collateral. However, not all households have land use certificates for the land they use, making it impossible to use as collateral.
• Policy Confusion: Bank officials are often confused about regulations around collateral. In Myanmar, it was found that  banks misunderstood regulations and thought they could not loan more than MMK 1.5 million ($1141) to farmers.
• Poor Credit Scoring: In Indonesia and Viet Nam, banks are often risk averse in their lending, in part because they lack the ability to assess potential creditors. As a result, lending without collateral is limited, and banks sometimes even require collateral for loans that are not required by policy.

Financial institutions may face more than just difficulty assessing credit risk of individual borrowers; they may just be too unfamiliar with agriculture to feel comfortable lending to agricultural enterprises. This problem appeared acute in Myanmar even prior to the coup, as banks and other lending institutions lacked capacity to assess agricultural developments or enterprises in general. Similarly, in Viet Nam where VBARD and VBSP dominate lending and branches throughout the country, other banks likely lack much capacity to assess agricultural lending or even agribusiness lending.

Other Interventions

Indonesia in particular has an interesting model used for investing in rural areas. Profitable corporations are required to pay a small percentage of profits into corporate social responsibility funds. Some of these funds are directed toward industries that are important for agriculture—for example, rice milling. In the second phase of IFS4Ag, we are working with a group of CSRs to understand whether additional lending through the CSR can lead to increased local supply.

To foster AVCF development, some policy rules of thumb could be considered by the governments of countries studied here and beyond.

• Agricultural loans, by nature, have different requirements than non-agricultural loans. Revenues tend to be lumpy, occurring only at specific times; liquidity requirements are typically short term (weeks or months) rather than long term, except for tree crops; and weather plays a different role in determining risk. Policies can hinder agricultural lending if they require consistent payments or unsuitable loan terms (too short or too long relative to crop and cash flow cycles), or if they inappropriately price risk.
• It is important to clarify collateral requirements for agricultural lending; if loan officers are confused about requirements, they may hinder borrowers from obtaining credit. Moreover, technology should make it possible to develop improved credit scoring and new types of collateral; governments should encourage this development.
• ICTs can be useful tools in catalyzing agricultural growth, but regulations such as caps on mobile money transfers can hinder their use in agriculture. Ensuring the appropriate use of technology to enhance financial options for farmers should be an important goal of regulators in all three countries. Indonesia has started this process, as the Financial Services Authority (Otoritas Jasa Keuangan) has been cautiously approving new financial products that are already helping some farmers find new markets and finance options. In Viet Nam, the State Bank of Viet Nam should consider how to allow current mobile money options to enhance financial inclusion in ways that facilitate agricultural lending.

This work was undertaken as part of, and funded by, the CGIAR Research Program on Policies, Institutions, and Markets (PIM) led by the International Food Policy Research Institute (IFPRI). PIM is in turn supported by these donors. This blog has not gone through IFPRI’s standard peer-review procedure. The opinions expressed here belong to the author, and do not necessarily reflect those of PIM, IFPRI, or CGIAR.