Finance & Investment
Why Higher Commodity Prices Hurt Smallholder Farmers — and What Can Be Done to Help

By investing in SMEs in developing countries, we aim to help them enhance their businesses for the benefit of smallholders — proving they are credible to the local banking sector along the way. Ultimately, our core purpose is to tilt the economic balance back toward smallholders; so they can make a decent living in normal times and survive inevitable price shocks.

Price volatility is the enemy of the smallholder farmer. That applies when prices rise dramatically just as much as when they fall.

Current spikes in commodity prices and supply chain disruptions caused by the conflict in Ukraine are exacerbating disparities in world food systems that have already been severely tested by the pandemic. And smallholders are being hit the hardest.

According to the World Bank, there are roughly 500 million smallholder households globally, accounting for almost two billion people — with 65 percent of poor working adults earning their living through agriculture. Many live in countries caught in the commodities trap, which means 60 percent or more of their total merchandise exports are commodities. This makes them particularly vulnerable to commodity price instability.

It may seem counterintuitive that commodity price rises would harm commodity producers. But the smallholder farmer growing and selling maize, vanilla or cocoa on a hectare or two of land is in a very different position from a multinational commodities business. They are lucky if they achieve a two-digit return on their investment, and high prices are making that even more difficult.

There are a number of reasons why this is happening. The price of a farmer’s crop may have risen, but so have the inputs — such as nitrogen fertiliser and fuel — that enable them to farm it. In fact, according to the UN’s Food and Agriculture Organization (FAO), input inflation has outstripped output inflation by 6 percent to 2 percent in the past 12 months. With the pay-off for investment uncertain — Will prices still be high when the crops are ready to harvest months down the line? — there’s little incentive for farmers to commit to growing the food that is vital for them and their communities.

Smallholder farmers are also consumers of the products their crops are used to make. In the poorest countries, where the poorest smallholders are, households spend 60-80 percent of their income on food compared to around 10 percent in rich nations — which means they are disproportionately impacted when prices in the shops rise. Any extra they can charge for their produce is soon eaten up by the money they are now spending to feed their families.

Whether they can actually charge extra is another point of concern. Many live and work in hard-to-reach areas and have little access to competitive markets. They are at the end of the value chain; and their selling price is determined by a market system which is beyond their control.

In other words, they are price takers, with limited power to bargain that price upwards. They cannot raise them in the same way a retailer or brand can when their costs grow. And, inevitably in this scenario, the amount they’re paid rarely rises as quickly as it falls.

Where there are local enterprises that seek to pay smallholders a fairer share, they too are being squeezed from several directions. Not only are they contending with higher input prices, they’re unable to pass on costs to local consumers who have little ability to pay more. In addition, supply chain issues such as sea container shortages and delays are forcing them to wait longer to receive the value of their exports. In turn, they do not have the cashflow to reinvest in smallholder produce.

On the ground, the consequences of these multiple challenges are stark. Without stable incomes, smallholder families are less likely to afford school fees for their children — which leads to an increase in harmful practices such as child marriage; and for many, it means hunger for them and their communities. As always, poverty causes social and political instability — which exacerbates poverty even further. This is not the time to look away and assume all commodity producers are winning.

In the short term, governments and institutions must step up and provide financial support and subsidies for smallholders and local agribusinesses to weather this storm. Large multinational companies must also make sure they are a paying a fair market rate to smallholders for their crops. At the Common Fund for Commodities (CFC), we are always looking for ways to help viable businesses survive during a crisis — as we did by providing liquidity to several of our partners when COVID-19 was at its height.

But long-term resilience to price volatility requires deeper change. Small and medium-sized enterprises (SMEs) that work to benefit smallholders need financial backing and a fair playing field to profitably expand in existing and new markets. But these businesses are often viewed as too risky by local lenders, which means they struggle to access the working capital they need to drive growth.

By investing in SMEs in developing countries, we aim to help them enhance their businesses for the benefit of smallholders — proving they are credible to the local banking sector along the way. This might involve building factories that add value to products; creating brands that encourage farmers to diversify their crops, so they are not over-reliant on a single harvest; promoting climate-resilient farming practices; and finding innovative ways to boost incomes, such as through carbon credits.

Ultimately, our core purpose is to tilt the economic balance back toward smallholders — so they can make a decent living in normal times and have the strength to survive when inevitable price shocks strike.

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