Small-scale food processing in rural development
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CTA. 1996. Small-scale food processing in rural development. Spore 65. CTA, Wageningen, The Netherlands.
Permanent link to this item: http://hdl.handle.net/10568/47431
New market opportunities are now providing a still largely unexploited niche for smaller-scale food processing. These lie between the hive of activity in the informal sector and the large private or public African businesses, based on...
New market opportunities are now providing a still largely unexploited niche for smaller-scale food processing. These lie between the hive of activity in the informal sector and the large private or public African businesses, based on imported industrial technology. Whereas urban processors have undoubted advantages, especially their proximity to large markets, the backers of smaller enterprises often find advantage in setting up businesses in the industrial areas of large rural centres or in small towns. The conditions needed for the development of private businesses in the modern sector are still far from being satisfied in many ACP countries. These conditions include more or less stable and open markets; fixed regulations and rules within which businesses can operate; simultaneous presence of the competing and complementary modern and informal sectors; availability of credit and access to technical and commercial know-how. The additional problems of lack of infrastructure, water and electricity, need to be overcome in order for businesses to be set up outside the main urban areas (see Spore No 60 - What has rural life to offer). The tremendous opportunities for food processing do, however, offer many possibilities for setting up smaller plants in the rural areas, even though the potential for adding value to local resources through the processing of fruits, cereals, milk, oilseeds and fish depends very much on the locality. These 'village industries' contribute greatly to the development of the rural economy They provide added income to the small farmers who supply raw materials and create job opportunities for many other people. These industries also generally improve the quality of the raw material and reduce post-harvest losses. Making use, by definition, of local resources, they supply products in high demand, reduce the need for imports and contribute to the overall national economy Food processing industries already contribute considerably to African national economies. One of the conclusions of a workshop held in April, 1996 in Stuttgart in Germany under the auspices of Food-Net/RESAA (a network of NGOs and European institutions that promote appropriate technology) was that 'Food processing accounts for some 40% of the value added by all manufacturing industries.' These activities, which are 'for the most part small or informal businesses are a major source of rural employment because they create jobs and income for about 60% of the sub-Saharan African labour force, most of whom are women, who thereby earn the money needed to support their families.' This strong emphasis on women is a characteristic of the sector but may act as a brake on small business development in so far as women unfortunately also tend to have less access to improved technology, extension services and credit. Informal and urban markets The rapidly expanding urban areas and the informal urban food sector, provide opportunities for consumption of a large proportion of rural production. The difficulties of gaining access to profitable but highly competitive markets thus constitute a first set of problems. These limit the growth potential of food processing businesses that are not within the immediate neighbourhood of the major urban conurbations. Whilst already a long way from being negligible, the opportunities will increase as the proportion of the total population living in urban areas also increases. A perspective study by the Club du Sahel, the African Development Bank and CILSS estimates that 270 million of the expected total of 430 million people in West Africa in 2020 will be living in 6,000 urban areas of more than 5,000 people and that there will be more than 300 large centres with populations in excess of 100,000 inhabitants. These will provide just as many opportunities for marketing rural products and will certainly be easier to access than the very large clues. Whether managed by an individual or a small group, a small business might well decide to start operations in the catchment area of a secondary urban zone. In addition to the necessary basic services, such a zone can potentially provide a profitable outlet for production. Initially demand may be limited but this need not be an impediment provided that the supply does not exceed the demand. By improving its technical ability, by broadening its range of products and by producing a variety of items from a single primary product (pasteurized milk making butter, yoghurt and cheese, for example) a small enterprise can expand its business in the local market. Capturing new and more distant but larger markets, possibly in the capital city or abroad, will then determine the rate of expansion of the business. This type of progression faces many obstacles but the chances of success are increased in relation to the nearness of the primary resources which it utilizes and which provide a comparative advantage over business competition located in the major towns. Advantages of rural processing A significant advantage can be gained by processing locally a highly perishable product and reducing losses through early treatment. Milk and fruit offer the best advantages and are much better for processing than, for example, cereals which store better as grain than as flour. Cassava also supplies a whole downstream chain of businesses which, while being largely informal in nature, are very active. It is thus logical that milk, fruit and cassava processing are now the main ventures of the modern food processing sector outside the major cities. Distance is certainly a handicap when it comes to gaining an awareness of, adapting to, and manipulating the market. This can be overcome to a large extent by organizing delivery and achieving savings in the cost of raw materials. For example, five small businesses in Haiti that produce guava and pineapple jam could triple the size of their businesses without any marketing problems if they were able to find sufficient supply (see Spore 61 - Fruit processing in Haiti). With the exception of the large export-oriented and intensively managed plantations, smaller scattered plantations are now facing considerable losses. Thus, for example, 80% of the mangoes of the Bio Guinea Company at Kindia to the north of Conakry simply rot where they have fallen due to lack of a market. Building a processing plant near to the production site provides impetus for proper harvesting regimes, whose effect is enhanced if the processing enterprise pays at least part of the purchase price at the time of delivery. Using the products as collateral for credit Smaller businesses are limited by lack of funds and an almost total absence of credit. Even when only limited investment is needed to buy processing machinery, heavy operating costs must still be financed. Customer allegiance, which is a basic tenet of efficient modern marketing, demands that the products (fruit juices or jam, for example) be available on shop shelves at all times. To be able to fulfil this demand, and to provide goods throughout the year in spite of the seasonal nature of the primary product, a business and its partners must build up a stock of finished products at harvest time. Financing these stocks is a further heavy burden which is added to by the need for appropriate storage. Motorized pulper Providing a guarantee of payment to a potential lender is a basic condition for obtaining credit. In order to overcome the problem of restructuring the cereal markets PRMC (Programme de restructuration du marché céralier) established a system in Mali in 1982, that linked management of food aid with provision of credit to the large and small private businesses which took over cereal marketing from the state organization. With the exception of emergency assistance, food aid is sold to commercial businesses, which then further sell on the open market. The nominal value of the cereals and some external financing provide the collateral which, in the absence of any concern by the banking system, is needed for the merchants to obtain credit. As a guarantee the merchants' stocks are maintained in independent storage (which is paid for) under good conditions of hygiene and are released in blocks as and when the loan is repaid. Although it is restricted to cereals this system, known as 'third party storage', proves that a Government can stimulate efficient private sector activity through close collaboration with the businesses that it wants to promote. Market studies and business management Among factors limiting the activities of small-scale food processing businesses the FoodNet/RESAA workshop noted the lack of adequate market information and problems associated with selling the finished product. Many countries do, however, have universities or professionals that would be able to provide such information. The cost of procuring information and marketing might induce several businesses to group together to finance them, along with some national and international assistance. In order to remain close to the production base while marketing their finished product in distant markets, small businesses may seek some advantageous arrangement with a large wholesaler. In this way the final added value must be shared. For this to be equitable, the processor must have accurate information on the retail price and the real costs incurred by the wholesaler. The FoodNet/RESAA workshop proposed, however, an alternative and less dependent strategy which several small businesses could adopt by joining together to market their products communally. The proposal was to form an organization, which must as far as possible, be under the control of the processors and be paid for by charging a percentage of the final sale price. The need for public involvement Relieved of the need for routine business management by economic liberalization and privatization, governments now, more than ever, have the responsibility of ensuring that policies and legal frameworks encourage development of the private sector. There are several ways in which the public sector can act. To improve the advantages of processing plants being close to the production site and to encourage business investment, local authorities can offer a range of incentives. One such is to provide land free-of- rent and another is to reduce, or even eliminate, local taxes for these businesses for a short or long period. As yet, there has not been sufficient research on the ways by which the traditional processing methods of many smaller businesses may be improved. An expert in this field is Mathurin Coffi Nago of the National University of Benin, who emphasizes that 'improved processing methods can lead to reductions in losses of the primary product while improving the efficiency of labour' (see Spore 63 - Small business opportunities are there for the taking). Ultimately, the economic performance of small businesses will also vary with the amount of tax they have to pay. In Uganda, for example, there is no tax on industrial machinery whereas in Burkina Faso it is in the range of 50-80%. Is local development likely to be encouraged when, as for example in Mauritania, a plant for processing camel milk into cheese has to pay 30% import duty on its packaging material, whereas the same packaging on imported European cheese which competes with it is taxed at only 10%? (see Spore 55 - Curds and why?) Equipment for juice extraction Whether supportive or discouraging, it is legal frameworks and sectoral policies that largely determine the success of a private business: applied correctly, they can help the development of the food processing industries on which the national economy and the rural areas are in so much need.