Insight

Understanding investment and sourcing through smallholder supply chains

A deep dive into ten corporate approaches to engaging, protecting and supporting smallholder farming suppliers

November 30, 2021

Smallholder farming directly and indirectly supports the livelihoods of many of the planet’s most vulnerable people and coexists with some of its most diverse and ecologically threatened landscapes. While defined differently depending on the country and agro-ecological context, smallholder farmers (SHFs) are best characterised as having ‘limited resource endowments relative to other farmers’ according to the UN’s Food Agriculture Organisation (FAO).

Smallholder farming is predominantly a household business, where families face constraints including lack of access to technology, finance and high-yield production techniques, limited market access, low bargaining power, informal or insecure landholdings, climate vulnerability and resource scarcity, as well as structural social challenges including an aging population, limited education, and marginalisation.

The International Finance Corporation (IFC) estimated in 2013 that there are as many as 525 million SHF farms globally, and in many countries smallholder farming predominates. Typically, a smallholding might constitute 1‒10 hectares of cultivated land. In Tanzania for example – a country where agriculture contributes to 28% of GDP – approximately 19 million people farm 3.7 million smallholdings, representing 80% of total farms in the country. The number of SHFs – and those who work for or with them – is also growing at a faster rate than global population, while smallholdings themselves tend to decrease in size as members of large families split inherited plots amongst themselves. This poses a structural challenge to prospective development of economies of scale (one means by which SHFs can improve their livelihoods).

525 million

estimated global number of smallholder farms

85 %

estimated proportion of rubber grown by smallholders

80 %

estimated proportion of sugar grown by smallholders

Between 60- 80 %

estimated proportion of coffee grown by smallholders

Operating at the sharp end of global food supply chains, SHFs produce many of the most widely used crops worldwide such as palm oil, coffee, cocoa, and livestock. At the other end, consumer goods companies bring these crops or their derivatives to market. These two ends of the spectrum are often very separated from one another by others in the value chain, ranging from commodity aggregators to traders and processors. So it’s challenging for consumer goods firms to monitor and manage sustainability at the smallholder level, exposing themselves to financial, reputational and even legal risks.

In 2020, a long-established sustainable investment manager contracted NIRAS-LTS International to study supply chains between some of the world’s largest consumer goods companies and their SHF suppliers. Looking first at the definition of smallholder farming and how their produce is brought to market, the consulting team analysed environmental, social and governance factors impacting SHFs, the risks they present, and some mitigating actions companies could take. The team was asked for a specific analysis of the link between smallholder farming and deforestation, including an assessment of certification standards and forest protection agencies seeking to improve smallholder supply chains.

There are good economic and social reasons for supporting the development of SHFs, from raising rural incomes and employment opportunities, to encouraging indigenous entrepreneurship and securing more consistent and better-quality supply of raw materials. However, value chains where SHFs are present result in specific sustainability challenges namely those related to deforestation, traceability of crops, child labour, and so on. The report goes on to highlight some best practices in managing these complex value chain challenges.

Assessing companies against key sustainability criteria: finding best practice and opportunities for improvement

To provide deeper insights and best practice detail, we examined ten consumer goods companies’ approaches to engaging, protecting and supporting their respective supply chains’ SHFs. The key findings show that:

Few consumer goods companies sufficiently integrate SHFs within their sustainability commitments. Most pass this responsibility on to their core suppliers and do not explicitly extend their own policies.
Of the companies assessed, a surprising number lack commitments on basic aspects of SHF sustainability, with the two most notable omissions concerning ‘free, prior and informed consent’ (FPIC) and indigenous rights commitments.
Diversity in the selected companies highlights different regional approaches which provides an interesting insight into the sustainability approaches adopted in different markets, as well as local regulations and consumer interests.
Company reporting has declined in terms of detail and progress against previously reported indicators, which might be a reflection of poor progress against 2020 targets
Companies need to go further than identification of ‘critical’ supply chains for traceability efforts as the term ‘critical’ is defined differently and can hide underperformance against old traceability targets.
There is a lack of third-party verification throughout the industry and where it is used, the results are often not publicly shared. The trend is moving towards increased internal certification. While this initially appears a positive step, indicating sustainability is becoming more embedded in internal operations, it also reflects a departure from market standards and further reduces transparency.