Value chain approach to increase production of RUTF/CSB
By Yuki Isogai
Yuki Isogai is Operations Officer for the Ethiopia Nutrition Project/Private Sector Development Specialist with the World Bank. She has a wide range of experiences in private sector development, including in areas of public private partnership (PPP), foreign direct investment (FDI) promotion, tourism development, micro small enterprise (MSE) development, and women entrepreneurship development.
In Ethiopia, 13.7 million people face chronic food insecurity. Out of this figure, the number of people who needed emergency food aid reached about 6.2 million in June 2009. An additional 7.5 million received aid in return for work on community projects as a part of the Productive Safety Net Programme (PSNP).
In September 2006, the Government of Ethiopia adopted its second Poverty Reduction Strategy Paper (PRSP), The 'Plan for Accelerated and Sustained Development to End Poverty' (PASDEP), called for the implementation of the National Nutrition Strategy (NNS) (formulated in 2005/2006) to achieve the Millennium Development Goal 1 (MDG1) for halving hunger, malnutrition and poverty. The National Nutrition Programme (NNP) was designed and launched in 2009 in order to implement the NNS. It encompasses Therapeutic Feeding Programmes (TFP), which utilise Ready-to-Use-Therapeutic-Foods (RUTF), and Targeted Supplementary Food Programmes (TSFP) which require Corn Soya Blend (CSB).
Local demand and supply of RUTF and CSB
The cost of treating the severely and moderately malnourished in Ethiopia is prohibitive since a large share of the feeding products, i.e. RUTF and CSB, must be imported. Table 1 reflects the local supply versus demand gap. Furthermore, it is not only the final feeding products that have to be imported. As the domestic supply of inputs is quite limited (Table 2), a large proportion of these, e.g. powdered milk and soya bean oil, also have to be imported. This means the price of RUTF produced in Ethiopia is quite high relative to other countries. This is highlighted in Table 3 where costs are compared with Malawi. In addition, the freight costs are substantial, e.g. in the case of the RUTF, Plumpy'nut, the air freight costs are $2.63/kg, while the production costs are $3.46/kg. The result is that only a limited share of the total number of malnourished people in Ethiopia can be treated using these products.
|Table 1: Supply/demand gap for RUTF and Corn Soya Blend (CSB) (2008-2009)|
|Demand||Local production||Production capacity|
|RUTF (Plumpy'nut)||~3,273MT||385MT (11.7%)||1,800MT|
|CSB||~126,000MT||9,683MT (7.7 %)||43,200MT|
|Table 2: Supply/demand gap for inputs (2008-2009)|
|Milk Powder||982 MT||None||No. of milking cows ~9.9 million Total milk output ~976,615 MT|
|Soya Beans||74,762 MT||6,790 MT|
|Soya Bean Oil||7,242 MT||None|
*Other costs includes labour, quality control, packaging, energy and overheads
The total value of imported inputs alone adds up to $45.99 million/year, while the total RUTF/CSB market is worth, on average, about $60 million/year. This market is significant, and while development partners (DPs) are willing to purchase RUTF from local producers, local production has not met the demand so far (reflected in Table 1). However, investments in these products are profitable. For example, according to a feasibility study on powdered milk conducted by the Amhara Investment Office, the simple rate of return is 27.6%, which by any business standards, is profitable.
Thus, it appears that opportunities for developing agro-processing businesses within Ethiopia have been missed. Furthermore, promotion of local production of these products would improve the coverage/timeliness of the treatment of malnutrition and contribute to import substitution.
Why are local producers not meeting market demand?
Given the large market, the question arises, why the private sector in Ethiopia has not yet responded to meet this need, particularly since DPs are willing to procure the products from local producers. The World Bank Ethiopian Nutrition Team has conducted a thorough review of this question and identified three major issues, which are interlinked with each other: lack of market information, low access to finance and a weak value chain (see Figure 1).
Lack of market information
As a number of actors are involved between the farmers and the customers and the chain is quite segmented, market signals are not flowing down through suppliers. Thus, producers, including input suppliers and farmers, do not respond to the market as much as they could.
Low access to finance
Commercial banks normally consider the risks of agro-processing business so high that the level of collateral for related investment is set very high (up to 200%). In addition, the banking sector lacks capacity to evaluate properly the risks of new business areas, like RUTF/CSB production. Therefore, processing companies cannot obtain loans from banks for both capital investment and working capital.
The existing processing companies particularly suffer from lack of working capital. As agricultural products are normally available for only six months after the harvest due to lack of storage, the factories have to purchase inputs during the six months for the whole year of operation. This requires quite substantial working capital. However, banks are reluctant to lend working capital without high collateral, although a loan for working capital is for shortterm investment which is low risk. As a result, the operation rate (actual production/production capacity) of these factories is very low, e.g. average of 40% or even less.
Weak value chain
Even if the factories had enough working capital to purchase all required inputs, a problem still remains. There is insufficient supply of quality inputs. This applies for the whole value chain, i.e. RUTF/CSB producers and inputs (oil/powdered milk suppliers). Improvement in the quality and stability of input supply throughout the value chain is essential to increase the operation rate and reduce the level of risk for the industry.
Value Chain Approach with strong Public Private Partnership (PPP)
As reflected in Figure 1, production cannot be increased through a conventional approach that focuses on only one of the issues. All the issues affecting the value chain need to be tackled at the same time. To do so, a strong Public Private Partnership (PPP) involving private companies, commercial banks, farms, NGOs supporting farmers, UNICEF, WFP and the World Bank is required. Each actor will need to play a distinct role at various links in the chain. Production will not increase if one link is broken.
DP: Development partner; TA: Technical assistance; MFI: Micro-finance initiative
To improve the market information flow, DPs including the World Bank, can conduct feasibility studies and organise dissemination workshops, inviting a wide range of stakeholders, i.e. farmers, investors and bankers. This will improve understanding of the market amongst key actors.
Bank reluctance to lend to what they perceive as high risk agribusiness, unless businesses have large collateral, could be addressed through 'guarantee funds'. These funds cover a certain percentage of defaults, could be provided by DPs and would help to significantly reduce the risk for banks. At the same time, technical assistance (TA) to the banking sector is a key to improve their capacity to evaluate the profitability/feasibility of new businesses.
The perception of banks that the agribusiness sector carries risk is not completely unfounded. Due to the relatively primitive production systems at farm level, the existing processing companies have to operate factories with unstable supplies of inputs. New investors therefore hesitate to enter the business as a 'high tech' factory cannot be operated without a strong supply chain. At the same time, there are several NGO projects supporting small farmers to improve the productivity and quality of agro-products which are seeking markets (producers). Support for processing companies should be linked to these efforts on the ground.
The advantages of the value chain approach to increase the production of RUTF/CSB are:
- The targeted market is large and relatively secured by development partner's funds
- A value chain approach simultaneously supports different elements of the value chain, e.g. RUTF producers, groundnut farmers, milk powder producers, thereby creating synergy of impact. This contrasts with more conventional approaches where there is less joined up support.
- It has cross-sectoral effects, i.e. impact on humanitarian activities and national economic growth
- It significantly contributes to import substitution
- It improves the access to and the timeliness of delivery of relevant food products for needy beneficiaries.
As a pilot study, the Ethiopia World Bank Nutrition team has conducted a thorough feasibility study of powdered milk production and means of promoting an investment and link to NGO funded dairy projects, as well as the RUTF producers.
For more information, contact: Yuki Isogai, email: email@example.com
More like this
FEX: The RAIN programme
By Miriam Christensen and Todd Flower Miriam Christensen was the Documentation and Information Officer with the RAIN programme. She specialises in communications and knowledge...
We asked Peter Djikhuizen from WFP to comment on this article. He made the following points: The successful exercise of establishing local factories for UNIMIX in Kenya was...
Smaller scale production of RUTF in Malawi Summary of editorial1 An editorial in 'Maternal Health and Nutrition' explores some of the issues around local versus centralised...
By Steve Taviner Steve is Development Director of Meds & Food for Kids (MFK) based in St Louis, USA. Before taking on this role, he spent the last 15 months overseeing MFK...
By Jan Komrska Jan Komrska is a pharmacist working at UNICEF Supply Division leading Nutrition unit and responsible for procurement of products related to nutrition...
By Andrew Simons, Daniel Gebeyehu, Getachew Gemtesa and Markos Kidane Andrew Simons is the National Programme Director for Food for the Hungry (FH) Ethiopia. He holds an...
By Marta Ortiz Nunez Marta Ortiz Nunez is a recent Masters graduate in International Development. In 2006 she co-founded a Spanish non-governmental organization focusing on...
4.1 CTC from Scratch - Tear Fund in South Sudan By Ed Walker (Tearfund) Beneficiaries collecting their general ration in South Sudan. Tearfund has been working in Northern...
By Dr Peter Fellows Introduction The development of RUTF has been an important factor facilitating the development of CTC. However at the moment, most RUTF is made in France,...
Summary of position paper1 Action Against Hunger | ACF International has recently produced a position paper on the role of products in the treatment and prevention of global...
7.1 Introduction This section focuses on supporting agricultural production, in particular farming and livestock production, as livelihood strategies. Production support can...
FEX: Valid Nutrition
Name Valid Nutrition Address Cuibín Farm, Derry Duff, Bantry, Co. Cork, Ireland Chief Executive Officer: Derek Staveley Phone +353 86 7809541 Chair of Trustees...
FEX: From the editor
Ethiopia is a diverse country where a significant proportion of the population live on or below the poverty line, where food insecurity is widespread and rates of acute...
6.1 Introduction In emergencies, access to markets may be lost for a number of reasons. Since most people live in a cash economy, restoring and maintaining adequate access to...
FEX: Understanding access to nutritious food by poor urban pregnant women and lactating mothers and their children in Kisumu, Kenya
By Albertien van der Veen, Rik Delnoye and Femke van der Lee Albertien van der Veen is an experienced public health nutritionist/epidemiologist and team-leader of the urban...
By Shekar Anand, Oxfam Shekar is Programme Director for Oxfam GB in Ethiopia. Past experience includes working with OXFAM, CARE, CIDA, and Government in Aceh, India, Zimbabawe...
FEX: Clinton Foundation
Name Clinton Foundation Year founded 1970 Address 55 West 125th Street, New York, NY 10027 Director Anil Soni, CEO Email firstname.lastname@example.org No. of HQ staff...
By Lili Mohiddin and Mike Albu Lili Mohiddin has been an Emergency Food Security and Livelihoods Advisor with OXFAM GB since September 2005, based in the UK. Mike Albu is an...
By The Relief Society of Tigray (REST) Mekelle Team The Relief Society of Tigray (REST) has been in existence in Ethiopia for over 30 years, starting out as a relatively small...
Summary of published review Blended food is often used in supplementary feeding programmes. Fango, Ethiopia, 2000. Pieternella Pieterse (Concern) Pieter Dijkhuizen has been a...
Reference this page
Yuki Isogai (2011). Value chain approach to increase production of RUTF/CSB. Field Exchange 40, February 2011. p78. www.ennonline.net/fex/40/value