Rising food and input prices, alongside ongoing contextual challenges, are putting pressure on food system SMEs

Recent months have seen a series of alarming headlines about food prices: while the global food price index of the U.N. Food and Agriculture Organisation is now on the decline, it remains 23% above its value a year ago, driven by large year-on-year increases in the prices of cereals and vegetable oil, as well as dairy products. Meanwhile, agricultural input prices (e.g., energy, feed, and fertiliser) have also been rising and at rates even higher than food prices. These trends began before 2022, but the Russian invasion of Ukraine added additional upward pressure on prices, as Ukraine, Russia, and Belarus are collectively major producers of wheat, maize, sunflower oil, natural gas, and fertilisers.

Weathering these peaks and volatility is challenging even for rich countries and large corporations. So how are small- and medium-sized enterprises (SMEs), which make up the bulk of the food system in low- and middle- income countries, coping with these challenges? A recent online survey by the Scaling Up Nutrition (SUN) Business Network (convened by the World Food Programme (WFP) and GAIN) aimed to answer this question.

Looking across the responses received from 219 owners and/or managers of food system SMEs in 12 countries in Africa and Asia, with about 34% from women-owned businesses and about 28% from youth-owned businesses, paints a nuanced picture. First, it is clear that SMEs are feeling the pinch: 79% reported that high or volatile prices were a current challenge for their business, with about a third ranking this as their main challenge and 17% saying high prices were having such a severe impact on their business that it risked closure. Firms led by women and youth were particularly likely to cite rising prices as a top contextual challenge. Most firms estimated that prices for their input had increased by over 30% in the past 6 months. About two-thirds of firms also reported changes to input availability since the start of 2022; of these, 68% reported a decrease in availability.

Rising prices were, however, not the only difficulty faced. Indeed, considering their biggest challenge, most respondents named either difficulty accessing financing or limited financial reserves. The fact that food system SMEs in low- and middle- income countries face difficulties with accessing financing is widely noted and at present this long-standing challenge is exacerbating the economic pressure they feel from rising prices.

The main strategy firms used to respond to input price increases was raising sales prices: 71% of respondents had changed their product’s price in the prior 6 months; of these changes, nearly three-quarters were increases. Others cited strategies like cutting staffing and reducing product sizes, which could hinder long-term firm performance or customers’ food access. For example, a processor of edible oils and condiments in Nigeria noted cutting three staff members, reducing product sizes, and decreasing working hours to save fuel. However, some firms were also finding innovative ways to respond that could increase their long-term resilience, such as by strengthening local supply chains and switching to renewable energy sources. For example, a legume processor in Madagascar noted making direct contracts with farmers to source raw materials locally and thus avoid some of the volatility of global supply chains and investing in training those farmers to ensure high-quality products.

Encouragingly, many firms also saw opportunities due to the present challenges, with about half wishing to explore new business areas. For example, an egg producer in Kenya planned to set up his own feed mill, to avoid risks of volatile prices or interrupted access to chicken feed (which is typically made from grains plus oilseed meals). Moreover, 63% of firms reported that actions they had taken to adapt to the COVID-19 pandemic such as adapting products, changing distribution methods, and adopting online sales had helped them to cope with the current situation.

However, rising input prices still represent an acute challenge for many firm leaders, and one that exists alongside other contextual challenges, such as poor economic growth, climate shocks, local conflict, and political instability and comes as most firms are still feeling impacts of the COVID-19 pandemic on their business. These multiple challenges can have compounding effects. For example, two chicken farmers in Mozambique explained how, even before the pandemic, they had lost clients and sales due to conflict in the north of the country, putting them in a weak position to respond to the current price increases. And a fruit processor in Pakistan noted how half of their input crop had been damaged by monsoon rains, damping their expected rebound from two years of weak sales during the pandemic.

Disruptions to global food markets are likely to continue amid ongoing conflict; in many low- and middle- income countries, they will be exacerbated by other challenges like local political insecurity and climate shocks. To ensure a resilient food system, it will be important to mitigate these effects on SMEs and facilitate the opportunities that emerge for them thereby buffering impacts on the consumers who rely on them for nutritious food. This can be done locally through increasing financing options for SMEs in both the short and long terms and using fiscal policies (such as time-limited tax exemptions or reductions in interest and utility payments) to reduce the pressure on SME finances. At the global level, ensuring the free flow of food and inputs, including to the poorest countries and out of conflict areas, will be essential to stem the tide of rising prices.

This blog piece was written by Stella Nordhagen, with support from the SBN Team