Highlights:

1. Pakistan’s agriculture sector is lagging behind its potential and needs to focus beyond productivity improvements towards transformation through high value production. Recent World Bank Group analytics have highlighted the need for Pakistan to overcome low productivity in the agriculture sector and improve its poor business environment and financial inclusion. They further underlined the need for interventions in agriculture to move beyond improving productivity towards the environmental sustainability of the agriculture sector and an agricultural transformation through high value production, water use efficiency and increased competitiveness, and to address distortionary policies in the agriculture sector, inefficiencies in the wholesale markets for non-traditional products, poor physical infrastructure, the limited knowhow of producers, and a lack of modern agricultural research.

2. In support of the World Bank’s development priorities to increase competitiveness and promote equity and inclusion in Pakistan’s agriculture sector, several projects under preparation aim to increase green and inclusive private sector growth. The Punjab Resilient and Inclusive Agricultural Transformation (PRIAT) Project and the Sindh Livestock and Aquaculture (LIVAQUA) Project under preparation at the time of this report are aimed at:

1. overcoming low productivity and unsustainable production practices;

2. addressing information asymmetries and promoting more inclusive market integration;

3. improving the business enabling environment; and

4. strengthening supply chain resilience and ameliorate the risk of environmental damage.

To help inform the World Bank’s approach to smallholders’ market integration in Sindh and Punjab, five background feasibility studies were prepared to evaluate the current level and opportunities for strengthening producer integration in key commodity markets: fruit and vegetables (Punjab); livestock (Sindh); and fisheries/aquaculture (Sindh). The main findings and recommendations of the feasibility studies have been summarized in this synthesis report to identify and propose market linkage approaches.

Pakistan’s Agriculture Sector and Market Trends

3. Agriculture continues to be the main livelihood in rural areas and the country’s urbanization bears great potential for inclusive sector growth. Agriculture represents about 20 percent of Pakistan’s GDP and employs almost 40 percent of the workforce. Relative rural migration trends are muted in Pakistan, with 37 percent of the population living in urban areas. These trends are mainly due to the forces of high population growth, particularly in rural areas, and the inability of the services and industrial sectors to create enough jobs to keep pace with a rapidly expanding youth cohort looking for off-farm work. As a result, thousands of smallholder producers are encumbered with increasingly smaller parcels of land and meager livelihood prospects. In absolute terms, however, urbanization is significant in Pakistan due to its ever-expanding population.

4. Pakistan’s farming sector is highly fragmented. Small average plot sizes and livestock holdings dominate farming, which creates difficulties for linking to markets. The latest agriculture census (2010) noted that, of the 8.3 million farms in Pakistan, 89 percent were less than 5 ha, accounting for 48 percent of the national farm area The livestock subsector represents 60 percent of Pakistan’s agricultural GDP, but smallholders dominate the industry: 94 percent of farms own less than 10 cattle and buffalo, accounting for 67 percent of cattle and 71 percent of buffalo in Pakistan.

5. Pakistani agriculture is not realizing its full potential. Although there is agricultural activity in all areas of Pakistan, most crops are grown in the Indus River basin of Punjab and Sindh producing roughly 80 percent of national output. The agriculture sector is operating below the potential yields that the well-irrigated and fertile soils of the Indus irrigation system could produce when compared to productivity levels in similar regional and global farming systems. The food and beverage processing industry is the second largest industry in Pakistan after textiles, accounting for 27 percent of the value-added production and 16 percent of employment in the manufacturing sector. Most of Pakistan’s food processing industries are located in Punjab (60 percent) and Sindh (30 percent).

6. The vast bulk of fresh produce passes through traditional marketing systems onto consumers. This carries substantial costs, especially for smallholder producers, where supply chains contain multiple intermediaries including village-level consolidators, transporters, wholesalers and commission agents in state-regulated government markets, and retailers The long chain of intermediaries inflates the prices paid by the end consumers. Farmers are often in unfavourable bargaining positions as their holding capacity and market information are low. They are unaware of quality standards, if any, and traders are more adept at judging the in-field returns (e.g., dressing percentages, harvest returns from an orchard). Additionally, the lack of transparent trading practices in the markets represented by trader collusion and improper or no weighing procedures, the limited availability of market infrastructure (e.g., pre-cooling facilities), and an inadequate transport and logistics infrastructure lead to wastage that can amount to 20-30 percent through the supply chains.

7. Pakistan, as a lower middle-income country with high population growth, increasing incomes, improved communications and urbanization, has followed global food demand trends. Pakistan’s growing middle-class consumers now demand more dairy products, meat, fresh fruit and vegetables, and processed convenient foods, and less unprocessed grain staples. These trends, plus the liberalization of markets, attracted many large foreign and local companies such as Eximp Agri Products (rice), PepsiCo (potatoes), Rafhan (maize), Pakistan Tobacco Company (tobacco), K&N (meat and poultry), and Nestle and Engro Foods (milk) to Pakistan’s food sector.

8. Despite the significant transformation of the urban retail sector, and the moderate transformation of the fresh produce wholesale sector, little information is transmitted back to producers because supermarkets and most agro-processors continue to source the bulk of their requirements from wholesale markets. Farmers’ capabilities are low as they are not well informed of the standards required by supermarkets, processors, exporters, etc., and even more critically, they lack the capacity to achieve those standards. Absent are contractual relationships and the emergence of specialized wholesalers dedicated to modern supply channels. This results in lost opportunities for local farmers to supply the higher quality produce increasingly demanded by the growing urban middle classes and, consequently, to receive higher returns for their work. Punjab’s Higher Value Crops.

9. The increasing domestic demand for fruit and vegetables encouraged an expansion in production of higher value crops, including fruits and vegetables, in Punjab. Except for the potato industry, the increased production was driven by the expansion of cultivated area rather than any productivity improvements. A significant recent reform in produce marketing is the Punjab Agriculture Marketing Regulatory Authority (PAMRA) Act which aims at increasing competition in agriculture markets. PAMRA’s main task is to register and deregulate wholesale markets, collection centers, warehouses, cold storage facilities, accreditation bodies, and service providers (brokers, graders, assayers, commission agents, etc.).

Sindh’s Livestock and Aquaculture

10. Consumption trends in Sindh for animal-based foods have increased, although most consumers still prefer raw, warm milk, live chickens and unpacked meat. The lack of modern infrastructure and services along key commodity supply chains contributes to these trends. Most milk supplies (80-90 percent) continue to be marketed through traditional channels as unpasteurized milk which leads to high contamination levels due to poor hygienic practices, the absence of chilling, and adulteration by producers and traders. About 20 percent of the national ruminant livestock herd is located in Sindh. Meat is the main source of protein in local diets and Sindh supplies about 30 percent of national production. Most of the increase in demand for meat in Pakistan has been met by poultry, which is the cheapest meat. The production strategies, business set-up and processing in the poultry industry are the most advanced of any meat subsector in Pakistan.

11. The bulk of expected future demand for aquaculture products will need to be met by fish farming. The volumes of marine captured fish have remained steady at around 500,000 tonnes for the past decade and are unlikely to grow considering coastal fishery stocks are over-exploited and cannot sustain the current levels. Fishery exports, mainly to China and Thailand, have risen steadily during the past decade and amounted to US$474 million in 2019.

Proposed Market Linkage Approaches

12. Efforts to form producer groups in Pakistan have not proven sustainable once project or NGO support ends. The cluster approach has proven more effective in developing market opportunities. Producers will not generally self-organize into groups but rather congregate around a mutually beneficial economic purpose (e.g., selling to a common agro-processor) or a piece of infrastructure for collective action, such as aggregating their produce for certain buyers. Interventions to support smallholder commercialization, such as market analyses, contract farming, certification, and strategies to strengthen local business development and value chain investment have been deficient within the agriculture sector of Pakistan.

13. Producer Collection Centers provide points of aggregation for growers to either individually or collectively sell their produce. The availability of bigger quantities of fresh produce, sorted into quality grades, would attract a wider range of buyers seeking larger volumes for ease of transportation. These improved economies of scale promote more competition between buyers and should propel higher returns for smallholders. Collection centers have delivered effective results for smallholders selling fresh milk daily that needs to be chilled, and this model could be replicated for other perishable commodities (i.e., fish, fruit and vegetables). The ownership and management of the collection center is possibly the most important issue impacting the efficiency, profitability and sustainability of the center, and thus, a key challenge to the advancement of this approach among the target commodity subsectors.

14. The Productive Alliance approach aims to change the buying and selling culture from the occasional and opportunistic sales transactions of individual farmers to transient traders, to a more consistent sales approach that builds relationships between registered producers or groups of registered farmers selling to known trading partners. The public partner or the project’s team would be the driver of the partnership by creating the conditions for the development and exploitation of the identified market opportunity by focusing support on the weak links in the supply chain. Alternatively, smallholders could be connected to a larger producer or trader with experience and longer-term downstream linkages. The limitations to sustainably link smallholders to higher value markets include their lack of timely supply and the uneven quality of the produce delivered to buyers. Projects need to employ specialist intermediaries to help bridge the gap between producers and companies. The main barrier to these more formal supply transactions is the lack of trust between all groups, both horizontally and vertically, within the supply chains.

15. Tackling supply chain weaknesses in existing marketing systems, such as food losses and waste (both on-farm and downstream) in an efficient, sustainable and integrated way provides an opportunity to reduce costs and value erosion in a relatively cost-effective way that would potentially increase the incomes of all chain players. Chain integrators may be able to introduce new standards and technologies in the sector that support smallholder farmers in improving their production quality and quantity. These more progressive intermediaries often have a strong focus on service provision but with a commercial attitude. The major barrier to improving the existing marketing system would likely be the strong vested interests among the various intermediaries to maintaining the status quo. Assistance with product pricing, the relationship between buyers and smallholders, timing of payments, quality issues, location of sales, production-related decisions, timing of selling, access to inputs, and investment costs are all possible entry points for project interventions to improve existing food marketing systems.

Recommended Interventions

16.The following recommended project activities are based on the lessons learned from previous market linkage efforts highlighted in the feasibility reports for each commodity and project experiences that specifically aim to improve marketing outcomes for smallholders.

• Identify the market opportunities that will guide subsequent project interventions. Support agencies undertake a series of stud ies to understand key issues such as market demand, local production conditions, the business environment, interests of farmers, traders and agribusinesses, and the farmers’ ability to access business support services including extension advice.

• Define the exclusive benefits that cooperation will generate for value chain players. Collective action is most successful when farmers perceive that the benefits from group activities outweigh any additional costs. Project teams should clearly identify these potential benefits early and develop/increase the group’s performance through production intensification and marketing improvement, while also working on the organizational aspects of group formation.

• Target external financial and technical support to help small-scale producers and agri-businesses access financial, managerial and business services. Provide technical assistance to help smallholders meet quality standards, implement efficient agronomic techniques, understand markets, develop business proposals, etc. If projects disrupt traditional sources of credit (e.g., trader advances), then alternatives need to be identified that provide long-term, sustainable funds for smallholders.

• Prioritize producer collaboration over formal organizational structures as farmers should decide for themselves whether they wish to operate as a formal group or remain a loose alliance. The group development process should use a bottom-up, member-owned, democratically-operated approach with transparency in operational rules and management decisions.

• Assist farmers to improve their on-farm productivity and production decisions to be more aligned to market demands by: i) Overcoming market information asymmetry. ii) Developing or improving smallholder-targeted infrastructure. iii) Facilitating production diversification. iv) Adapting innovative technologies and practices. v) Facilitating the provision of extension, financial, and business development services. vi) Monitor outcomes that mantain a focus on desired smallholder producers results and supply chain improvements that could possibly be expanded and replicated in other project areas.

Institutionalization

17. Establishing a permanent Project Management Unit (PMU) is the recommended option for institutionalizing market integration work in the provincial governments. The PMU would be established within the Agriculture Marketing Secretariat under a Board of Directors chaired by the Secretary, with members from the farm community, the private sector, NGOs, and the government. The PMU would include units responsible for: social mobilization; project implementation; market integration; financing and administration; and capacity building. Alternatively, the responsibility for managing market linkage projects could be allocated to an existing government agency such as the Agriculture Delivery Unit (Punjab), one of the various semi-autonomous companies or programs already developed in each province during previous donor-supported projects, or a combination of these organizations, particularly those with certain expertise (e.g., financing).