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company works closely with high-value retail buyers. But the irm has found it harder than expected to obtain a reliable
supply from organised small-scale producers, and now buys only 30 per cent of its produce from farmer groups, and half
from traders and wholesale markets Box 3.3.
3.1.3 Limits of informality
The upsurge in informality presents challenges for long- term sustainable development. Though informal markets
offer the crucial advantages of access and lexibility, and are sites of creativity and trust among small farmers and other
market actors, they also have a dark side, including poor traceability and food safety, poor records on environmental
impacts and worker welfare, and sometimes corruption, criminality, monopolies and cartels. Some researchers point
to the risks of trapping poor households in poverty, even if in the short-term informality can provide solutions. Recent
studies suggest that in crises andor global economic slowdown, the informal sector may be hit harder than the
formal sector, contrary to popular understanding that the informal sector provides a more resilient refuge in times
of economic crisis. In these situations, traditional social networks and safety nets cannot provide enough support
Heltberg et al. 2012.
For some Learning Network members, a key concern is that producers who continue to trade in marginal spaces
outside formal systems will not gain a place at policy tables. In countries with weak institutions and central governments
and less developed formal economies, the informal sector can become an important power structure in its own
right — the de facto formal. But in most contexts, oficial laws and policies still have signiicant consequences for
small-scale farmers, shaping their competitive playing ield. Without a platform to inluence these rules, producers
cannot remove the constraints to formality — or have a say over forces that affect both formal and informal markets,
such as trade agreements that can open up a lood of low- priced imports. Where informal systems remain fragmented
and local, staying informal can also limit the ability of small farmers to scale up their operations and build critical mass
in markets. In some cases this critical mass is essential to draw in state support and private investment.
Another key weakness of informal markets is that, although they excel at feeding low-income people cheaply, they lack
systems for quality control and food safety — rising priorities
Box 3.3 Changing business model for an ‘ethical middleman’
During a Learning Network meeting in West Java, Indonesia, we spoke with managers while visiting the
warehouse of vegetable trading company Bimandiri. Bimandiri has struggled to form producer groups,
we learned, despite the irm’s intention of basing its business model on organising small-scale farmers. As
recently as 2008, Bimandiri believed that all its stock would come from farmer groups. Today, about 30
per cent comes from these groups, 20 per cent from individual farmers, 40 per cent from traders, and 10 per
cent from the wholesale market Sandredo 2012.
Bimandiri’s main problem is not demand but supply. Vegetable farmers often rent their land, so they
frequently move and change crops — a strategy that relies on lexible trading relationships with informal and
traditional buyers. Maintaining a continuous supply is a challenge for Bimandiri, management said, as is
assembling from small quantities. It takes time to build loyalty with farmers, which the company does in part by
demonstrating time and again that they have a market. But that market requires a high quality, quantity and
consistency of supply. And contrary to the much-touted trend towards fewer ‘preferred suppliers’ for modern
retail, Bimandiri’s market is growing more competitive. The company was formerly one of four trading irms
supplying the Carrefour supermarket chain, but Carrefour recently changed its policy to deal with ten
different traders.
Whereas some of these brokers act opportunistically, Bimandiri management said their company seeks to
maintain long-term trading relationships with farmers. Nevertheless, the company has to adjust to a shifting
producer base as small farmers exercise agency by adapting and making choices about renting, growing
and trading.
Bimandari as a formal intermediary to supermarkets demonstrates how investments in terms of aggregating
and packaging and training can create off-farm employment in the rural areas despite its limitations.
These kinds of intermediaries are largely absent in India, for example, and can provide a key insight to
businesses on how they can deepen their interventions in a potential win-win situation for businesses, small
producers and rural youth.
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for consumers and governments in countries with growing middle classes. Safety problems in informal food systems
can lead to scandals and heavy-handed state responses, as was recently seen in the Chinese dairy sector Box 3.4. In
that case, outcry over tainted milk led to dramatic declines in consumption of domestically produced milk, so the state’s
intervention may have served to save many dairy farmers’ livelihoods — but only by formalising them.
There are many other markets where informal trade of highly perishable products is the norm, and calls for safety
standards could grow. Looking just at the dairy sector, Mugoya’s study for the Learning Network noted that 42
per cent of milk in Kenya is sold directly from farmers to consumers and usually delivered to their doorsteps; another
17 per cent is sold to mobile traders on bicycles, and 15 per cent to small shops, kiosks or milk bars that are mostly
unlicensed. In comparison, registered dairy cooperatives purchase 24 per cent of all dairy farmers’ milk. Only 2 per
cent of the milk produced in Ethiopia reaches the market through the formal dairy chain van der Valk and Tessma
2010, while in the state of Assam in northeastern India, 96 per cent of milk is distributed by informal milk vendors,
leaving only 4 per cent for the organised sector Grace et al. 2011.
3.1.4 Accommodating informality
