Smallholder Business Models For Agribusiness-Led Development

Download as pdf or txt
Download as pdf or txt
You are on page 1of 28

Rural Infrastructure and

Agro-Industries Division

Smallholder business models


for agribusiness-led
development

Good practice
and policy guidance
Smallholder business models
for agribusiness-led
development

Good practice
and policy guidance

Siobhan Kelly
Agribusiness Economist
Rural Infrastructure
and Agro-Industries Division (AGS)

FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS


Rome, 2012
The designations employed and the presentation of material in this information product do not
imply the expression of any opinion whatsoever on the part of the Food and Agriculture
Organization of the United Nations (FAO) concerning the legal or development status of any
country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers
or boundaries. The mention of specific companies or products of manufacturers, whether or not
these have been patented, does not imply that these have been endorsed or recommended by
FAO in preference to others of a similar nature that are not mentioned.

The views expressed in this information product are those of the author(s) and do not necessarily
reflect the views of FAO.

All rights reserved. FAO encourages reproduction and dissemination of material in this information
product. Non-commercial uses will be authorized free of charge, upon request. Reproduction for
resale or other commercial purposes, including educational purposes, may incur fees. Applications
for permission to reproduce or disseminate FAO copyright materials, and all queries concerning
rights and licences, should be addressed by e-mail to copyright@fao.org or to the Chief, Publishing
Policy and Support Branch, Office of Knowledge Exchange, Research and Extension, FAO, Viale
delle Terme di Caracalla, 00153 Rome, Italy.

© FAO 2012
iii

Contents

Acknowledgements iii

Acronyms iv

1. Introduction 1

2. Easing the cost and risk of doing business with smallholders 3

3 Supporting smallholder competitive advantage for agribusiness-led development 7

4. Institutional innovations and strategic value addition for sustained value capture 9

5. Smallholder organizational models for improved bargaining power


and value-chain governance 11

6. Success factors for strengthening smallholder organizational models: 15


6.1 Success factors and policy guidance for strengthening smallholder-buyer
business models within value chains 15
6.2 Policy guidance principles for supporting smallholder-buyer business models 16

Conclusions 17

References 19
v

Acknowledgements

Insights and cases noted in this paper, while focused on Africa, are based activities carried out under
the aegis of the EU-funded All ACP1 Agriculture Commodity Programme2, on integrating smallholder
farmers into value chains across a range of ACP countries. The concept for the programme of work on
producer-buyer business models was developed under the technical guidance of Doyle Baker, Senior
Technical Officer, Rural Infrastructure and Agro-Industries Division (AGS) and implemented in col-
laboration with Heiko Bamman, Agribusiness Officer (AGS), Florence Tartanac, Senior Officer (AGS)
and Cora Dankers, Consultant (AGS). Valuable comments on draft versions of this paper from David
Kahan and David Hitchcock are gratefully acknowledged.

1 Africa, Caribbean and Pacific Countries


2 http://www.euacpcommodities.eu/en; http://www.fao.org/economic/EST/AAACP/en/
vi Smallholder business models for agribusiness-led development – Good practice and policy guidance

Acronyms

ACP Agricultural Commodities Programme


AGS Rural Infrastructure and Agro-Industries Division (FAO)
CFA franc Central African CFA franc
CPO crude processed oil
EU European Union
FAO Food and Agriculture Organization of the United Nations
FFB Fresh Fruit Bunches
GDP gross domestic product
GTZ Deutsche Gesellschaft für Technische Zusammenarbeit
HQCF High Quality Cassava Flour
IFAD International Fund for Agricultural Development
IFC International Finance Corporation
NGO non-governmental organization
SMAE small- and medium-sized agro-enterprises
SME small and medium enterprises
UNIDO United Nations Industrial Development Organization
1

Chapter 1
Introduction

Macroeconomic and trade policy tools were com- economy, when a market opportunity exists, the
mon instruments used to defend local economies private sector entrepreneurs will work around
and livelihoods from the fallout of the post-struc- disabling environment factors to move their local
tural adjustment era. Conceptual and empirical businesses forward, albeit at a slow rate and with
evidence increasingly suggest, however, that inter- higher transactions costs. As such, if both play-
ventions aimed at facilitating smallholder organiza- ers – suppliers and buyers - believe that the net
tion and market participation require support that economic value of the business partnership is
is targeted at facilitating and reducing the costs of worth more than the resources, time and effort
interactor agribusiness along value chains (FAO invested in dealing with standard transactions
2010a). The onset of the 2008 food crisis has placed costs, complex business registration procedures,
smallholder-based import substitution strategies local levies, or paying regular bribes, then growth
for food commodities and staples at the centre of will take place.
many agriculture development programmes, mak- Second, that small-scale institutional innova-
ing public sector guidance on this topic even more tions focused on reducing inefficiencies in supplier
essential. to buyer commercial transactions, are more effec-
Even before the 2008 crisis a wide range of pro- tive than macrotrade and price policy initiatives,
grammes were launched with the aim of strength- which are often far removed from the realities and
ening smallholder-market linkages, many of which needs of district level businesses (Barrett, Bachke,
adopted a value-chain approach. The basis of this Bellemare, Michelson, Narayanan, Walker, 2012).
approach is anchored on an analysis of the inter- This argument is reinforced by international cor-
dependence between actors to better understand porate strategic management thinking that growth
the formal and informal dynamics of potential and wealth creation do not necessarily transpire at
chain partnerships and related needs. The success the level of a sector or industry but in the ability of
and failures of many of these initiatives have been firms to create valuable goods and services using
well documented, but the fact still remains that efficient methods (Porter, Ketels, Delgado 2006).
for most cases, the producer-first buyer point of Kenya is a lead example of the potential role
sale continues to be the most inefficient linkage, that, small-holder linkages to small and medium
impacting on the overall chances of a successful sized agroenteprises (SMAEs), have in poverty
smallholder-based chain. reduction and rural development. Three-quarters
In an effort to better understand how the public of Kenya’s population depend on SMAEs and
sector can support smallholder integration in small-scale farming for a living with the sector
value chains, FAO – with the support of the EU – providing most employment in the country and
pilot tested a business model approach to identify almost half of the GDP. Between 2003 and 2009
the critical success factors for improving supplier- agriculture growth has more than trebled from
buyer trade falling under different contexts and 2.0 to 6.7 percent annually, and the portion of the
market structures. The approach provides a frame- rural population living below the poverty line has
work for analysing the inter-organizational link- declined by 5 percent over the same period (GTZ
ages between producers and buyers to understand in Schneider, Buehn, Montenegro 2010).
the potential for coordination and partnership, The Kenyan experience coupled with the
and to identify where value can be added, costs region’s access to huge reserves of arable land and
reduced and efficiency improved. rural labour has contributed to a growing realiza-
The rationale for this action-research pro- tion in many African countries that, support for
gramme of work was based on two key argu- local level agribusiness, needs to be a major focus
ments. First, that within a relatively liberal market of public policy concern, if agriculture is to be
2 Smallholder business models for agribusiness-led development – Good practice and policy guidance

transformed into a competitive sector for develop-


ment and poverty reduction (UNIDO. 2011).
Drawing on this genesis, FAO piloted a number
of microeconomic and firm-level analyses (small-
holder supplier to buyer) to identify country-
specific, industry-specific, time-specific and mostly
institution-specific solutions across local contexts
and commodity markets dependent on smallholder
supplies. In this regard, in collaboration with local
service providers, activities were carried out across
14 countries, linking approximately 42 farmer
groups to 30 small, medium and large agroenterpri-
ses for a selection of cash and food crops3 between
September 2008 and December 2011.
While policy guidance for broad value chain
development encompasses an array of strategic entry
points ranging from enhancing agricultural pro-
ductivity to upgrading national infrastructure and
investing in research and development, these activi-
ties, as a result of focusing on one core linkage within
the value chain (producer-first buyer), have enabled
the development of four strategic policy areas. An
appraisal of these areas has subsequently led to the
identification of a number of success factors and poli-
cy guidance for fostering smallholder-buyer business
models and their role in value chains for agribusiness-
led development. As such, this paper covers:
1. Easing the cost and risk of doing business
with smallholders for SMAEs.
2. Supporting smallholder competitive advan-
tage for agribusiness-led development.
3. Smallholder organizational models for
improved bargaining power and value-chain
governance.
4. Institutional innovations and strategic value
addition for sustained value capture.
5. Success factors and policy guidance for
strengthening smallholder-buyer business
models within value chains.

3 Africa: Kenya, Zambia – Cotton; Zambia, Malawi,


Cameroon – Cassava; Senegal, Mali, Burkina Faso –
Rice; Cameroon – Coffee, Oil Palm Partners: Farm
Concern International, Zambia Agribusiness Technical
Assistance Centre ZATAC) Centre, IITA, Groupe de
Recherche et d’Echanges Technologiques (GRET),
Amassa Afrique Verte.
Pacific: Samoa, Vanuatu, Solomon Islands, Fiji – Fruits
and Vegetables Partners: Samoan Crops Corporation
Association, Nature Way Cooperative, Farmer Support
Association, Kastom Gaden Association.
Caribbean: St. Vincent’s and the Grenadines, Guyana,
Jamaica, Grenada – Roots and Tubers. Partners: Carib-
bean Farmers Network
3

Chapter 2
Easing the cost and risk of doing business
with smallholders

A critical role of government in improving the constraints still need to be addressed before the
integration of smallholders into value chains is to full developmental potential can be realized. To
ensure that policy eases the costs and obstacles better understand the challenges faced and the
of doing business with small farmers. The role of strategies required to overcome them, FAO
small firms however in rural development and job organized a number of regional “agribusiness
creation is often not given due credit and recogni- roundtables” with SMAE managers in developing
tion. In addition to being overlooked by develop- countries, with a number of interesting lessons
ment agencies, where the focus is primarily on emerging, described in Box 1.
more disadvantaged groups, the regulation of In addition to guiding investment in local
SMAEs tend to receive very little attention from infrastructure development, governments can also
the state as they fall between the policy mandates support the role of SMAEs in the agribusiness
of the ministries of agriculture, trade, industry and sector by introducing policies that cover a number
commerce (Baker, 2011). of institutional, legal and administrative factors to
While SMAEs play a critical role in driving stimulate a general easing of doing business with
modernization of the agricultural subsectors and smallholders. The IFC/World Bank annual review
rural employment creation, a number of critical of Doing Business provides an overview of govern-

BOX 1 some firms having to divest scarce resources


Lessons from FAO-led SMAE Roundtables to small farmer organization schemes and on-
farm technical assistance to improve supplies.
1. SMAEs start as family-type businesses, using 6. SMAEs often face competition from cheap
personal savings and loans, based on a vision imports and as such require support with
and need to generate income and wealth for market development in developing local brand
the family and relatives. Capitalization and differentiation to build up a reliable and loyal
access to finance is always an issue with few customer base.
commercial banking options to choose from 7. Business is also highly dependent on a mini-
and unreasonable high interest rates and loan mum standard quality product. Small compa-
criteria. nies however often do not have the capacity
2. Large seasonal variations in employment and to ensure safe and good quality food or the
pressure from extended family and friends for resources for certification fees charged to
jobs is a daily stress for owners and managers. large firms. With assistance, however, locally
3. The over-regulation and bureaucracy that customized quality management schemes can
SMAEs face discourage the formalizing of be put in place.
their businesses. 8. Operations and transport can be a company’s
4. The unreliability and cost of utilities infrastruc- highest cost factor. Again with support on
ture (power and water) lead to waste and loss post-harvest and logistics systems in place a
of business effecting long-term competitive- small company can address a lot of waste and
ness. in-efficiency transforming this aspect of busi-
5. Smallholder challenges related to production, ness into a competitive advantage relative to
planning and collective marketing translate other local companies.
into procurement impediments, resulting in
4 Smallholder business models for agribusiness-led development – Good practice and policy guidance

ments’ progress in the area, showing for instance,


that Cameroon established a one-stop shop for BOX 2
setting up a business, abolishing requirements for Ease of Doing Business
certifying business premises and fees; Cape Verde
eliminated the needs for a municipal inspection; 1. Starting a business
Congo Dem. Rep. eliminated for the need of a 2. Dealing with construction permits
company seal; and many countries across Africa 3. Registering property
have introduced online registering of businesses. 4. Getting credit
Box 2 shows the criteria used by the IFC/World 5. Protecting investors
Bank appraisal to monitor the Ease of Doing 6. Paying taxes
Business in different countries, with Rwanda, 7. Trading across borders
Zambia and Cape Verde among the top 10 8. Enforcing contracts
economies for improving the most in the ease of 9. Closing a business
doing business in 2009/2010.
Governments can also promote local insti-
tutional strengthening with the establishment of Source: World Bank/FC, 2011

business information centres and support at the


municipality level which, presuming a high quality
standard, can also be an extremely useful mecha- provide an excellent platform for information
nism to help small businesses and farmer organiza- sharing and collaboration among actors, there is
tions, through tedious administrative processes. An the risk that dialogue agendas can be captured
example of this type of service is the award-winning and dictated by individual personalities or groups.
work of Entebbe Municipal Council on improving For newly commercializing food commodities
licensing4 (Bannock Consulting Ltd. 2005). for instance, such as rice and cassava, micro and
This type of proactive state support to the small-scale enterprises, the bulk of firms in the
private sector is commendable and is a definite sector, rarely had a significant voice in value-chain
step forward from a macroeconomic management dialogues because of an absence of strong associa-
approach to poverty. The challenge however for tions representing their interests.
policy-makers is to design policies that reach, fix It was also found that value-chain platforms
and stimulate market access at the district level can be over-participatory, addressing all of the
where business takes place between farmers and main actors’ agendas without due consideration
processors, traders, transporters, retailers etc., placed on strategic prioritization with the result
and reinforce this upgrading with industry policy that the most essential constraints and priorities
frameworks that address value-chain collabora- for improved competitiveness do not receive the
tion and guide competitiveness. National com- required attention from follow-up funding oppor-
modity value-chain strategies and platforms are, to tunities and support interventions.
a certain extent, a response to this need and have Cases under the 3ACP also showed that mac-
become popular over the past few years as instru- roeconomic policies, in an effort to protect dis-
ments responsible for ongoing analyses, interactor advantaged groups, can hamper the efforts of
dialogue, priority setting and channeling public resource poor farmers from taking advantage of
funding. Some donors such as the EU, will often market opportunities. For instance, in 2008, sup-
not lend support to a commodity, without these port for strengthening rice producers buyer link-
types of strategic mechanisms being in place. ages in West Africa was considered timely with
FAO’s experience under the EU-funded All the onset of the food crisis, when price spikes for
ACP Agricultural Commodities Programme5 crops such as wheat doubled and for rice tripled in
(3ACP), which was designed around the establish- a matter of weeks. Smallholders and SMAEs, set to
ment or support to existing value-chain platforms benefit from these market conditions, were unable
and strategies, noted that, while these initiatives to do so, however, as some governments quickly
set minimum prices and lowered import duties
in an effort to protect consumers. Ultimately
the well-intentioned policy changes offered little
4 The Entebbe initiative won the Africa Investor 2004 respite and were mostly counterproductive for the
award for “Smart Regulation” presented in Dakar, Sen-
egal. other domestic groups who otherwise could have
5 http://www.euacpcommodities.eu/en benefited from the price movement.
Chapter 2 – Easing the cost and risk of doing business with smallholders 5

Experience has also shown that commodity factors ease the general costs and obstacles of
specific policy support to value-chain development doing business within the agricultural sector and
should be carefully designed and based on reliable with smallholders. FAO support to smallholder
market, policy analysis and public-private sector integration in value chains has shown, that more
dialogue. Targeted interventions also need to be care needs to be taken by policy-makers to ensure
acutely aware of the impact, not only on chain that chain specific support does not result in inter-
actors and long-term competitiveness, but also on ventions that unduly subsidize or distort market
the potential for adverse effects on substitute and conditions. Most importantly interventions need
competing crops. These types of policy challenge to be based on reliable analysis and public-private
became evident during support provided to the dialogue which have impartially identified critical
commercialization of cassava in Zambia, where factors for improved competitiveness, rather than
SMAE’s efforts to break into the animal feed sec- on agendas developed by pandering to the needs
tor face a major barrier in the form of government of politically influential actors.
subsidies for maize. Conversely in Nigeria, the
government over the years has introduced a series
of policy changes to make High Quality Cassava
Flour (HQCF) more economically viable to the
baking industry than wheat flour. Despite the
obvious debilitating effects for actors dependent on
wheat flour production, the government’s enforce-
ment of the policy changes has in the past trans-
lated into savings of US$14.8 million per annum in
foreign exchange; net returns to processors from
this saving has been estimated at US$12.7, and
cassava farmers have received in the region a gross
benefit of US$4.2 million (FAO, IFAD, 2004).
Using Nigeria as a benchmark example, a key
policy request emerging from FAO-3ACP support
to the producer-buyer linkages in the cassava sec-
tor in both Cameroon and Zambia has been a call
for similar policy initiatives to stimulate the use of
cassava products, such as flour and chips for the
bakery and animal feed industries.
In Kenya, commodity and stakeholder specific
policy interventions for the cotton sector in the
form of a minimum farmgate price for cotton were
introduced in an effort to protect smallholder
exploitation and improve the quality of cotton.
Stakeholders argue, however, that with so many
factors determining price, it is difficult for the
government to monitor or predict how a fixed
price is facilitating or adversely damaging the
industry. The strategy in Kenya has led to industry
factions, with the ginneries boycotting cotton
board meetings in protest at the minimum prices,
arguing that the policy is squeezing the ginning
industry out of business, promoting cross-border
black-market trade, and in most cases does not
protect smallholders from price volatility because
of a lack of enforcement at the local level.
Ultimately, public policy and support is critical
for fostering competitive producer-buyer busi-
ness models, by ensuring that policies covering a
number of institutional, legal and administrative
7

Chapter 3
Supporting smallholder competitive
advantage for agribusiness-led
development

Public support for promoting smallholder-based cussed above, was short-lived because of policies
value chains must be anchored on the premise that put in place to protect consumers. The strength
a business case exists for supporting smallholders of the competitive advantage varies according to
supply to the market. A business case is generally the commodity, local market structure and local
based on the existence of a smallholder comparative business enabling environment.
advantage in supplying a product that satisfies the For the case of the smallholder-industrial buyer
buyers’ needs, better or more effectively than other linkage model in support of the oil-palm sector in
types of suppliers (Johnson and Scholes, 2002). Cameroon, smallholders’ competitive advantage
Firms, which can also include smallholder- lay in their access to land in the face of forest pro-
based enterprises and SMAE’s, when compared tection laws prohibiting industry from expanding
to competing suppliers and enterprises, can pos- plantation farming, as well as no alternative local
sess a competitive advantage from a number of sources of supply and elevated market prices of
circumstances particular to their local context crude oil-palm because of competition from the
(Porter, 1985), from access to suitable local agro- biofuel market. For support lent to labour-intensive
ecological land and knowledge; basic agroclimatic hand-picked cash crops, such as coffee and cotton,
and hydrological conditions; proximity to appro- abundant and low cost labour is the main small-
priate infrastructure, such as market feeder roads, holder advantage, as well as local agro-ecological
warehouses, processing facilities; access to cheap and product knowledge, particularly in arid areas
labour and subsidized inputs; good organization and for drought resistant crops such as cassava.
of smallholder supply; and no alternative sources Before investing in a smallholder-based value
of supply (Bennett et al 2012). chain the public sector needs to appraise if down-
By capitalizing on a given competitive advan- stream actors are also convinced of a smallholder
tage, smallholders can better compete with other competitive advantage in supplying a product.
larger suppliers by offering a differentiated prod- In other words, buyers need to believe that the
uct to the market, which can be characterized by risks of doing business with smallholders will
a higher quality grade; a lower price; or a niche be covered by net value of the final transaction.
market product destined for fair trade, organic or Risks can include: not meeting quality standards
boutique premium markets. specified by the market; inconsistent supply of
Provided that there is a business case, the public agreed quantities; contract hold-up because of
sector should contribute to fostering private sec- side-selling; and reputational risk based on public
tor service provision that reinforces the collective perception of exploitation of smallholders by buy-
core competencies of suppliers through a variety ers. It can be conceded, therefore, that the more
of actions related to improved production, prod- willing the buyer is to assume the risks of dealing
uct assembly and better access to market-oriented with smallholders and withstanding initial trials
services, with due care taken not to oversubsidize and errors of supply, the stronger the smallholder
or unduly distort market conditions. competitive advantage.
Drawing on this principle, a fundamental entry A key lesson to emerge from FAO programme
point for FAO’s support to smallholder-based of support to smallholder-based value-chain devel-
value-chain development has been the existence of opment has been the need to better understand and
a smallholder competitive advantage in supplying manage buyers’ risks in order to increase procure-
the market. The 2008 food crisis, and the ensuing ment from smallholders, with the realization that
price spikes, provided a competitive advantage more focus needs to be on the sourcing decisions
across a range of smallholder commodities and of buyers rather than the market opportunities
impetus to FAO’s programme of work, but, as dis- of smallholders. During FAO consultations with
8 Smallholder business models for agribusiness-led development – Good practice and policy guidance

agro-enterprises in various ACP countries, it Assuming the existence of a business case


was noted that buyers evaluate the associated for fostering and supporting smallholder-based
risks of doing business with smallholders accord- value chains, a top priority for the public sector
ing to various factors, including: land tenure; subsequently needs to be a combination of institu-
agro-ecological knowledge and skills relative to tional strengthening and the creation of conditions
the crops’ characteristics; proximity to markets; so that local communities, local governments,
membership of a functioning farmer organization; non-governmental organizations (NGOs) and the
local infrastructure and transport; and local and private sector (including producers) mobilize their
national business enabling environments. own resources to invest in agribusiness so that
Companies also noted that because of a high public support can be applauded for “crowding-
probability of some level of side-selling on inputs in” rather than impeding potential private invest-
and contracted produce, a decisive factor in doing ment (Staatz in Yumkella et al. 2011).
business with smallholders was the level of credit,
inputs and technical assistance required by suppliers,
and the impact of this diversification of resources
away from potential buyers’ core business. BOX 3
Access constraints to finance, inputs and techni- Strengthening linkages between
cal assistance is nonetheless endemic across all smallholders and financial service providers
smallholder-based agriculture commodities in
developing countries, and without improved access Business model appraisals were commissioned to
it is difficult for small farmers to compete in modern identify constraints, but most importantly the criti-
markets. Obstacles, however, are not just confined cal success factors required to strengthen the
to credit and finance but form part of the overall producer-buyer relationship. In anticipation of the
malfunctioning of smallholder- based value chains, identification of access to finance and inputs as a
interrelated with problems regarding confidence of constraint, initial support for all cases immediately
commercial banks in financing smallholders and commissioned a local financial landscape appraisal
guaranteed collateral; absence of reliable and func- and implementation plan for linking smallholder
tioning agricultural inputs and services markets; groups to existing local financial products and serv-
collective bargaining power of smallholders; feasi- ices. The objective of the review was to dissuade
ble diversification strategies; appropriate targeting the provision of subsidized inputs that contravene a
of markets; sound business plans; and the ability business approach to smallholder-based agriculture,
of producer organizations to manage business and and promote a strategy whereby representatives of
financial operations of their members. smallholders engage in dialogue with financial serv-
In short, the issues of access to finance need ice providers to design bankable products.
to be tackled from a value-chain position, with
a view to long-term sustainability, rather than
being resolved through punctual and isolated
subsidies in the form of agriculture inputs, equip-
ment, revolving funds, grants, etc. National and
local government can promote this message and
approach, promoting the good practice that non-
financial alternatives are considered before direct
financial support is provided to any actor along a
value chain.
As described in Box 3 practical public support
can include brokering linkages with microfinance
institutes and other commercial banking and inves-
tor groups; neutrally facilitated dialogue spaces that
bring together financial providers and potential
value-chain clients; technical assistance to farmer
organizations or SME’s in compliance with bank
criteria; facilitating linkages with exporters; and
sound market outlets providing financiers with
more lending confidence (Miller, Jones 2011).
9

Chapter 4
Institutional innovations and strategic
value addition for sustained value capture

Interest in value-added commodities has grown farmer groups were struggling to compete on the
over recent years with farmers, traders and small basis of their core business, that is, their ability to
agroprocessors working towards the adoption grow and supply Fresh Fruit Bunches (FFB) to
of mechanized technologies in an effort to earn the market. Farmer groups and supporting local
higher returns that are typically captured by NGOs were, nonetheless, particularly keen to
upstream actors (FAO. 2007b.). Value addition take on medium-scale processing units to capital-
is also often synonymous with investments in ize on the high price per litre of crude processed
high-value processing, however significant value oil (CPO) during the food crisis 2007–2008. A
can be added to raw produce without changing feasibility analysis revealed, however, that returns
the physical form of the product by introducing on investments were, per kilo harvested, higher if
activities including for instance, cleaning, grading they sold their raw product directly to industry
or labeling. Value can also be added by putting for processing. Table 1 shows a comparative
in place logistical, marketing and quality control return on investments across three smallholder
systems that mostly involve strategic planning and cooperatives, which clearly demonstrated to the
cooperation with value-chain partners. groups with direct sales to industry without value
Value subtraction rather than value addition addition (MAIIF Coop) had a higher return on
can occur however when the end buyer is not investment compared with neighbouring coops
willing to pay a higher price for the product that (SOCOMAK, SOCOAP) which focus their activ-
more than compensates for the cost of the invest- ities on processing crude palm oil for the local
ments in value addition. This can often be the case wholesale market.
when subsidized investments are made in mecha- Experiences have also shown that the transfor-
nization, tractors or processing equipment, which mation of agricultural raw materials into higher
encourage firms to adopt capital-intensive, labour value products does not only depend on invest-
displacing technologies where labour is abundant ments in new agrofood technologies but also on
and cheap, relative to capital scarcity and high value-chain systems and capacities that are put
interest rates (Staatz in Yumkella et al, 2011). in place to reduce transaction costs (UNIDO.
During consultation processes carried out by 2011). Under the aegis of the 3ACP, the World
FAO with farmer groups and supporting local Bank identified three sites for the location of tech-
NGO’s to prioritize interventions for improving nologically appropriate Coffee Washing Stations
producer-buyer linkages, numerous calls were with initial training provided in the running and
voiced for support on investments in agroprocess- maintenance of the stations. After some months
ing technologies. Motives were noted to be, how- FAO, in collaboration with the World Bank, Café
ever, supply-push rather than market-led, with lit- Africa and the Coffee and Cocoa Board of Cam-
tle background carried out on feasibility studies or eroon, developed a capacity building programme,
comparative advantage appraisals for diversifying after it became evident that the stations were at
into a new business and market. Ultimately, many risk of failure because of the need for additional
of the proposed additional income-generating and reiterative trainings, not only in the running
and value-addition activities added very little in and management of the new technology, but also
terms of competitiveness and mostly resulted in in agribusiness and marketing skills, required to
the diversion of the groups’ resources and atten- enable the group to survive and interact within a
tion away from improving their core business of new value chain. To ensure that high cost capital
production and marketing. investments in agroprocessing are capitalized on,
In the case of support to the palm-oil sector the support provided demonstrated the impor-
in Cameroon, for the most part, participating tance of delivering complementary and reiterative
10 Smallholder business models for agribusiness-led development – Good practice and policy guidance

capacity building in a range of skills, that not only more effective in the medium term, than high cost
match the new technology acquisition, but also technologies, as products can be marketed to local,
the new target market and value chain. national and regional markets with similar con-
Based on the cases outlined above and the sumer preferences, and where fewer requirements
type of support delivered, two key messages are needed to conform to standards demanded by
have emerged from FAO support to smallholder consumers in developed countries.
integration into value chains. First, before public
support is provided to farmer groups or SMEs to
move up the value chain, care needs to be taken
to ensure that groups excel at their core function
and as such are considered reliable chain partners.
Second, that low capital intensive value-addition
strategies and organizational innovations can be

TABLE 1
A comparative cost/returns analysis of profit from 1 hectare (ha) of oil-palm (in CFA francs)

Activity/Item MAIIFA COOP SOCAMAK SOCOAP LH

A. Tree felling (4 rounds per year) 60 000 60 000 40 000

B. Clearing (twice a year) 30 000 30 000 30 000

C. Pruning and other maintenance activities 30 000 30 000 30 000

D. Fertilizer (150 kg) 0 0 0

E. Farm tools 15 000 15 000 15 000

F. Road maintenance 5 000 5 000 5 000

G. Harvesting 30 000 30 000 30 000

H. Maintenance fees 30 000 38 000 38 000

I. Depreciation 25 000 25 000 25 000

J. Return on investment (450.000X5%) 22 500 22 500 22 500

K. Total production cost (per hectare) 247 500 255 500 235 500

L. Average yield per hectare 8 tonnes 7 tonnes 6 tonnes

M. Cost of production per tonne 30 938 36 500 39 250

N. Purchase price of 1 tonne 40 000

O. Cost of transportation to mill 21 000 10 000

P. Cost of processing (10 000/tonne) 70 000 70 000

Q. Total processing cost per hectare (O+P) 91 000 80 000

R. TOTAL COST (K+Q) 247 500 346 500 315 500

S. CPO obtained per ha (12% extraction rate) 840 litres 720 litres

T. Price per litre CPO 450 500

U. Total revenue (LxN for others) 320 000 378 000 360 000

V. Total profit per hectare (U-R) 73 500 31 500 44 500


11

Chapter 5
Smallholder organizational models
for improved bargaining power
and value-chain governance

Under the aegis of FAO’s programme of work on Depending on the local context, commodity
smallholder integration in value chains, the term and market structure, there are a number of small-
value chain implies a focus on market-oriented holder organizational models that can be applied,
smallholder farmers, where impact and sustain- including traditional marketing cooperatives that
ability are most likely to be maximized. As a result are vertically integrated into value chains; farmer
of observing the welfare-enhancing effects of mar- associations mandated to bargain on behalf of
ket participation from others, small-scale farmers members; registered producers groups; informal
will transition to more commercially oriented farmer groups. In the absence of effective farmer
farming. Within the context of value-chain devel- groups, external actors may seek to organize indi-
opment literature, the more recent adoption of the vidual farmers through, for instance, outgrower
term “inclusive” does not imply “no farmer left schemes or local traders6.
behind” or “a focus on the poorest of the poor” The ways in which farmer organizations can
but instead refers to scale and outreach to a large be linked to the market can, as described in Table
number of smallholder farmers (Neven, 2012). 2, be labeled “driver models”, which are namely
If smallholders are expected to participate in, producer-driven, buyer-driven, or intermediary-
and benefit from a well coordinated chain, any driven7. Producer-driven models are motivated
type of public support must take into consid- and owned by small-scale producers based on col-
eration the relevance of farmer organizational lective action for increased small-farmer participa-
models, starting from a situation where farmers tion in markets. Buyer-driven models involve
participate in some form of informal or formal larger businesses organizing farmers into suppli-
organized structure. ers, which can also include the provision of inputs

TABLE 2
Organizational models for smallholders
Model Driver Motivation

Access to new markets, increased bargaining power,


Smallholder groups, associations,
Producer-driven access to inputs, technical assistance, secure market
cooperatives
position, farmer empowerment

Processors, retailers, exporters, traders, Access to land, supplies, increase volumes, supply
Buyer-driven
wholesalers niche markets

NGOs, development agencies, Local and national economic development, farmer


Intermediary-driven
governments empowerment

6 See Chapter 2 of Mangus, de Steenhuijen Piters, 2010,


Dealing with Smallscale Producers – Linking buyers
and producers, Kit publishers for a detailed overview
of various forms of smallholder-market organizational
models.
7 This concept was developed in FAO 2008a. Business
Models for Small Farmers and SMEs. Rome.
12 Smallholder business models for agribusiness-led development – Good practice and policy guidance

and technical advice based on the buyers’ needs,


also known as contract farming. In conclusion, BOX 4
intermediary models that are commonly led by Criteria for assessing smallholder
local NGOs involve the provision of technical bargaining power
assistance and support to identify and improve
smallholder market linkages. Smallholder bargaining power is adversely weak if:
As such, traditional farmer organizations are ƒƒ there is collusion among buyers, particularly if
only one of a number of ways for organizing the the volumes of purchases are high;
supply of smallholders’ products through a value ƒƒ there is a lack of collusion among suppliers due
chain to the market, and to varying contextual to high number of fragmented smallholders;
degrees offer farmers the space to collectively ƒƒ there is a local functional farmer organization
face the demands of modern agriculture, with the to support smallholder collection action;
coordination of activities, such as bulk buying of ƒƒ there are alternative supplies, for instance,
inputs, collective marketing, negotiating credit from more commercial farmers, or through
and contracts, and lobbying policy makers. cheaper imports;
If successful, collective action can address ƒƒ the cost of switching suppliers for the buyer
key constraints related to high transaction costs, is relatively easy, for instance, if there are no
entry to higher value markets, and access to busi- long-term contracts;
ness development services and finance, and more ƒƒ the product being supplied is undifferentiated,
importantly, can enable a renegotiation of power with many supply sources; such as products
relations in the chain. with little value addition – e.g. seed cotton.
Porter’s Five Forces Theory explained in
Box 4, enables a better understanding of how
power is established and maintained in a chain,
and is useful to gauge and measure bargaining Source: Porter’s Five Forces Theory (1980) (in Johnson and Scholes 2002)
power. However, for smallholder-market integra-
tion, there are a series of dysfunctional market
characteristics that generally prevent upstream
players from benefiting from apparent strengths. it, with the balance being paid after the parboiled
The cases supported by FAO show that, while it rice had been sold, resulting not only in a simple
is unrealistic and unviable to expect a level-playing win-win solution for the buyers and sellers, but
field, an overtly skewed lack of relative bargain- also an improvement in bargaining power for the
ing power for any player in the chain, not only parboliers group and a realignment in the chain.
impedes the progress of the given actor, but also For value chains that are made up of fragmented
adversely impacts on partners on either side of its actors, either buyers or sellers, collective action is
trading base, effecting the overall functioning of crucial, not only for improving relative bargaining
the entire chain. power, but also for overall chain alignment and
This was seen in the case of the rice sector in efficiency. Collective action is most often thought
West Africa, where the circumstances showed of in terms of smallholder organizational models,
that the skewed bargaining power of one actor, but FAO support to smallholder-buyer linkage
the women parboilers in this case, can impede initiatives has shown that addressing the frag-
the overall progress and competitiveness of the mentation and collective capacity of buyers is as
entire chain. In Burkina Faso, for instance, women important for the overall effectiveness of the chain
parboilers are, similar to other countries in the and smallholder inclusion.
region, an important actor in the rice value chain Support to
�����������������������������������
a cassava smallholder-SMAE link-
and a major buyer for rice producers. Despite the age case in Malawi demonstrated the smallholder
groups having secured a market for large volumes benefits that can be accrued from trading with
of parboiled rice, they lacked access to credit to processors that are collectively organized around
augment their orders from smallholder producers an association which provides services for market
because of significantly less bargaining power than linkages, product promotion and lobbying. By
the rice producers’ association. As a solution to working together as an association of small-agro-
the issue, facilitated seller-buyer meetings were processors, the group was better able to inform
organized where it was agreed that the producers small suppliers of the sub-sector’s requirements
associations would supply rice at 50 percent cred- as well as arranging collection points. The col-
Chapter 5 – Smallholder organizational models for improved bargaining power and value-chain governance 13

lective action of the buyers resulted in improved


smallholder confidence in a market outlet which
led to improved production planning, and overall
considerably offset the diseconomies of scale from
unorganized smallholders.
Support to smallholder collective action for the
cotton sector in Kenya is another good example
of how groups can work around institutional
obstacles by promoting smallholder group set-ups
based on the members’ needs, and the local mar-
keting requirements of cotton, which contributed
significantly to an improvement in smallholder-
ginnery relations. Support provided to cotton
cooperative-ginnery linkages in Kenya found that
cooperatives were often non-functional because of
some type of internal conflict and political strife.
Appraisals also noted that a lack of success in
membership recruitment was also because of the
political stigma associated with the cooperative
movement from the pre-structural adjustment
era, a common trait across a number of Afri-
can countries. To work around this institutional
obstacle, in consultation with local cooperative
management and the Ministry of Cooperatives,
smallholder cotton marketing groups were organ-
ized outside of these structures, to avoid associa-
tion with politically aligned groups. The group
designed rules of membership suitable to their
needs, and the marketing requirements of cotton,
contributing significantly to an improvement in
smallholder-ginnery relations.
These cases have shown that institutional inno-
vations that are grounded in the realities of the
local context can add considerable value to the role
of smallholder groups in value chains. To support
this process there are a number of ways in which
the state can indirectly enable collective action by,
first, not creating or dismantling over bureaucratic
legal rules of institutional organization, bearing in
mind that “the organizational form that minimizes
ownership costs has the greatest probability of sur-
vival.” (Cook, Burress, 2011). Ultimately, as much
room as possible should be allowed for groups
to design membership and organizational rules
locally to ensure coherence with the local cultural
context and marketing needs of the targeted com-
modities (Markelova, Meinzen-Dick, 2009).
15

Chapter 6
Success factors and policy guidance
for strengthening smallholder-buyer
business models within value chains

Based on an appraisal of the strategic areas out- which should take precedence as they are directly
lined above, the below covers, (a) a review of key linked to poverty reduction and the financial
success factors for strengthening farmer-based sustainability of the organization.
organizational models8, and (b) a number of Network membership: Primary level organi-
policy guidance principles for promoting local- zations need to be part of a wider network that
ly-led market linkage innovations for fostering links members to information on new technical
smallholder-buyers business models and their role ideas, markets and funding opportunities outside
in contributing to competitive value chains. of their community.
Focus on core business: Farmer organiza-
tions need to, first, excel on their core function
6.1 SUCCESS FACTORS FOR of supporting members to improve productivity,
STRENGTHENING SMALLHOLDER production planning and marketing; and, second,
ORGANIZATIONAL MODELS: have acquired the appropriate marketing and
management capacities, before diversifying activi-
The following factors have been identified as key ties and resources into additional enterprises such
for strengthening the role of smallholder organi- as capital intensive value adding agroprocessing
zational models and their overall position in the technologies.
value chain: Low cost value addition through organi-
Non-politically aligned organizations: There zational innovations: If compatible with their
is a lingering political stigma associated with core business, farmer organizations can play an
farmer organizations and cooperative terminology important role in adding value to their members
in Africa, with groups preferring to disassociate produce through organizational innovations and
themselves from past connotations of politically support with activities, such as sorting, grading,
aligned organizations in order to be viewed as production planning and logistics, which do not
practical and market oriented service providers for require high cost capital investments.
their members. There is no “one-size-fits-all”: Farmer organi-
High quality service provision: In order to zation models can range from traditional market-
retain and recruit farmers, members must value ing cooperatives and farmer bargaining associa-
their membership based on the provision of paid tions to informal groups. The models identified as
high quality services, some of which may be the most likely to succeed are those that are
outsourced, such as: the identification of mar- formed on the basis of local cultural contexts and
ket outlets, product assembly, training, technical the marketing needs of members.
assistance and advice. Understanding the needs and risks of agri-
Social and enterprise strategies: In the absence business companies: There are a number of risks
of local social services, farmer organizations are that agro-enterprises face when buying from
often compelled to address the priorities of the smallholders – from inconsistent quality and
community. These activities should be managed quantity of supply to side-selling and reputational
separately from agribusiness related activities, risk based on public perception of smallholder
exploitation. To minimize these risks an important
role of farmer organizations is to remain in con-
stant dialogue with buyers and guide smallholders
8 This list is not intended to be a comprehensive list of in responding to market requirements.
all necessary requirements for linking farmers to mar-
kets, as the prioritization of factors will vary according
to local institutions, markets and commodities.
16 Smallholder business models for agribusiness-led development – Good practice and policy guidance

6.2 POLICY GUIDANCE PRINCIPLES FOR Long-term public commitment with short-
SUPPORTING SMALLHOLDER-BUYER term interventions: Farmer-based organizations
BUSINESS MODELS learn and grow, sometimes fail and in many cases
take a long time to mature. Organizations need to
The following principles have been identified know that they have the long-term commitment
as key for guiding policy support that strength- of the public sector, which is based on, when
ens producer-SMAE business models and overall required, short-term sustainable interventions
position in the value chain: with clear exit strategies embedded.
Formalization of the shadow economy: The Support to broad-based innovation: Institu-
vast majority of agro-enterprises operating in the tional strengthening of agriculture and business
informal sector seldom grow sustainably, making service providers, and location of industrial tech-
informality a major obstacle to economic growth nology and innovation centres as close as possible
and major focus of public policy concern if agri- to SMAEs.
culture is to be transformed into a legitimate and Local government support for SMAEs: Local
competitive sector for development and poverty government officials, if given the mandate, capac-
reduction. ity and resources, can monitor the provision of
Good governance and management systems: service provision, identifying capacity and services
A departure from farmer organizations that are gaps, and establishing linkages with national fora,
dogged by nepotistic and paternalistic behaviour technical training institutes and potential investors.
patterns is needed with more support for struc-
tures that promote transparency good leadership
with knowledge about target commodity markets,
combined with transparent financial and man-
agement systems capable of delegating tasks to
experienced staff.
Easing the costs of doing business locally:
SMAEs can provide smallholder groups with
reliable market outlets. As such their role in rural
development is often not given due credit and
recognition. To this end, a general easing of doing
business locally for SMAEs can significantly con-
tribute to the role of farmer organizations in link-
ing smallholders to markets.
Coherence with local cultural and market
contexts: Support should focus on dismantling
superfluous rules and regulations and not create
over-bureaucratic legal rules for voluntary organi-
zations; promoting the design of membership and
organizational rules that are coherent with the
local cultural and market contexts.
Due care in not creating dependency syn-
drome: Any direct support to SMAEs or farmer
organizations in the form of subsidies, equipment
or credit funds should not unduly subsidize activi-
ties that can create a dependency syndrome on
public support and threaten the long-term sustain-
ability of a business.
Creating an enabling environment for pri-
vate sector investment: Targeted support should
not distort local market condition or crowd out
potential private sector investment, with condi-
tions created that allow farmer organizations and
SME’s to mobilize their own resources to invest
in agribusiness.
17

Conclusions

This paper advocates agribusiness-led develop-


ment based on increased public support for small-
scale, locally-led institutional innovations and
private sector investment that foster business
between local farmers and buyers. As these types
of innovations are generally carried out under
context specific settings, involving an array of
local institutions, markets structures and com-
modities, they are however, often difficult to
upscale, constituting a common argument against
this type of public support.
Rather than gauging the success of support
based on the possibility for replication, success
stories emerging from these cases should be more
widely publicized and disseminated for adaptation,
customization, and primarily for stimulating ideas
on organizational and institutional innovations at
the district level based on good business practice.
The role of policy in promoting these innovations
is critical, but needs to be anchored on the exist-
ence of a smallholder competitive advantage and
a private sector willing to do business with small
farmers. This paper, based on practical field-based
initiatives, provides some practical guidance on
how public policy can support this trend.
19

References

Ashley, C. 2009. Harnessing core business for FAO. 2012b. Regional Programme for Africa
development impact, Background Note, ODI Programme Review. Ghana.
publications. Johnson, G., Scholes, K. 2002. Exploring Corporate
Barret, C.B., Bachke, M. E, Bellemare, M.F., Strategy. 6th Ed, FT Prentice Hall, London.
Michelson, H.C., Narayanan, S., Walker, T.F. Mangnus, E., Piters., B. 2007. Dealing with
2012. Smallholder Participation in Contract Smallscale Producers, Linking buyers and
Farming: Comparative Evidence from Five producers. KIT.
Countries. World Bank, Washington. Markelova, H., Meinzen-Dick, R. 2009. Collective
Baker D. 2011. Agribusiness for Development, Action for Smallholder Market Access. Policy
FAO’s contribution to Value Chain Development, Brief Number 6. CAPRI-CGIAR. Washington.
FAO, Rome. McDermott, M., Taggart, J. 1993. The Essence of
Bannock Consulting Ltd. 2005. Reforming the International Business. Prentice Hall.
Business Enabling Environment, Mechanisms and Miller, C., Jones, L. 2010. Agricultural Value Chain
Processes for Private-Public Sector Dialogue. DAI. Finance, Tools and lessons. FAO and Practical
Cook, M., Burress, M. 2011. Collective Action. Rome.
Entreprenuership: The emergence of alternative Neven, D. 2012. Draft report on Sustainable and
coordination mechanisms to enhance collective Green Value Chains. Rome.
action. University Of Missouri. Oxfam, Sustainable Food Laboratory. 2010.
FAO, IFAD. 2004. Global Cassava Market Study. Think big. Go Small. Adapting business models to
Rome. incorporate smallholder into supply chains. Oxfam
FAO. 2007a. Agro-industrial supply chain International. Oxford.
management: Concepts and applications. Porter, M.E., C. Ketels, M. Delgado. 2006. The
Agricultural Management, Marketing and Finance Microeconomic Foundations of Prosperity:
Occasional Paper 17. Rome. Findings from the Business Competitiveness
FAO. 2007b. Approaches to linking producers to Index. In World Economic Forum The Global
markets. Rome. Competitivenss Report 2006-2007. London.
FAO. 2008. Business Models for Small Farmers and Palgrave Macmillan, PP. 51-80.
SMEs. Rome. Porter, M.E. 1985. Competitive advantage, creating
FAO, IFAD, UNIDO. 2009. Report of the Global and sustaining superior performance. Freepress.
Agro-Industries Forum. Rome. Schneider, F., Buehn., A., Montenegro, C.E. 2010.
FAO. 2010a. A review of Existing Organizational Shadow economies all over the world. Policy
Forms of Smallholder Farmers’ Associations and Research Working Paper 5356. World Bank,
their Contractual Relationships with Other Washington.
Market Participants in the East and Southern UNIDO. 2011. Agribusiness for Africa’s Prosperity.
African Regions. Wilding, R. 2009. Playing the tune of shared success.
FAO. 2010b. Constraints to Smallholder Financial Times Partnership Publications.
Participation in Cassava Value Chain Wilding, R. 1998. The supply complexity triangle,
Development. Zambia. Uncertainty generation in the supply chain.
FAO. 2011. Enhancing farmers’ access to markets International Journal of Physcial Distribution &
for certified products: A comparative analysis Logistics Management, Vol. 28. p.599-616.
using a business model approach. Rome.
FAO. 2012a. Outgrower schemes: advantages of
different business models for sustainable crop
intensification. Rome.
Rural Infrastructure and Agro-Industries Division (AGS)
Food and Agriculture Organization of the United Nations (FAO)

Viale delle Terme di Caracalla, 00153 Rome, Italy


www.fao.org/ag/ags | AG-Registry@fao.org | fax: +39 06 57053057

You might also like