Contract Farming & Market Linkages in Africa, The role of NGO's - a Private Sector perspective, Cape Town 6 Oct 2009

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Business & Mgmt

Published on October 10, 2009

Author: markterken

Source: slideshare.net

Description

A private sector perspective of the roles that NGO's play in the market linkages of small farmers to Agribusiness in Africa.

FAO – NAMC Linking Farmers to Markets The role of the NGO ; an Agri business perspective CHEETAH PAPRIKA Mark Terken Stellenbosch, 6 Oct 2009

Presentation Outline Introduction and background Strength & weakness of the 3 groups; - Agri business, NGO & farmer What is an enterprise / agribusiness Cheetah paprika and contract farming 5 examples of co-operation with NGO & projects; Clusa, Care, POTC, Cordaid, Zatac Recommendations

Introduction and background

Strength & weakness of the 3 groups; - Agri business, NGO & farmer

What is an enterprise / agribusiness

Cheetah paprika and contract farming

5 examples of co-operation with NGO & projects; Clusa, Care, POTC, Cordaid, Zatac

Recommendations

Strength & Weakness Agri buss / Cheetah STRENGTH Excel in product and market knowledge Long term vision – Focus on sustainability Understand farmer skills and 3 rd party missions Strong in agronomy, extension materials, production cycles and training Individual, well defined one page contracts with farmer WEAKNESS Occasional delay in payment to farmer Extension & Procurement on ground not always in line with company rules Control over transparent grading

STRENGTH

Excel in product and market knowledge

Long term vision – Focus on sustainability

Understand farmer skills and 3 rd party missions

Strong in agronomy, extension materials, production cycles and training

Individual, well defined one page contracts with farmer

WEAKNESS

Occasional delay in payment to farmer

Extension & Procurement on ground not always in line with company rules

Control over transparent grading

Strength & Weakness Small holder farmers STRENGTH Committed to farming Once a product / system works for him or her, he or she will stick to it Eagerness to learn and improve WEAKNESS Education poor, lack of expertise and will sign any ‘contract’ Hear say is the norm rather than being factual Farming by default, rather than by choice & ability Lack of a ‘3 year vision’ Generally late in preparations, spending minimal effort Diversion of inputs for cash and to known crops Will sell to highest bidder versus sticking to contract

STRENGTH

Committed to farming

Once a product / system works for him or her, he or she will stick to it

Eagerness to learn and improve

WEAKNESS

Education poor, lack of expertise and will sign any ‘contract’

Hear say is the norm rather than being factual

Farming by default, rather than by choice & ability

Lack of a ‘3 year vision’

Generally late in preparations, spending minimal effort

Diversion of inputs for cash and to known crops

Will sell to highest bidder versus sticking to contract

Strength & Weakness NGO or Project STRENGTH Resources; people, transport, crop finance Training farmers Knowledge and operational at rural level WEAKNESS Subjective; sentiments close to farmers Selection of commodities and farmer groups not based on realistic business opportunities Lack of understanding of business, markets & logistics Project term (short) / project manager focus

STRENGTH

Resources; people, transport, crop finance

Training farmers

Knowledge and operational at rural level

WEAKNESS

Subjective; sentiments close to farmers

Selection of commodities and farmer groups not based on realistic business opportunities

Lack of understanding of business, markets & logistics

Project term (short) / project manager focus

 

ENTERPRISE Definition; organized business activities aimed specifically at growth and profit a new, often risky, venture that involves confidence, initiative and cash

Definition;

organized business activities aimed specifically at growth and profit

a new, often risky, venture that involves confidence, initiative and cash

Differentiate ‘ENTERPRISE’ from activities or organizations which do require continued support Many local or international NGO supported projects or activities Most humanitarian work Relief programmes Charities Many donor projects and other public sector interventions ACTIVIES DEVELOPED WITHOUT THE UNDERSTANDING OF LOCATION OF PRODUCTION IN RELATION TO LOCATION OF MARKETS SUPPLY SCHEDULE, VOLUME AND QUALITY REQUIREMENTS OF BUYERS / PROCESSORS TRUE VALUE (AND PRICE VOLATILITY) OF COMMODITIES REAL COST OF PRODUCTION OF GOODS OR SERVICE

Many local or international NGO supported projects or activities

Most humanitarian work

Relief programmes

Charities

Many donor projects and other public sector interventions

ACTIVIES DEVELOPED WITHOUT THE UNDERSTANDING OF

LOCATION OF PRODUCTION IN RELATION TO LOCATION OF MARKETS

SUPPLY SCHEDULE, VOLUME AND QUALITY REQUIREMENTS OF BUYERS / PROCESSORS

TRUE VALUE (AND PRICE VOLATILITY) OF COMMODITIES

REAL COST OF PRODUCTION OF GOODS OR SERVICE

WARNING ENTERPRISE requires to provide goods or services; to a market or client which is within reach of the enterprise supplied in volumes, of a specified quality and per schedule as determined by the client produced and delivered at price higher than the cost of production (= for profit) offered at a competitive price (your client has to earn with the goods or services supplied) on a growth and sustainable basis

ENTERPRISE requires to provide goods or services;

to a market or client which is within reach of the enterprise

supplied in volumes, of a specified quality and per schedule as determined by the client

produced and delivered at price higher than the cost of production (= for profit)

offered at a competitive price (your client has to earn with the goods or services supplied)

on a growth and sustainable basis

 

CHEETAH LIMITED Private company established in 1995 Exporting Paprika and Chilli products from Zambia, Malawi and Mozambique to European Food Ingredient industry after establishing agronomical suitability and international competitiveness Operating an out grower scheme for the supply of raw materials; dried and graded paprika Exports peaked in 2003 exporting 2,500,000 kg dry paprika Offering up to 20,000 Smallholder farmers An alternative cash crop with growth opportunities Contracts with Guaranteed market, regional sales points Price stability, based on US$ Credit arrangement on Quality Seed and Agrochemicals Improved agronomy Training and extension services inclusive of materials

Private company established in 1995

Exporting Paprika and Chilli products from Zambia, Malawi and Mozambique to European Food Ingredient industry

after establishing agronomical suitability and international competitiveness

Operating an out grower scheme for the supply of raw materials; dried and graded paprika

Exports peaked in 2003 exporting 2,500,000 kg dry paprika

Offering up to 20,000 Smallholder farmers

An alternative cash crop with growth opportunities

Contracts with Guaranteed market, regional sales points

Price stability, based on US$

Credit arrangement on Quality Seed and Agrochemicals

Improved agronomy

Training and extension services inclusive of materials

Key Economic Factors for Cheetah as a business Volume > 500,000 kg dry paprika per country Can only sell Quality as determined by it’s client Need to supply clients on contracted monthly delivery schedule Competitive purchase price, to be able to compete on global markets Can this be achieved with smallholder farmers in a complex and demanding social, political and economical environment and where rainfall is a determining factor?

Volume > 500,000 kg dry paprika per country

Can only sell Quality as determined by it’s client

Need to supply clients on contracted monthly delivery schedule

Competitive purchase price, to be able to compete on global markets

Can this be achieved with smallholder farmers in a complex and demanding social, political and economical environment and where rainfall is a determining factor?

International Competitors Competing for Market Issues Issues Issues Issues Issues Issues Socio-Economics CHEETAH Competitors Export Market Employees Structure CEO Extension and Procurement Sales and Marketing Finance and Admin Quality Control Productions & Operations Distribution Processes Politicians Govt Zimbabwe Peru India China Brazil SA US Spain

THE CHEETAH MODEL Field days Group formation or group / group leader support Dollar based pricing Pre-season agreements – guaranteed minimum price and market – written one page contracts Seeds & agrochemicals on part credit Extension materials (crop budgets, agronomy manual, crop cycle news letters) and training Provision of packaging materials Crop collection and depots close to farmers Feed back

Field days

Group formation or group / group leader support

Dollar based pricing

Pre-season agreements – guaranteed minimum price and market – written one page contracts

Seeds & agrochemicals on part credit

Extension materials (crop budgets, agronomy manual, crop cycle news letters) and training

Provision of packaging materials

Crop collection and depots close to farmers

Feed back

Contracting Systems used by Cheetah Direct through own extension network system, smallholder groups and commercial farmers Traders NGO’s, projects and other collaborating partners; Care, Clusa, Potc, IDE, Zatac, World Relief, World vision, Cordaid, Hivos, Copperbelt initiative, SFAP, etc..

Direct through own extension network system, smallholder groups and commercial farmers

Traders

NGO’s, projects and other collaborating partners; Care, Clusa, Potc, IDE, Zatac, World Relief, World vision, Cordaid, Hivos, Copperbelt initiative, SFAP, etc..

Direct Strength Close collaboration with farmer groups Intensive training per farmer group Control over quality and quantity Weakness High overhead costs per kg Management intensive Short term employment requirements Cash payments in fields – risks

Strength

Close collaboration with farmer groups

Intensive training per farmer group

Control over quality and quantity

Weakness

High overhead costs per kg

Management intensive

Short term employment requirements

Cash payments in fields – risks

Trader Strength Little risk for Cheetah Operate in remote, non viable areas for Cheetah Weakness Intermediate Buyers Short term advantage  Farmer may be neglected especially during seasons of low pricing Unreliable - limited supply security even with contract in place

Strength

Little risk for Cheetah

Operate in remote, non viable areas for Cheetah

Weakness

Intermediate Buyers

Short term advantage  Farmer may be neglected especially during seasons of low pricing

Unreliable - limited supply security even with contract in place

NGO’s and other dev. Partners Strength Rapid expansion of commodity volume Potential for good quality and budget yields because of input finance Central training of NGO’s extension staff Sub-contracting procurement – absorption Extension and procurement costs General reduction of high transaction costs Weakness Temporary Do Good motivation – rather than ensuring sustainability of value chains Subsidizing business costs – unfair competition NGO’s vulnerability to political and other external pressure Unknown agendas & plans, especially on exit

Strength

Rapid expansion of commodity volume

Potential for good quality and budget yields because of input finance

Central training of NGO’s extension staff

Sub-contracting procurement – absorption Extension and procurement costs

General reduction of high transaction costs

Weakness

Temporary Do Good motivation – rather than ensuring sustainability of value chains

Subsidizing business costs – unfair competition

NGO’s vulnerability to political and other external pressure

Unknown agendas & plans, especially on exit

 

Evolving Cheetah model From group contracting (1 per group) to individual farmer contracts From mass recruitments to selected group formation and selection From supply of seed and packaging materials on full credit basis to down payment system by farmer From contracting and extension services provided by Cheetah personnel to provision of these services by empowered groupleaders, Cheetah personnel having role of coordination and technical training of group leaders Reduction of company overheads by providing income to group leaders, who receive income based on seed sales / contracts, credit recovery and crop volumes / grading

From group contracting (1 per group) to individual farmer contracts

From mass recruitments to selected group formation and selection

From supply of seed and packaging materials on full credit basis to down payment system by farmer

From contracting and extension services provided by Cheetah personnel to provision of these services by empowered groupleaders, Cheetah personnel having role of coordination and technical training of group leaders

Reduction of company overheads by providing income to group leaders, who receive income based on seed sales / contracts, credit recovery and crop volumes / grading

Improvements required on Cheetah model Create greater efficiencies; concentrate farmer groups Select farmers with greater potential and grow the ability of the farmer Create a better understanding by the contracted farmers of the annual agreements in relation to product quality, grading, price and payment modalities Ensure consistent payment within 1-2 week after purchase Empower Group leaders to become Entrepreneurs Provide higher level of inputs provided that credit recovery rates increase to acceptable levels (> 80%) Grow farmer volume from 50 - 100 kg paprika to 250 - 500 kg Government to assist in agreements enforcing, reduce side selling / side buying activities, support genuine businesses and not the ones affiliated to politicians

Create greater efficiencies; concentrate farmer groups

Select farmers with greater potential and grow the ability of the farmer

Create a better understanding by the contracted farmers of the annual agreements in relation to product quality, grading, price and payment modalities

Ensure consistent payment within 1-2 week after purchase

Empower Group leaders to become Entrepreneurs

Provide higher level of inputs provided that credit recovery rates increase to acceptable levels (> 80%)

Grow farmer volume from 50 - 100 kg paprika to 250 - 500 kg

Government to assist in agreements enforcing, reduce side selling / side buying activities, support genuine businesses and not the ones affiliated to politicians

How to promote trust Be an industry leader for a number of years Be visible & transparent Develop open Farmer, Group, NGO and Agri buss Extension staff relationships, create feed back and discuss Offer a 2 way purchase agreement which is fully understood and agreed by farmer Pay within 7 days of product delivery Agree on grade & weight at time of transaction, not afterwards with results from central factory Host field days & carry out regular cycle training

Be an industry leader for a number of years

Be visible & transparent

Develop open Farmer, Group, NGO and Agri buss Extension staff relationships, create feed back and discuss

Offer a 2 way purchase agreement which is fully understood and agreed by farmer

Pay within 7 days of product delivery

Agree on grade & weight at time of transaction, not afterwards with results from central factory

Host field days & carry out regular cycle training

How to avoid input diversion Train farmer in crop budgets and make him understand that fertlizer and agro chemicals applications are essential to achieve budget yields Monitor, monitor, monitor Ensure that farmer applies at appropriate rates and times and let him experience the reduced losses and maximum yields over a period of 3 years

Train farmer in crop budgets and make him understand that fertlizer and agro chemicals applications are essential to achieve budget yields

Monitor, monitor, monitor

Ensure that farmer applies at appropriate rates and times and let him experience the reduced losses and maximum yields over a period of 3 years

How to avoid side selling = WISH LIST FOR FARMER Buy at Farm gate Offer highest price Cash payment Offer all inputs; seed, fertilizers, chemical, packaging Offer training & materials Be lenient in product grading The above is a BIG LIST a very costly package and not so ‘real world’….

Buy at Farm gate

Offer highest price

Cash payment

Offer all inputs; seed, fertilizers, chemical, packaging

Offer training & materials

Be lenient in product grading

The above is a BIG LIST a very costly package and not so ‘real world’….

Clusa Zambia + Vast amount of resources; management, extension staff, extension equipment, support office, training, input provision and distribution + credit management business in house + solid development over 3 yrs + farmers well trained in paprika agronomy (and horticultural production in general) + farmers trained in borrowing and repayments no clear exit strategy in place sell out to Bimzi / Enviro oils due to political pressure in year 3, system collapses

+ Vast amount of resources; management, extension staff, extension equipment, support office, training, input provision and distribution

+ credit management business in house

+ solid development over 3 yrs

+ farmers well trained in paprika agronomy (and horticultural production in general)

+ farmers trained in borrowing and repayments

no clear exit strategy in place

sell out to Bimzi / Enviro oils due to political pressure in year 3, system collapses

Care Mozambique + Strong driver in developing new products in Nampula + Understand requirement for solid agri buss partner + Vast amount of growers instantly; 5000 + Extension systems + hardware availability Farmer density too low, transaction cost for the agri business is too high Climate & soils not optimal for the crop, should have been tested Cheetah had too few resources in place for quality extension network and logistical support (inputs in – product out)

+ Strong driver in developing new products in Nampula

+ Understand requirement for solid agri buss partner

+ Vast amount of growers instantly; 5000

+ Extension systems + hardware availability

Farmer density too low, transaction cost for the agri business is too high

Climate & soils not optimal for the crop, should have been tested

Cheetah had too few resources in place for quality extension network and logistical support (inputs in – product out)

POTC, Zambia + Vast amount of resources: Management, Extension, Large fleet, Group formation & training, High level of input provision, crop collection + Created production of 140,000 kg quality paprika after only 3 year period Over extending credit to farmers Transferring NGO contract price, this meant a farm gate price 20-25% above real market value price (nice for farmers but not sustainable) No long term agreement in place – year to year negotiations uncertainty for Cheetah No MOU detailing an exit strategy in place, basically 4 years work and a lot of capital (public funds) lost…

+ Vast amount of resources: Management, Extension, Large fleet, Group formation & training, High level of input provision, crop collection

+ Created production of 140,000 kg quality paprika after only 3 year period

Over extending credit to farmers

Transferring NGO contract price, this meant a farm gate price 20-25% above real market value price (nice for farmers but not sustainable)

No long term agreement in place – year to year negotiations uncertainty for Cheetah

No MOU detailing an exit strategy in place, basically 4 years work and a lot of capital (public funds) lost…

Cordaid Malawi + Base line study in place + Focal analysis of business proposition; product, market, business, finance requirements + Value Chain approach; Extension, Inputs – Micro finance, Trade finance + Let the partnering Agri bussiness be the leader / driver of the development + Clear contracts and financial means in place - Requires more monitoring of extension results and micro finance management + credit recovery

+ Base line study in place

+ Focal analysis of business proposition; product, market, business, finance requirements

+ Value Chain approach;

Extension, Inputs – Micro finance, Trade finance

+ Let the partnering Agri bussiness be the leader / driver of the development

+ Clear contracts and financial means in place

- Requires more monitoring of extension results and micro finance management + credit recovery

Zatac Zambia + Understanding of markets American Consulting firms require vast farmer numbers to succeed in winning tenders for the running of value chain programs Interventions not very clear It is unclear what value the farm as well as the agri business interventions have created Most resources will go to the Consulting firms, not to the intervention with the farmer (training, inputs, logistic support)

+ Understanding of markets

American Consulting firms require vast farmer numbers to succeed in winning tenders for the running of value chain programs

Interventions not very clear

It is unclear what value the farm as well as the agri business interventions have created

Most resources will go to the Consulting firms, not to the intervention with the farmer (training, inputs, logistic support)

Recommendations to NGO Be realistic; know the farmers, infrastructure & transport, markets and your own capacity and means Separate ‘Doing Good’ from ‘Creating Sustainable Farming’ Carry out check on feasibility of product & logistics Know product cycles and price volatility Adjust your support to the commodity and the agribuss relative to the investment made and volumes in the past traded by the agri business 3 YEAR MOU BETWEEN NGO & AGRI BUSS, the MOU is supported by annual work plans Smallholder support; extension, input provision, logistics are very costly – ensure that strong management & budget (people, transport, logistics & inputs) are in place and really relate to the number of farmers or farmer groups supported

Be realistic; know the farmers, infrastructure & transport, markets and your own capacity and means

Separate ‘Doing Good’ from ‘Creating Sustainable Farming’

Carry out check on feasibility of product & logistics

Know product cycles and price volatility

Adjust your support to the commodity and the agribuss relative to the investment made and volumes in the past traded by the agri business

3 YEAR MOU BETWEEN NGO & AGRI BUSS, the MOU is supported by annual work plans

Smallholder support; extension, input provision, logistics are very costly – ensure that strong management & budget (people, transport, logistics & inputs) are in place and really relate to the number of farmers or farmer groups supported

Recommendations to NGO cntd HAVE A CLEAR JOINT EXIT STRATEGY Make farmers stick to the annual contracts; it is a one year marriage Drop loosing products as well as short term farmers and agri business Ensure that farmers invest from own resources & savings, even when it is a small contribution. Farmers need real risk, realistic opportunities, hard work and commitment to succeed !! (this counts for all of us..) NGO’s are responsible for money being well spent; establish base lines before interventions and measure value created to both the farmer and relevant partners in the value chain Stay out of creating ‘the competition game’…

HAVE A CLEAR JOINT EXIT STRATEGY

Make farmers stick to the annual contracts; it is a one year marriage

Drop loosing products as well as short term farmers and agri business

Ensure that farmers invest from own resources & savings, even when it is a small contribution. Farmers need real risk, realistic opportunities, hard work and commitment to succeed !! (this counts for all of us..)

NGO’s are responsible for money being well spent; establish base lines before interventions and measure value created to both the farmer and relevant partners in the value chain

Stay out of creating ‘the competition game’…

What to do Know products (agronomy + production costs + quality specs), markets & price and logistics Envision realistic goals for over a 5 year period Understand the drivers of both farmer and agribusiness equally well Adjust the farmers numbers and work program to management, staff and resources available Work out and deliver on a clear 3 year MOU + exit strategy with the Agri business party GOOD LUCK SUPPORTING FARMERS, GROUPS, AGRI BUSSINES AND YOURSELF SO ALL BECOME WINNERS !!!!!

Know products (agronomy + production costs + quality specs), markets & price and logistics

Envision realistic goals for over a 5 year period

Understand the drivers of both farmer and agribusiness equally well

Adjust the farmers numbers and work program to management, staff and resources available

Work out and deliver on a clear 3 year MOU + exit strategy with the Agri business party

GOOD LUCK SUPPORTING FARMERS, GROUPS, AGRI BUSSINES AND YOURSELF

SO ALL BECOME WINNERS !!!!!

CHEETAH PAPRIKA CREATING MARKETS TRAINING PEOPLE AND EMPOWERING COMMUNITIES ZIKOMO MARK TERKEN VALUE CHAIN SPECIALIST

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