Published on March 12, 2014
Interna'onal Lessons: Models for Linking Smallholder Farmers to Markets TCi 2014© Prabhu Pingali Professor of Applied Economics & Director, Tata-‐Cornell Ini'a've for Agriculture & Nutri'on, Cornell University Bhaskar MiJra Associate Director, Tata-‐Cornell Ini'a've for Agriculture and Nutri'on, Cornell University and Tata-‐Ins'tute of Social Sciences (TISS) Ka'e RickeJs Research Associate, Tata-‐Cornell Ini'a've for Agriculture and Nutri'on, Cornell University
Why might companies choose to source from smallholder farmers? TCi 2014©
The business case: Supply: • Inves'ng in supply base and seeking to expand procurement network • Increase produc'vity, quality or supply chain eﬃciency by inves'ng in smallholder farmers and traders • Develop new products, develop local supply sources and reduce dependency on import markets (i.e., lower costs) Brand, Marke'ng and Reputa'on • Market diﬀeren'a'on • Develop strategic partnerships (rural communi'es, governments, NGOs, civil society groups) • Strengthen local demand and image through smallholder sourcing projects TCi 2014©
4 ©Tata-‐Cornell Agriculture and Nutri8on Ini8a8ve (TCi), 2013 Women’s empowerment Pathways to improved nutri'on: TCi conceptual framework TCi 2013©
5 ©Tata-‐Cornell Agriculture and Nutri8on Ini8a8ve (TCi), 2013 1. Increases rural household incomes (food aﬀordability) 2. Expansion of the local food supply (food availability) through increased produc'vity and/or responding to demand for dietary diversity demand INCREASED MATERNAL HEALTH AND REDUCTION IN CHILDHOOD STUNTING TCi 2014© Linking farmers to markets can create nutri'onal impacts through…
Farmers Tradi'onal retailers Traders & intermediaries Input companies Consumers Provide: • Seeds • Fer'lizer • Crop insurance • Animal health/ nutri'on • Food ingredients Produce: • Dairy/meat • Hor'culture • Seed Provide: • Purchasing • Transporta'on • Price informa'on • Basic processing • Corner stores • Wet markets • Roadside stands • ‘mom and pop’ stores Food markets can provide: • Low-‐priced fruits and vegetables (micronutrients) plus cereals (calories.. • Employment (income) for poor rural households. Direct selling to market Farmers produce for input markets Direct selling Agri-‐food value chains Modern retailers • Supermarkets in urban and peri-‐ urban areas • Mul'na'onal trading companies • Mul'na'onal food manufactures Supply/input coordina'on Direct selling Quality standards Quality standards Sell Sell Sell Sell Sell Sell TCi 2013©
In prac'ce, smallholder farmers can be integrated by: Independent farmers Regional ‘hubs’ Coopera'ves and farmer-‐based organiza'ons Lead-‐farmer/nucleus clusters TCi 2014© Buyer Buyer Buyer Buyer Product ﬂow Product ﬂow Product ﬂow Product ﬂow
Interna'onal models for integra'on and aggrega'on Individual farmers linked through: Company Product(s) Key Implemen'ng Partner(s) Country Corporate mo'va'on Regional “hub” Starbucks Coﬀee N/A Global Expand supply, invest in quality. Armajaro Cocoa Source Trust (sister NGO organiza'on) Global Expand supply, invest in quality. Coopera'ves & farmer-‐ based organiza'ons (FBOs) Unilever Black soy Local university (extension services) Indonesia Capture new market ops, reduce costs. Coca Cola Mangos NGO (Technoserve) Uganda, Kenya Capture new market opportunity, expand supply. Sysco Broccoli NGO (Oxfam, ADAM) Guatemala Expand available supply. Lead farmer/ nucleus clusters Tate-‐Lyle Sugarcane Rabobank, local government Vietnam Capture new market opp., reduce costs. Heineken Sorghum NGO (Technoserve) Sierra Leone Capture new market opp., reduce costs. Chiquita Passion Fruit NGO (Rainforest Alliance) Costa Rica Expand supply. TCi 2014©
Model 1: Regional ‘hub’ Starbucks Crop: coﬀee Mo'va'on: To ensure responsible produc'on prac'ces, support the produc'on of high quality coﬀee, and monitor the needs of the farmers Starbucks started C.A.F.E. Prac'ces– now reaching 141,000 farmers in 20 countries. Regional ‘hub:’ • Farmer Support Centers (FSC) link growers to necessary services. • Extension access, lead farmer training • Credit access • Quality trainings and quality experts In 2012, Starbucks has purchased more than 90% of their supply through the program. Armajaro Ltd. Crop: cocoa Mo'va'on: Armajaro LTD faced growing demand for cocoa and were dependent on a farming system characterized with low produc'vity, persistent poverty and child labor. The ﬁrm created Source Trust to implement regional hubs for service provision, quality control, aggrega'on, and community care & empowerment. Regional ‘hub’: • Farmer Development Centers (FDCs) operated by the NGO Source Trust (created by Armajaro) oﬀers extension services to help farmers improve livelihoods through beier crop yields and quality. Speciﬁcally, FDCs: – Provide extension, courses, and informa'on – Develop premium cocoa opportuni'es for growers – Seedling nurseries and clean plan'ng materials – Farm inputs/credit – Village resources (malaria preven'on, community infrastructure). TCi 2014©
Regional hubs: Take-‐aways Regional “hubs” demand: 1) Long term commitment in infrastructure and human capital development and 2) Large investments. This model tends to work where: • Clearly established demand with strong growth prospects. • Supply needs to be safeguarded and sustained. TCi 2013©
Model 2: Coopera'ves & farmer-‐ based organiza'ons (FBOs) Unilever Crop: black soy Mo'va'on: Unilever expanded sourcing to capture new market opportunity in Indonesia for black soy and expand locally available supply. Star'ng with 12 farmers in 2001, they expanded produc'on to source from 6,600 farmers that were organized into coopera'ves with government and local NGO assistance. These farmers now supply 30% of the market demand covered by Unilever. Coopera've model: • Leveraged government and academic partners. • Coopera've planorm allows farmers access to loans, improved seeds, agronomic assistance. • Yields for farmers have doubled since the program began 8 years ago. Local brand designa'ng locally sourced soy has improved reputa'on throughout Indonesia. TCi 2014©
Model 2: Coopera'ves & farmer-‐ based organiza'ons (FBOs) Crop: frozen broccoli Mo'va'on: Sysco wanted to make investments to expand their supply and ensure long-‐term sustainability. The company iden'ﬁed Superior Foods (who has links to small scale farming opera'ons/prodcut in La'n America) as a key partner to do this. Superior Foods worked together with a local exporter, Sumar, and local NGOs to link indigenous smallholder farmer coopera'ves in Guatemala to this new broccoli value chain. Coopera've model: • 16 coopera'ves par'cipa'ng • Technical support is given by local NGOs who assist the coopera'ves with quality upgrading and business development • Volume contracts were established with the coopera'ves • NGO partners invested in basic infrastructure investment (seedling produc'on and packing sheds) TCi 2014©
Linking through coopera'ves and FBOs: Take-‐aways Successful coopera've models demand: 1. Provision of necessary services to meet quality and quan'ty demands 2. Partnership with technical service providers (NGOs, academic ins'tu'ons, or public sector) This model tends to work where: • Strong NGO/public partnerships can assist with: – Organiza'on of new coopera'ves (if not yet established) – Technical service provision – Co-‐investment for necessary infrastructure TCi 2014©
Model 3: Linking through lead farmers and nucleus clusters Crop: cane sugar Mo'va'on: Tate & Lyle invested in a new cane processing plant in Vietnam to capture strong na'onal demand for sugar. There was high cane imports and legal prohibi'on of large holdings, so they began a smallholder sourcing program with the government and the Rabobank Founda'on (RF) to reduce import costs and capture new market demand for sugar. Lead farmer model: • Created network of respected ﬁeld managers, lead farmers that work with 20,000 farmers. • SMS data/GPS system communicates when to harvest & deliver, and conveys quality and payment informa'on to farmers, • Partnership with Rabobank enabled access to credit and took advantage of public subsidies for new agriculture endeavors. Credit system is now self-‐sustaining and default rate is 4%. • IT system allows for quick communica'on about projected supply. TCi 2014©
Model 3: Linking through lead farmers and nucleus clusters Crop: sorghum In 2005, Heineken started a local sourcing program for sorghum as a subs'tute for malted barley for beer markets in Nigeria, Ghana, and Sierra Leone. In addi'on to developing new product lines for growing beverage markets, shorter supply chain for primary materials would lower import bill (safeguard against price shocks). 1,600 farmers now sell into this supply chain. Lead farmer model: • Iden'ﬁca'on and training of nucleus farmers who organized the collec'on of sorghum from village-‐level groups. • Interven'ons in a) credit facilita'on for nucleus farmers and b) micro-‐credit to farmer groups were enacted in order to assist cul'va'on. • Insuﬃcient training, credit access and poorly communicated quality parameters leq farmers and company frustrated. New approach is now being undertaken with addi'onal partners (NGOs and local research ins'tute). TCi 2014©
Linking through lead farmers and nucleus cluster mechanisms: Take aways Nucleus clusters and lead farmer models require: 1) Iden'ﬁca'on of suitable lead farmers/nucleus farms and adequate training 2) Nucleus farms/lead farmers to be well-‐known and respected individuals in the community This model tends to work where: • There is strong alignment of expecta'ons on quality and volume standards. • Local capacity building is a priority and development of local leaders is possible. TCi 2014©
Cri'cal ins'tu'onal considera'ons • Crop-‐speciﬁc processing infrastructure for smallholder farmers and value chain par'cipants needs to be developed. – Perishable crops requires immediate processing – Fresh produce requires intense labor • Ownership structures throughout the developing world are diverse. – Can range from fully controlled state schemes to full private agribusiness control. • Contractual arrangements vary considerably. Range includes: – Seasonal credit and liile interven'on from buyer • Use of market speciﬁca'on and resource contracts – Quasi-‐planta'on system where outgrowers labor as quasi-‐wage workers (extreme produc'on contracts). • Regulatory environment depends on market focus – Export markets demand compliance to interna'onal and import standards (pes'cide load, labor standards) and tariﬀs. – Procurement for modern retailers (supermarkets) require compliance with elevated quality standards of mul'na'onal retailers. TCi 2014©
In the interna'onal context… experience shows that companies need to ask: 18 • What is the business beneﬁt(s) sought? • Is sourcing from small scale producers feasible with this crop? – How does the crop ﬁt into the local farming systems? – Can the crop be grown eﬃciently and cost-‐compe''vely in this par'cular region and by this set of farmers? – What investment is needed at farm and processing and market levels to meet required volumes, quality and standards, and to get the sourcing model to the point where it is self-‐sustaining? – Who will make this investment? How long will it take? • What could go wrong? – Are the risks to the company, smallholders and other aﬀected par'es manageable (e.g. climate change, changing consumer preferences, currency movements)? • What could be the development impact? – Are other investments needed to reduce risk, increase development beneﬁts, or promote sustainable farming prac'ces? TCi 2014© Adapted from Sustainable Food Lab © 2013
Moreover, companies need to consider the household, community, value chain and market context… 19 Important Ques'ons • Is there a good case for farmers to invest in this crop? • If there is a farmer group (e.g. coop) and do they have the business skills & assets to be capable trading partner? • Are there intermediate suppliers and what inﬂuence do you have on them? • What else beyond the value chain is needed for success? • Are there are any major ecological or social concerns from the produc'on of this crop? Adapted from Sustainable Food Lab © 2013 TCi 2014©
Food & nutri'on insecurity There are many well-‐known problems related to smallholder sourcing, which create commercial and reputa'onal risks for companies if not handled well. Examples from the cases (and informal interviews around failure points) include: Women’s exclusion Child Labor Low produc'vity & quality (therefore low crop income, high costs) Poor environment prac'ces (soil erosion, deforesta'on, etc) Poor health & safety on farm e.g. pes'cide management etc Over dependency on one crop / buyer Side selling Labor condi'ons No ability to make claims based on veriﬁable impacts Poor management and proﬁtability Unreliable delivery Farmers (produc'vity, quality, income) Aggregator / Trader Processor Branded Firm Farming Households Across smallholder farmer aggrega'on models, various risks are common… Adapted from Sustainable Food Lab © 2013 TCi 2014©
Thank you! 21 Website: tci.cals.cornell.edu Blog: blogs.cornell.edu/agricultureandnutri'on/
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