COFFEE FARMING

AS A BUSINESS

EASTERN AFRICAN FINE COFFEES

ASSOCIATION (EAFCA)

AUGUST, 2003

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TABLE OF CONTENTS………………………………………………………………...1 ACKNOWLEDGEMENT. ………………………………………………………… ….2 INTRODUCTION ………………………………………………………………………………3 WHAT IS BUSINESS? .………………………………………………………………………….7 POTENTIAL PROFITS AND LOSSES WHEN LOOKING AT CURRENT FARMING TECHNIQUES AS A BUSINESS. ……………………………………………….14 PROFITS AND LOSSES WHEN LOOKING AT CURRENT FARMING TECHNIQUES AND IMPROVED SEEDLING………………………………………………….24

INTRODUCTION TO SAVING FOR INVESTMENT IN PRODUCTION ……………………..31 THE PROFIT IMPACT OF CHANGING PRICES ………………………………………………38 COMMON SENSE AND DIVERSIFICATION FOR RISK MANAGEMENT ………………….43 COST SAVING BENEFITS OF SMALL HOLDER ASSOCIATIONS ………………………...50 VALUE - ADDITION IN THE SCALE OF SMALL HOLDER ASSOCIATIONS………………57 REVIEW OF PROJECTED INCOME STATEMENT IMPROVEMENTS OVER THE COURSE OF THE PREVIOUS CHAPTERS……………………………………….……… 66 MARKETING IN THE SCALE OF SMALL HOLDER ASSOCIATIONS ……………………...69 WORKPLANNING AND RECORD KEEPING …..…………………………………………….76 MONITORING AND EVALUATION ………..…………………………………………………84 WRAP UP. ……………………………………………………………………………………91

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ACKNOWLEDGEMENTS Many talented people contributed to writing and designing this coffee farming as a business-training manual. Without their advice, guidance and contributions, the quality of the final product would have suffered. Rich Pelrine and Dann Griffiths designed the format and authored the original content. Eastern African Fine Coffees Association (EAFCA) and Uganda Coffee Farmers association (UCFA) provided the literature where prices, costs and other critical data employed in the manual was derived. We most especially wish to recognize the NSBC research team and members who dedicated their valuable time to collecting and reviewing the data from the grassroot coffee farmers' associations, for their patience in reviewing the early drafts and furnishing very constructive criticism that improved the effectiveness of the final product. They are also thanked for contributing their vast experience in agri-business to ensure that the trainers' guide remained targeted at the intended client groups - extension agents and the farmers with whom they work. Finally, this manual would not have been possible without the financial support of the East African Fine Coffee Association (EAFCA).

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INTRODUCTION Over 85% of Uganda’s population live in rural areas and are engaged in subsistence agriculture as their principle livelihood. 45%– 50% of rural Ugandans live in absolute poverty. Coffee is still the most important traditional cash crop, with households mostly operating small units of 100 to 2000 trees 0.25 – 5Acres). It is these small holders that produce the bulk of Ugandan coffee. However, production is constrained due to low adaptation and adoption of improved technologies, volatile markets, limited access to markets, disease (especially coffee wilt disease lately) and a lack of business knowledge among farmers. Use of fertilizers, pesticides and improved seedlings and practices are only recently gaining momentum. Most farm families are unable to meet their basic household needs. The coffee and general situation is not much different in the rest of Eastern Africa. The goal of this training product (Coffee Farming as a Business – CFaaB – ) is to address the lack of business understanding among farmers, with the view that after analyzing the benefits of coffee growing using different approaches, the farmer will become able to tackle the other problems, making choices based on business understanding. The overall aim of approaching farming as a business is to increase the incomes of the rural poor, or to put more money in the farmers’ pockets and into the rural economy. This will enable them to improve their standards of living in terms of housing, food security and basic household needs, while contributing to the larger goal of making the transition from a subsistence to a cash economy, or the creation of wealth. Agriculture in the Ugandan context is the only logical engine for rural economic growth. It generates income, provides productive employment, and enhances food security. To improve the livelihoods of rural people, there is a need to view agriculture as a business. Farm business emphasizes a shift from farming for subsistence to farming for profit. Farmers must learn to critically examine the costs related to production, and marketing, and the benefits that accrue through improved efficiencies from making informed management decisions. Before any venture is undertaken, the farmer must set a viable business goal. Business planning through self-assessment and examining the operating environment is essential in understanding both the risks and benefits of the business. In this manual, comparisons of farming and tailoring are used to demonstrate that the framework necessary for any business analysis is similar. The Trainers’ Guide is designed to arm extension workers with skills that will assist them in fully understanding the commercial potentials of small-farm agricultural production. Throughout the training manual, the potential for profits increase as the complexity of the management increases. A systematic and slow-paced process is followed from the first chapter to the last chapter, with each chapter building upon the lessons learned in previous sessions. Note: chapter eleven contains a summary table and chart showing the full development of the lessons. Using a progressive methodology, the manual helps to assess capacity, identify shortcomings and propose strategies affecting the household’s business success. The extension workers and farmers are guided through the following steps: ! Understanding business terms and concepts as they relate to farming and tailoring. ! Comparisons of the costs and benefits of differing approaches to farming and business management. ! The value of saving compared to credit costs as an input.

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! Investigating various value-adding strategies. ! Risk management strategies. ! Reviewing market access and market alternatives.

! Understanding the potential benefits of collective actions through associations with other farmers. ! Understanding simple and informative farm records ! Understanding farm accounts for good decision-making and business performance monitoring. ! Developing indicators to measure progress of the farm as an enterprise. Training framework and the target clients: The ultimate objective of the training program is to furnish farmers with appropriate-level analytical skills and business management tools. The skills and tools will in turn guide them toward making decisions based on business principles, thereby decreasing costs, decreasing risks and increasing profits. Although the final client of the training process is the farmer, this manual is not designed for direct use by most smallholder farmers. It is designed as an instrument to train extension workers working directly with farmers. Any credible and effective trainer must possess a far greater depth of understanding of the technical material than the final client. The design of this training manual is based on that irrevocable fact. The materials that will be used by the extension workers to train smallholder farmers will be adapted directly from the content of this Trainers’ Manual, but they will be designed and presented at a level that is appropriate for the farmer clients. Farmers should be trained throughout the country. The relative sophistication of the client groups will vary from region to region; the approach to training each group will vary accordingly, and it will be the responsibility of the extension workers to adapt the materials to the specific needs of their farmer clients. Most of the extension workers participating in the Training-of-Trainers program will conduct formal training session for their farm clients. However, depending on the time of the year, a limited number of farm families can afford to spend five to six continuous days at a training event. It is quite likely that training will take place over shorter periods of time – a day at a time or a few hours at a time – over an extended period. And, regardless of timing of the training, the reinforcement of the new business skills will take place most effectively during repeated after-training visits to individuals and groups of farmers. The extension workers must become farm business consultants, and not only trainers in a formal workshop setting. Extension workers will be trained during a two-week workshop. The first week will be dedicated to transferring the technical content to the future trainers. During the second week of training, the extension workers will co-facilitate the training with NSBC's Master Trainers. In this week, their grasp of the technical material and their training methods will be evaluated. The materials for the farmers will be drawn directly from the Trainers’ Manual, with the focus on practical tools - largely fill-in-the-blank forms for planning, record keeping and analysis. The Farmers’ Workbook will serve as an instructional manual during training session and as a reference manual in the field. Training sequence and assumptions The goal of this training product is to deliver the message that farmers will increase their profits when farming is approached as a business. To demonstrate the results of improved practices (business and

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technical) and the value of planning, managing risks and greater efficiencies, coffee is used as the example crop from the beginning to the end of the training process. The lessons learned are equally applicable to beans, sunflower, simsim, apples or any other crop. Coffee is used as an example because it is familiar to most farmers and it conveniently serves the purpose of demonstrating the benefits of various alternative approaches to farming and business. The principles are equally applicable to any non-farm business undertaking, where examples from a tailoring business could easily be applied to another retail business. Two training sessions during the last days of the workshop are dedicated to the Farm Business Game. The Game is competitively played between small groups, with the winning team being determined by the amount of profits earned. It is designed to simulate situations encountered on the farm and to encourage the clients to apply and test the new business skills they have learned. Clients are faced with a variety of decisions that impact the profitability of their businesses. From Chapter 2 though Chapter 9, one acre of coffee production is consistently the basis of comparison (chapter 10 expands the production model to 2 acres). Assumptions concerning the costs of inputs, the values of outputs and post-harvest losses are defined in the early chapters. The values used in the analyses are average figures based on ranges of values gathered from multiple sources (FEWS, IDEA, NARO, PHHS project, MAAIF, UCDA, EAFCA). Using averages can be misleading, as they more often than not misrepresent the actual figures any given farmer will encounter in the marketplace. To overcome the flaws inherent in the use of average values, chapter 6 is dedicated to discussing the impact of changes in those values. Throughout the manual, one day of farm labor is valued at 1,000 USH. The authors recognize that “return to labor” or return on the time invested in farm labor, is an alternative approach to costing labor in farm financial analysis. Depending on what is most appropriate for any given group of farmers, the labor-cost issue can be addressed in either fashion. The key question is what is the most effective approach for farmers to understand and apply the concept consistently? Chapter 2 discusses the costs and benefits of growing one acre of coffee when not using improved inputs and borrowing money. In subsequent chapters, only one change is made in the previously presented model. This approach isolates the costs and benefits of each discrete step, and simplifies a potentially complex analysis. By the end of the training process the clients will have gained an understanding of the benefits of each individual step, and the cumulative benefits of all of the improved business farming practices. Also, in an effort to reduce the complexity of the material without sacrificing the “messages”, the authors have omitted references to certain concepts that are commonly applied to the financial analysis of a business. Simple tools (hoes and Pangas) are considered as consumables or variable costs. It is assumed that they must be purchased each season, and are therefore not considered as fixed costs. In discussions of capital assets (grain dryers, mud silos and charcoal heaters), depreciation is not calculated. Finally, in discussions concerning relative merits of savings and credit, we do not calculate the opportunity costs normally associated with saving. In spite of these intentional omissions, or in part because of them, the central messages are clearly relayed to the clients. This training manual will always be viewed as a work in progress. If it is to serve the farmer, it must be dynamic and adaptable to changing conditions in the same way that any businessperson must be adaptable to changing forces. All constructive criticism is welcomed and encouraged. The farmers will inform us all concerning the effectiveness of the content and the methods by which the materials are presented.

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The Social Agenda and the Business Agenda: The funding agreements that define and guide a development organizations’ activities are framed in terms of stated outputs, or the achievement of goals and objectives (production and/or value targets). The production and value targets (business oriented) are the central theme of this training program. However, many development projects also address issues of broader social importance – better nutrition, improved health, education and gender issues, as examples. All of the goals addressing improved general well-being of the family and the community are valid and deserving of attention and investment. However, those goals and the measurements of their attainment should not be confused with the assessment of successes in business. It is the intention of every development worker to contribute to the overall improvement of the social condition, but inserting a social agenda into business activities may only serve to diminish the eventual positive impact the business can have on the larger social good. Efficient and more productive businesses create wealth and jobs in a competitive marketplace. The tax base is made deeper and broader, resulting in increased revenues and the communities’ enhanced capacity to cater for their own social and infrastructure needs. If your organization is required to gather information concerning social well being, by all means gather the required information; it is very important to have a broad understanding of changes in the community. But, by so doing, do not be tempted to directly leverage business successes into social improvements with the individual businessperson. Do not impose social or moral conditions, such as how the profits should be spent outside of the framework of the business (If the farmer applies the business practices in this training course to his farming establishment, he will reinvest in the growth of the business). If the farmer wants to spend his increased profits on beer rather than for school fees or needed medicine, that is unfortunate, but it is not the business of the extension agent (farm business trainer) to dictate how his hard-earned money is spent. Succeeding in business is difficult enough without attaching extraneous conditions governing how the business owner must spend his earnings. Key Training Messages The training objective simply stated, is to “put more money in farmers’ pockets”, or to create wealth within the farm household. Approaching farming as a business will contribute to reduced costs, reduced risks, and increasing profits. The key elements required to achieve this are all related to the production of surpluses and increased efficiencies. The extension agents and the farmers will leave the training event with a greater understanding of four critical lessons: - Improved inputs and practices lead to surplus production and increased profits; - Profits increase through better management and informed decision-making, or planning and record

keeping; - Efficiencies and profits increase through association with other farmers in a business relationship; - Saving is more a profitable input (cost of production) than credit.

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CHAPTER ONE WHAT IS BUSINESS? Objectives: To understand the term business using familiar examples.

To enable farmers to become familiar with business concepts and vocabulary, and to start thinking about farming in business terms.

Introduction: This chapter sets the stage for the remainder of the training content. It is intended to drive home the central point that farming is indeed a business. What may appear as a foregone conclusion to many, is not so clear to other development workers, and especially in the minds of many relief workers. Development and relief organizations categorize their interventions into sectors – health, education, environment, etc. In Uganda, some donor organizations actually recognize income generation as a sector that is distinct from agriculture. In a society where over 85% of the population is involved in production agriculture, agriculture must be viewed as THE primary generator of income and wealth. It must be approached as any other business – with the goals of minimizing costs and risks and maximizing profits. Farmers must come to this understanding if they are to produce marketable surpluses. To make the point that farming is similar to other businesses, we compare it to tailoring. Tailors do not invest in their training and their operational and capital costs only to clothe their families. They produce their products for the market; a market that will pay a price that includes a fair profit. Farmers must approach their businesses in the same way. 1.1 Process Process Methodology Materials Time ! Introduce the topic (business),

purpose, and objectives by giving an overview on farming as a business, and comparing it with other businesses, and understanding risks involved in business enterprises.

! Elaborate on business vocabulary, and the farmers’ need to become familiar with the terms.

! Discuss with clients their perceptions of a business, comparing the differences and similarities of farming business with tailoring.

Brain storming, Class discussion, and group work

Flip charts 1 hour

! Divide participants into groups. Ask them to compare and contrast farming with tailoring.

! In plenary, discuss the results. ! Ask one member to summarize the

results.

1 hour

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1.2 Training Steps I. Participants’ Perception of Business ! Introduce the topic and objectives. Explain why the topic is relevant. ! Ask the participants to discuss their perceptions of what business means. Compare their definitions

with the Trainers’ Notes. II. Demonstrate That Farming is Like Any Other Business ! Working in small groups, ask the participants to compare the differences and similarities between

farming and tailoring from a business perspective. They should consider inputs, outputs, costs and risks. Emphasize that business characteristics are very similar regardless of the trade. Compare the results with the Trainers’ Notes.

! Allow each group to present their thoughts and results. Compare the results with the Trainers’ Notes. III. Business Vocabulary ! To facilitate their understanding of business, there is specialized vocabulary that the participants

should become familiar with. Ask them to list and discuss the terms that they know and to give examples. Compare the results with the Trainers’ Notes.

1.3 Trainers’ Notes Building on the responses of the participants, discuss and define business in fundamental terms. Stress the difference between farming for subsistence and farming for profit (sometimes called “agribusiness”). Summary Business is an activity operated for the purpose of earning a profit by providing a service or product. Entrepreneurs or associations of entrepreneurs put their money at risk. The risk is associated with an activity or venture for the purpose of earning a profit. Regardless of the type of business, there is a need to take into consideration the costs of production and marketing of the output commodity.

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Comparison of Agribusiness with a Tailoring Business Tailoring Farming Inputs: ! Fabric

! Sewing machine ! Scissors ! Measuring tape ! Thimbles ! Thread ! Pins ! Paper ! Packaging materials

! Seeds ! Land ! Hoes ! Ropes ! Gum-boots ! Fertilizers ! Pangas ! Paper ! Bagging materials

Operational Activities

! Cutting the fabric ! Make designs and

embroidery ! Put final touches like

seams, buttons, designs on product

! Package to suit clients

! Preparing land ! Weeding ! Sowing the seeds ! Apply fertilizers and

pesticides ! Harvest, sort, dry, and

grade ! Package to suit clients

Marketing ! Requires transport ! Specification based on

demand such as season, preference.

! Designing and packaging ! Market information.

! Transport ! Specification based on

demand such as people’s preference, season, etc.

! Sorting, grading, and packaging.

! Market information Comparative Risks between Agribusiness and Tailoring

Risks Tailoring Agribusiness Weather - ! Post Production Losses - ! Security ! ! Market Availability ! ! Competition ! - Adding Value ! ! Pests and Diseases minimal ! Storage minimal !

Note: Stress how competition is different in farming than in many other businesses. The market price fluctuates with supply and demand and is not necessarily predictable. The farmer must keep her costs low to maximize profit, as she is a price taker.

At the end of the session, the farmers will appreciate that farming is like any other business requiring inputs, operational activities, completion and marketing of the final product. All businesses have risks differing in magnitude. Farming, seems to have more risks than tailoring, however, when the right decisions are made at the right time through proper business planning and management, risks can be minimized (Chapter 7).

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At the end of the exercise, one or two of the participants should summarize the major differences and similarities of farming and tailoring businesses, and lessons learned. 1.4 Basic Business Vocabulary:

Production Costs. These are the financial and non-financial expenditures used in producing a commodity. For example, the costs pertaining to a farming business include seeds, chemicals, transport, processing, packaging and marketing. While costs pertaining to tailoring include a sewing machine, fabric, thread, machine oil, scissors, needles, and labor, etc. Labor costs. The total expenditure paid for family labor1 and for hired casual labor in the production of specified commodity. Farms may have a casual labor cost for activities such as sowing, weeding and harvesting. Tailor shops may have no need for outside labor. Yield or Output. This is the total volume of the product produced in a given time period. In case of a farm business, the yield would be in terms of quantity of crop produced (kilograms) per acre after a season, while in tailoring it would be the number of dresses, shirts, skirts, trousers, bed-sheets made and ready for sale, over a specified time period. Producer Price (“farm gate price”): This is the price at which the farm-business sells the commodity to an on-farm buyer. The price is usually lower than terminal markets prices. For example, clothing purchased at a village tailor may be resold in Kampala at a higher price. Likewise, coffee and beans can be bought from the farmers at lower prices and resold in town markets at higher prices. Gross Income (Total Income). The sum of money an entrepreneur receives for selling his output commodity before deducting the costs incurred for producing that commodity. Net Profit The sum of money left when all costs of production are deducted from the gross income. Return to Labor. Net profit divided by total number of person-days used to produce the commodity. Person-day: a unit used to measure casual labor. Operational Costs. The costs of actions or services needed to produce the output commodity. Note that this does not include the costs of inputs. For example, in a farming business, such services paid for would include labor for land preparation, fertilizers, etc. While in a tailoring business, this would include labor for cutting fabric, sewing, lifting materials, etc. Fixed Capital: Machinery, tools, etc. that are invested in and paid for by a business in an initial period, that will last for some time into the future. Savings: Money or goods set aside for future use or putting aside some of a business’ profits or earnings for investing in the next production cycle (or season in the case of farming). Credit. Borrowed money before production and paying it back with interest after production is finished and the product sold. 1 This is determined by counting how many complete days that family members contribute to the income generating activity on the farm multiplied by the daily rate of a casual labourer.

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Break Even Yield. This is the crop yield that must be realized to pay all costs of production (both inputs and operational costs). Unit Costs and Unit Margins. The cost of production per kg; the profit margin is difference between cost and sales price per unit of production. In this manual the unit of comparison is one kilogram (Kg). Break Even Price. This is the minimum price the businessperson must receive to cover all costs of production. Value-Adding. Any activity performed by the business to capture more of the profit from the retail price that the end consumer will eventually pay for the product. Marketing. This is everything an entrepreneur does to identify customers and what goods or services they are interested in buying. It also broadly covers research about customers and the competition, and how they impact your business. Market. The market is a place, physical location or broader spectrum, where buyers of goods meet sellers of goods. A market also means the people who have the needs and wants that must be met by your product. These people must have the effective demand that will be met by your product. They could be individuals or institutions interested in buying your product. Small Holder Association (SHA): a collaborating group of farmers who, for the purpose of earning higher profits and paying lower costs collaborate. Record Keeping. This is the organized recording of information about a business to be used to monitor progress and improve efficiency. Middlemen: Market participants that purchase from the producer or another middleman and sell to the final consumer or another market intermediary. Cash Flow: Any amount of money that flows into the business as income or out of the business as an expenditure. Projected Income Statement: A simple predictive and management tool that informs the businessperson about the anticipated outcome of expenditures (investments) in terms of profits or losses (return on investment). Efficiency: A process of working well, quickly and without waste. Appellations: A (commodity) growing geographic area that has unique characteristics such as altitude, topographic features, soil characteristics and location, and produces products with a distinct quality rating such cup taste (flavour), which can be differentiated and marketed by its own brand name. Niche Market: A particular segment of consumers demanding and supplied with coffee of particular special/unique characteristics, e.g. organic coffees, bird-friendly coffee or shade-grown coffee. Two main factors that are necessary for a niche market are the coffee quality and its availability. Cupping: The tasting and testing of different coffees and their brews to judge the ones with the best consumer characteristics like aroma, colour and acidity in order to determine their quality, usefulness and price. Cupping Competitions are held to judge and grade coffees from different sources. The higher-grade coffees fetch higher prices.

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Specialty: Specialty coffee refers to coffees that either command a premium price over other coffees or are perceived by consumers as being different from the widely available mainstream brands of coffee. Specialty means a degree of exclusivity. Wet Processing: A system of cleaning coffee where the (red) cherries are pulped and washed with water to remove the mucilage and produce clean parchment coffee. It results in higher quality coffee. Pulping: The process of removing the red outer skin of coffee cherries. Dry processing: Where the coffee cherries are dried without removing the pulp. The dried cherries (kiboko) are then hulled to produce clean beans (kase). Hulling: The process of removing the husk (dehusking) from dry coffee cherries. Kiboko: (Local Ugandan term to mean) Dried ripe coffee cherries. Auctioning: A system of selling transparently to competitive buyers where the highest bidder takes the goods. Premium: An increment (top-up) in selling price paid by the buyer for a unique/additional quality in the product offered by the seller. Trainers’ Note: Give a brief explanation covering projected income statement and its value as a predictive management tool. Explain that it measures the anticipated results in terms of expenditure vs. expected gross income.

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CHAPTER ONE: NOTES PAGE

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CHAPTER 2 POTENTIAL PROFITS AND LOSSES WHEN LOOKING AT CURRENT FARMING TECHNIQUES IN BUSINESS TERMS Objectives: Understand simple analysis of profit and loss on the basis of costs and benefits to a farm. Introduce the costs and impact of production credit. Introduction: In the previous chapter we introduced and discussed with the participants the fact that farming is a business similar to any other business. We further reviewed and internalized some vocabulary that is relevant to the understanding of business concepts. In this chapter we begin to closely analyze farming as a potentially profitable business venture. Traditional farming methods in Uganda are based on a household unit of production. Normally, the household uses inputs and produces outputs without costing the value of either. While farmers may have an awareness of what the costs and benefits to their households are from farming, there is rarely any systematic method for minimizing costs and maximizing benefits. Hence, in this chapter we will model the projected income statements associated with a farming enterprise. For convenience, we will analyze the costs and benefits of growing one acre of coffee. (One acre of coffee production will be the standard unit of production used for comparison throughout almost the entire training process.) The issue of producer credit and whether or not it is a benefit will also be explored here. This chapter is the first step in analyzing the household farm as a business unit. After completing this chapter the participants will be able to analyze closely the costs, profits and efficiency of their own production. The content of this chapter constructs the foundation upon which the remainder of the training content is to be built. It is therefore very important that the clients fully understand the projected income statement tool and all of its components before continuing to chapter 3. The homework assignment at the end of the first day will reinforce the use of the projected income tool and inform the trainers whether or not the clients have understood its construction and application. 2.1 Process:

Process Methodology Materials Time ! Review the previous session’s

work. ! Introduce the topic stating the

objectives using examples to clarify the abstract.

Discussion Flip charts 10 minutes

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! Ask the participants to describe

their farming methods. ! Discuss and agree with clients the

inputs necessary for production of one acre of coffee.

! Ask them the operations costs required for production of one acre of coffee.

! Explain step by step the production ! and operations costs using the

figures in the text. ! When they have understood the

concept of farming, divide them into three groups.

! Using the guidelines (figures), ask each group to go through the process of determining production costs.

! Each group should select a chairperson, reporter, and secretary to take record of all discussions.

Facilitation, Group Discussion, Group Presentations

Flip Charts, Illustrations

1 hour and 20 minutes

! Ask each group to present and discuss their assignment.

! Ask one participant to wrap up.

Discussion Flip Charts 30 minutes

! Discuss and agree on yields for an acre of coffee grown using traditional methods.

! Discuss and agree on an average price per kilogram of coffee sold at harvest.

! Work out potential profit and/or losses on growing an acre of coffee.

Group Discussion, Work out the example on a flip chart

Flip Charts 30 minutes

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COST AND IMPACT OF CREDIT ! Ask the clients, their perceptions

of credit or loans. Have they borrowed money from a bank or a friend? Use the definition in chapter 1.

! Building on what they know, explain interest accrued from the loan. This is an input that has to be added on the input costs.

! Assume that the interest rate on a loan is 35% per annum.

! Add the cost of borrowing money to cover all production costs from the previous example

! Discuss the impact of credit comparing the results to the previous example.

! Discuss costs saving and income increasing strategies

! Explain the homework assignment and the expectations

Discussion Flip Charts 1 hour

2.2 Training Steps A Tool for Projecting Profits from a Business Undertaking The following is a guide for modeling a farm’s projected income statements and using those statements for calculating the anticipated profit or loss earned on growing one acre of coffee using traditional methods. The trainer may opt to use all of the following figures and methods of calculation2. Throughout the extension agent training, we will conduct analyses using the costs and price assumptions as defined on the following pages. In the field, the actual values will vary depending on the crop, the season, the year and location. But, keep in mind that the central goal of the training is to demonstrate the trend toward increased efficiencies and profits when employing improved business practices. I. Select, Quantify and Cost all Inputs Key Assumptions Regarding Costs: Inputs: Seedlings are assigned a cost of 50 USH per seedling with a sowing rate of 450 seedlings

per acre. These seedlings are normal, unimproved varieties. Tools such as hand hoes are assigned a cost of 3,500 USH and Pangas 3,000 USH each. It

is estimated that 2 hoes and 2 Pangas will be necessary to farm one acre of coffee. Two

2 This training strategy has potential advantages and disadvantages. The advantages are: flip charts and other visual aids can be prepared in advance, trainers will have ready made examples from this manual to facilitate their presentation, and, all of the examples will build on the same figures and calculations progressively throughout all of the chapters. The possible disadvantage is that the figures quoted may not reflect the participants’ local costs and potential income with 100% accuracy. Therefore, if the trainer and the participants wish to use other figures, they should agree upon the costs and benefits of each of the items mentioned in this and all similar sections of this guide and use those figures throughout the training. Using the figures furnished in this manual may be most appropriate for TOTs, where using client-generated figures is likely to be more effective for farmers.

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Pruning saws will nee needed each at 5,000 USH. Three scateures, each at 6000 USH. One wheelbarrow, at 60,000 USH. Two slashers and two spades will be required at 3,000 USH and 5,000 USH respectively. Two pick-ups of mulch will be used in the first harvest and one pick-up in the second harvest at 35,000 USH each.

Bagging materials for harvest are assigned a cost of 600 USH per 60-kilogram bag. (Kiboko). Output during fist harvest is 900 kgs thus 15 bags and during second harvest is 1575 kgs hence 27 bags.

Labor: Field clearing or first plowing is estimated to cost 50 man-days at 1,000 USH per day.

Second plowing will also require 50 man-days at 1000 USH each. Hole digging will need 45 man-days at 1000 USH each. Planting will take 10 man-days at 1000 USH each. Mulching will need 50 man-days for the first harvest and 25 man-days for the second harvest at 1,000 USH each man-day. Weeding will require 22 man-days in the first harvest and 10 man-days in the second harvest, at 1,000 USH each day. Pruning will require 20 man-days for the first harvest, and 5 man-days for the second harvest at 1,000 USH each man-day. Soil conservation will take 20 man-days for the first harvest and 5 man-days for the second harvest, at 1,000 USH each day. Harvesting requires 15 man-days of labor for fist harvesting and 20 man-days for second harvesting costing 1,000 USH each. Supervision will need 20 man-days at 3,000 USH each. Drying, sorting, grading and bagging will require 25 man-days of labor during first harvesting and 30 man-days at second harvesting costing 1,000 USH each. All these activities will be called processing.

Using the above assumptions (which are based on recent field research) we can summarize our costs with the participants as follows:

COSTS PER ACRE TRADITIONAL Costs/acre

Input Costs 1st HARVEST 2nd HARVEST Seedling (Traditional) 450 Seedlings X 50 USH/each -22,500 Tools (Hoes) 2 X 3,500 USH/hoe -7,000 Tools (Pangas) 2 X 3,000 USH/Panga -6,000 Tools (Pruning saw) 2 X 5,000 USH/Saw -10,000 Tools (Scateure) 3 X 6,000 USH/Scateure -18,000 Tools (Wheel barrow) 1 X 60,000 USH/Wheel barrow -60,000 Tools (Slasher) 2 X 3,000 USH/Slasher -6,000 Tools (spade) 2 X 5,000 USH/Spade -10,000 Mulch 2 X 35,000 USH/Unit -70,000 Mulch 1 X 35,000 USH/Unit -35,000

Labor Costs Plowing (First) 50 days X 1000 USH/day -50,000 Plowing (Second) 50 days X 1000 USH/day -50,000 Hole digging 45 days X 1000 USH/day -45,000 Planting 10 days X 1000 USH/day -10,000 Mulching 50 days X 1000 USH/day -50,000

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Mulching 25 days X 1000 USH/day -25,000 Weeding 22 days X 1000 USH/day -22,000 Weeding 10 days X 1000 USH/day -10,000 Pruning 20 days X 1000 USH/day -20,000 Pruning 5 days X 1000 USH/day -5,000 Soil conservation 20 days X 1000 USH/day -20,000 Soil conservation 5 days X 1000 USH/day -5,000 Harvesting 15 days X 1500 USH/day -22,500 Harvesting 20 days X 1500 USH/day -30,000 Supervision 60 days X 1000 USH/day -60,000 Supervision 12 days X 1000 USH/day -12,000

Post Harvest Costs Bags 15 bags X 600 USH/bag -9,000 Bags 27 bags X 600 USH/bag -16200 Processing 15 bags X 1750 USH/bag -26,250 Processing 27 bags X 1750 USH/bag -47250

Money needed -594,250 -185450Credit cost Total cost -594,250 -185,450 II. Estimate Expected Yield and Its Value Key Assumptions Regarding Yield: Output: It was noted that one acre will accommodate 450 plants. Output or yield per acre using

traditional strategies or low level inputs for growing robusta coffee can yield on average 2 kgs per tree. Therefore one acre is 450 X 2 kgs = 900 kgs. This is the figure we will use to estimate our yield for production of robusta coffee. This figure will apply for an estimated period of 5 years when all the first harvest will be made.

Post Harvest Losses: Losses due to insect damage, mildew, mishandling, etc. are estimated at 5% of the total

output. Price: Coffee prices in Uganda are historically volatile (subject to wide variations depending on

time of year and location). In order to have a convention for this training, we will use the following table:

Time of Sale

3-4 months after Normal Harvest

Normal Harvest

Week

Price

600 USH/kg

450 USH/kg

Please remember that these prices may not reflect the actual observed prices at various rural markets. Using the above assumptions we can summarize our gross income with the participants as follows:

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Yield Coffee Harvested 900 kg X 450 USH/kg 405,000 Coffee Harvested 1575 kg X 450 USH/kg 708,750

Post Harvest Losses Damaged Coffee 5% or 45 kg X 450 SH/kg -20,250 Damaged Coffee 5% or 78.75 kg X 450 SH/kg -35,438

Total Expected Gross Income 384,750 673,312 III. Estimate Expected Profit or Loss This is accomplished by adding the sum of the costs (which is a negative value) and the sum of the expected gross income. This can be done as follows:

Net Income/acre Net Income/acreTotal Costs -594,250 -185,450Total Expected Gross Income 384,750 673,312Total Expected Net Income or Profit -209,500 487,862 Unit cost and margins

Production cost per kg -695.0 -123.9 Selling price per kg 450 450 Profit /loss per kg -245.0 326.1

The Production Cost per Kg figure is calculated by dividing the total cost of production by the kilograms of coffee sold (coffee harvested minus the post-harvest losses) i.e. 900 kgs - 45 kgs = 855 kgs. = 594,250 = 695.0 855 Another name for this figure is the Break-Even Price, or the price required to recover all costs of production. The Profit Margin per Kg is calculated by subtracting the Production Cost per Kg from the Sale Price per Kg. These will serve as a basis of comparison throughout the training manual. These figures are complimented by comparative profits per acre - the common unit of production in all but one chapter. The preceding example demonstrates the process of predicting the costs of production and comparing those costs to the expected gross revenues. The result of the comparison is the profit or loss we expect to earn if our assumptions about the costs of production and the market value of coffee were correct. We will continue to build upon this simple model throughout the remainder of the training manual. The concept and the procedure will not change, but we will add new items within the same general categories. We should realize that this is a model. This result for one acre of coffee production will only happen if all of the costs are accurate and the price of coffee is accurate. The Costs and the Impact of Credit After assuring that the clients understand the basic model for estimating costs, we will introduce the cost of credit as another probable input cost in agricultural production. The first example was employed to demonstrate the predictive tool in the simplest possible form. In the interest of simplicity, we have assumed that there was no need for the farmer to borrow money to plant, harvest and market her crop. To demonstrate the impact that credit has on the profits in the above example we will now assume that credit was required to pay for all of the production costs.

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Assumptions about the costs of credit: Credit: We will assume that a loan will be taken for five years with a one- time repayment. The

interest rate will be 35 % per annum.

Remember that this number is only an indicator and that the real cost of credit may be higher or lower depending on the credit provided.

Add the cost of credit to the previous example and discuss the results with the clients.

COSTS PER ACRE TRADITIONAL - ROBUSTA WITHOUT LOAN WITH LOAN costs/acre

Input Costs 1st HARVEST

2nd HARVEST

Ist Harvest 2nd Harvest

Seedling (Traditional) 450 Seedlings X 50 USH/each -22,500 -22,500 Tools (Hoes) 2 X 3,500 USH/hoe -7,000 -7,000 Tools (Pangas) 2 X 3,000 USH/Panga -6,000 -6,000 Tools (Pruning saw) 2 X 5,000 USH/Saw -10,000 -10,000 Tools (Scateure) 3 X 6,000 USH/Scateure -18,000 -18,000 Tools (Wheel barrow) 1 X 60,000 USH/Wheel

barrow -60,000 -60,000

Tools (Slasher) 2 X 3,000 USH/Slasher -6,000 -6,000 Tools (spade) 2 X 5,000 USH/Spade -10,000 -10,000 Mulch 2 X 35,000 USH/Unit -70,000 -70,000 Mulch 1 X 35,000 USH/Unit -35,000 -35,000

Labor Costs Plowing (First) 50 days X 1000 USH/day -50,000 -50,000 Plowing (Second) 50 days X 1000 USH/day -50,000 -50,000 Hole digging 45 days X 1000 USH/day -45,000 -45,000 Planting 10 days X 1000 USH/day -10,000 -10,000 Mulching 50 days X 1000 USH/day -50,000 -50,000 Mulching 25 days X 1000 USH/day -25,000 -25,000 Weeding 22 days X 1000 USH/day -22,000 -22,000 Weeding 10 days X 1000 USH/day -10,000 -10,000 Pruning 20 days X 1000 USH/day -20,000 -20,000 Pruning 5 days X 1000 USH/day -5,000 -5,000 Soil conservation 20 days X 1000 USH/day -20,000 -20,000 Soil conservation 5 days X 1000 USH/day -5,000 -5,000 Harvesting 15 days X 1500 USH/day -22,500 -22,500 Harvesting 20 days X 1500 USH/day -30,000 -30,000 Supervision 60 days X 1000 USH/day -60,000 -60,000 Supervision 12 days X 1000 USH/day -12,000 -12,000

Post Harvest Costs Bags 15 bags X 600 USH/bag -9,000 -9,000 Bags 27 bags X 600 USH/bag -16200 -16200 Processing 15 days X 1750 USH/day -26,250 -26,250 Processing 27 days X 1750 USH/day -47,250 -47,250

Money needed -594,250 -185450 -594,250 -185450credit cost

interest on 50% on costs 35% per annum for five years -519,969 Total cost -594,250 -185,450 -1,114,219 -185,450

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Income/acre Income/acre Yield

Coffee Harvested 900 kg X 450 USH/kg 405,000 405,000 Coffee Harvested 1575 kg X 450 USH/kg 708,750 708,750

Post Harvest Losses Damaged Coffee 5% or 45 kg X 450 SH/kg -20,250 -20,250 Damaged Coffee 5% or 78.7 kg X 450 SH/kg -35,438 -35,438

Total Expected Gross Income 384,750 673,312 384,750 673,312 Net Income/acre Net Income/acre

Total Costs -594,250 -185,450 -1,114,219 -185,450Total Expected Gross Income 384,750 673,312 384,750 673,312Total Expected Net Income or Profit -209,500 487,862 -729,469 487,862 Unit cost and margins

Production cost per kg -695.0 -123.9 -1303.2 -123.9 Selling price per kg 450 450 450 450 Profit /loss per kg -245.0 326.1 -853.2 326.1 NOTES:

Interest is 50% on costs

1st Harvest = 0.5 * 565,500 * 5 years * 35/100 1st Harvest = 2 kgs per tree Optimum harvest during second harvest = 3.5 kg per tree

Compare the production costs in this example with the costs in the previous example. The only difference is the cost of credit –623,438 USH. Our total production costs are now 1,217,188 USH. Note below that the projected yield has not changed. We have spent much more money, but have not realized a higher level of production! Now look at the impact that borrowing all of the money needed to produce one acre of coffee has had on our profits. Also note the differences in the unit costs and margins. Total cost = 1,217,188 = 1423.6 Net yield 855 Unit Costs and

Margins Production Cost Per Kg (1423.6)Sale Price per Kg 450Profit / loss Margin per Kg (973.6)

The only input we added to this example was the cost of interest when borrowing to finance all of the production costs. The result is that our profit for one acre of coffee is now (832,438) USH compared to (209,500) USH in the previous example, and profit/loss margin per Kg is now (973.6) USH rather than (245.0) shillings. Is credit affordable if we are going to approach farming as a business?

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IV. Discussion The above result informs the farmer that using traditional techniques, given the prevailing costs and the expected yields, she can expect to make a very small profit growing one acre of coffee. The profit is anticipated to be (832,438) USH when borrowing money – still in losses. The smallest increase in input costs, a small reduction in yields, or a drop in the value of coffee would turn this loss into a bigger one. Immediately, we begin to see the power in planning the business before we execute it. This, at the most fundamental level is “farming as a business”. Increasing Profits – How? With the participants, discuss ways that costs could be reduced and/or ways that income could be increased. These ideas among others, will be the focus of the coming chapters. Some Cost Saving-Strategies Might Include: --Cooperating with neighbors to buy improved inputs and tools in bulk --Saving up income from one season to the next to lower the need for credit Some Income-Increasing Strategies Might Include: --Harvesting early to maximize the market price received --Drying and storing coffee until the price of coffee rises after harvest --Investing in improved varieties of seedlings --Investing in fertilizer Homework Assignment: Projected Income Statement

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CHAPTER TWO: NOTES PAGE

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CHAPTER 3 PROFITS AND LOSSES WHEN LOOKING AT CURRENT FARMING TECHNIQUES AND IMPROVED SEEDLING Objectives: Understand the implications of investing in improved inputs in a simple agribusiness. Introduction: In chapter two we introduced and discussed with the participants the fact that farming is a business, and we begin to model one acre of coffee production on the subsistence farm as an agribusiness to appreciate the power of the Projected Income Statement. All inputs can be costed and potential profits or losses can be forecast. Knowing how to model the potential Projected Income Statement is the first step in improving the performance of the farm. The process of modifying the choice of inputs and their associated costs begins in this chapter and is the subject for the remainder of this manual. We will continue to use the Projected Income Statement modeled in the second example from chapter two (using credit for production costs), and each new example will make only a minor change from the previous example. In this way we can appreciate most fully the value of Projected Income Statement analysis and the immediate impact of each successive improvement in business practices. The real power of this technique is in the estimation of costs and profits before any investment is made. In this chapter we will examine the potential benefits of using improved seedling. We will calculate the added cost of improved seedling as an investment and then we will observe the change in profit from using improved seedling to increase our yield at harvest. As in the previous chapter, the interest on credit is calculated as an input. In chapter two we discussed the Projected Income Statement with the participants and walked them through the process twice. In this chapter, we will encourage them to develop their own Projected Income Statements in their small groups. We should allow the participants as much as possible to work through the process on their own and present their results. Their capacity to complete the Projected Income Statement will inform us about how well they understood the content of the first day’s lessons. 3.1 Process: Process Methodology Materials Time ! Review the previous days work.

Be sure that all clients understand the use of the Projected Income Statement.

! Introduce the topic stating the objective using examples to clarify the abstract.

Discussion Flip charts 20 minutes

! Ask the participants to discuss their knowledge of improved seedling or “high yielding varieties”.

! Explain the increased costs of using improved seedling and ask

Facilitation, Group Discussion, Group Presentations

Flip Charts, Illustrations

1 hour and 10 minutes

25

! the participants whether or not

they would invest in such seeds. ! Share with the participants the

likely increase in yield in using improved seedling.

! Break the participants up into their same small groups and ask them to recalculate the costs, expected yields, expected losses and expected profit (loss) using high yielding varieties.

! Ask each group to present and discuss their assignment.

! Ask one participant to wrap up.

Discussion Flip Charts 20 minutes

! Compare the results of this chapter’s Projected Income Statement with the results of chapter two’s Projected Income Statement.

! Reiterate the power of the Projected Income Statement for forecasting potential profits on the basis of chosen costs.

Presentation Flip Charts 10 minutes

3.2 Training Steps As in the previous chapter, the following is a guide for modeling a farm’s Projected Income Statement and using that Statement to forecast a profit or a loss. In this chapter we replace the cost of traditional seedlings with that of improved seedlings and observe the change in profit/loss. Key Assumptions Regarding Costs: Inputs: Improved seedlings are assigned a cost of 500 USH per seedling with a sowing rate of 450

seedlings per acre. We will replace the cost of normal seedlings from chapter two with this figure.

Labor: Because improved seedlings will increase the yield, the labor costs for harvesting will rise

from 15 days to 20 days for the first harvest. In the second harvest, the yield will rise from 20 days to 25 days. The unit cost of labor continues to be 1500 USH per day

Post Harvest: With the increased yield, the farmer will now require 23 bags in the first harvest and 38

bags in the second harvest at 600 USH each. Processing: Labor for processing the coffee will be charged per bag at a cost of 1750 USH each. NOTE: All other costs will remain the same. Using this new cost for seedling, the participants can summarize their costs as follows:

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II. Estimate Expected Yield and Its Value Key Assumptions Regarding Yield: Output: Output or yield using improved seedlings for growing clonal coffee is approximately

1350kgs and 2250kgs for the first and second yields respectively. These are the figures we will use to estimate our yield. NOTE: All other assumptions regarding losses and price will remain the same. Using the above assumptions the participants can summarize their gross income as follows:

COSTS PER ACRE - CLONAL WITHOUT LOAN WITH LOAN Costs/acre

Input Costs 1st Harvest 2nd Harvest Ist Harvest 2nd Harvest Seedling (Clonal) 450 Seedlings X 500

USH/each -225,000 -225,000

Tools (Hoes) 2 X 3,500 USH/hoe -7,000 -7,000 Tools (Pangas) 2 X 3,000 USH/Panga -6,000 -6,000 Tools (Pruning saw) 2 X 5,000 USH/Saw -10,000 -10,000 Tools (Scateure) 3 X 6,000 USH/Scateure -18,000 -18,000 Tools (Wheel barrow) 1 X 60,000 USH/W/barrow -60,000 -60,000 Tools (Slasher) 2 X 3,000 USH/Slasher -6,000 -6,000 Tools (spade) 2 X 5,000 USH/Spade -10,000 -10,000 Mulch 3 X 35,000 USH/Unit -105,000 -105,000 Mulch 1 X 35,000 USH/Unit -35,000 -35,000 Herbicide 2 X 13,000 USH/liter -26,000 -26,000 -26,000 -26,000

Labor Costs Plowing (First) 20 days X 2500 USH/day -50,000 -50,000 Plowing (Second) 20 days X 2500 USH/day -50,000 -50,000 Hole digging 9 days X 5000 USH/day -45,000 -45,000 Planting 10 days X 1000 USH/day -10,000 -10,000 Mulching 50 days X 1000 USH/day -50,000 -50,000 Mulching 25 days X 1000 USH/day -25,000 -25,000 Weeding 22 days X 1000 USH/day -22,000 -22,000 Weeding 3 days X 1500 USH/day -4,500 -4,500 Pruning 20 days X 1000 USH/day -20,000 -20,000 Pruning 5 days X 1000 USH/day -5,000 -5,000 Herbicide application 4 days X 1500 USH/day -6,000 -6,000 -6,000 -6,000 Soil conservation 20 days X 1000 USH/day -20,000 -20,000 Soil conservation 5 days X 1000 USH/day -5,000 -5,000 Harvesting 20 days X 1500 USH/day -30,000 -30,000 Harvesting 25 days X 1500 USH/day -37,500 -37,500 Supervision 60 days X 1000 USH/day -60,000 -60,000 Supervision 5 days X 3000 USH/day -15,000 -15,000

Post Harvest Costs Bags 23- bags X 600 USH/bag -13,800 -13,800 Bags 38 bags X 600 USH/bag -22800 -22800 Processing 23 bags X 1750 USH/bag -40,250 -40,250 Processing 38 bags X 1750 USH/bag -66,500 -66,500

Money needed -890,050 -248300 -890,550 -248300credit cost

interest on 50% on costs

35% per annum for 3 years -467539

Total cost -890,050 -248,300 -1,358,089 -248,300! Discuss the impact of credit comparing the results to the previous example. ! Discuss costs saving and income increasing strategies

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Explain the homework assignment and the expectations Estimate Expected Profit or Loss

Income/acre Income/acre Yield

Coffee Harvested 1350 kg X 450 USH/kg 607,500 607,500 Coffee Harvested 2250 kg X 450 USH/kg 1,012,500 1,012,500

Post Harvest Losses Damaged Coffee 5% or 67.5 kg X 450 SH/kg -30,375 -30,375 Damaged Coffee 5% or 112.5 kg X 450 SH/kg -50,625 50,625

Total Expected Gross Income 577,125 961,875 577,125 961,875

Again, allow the participants to add the sum of the costs (a negative value) and the sum of the expected gross income. This can be done as follows:

Net Income/acre Net Income/acre

Net Income/acre

Net Income/acre

Total Costs -890,050 -248,300 -1,358,089 -248,300Total Expected Gross Income 577,125 961,875 577,125 961,875Total Expected Net Income or Profit -312,925 713,575 -780,964 713,575 Unit cost and margins

Production cost per kg -693.9 -116.2 -1058.9 -116.2 Selling price per kg 450 450 450 450 Profit /loss per kg -243.9 333.8 -608.9 333.8

IV. Discussion We note that by using improved seedlings (clonal) our losses go up from –209,500 USH to –313,425 USH, a difference of -103,925 USH without credit. This situation is explained by the massive investment in the expensive improved seedlings but the situation drastically improves during the second harvesting when little money is required for input purchase. In the second harvest we shall increase our profits to 713,575 USH from 487,863 USH, a difference of 225,712 USH. This step toward improved profits costs 225,000 USH for improved seedlings, a little more labour, more bags and credit cost. The investment paid for itself and increased our profits. It was a very good business decision. The following Projected Income Statement summarizes and compares costs and potential income using traditional methods versus using improved seedlings:

TRADITIONAL ROBUSTA IMPOVRED (CLONAL) COSTS PER ACRE CLONAL COFFEE WITH LOAN WITH LOAN

YR 4 YR 5 YR 3 YR 4

Seedling (Traditional) 450 Seedlings X 50 USH/each -22,500 Seedling (Clonal) 450 Seedlings X 500 USH/each -225,000 Tools (Hoes) 2 X 3,500 USH/hoe -7,000 -7,000 Tools (Pangas) 2 X 3,000 USH/Panga -6,000 -6,000 Tools (Pruning saw) 2 X 5,000 USH/Saw -10,000 -10,000 Tools (Scateure) 3 X 6,000 USH/Scateure -18,000 -18,000 Tools (Wheel barrow) 1 X 60,000 USH/Wheel barrow -60,000 -60,000

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Tools (Slasher) 2 X 3,000 USH/Slasher -6,000 -6,000 Tools (spade) 2 X 5,000 USH/Spade -10,000 -10,000 Mulch 2 X 35,000 USH/Unit -70,000 Mulch 1 X 35,000 USH/Unit -35,000 -35,000 Mulch 3 X 35,000 USH/Unit -105,000 Herbicide 2 litres X 13,000 USH/Unit -26,000 -26,000 Plowing (First) 20 days X 2500 USH/day -50,000 -50,000 Plowing (Second) 20 days X 2500 USH/day -50,000 -50,000 Hole digging 45 days X 1000 USH/day -45,000 -45,000 Planting 10 days X 1000 USH/day -10,000 -10,000 Mulching 50 days X 1000 USH/day -50,000 Mulching 25 days X 1000 USH/day -25,000 Mulching 50 days X 1000 USH/day -50,000 Mulching 25 days X 1000 USH/day -25,000 Weeding 22 days X 1000 USH/day -22,000 -22,000 Weeding 10 days X 1000 USH/day -10,000 Weeding 3 days X 1500 USH/day -4500 Pruning 20 days X 1000 USH/day -20,000 -20,000 Pruning 5 days X 1000 USH/day -5,000 -5,000 Herbicide application 4 days X 1500 USH/day -6,000 -6,000 Soil conservation 20 days X 1000 USH/day -20,000 -20,000 Soil conservation 5 days X 1000 USH/day -5,000 -5,000 Harvesting 15 days X 1500 USH/day -22,500 Harvesting 20 days X 1500 USH/day -30,000 Harvesting 20 days X 1500 USH/day -30,000 Harvesting 25 days X 1500 USH/day -37,500 Supervision 20 days X 3000 USH/day -60,000 -60,000 Supervision 4 days X 3000 USH/day -12,000 Supervision 5 days X 3000 USH/day -15,000

Bags 15 bags X 600 USH/bag -9,000 Bags 27 bags X 600 USH/bag -16200 Bags 23 bags X 600 USH/bag -13,800 Bags 38 bags X 600 USH/bag -22,800 Processing 15 bags X 1750 USH/day -26,250 Processing 27 bags X 1750 USH/day -47250 Processing 23 bags X 1750 USH/day -40,250 Processing 38 bags X 1750 USH/day -66,500 Total -594,250 185,450 -890,550 -248,300

interest on 50% on costs

35% per annum for five years

-623963 -467,539

Total -1,218,213 -185,450 -1,358,089 -248,300 Income/acre Income/acre Income/acre

Coffee Harvested 900 kg X 450 USH/kg 405,000 Coffee Harvested 1575 kg X 450 USH/kg 708,750 Coffee Harvested 1350 kg X 450 USH/kg 607,500 Coffee Harvested 2250 kg X 450 USH/kg 1,012,500 Post harvest losses Damaged Coffee 5% or 45 kg X 450 SH/kg -20,250 Damaged Coffee 5% or 78.75 kg X 450 SH/kg -35,438 Damaged Coffee 5% or 67.5 kg X 450 SH/kg 30,375 Damaged Coffee 5% or 112.5 kg X 450 SH/kg 50,625 Total Expected Gross income 384,750 673,313 577,125 961,875

Net Income/acre Net Income/acre

Total costs -1,218,213 -185450 -1,358,089 -248,300 Total expected gross income 384,750 673,313 577,125 961,875 Total Expected Net profit or income -833,463,975 487,863 -780,964 713,575 Unit Costs and margins Production cost per kg -1424.8 -126.2 -1058.9 -116.2 Selling price per kg 450 450 450 450 Profit /loss per kg -974.8 323.8 -608.9 333.8

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The above Projected Income Statement comparison demonstrates a clear advantage to using high yielding seedlings versus using local (traditional) seedlings. Again, these figures may not represent costs with 100% accuracy as prices and costs from time to time and place to place may vary. However, it is clear that improved seedlings alone greatly contributes to improving the trend toward profitability. We can once again see the power of the Projected Income Statement. Before we have invested a single shilling, we are able to forecast what our profits are likely to be. Further, we can change the costs of inputs and the likely yield changes using this technique to find the most profitable method for using the cash at our disposal. Observe that our most expensive input cost above is interest on credit. What might we do to reduce this cost?

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CHAPTER THREE: NOTES PAGE

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CHAPTER 4: INTRODUCTION TO SAVING FOR INVESTMENT IN PRODUCTION Objective: To understand the advantages of saving for investment as opposed to borrowing for

investment. Introduction: In chapter three we found that by using improved seedling, we begin to improve our profit picture. While the initial investment cost was higher, the increase in yield was substantial. This chapter will begin the process of showing the benefits of saving some of the farm’s profit from each season to finance the planting costs of the following season. We will demonstrate that reserving some money for reinvestment can greatly reduce the costs a farm incurs through credit. Lower costs at the start of the season will lead to higher profits at harvest time. 4.1 Process: Process Methodology Materials Time ! Review the previous session’s

work. ! Introduce the topic stating the

objective using examples to clarify the abstract.

Discussion Flip charts 10 minutes

! Discuss with the participants their awareness of savings schemes

! Have any of them participated in these schemes, or routinely saved in other ways?

! Ask if any of the participants save money from one season’s harvest to invest in the following season’s planting.

! Explain the difference between “saving up” and “saving down” using the bar chart (to be furnished in the training package).

! Ask how they have saved or how they would save.

! Add one line item to the input cost per acre table from earlier in this chapter, and label it “reinvestment”.

! Again, in-groups, ask the participants to recalculate their profit /loss on an acre of coffee assuming that they used savings of 667,913 USH.

! Be sure that the participants

Group Discussions, Lecture

Flip Charts 1-hour and10 minutes.

32

correct the interest payment on their loan to reflect the 667,913 USH reinvestment.

! Ask them to come together and discuss their findings.

Plenary

! Drive the point home that by saving 667,913 USH for reinvestment, they avoid a cost of 233,769 USH, which is otherwise subtracted from their profits.

! ! Explain that by saving more of

the profit from each subsequent season, eventually they will no longer need credit and the most costly input to their production can be eliminated.

Lecture, Discussion Summary

Flip Charts 10 minutes

4.2 Training Steps: We will remodel our Projected Income Statement using savings to replace some of the credit investment to show that saving is a better strategy than borrowing for required costs in that the farm does not incur the costs of loan interest. Trainer’s Note: On a flip chart or blackboard, draw the credit-saving chart to demonstrate the similarities

in sequence and the differences is costs. The sample diagram is in your Trainer’s Packet.

I. Re-Visit the Profits Earned by Using Improved seedling Varieties Remind the participants of the increased profits from the use of high yielding varieties. Redisplay the profit/(loss) statement from the previous chapter.

Net Income/acre Net Income/acreTotal Costs -1,358,089 -248,300Total Expected Gross Income 577,125 961,875Total Expected Net Income or Profit -780,964 713,575

II. Add the Reinvestment of 667,913 USH to the Input Cost Analysis Key Assumption for Re-Investment Investment: Agree with the participants that they should set aside 667,913 USH for investing in the

coffee growing. Assuming they do set aside 667,913 USH, analyze the potential benefit. The new input cost section of the Projected Income Statement diagram might appear as follows (see following page):

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COSTS PER ACRE - CLONAL

Input Costs Ist Harvest 2nd Harvest Seedling (Clonal) 450 Seedlings X 500 USH/each -225,000 Tools (Hoes) 2 X 3,500 USH/hoe -7,000 Tools (Pangas) 2 X 3,000 USH/Panga -6,000 Tools (Pruning saw) 2 X 5,000 USH/Saw -10,000 Tools (Scateure) 3 X 6,000 USH/Scateure -18,000 Tools (Wheel barrow) 1 X 60,000 USH/Wheel barrow -60,000 Tools (Slasher) 2 X 3,000 USH/Slasher -6,000 Tools (spade) 2 X 5,000 USH/Spade -10,000 Mulch 3 X 35,000 USH/Unit -105,000 Mulch 1 X 35,000 USH/Unit -35,000 Herbicide 2 X 13,000 USH/liter -26,000 -26,000

Labor Costs Plowing (First) 20 days X 2500 USH/day -50,000 Plowing (Second) 20 days X 2500 USH/day -50,000 Hole digging 45 days X 1000 USH/day -45,000 Planting 10 days X 1000 USH/day -10,000 Mulching 50 days X 1000 USH/day -50,000 Mulching 25 days X 1000 USH/day -25,000 Weeding 15 days X 1500 USH/day -22,500 Weeding 3 days X 1500 USH/day -4,500 Pruning 20 days X 1000 USH/day -20,000 Pruning 5 days X 1000 USH/day -5,000 Herbicide application 4 days X 1500 USH/day -6,000 -6,000 Soil conservation 20 days X 1000 USH/day -20,000 Soil conservation 5 days X 1000 USH/day -5,000 Harvesting 20 days X 1500 USH/day -30,000 Harvesting 25 days X 1500 USH/day -37,500 Supervision 20 days X 3000 USH/day -60,000 Supervision 5 days X 3000 USH/day -15,000

Post Harvest Costs Bags 23- bags X 600 USH/bag -13,800 Bags 38 bags X 600 USH/bag -22800 Processing 23 bags X 1750 USH/bag -40,250 Processing 38 bags X 1750 USH/bag -66,500

Money needed -890,550 -248300 credit cost

Interest on 25% on costs, 35% per annum for five years -233769 Total cost -1,124,319 -248,300

Note here with the participants that investment is a positive value. All other values are current costs. These are costs, which are incurred during the business cycle (crop cycle). The Re-Investment is using money the farmer has; he does not have to pay for it. In fact, it is not really a cost in the same sense as the other items listed above. It is included in this part of the Projected Income Statement because it is the most logical place for it. Note: In the interest of simplicity we are not calculating the costs of savings. We acknowledge that there

is a cost in terms of lost opportunity to profit from the dormant funds. However, if the funds were

34

placed in an interest-bearing account, small profits could be realized to offset the cost of lost opportunities.

III. Estimate the Yield and Its Value

Yield Income/acre Income/acre

Coffee Harvested 1350 kg X 450 USH/kg 607,500 Coffee Harvested 2250 kg X 450 USH/kg 1,012,500

Post Harvest Losses Damaged Coffee 5% or 67.5 kg X 450 SH/kg -30,375 Damaged Coffee 5% or 112.5 kg X 450 SH/kg -50,625

Total Expected Gross Income 577,125 961,875

This will not change from the previous chapter and all previous assumptions are binding. IV. Estimate the Expected Profit or Loss Again, allow the participants to add the sum of the costs (a negative value) and the sum of the expected gross income. This can be done as follows: Total Expected Gross Income 577,125 961,875

Net Income/acre Net Income/acre Total Costs -1,124,319 -248,300 Total Expected Gross Income 577,125 961,875 Total Expected Net Income or Profit -547,194 713,575 Unit cost and margins

Production cost per kg -876.7 -116.2 Selling price per kg 450 450 Profit /loss per kg -426.7 333.8

V. Discussion We note that by re-investing 667,913 USH from savings, we can reduce our need for credit. Look at the following comparison (similar to the one in the previous chapter) and observe how by investing 667,913 USH in savings the farmer earns an additional 233,769 USH in profit at the end of the season.

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COMPARISON OF CHAPTER THREE AND FOUR

Input Costs CHAPTER 3 CHAPTER 4 Seedling (Clonal) 450 Seedlings X 500 USH/each -225,000 -225,000 Tools (Hoes) 2 X 3,500 USH/hoe -7,000 -7,000 Tools (Pangas) 2 X 3,000 USH/Panga -6,000 -6,000 Tools (Pruning saw) 2 X 5,000 USH/Saw -10,000 -10,000 Tools (Scateur) 3 X 6,000 USH/Scateure -18,000 -18,000 Tools (Wheel barrow) 1 X 60,000 USH/Wheel barrow -60,000 -60,000 Tools (Slasher) 2 X 3,000 USH/Slasher -6,000 -6,000 Tools (spade) 2 X 5,000 USH/Spade -10,000 -10,000 Mulch 3 X 35,000 USH/Unit -105,000 -105,000 Mulch 1 X 35,000 USH/Unit Herbicide application 2 X 13,000 USH/liter -26,000 -26,000

Labor Costs Plowing (First) 20 days X 2500 USH/day -50,000 -50,000 Plowing (Second) 20 days X 2500 USH/day -50,000 -50,000 Hole digging 9 days X 5000 USH/day -50,000 -45,000 Planting 10 days X 1000 USH/day -10,000 -10,000 Mulching 50 days X 1000 USH/day -50,000 -50,000 Mulching 25 days X 1000 USH/day Weeding 15 days X 1500 USH/day -22,500 -22,500 Weeding 3 days X 1500 USH/day Pruning 20 days X 1000 USH/day -20,000 -20,000 Pruning 5 days X 1000 USH/day Herbicide application 4 days X 1500 USH/day -6,000 -6,000 Soil conservation 20 days X 1000 USH/day -20,000 -20,000 Soil conservation 5 days X 1000 USH/day Harvesting 20 days X 1500 USH/day -30,000 -30,000 Harvesting 25 days X 1500 USH/day Supervision 20 days X 3000 USH/day -60,000 -60,000 Supervision 5 days X 3000 USH/day

Post Harvest Costs Bags 23- bags X 600 USH/bag -13,800 -13,800 Bags 38 bags X 600 USH/bag Processing 23 bags X 1750 USH/bag 40,250 40,250 Processing 38 bags X 1750 USH/bag

Money needed -890,550 -890,550 Re-investment Saving 445,275 667,913 Loan needed credit cost

interest on 50% on costs 35% per annum for five years 467,539 interest on 25% on costs 35% per annum for five years -233,769

Total cost -1,358,089 -1,124,319 Income/acre

Yield Coffee Harvested 1350 kg X 450 USH/kg 607,500 607,500 Coffee Harvested 2250 kg X 450 USH/kg

Post Harvest Losses Damaged Coffee 5% or 67.5 kg X 450 SH/kg -30,375 -30,375

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Damaged Coffee 5% or 112.5 kg X 450 SH/kg Total Expected Gross Income 577,125 577,125

Net Income/acre Total Costs -1,358,089 -1,124,319 Total Expected Gross Income 577,125 577,125 Total Expected Net Income or Profit 780,964 -547,194 Unit cost and margins

Production cost per kg -1058.9 -876.7 Selling price per kg 450 450 Profit /loss per kg -608.9 -426.7

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CHAPTER FOUR: NOTES PAGE

38

CHAPTER 5 THE PROFIT IMPACT OF CHANGING PRICES WHAT IF THE FARMING COSTS AND COMMODITY PRICES ARE NOT AS WE ASSUMED? WE ASSURE YOU THEY WILL BE DIFFERENT. Objective: Understand the impact on profits if production costs and commodity prices vary from the

original assumptions. Introduction: Throughout four of the previous chapters we have estimated the changes in potential profits as the result of differing approaches to a farm business. As outlined earlier, the costs of inputs and operations and the values of commodities have been based on representative averages. The use of average costs and prices are the only sensible choices, but averages can be deceiving; they represent the common mid-point between two extremes, and therefore portray a picture that intentionally does not depict either extreme case. In this brief chapter, we want to investigate what happens when we move away from the average or expected case, and toward either of the extremes – the best case or the worse case. This discussion is important in understanding and managing risks - the topic of the next chapter. It is important for the clients to understand that the examples used in the training manual are employed primarily as a means of teaching the analytical process. The examples are not to be viewed as quantitative recipes or formulae for success. 5.1 Process: Process Methodology Materials Time ! Review the previous session’s

work. ! Introduce the topic stating the

objective using examples to clarify the abstract.

Discussion Flip charts 15 minutes

39

! Review the input/output values used in the previous chapter and throughout the manual.

! Ask clients again to agree on the values or at least the reasons why we have adopted them.

! Ask them which values are most likely to (at risk to) change from those in the example.

! Discuss why they might change and the possible impact on profits.

! Explain the “What if” tables pointing out the “expected case” in each table.

! Point out how improved farming methods and aggressive savings serve as risk management tools.

! Summarize the chapter and tie it to the following chapter on risk management.

Group Discussion, Lecture

Flip Charts 30 minutes

5.2 Training Steps I. Review input/output values in terms of the “expected case” For the expected case we will use the figures from the second example in chapter five. Let’s review the assumptions upon which that example is based: Value of one KG of coffee 450/= Yield per acre 2250 KG Post-harvest losses 5% Savings 100% Input and operations costs Consistent throughout previous chapters Net profit based on assumptions 713,575/= If all of our assumptions were, in fact, correct, then the projected profit would also be correct. However, in the real world, and especially in farming, market and environmental forces frequently come into play; commodity prices and/or yields may be lower, input costs may be higher, post-harvest losses may be higher or storage may be more expensive than anticipated. It is also possible that our assumptions were too conservative and that profits may be higher due to a good production year and favorable markets. Ask the clients to list the key variables and what impact changes in those variables would have on profits. 5.3 “What-if” or Sensitivity Analysis Sensitivity analysis looks at how sensitive the outcome (profits) of a mathematical problem (Projected Income) is to changes in selected variables within the problem. Or “what if” I change this assumed value or that one? What will happen?

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The following four tables were compiled using the input/output values from the last example in chapter four as the base line, or starting point. In each table, the impact of altering the values of two variables is investigated. Note that the projected profit figures in bold are always 713,575/=, the same profit that was projected in chapter four, second season. Other projected profit figures in the tables show the results of changing one or both of the variables. The following table illustrates the effect of varying yields and market prices. The discussion in chapter four assumes that the yield is 2250 KGs, and the sale price per KG is 450/=. Note the differences in profits as the yields and market prices change.

YIELD VS PRICE PRICE PER KG

YIELDS PHL % 300 450 500 600 700 900 45 8,200 136,450 179,200 264,700 350,200

1500 75 179,200 392,950 464,200 606,700 749,200 2250 112.5 392,950 713,575 820,450 1,034,200 1,247,950 2300 115 407,200 734,950 844,200 1,062,700 1,281,200

The second table shows the effect of altering post-harvest losses and yields. The familiar profit figure of 713575/= again appears in the table at the intersection of the variables used in chapter four – 5% post-harvest loss and 2250 KGs of coffee. Changing either value alters the projected net income. Note that when lowering the post-harvest losses, the farmer is able to make a profit even at the lower yields. POST HARVEST LOSSES VS YIELDS

YIELDS IN KG PHL 900 1500 2250 2300

3% 144,550 406,450 733,825 755,650 4% 140,500 399,700 723,700 745,300 5% 136,450 392,950 713,575 734,950 6% 132,400 386,200 703,450 724,600

The comparative table below depicts the potential benefits from saving increasing amounts of money for investments in future planting seasons. Saving is most definitely cheaper than paying interest on loans.

SAVING RATE VS PRICE PRICE PER KG

SAVING RATE 300 450 500 600 700 0% 132,235 452,860 559,735 773,485 987,235

25% 197,414 518,039 624,914 838,664 1,052,414 50% 262,593 583,218 690,093 903,843 1,117,593 75% 327,771 648,396 755,271 969,024 1,182,771

100% 392,950 713,575 820,450 1,034,200 1,247,950

The final example bellow shows the impact of changes in the post harvest losses and market prices. As in the previous table, the positive effect of proper post-harvest techniques is dramatically demonstrated.

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POST HARVEST LOSSES VS PRICES PRICE PER KG

P-H LOSS 300 450 500 600 700 3% 406,450 733,825 842,950 1,061,200 1,279,450 4% 399,700 723,700 831,700 1,047,700 1,263,700 5% 392,950 713,575 820,450 1,034,200 1,247,200 6% 386,200 703,450 809,200 1,020,700 1,232,200

Discussion: This chapter should serve three distinct purposes: 1. Farmers understand the impact of changing the values of inputs/outputs, whether they are from natural

causes or due to farming practices or market forces. 2. The values used in this manual are only examples to demonstrate the planning process. They are not

to be viewed as “THE only values”. 3. An introduction to risk management. Understanding the effects of changes in our assumptions is a valuable tool in understanding the potential risks. By using the comparative tables, a farmer and/or extension agent can make decisions concerning high-risk and low-risk activities and to weigh the relative advantages and disadvantages of investments of capital and other resources. The next chapter discusses risk management in greater depth. The predictive tools employed to this point in the training are keys to managing risks in a risky business sector.

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CHAPTER FIVE: NOTES PAGE

43

CHAPTER 6 COMMON SENSE AND DIVERSIFICATION FOR RISK MANAGEMENT Objectives: Understand the benefits of building on existing capacity of a farmer in terms of lowering

risk. Internalize the fact that planning is a risk management strategy. Understand some broad strategies for lowering Crop Failure Risk and Market Price Risk. Introduction: In chapter five we looked at the benefits of aggressive savings as a tool for cutting credit costs and enhancing profits. From that point forward, we would like to explore the cost-saving and profit-enhancing benefits of farmers working together. However, before we leave behind the lessons of farming as a business for individual farmers, we would be wise to discuss risk management. In chapter one, we compared farming as a business to tailoring. We showed that like tailoring, agribusiness uses inputs and labor to produce outputs for a market. We further pointed out that tailoring could be considered less risky than agribusiness. In this chapter we will depart from the numeric methods we have relied on for the last several chapters to discuss formally and informally methods of lowering risk. When we speak of risk in agribusiness, we normally refer to two types of risk (though there may be others). These are risk of crop failure (due to erratic weather or attack by disease and/or pests) and market price failure (when the price you are planning on turns out to be lower than expected). When a farm is in debt to a bank or a moneylender, lowering these risks is essential. The strategy we will look at in this chapter is common sense and diversification. That is first and foremost, “grow what you know” - encourage participants to work with crops and products with which they are familiar. Experience is a valuable risk-management tool. Diversification, the second strategy to be stressed is simply undertaking different business activities and different types of business activities (again with which they are familiar). This is to ensure that if there are minor or major failures in any single activity there is likely to be a success to offset that failure. It might be important to note here that the common sense approach of “grow what you know” is not meant to preclude innovation. For example, with good access to both extension services and a market for improved seedling and manure, a farmer should not be discouraged from improving her performance on a crop (like coffee) with which she is familiar. 6.1 Process: Process Methodology Materials Time ! Review the previous session’s

work. ! Introduce the topic stating the

objective using examples to clarify the abstract.

Discussion Flip charts 10 minutes

! Review the lesson from chapter one comparing a tailoring business with

Group Discussion,

Flip Charts 30 minutes.

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an agribusiness. ! Reiterate the point made in that

chapter that while both are businesses, agribusiness is subject to more risk.

! Ask the participants what are the different types of risks an agribusiness is exposed to. List their responses on flip charts.

! Categorize their responses as either “Crop Failure Risk” or “Market Price Risk”.

! Discuss the consequences of these risks, should they be realized, with the participants.

Lecture

! In small groups, ask the participants to discuss and list strategies for minimizing or coping with crop failure risks listed.

! Ask them to come together and discuss their findings.

Group Discussion

Flip Charts 15 minutes

! Again, in small groups, ask the participants to discuss and list strategies for minimizing or coping with market price risks listed.

! Ask them to come together and discuss their findings.

Group Discussion

Flip Charts 15 minutes

! Based on the participants responses and the steps listed below, reiterate the following points for managing risk:

1. Plan your business using Projected Income Statements.

2. Grow what you know. 3. Use extension services and the best

agricultural techniques possible. 4. Plant several types of crops (coffee,

beans, sunflowers, etc.). 5. Set aside profits from each season as

savings. 6. Keep records of costs, prices, profits,

planting times, harvesting times, etc. to maximize business efficiency.

7. Store some of your harvest to speculate on price changes.

8. If possible, undertake some non-agricultural profit generating activity.

Lecture, Discussion

Flip Charts 20 minutes

6.2 Training Steps: I. Review the Comparison of Agribusiness to Tailoring from Chapter 1

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Review the two tables below that we compiled (and placed on flip charts) comparing tailoring and agribusiness. Comparison of Agribusiness with a Tailoring Business Tailoring Farming Inputs: ! Fabric

! Sewing machine ! Scissors ! Measuring tape ! Thimbles ! Thread ! Pins ! Paper ! Packaging materials

! Seeds ! Land ! Hoes ! Ropes ! Gum-boots ! Fertilizers ! Pangas ! Paper ! Bagging materials

Operational Activities

! Cutting the fabric ! Make designs and

embroidery ! Put final touches like

seams, buttons, designs on product

! Package to suit clients

! Land Preparation ! Weeding ! Sewing the seeds ! Apply fertilizers and

pesticides ! Harvest, sort, dry, and

grade ! Package to suit clients

Marketing ! Requires transport ! Specification based on

demand such as season, preference.

! Designing and packaging ! Market information.

! Transport ! Specification based on

demand such as people’s preference, season, etc.

! Sorting, grading, and packaging.

! Market information Comparative Risks between Agribusiness and Tailoring

Risks Tailoring Agribusiness Weather - ! Post Production Losses - ! Security ! ! Market Availability ! ! Competition ! - Adding Value ! ! Pests and Diseases Minimal ! Storage Minimal !

Reiterate with the participants that agribusiness has more and larger risks than tailoring. However, there are ways of minimizing risks to agribusiness ventures. Note well that agribusiness is the best option for rural households in Uganda for increasing their wealth. Therefore, while it may be riskier than many would like, rural Ugandans have the necessary skills, adequate land, existing inputs, access to purchased inputs and markets for successfully running a farm-based business.

46

II. Discuss with the Participants the Different Risks to Agribusiness: There are essentially two categories of risk that agricultural businesses try to minimize. These are Crop Failure Risk and Market Price Risk. In guided discussion with the entire group of participants, ask them to brainstorm on the different types of risk that a farming venture is exposed to. List these on flip charts. Half way through the session, introduce the categories of Crop Failure Risk and Market Price Risk. Define these and their consequences as follows: Crop Failure Risk: The possibility that due to weather, ineffective crop management, insects, birds,

rodents, disease, etc. the expected yield at harvest will be lower than anticipated. It may fail altogether.

Consequences: Possible consequences of crop failure are: the inability to repay credit, the inability

to save, food shortage, cash shortage, etc. Market Price Risk: The possibility that due to too much output (for example coffee) arriving in the

market at the same time, the demand for that output is low and the price for that output is lower than expected. The profit is therefore lower than expected.

Consequences: Possible consequences of market price failure are: the inability to repay credit, the

inability to save, short-term to long-term cash shortage, etc. Note: Of the two types of risks the Market Price Risk is more of a serious financial (business only) risk. Crop Failure Risk poses both a financial risk, and depending on the level of crop failure, a life threatening risk to the household. Separate the participants’ responses regarding risk into these two categories. III. In Small Groups Participants Devise Risk-Minimizing Strategies: For 45 minutes allow the participants to meet together, discuss and list ways to minimize Crop Failure Risk. Bring the groups together for 15 minutes to present their findings. List them on flip charts. Again, for 45 minutes allow the participants to meet together, discuss and list ways to minimize Market Price Risk. Bring the groups together for 15 minutes to present their findings. List them on flip charts. IV. Reiterate, Reinforce and Discuss Risk Minimizing Strategies: In the full group, discuss with the participants their responses for minimizing the risks they identified. Be sure that the following key points are either reported by the participants themselves or, through the intervention of the trainer, motivated out of the participants. 1. Plan your business using Projected Income Statement. ! In exactly the way that we have been modeling the agribusiness Projected Income Statement from

chapters one through six, always plan your business in advance. Before spending one shilling, try to identify everything you will need for your production and what it will cost. If you are not sure of the cost of an item, over-estimate its cost.

! When planning Expected Income use an average price or even a lower than average price for the market value of the output. This limits the possible negative effects of Market Price Risk.

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2. Grow what you know. ! Grow crops that you are familiar with and access technical assistance (i.e. extension services – private

or public) to help you to improve what you already know how to do. ! Do not rely on a crop with which you have no experience to provide the majority of your agribusiness’

income. ! Trying new crops with potentially good profits should be encouraged, but should be done first on a

small scale (with limited investment), then on a larger scale when you have confidence in anticipating costs, market price and possible problems.

3. Use extension services and the best agricultural techniques possible. ! As was discussed above, use extension services to enhance the skills you already have. Extension

agents should be aware of the best techniques, types of fertilizers, seeds and pesticides to use and how and where to get inputs. Learn from your neighbors who are successful farmers.

! Using good techniques on a small plot of land is often better than using traditional methods on a large plot of land. If your cash is limited, it may be better to grow a quarter acre of coffee using improved seedling and fertilizer than growing an acre of coffee using traditional techniques. Draw a projected income statement of each option and compare the results.

4. Plant several types of crops (coffee, beans, sunflowers, etc.). ! The business planning, Projected Income Statement model can be used for any crop. Use the same

planning technique to decide the best profit options. ! Instead of choosing only the most profitable option, plant several types of crops. The advantage is if

one crop fails, another is still likely to succeed. If you plant a crop that requires high rainfall, offset the potential risk by planting a drought-resistant variety.

! Similarly by diversifying your choice of crops you also minimize the Market Price Risk. If the price for one crop is too low, others may be unusually high.

5. Set aside profits from each season as savings. ! Chapters three through five showed how saving can lower costs and enhance profits. Saving can also

minimize risk in two ways. ! Investing savings instead of borrowing means that your obligation is only to yourself. If,

unfortunately, your crop fails, no bank or moneylender can chase after you for repayment. None of your hard-earned possessions can be confiscated.

! Saving beyond the needs of the farm and for the needs of the household also provides the benefit of cash for buying food, medicines, etc. if crops or market prices fail.

6. Keep records of costs, prices, profits, planting times, harvesting times, etc. to maximize business

efficiency. ! One key strategy for managing risk, and the topic of a later chapter, is quality record keeping. ! By recording key information, farmers can follow trends in costs of inputs (Farmers can also follow

trends in output prices (is it better to sell my coffee at harvest, a week before, three months after harvest?).

! With record keeping, many of the unknown elements of business planning can be more accurately estimated.

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7. Store some of your harvest to speculate on price changes. ! On the basis of record keeping and drawing projected income statement, you may be able to predict an

upward price trend after harvest. By planning before planting to have more output than you need to cover costs and by saving and not incurring large debts, storing becomes an interesting Market Price Risk management strategy.

! Storage is a “value adding” activity and the topic of a coming chapter. 8. If possible, undertake some non-agricultural profit generating activity. ! While this may not always be an option, having a business income outside of agriculture is a sound

risk management strategy at the level of the household. ! Alternative income sources that are not sensitive to the weather, like brewing, bicycle repair, brick

making, etc., provide low profit but consistent cash flows in the household. 9. Work with other farmers to reduce costs and increase profits. ! Buy inputs in bulk ! Add value to your crops with jointly purchased capital assets ! Increase operational efficiencies ! Access alternative markets The following chapters will address the potential benefits of working with farmer groups. IV. Commodity Risk Management From the foregoing it can be seen that coffee farmers face many risks. These risks could lower the anticipated income of the farmer and have negative effects on his standard of living. The fall of prices over the course of a season can be minimized by a minimum price guarantee. Most often farmers watch the rise and fall of coffee prices. There is a lot of uncertainty regarding the price the farmers would get for their produce. This makes difficult for farmers to plan for the inputs and other related investment decisions. The farmers can not plan their crops, allocate their resources, obtain credit for inputs and even simply recover costs under such situation. Commodity Price Risk Management is therefore intended to give the farmers a greater understanding of the concept of price risks in order to allow the farmers to evaluate whether a Guarantee system is an appropriate investment at any one given time. Minimum Price Guarantee A minimum price guarantee gives the farmer the minimum price he/she will receive for his/her coffee no matter how low the price of coffee falls. It sets a minimum, it does not fix a price. In other words if the farmer purchases a minimum price guarantee and the price of coffee rises, the farmer will receive the local price. But once the farmer decides to purchase a minimum price guarantee, he can not get the cost of the guarantee (the premium) back, whether the price of coffee rises or falls.

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CHAPTER SIX: NOTES PAGE

50

CHAPTER 7 COST SAVING BENEFITS OF SMALL HOLDER ASSOCIATIONS (SHAs) Objectives: Understand the advantages and disadvantages of SHAs.

Understand the capacity of SHAs to reduce costs on inputs through collective purchasing. Introduction: In the previous chapter we introduced the idea of risk management. Agribusiness is practically the only profitable and viable activity that is available to Uganda’s many rural farmers. It is also an activity that has some potentially high risks. Through identifying the risks and planning methods to cope with them, the risks can be greatly reduced. While all of the chapters in the manual to this point are strategies for enhancing profits and minimizing costs, it should be clear from the last chapter that they are also strategies for minimizing risk. This chapter is no different. This chapter begins a change in focus that is applied to the remainder of the manual. The first seven chapters have concentrated on the individual household as the unit of production. In fact, we have never allowed the discussion even to stray outside the limits of one acre of coffee production (though we have mentioned diversifying crops as a strategy). From this point forward we will begin to consider the benefits of farmers forming associations. We will call these “Small Holder Associations”(SHAs3). Associations can help to lower costs through greater purchasing power (it is normally cheaper to buy a lot of things at once than to buy just a few things or a lot of things over a long period of time). This is the topic of this chapter. The following chapters will look at other benefits of SHAs in terms of increasing profits and increasing investment capacity so that farmers can invest in “value-adding” technologies, which would be too costly to a single farmer. 7.1 Process: Process Methodology Materials Time ! Review the previous session’s

work. ! Describe the change in training

focus from individual farmers to SHAs.

! Introduce the topic stating the objective using examples to clarify the abstract.

Discussion Flip charts 10 minutes

! Discuss with the participants the Group Flip Charts 10 minutes 3 We will use the term Smallholder Association (SHA) throughout the remainder of this manual to describe a group of farmers working together to benefit from reduced costs, value-addition, operational efficiencies and greater market access. Any name can be used to describe a group that is working co-operatively for the benefit of each individual – farm club, farm action committee, or even Cooperative. The important fact is that the organisational entity is owned and controlled by farmers and managed as a business.

51

potential cost savings in bulk or wholesale purchasing. Use simple examples such as purchasing one soda versus purchasing a case of soda.

! Ask them if they have ever participated in a group where money was pooled to purchase a large item which all of the many individuals would share. An example might be an animal slaughtered for a wedding.

! Explain that there are examples from rural Uganda where farmers have come together to purchase seeds and fertilizer collectively in order to enjoy a cost saving.

Discussion, Lecture

! Brainstorm with the participants some problems that might occur with forming groups. Such things might include mistrust in handling money, mistrust in handling purchased goods, etc.

! Brainstorm with the participants what they might do in the beginning to develop strong groups. Such things might include having by-laws, only pooling money on the day when a purchase is to be made, distributing what has been purchased the same day it is purchased, only including hard-working and honest members, etc.

! Finally point out that by forming groups to perform small tasks in the beginning, trust and experience can be developed so that groups can take on progressively more responsibility as time goes on.

Brainstorming, Discussion

Flip Charts 30 minutes

! Put up a flip chart that shows the retail and wholesale prices of improved seedling, tools, and fertilizer.

! Show both the quantity price and the per unit price.

! Discuss with the participants how large the quantities purchased must be to purchase these items

Brainstorming, Discussion

Flip Charts 20 minutes

52

for the wholesale price. ! Determine with the participants

how many farmers would have to form a group to enjoy those lower prices.

! What qualities might they look for, outside of character, for their group members? Some things might include farmers who are close to each other (to save transport costs), farmers who save money after each harvest (so they are sure to have the cash for the purchase when they need it), etc.

! In their small groups, ask the participants to recalculate their profit (loss) on an acre of coffee assuming that they could purchase their inputs using the wholesale (SHA) price.

! Again, allow the participants to work on their own and only aid them when absolutely necessary.

Discussion Flip Charts 10 minutes

! Bring the groups back together to share their results. Compare the input costs, yields and expected income on flip charts for one farmer versus a SHA.

! Discuss the results with the whole group.

! Reiterate the issues of problems, concerns and benefits in SHA formation.

! Reiterate the potential cost savings in collective purchasing of inputs.

! Finally review that collective purchasing is a risk management strategy because it lower costs and the need to use loans or household savings to meet business obligations.

Lecture, Discussion

Flip Charts 10 minutes

7.2 Training Steps: I. Observe the Input Cost for Improved seedling, Hoes, Pangas, Fertilizer and bags when

wholesale purchasing is possible. Costs and quantities are summarized in the following table.

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Input Retail Price Wholesale Price Wholesale Quantity Improved seedling 500/seedling 400/seedling Above 1,000 seedlings

Hoes 3,500/piece 3,000/piece 25 pieces Pangas 3,000/piece 2,500/piece 25 pieces Slashers 3,000/piece 2,500/piece 25 pieces Spades 5,000/piece 4,500/piece 12 pieces Pruning saws 5,000/piece 4,500/piece 12 pieces Wheelbarrows 60,000/piece 5,500/piece 12 pieces Scateur 6,000/piece 5,500/piece 12 pieces Bags 600/piece 500/piece 100 pieces On the basis of the above table we can determine how many acres we must farm to allow us to buy inputs at a wholesale price. Review the required inputs for an acre of coffee. We know what our inputs per acre are and our wholesale quantity. We can construct a table as follows to figure out our minimum number of acres.

Input Quantity Per Acre (1)

Wholesale Quantity (2)

Number of Acres = (2) / (1)

Improved seedling 450/acre 9,000 seedlings 20 acres Hoes 2/acre 25 pieces 12.5 acres Pangas 2/acre 25 pieces 12.5 acres Slashers 2/acre 25/pieces 12.5 acres Spades 2/acre 12/pieces 6 acres Pruning saws 2/acre 12/pieces 6 acres Wheelbarrows 1/acre 12/pieces 12 acres Scateur 3/acre 12/pieces 4 acres Bags 38/acre 100/pieces 2.6 acres From this table we see that in order to purchase our clonal seedlings at a wholesale price we must farm a minimum of twenty acres. This means our group size can be up to twenty farmers if each farms one acre only. It is likely that it will be less than twenty farmers, as some will farm more than one acre. We also have the option in the short term of paying retail prices for clonal seedlings but getting all of the other inputs as wholesale. This would reduce the group size from a maximum of twenty to a maximum of ten. II. Modify the Input Cost for Wholesale Inputs: Key Assumption: Assume that the group size is large enough to purchase all of the inputs listed above at wholesale prices. While we might assume that some group members would farm more than one acre of coffee, we will continue to use a single acre as our unit of analysis. Using the wholesale costs for inputs, the participants can summarize their costs as follows:

COSTS PER ACRE - CLONAL WITHOUT LOAN WITH LOAN Costs/acre Costs/acre Costs/acre Costs/acre

Input costs 1st HARVEST 2nd HARVEST Ist Harvest 2nd HarvestSeedling (Clonal) 450 Seedlings X 400

USH/each -180,000 -180,000

Tools (Hoes) 2 X 3,000 USH/hoe -6,000 -6,000

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Tools (Pangas) 2 X 2,500 USH/Panga -5,000 -5,000 Tools (Pruning saw)

2 X 4,500 USH/Saw -9,000 -9,000

Tools (Scateure) 3 X 5,500 USH/Scateure -16,500 -16,500 Tools (Wheel barrow)

1 X 55,000 USH/Wheel barrow

-55,000 -55,000

Tools (Slasher) 2 X 2500 USH/Slasher -5,000 -5,000 Tools (spade) 2 X 4,500 USH/Spade -9,000 -9,000 Mulch 3 X 30,000 USH/Unit -90,000 -90,000 Mulch 1 X 30,000 USH/Unit -30,000 -30,000Herbicide 2 X 12500 USH/liter -25,000 -25,000 -25,000 -25,000Labor costs Plowing (First) 1 day X 45000 USH/day -45,000 -45,000 Plowing (Second) 1 day X 45000 USH/day -45,000 -45,000 Hole digging 9 days X 5000 USH/day -45,000 -45,000 Planting 7 days X 1500 USH/day -10,500 -10,500 Mulching 50 days X 1000 USH/day -50,000 -50,000 Mulching 25 days X 1000 USH/day -25,000 -25,000Weeding 15 days X 1500 USH/day -22,500 -22,500 Weeding 3 days X 1500 USH/day -4,500 -4,500Pruning 20 days X 1000 USH/day -20,000 -20,000 Pruning 5 days X 1000 USH/day -5,000 -5,000Herbicide application

4 days X 1500 USH/day -6,000 -6,000 -6,000 -6,000

Soil conservation 20 days X 1000 USH/day -20,000 -20,000 Soil conservation 5 days X 1000 USH/day -5,000 -5,000Harvesting 20 days X 1500 USH/day -30,000 -30,000 Harvesting 25 days X 1500 USH/day -37,500 -37,500Supervision 20 days X 3000 USH/day -60,000 -60,000 Supervision 5 days X 3000 USH/day -15,000 -15,000Post harvest costs

Bags 23- bags X 500 USH/bag -11,500 -11,500 Bags 38 bags X 500 USH/bag -19000 -19000Processing 23 bags X 1750 USH/bag -40,250 -40,250 Processing 38 bags X 1750 USH/bag -66,500 -66,500Money needed -806,250 -238500 -806,250 -238500

Interest on 25% on costs

35% per annum for three years

-211,641

Total costs -806,250 -238,500 -1,017,891 -238,500 Estimate Expected Yield and Its Value The yield will remain the same as we have only altered input costs. The participants can summarize their

gross income as follows: Yield Income/acre Income/acre Income/acre

Coffee Harvested 1350 kg X 450 USH/kg 607,500 607,500 Coffee Harvested 2250 kg X 450 USH/kg 1,012,500 1,012,500

55

Damaged Coffee 4% or 1350 kg X 450 SH/kg -24,300 -24,300 Damaged Coffee 4% or 2250 kg X 450 SH/kg -40,500 -40,500Total Expected Gross

Income 583,200 972,000 583,200 972,000

IV. Estimate Expected Profit or Loss Again, allow the participants to add the sum of the costs (a negative value) and the sum of the expected gross income. This can be done as follows:

Total Expected Net Income or Profit/loss Net Income/acre

Net Income/acre

Total costs -806,250 -238,500 -1,017,891 -238,500Total Expected Gross Income 583,200 972,000 583,200 972,000Total Expected Net Income or profit -223,050 733,500 -434,691 733,500

V. Discussion: Once again, we can see the power of the Projected Income Statement as a planning tool. View the comparison of costs and expected income from purchasing inputs as a single household versus purchasing inputs as a SHA on the following page. Discuss with the participants whether these new benefits might tempt them into collaborating in a purchasing group. Revisit the idea that working as a SHA requires careful planning to select the most reputable people in the community, those people who are geographically closest to our own operations and those people who are aggressive savers and likely to have the cash when they need it for collective purchasing. Discuss further how collective purchasing functions as a risk management tool in that it lowers input costs. Lower input costs mean less of a need for outside credit. If crops fail, the SHA members will not be beholding to a moneylender or a bank. Further, wholesale inputs lower the cash requirements for the household which means that by being less “cash strapped” the household is more resistant to adversity. That is, with extra cash on hand, the household can hold out its harvest if farm gate prices are too low, pay for food if the crop fails, or, purchase emergency needs such as medicines. Buying inputs as a SHA not only saved us money on the cost of the inputs, but we also saved the cost of interest we might have had to pay for the loan for the amount we saved. Profit margin per Kg:

Production cost per kg -622.1 -110.4 -785.4 -110.4Selling price per kg 450 450 450 450Profit /loss per kg -172.1 339.6 -335.4 339.6

56

CHAPTER SEVEN: NOTES PAGE

57

CHAPTER 8 VALUE-ADDITION IN THE SCALE OF SMALL HOLDER ASSOCIATIONS Objective: Understand the capacity of an established SHA to enable members to add value to their

commodities and to increase profits. Introduction: In the previous chapter we introduced the concept of doing business as a Small Holder Association (SHA). We began with a discussion of difficulties of forming a SHA and further discussed some strategies to overcome these weaknesses. In the beginning it was recommended that SHAs develop the trust among the members slowly. The SHA can, for example, perform collective purchasing for inputs in the beginning. In this way members need only pool their finances for one day to enjoy the benefit of wholesale pricing for inputs. The level of trust must be low in the initial phases of a SHA so those members who are sincere do not take too many risks with those who are not. Chapter seven concluded by illustrating the cost savings and expected profit benefits of wholesale purchasing of inputs. Again, for small farmers, the best, and possibly the only, way to enjoy wholesale prices on inputs is through a SHA. In this chapter, we will assume that the associations we formed in chapter seven have been operating for a long enough time period that the members are comfortable with each other. The SHAs will be no larger than they must be. The members will come from a close proximity and within a homogeneous community. The members will be made up of people who are serious about agribusiness and have proved it with aggressive savings and high output. Finally, members will be only those individuals who have proven their exemplary character. It may take months or years for an SHA to achieve this level of trust. Assuming that the trust is there, now we will consider what a SHA can do for its owners in terms of both adding value to their crop output and marketing their crop output. These activities will require long-term commitments and, if possible, investments by the SHAs’ members. 8.1 Process: Process Methodology Materials Time ! Review the previous session’s

work. ! Introduce the topic stating the

objective using examples to clarify the abstract.

Discussion Flip charts 15 minutes

! Review specifically with the participants some of the key qualities of a strong SHA.

1. An established history of trust among the members.

2. Explicit and enforceable by-laws. 3. Strong savings and business

habits among members. 4. Group size no larger than it must

be. 5. Members’ households are not far

from each other.

Group Discussion, Lecture

Flip Charts 1 hour.

58

6. Members’ performing similar activities.

7. SHAs share profits/losses with owners.

! Ask the participants what other qualities for the SHA and among the members they might seek out in order to have a strong group.

! On a flip chart, divide SHA activities between “Low Trust” activities and “High Trust” activities. Give a few examples of each (see the Training Steps) and ask the participants to brainstorm and provide some more examples.

! Ask the participants how long they feel a group must do “Low Trust” activities together before they can develop strong enough relationships to perform “High Trust” activities.

! Define the term “value-adding”. ! Give examples of value-adding

activities such as coffee drying, hulling, pulping/washing, grading, packaging, storing, etc.

! Ask the participants what other activities could be added to this list.

! Explain that many value-adding activities require large investment and that this investment is often unavailable to solitary farmers.

! Reiterate that strong SHAs are a good way to invest in value adding.

Lecture, Discussion

Flip Charts 30 minutes

! In their small groups, ask the participants to recalculate their profit (loss) on an acre of coffee assuming that they were members of a strong SHA, taking advantage of reduced costs in terms of transporting, processing and marketing their coffee beans.

! Again, as much as possible, allow the participants to work on their own and only aid them when absolutely necessary.

Group Discussion

Flip Charts 30 minutes

! Bring the groups back together to Discussion Flip Charts 15 minutes

59

share their results. Compare the input costs, yields and expected income on flip charts for one farmer versus a SHA.

! Briefly discuss the results with the whole group.

! Ask the participants to go back to their small groups and recalculate the input costs, yields and expected income for a second season.

! Bring the groups back together to again share their results.

! Note with the participants how the profits will soar after adding value to their coffee.

! Reinforce the costs and benefits of value adding.

! Review the other types of value adding activities.

! Reiterate the necessity of strong SHA formation.

Discussion Flip Charts 30 minutes

8.2 Training Steps: I. Review the Qualities of a Strong SHA. In chapter seven, we discussed some qualities of a “strong SHA”. These included 1. An established history of trust among the members. 2. Explicit and enforceable by-laws. 3. Strong savings and business habits among members. 4. Group size no larger than it must be. 5. Members’ households are not far from each other. 6. Members’ performing similar activities. 7. Proper Record Keeping. Ask the participants to add to this list. Explicitly, reiterate the absolute need for trust in an SHA before any larger scale activity can be undertaken. Ask the participants to list some Low-Trust activities and some High-Trust activities. Use the list below to facilitate this discussion if necessary. Ask the participants to consider and comment on how long a SHA should take to develop “High-Trust Relationships” among the membership. Ask them to consider what steps they might take to facilitate the process of forming strong SHAs.

Low-Trust Activities High-Trust Activities ! A collective purchase of inputs where

members pool their money and make the purchase on a single day.

! A collective savings scheme where members pay into a common fund over a long period of time which is

60

! A meeting of members to discuss a possible future project.

! Purchasing and sharing a few tools between neighboring farms.

! Inviting a buyer to come to a central location to which all farmers will transport their coffee.

managed by a committee. ! Members collectively investing their

money into a planned project. ! Purchasing tools and storing them for

use among twenty farms. ! Entrusting a member with the full

coffee harvest and the money needed to rent a truck to bring the coffee to an urban market.

II. Discussion of Value-Adding Value Adding is conventionally defined as any activity that enables the producer to capture a greater portion of the profit earned on the production, processing, transport and marketing of an output good. For a quick example, think again of the tailor. Perhaps the tailor produces shirts and sells them to retailers whom, in turn, package them and sell them to consumers. One, of the many value-adding activities available to this tailor might be to package the shirts himself and sell them at a higher price to the retailer. The tailor could buy the packaging at wholesale and earn an extra profit on the packaging when selling the shirts to a retailer. There are many value-adding activities, which are available to commercial coffee growers. These include, but are not limited to: ! Hulling the coffee, ! Pulping the coffee ! Grading coffee ! Sorting ! Drying the coffee, ! Storing the coffee to sell later at higher off-season prices, ! Transporting the coffee from the farm-gate to an urban market, ! Packaging the coffee for wholesalers, ! Growing a particular type and quality of coffee for an international buyer, ! Etc. If we quickly review the above list, we learn that many of these activities require a large cash investment. Some of the equipment that might be required for the above operations include: vehicles, Hulling equipment, pulping equipment, dryers, packing equipment, etc. Many of these items are simply beyond the ability of a solitary or smallholder farmer association, no matter how talented, to buy. We will therefore assume that, farmers transport their coffee to a processing plant as an association to take advantage of the reduced transportation and processing costs per unit, as well as having a strong bargaining voice for a better price of their coffee beans. III Key Assumption Regarding the SHA—20 members farming one acre each To make this example a bit more simple to work with (it is complicated enough), we will assume that our SHA is an organization of 20 farmers. We will further assume that each farmer is growing only one acre of coffee (which may be unrealistic once the members have achieved this scale of operation). In this way we can simply take our collective costs such as transport, processing and marketing.

61

Key Assumptions Regarding Costs:

Processing: Quite a number of activities are expected to be performed in order to have good quality coffee beans ready for marketing. The processing one kilo of ready-to-market coffee right from harvesting to packaging will be assumed to cost 80 USH. Transport:

Because farmers are organized in an SHA, they have one collecting center/village for their coffee, and as such it becomes easy and cheap to jointly hire a truck to take their coffee from point A to point B as may be necessary. The cost of transporting one kilogram of coffee will therefore be assumed at 20 USH.

Inputs: As in the previous chapter.

The participants might summarize their pis as follows:

Ist Harvest 2nd Harvest Seedling (Clonal) 450 Seedlings X400 USH/each -180,000 Tools (Hoes) 2 X 3,000 USH/hoe -6,000 Tools (Pangas) 2 X 2,500 USH/Panga -5,000 Tools (Pruning saw) 2 X 4,500 USH/Saw -9,000 Tools (scateur) 3 X 5,500 USH/Scateure -16,500 Tools (Wheelbarrow 1 X 55,000 USH/Wheel barrow -55,000 Tools (Slasher) 2 X 2,500 USH/Slasher -5,000 Tools (Spade) 2 X 4,500 USH/Spade -90,00 Mulch 1 X 30,000 USH/Unit -30,000 Herbicide 2 X 12,500 USH/liter -25,000 -25,000

Labor costs Plowing (First) 1 day X 45000 USH/day -45,000 Plowing (Second) 1 day X 45000USH/day -45,000 Hole digging 9 days X 5000 USH/day -45,000 Planting 10 days X 1000 USH/day -10,000 Mulching 50 days X 1000 USH/day -50,000 Mulching 25 days X 1000 USH/day -25,000 Weeding 15 days X 1500 USH/day -22,500 Weeding 3 days X 1500 USH/day -4,500 Pruning 20 days X 1000 USH/day -20,000 Pruning 5 days X 1000 USH/day -5,000 Herbicide application 4 days X 1500 USH/day -6,000 -6,000 Soil conservation 20 days X 1000 USH/day -20,000 Soil conservation 5 days X 1000 USH/day -5,000 Harvesting 20 days X 1500 USH/day -30,000 Harvesting 25 days X 1500 USH/day -37,500 Supervision 20 days X 3000 USH/day -60,000 Supervision 5 days X 3000 USH/day -15,000 Post Harvest costs Bags 9 bags X 500 USH/bag -4,500

62

Bags 14 bags X 500 USH/bag -7000 Processing 810kgs X 100USH/kg -81,000 Processing 1350kgs X 100 USH/kg -135,000 Money needed -839,500 -295000 Re-investment Saving 629,625 Loan needed -209,875 Credit cost Interest on 25% on costs 35% per annum for three years - Total cost -1,059,869 -295,000

IV. Estimate Expected Yield and Its Value

Key Assumptions Regarding Output/Yield:

As earlier assumed, one acre of Clonal coffee will yield 1350 Kgs and 2250 Kgs of dry coffee for the first and second season respectively. It is further assumed that for every five kilograms of dry Kiboko, you get three Kgs of dry parchment coffee, locally known as Kase.

Post Harvest Losses: It is assumed that farmers pay more attention and care to parchment coffee as opposed to

Kiboko. This therefore, results into reduced losses through mishandling and spillage, rendering the post harvest losses as low as 1% of the total output.

Price: Coffee prices in Uganda are historically volatile (subject to wide variations depending on

time of year and location). In order to have a convention for this training, we will assume the price Kase to be 1200 USH per kilogram.

Income/acre Income/acre

Yield Coffee Harvested 810 kg X 1200 USH/kg 972,000 Coffee Harvested 1350 kg X 1200 USH/kg 1,620,000 Post Harvest Losses Damaged Coffee 1% -9,720 Damaged Coffee 1% -16,200 Total expected gross income

962,280 1,603,800

V. Estimate Expected Profit or Loss Again, the participants can accomplish this by adding the sum of the costs (which is a negative value) and the sum of the expected gross income. This can be done as follows:

Net Income/acre Net Income/acre Total costs -1,059,869 -295,000 Total Expected gross Income 962,280 1,603,800 Total Expected Net Income / profit -97,589 1,308,800

63

Unit costs and margins Production cost per kg -1321.7 -220.7 Selling price per kg 1200 1200 Profit /loss per kg -121.7 979.3

VI. Brief Discussion It now quite evident that, as long as the farmer has to borrow for investment in the coffee growing business, the net income for the first harvest is negative. This is attributed by the expensive loan, which the farmer had to pay within the given period. However, the situation drastically improves in the second and subsequent seasons. Bellow is a projected income statement showing the potential profits/losses when a farmer chooses to borrow and not to borrow for investment:

COSTS PER ACRE - CLONAL WITHOUT LOAN WITH LOAN Costs/acre Input Costs 1st Harvest 2nd Harvest Ist Harvest 2nd Harvest Seedling (Clonal) 450 Seedlings X400 USH/each -180,000 -180,000 Tools (Hoes) 2 X 3,000 USH/hoe -6,000 -6,000 Tools (Pangas) 2 X 2,500 USH/Panga -5,000 -5,000 Tools (Pruning saw) 2 X 4,500 USH/Saw -9,000 -9,000 Tools (Scateure) 3 X 5,500 USH/Scateure -16,500 -16,500 Tools (Wheel barrow) 1 X 55,000 USH/Wh. barrow -55,000 -55,000 Tools (Slasher) 2 X 2.500 USH/Slasher -5,000 -5,000 Tools (spade) 2 X 4,500 USH/Spade -9,000 -9,000 Mulch 3 X 30,000 USH/Unit -90,000 -90,000 Mulch 1 X 30,000 USH/Unit -30,000 -30,000 Herbicide 2 X 12,500 USH/liter -25,000 -25,000 -25,000 -25,000Labor Costs Plowing (First) 1 days X 45,000 USH/day -45,000 -45,000 Plowing (Second) 1 day X 45,000USH/day -45,000 -45,000 Hole digging 9 days X 5000 USH/day -45,000 -45,000 Planting 10 days X 1000 USH/day -10,000 -10,000 Mulching 50 days X 1000 USH/day -50,000 -50,000 Mulching 25 days X 1000 USH/day -25,000 -25,000 Weeding 15 days X 1500 USH/day -22,500 -22,500 Weeding 3 days X 1500 USH/day -4,500 -4,500 Pruning 20 days X 1000 USH/day -20,000 -20,000 Pruning 5 days X 1000 USH/day -5,000 -5,000 Herbicide application 4 days X 1500 USH/day -6,000 -6,000 -6,000 -6,000 Soil conservation 20 days X 1000 USH/day -20,000 -20,000 Soil conservation 5 days X 1000 USH/day -5,000 -5,000 Harvesting 20 days X 1500 USH/day -30,000 -30,000 Harvesting 25 days X 1500 USH/day -37,500 -37,500 Supervision 20 days X 3000 USH/day -60,000 -60,000 Supervision 5 days X 3000 USH/day -15,000 -15,000Post Harvest Costs Bags 9 bags X 500 USH/bag -4,500 -4,500 Bags 14 bags X 500 USH/bag -7000 -7000

64

Processing 810kgs X 100 USH/kg -81,000 -81,000 Processing 1350kgs X 100 USH/kg -135,000 -135,000Money needed -839,500 -295000 -839,500 -295000Credit cost Interest on 25% on costs 35% per annum for five years -220,369Total cost -839,500 -295,000 -1,059,869 -295,000 Income/acre Income/acre Yield Coffee Harvested 810 kg X 1200 USH/kg 972,000 972,000 Coffee Harvested 1350 kg X 1200 USH/kg 1,620,000 1,620,000Post Harvest Losses Damaged Coffee 1% or 8.1 kg X 1200 SH/kg -9,720 -9,720 Damaged Coffee 1% or 13.5 kg X 1200 SH/kg -16,200 -16,200Total Expected Gross Income

962,280 1,603,800 962,280 1,603,800

Net Income/acre

Net Income/acre

Total Costs -839,500 -295,000 -1,059,869 -295,000Total Expected Gross Income 962,280 1,603,800 962,280 1,603,800Total Expected Net Income or Profit

122,780 1,308,800 -97,589 1,308,800

Unit cost and margins Production cost per kg -1046.9 -220.7 -1321.7 -220.7 Selling price per kg 1200 1200 1200 1200 Profit /loss per kg 153.1 979.3 -121.7 979.3

65

CHAPTER EIGHT: NOTES PAGE

66

CHAPTER 9 REVIEW OF PROJECTED INCOME STATEMENTS OVER THE COURSE OF THE PREVIOUS CHAPTERS Throughout the course of training we have discussed farming and business practices that assist the farmer in reducing costs and increasing profits. The content of each chapter has built upon the lessons learned in earlier discussions and has increasingly demonstrated that approaching farming as a business pays dividends in higher profit margins. Early in the training we acknowledged that the actual cost, production and commodity price figures may vary from location to location and from season to season. The figures must be adapted to reflect the actual costs and prices in any given location. However, regardless of the actual figures applied, the trend will clearly be toward increased returns on investments. Point out to farmers that, although we have consistently used one acre of coffee through out this manual, the costs and benefits for any crop and any acreage could be analyzed in the same fashion. The chart and the table bellow summarize the Projected Income Statements found throughout the previous chapters. The table and chart will serve extension agents in demonstrating the very positive changes in profits when farming is approached as a business.

The following table sequentially displays the same information contained in the chart. At the top of each column, the chapter where the analysis was discussed is noted.

Farming Methods

Total cost Income Profit

Traditional method without credit

185,450 487,862 326.1

Traditional method with credit

347,719 325,593 216.8

Improved seedlings (clonal) with own savings

248,300 713,575 333.8

Improved seedlings with credit

378,658 583,217 273

Input saving as SHA without credit

238,500 723,375 280

C O F F E E F A R M IN G A S A B U S IN E S S M E A N S IN C R E A S E D P R O F IT S

0

2 0 0 0 0 0

4 0 0 0 0 0

6 0 0 0 0 0

8 0 0 0 0 0

1 0 0 0 0 0 0

1 2 0 0 0 0 0

1 4 0 0 0 0 0

T ra d it io n a l Im p ro v e ds e e d lin g s

In p u t s a v in g a sS H A

V a lu e a d d it io n

F a r m in g m e th o d s

Shill

ings

W ith o u t c re d itW ith c re d it

67

Input saving as SHA with credit

363,713 598,162 338.4

Value addition without credit

295,000 1,308,800 979.3

Value addition with credit

449,875 1,170,125 863.4

Key messages: • Minimize cost • Reduce risk • Increase profit ! Making informed decisions leads you to achieve the above

COST AND INCOME ANALYSIS

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

Traditionalwithout credit

Traditional withcredit

Clonal with ownsavings

Clonal withcredit

Input saving asSHA without

cerdit

Input saving asSHA with cerdit

Value additionwithout credit

Value additionwith credit

Farming Methods

Shill

ings

Total cost

Net Income

LINE GRAPH SHOW ING TOTAL COST AND NET INCOME

0

200000

400000

600000

800000

1000000

1200000

1400000

Traditionalwith nocredit

Traditionalwith credit

C lonal withown savings

Clonal withcredit

Input savingw/out credit

Input savingw/credit

Valueaddition

w/out credit

valueadditionw/credit

Fram ing m ethod

Shi

lling

s

Total cost

Net

68

CHAPTER NINE: NOTES PAGE

69

CHAPTER 10 MARKETING IN THE SCALE OF SMALL HOLDER ASSOCIATIONS Objective: Understand how the individual owners of a Small Holder Association can increase

profits through efficient marketing. Introduction: In earlier chapters we have learned that profits can be enhanced through improved practices, cost reductions and value addition. We have also learned that a farm-business person can benefit from operational and cost efficiencies by purchasing inputs as an owner of a SHA, and that some value-adding capital investments are also more practical when sharing those costs with other SHA member-owners. Throughout the previous chapters we have based our Projected Income Statement on a number of agreed upon assumptions; one of which has been the different market prices of coffee. The prices used in our analyses assume that we are receiving fair prices for our commodities, or that we are effectively marketing our coffee. In this chapter we will discuss marketing strategies targeted at increasing market access, reducing risks and growing profits. Earlier discussions concerning risk management, storage and adding value will all contribute to the successes of our marketing efforts. We are still maintaining the assumption from the previous chapter that the farmers are working as owners of an established SHA. This assumption is the key to realizing the maximum benefits in the marketplace. Unlike previous chapters, this discussion will not result in a Projected Income Statement. The content will focus on strategies for accessing alternative markets, attracting market players, increasing profits and capturing a greater share of terminal market prices. Also note that this chapter is not intended to be a comprehensive guide to small holder commodity marketing; it is designed to introduce clients to the benefits of effective marketing. 10.1 Process: Process Methodology Materials Time ! Review the previous sessions’

work and the results. Concentrate on reinforcing the reasons for the steadily increasing profits as an owner of a SHA.

! Define marketing and markets, and introduce the topic stating the objective using examples to clarify the abstract.

Discussion Flip charts 30 hour.

! On a flip chart, define the 4 Ps and 2 Cs of marketing in tailoring terms.

1. Discuss the six points in terms of farming, and rank them according to their relevance to the farmer. Stick to wholesale markets only.

2. On a flip chart list, by category,

Group Discussion, Lecture

Flip Charts 1 hour

70

the marketing constraints facing the individual coffee farmer.

3. On another chart list the advantages offered by a SHA. From previous chapters, recall other SHA advantages that contribute to successful marketing.

! Review: Summarize the lessons

learned in this chapter, concentrating on the 4 P’s and the 2 C’s of marketing. Point out that all of the 6 points are better served when processing and marketing coffee in larger quantities and of reliable quality.

Group Discussion, Lecture

Flip Charts 30 minutes

10.2 Training Steps:

I. Review the Trend of Increasing Benefits Derived from Bulk Input Purchases and Value Addition.

In chapters eight we demonstrated how profits are enhanced through the bulk purchase of inputs and by adding value to coffee. Review the results from chapter eight as a reminder of the benefits of SHAs. Use the Projected Income Statement. II. Define Markets and Marketing and their Relationship to Production. Define markets and marketing and relate what was learned in the previous chapters to the current topic. ◊ What cannot be sold should never be produced. When a business ignores the needs and preferences

of consumers, it ends up with products that are not sellable and it drowns in debt. ◊ The market is comprised of all the people and companies supplying a product or service, coupled to all

the people and companies demanding the product or service. ◊ Marketing is the study of consumers and their purchasing tendencies and those of the competitors.

The purpose of the “study” is to understand the markets. As earlier noted in the opening remarks, above eighty percent of Uganda's population depend on agriculture. The exports of the country are predominantly agricultural with coffee contributing about 50% of the export earnings. Thirty five percent of all Ugandans live below the poverty line and the majority of these are small-scale farmers. This reveals a serious problem in the agricultural sector, more specifically in marketing. Marketing problems identical with Uganda coffee farmers include price fluctuation, inadequate market information, crafty intermediaries, competition with other products and same products on local and international market, low quality and semi-processed products, poor infrastructure to mention but a few. In understanding the marketing situation and the impending challenges, it is pertinent that the coffee farmers closely analyze the marketing concepts.

71

III. The Four P’s and two C’s of Marketing Marketing professional often cite the four P’s and two C’s of marketing:

Four P’s: Product, Price, Place and Promotion, and Two C’s: Consumer and Competition.

Discuss each point and their importance in terms of tailoring: " There must be a demand for the product. If there is no demand, there is no market. " The price must be affordable and in line with other producers. " The place (location) must be convenient – easily accessible. " Promotion must come from word of mouth (reputation) or advertising. " The consumers’ needs, desires and finances must be considered. " The competition must be known and understood. After using tailoring to illustrate the above-listed points, ask the participants to relate the same points to their farming businesses and rank them according to their relative importance. Limit the discussion to wholesale markets and list the ranking on a flip chart. Some of the P’s and C’s have different importance for a farm business than they would have for a retail or manufacturing business. For example, the market largely dictates the sale prices of farm commodities. A tailor may design a new piece of clothing that is very popular and in short supply. He may therefore be able to assign a higher price as long as the demand is high and the supply is low. In farming, the sale price may be improved by adding value or by accessing markets where prices are more favorable. In a sense, the farmer is competing with costs, not the other market players. The place, in terms of a SHA, can be a very important factor. When farmers are able to consolidate their coffee at a central and easily accessible location, the buyers are able to reduce their transaction costs compared to buying small quantities from many small farmers. This fact makes the SHA more competitive than individual farmers, allowing them to charge a premium price. Place also may refer to transporting the coffee to the buyer. Naturally, we must grow the coffee varieties that are high yielding and are on demand, but product refers not only to the coffee grown; it also refers to the quality and quantity of that coffee. If the buyers (consumers) have confidence in the quality and quantity of the coffee, they will become regular customers. Dependability results in repeat business; that’s self-promotion by establishing a positive reputation. Promotion of farm products can also refer to making contacts with market players in Kampala or other market centers. Bringing them a sample and offering them options concerning transport, time of delivery and prices is a direct approach to promoting the farm business. III. Marketing as Individual Households vs. Small Holder Association Owners: Using a flip chart, list the advantages and disadvantages of marketing commodities at the household level. Ask the clients to construct the list. Don’t assist unless they have omitted key points. Examples may include:

72

Advantages Disadvantages

◊ Coffee stored at home ◊ No transport costs

◊ High storage losses ◊ Low farm-gate prices ◊ Market choices limited ◊ Lower profits

Once we are sure that all comments have been included in the above chart, entitle a second flip chart, Small Holder Associations using the same two categories.

Advantages Disadvantages

◊ Low storage losses in modern storage facilities

◊ Higher prices for commodities ◊ Value addition options to respond

to market demands ◊ Lower transportation costs ◊ Market access ◊ Market information ◊ Elimination of some middle market

players ◊ Higher profits ◊ Allow small holder farmers to

control their livelihoods ◊ Advocacy for the farmer

◊ Must trust the SHA manager and members

◊ No immediate access to commodities ◊ Slow decision making ◊ Members bear the risks and losses of

the Association ◊ Members have to volunteer their time

and efforts to work for the Association

IV. Discussion of Marketing The objective of effective marketing is the same as the overall objective of any business – to decrease cost and increase profits. To get our lower-cost, higher-quality coffee to the market and to reap the greatest reward, we must be “easy to buy from”. That simple statement is a summary of the four P’s and two C’s of marketing. We must make it less costly and more convenient for our customers to purchase our coffee; we must be able to reliably deliver coffee on time and at the specified quality and quantity. The Middleman Commodity buyers are often seen as taking advantage of the smallholder farmer because the farm-gate prices are so low. But, we must keep in mind that the coffee buyer is also a businessperson who must cover costs and make a profit. When a buyer must go from farm to farm to purchase small quantities of coffee, his operating cost are very high. He incurs elevated costs of labor, fuel and maintenance of his truck. He must pay those costs if he is to make a profit. He pays those costs by offering a lower price at the farm. Commodity Consolidation A very important function of a SHA is that coffee can be consolidated at central and easily accessible locations. If a buyer is able to reduce costs by filling his truck at one location, the SHA is in a position to negotiate a more favorable price for its owners. A well-established and organized SHA essentially replaces one or often more middlemen, thereby capturing the added profits for the owners.

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Alternative Markets Another marketing advantage of a SHA is its ability to access distant markets. SHA management can approach the terminal buyers (exporters, etc..) and negotiate deals that are attractive to both the buyer and the seller. Again, the SHA becomes the middleman and reaps the additional profits for the owners. Transportation Access to affordable transportation is another important marketing tool. If a seller (the SHA) is able to reach the terminal markets in Uganda or in neighboring countries, or even export their own coffee to Europe, they can benefit from geographical price differences. Presentation Buyers of coffee may require coffee delivered in different grades and quantities. They may need coffee beans graded according to bean color, bean size, etc.. Knowing the customers’ requirements and conforming to those requirements makes us easier to buy from and that makes us a preferable choice as a supplier. Information In order to take advantage of constantly changing markets, farmers must have access to current and historical information. A marketing plan is based on past experience while being flexible enough to quickly adapt to changing market conditions. Information on trends in seasonal price fluctuations is available and should be systematically accessed by SHAs. Among other decisions, the choice of whether or not to store coffee until prices improve, is an important function of the management of an SHA. Contact with buyers and other sellers will inform the SHA management about the current prices. Newspapers, radio programs, private sector like Uganda Commodity Exchange, Private Sector Foundation, UCDA, selected NGOs and even the Ministry can also furnish important information. Timing With reliable historical information concerning price fluctuations from season to season, we can determine when the markets are likely to be more or less favorable. There is a cost for storage. The important question is whether or not the cost is justified by the price advantage anticipated during a period of relative scarcity. Projected income statement will help the farmer determine if it is more beneficial to sell or to hold her coffee. Commodity Exchange A commodity exchange is a central place for buyers and sellers to transact business in commodities, including coffee among other agricultural commodities. A commodity exchange operates like a stock exchange only that it does not trade in financial instruments but agricultural commodities. This type of marketing is just taking root in Uganda with the formation of the Uganda Commodity Exchange, located on Uganda Cooperative Alliance Building, Nkrurumah Rd in Kampala. The exchange has been formed to: • Ensure that the private sector accesses a level of exportable quality stocks of agricultural commodities,

quickly and at prices quoted by the farmer, not the middlemen and in so doing guarantee the buyers of a reliable and sustainable volumes of standardized/graded quality products.

• Provide market information on the existence of trade opportunities in agro-communities and hence help stakeholders discover market prices.

• Provide a market mechanism through which trades in agro-commodities can be conducted efficiently, timely and transparently, thereby shortening the marketing chains between farm-gate and markets.

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• Manage market price risks through futures contracts and options according to dictates of market development. Coffee farmers have to take opportunity of existence of this facility in order to meet and overcome some of the challenges in marketing.

V. Discussion Understanding markets and marketing is a cornerstone in the foundation of any business. What to grow, when to plant, when to harvest, what value addition measures to employ and whether to store coffee are all based on an understanding of the markets. Marketing is not something that a businessperson considers only at the end of the production cycle. It must be among the first considerations when planning a farm business or any other business. Farmers (SHAs) must cultivate relationships with buyers over many seasons. Mutual trust between trading partners is as important as it is among SHA owners. When a buyer learns that an agribusiness will deliver reliable quality commodities of the specified volumes, an ongoing business relationship based on trust is strengthened over time. We have learned how to reduce costs and to increase the production of higher quality crops, but without close attention to marketing, we will be unable to maximize the benefits of our new business approach to farming. The future belongs to the organized. The individual household produces small quantities of poor quality products, and they have very limited access to alternative markets. Only through collective action with other farmers will they begin to realize a greater share of the terminal market prices.

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CHAPTER TEN NOTES PAGE:

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CHAPTER 11 WORKPLANNING AND RECORD KEEPING Objectives: Based on the projected income statement employed throughout the manual, to establish

simple tools for planning the work program of a farm business.

Using the same template, enable participants to know how to keep record of costs and outputs of their farm businesses.

In five of the previous chapters we employed a simple Projected Income Statement tool to project the results of applying various farming methods and business practices. The power of that tool is now well established as a planning instrument and is now very familiar to all training clients. We will take advantage of that familiarity and use the Projected Income Statement format as the starting point from which we will develop a simple workplan format and equally simple record forms. The combination of the Projected Income Statement, workplan and record form gives the farmer the ability to analyze past performance and future options: Projected Income Statement: Where do we want to go – options Workplan: How to get there Records: Where have we been (a record of activities and profits or losses)? The form on the following page is a blank version of the Projected Income Statement used throughout this manual. In its more generic form it serves the farmer and extension worker as a fill-in-the-blank tool for projecting the comparative advantages and disadvantages between different crops and different farming and business methods. Extension workers and farmers can refer to the numerous examples throughout the text for assistance in filling out the cash-flow forms, 11.1 Process: Process Methodology Materials Time ! Review the previous sessions’ work and

reinforce the power of the Projected Income Statement

! Ask clients how the Projected Income Statement might be similar to workplans and record keeping, but with different functions.

! Discuss “Where we want to go”, “How to get there” and “Where we have been and the importance of each step.

Discussion Lecture

Flip charts 30 minutes

! On a flip chart, list responses to “What items do we need on a workplan”. Repeat the exercise on record keeping.

! Reinforce that workplanning and record keeping addresses the same points.

! Discuss the forms and how to use them. ! Relate workplans and records to M&E

obligations.

Group Discussion, Lecture

Flip Charts 1 hour

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PROJECTED INCOME STATEMENT

Input costs UNITS

CHEMICALS

OTHER

Labor Costs (Operations)PREPARATION

PLANTING

WEEDING

HARVESTING

OTHER

Post Harvest CostsBAGS

DRYING

TRANSPORT

Re-InvestmentSavings (Saving Up)

Credit CostsCredit (Saving Down)

Total Costs

Projected Yield

Post-Harvest Losses

Total Expected Gross Income

Total Costs

Total Expected Gross Income

Total Expected Net Income or Profit

Net Income Net Income Net Income Net Income

Income Income Income Income

1 2 3 4OPTION OPTION OPTION OPTION

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Farmers and extension workers can use the fill-in-the-blank Projected Income Statement form to make projections concerning the cost/benefit differences between different crops and farm- business approaches. With this template, agribusiness people will not actually require this form –they can copy it by hand into their exercise books. 11.2 Work plans The line items found in the Projected Income Statement form define the cost of farm inputs and operations. A work plan defines the activities and the sequence of those activities over time. The following work plan sheet is very similar to the Projected Income Statement form. The differences are that the yield and profit and loss sections are omitted and the column headings refer to time periods rather than production and management options. The farmer can assign the most appropriate column headings – days, weeks, months – and add as many columns as necessary.

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WORK PLAN FORM Period I Period II Period III Period IV

Input purchases Specifications SEEDLINGS when? how much? TOOLS when? how much? MANURE when? how much? CHEMICALS when? how much? OTHER when? how much?

Field Operations PREPARATION when? how much time? PLANTING when? how much time? MANURE APPLICATION when? how much time? WEEDING when? how much time? HARVESTING when? how much time? OTHER when? how much time?

Post Harvest Operations DRYING when? how much time? HULLING when? how much time? SORTING/GRADING when? how much time? BAGGING when? how much time?

MARKETING where? how much time? who?

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Record Keeping Any businessperson must keep records in order to know what his outflows (payments) and inflows (receipts) are. The difference between the two figures will inform the farmer if he has made a profit or incurred a loss. Farmers must learn from past successes and mistakes if they are to grow coffee as a business. They can not learn what has worked well and what has not if they do not keep accurate records. The form below can be copied into a simple exercise book. With this simple form a farmer can track his cash inflows and outflows. Every expense and income figure discussed in the repeated Projected Income Statement must be entered. Now is the time to learn if our projections were accurate. Keeping these simple records will inform the farmer about how to adapt his planning process in the future.

Income and Expense Record

PAYMENTS (for purchases)

Date Particulars Amount Date Particulars Amount

A record of activities should compliment the record form above - a record that shows when a task was performed and how much time it took.

Activity Record

Start Date Activity/Task Completion Date

Comments

The information compiled in the two simple forms above will inform the farmer about the performance of his business during the period for which the records are kept. At the end of a production-marketing cycle the farmer can combine the information recorded in the exercise book on a single form – a modified profit and loss statement that is very similar in appearance to the Projected Income Statement. The primary difference in the two forms is found in the column headings.

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ACTIVITIES AND EARNINGS RECORD

INPUTS UNITS SEEDLINGS

TOOLS

MANURE

CHEMICALS

OTHER Field Operations

PREPARATION

PLANTING

WEEDING

MANURING

HARVESTING

OTHER

Post Harvest Operations Bags Drying Hulling Grading Packing Transport

Re-Investment Savings (Saving Up) Credit (Saving Down)

Total Costs of Inputs and Operations

Actual Yield Price Commodity per KG Volume in Kgs

Post Harvest Losses Price Commodity Per KG Volume in Kgs

Total Actual Gross Income

Total Costs of Inputs and Operations

Total Actual Gross Income

Total Net Income (Total costs minus gross income|)

WHEN HOW MUCH HOW MUCH COMMENTS TIME MONEY

Income

Net Income

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Where the column headings on the Projected Income Statement define options relating to crop choices or farm business practices, the Activities and Earnings Record uses column heading that correspond to the information gathered in the preceding two simple record forms. Discussion: Projected Income Statement, work plans and record keeping help any businessperson to better understand the performance of his business. The heightened understanding empowers the businessperson with information that assists him analyzing his business, and in making adjustments that will reduce costs, increase production and improve profits. How? The Projected Income Statement show the business farmer his choices and sets targets of performance. The workplan defines the systematic sequence to reach the targets. Keeping records tells him if he is reaching the targets and eventually if he has attained them. In the arena of economic development we call this process Project Design and Monitoring and Evaluation. " We define the objectives (projected targets or Projected Income Statement) we want to achieve by

the end of a given period and how we are going to achieve them (work planning). " We schedule periodic monitoring exercises (record keeping), which inform us if we are on track to

our target, " We evaluate the results at the end of a project cycle (profit and loss analysis) to document our

successes and failures, and " Based on what we have learned, we make adjustments in how we design future programs. The

businessperson refines his Projected Income Statement and his approach to managing his enterprise. The ultimate indicator of success in business is profit, or return on investment. Is the business producing more each business cycle? Are costs being reduced? Are markets expanding? These are the indicators of success for any business. These are the points we monitor to measure our progress toward the target or the goal. The key question in the final evaluation of any business is - ARE PROFITS INCREASING? As they say in business, “the bottom line is the only evaluation of success or failure”. Accurate records are essential management tools: • Improved management results in higher profits. • Higher profits contribute to the accumulation of capital. • Accumulated capital equals the creation of wealth. • Wealth is the key in making the transition from a subsistence to a cash economy, and that path leads

to sustainable development.

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CHAPTER ELEVEN NOTES PAGE:

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CHAPTER 12 MONITORING AND EVALUATION Objectives: To equip extension workers with tools that will enable them to assist farmers in

keeping meaningful records that will enhance their capacities to improve their businesses.

To assist extension workers in capturing relevant qualitative and quantitative data that will increase the veracity of the data while reducing the time (costs) of gathering the information.

Introduction: At the end of the last chapter we discussed how work planning and record keeping were the business equivalent of Monitoring and Evaluation – that for the farmer, increased profits were the only meaningful quantitative indicator of success. Social indicators, or quality-of-life indicators (children in school, diet and health as examples), do not assess the primary goal of business. However, as incomes increase, the quality of life is also likely to improve within the household and the larger community. Although the primary agenda of a successful business is increased income, that agenda serves the broader goals of the development community and the government. This chapter will build upon the previous chapter by reinforcing the importance of work planning and record keeping. This discussion will focus on the needs of the farmer as a decision-maker and a business manager. If we agree that the goal of a successful business is to reduce costs and risks while increasing profits, then we must also agree that a business has no social agenda (which is very different from “no social impact”). Given agreement on those points, we will restrict our discussions to quantitative business indicators of success and how to document changes. For the extension agents we make distinctions between different categories of indicators - process indicators vs. impact indicators, and qualitative vs. quantitative indicators. 12.1 Process: Process Methodology Materials Time ! Review the previous session’s work

making a clear connection between planning/record keeping and M&E.

! Define monitoring and evaluation and discuss their significance for businesses and development projects alike.

! Discuss M&E indicators of change and ask for examples of quantifiable (measurable) indicators.

Discussion Lecture

Flip charts 30 – 45 minutes

! Define the differences between process and impact indicators and ask for examples to be listed a chart. ! Baseline data: Explain the importance of gathering reliable baseline information. Request input on

Group Discussion, Lecture

Flip Charts 1 hour to 90 `minutes

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what constitutes reliable information. Only collect baseline information on the indicators to be tracked. ! M&E Checklist: Use these lists to reinforce the qualities of meaningful M&E. ! Diagnosis and Revision: Discuss the importance of revisiting M&E plans to assure that they retain their connection to the objectives. They are dynamic plans. ! Discuss the differences between business and social agendas and the need for separation of the two. Discuss the contribution that business can make to the social agenda. ! NGOs’ need and the Farmers’ needs: Discuss the possible conflicts and stress the fact that a farmer that keeps quality business records will make the extension agents’ M&E tasks easier and less costly.

12.2 Training Steps: Open the discussion on M&E and ask for comments about the importance of tracking progress against stated objective. List responses and fill in any gaps. Monitoring is a systematic recording and continuous or periodic reviewing and surveillance of the business, allowing farmers to determine whether the business activities are keeping them on track toward the attainment of their goals, i.e. input deliveries, work schedules, targeted outputs and other required actions are proceeding according to plan. Evaluation is a process of determining systematically and objectively the relevance, efficiency, effectiveness and impact of activities in light of the goals. The evaluation process provides an opportunity for farmers and other interested parties to stop and reflect on the past in order to make decisions about the future. Advantages of Monitoring and Evaluation " Performance: Helps farmers assess the performance by asking, “Am I on track toward the

achievement of my goal?” " Mid-course corrections: Early identification of problems or mistakes allows the farmer or

extension worker to make corrections before irreparable damage is done. " Accountability and Transparency: Reliable documentation of processes and impact. " Communication: Sharing of results, lesson learned and experiences about business farming with

other stakeholders. " Learning from documented experiences: Farmers learn from their achievements and mistakes,

and develop enhanced capacities.

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I. Developing Monitoring and Evaluation Indicators What is an indicator? – A measuring rod, or measure of change. QUALITIES OF GOOD INDICATORS 1. Easily observable, verifiable and accurate: Select an indicator for which

information is not difficult to obtain and is accurate. For example, properly kept farm records are easily available and can provide indications of improved business or areas requiring improvement.

2. Relevant: Must be relevant to the activities of the objectives. For example,

number of bags of coffee harvested and sold, time required for a task, costs of inputs and operations.

3. Reliable and up to date: Information should be collected frequently and

routinely. For example, daily labor requirements, crop growth and pest infestation.

4. Sensitive: An indicator must reflect change 5. Simple: Simple to record and simple for the farmer to analyze or interpret. All of the indicators that measure change should be recorded in the farmers’ record books and they should all be useful in decision-making and management. Almost all critical business performance indicators are listed in the Projected Income Statement. The indicators should be tracked by keeping records and evaluating the attainment of the goals in the profit and loss or earnings statement. II. Process Indicators and Impact Indicators: Monitoring of activities or tasks is monitoring processes. Examples on the farm would be purchasing improved inputs, planting, weeding, harvesting and drying. The performance of these tasks tells the farmer and the extension worker that activities are being completed. However, the completion of the activities does not necessarily imply that there will be positive impact as a result of the actions. If the process is performed correctly, the assumption is that there will be positive impact. The associated impact indicators to measure results would be improved germination rates, faster growth, higher production, higher prices and increased profits. For the extension worker, process indicators may be the number of farmers visited or the number of training sessions conducted. If the farmer visits or training were ineffective the change in performance or the desired impact may not be realized. The impact indicators that measure the effectiveness of the visits and training are the same as the indicators of success for the farmer – increased production, higher prices and higher profits III. Baseline definitions: In order to measure changes one must first know where the starting point is. Profits are the ultimate measure of a successful business, so that is the indicator of foremost importance. We must therefore know the profit history of our business. How much money or how much production has been generated

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in the past? What was the level of performance before we changed our approach? Determine historical production and profit histories with the farmers as accurately as possible. Other indicators of change must also be measured against baseline definitions. What was the level of pest infestation before the application of pesticides? What was the growth rate and yield of crops with and without fertilizer? What were the markets in previous years? How much time was spent on specific operational tasks? IV. Monitoring Check list # What are the measurable objectives of the business? # What type of measurement will be used to determine that objectives have been

reached? # Who will be responsible for monitoring the activities? # What are the critical success factors for the business? # What data and information will you need at the start and throughout the business

to gauge its success (baseline starting information, on going information, etc?) # Does the farmer have a calendar (workplan) with enough detail to use as a

monitoring tool? # Does the farmer have periodic (weekly, bimonthly, quarterly) monitoring updates?

What information will be needed in the updates? V. Evaluation Check List # Have your business objectives been met? How were the objectives measured? # What do you need to know to evaluate your success, and to assess the

effectiveness of your approach and your business management? # What was the greatest impact on the business? What have been the changes

because of your business? # What was learned in performing the business and related activities? # How will the information you have learned during this evaluation be used for

future businesses? # When will evaluations be conducted to make maximum use of lessons learned? # Have you and your family or business benefited or changed through this business? VI. Diagnosis and Regular Revisions Monitoring and evaluation are intended to inform us about the validity of assumptions made during the planning stage of our business (or project). Without fail, some of those assumptions will prove to be faulty due to changing conditions (markets, pest infestations, weather, etc.). A businessperson must

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revise a business plan in the same way that the manager of a development project must alter his/her project plan to adapt to changing conditions. The information collected needs to be analyzed by the farmers, necessary conclusions drawn and appropriate courses of action taken. Extension workers may wish to help them initially, but the farmers should come to this point through practice. Avoid imposing your own ideas. The farmers should come to their own conclusions if they are going to make their own decisions. As the business progresses, and as discussions proceed over time, new activities, objectives, and new indicators may emerge. M & E system should be adapted accordingly. VII. Discussion: The farmers’ needs and the extension workers’ (NGO/donors’) needs. For extension workers employed by development organizations and funded by donors, this distinction is important. The agreements that outline the terms of your funding define quantitative targets in terms of the volume and value of production. You have “promised” to reach or surpass your stated targets, and you are therefore obligated to monitor the progress toward the attainment of the targets and evaluate the final outcome. Your tasks, in this regard, conform perfectly to the similar tasks that the farm businessperson must perform. If, as an extension worker, you are able to instill in your clients the importance of planning and record keeping, your monitoring and evaluation obligations will be far less time consuming, more meaningful and less costly. Increasing production and profits through the application of business practices is the goal of this training package, but without recording the results, the full benefits of our efforts will go undocumented. It is the extension workers’ job to assure that the results are well documented. If your farmer clients do not keep accurate records, your monitoring activities will be less meaningful and the evaluations of your actions may not reflect the true case. Helping the farmer to better monitor and evaluate his business enterprise helps you and your organization to better meet your obligations and to increasingly contribute to rural economic development. Monitoring and evaluations are as indispensable in the management of a successful business as they are in the effective implementation of a successful development project. In both cases we must learn from our mistakes and successes. We endeavor to reduce mistakes and maximize successes. As in all other elements of business there are costs associated with monitoring and evaluation. It takes time to make cash-flow projections, and it requires time to keep records and to learn how to effectively interpret them. There are also costs associated with M&E activities within your agricultural development programs. If you are teaching farmers how to function as businessmen, you are obligated to approach your job in a business minded fashion as well. Among other things this includes gathering your monitoring and evaluation data in the most efficient way possible, and in a way that does not impose undue hardship on your clients. You should be able to collect almost all of your data in the course of your daily routine, precluding the need to make expensive trips where the only purpose is to collect M&E data. And, if you properly teach and re-enforce the importance of planning and record keeping, you will find that the farmer has already collected all of the pertinent information for you. You will simply have to copy it from his/her records.

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Take up the challenge to approach your job as a business. You will be more efficient and you will have more time to work directly with your clients in transferring skills in farming and farming as a business. Homework Assignment during the one-week break: Monitoring and Evaluation Plan Design - Baseline information: Who, when, where and what. - Data collection frequency, and how that will be incorporated into your existing routine. - Indicators of change. - Data forms. - How your needs will compliment and reinforce the farmers’ needs in planning and record keeping.

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CHAPTER TWELVE NOTES PAGE:

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WRAP UP: What are the key lessons? Throughout the training process we have demonstrated that when approaching farming as a business we are able to dramatically increase our profits. The examples employed in chapters 2 through 8 clearly showed us what is possible and how each individual step adds profits to our business. In chapter 2 our profit was almost 487,862 USH in the second season for one acre of coffee; by the time we started adding value to our coffee (Kase), from one acre of coffee we were earning 1,308,800 USH in the second season. If we had planted two acres our income would double to 2,617,600 USH! How did we achieve this dramatic improvement in our profits? Improved Inputs:

By purchasing improved seedlings and manure, we increased the productivity and the profits. The often-heard statement that small farmers are too poor to purchase improved seedlings and manure has been proven false. The fact is that they will remain poor if they do not devise ways of assuring that they are routinely able to make those purchases. Promoting traditional methods of agriculture is promoting sustainable poverty!

The importance of saving a portion of the increased profits:

Credit for production agriculture, if available, is not affordable for the smallholder farmer. We have demonstrated that the high interest charges are not an affordable input. If improved seedlings and manure did not pay for themselves and return a substantial profit, the investment would not be justified. The same reasoning should hold true for any other input or investment in our business – including unaffordable interest costs on crop production credit. The transition from credit to saving is not one we should expect to take place from one season to the next. Farmers must first begin to realize increased profits before they will have enough cash to save, and increasing the amount they are able to save, in most cases, will require multiple cropping cycles. However, we have seen the impact of saving even small amounts of money. Farmers can and do save money is many ways: ! Portions of their crops in safe and secure storage ! In livestock ! In their homes ! With family and friends ! In the banks ! In savings and credit associations

If farmers are successfully working together, as we have discussed in this business-training course, it strongly indicates that they have established collaborative relationships based on experience, trust and on systematic controls. It also means that they are earning enough money to routinely save money. In that environment they also have the organizational capacities to integrate their routine savings into a savings and credit function within their established business association. The Savings and Credit Association becomes another element of value-addition within the SHA while it also contributes to cost savings and operational efficiencies. That translates into higher profits as we have demonstrated in this manual.

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Accumulating Savings and Credit Associations (ASCAs) are owner capitalized (by owner savings) and independent of outside capital support. If properly managed they are more efficient in terms of the cost of credit, or the interest rates they must charge. Their transaction costs are lower than for banks and MFIs and every owner has a vested interest in the successful management of the funds. They are, in essence, all “loan officers” because default by any member has a negative impact on all other members. Savings and credit functions (ASCAs) require that the owners develop new skills in transparent and effective management. They must understand simple interest rate calculations, loan management, book keeping, by-law formulation, financing and more - or in other words - “Banking as a Business”. Without these skills, the self-reliance of the SHA and its owners, in terms of credit requirements, would be very questionable. SHA owners (or others) who wish to establish affordable and viable savings and credit functions must seek training from a qualified organization in efficient and transparent management of the owner-controlled system. One must not assume that semi-formal savings and credit schemes will be successful without training in the establishment and management of those schemes.

Planning and record keeping:

We have learned about the power of projecting the outcome of a business approach before risking resources (time and money). It has been the common thread throughout the fabric of this training manual. All participants should have a very strong grasp on how to use the cash-flow tool to the greatest advantage. The work plan and the earnings and activity records are indispensable companions to the Projected Income Statement. They inform us about which assumptions were correct in our Projected Income Statement and which ones were not. With this valuable information we are able to make adjustments in our business operations from season to season and from year to year. Planning and record keeping are indispensable in any successful business.

Increased profits through collective action:

The most notable increases in profits were realized when we benefited from working together with other farmers to purchase cheaper inputs, add value to our crops, increase productivity and operational efficiencies and to access alternative markets. The individual farmer or household has very limited options for increasing production and profits when they operate their business alone. They become victims of the market rather than a force in the market. The history of cooperatives in Uganda, to put it very mildly, has not been encouraging. For that reason, until now, we have not used the term cooperative in this manual. The term and the memories it evokes are very negative, and for very good reasons. The farmers know cooperatives as institutions that did not serve the needs of the members. One reason for that – the members were not the OWNERS – they were used by the cooperative system to furnish cheap commodities to the inefficient and corrupt marketing boards. Farmers had to wait for months or even years to receive payment for their crops, they never received a share of the profits (dividends) and they had no voice in the decision making or the management of the government-controlled entity. Cooperatives were used to control and regulate farmers’ production, and not as true cooperatives where the mission and vision should be economic empowerment of the farmer/owner.

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In Uganda, cooperatives never should have been called cooperatives. They never earned the name. They should have used a name that more accurately defined their role – perhaps Marketing Board Inoperatives or Market Control Inoperatives would have given a much clearer picture of their functions in the production-marketing chain. The SHAs we speak of in this training manual must be true cooperatives that are farmer-owned and controlled. The name we use is unimportant. We can use any name we wish as long as the business functions as a true cooperative. The cooperative business model is in many ways similar to other business models – the sole proprietorship (one owner), the partnership or the corporation. And, they all have similar objectives; to reduce costs, to manage risks, to be competitive and to increase profits. All businesses must produce goods (or services) that are marketable. All businesses must finance their operations. All businesses must manage their operations. Cooperatives are no different; they too must successfully perform all the same functions. However, SHAs (true cooperatives) have a unique organizational structure from other business models. That structure is designed to increase efficiencies of individual owners through well-organized collective actions. If farmer-owned SHAs are going to be successful in putting more money in the pockets of farmers, they must be managed as a business. The owners and the management must be trained in the following critical functions that are common to all businesses and in some areas that are unique to the cooperative business model: ! Management ! Roles, Rights, Responsibilities and Organization (By-Laws) ! Finance ! Accounting and Book Keeping ! Business Planning ! Marketing

Without adequate skills in the above-listed elements of basic business and cooperative operations, the farmer-owned SHA will have minimal chances of success. If we promote SHAs and ignore the critical needs for training in these areas, we risk repeating the failures of the past, or being a contributor to counter development and a supporter of sustainable poverty.

All four of the key messages of this training product are essential in the ultimate economic empowerment of the rural farm family and in the transition from a subsistence economy to a cash economy. However, the required changes and the transition they will promote cannot be viewed as events, but as processes that require patience and on-going support. Farmers cannot move from an over-dependence on credit to aggressive saving in one season. They cannot change from traditional, low-profit farming methods over night. They can’t be expected to immediately establish multi-service SHAs. All these complimentary and interdependent steps can be taken concurrently, but the initial steps must be measured, with a focus on managing the inherent risks of new and innovative approaches to farming. Development workers and donors must assume the burden of calculated risks, while minimizing the risks imposed on farmers. If we listen to the farmers and respond to their needs and build upon their assets, the pace of change will be dictated by the farmers and informed by their tolerances for risk. As the new skills are adopted and the benefits of the initial steps are recognized, the farmers’ eagerness for subsequent changes should rapidly accelerate.