Small business models - FAO ACP

8/12/2019 Small business models - FAO ACP

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Smallholder business models

for agribusiness-leddevelopment

Good practiceand policy guidance

RURALINFRASTRUCTUREAND

AGRO-INDUSTRIESDIVISION


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Good practiceand policy guidance

Siobhan KellyAgribusiness Economist

Rural Infrastructureand Agro-Industries Division (AGS)

FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS

Rome, 2012

Smallholder business modelsfor agribusiness-led

development


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FAO 2012


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iii

Contents

Acknowledgements iii

Acronyms iv

1. Introduction 1

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

3 Supporting smallholder competitive advantage for agribusiness-led development 7

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

5. Smallholder organizational models for improved bargaining powerand value-chain governance 11

6. Success factors for strengthening smallholder organizational models: 15

6.1 Success factors and policy guidance for strengthening smallholder-buyerbusiness models within value chains 15

6.2 Policy guidance principles for supporting smallholder-buyer business models 16

Conclusions 17

References 19


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v

Acknowledgements

Insights and cases noted in this paper, while focused on Africa, are based activities carried out underthe aegis of the EU-funded All ACP1Agriculture Commodity Programme2, on integrating smallholderfarmers into value chains across a range of ACP countries. The concept for the programme of work onproducer-buyer business models was developed under the technical guidance of Doyle Baker, SeniorTechnical Officer, Rural Infrastructure and Agro-Industries Division (AGS) and implemented in col-laboration with Heiko Bamman, Agribusiness Officer (AGS), Florence Tartanac, Senior Officer (AGS)and Cora Dankers, Consultant (AGS). Valuable comments on draft versions of this paper from DavidKahan and David Hitchcock are gratefully acknowledged.

1 Africa, Caribbean and Pacific Countries2 http://www.euacpcommodities.eu/en; http://www.fao.org/economic/EST/AAACP/en/


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

Acronyms

ACP Agricultural Commodities ProgrammeAGS Rural Infrastructure and Agro-Industries Division (FAO)CFA franc Central African CFA francCPO crude processed oilEU European UnionFAO Food and Agriculture Organization of the United NationsFFB Fresh Fruit BunchesGDP gross domestic productGTZ Deutsche Gesellschaft fr Technische ZusammenarbeitHQCF High Quality Cassava Flour

IFAD International Fund for Agricultural DevelopmentIFC International Finance CorporationNGO non-governmental organizationSMAE small- and medium-sized agro-enterprisesSME small and medium enterprisesUNIDO United Nations Industrial Development Organization


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1

Macroeconomic and trade policy tools were com-mon instruments used to defend local economiesand livelihoods from the fallout of the post-struc-tural adjustment era. Conceptual and empiricalevidence increasingly suggest, however, that inter-ventions aimed at facilitating smallholder organiza-

tion and market participation require support thatis targeted at facilitating and reducing the costs ofinteractor agribusiness along value chains (FAO2010a). The onset of the 2008 food crisis has placedsmallholder-based import substitution strategiesfor food commodities and staples at the centre ofmany agriculture development programmes, mak-ing public sector guidance on this topic even moreessential.

Even before the 2008 crisis a wide range of pro-grammes were launched with the aim of strength-ening smallholder-market linkages, many of which

adopted a value-chain approach. The basis of thisapproach is anchored on an analysis of the inter-dependence between actors to better understandthe formal and informal dynamics of potentialchain partnerships and related needs. The successand failures of many of these initiatives have beenwell documented, but the fact still remains thatfor most cases, the producer-first buyer point ofsale continues to be the most inefficient linkage,impacting on the overall chances of a successfulsmallholder-based chain.

In an effort to better understand how the public

sector can support smallholder integration invalue chains, FAO with the support of the EU pilot tested a business model approach to identifythe critical success factors for improving supplier-buyer trade falling under different contexts andmarket structures. The approach provides a frame-work for analysing the inter-organizational link-ages between producers and buyers to understandthe potential for coordination and partnership,and to identify where value can be added, costsreduced and efficiency improved.

The rationale for this action-research pro-gramme of work was based on two key argu-ments. First, that within a relatively liberal market

economy, when a market opportunity exists, theprivate sector entrepreneurs will work arounddisabling environment factors to move their localbusinesses forward, albeit at a slow rate and withhigher transactions costs. As such, if both play-ers suppliers and buyers - believe that the net

economic value of the business partnership isworth more than the resources, time and effortinvested in dealing with standard transactionscosts, complex business registration procedures,local levies, or paying regular bribes, then growthwill take place.

Second, that small-scale institutional innova-tions focused on reducing inefficiencies in supplierto buyer commercial transactions, are more effec-tive than macrotrade and price policy initiatives,which are often far removed from the realities andneeds of district level businesses (Barrett, Bachke,

Bellemare, Michelson, Narayanan, Walker, 2012).This argument is reinforced by international cor-porate strategic management thinking that growthand wealth creation do not necessarily transpire atthe level of a sector or industry but in the ability offirms to create valuable goods and services usingefficient methods (Porter, Ketels, Delgado 2006).

Kenya is a lead example of the potential rolethat, small-holder linkages to small and mediumsized agroenteprises (SMAEs), have in povertyreduction and rural development. Three-quartersof Kenyas population depend on SMAEs and

small-scale farming for a living with the sectorproviding most employment in the country andalmost half of the GDP. Between 2003 and 2009agriculture growth has more than trebled from2.0 to 6.7 percent annually, and the portion of therural population living below the poverty line hasdeclined by 5 percent over the same period (GTZin Schneider, Buehn, Montenegro 2010).

The Kenyan experience coupled with theregions access to huge reserves of arable land andrural labour has contributed to a growing realiza-tion in many African countries that, support forlocal level agribusiness, needs to be a major focusof public policy concern, if agriculture is to be

Chapter 1

Introduction


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Smallholder business models for agribusiness-led development Good practice and policy guidance2

transformed into a competitive sector for develop-ment and poverty reduction (UNIDO. 2011).

Drawing on this genesis, FAO piloted a numberof microeconomic and firm-level analyses (small-

holder supplier to buyer) to identify country-specific, industry-specific, time-specific and mostlyinstitution-specific solutions across local contextsand commodity markets dependent on smallholdersupplies. In this regard, in collaboration with localservice providers, activities were carried out across14 countries, linking approximately 42 farmergroups to 30 small, medium and large agroenterpri-ses for a selection of cash and food crops3betweenSeptember 2008 and December 2011.

While policy guidance for broad value chaindevelopment encompasses an array of strategic entry

points ranging from enhancing agricultural pro-ductivity to upgrading national infrastructure andinvesting in research and development, these activi-ties, as a result of focusing on one core linkage withinthe value chain (producer-first buyer), have enabledthe development of four strategic policy areas. Anappraisal of these areas has subsequently led to theidentification of a number of success factors and poli-cy guidance for fostering smallholder-buyer businessmodels and their role in value chains for agribusiness-led development. As such, this paper covers:

1. Easing the cost and risk of doing business

with smallholders for SMAEs.2. Supporting smallholder competitive advan-

tage for agribusiness-led development.3. Smallholder organizational models for

improved bargaining power and value-chaingovernance.

4. Institutional innovations and strategic valueaddition for sustained value capture.

5. Success factors and policy guidance forstrengthening smallholder-buyer businessmodels within value chains.

3 Africa: Kenya, Zambia Cotton; Zambia, Malawi,Cameroon Cassava; Senegal, Mali, Burkina Faso Rice; Cameroon Coffee, Oil Palm Partners: FarmConcern International, Zambia Agribusiness TechnicalAssistance Centre ZATAC) Centre, IITA, Groupe deRecherche et dEchanges Technologiques (GRET),Amassa Afrique Verte.

Pacific: Samoa, Vanuatu, Solomon Islands, Fiji Fruitsand Vegetables Partners: Samoan Crops CorporationAssociation, Nature Way Cooperative, Farmer SupportAssociation, Kastom Gaden Association.

Caribbean: St. Vincents and the Grenadines, Guyana,Jamaica, Grenada Roots and Tubers. Partners: Carib-bean Farmers Network


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3

A critical role of government in improving theintegration of smallholders into value chains is toensure that policy eases the costs and obstaclesof doing business with small farmers. The role ofsmall firms however in rural development and jobcreation is often not given due credit and recogni-

tion. In addition to being overlooked by develop-ment agencies, where the focus is primarily onmore disadvantaged groups, the regulation ofSMAEs tend to receive very little attention fromthe state as they fall between the policy mandatesof the ministries of agriculture, trade, industry andcommerce (Baker, 2011).

While SMAEs play a critical role in drivingmodernization of the agricultural subsectors andrural employment creation, a number of critical

constraints still need to be addressed before thefull developmental potential can be realized. Tobetter understand the challenges faced and thestrategies required to overcome them, FAOorganized a number of regional agribusinessroundtables with SMAE managers in developing

countries, with a number of interesting lessonsemerging, described in Box 1.

In addition to guiding investment in localinfrastructure development, governments can alsosupport the role of SMAEs in the agribusinesssector by introducing policies that cover a numberof institutional, legal and administrative factors tostimulate a general easing of doing business withsmallholders. The IFC/World Bank annual reviewof Doing Businessprovides an overview of govern-

BOX 1

Lessons from FAO-led SMAE Roundtables

1. SMAEs start as family-type businesses, using

personal savings and loans, based on a vision

and need to generate income and wealth for

the family and relatives. Capitalization and

access to finance is always an issue with few

commercial banking options to choose from

and unreasonable high interest rates and loan

criteria.

2. Large seasonal variations in employment and

pressure from extended family and friends for

jobs is a daily stress for owners and managers.

3. The over-regulation and bureaucracy that

SMAEs face discourage the formalizing of

their businesses.

4. The unreliability and cost of utilities infrastruc-

ture (power and water) lead to waste and loss

of business effecting long-term competitive-

ness.

5. Smallholder challenges related to production,

planning and collective marketing translate

into procurement impediments, resulting in

some firms having to divest scarce resources

to small farmer organization schemes and on-

farm technical assistance to improve supplies.

6. SMAEs often face competition from cheap

imports and as such require support with

market development in developing local brand

differentiation to build up a reliable and loyal

customer base.

7. Business is also highly dependent on a mini-

mum standard quality product. Small compa-

nies however often do not have the capacity

to ensure safe and good quality food or the

resources for certification fees charged to

large firms. With assistance, however, locally

customized quality management schemes can

be put in place.

8. Operations and transport can be a companys

highest cost factor. Again with support on

post-harvest and logistics systems in place a

small company can address a lot of waste and

in-efficiency transforming this aspect of busi-

ness into a competitive advantage relative to

other local companies.

Chapter 2

Easing the cost and risk of doing business

with smallholders


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ments progress in the area, showing for instance,that Cameroon established a one-stop shop forsetting up a business, abolishing requirements forcertifying business premises and fees; Cape Verde

eliminated the needs for a municipal inspection;Congo Dem. Rep. eliminated for the need of acompany seal; and many countries across Africahave introduced online registering of businesses.Box 2 shows the criteria used by the IFC/WorldBank appraisal to monitor the Ease of DoingBusiness in different countries, with Rwanda,Zambia and Cape Verde among the top 10economies for improving the most in the ease ofdoing business in 2009/2010.

Governments can also promote local insti-tutional strengthening with the establishment of

business information centres and support at themunicipality level which, presuming a high qualitystandard, can also be an extremely useful mecha-nism to help small businesses and farmer organiza-tions, through tedious administrative processes. Anexample of this type of service is the award-winningwork of Entebbe Municipal Council on improvinglicensing4(Bannock Consulting Ltd. 2005).

This type of proactive state support to theprivate sector is commendable and is a definitestep forward from a macroeconomic managementapproach to poverty. The challenge however for

policy-makers is to design policies that reach, fixand stimulate market access at the district levelwhere business takes place between farmers andprocessors, traders, transporters, retailers etc.,and reinforce this upgrading with industry policyframeworks that address value-chain collabora-tion and guide competitiveness. National com-modity value-chain strategies and platforms are, toa certain extent, a response to this need and havebecome popular over the past few years as instru-ments responsible for ongoing analyses, interactordialogue, priority setting and channeling public

funding. Some donors such as the EU, will oftennot lend support to a commodity, without thesetypes of strategic mechanisms being in place.

FAOs experience under the EU-funded AllACP Agricultural Commodities Programme5(3ACP), which was designed around the establish-ment or support to existing value-chain platformsand strategies, noted that, while these initiatives

4 The Entebbe initiative won the Africa Investor 2004

award for Smart Regulation presented in Dakar, Sen-egal.5 http://www.euacpcommodities.eu/en

provide an excellent platform for informationsharing and collaboration among actors, there isthe risk that dialogue agendas can be capturedand dictated by individual personalities or groups.For newly commercializing food commoditiesfor instance, such as rice and cassava, micro andsmall-scale enterprises, the bulk of firms in thesector, rarely had a significant voice in value-chaindialogues because of an absence of strong associa-tions representing their interests.

It was also found that value-chain platformscan be over-participatory, addressing all of themain actors agendas without due considerationplaced on strategic prioritization with the resultthat the most essential constraints and prioritiesfor improved competitiveness do not receive therequired attention from follow-up funding oppor-tunities and support interventions.

Cases under the 3ACP also showed that mac-roeconomic policies, in an effort to protect dis-advantaged groups, can hamper the efforts ofresource poor farmers from taking advantage of

market opportunities. For instance, in 2008, sup-port for strengthening rice producers buyer link-ages in West Africa was considered timely withthe onset of the food crisis, when price spikes forcrops such as wheat doubled and for rice tripled ina matter of weeks. Smallholders and SMAEs, set tobenefit from these market conditions, were unableto do so, however, as some governments quicklyset minimum prices and lowered import dutiesin an effort to protect consumers. Ultimatelythe well-intentioned policy changes offered littlerespite and were mostly counterproductive for theother domestic groups who otherwise could havebenefited from the price movement.

BOX 2

Ease of Doing Business

1. Starting a business2. Dealing with construction permits

3. Registering property

4. Getting credit

5. Protecting investors

6. Paying taxes

7. Trading across borders

8. Enforcing contracts

9. Closing a business

Source: World Bank/FC, 2011


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Chapter 2 Easing the cost and risk of doing business with smallholders 5

Experience has also shown that commodityspecific policy support to value-chain developmentshould be carefully designed and based on reliablemarket, policy analysis and public-private sector

dialogue. Targeted interventions also need to beacutely aware of the impact, not only on chainactors and long-term competitiveness, but also onthe potential for adverse effects on substitute andcompeting crops. These types of policy challengebecame evident during support provided to thecommercialization of cassava in Zambia, whereSMAEs efforts to break into the animal feed sec-tor face a major barrier in the form of governmentsubsidies for maize. Conversely in Nigeria, thegovernment over the years has introduced a seriesof policy changes to make High Quality Cassava

Flour (HQCF) more economically viable to thebaking industry than wheat flour. Despite theobvious debilitating effects for actors dependent onwheat flour production, the governments enforce-ment of the policy changes has in the past trans-lated into savings of US$14.8 millionper annuminforeign exchange; net returns to processors fromthis saving has been estimated at US$12.7, andcassava farmers have received in the region a grossbenefit of US$4.2 million (FAO, IFAD, 2004).Using Nigeria as a benchmark example, a keypolicy request emerging from FAO-3ACP support

to the producer-buyer linkages in the cassava sec-tor in both Cameroon and Zambia has been a callfor similar policy initiatives to stimulate the use ofcassava products, such as flour and chips for thebakery and animal feed industries.

In Kenya, commodity and stakeholder specificpolicy interventions for the cotton sector in theform of a minimum farmgate price for cotton wereintroduced in an effort to protect smallholderexploitation and improve the quality of cotton.Stakeholders argue, however, that with so manyfactors determining price, it is difficult for the

government to monitor or predict how a fixedprice is facilitating or adversely damaging theindustry. The strategy in Kenya has led to industryfactions, with the ginneries boycotting cottonboard meetings in protest at the minimum prices,arguing that the policy is squeezing the ginningindustry out of business, promoting cross-borderblack-market trade, and in most cases does notprotect smallholders from price volatility becauseof a lack of enforcement at the local level.

Ultimately, public policy and support is criticalfor fostering competitive producer-buyer busi-ness models, by ensuring that policies covering anumber of institutional, legal and administrative

factors ease the general costs and obstacles ofdoing business within the agricultural sector andwith smallholders. FAO support to smallholderintegration in value chains has shown, that more

care needs to be taken by policy-makers to ensurethat chain specific support does not result in inter-ventions that unduly subsidize or distort marketconditions. Most importantly interventions needto be based on reliable analysis and public-privatedialogue which have impartially identified criticalfactors for improved competitiveness, rather thanon agendas developed by pandering to the needsof politically influential actors.


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7

Public support for promoting smallholder-basedvalue chains must be anchored on the premise thata business case exists for supporting smallholderssupply to the market. A business case is generallybased on the existence of a smallholder comparativeadvantage in supplying a product that satisfies the

buyers needs, better or more effectively than othertypes of suppliers (Johnson and Scholes, 2002).

Firms, which can also include smallholder-based enterprises and SMAEs, when comparedto competing suppliers and enterprises, can pos-sess a competitive advantage from a number ofcircumstances particular to their local context(Porter, 1985), from access to suitable local agro-ecological land and knowledge; basic agroclimaticand hydrological conditions; proximity to appro-priate infrastructure, such as market feeder roads,warehouses, processing facilities; access to cheap

labour and subsidized inputs; good organizationof smallholder supply; and no alternative sourcesof supply (Bennett et al 2012).

By capitalizing on a given competitive advan-tage, smallholders can better compete with otherlarger suppliers by offering a differentiated prod-uct to the market, which can be characterized bya higher quality grade; a lower price; or a nichemarket product destined for fair trade, organic orboutique premium markets.

Provided that there is a business case, the publicsector should contribute to fostering private sec-

tor service provision that reinforces the collectivecore competencies of suppliers through a varietyof actions related to improved production, prod-uct assembly and better access to market-orientedservices, with due care taken not to oversubsidizeor unduly distort market conditions.

Drawing on this principle, a fundamental entrypoint for FAOs support to smallholder-basedvalue-chain development has been the existence ofa smallholder competitive advantage in supplyingthe market. The 2008 food crisis, and the ensuingprice spikes, provided a competitive advantageacross a range of smallholder commodities andimpetus to FAOs programme of work, but, as dis-

cussed above, was short-lived because of policiesput in place to protect consumers. The strengthof the competitive advantage varies according tothe commodity, local market structure and localbusiness enabling environment.

For the case of the smallholder-industrial buyer

linkage model in support of the oil-palm sector inCameroon, smallholders competitive advantagelay in their access to land in the face of forest pro-tection laws prohibiting industry from expandingplantation farming, as well as no alternative localsources of supply and elevated market prices ofcrude oil-palm because of competition from thebiofuel market. For support lent to labour-intensivehand-picked cash crops, such as coffee and cotton,abundant and low cost labour is the main small-holder advantage, as well as local agro-ecologicaland product knowledge, particularly in arid areas

and for drought resistant crops such as cassava.Before investing in a smallholder-based value

chain the public sector needs to appraise if down-stream actors are also convinced of a smallholdercompetitive advantage in supplying a product.In other words, buyers need to believe that therisks of doing business with smallholders willbe covered by net value of the final transaction.Risks can include: not meeting quality standardsspecified by the market; inconsistent supply ofagreed quantities; contract hold-up because ofside-selling; and reputational risk based on public

perception of exploitation of smallholders by buy-ers. It can be conceded, therefore, that the morewilling the buyer is to assume the risks of dealingwith smallholders and withstanding initial trialsand errors of supply, the stronger the smallholdercompetitive advantage.

A key lesson to emerge from FAO programmeof support to smallholder-based value-chain devel-opment has been the need to better understand andmanage buyers risks in order to increase procure-ment from smallholders, with the realization thatmore focus needs to be on the sourcing decisionsof buyers rather than the market opportunitiesof smallholders. During FAO consultations with

Chapter 3

Supporting smallholder competitive

advantage for agribusiness-leddevelopment


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agro-enterprises in various ACP countries, itwas noted that buyers evaluate the associatedrisks of doing business with smallholders accord-ing to various factors, including: land tenure;

agro-ecological knowledge and skills relative tothe crops characteristics; proximity to markets;membership of a functioning farmer organization;local infrastructure and transport; and local andnational business enabling environments.

Companies also noted that because of a highprobability of some level of side-selling on inputsand contracted produce, a decisive factor in doingbusiness with smallholders was the level of credit,inputs and technical assistance required by suppliers,and the impact of this diversification of resourcesaway from potential buyers core business.

Access constraints to finance, inputs and techni-cal assistance is nonetheless endemic across allsmallholder-based agriculture commodities indeveloping countries, and without improved accessit is difficult for small farmers to compete in modernmarkets. Obstacles, however, are not just confinedto credit and finance but form part of the overallmalfunctioning of smallholder- based value chains,interrelated with problems regarding confidence ofcommercial banks in financing smallholders andguaranteed collateral; absence of reliable and func-tioning agricultural inputs and services markets;

collective bargaining power of smallholders; feasi-ble diversification strategies; appropriate targetingof markets; sound business plans; and the abilityof producer organizations to manage business andfinancial operations of their members.

In short, the issues of access to finance needto be tackled from a value-chain position, witha view to long-term sustainability, rather thanbeing resolved through punctual and isolatedsubsidies in the form of agriculture inputs, equip-ment, revolving funds, grants, etc. National andlocal government can promote this message and

approach, promoting the good practice that non-financial alternatives are considered before directfinancial support is provided to any actor along avalue chain.

As described in Box 3 practical public supportcan include brokering linkages with microfinanceinstitutes and other commercial banking and inves-tor groups; neutrally facilitated dialogue spaces thatbring together financial providers and potentialvalue-chain clients; technical assistance to farmerorganizations or SMEs in compliance with bankcriteria; facilitating linkages with exporters; andsound market outlets providing financiers withmore lending confidence (Miller, Jones 2011).

Assuming the existence of a business casefor fostering and supporting smallholder-basedvalue chains, a top priority for the public sectorsubsequently needs to be a combination of institu-

tional strengthening and the creation of conditionsso that local communities, local governments,non-governmental organizations (NGOs) and theprivate sector (including producers) mobilize theirown resources to invest in agribusiness so thatpublic support can be applauded for crowding-in rather than impeding potential private invest-ment (Staatz in Yumkellaet al.2011).

BOX 3

Strengthening linkages betweensmallholders and financial service providers

Business model appraisals were commissioned to

identify constraints, but most importantly the criti-

cal success factors required to strengthen the

producer-buyer relationship. In anticipation of the

identification of access to finance and inputs as a

constraint, initial support for all cases immediately

commissioned a local financial landscape appraisal

and implementation plan for linking smallholder

groups to existing local financial products and serv-

ices. The objective of the review was to dissuadethe provision of subsidized inputs that contravene a

business approach to smallholder-based agriculture,

and promote a strategy whereby representatives of

smallholders engage in dialogue with financial serv-

ice providers to design bankable products.


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9

Interest in value-added commodities has grownover recent years with farmers, traders and smallagroprocessors working towards the adoptionof mechanized technologies in an effort to earnhigher returns that are typically captured byupstream actors (FAO. 2007b.). Value addition

is also often synonymous with investments inhigh-value processing, however significant valuecan be added to raw produce without changingthe physical form of the product by introducingactivities including for instance, cleaning, gradingor labeling. Value can also be added by puttingin place logistical, marketing and quality controlsystems that mostly involve strategic planning andcooperation with value-chain partners.

Value subtraction rather than value additioncan occur however when the end buyer is notwilling to pay a higher price for the product that

more than compensates for the cost of the invest-ments in value addition. This can often be the casewhen subsidized investments are made in mecha-nization, tractors or processing equipment, whichencourage firms to adopt capital-intensive, labourdisplacing technologies where labour is abundantand cheap, relative to capital scarcity and highinterest rates (Staatz in Yumkella et al, 2011).

During consultation processes carried out byFAO with farmer groups and supporting localNGOs to prioritize interventions for improvingproducer-buyer linkages, numerous calls were

voiced for support on investments in agroprocess-ing technologies. Motives were noted to be, how-ever, supply-push rather than market-led, with lit-tle background carried out on feasibility studies orcomparative advantage appraisals for diversifyinginto a new business and market. Ultimately, manyof the proposed additional income-generatingand value-addition activities added very little interms of competitiveness and mostly resulted inthe diversion of the groups resources and atten-tion away from improving their core business ofproduction and marketing.

In the case of support to the palm-oil sectorin Cameroon, for the most part, participating

farmer groups were struggling to compete on thebasis of their core business, that is, their ability togrow and supply Fresh Fruit Bunches (FFB) tothe market. Farmer groups and supporting localNGOs were, nonetheless, particularly keen totake on medium-scale processing units to capital-

ize on the high price per litre of crude processedoil (CPO) during the food crisis 20072008. Afeasibility analysis revealed, however, that returnson investments were, per kilo harvested, higher ifthey sold their raw product directly to industryfor processing. Table 1 shows a comparativereturn on investments across three smallholdercooperatives, which clearly demonstrated to thegroups with direct sales to industry without valueaddition (MAIIF Coop) had a higher return oninvestment compared with neighbouring coops(SOCOMAK, SOCOAP) which focus their activ-

ities on processing crude palm oil for the localwholesale market.

Experiences have also shown that the transfor-mation of agricultural raw materials into highervalue products does not only depend on invest-ments in new agrofood technologies but also onvalue-chain systems and capacities that are putin place to reduce transaction costs (UNIDO.2011). Under the aegis of the 3ACP, the WorldBank identified three sites for the location of tech-nologically appropriate Coffee Washing Stationswith initial training provided in the running and

maintenance of the stations. After some monthsFAO, in collaboration with the World Bank, CafAfrica and the Coffee and Cocoa Board of Cam-eroon, developed a capacity building programme,after it became evident that the stations were atrisk of failure because of the need for additionaland reiterative trainings, not only in the runningand management of the new technology, but alsoin agribusiness and marketing skills, required toenable the group to survive and interact within anew value chain. To ensure that high cost capitalinvestments in agroprocessing are capitalized on,the support provided demonstrated the impor-tance of delivering complementary and reiterative

Chapter 4

Institutional innovations and strategic

value addition for sustained value capture


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capacity building in a range of skills, that not onlymatch the new technology acquisition, but alsothe new target market and value chain.

Based on the cases outlined above and the

type of support delivered, two key messageshave emerged from FAO support to smallholderintegration into value chains. First, before publicsupport is provided to farmer groups or SMEs tomove up the value chain, care needs to be takento ensure that groups excel at their core functionand as such are considered reliable chain partners.Second, that low capital intensive value-additionstrategies and organizational innovations can be

more effective in the medium term, than high costtechnologies, as products can be marketed to local,national and regional markets with similar con-sumer preferences, and where fewer requirements

are needed to conform to standards demanded byconsumers in developed countries.

TABLE 1

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

Activity/Item MAIIFA COOP SOCAMAK SOCOAP LH

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

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

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

D. Fertilizer (150 kg) 0 0 0

E. Farm tools 15 000 15 000 15 000

F. Road maintenance 5 000 5 000 5 000

G. Harvesting 30 000 30 000 30 000

H. Maintenance fees 30 000 38 000 38 000

I. Depreciation 25 000 25 000 25 000

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

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

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

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

N. Purchase price of 1 tonne 40 000

O. Cost of transportation to mill 21 000 10 000

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

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

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

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

T. Price per litre CPO 450 500

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

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


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and technical advice based on the buyers needs,also known as contract farming. In conclusion,intermediary models that are commonly led bylocal NGOs involve the provision of technical

assistance and support to identify and improvesmallholder market linkages.

As such, traditional farmer organizations areonly one of a number of ways for organizing thesupply of smallholders products through a valuechain to the market, and to varying contextualdegrees offer farmers the space to collectivelyface the demands of modern agriculture, with thecoordination of activities, such as bulk buying ofinputs, collective marketing, negotiating creditand contracts, and lobbying policy makers.

If successful, collective action can address

key constraints related to high transaction costs,entry to higher value markets, and access to busi-ness development services and finance, and moreimportantly, can enable a renegotiation of powerrelations in the chain.

Porters Five Forces Theory explained inBox 4, enables a better understanding of howpower is established and maintained in a chain,and is useful to gauge and measure bargainingpower. However, for smallholder-market integra-tion, there are a series of dysfunctional marketcharacteristics that generally prevent upstream

players from benefiting from apparent strengths.The cases supported by FAO show that, while itis unrealistic and unviable to expect a level-playingfield, an overtly skewed lack of relative bargain-ing power for any player in the chain, not onlyimpedes the progress of the given actor, but alsoadversely impacts on partners on either side of itstrading base, effecting the overall functioning ofthe entire chain.

This was seen in the case of the rice sector inWest Africa, where the circumstances showedthat the skewed bargaining power of one actor,

the women parboilers in this case, can impedethe overall progress and competitiveness of theentire chain. In Burkina Faso, for instance, womenparboilers are, similar to other countries in theregion, an important actor in the rice value chainand a major buyer for rice producers. Despite thegroups having secured a market for large volumesof parboiled rice, they lacked access to credit toaugment their orders from smallholder producersbecause of significantly less bargaining power thanthe rice producers association. As a solution tothe issue, facilitated seller-buyer meetings wereorganized where it was agreed that the producersassociations would supply rice at 50 percent cred-

it, with the balance being paid after the parboiledrice had been sold, resulting not only in a simplewin-win solution for the buyers and sellers, butalso an improvement in bargaining power for theparboliers group and a realignment in the chain.

For value chains that are made up of fragmentedactors, either buyers or sellers, collective action iscrucial, not only for improving relative bargainingpower, but also for overall chain alignment andefficiency. Collective action is most often thoughtof in terms of smallholder organizational models,but FAO support to smallholder-buyer linkage

initiatives has shown that addressing the frag-mentation and collective capacity of buyers is asimportant for the overall effectiveness of the chainand smallholder inclusion.

Support to a cassava smallholder-SMAE link-to a cassava smallholder-SMAE link-age case in Malawi demonstrated the smallholderbenefits that can be accrued from trading withprocessors that are collectively organized aroundan association which provides services for marketlinkages, product promotion and lobbying. Byworking together as an association of small-agro-processors, the group was better able to informsmall suppliers of the sub-sectors requirementsas well as arranging collection points. The col-

BOX 4

Criteria for assessing smallholder

bargaining power

Smallholder bargaining power is adversely weak if:

there is collusion among buyers, particularly if

the volumes of purchases are high;

there is a lack of collusion among suppliers due

to high number of fragmented smallholders;

there is a local functional farmer organization

to support smallholder collection action;

there are alternative supplies, for instance,

from more commercial farmers, or through

cheaper imports;

the cost of switching suppliers for the buyer

is relatively easy, for instance, if there are nolong-term contracts;

the product being supplied is undifferentiated,

with many supply sources; such as products

with little value addition e.g. seed cotton.

Source: Porters Five Forces Theory (1980) (in Johnson and Scholes 2002)


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Chapter 5 Smallholder organizational models for improved bargaining power and value-chain governance 13

lective action of the buyers resulted in improvedsmallholder confidence in a market outlet whichled to improved production planning, and overallconsiderably offset the diseconomies of scale from

unorganized smallholders.Support to smallholder collective action for the

cotton sector in Kenya is another good exampleof how groups can work around institutionalobstacles by promoting smallholder group set-upsbased on the members needs, and the local mar-keting requirements of cotton, which contributedsignificantly to an improvement in smallholder-ginnery relations. Support provided to cottoncooperative-ginnery linkages in Kenya found thatcooperatives were often non-functional because ofsome type of internal conflict and political strife.

Appraisals also noted that a lack of success inmembership recruitment was also because of thepolitical stigma associated with the cooperativemovement from the pre-structural adjustmentera, a common trait across a number of Afri-can countries. To work around this institutionalobstacle, in consultation with local cooperativemanagement and the Ministry of Cooperatives,smallholder cotton marketing groups were organ-ized outside of these structures, to avoid associa-tion with politically aligned groups. The groupdesigned rules of membership suitable to their

needs, and the marketing requirements of cotton,contributing significantly to an improvement insmallholder-ginnery relations.

These cases have shown that institutional inno-vations that are grounded in the realities of thelocal context can add considerable value to the roleof smallholder groups in value chains. To supportthis process there are a number of ways in whichthe state can indirectly enable collective action by,first, not creating or dismantling over bureaucraticlegal rules of institutional organization, bearing inmind that the organizational form that minimizes

ownership costs has the greatest probability of sur-vival. (Cook, Burress, 2011). Ultimately, as muchroom as possible should be allowed for groupsto design membership and organizational ruleslocally to ensure coherence with the local culturalcontext and marketing needs of the targeted com-modities (Markelova, Meinzen-Dick, 2009).


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Based on an appraisal of the strategic areas out-lined above, the below covers, (a) a review of keysuccess factors for strengthening farmer-basedorganizational models8, and (b) a number ofpolicy guidance principles for promoting local-ly-led market linkage innovations for fostering

smallholder-buyers business models and their rolein contributing to competitive value chains.

6.1 SUCCESS FACTORS FORSTRENGTHENING SMALLHOLDERORGANIZATIONAL MODELS:

The following factors have been identified as keyfor strengthening the role of smallholder organi-zational models and their overall position in thevalue chain:

Non-politically aligned organizations: Thereis a lingering political stigma associated withfarmer organizations and cooperative terminologyin Africa, with groups preferring to disassociatethemselves from past connotations of politicallyaligned organizations in order to be viewed aspractical and market oriented service providers fortheir members.

High quality service provision: In order toretain and recruit farmers, members must valuetheir membership based on the provision of paidhigh quality services, some of which may be

outsourced, such as: the identification of mar-ket outlets, product assembly, training, technicalassistance and advice.

Social and enterprise strategies:In the absenceof local social services, farmer organizations areoften compelled to address the priorities of thecommunity. These activities should be managedseparately from agribusiness related activities,

8 This list is not intended to be a comprehensive list of

all necessary requirements for linking farmers to mar-kets, as the prioritization of factors will vary accordingto local institutions, markets and commodities.

which should take precedence as they are directlylinked to poverty reduction and the financialsustainability of the organization.

Network membership: Primary level organi-zations need to be part of a wider network thatlinks members to information on new technical

ideas, markets and funding opportunities outsideof their community.

Focus on core business: Farmer organiza-tions need to, first, excel on their core functionof supporting members to improve productivity,production planning and marketing; and, second,have acquired the appropriate marketing andmanagement capacities, before diversifying activi-ties and resources into additional enterprises suchas capital intensive value adding agroprocessingtechnologies.

Low cost value addition through organi-

zational innovations: If compatible with theircore business, farmer organizations can play animportant role in adding value to their membersproduce through organizational innovations andsupport with activities, such as sorting, grading,production planning and logistics, which do notrequire high cost capital investments.

There is no one-size-fits-all:Farmer organi-zation models can range from traditional market-ing cooperatives and farmer bargaining associa-tions to informal groups. The models identified asthe most likely to succeed are those that are

formed on the basis of local cultural contexts andthe marketing needs of members.

Understanding the needs and risks of agri-business companies:There are a number of risksthat agro-enterprises face when buying fromsmallholders from inconsistent quality andquantity of supply to side-selling and reputationalrisk based on public perception of smallholderexploitation. To minimize these risks an importantrole of farmer organizations is to remain in con-stant dialogue with buyers and guide smallholdersin responding to market requirements.

Chapter 6

Success factors and policy guidance

for strengthening smallholder-buyerbusiness models within value chains


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6.2 POLICY GUIDANCE PRINCIPLES FORSUPPORTING SMALLHOLDER-BUYERBUSINESS MODELS

The following principles have been identifiedas key for guiding policy support that strength-ens producer-SMAE business models and overallposition in the value chain:

Formalization of the shadow economy: Thevast majority of agro-enterprises operating in theinformal sector seldom grow sustainably, makinginformality a major obstacle to economic growthand major focus of public policy concern if agri-culture is to be transformed into a legitimate andcompetitive sector for development and povertyreduction.

Good governance and management systems:A departure from farmer organizations that aredogged by nepotistic and paternalistic behaviourpatterns is needed with more support for struc-tures that promote transparency good leadershipwith knowledge about target commodity markets,combined with transparent financial and man-agement systems capable of delegating tasks toexperienced staff.

Easing the costs of doing business locally:SMAEs can provide smallholder groups withreliable market outlets. As such their role in rural

development is often not given due credit andrecognition. To this end, a general easing of doingbusiness locally for SMAEs can significantly con-tribute to the role of farmer organizations in link-ing smallholders to markets.

Coherence with local cultural and marketcontexts: Support should focus on dismantlingsuperfluous rules and regulations and not createover-bureaucratic legal rules for voluntary organi-zations; promoting the design of membership andorganizational rules that are coherent with thelocal cultural and market contexts.

Due care in not creating dependency syn-drome:Any direct support to SMAEs or farmerorganizations in the form of subsidies, equipmentor credit funds should not unduly subsidize activi-ties that can create a dependency syndrome onpublic support and threaten the long-term sustain-ability of a business.

Creating an enabling environment for pri-vate sector investment: Targeted support shouldnot distort local market condition or crowd outpotential private sector investment, with condi-tions created that allow farmer organizations andSMEs to mobilize their own resources to investin agribusiness.

Long-term public commitment with short-term interventions: Farmer-based organizationslearn and grow, sometimes fail and in many casestake a long time to mature. Organizations need to

know that they have the long-term commitmentof the public sector, which is based on, whenrequired, short-term sustainable interventionswith clear exit strategies embedded.

Support to broad-based innovation: Institu-tional strengthening of agriculture and businessservice providers, and location of industrial tech-nology and innovation centres as close as possibleto SMAEs.

Local government support for SMAEs:Localgovernment officials, if given the mandate, capac-ity and resources, can monitor the provision of

service provision, identifying capacity and servicesgaps, and establishing linkages with national fora,technical training institutes and potential investors.


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This paper advocates agribusiness-led develop-ment based on increased public support for small-scale, locally-led institutional innovations andprivate sector investment that foster businessbetween local farmers and buyers. As these typesof innovations are generally carried out under

context specific settings, involving an array oflocal institutions, markets structures and com-modities, they are however, often difficult toupscale, constituting a common argument againstthis type of public support.

Rather than gauging the success of supportbased on the possibility for replication, successstories emerging from these cases should be morewidely publicized and disseminated for adaptation,customization, and primarily for stimulating ideason organizational and institutional innovations atthe district level based on good business practice.

The role of policy in promoting these innovationsis critical, but needs to be anchored on the exist-ence of a smallholder competitive advantage anda private sector willing to do business with smallfarmers. This paper, based on practical field-basedinitiatives, provides some practical guidance onhow public policy can support this trend.

Conclusions


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