Value Chain Financing:

The Case of Selale area Dairy Value Chain

By

Getnet Haile Debebe

December 2010

Addis Ababa

Value Chain Financing:

The Case of Selale area Dairy Value Chain

By

Getnet Haile Debebe

A project study submitted to the school of Graduate Studies

of Unity University

in partial fulfillment of the requirements

for the Degree of Masters of Business Administration

December, 2010

Addis Ababa

School of Graduate Studies,Unity University

Value Chain Financing: --The Case of Selale area Dairy Value Chain

By: Getnet Haile Debebe

Approval of Board of Examiners

External Examiner

Name 7!~,~ SJ;be{{Y/')) )

Signature~~ .Date A ~/; )..-/1--0

Internal Examiner

Name,'4( ,'"

Signatu~

Date d-,

Confirmation

Chairperson, Department Graduate Committee

Name _

Signature _

Date -------

Letter of Declaration

I, Getnet Haile Debebe, declare that this research paper on the topic "Value Chain Financing: A case

Study of Selale area Dairy Value Chain" is completely a result of my work. I have carried out the paper

independently with the support and guidance ofthe research advisor, Dr. Tades~e Negash

Getnet Haile

October, 20 I0

Addis Ababa, Ethiopia

Unity University

Certification

This is to certify that Getnet Haile Debebe has carried out his research work on the topic entitled "Value

Chain Financing: A case Study of Selale area Dairy Value Chain" under my sup,ervision.

This work is original in nature and it is suitable for the award of the Masters Degree in Business

Administration (MBA).

Tadesse Negash, PhD

October, 20 I0

Unity University

Addis Ababa, Ethiopia

i

ACKNOWLEDGEMENT

I am grateful to my family, especially to my wife, WODERYELESH HABTIHUN for her

incredible assistance throughout this MBA program. I also want to thank Ato Yeshiwas Mamo

who advised me to join this program. Ato Alemayehu Takele is a special person who provided

me a lot of ideas and support during my study.

It is important also to mention the cooperation of my colleagues at Target Business Consultants,

especially in gathering of resources for the study and of covering part of my responsibilities in the

company and at home too during my absence. Aster Habtihun, Teferi Admasu and Addis

Yitbarek play important roles in this regard.

Finally, I would like to thank my advisor, Dr. Tadesse Negash for his dedicated support and

tolerance for my plenty of re-scheduling request for discussions during this study. His fatherly

advices and sharp critics are unforgettable.

ii

ACRONYMS

AI Artificial Insemination

CBE Commercial Bank of Ethiopia

Coops Cooperatives

CSA Central Statistical Agency

EIC Ethiopian Insurance Corporation

FAO Food and Agriculture Organization (of United Nation)

FINIDA Finland Development organization

GTZ German Development Organization

ILO International Labor Organization

IIRR International Institute for Rural Reconstruction

KIT Royal Tropical Institute (The Netherlands)

LDE Lame Dairy Enterprise

MCC Milk collection center

MFIs Microfinance Institutions

NAIC National Artificial Insemination Center

NGOs Non Governmental Organizations

SAI Sebeta Agro Industry

SDDP Smallholders Dairy Development Project

SMEs Small and Medium Enterprises

SNV Netherlands Development Organization

UHT Ultra Heat Treated package

UNDP United Nation Development Program

USAID United States International Development Organization

WOCCU World Council of Credit unions

iii

ABSTRACT

Value chain is a recent concept in Ethiopia. It has been promoted by different

development organizations and Ethiopian Government with the objective of enhancing

the livelihood of rural community and urban and peri-urban entrepreneurs. This study

examines value chain financing, one of the important issues in the value chain study. The

study is based on a case study on the Selale Dairy Business Value Chains. The chain

extends from dairy farmers to end consumers of dairy products.

Value chain as a concept examines the inter-relationship between the various actors

involved from production, collection, processing, retailing and consumption. Whereas

traditional value analysis focuses on a specific sector. Traditional farmers, commercial

farmers, collectors including cooperatives, union and individual collectors, milk

processors, other dairy product processors, supermarkets, kiosks, cafes and restaurants

are identified as important actors. These actors are classified as direct actors, indirect

actors and chain supporters who are working in the overall chain context which includes

the macro level issues like the economic, the political environment, the legal framework,

the physical environment, the culture and society and many more.

In relation to the dairy sector, Microfinance Institutions (MFIs) and Commercial banks

are identified as non-suitable to the lower level of value chain actors. Actors at the lower

level of the value chain are the farmers, individual collectors, cooperatives and the Union

(Selale Dairy Cooperative Union). There is a serious financing gap to this part of the

chain actors. Whereas actors at the higher level of the chain, like processors are well

financed. The lower levels of the chain actors are providing credit financing which

reaches the processors. For the efficient flow of products and value additions all the way

through the various actors financing services need to be available. The study recommends

a triangular inter-relationship of actors with MFIs and commercial banks to share risks

and to lower transaction costs, to fill in the financial gaps observed at the lower level of

the value chain actors. In addition to financing, milk quality, unfair competition,

marketing, weak milk consumption cultures, feed quality, access road and cost of inputs

are identified as serious challenges to the dairy value chain.

iv

Table of Content

Page

ACKNOWLEDGEMENT i

ACRONYMS ii

ABSTRACT iii

CHAPTER 1 1

INTRODUCTION 1

Background 1

Problem Statement 3

Study Objective 4

Research Questions 4

Study Scope 5

Study Significance 5

CHAPTER 2 6

LITERATURE REVIEW 6

Value Chain 6

Value Chain Finance 9

CHAPTER 3 12

FRAMEWORK ON VALUE CHAIN FINANCE 12

Value Chain Context 12

Chain Supporter 13

Chain Actors 13

Financing needs 14

CHAPTER 4 15

RESEARCH METHODOLOGY 15

Background 15

Data Collection 15

Interview 15

Discussion 16

Document Review 16

Sample taken 16

Analysis and Design 17

v

CHAPTER 5 18

STUDY FINDINGS 18

The Selale Dairy Business 18

The milk value chain 20

Chain Actors 21

Chain Supporter 28

Chain Context 31

Challenges and Opportunities 32

Financing Challenges and Opportunities 32

Non Financing Challenges and Opportunities 36

Milk Quality 36

Unfair competition 37

Marketing 37

Weak consumption culture for Dairy products 38

Feed cost and quality 38

Road accessibility 39

Machinery Cost 39

CHAPTER 6 40

CONCLUSION AND RECOMMENDATION 40

Conclusion 40

Chain Financing: Strong points 40

Chain Financing: Weak Points 41

Recommendation 43

Bibliography 48

Appendixes

Interview: Farmer Producers

Interview: Cooperatives

Interview: Processors

Interview: Microfinance Institutions

Interview: Commercial Banks

Interview Service Providers/NGOs

Additional common interview checklists

List of interviewees

1

CHAPTER 1

1. INTRODUCTION

Background Value chain is a recent concept in Ethiopia. It has been promoted by different

development organizations and Ethiopian Government with the objective of enhancing

the livelihood of rural community and urban and peri-urban entrepreneurs. For many

years, developing countries were striving for ensuring food security of the rural

community through different development activities to improve farm productivity. There

were remarkable improvements in farm productivity in the past. In some parts of the

country, farmers were challenged with price decline for their produce as their supply

increases beyond the market size of their village or nearby small town. This in turn

diminishes the net value of return from their agricultural activities. On the contrary, such

farm products are sold at a higher price elsewhere in the country. Market access is

becoming major problems ahead of issues of productivity. That is why value chain

concept becoming famous and kept dragging the attention of development organizations

and governments, with the objective of addressing the market linkage problem of the

rural community (SNV Annual Report 2009, Page 17, 20, 31) (World Bank 2009, P.34).

What is value chain? According to Kaplinsky and Morris, value chain describes the full

range of activities which are required to bring a product or service from conception,

through the different phases of production (involving a combination of physical

transformation and the input of various producer services), delivery to final consumers,

and final disposal after use (Kaplinsky and et al 2000).

Some describe value chain in a simple phrase as ‘F to F’; which is from Farm to Fork,

where farm indicates the producers and the fork indicates the end consumer. In the value

chain there are direct actors (like producers, traders, processors, retailers and consumers),

indirect actors (input suppliers, financial service providers, other service providers),

2

enabling environments (policies, infrastructures, legal system etc).

Existing value chain can be strengthened through the intervention of service providers,

government, with the communication of the various actors. Value chain can also be

created or deceased.

In Ethiopia, different value chain initiatives have been accomplished in the past

pioneered mainly by development organizations. Value chain studies were conducted for

livestock, sesame seeds, milk, honey, teff, fruits and vegetables, poultry and other

products in different localities. Interventions were made by government and NGOs for

development and enhancement of value chains. So much learning and achievements are

registered from the process (SNV 2009, Kahsay and etal 2008, IFPRI 2010). Value chain

development is not however an easy task. It is mired by various deep rooted challenges.

Among these challenges financing is at the forefront. Access to adequate and timely

financial services for all actors in the chain is essential. Like the large producers and

traders small producers and traders need finance for efficient performance in their

respective spot within the value chain. But, such finances are not always available to

mainly to those working in agricultural and rural value chain. Regular banks will not

operate in rural finance as it is perceived as risky and costly. Microfinance Institutions

are also inaccessible because of their low level of single borrower limit, limited coverage,

and high interest rate. Risks related to agriculture such as crop failure, diseases and

market fluctuations coupled with no or limited availability of insurance products and

absence of strong collateral makes such segments unattractive to these banks.

Commercial Bank of Ethiopia has been providing loan for unions and cooperatives in

special circumstances like for the purchase of fertilizers against government guarantee

(KIT 2010) (WOCCU 2009).

According to Royal Tropical Institute and IIRR, most microfinance institutions prefer

urban or peri-urban areas in a standard and group based system, which usually unfit for

the needs of small farmers (KIT 2010).

Value chain finance is then linking of financial institutions to the value chain, offering

3

financial services to support the product flow, and building on the established

relationships in the chain. It means that the product flow in the value chain is used as a

carrier to provide financial services. This way of financing can spread risk among the

financial institutions and chain actors and provides alternatives to traditional collateral

requirements. It provides tremendous potential for unleashing capital, scaling up and

sustaining chain prospects, but it needs to be managed and organized well (KIT 2010).

Problem Statement Lot of efforts is currently underway in linking the rural community to market with the

objective of enhancing the livelihood of the rural community and of the growth of the

overall economy. Value chain concept is at the forefront in these efforts. Establishment of

market and collection for different product markets, provision of training on business,

product quality, value chain governance, provision of seed money and technical

assistance to different actors in selected value chains are among the type of efforts made

(Target 2008). Remarkable achievements are declared by promoters and actors in the

value chain because of such interventions (SNV 2009). However, sustainability and

efficiency of value chains are challenged by a serious finance gap (KIT 2010).

As indicated above, regular banks are not suitable for such actors mainly because of

collateral issues and high cost of managing small transactions. Though microfinance are

mushrooming in Ethiopia and doing well in microfinance, small and medium size

businesses including cooperatives experience major problems in borrowing money for

their operation and investments mainly in rural areas. This research is expected to find

out the constraints, challenges, risks, best practices in financing of the rural producers,

cooperatives and small traders in the context of value chain.

The problem of finance gap is significant to a country like Ethiopia where agriculture

constitutes about 43.2% of the economy and a source of living for about 84% of the

population (CSA 2007, CSA 2009). In addition, small and medium size business is

believed to be a backbone of developing economies (Thitapha 2002).. When it comes to

specific dairy sector, the consumption level for dairy product is said to be low in Ethiopia.

It is unclear why this happen while Ethiopia is among the largest livestock population

country

4

Study objectives The overall all objective of this study is to address constraints, challenges and good

practices of delivering financial services to rural producers and agribusinesses. It is the

objective of this study to suggest innovative ways of value chain financing. In addition,

the study:

• assists the development effort of the government and NGOs involved in value chain

development in resolving finance gaps,

• assists value chain actors to benefit out of the proposed value chain financing

options for the smooth flow of products and services,

• promotes the sharing of equitable the risk and cost of financing among actors and

financiers,

• suggests approaches to banking and other financing institutions to benefit from a

strong value chain at cost effective and low risk manner than they used to perceive,

• helps researchers for further validating and upgrading the findings of this research,

and

• assesses the demand, supply and consumption patterns in the Selale Dairy Business

Value Chain.

Research questions i. What are the impact of banks and microfinance institutions in strengthening value

chains of selected products?

ii. What is the extent of finance gap of the rural entrepreneurs?

iii. What are the potential cultural setups which facilitates the introduction of new

financing products?

iv. What are the legal, political, infrastructural and technological aspects in

supporting the financial links of the various actors and in terms of risk

minimization in the process of value chain financing?

v. What are the possible courses of action to be accomplished or intervened by

NGOs, government, microfinance institutions, banks, and actors?

5

vi. Does value chain financing bring a real impact on strengthening value chain?

Study Scope The study is limited to value chain finance issues in the rural, peri-urban and urban areas

of Ethiopia taking the Selale Area Dairy Business Value Chain as a case. Selale area is

the largest milk shed in Ethiopia involving a range of actors. Accordingly, this case study

represents dairy and other agricultural based value chains in Ethiopia in relation with

value chain financing.

Study Significance

The financing part of value chain study is not well explored in Ethiopia. This research is

expected to suggest workable approaches in addressing financing bottlenecks in value

chain development.

The research will give more information to financial institutions how they could benefit

from the potential market by proper mitigation of risks and lowering of running costs of

financing.

The research is expected to give insight to the government and NGOs on how to

intervene to address financing gap which has been one of the causes for failures to some

value chain initiatives.

The research identifies the relationship of the various interventions in relation with value

chain finance and the efficiency of the value chain. Other researcher will benefit from

this study to use it as a reference to undertake similar studies and will serve as filling

some of the gaps that have been observed in earlier related researches.

6

CHAPTER 2

2. LITERATURE REVIEW Value Chain The term value chain is used by Michael Porter in his book entitled: Competitive

Advantage published in 1985. Porter’s value chain concept refers to the series of value

created by a firm in terms of competitive advantage. Porter introduced a generic value

chain model that comprises a sequence of activities. He classified them as primary

activities and support activities. The goal of these activities is to offer the customers a

level of value that exceeds the cost of the activities, thereby resulting in a profit margin.

Primary activities include inbound logistic, operations, outbound logistics, marketing and

sales and services. The primary activities are supported by infrastructures of the firm,

human resource management, technology development and procurement.

Unlike the meaning of value chain to business competitiveness, in the recent past

development organization and practitioners are using the term value chain in a deferent

perspective to address the activities, the actors, the stakeholders of a certain product or

services from production (or farm) all the way through the various distribution points to

the final consumers. In addition, indirect actors, service providers and enabling

environments are part of the value chain analysis in this context. While Porter’s value

chain is emphasizing the competitiveness of a firm, the concept of value chain by

development practitioners is focusing on the overall efficiency of a value chain for the

betterment of all actors, with special emphasis to the rural poor communities, with

equitable interrelationship among actors and service providers.

This research proposal is focusing on the concept of value chain from development

perspective. Various practitioners defined and formulated different approaches for value

chain development. Kaplinsky and Mike Morris in their book entitled: Hand Book of

Value Chain Research (2001, page 8) describes value chain as: the full range of activities

which are required to bring a product or service from conception, through the different

7

phases of production (involving a combination of physical transformation and the input

of various producer services), delivery to final consumers, and final disposal after use.

Another similar definition of value chain, from International Labor Organization (ILO)

Operational Value chain guide (2007, page 5) defined it as: a sequence of target-oriented

combinations of production factors that create a marketable product or service from its

conception to the final consumption. This includes activities such as design, production,

marketing, distribution and support services up to the final consumer. The activities that

comprise a value chain can be contained within a single firm or divided among different

firms, as well as within a single geographical location or spread over wider areas.

The value link manual of GTZ (Development organization of Germany) defined value

chain as a sequence of related business activities (functions) from the provision of

specific inputs for a particular product to primary production, transformation, marketing,

and up to the final sale of the particular product to consumers (the functional view on a

value chain). This particular definition is related to Porter’s definition of value chain as it

is related to a specific business perspective. The same manual, defined value chain as an

alternate definition as the set of enterprises (operators) performing these functions i.e.

producers, processors, traders and distributors of a particular product. Enterprises are

linked by a series of business transactions in which the product is passed on from primary

producers to end consumers. According to the sequence of functions and operators, value

chains consist of a series of chain links (or stages)(GTZ 2007, page 11).

According to Kaplinsky and Morris, value chain analysis resolves the weaknesses of the

traditional sector analysis, which doesn’t look into the inter linkage between interrelated

actors in a given market chain (Kaplinsky and Morris 2001, page 6).

Value chain guide of the World Bank explains how value chain analysis differs from the

traditional sector analysis:

“Identifying dynamic linkages between productive activities, value chain analysis

transcends traditional economic and industry sectors by showing where value is

added in production process.”

8

“Value chain analysis focuses on net value added instead of overall size and gross

output.”

“Traditional industry sector analyses often do not sufficiently determine the

distribution of value added between activities, both within and between countries, or a

country’s current insertion in local markets.”

“Value chain analysis thoroughly examines information flows among actors in the

value chain unlike typical industry analysis.”

“Segmenting the value chain allows for better understanding of the constraints and

\opportunities within each segment, as well as the context in which the chain

operates.”(World Bank 2007, page 21)

Some development organizations developed their own version of value chain. These

include different methodologies to map the physical flow of commodities along the chain,

output values at different stages of value chains, export market potentials, the regional

spread of value chains, inter-firm cooperation, production efficiency, etc. For instance

GTZ has a concept called ValueLinks. In its present state, it embraces the generic

methodology of value chain promotion. Its application in different industries and in

countries with varying degrees of economic development calls for additional situation-

specific tools. Of particular interest is its application to business opportunities at the

bottom of the pyramid. It is planned to produce sector-specific as well as country-specific

versions of ValueLinks that address specific needs. USAID developed its Participatory

Value Chain Analysis and it recommended quite extensive studies-based procedures for

the design of value chain programmes like that of GTZ.

Various organizations have commissioned various value chain analyses to identify their

entry point for intervention in chain development (Altenburg 2007, page 33).

9

Value chain finance Value chain developing and upgrading initiatives are often challenged by financial

service gap to small-scale rural producers and the Small and Medium Enterprises (SMEs).

Standard banking practices for analyzing risk and requirements for fixed asset collateral

are critical barriers in reaching these markets. The size of loan request of this group is big

beyond the capacity of microfinance institutions. Various researchers studied the

financial market gap existed for small and medium enterprises (SMEs), which has been

caught between microfinance and corporate banking. These researcher suggests value

chain finance sourced either from actors within the value chain itself or from external

financial institutions which offers alternatives to these restrictive practices through

unconventional methods for assessing risk and evaluating collateral.

The value chain finance brought new business opportunities for the financial

instaurations. According to Milder, to benefit from this opportunity, there is a need to

change thinking change and amendments to some regulatory frameworks (Enterprise

Development and Microfinance. 2008, page 1)

According to KIT (KIT 2007, page 20), Value Chain financing has three types of finance

for the actors in the value chain. These are chain liquidity, agricultural finance and value

chain finance. Chain liquidity refers Short-term loans from suppliers or buyers within the

value chain. Such financing within a chain is common between farmers or farmer groups

and traders. These credit flows are generally called trade credit, or chain credit. They

consist of short-term loans to ensure a smooth flow of products, keep the chain running

and maintain long-term relationships between trusted business partners. They may be

given in cash or in kind. Agricultural finance refers financial services from commercial

banks, microfinance institutions and other financial institutions. And Finally, Value chain

finance financial services that are based on cooperation in the value chain.

According to Tropical Royal Institute and International Institute of Rural Reconstruction

(IIRR) (KIT 2010, page 13), value chain finance means “linking financial institutions to

the value chain, offering financial services to support the product flow, and building on

the established relationships in the chain”. They further elaborated that the product flow

10

in the value chain is used as a carrier to provide financial services and way of financing

can spread risk among the financial institutions and chain actors and provides alternatives

to traditional collateral requirements. It provides tremendous potential for unleashing

capital, scaling up and sustaining chain prospects, but it needs to be managed and

organized well.

World Council of Credit unions (WOCCU) claim that successful value chain financing

when administered by credit unions are need to have solid financial institutions,

organized producer groups with market potential, basic infrastructure (roads, electricity

and telephone), legal systems that enforce contracts, end buyers who are willing to

participate in the value chain, staff members, technical assistance providers and market

data (WOCCU 2009a, Page 11).

WOCCU identifies three value chain financing phases namely: Phase 1: Identify,

evaluate, and prioritize value chains, Phase 2: Facilitate and leverage market linkages and

Phase 3: Tailor, underwrite, and administer the loans (WOCCU 2009, page 3). WOCCU

proposes more roles to the financing institution, mainly in researching, coordinating and

managing the whole process. Whereas based on experiences of Royal Tropical Institute

and IIRR, leading role or initiation for the value chain financing could come from actors

in the value chain. Both parties agree the presence of strong trust and relationships

between the value chain actors and the financial institutions.

A concept paper prepared by USAID on value chain financing presents a conceptual

guide for looking at financial flows, informally known as the “4-A Framework.” The

framework is intended to look financing from four angles, which are the enterprise, the

entrepreneur, the financial product and the financial provider. The purpose is to group

issues in four key questions. The key questions are (4As):

“Is the activity “bankAble”?, Does the value chain actor have the needed know-

how or “Acumen” to get optimal return from this financing?, Is the financing

needed “Accessible” to the user? And, finally, is the financing “Available”?”

(USAID 2007a, page 13).

11

Different experiences are presented on suggested value chain financing in a number of

studies which most of them are based on practical examples in different countries. Some

of good practices and examples could be replicated in other countries and some may not

be workable for various reasons like the socio economic factors, the legal systems,

cultures, the value chain governance and trust among the various actors. Accordingly, it

is essential to identify which value chain financing schemes are workable and practical

from Ethiopian context.

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CHAPTER 3

3. FRAMEWORK ON VALUE CHAIN FINANCE

Value chain finance connects the value chain actors involved in the process of production,

trading, processing and retailing with financers who have different financing products the

various actors. The value chain finance framework (see Figure 1) is developed based on

average size value chain where five main actors are involved. In this framework, the

relationship is expressed in terms of flows of products, finance and information. The

Value chain finance framework has four main components. These are the Value chain

context, the value chain supporters, the value chain actors and their financial relationship.

Figure 1: Value Chain Finance Framework (Ideas from value chain framework and value chain maps of KIR/IIRR: Value Chain Financing Beyond Microfinance (KIT 2010)

The value chain context: The value chain context covers the overall economic

environment (inflation, interest rate, economic growth, competition etc) Political System,

Security, Infrastructure, Natural Environment, the legal system and the likes. The value

13

chain context matter may help in the value chain by creating conducive environment,

transparency, stable macro-economic environment and the likes. In the contrary, the

value chain context could impose restriction or allowing corruption to flourish and

unpredictable policy environment.

Chain supporters: chain supporters are the service providers like banks, microfinance

institutions, insurance companies, transporters, brokers; and other supporters including

NGOs, government agencies, and research centers. The financial services they provide

include loans, pre-financing, shareholdings, factoring, leasing arrangements, and so on. It

is not just financial institutions that provide financial services; for example, an input

supplier may give a farmer a loan in the form of fertilizer, in return for repayment plus

interest after harvest (KIT and IIRR 2010).

Chain actors: chain actors those directly involved in the production and sales of the

product. Farmers at Selale area of Ethiopia, produce milk and sell it to their cooperative

(Selale Milk Union) or to a trader. The cooperative or the trader transport/store the milk

and sell to a processors (like Mama and Shola)1, the processor pasteurize some of the

milk and convert some to other dairy products and sell to retailers (like Supermarkets and

kiosks) and finally retailers sell to end consumers.

Chain actors are differing from chain supporters from ownership status they have to the

product. Chain actors own the product. Ownership is transferred from one actor to the

next actor in the chain. Supporters support actors in the chain in finance and other

services but not own the product. Value and costs are added at each stage all the way to

the end consumer.

The number of actors involved from producer to end consumer varies depending the

nature of the product and the established market chain. In the above example five actors

are identified. The first actor groups are producers. Producers sell their products to

1 Sebeta Agro Industry is a milk processor known for pasteurized branded milk called Mama. Lame Agro Industry known for a pasteurized milk brand name called Shola.

14

traders; traders sell their products to processors. Processors sales their end product to

retailers and retailers sell their product to end consumers. In some cases processors could

sales their products to wholesalers and wholesalers sell their products to retailers. In a

simple value chain; the actors are the producers the traders and the end consumers.

The bold arrows ( ) represents the flow of products and the broken arrows ( ) indicate

the flow of finance. Finance is flowing from buyers to sellers, from financers (bank and

microfinance) to borrowers (value chain actors).

Financing needs: The actors need finances for different purposes. The farmers need

finance to buy inputs to production, traders need finance to buy the product and some

capital items like equipments and vehicles, processors need finance to buy products from

traders, and to by capital items like machinery, construction materials, vehicle etc,

retailers need finance to for working capital and warehousing. One financial institution

may support one or more actors in the chain. Outside the formal financial institution,

actors often have trade finances like sales on credit and advance payments.

The common financial relation between actors in financial institution and actors is a one

two one (bilateral relation). The other type of relation is where one or more financial

institutions are working together with more than one actor in the value chain. Farmers get

a credit from microfinance institution and delivery the product to the trader and the trader

pays the loan repayment to the financial institution behalf of the farmer, and remit the

remaining value of the product to the farmers. This type of arrangement is called

triangular value chain finance. The agreement covers product, finance, and information

exchange and risk management. (KIT and IIRR 2010).

This study is more interested in the value chain financing, where one or more financing

institutions are working with two or more actors within the value chain with the objective

of enhancing the chain efficiency, risk distribution, lesser running costs to financiers and

affordable interest rates to the actors.

Based on the above illustrated framework, the study will conduct assessment of the

workability of the value chain financing approaches through various methodologies in the

Ethiopian context. The assessment will be made on Selale area milk value chain.

15

CHAPTER 4

4. RESEARCH METHODOLOGY

Background The research was conducted on Selale area milk value chains. Other value chains will be

referred for comparison purpose. Selale area milk value chain is selected for the large

number of actors’ involvement, especially at the level of producers and traders. In

addition, this value chain is selected based on convenience and involvement of the rural

and peri-urban community. The research is applied research, as it is intended to find a

solution to alleviate the immediate financing problems of the small producers and SMEs,

and it is also an analytical research which will identify the impact of various financing

related interventions and phenomena on the selected value chains.

Data Collection Assessment and discussion and interview have been made with different actors in the

value chain. In the process the unmet needs and wants of actors with special emphasis to

financing and the bottlenecks and opportunities are identified. The data collection enables

to analyse the applicability of the various value chain financing approach developed and

practiced in different countries. The data collection enables to assess the attitude and

opinion of actors and chain supporters in proposed value chain financing alternatives.

A pilot test has been conducted for the interview checklists before conducting a full scale

data collection. The pilot test was made with one processor, one farmer group (focus

group) and five households.

Interview: interview was made with actors, financers, potential stakeholders including

other NGOs and government offices who are working on the area of the selected value

chains. Loan officers and heads of selected banks and microfinance institutions are

interviewed. (Annex 8).

16

Key informants who have rich knowledge in the selected value chain are interviewed.

The interview was intended basically to gather information that is not available from

documents (Annex 8).

Discussion: Discussion was made with Selale Dairy Cooperative Union (SDCU) and

with its six member cooperatives’ leaders and individual members on the operation of the

cooperatives on financing schemes available for them and challenges to access to finance.

It is also attempted to assess the organizational effectiveness and business competence of

the target actors to engage in market chain in their respective areas of interest, by looking

into their governance, management practices, external relations, sustainability, level of

trust in within the chain etc.

Interview checklist developed in accordance with the type of respondent. Various rating

scales will be deployed depending on the type of information required during the

development of the interview checklist. The checklist has been developed for the Various

respondents including service providers (other than financial institutions), financial

institutions (bank, MFIs and insurance companies), farmers, collectors, processors,

retailers, households and Government agencies

Document Review: From secondary resource, value chain financing initiatives made so

far are assessed. Value chain studies made in the selected sectors will be reviewed for

better understanding of the challenges and opportunities within the chain. Documents like

value chain development reports and studies made to the respective selected value chain,

banking regulations, policies and proclamations from National Bank of Ethiopia, value

chain financing experience of different countries (plenty of these documents are collected)

and similar studies made, specifically in Ethiopia in relation with value chain financing.

Sampling taken Sampling has been selected from different group of actors. Table 1 summarized the

sample group and size of the different actors and chain supporters interviewed for this

study.

17

Group Interviewee Number of Interviewees

1 Dairy Cooperatives in Selale area 5 2 Focus group (farmers): With average of 10 farmers in each focus 5 3 Households 57 4 Supermarkets 16 5 Kiosk 7 6 Café 22 7 Processors 4 8 Private Collectors 2 9 Union 1 10 MFIs 2 11 Commercial Banks 3 12 NGOs 3 13 Government offices 6 Total Interviewee 133

Table 1: List of interviewees

Analysis and Design Critical analysis made on the existing financing products available to the dairy value

chain actors. Potentials for value chain financing in the Selale area dairy value chain has

been analyzed. Existing and potential relationship of various bodies in relation to

financing (government, MFIs and NGOs) has been examined. In addition, the challenges

and impacts of financing problem to the respective value chain is also analyzed.

Available financing products are analyzed in terms of size, outreach, cost, risk and costs

(interest charges). The workability and applicability of the various value chain financing

methodologies adopted in some countries will be thoroughly analyzed on their

applicability to the Ethiopian context based on the information gathered. Value chain

financing scheme suggested based on the analysis.

18

CHAPTER 5

5. STUDY FINDINGS

5.1. The Selale Dairy Business

Selale area is one of the largest milk shed in near to Addis Ababa (Olga and et al 2010).

This area is under the Semen Shoa Zone of Oromia Regional state. Most of the Woredas

are in Selale region along the road from Addis Ababa to Debre Markos. The shaded area

in Figure 2 below shows the milk shed along the main road. The population of the Semen

Shoa zone of Oromia as per the 2007 census (Central Statistic Agency 2007) was about

1.4 million.

Figure 2: Map of Selale area milk shed (rough sketch).

Map source: Encarta 2009

19

A number of projects, especially the Smallholders Dairy Development Project (SDDP)

are accountable for the development of milk production in this area. The project was

operational between the year 1995 and 1998 with the objective of improving the standard

of living of the smallholder farming families under friendly development approach

(Ahmed and et al 2003). During the project period, dairy stock and breeding bulls were

distributed. To enhance the marketing of the milk, the project facilitated the formation of

farmers group (between 10 to 30 farmers) to form a milk collection center (MCC). Later

on some of these farmer groups are transformed into a farmers’ cooperative.

Milk processors operating in Addis Ababa and surrounding area are the major buyers of

these farmer groups. The prices of milk were erratic and reached to level where the

farmers could not afford to supply as the cost of maintenance of dairy cow is increasing.

The coming of many processors in the dairy sectors attracted completion for milk

collection. The farmers group organized and formed a cooperative named Selale Dairy

Cooperative Union (SDCU) in 2001. SDCU has started its activity in 2002 by 9

cooperatives of 512 members and to date increased to 20 cooperatives of 1,454 members.

Together with the active members, the number of milk producers and suppliers to the

union has increased to 3,359 households.

There are a lot of households which are not a member of cooperatives and there are more

than 15 cooperatives in the area which are not a member of SDCU. Member of the

Unions are mainly supplying milk to the union through their respective cooperatives.

They sell the remaining milk to other buyers when they produce extra milk beyond the

requirement of the union.

Based on the data gathered from the Selale zone livestock development, health and

marketing office, the dairy cows population as of end of Ethiopian Fiscal Year (EFY)

2001 was about 1.04 million (See Table 2).

20

Table 2: Dairy Livestock population in Selale area (North Shoa Zone of Oromia Regional State)

Dairy cows Local Dairy

cows Cross breeds Total Cows 401,587 29,367 430,954

Heifers (above 12 months of age) 469,789 11,059

480,848 Female Calves (6-12 months) 62,453 2,947 65,400 Female Calves (Less than 6 months) 60,135 3,673 63,808 Bull 2,525 2,525

Total

993,964

49,571 1,043,535

Source: Selale Zone Livestock Production, Marketing and Health Office According to Selale Zone Livestock office, the estimated milk production per day is

352,000 liters and 558,000 liters from local dairy cows and cross-breed dairy cows

respectively. Currently more that 50,000 liters of milk are sold on a daily basis to

processors and other collectors. Out of this, about 10,000 liters of milk is supplied by

SDCU, and significant portion of milk is collected by processors like Sebeta Agro

Industry (SAI) and Lame Dairy Enterprise (LDE) their own collection centers. Based on

the opinion of the zonal livestock office experts, the majority of milk produced is

consumed at household level in the form of milk and butter. Part of converted milk

products like butter and ayib are sold through informal markets.

5.2. The milk value chain

The milk produced from the dairy farms will pass different channel before it reaches the

final customer. The milk value chain in Selale area is depicted in the figure 3. The milk

value chain is classified in three major groups. These are actors, chain supporters and

chain context. The chain actors are also further classified as direct and indirect actors.

The various bodies involved in this chain are explained hereunder.

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5.2.1. Chain Actors

Direct chain actors

Farmers (producers): there are two groups of dairy farmers, namely traditional farmers

and commercial farmers. Commercial farming in Selale area is now growing though their

number is not significant. Most of the commercial farms are delivering their whole milk

directly to restaurants in Addis Ababa. It is estimated that there are about 20 commercial

dairy farmers along the main road to Debre Markos. Commercial farmers cow holdings

range from 40 to 100 cows with a daily milking of about 18-20 litres per cow. Most of

the commercial farmers are selling their milk to big cafes’ and restaurants in Addis

Ababa.

The traditional farmers involved in the milk value chains are those who hold a cross

bread cows which are commercial viable to supply milk as a routine daily business.

Based on the study, the average total cow holding per household is about 5 to 7, and out

of which 3-4 cows are milking cows. These farmers are milking an average of 8-10 litres

of milk per day per cow.

Some of the farmers are organised in a cooperative and some of them are not. Those

organised are supplying fully or partially to their cooperatives. Partial supply is mainly

due to the quota (supply cap) set by the cooperative, which in most cases is determined

by the number of shares members have in their respective cooperatives.

Farmers who deliver only part of their milk production to their cooperatives are

supplying the remaining to individual, local or industry collectors.

Local collectors: Local collectors are collecting milk from farmers in the nearby MCCs

and resell to hotels and cafes in the same town they have collected the milk. The volume

of milk they often buy is small and limited to local supply. Hence, their role in the chain

is not significant.

22

Figure 3: Dairy Value Chain (Selale area)

Source: Based on the study findings

Individual Collectors: Individual collectors are mainly operating between Sululta and

Debre Tsigie. Individual collectors collect more milk and sale the milk in Addis Ababa,

unlike local collectors. Most of these individual collectors have their own pickup vehicles

to transport the milk they collect to Addis Ababa. Individual collectors are collecting

from farmers (from both members and non-members) and cooperatives. Union leaders

are often insisting its member cooperatives not to sell to these individual collectors as

they are often distorting the selling price and eroding the bargaining power of the Union.

Cooperatives/Union: Most of the cooperatives are transformed from the originally

formed farmers group who form collection centers in different parts of Selale area. Some

of the cooperatives formed the SDCU. SDCU is the only union in North Shewa Zone of

23

Oromia region. It is protected by law to have only one Union in one zone and one

cooperative in one Kebele. Kebeles are the lowest unit in Government Administration.

Cooperatives and unions are formed in accordance with proclamation no of 147/1991

(Ethiopian calendar) and directive no 106/1996 (Ethiopian Calendar). There are about 35

dairy cooperatives in Selale area and twenty of them are a member of SDCU.

Cooperatives are managed by board of directors and administered by 5 elected executive

members. In addition to the executive members audit and inspection committee elected

by and reported to the General Assembly is undertaking audit and inspection activities.

Cooperatives employed additional staffs for milk collection (milk technicians), cashiers

and guards. Executives are non salaried on a voluntary basis in accordance with

principles of cooperatives. Allowance may be paid to coop executives for field works.

The number of members in coop ranges from 50 to 200. During slack time, cooperatives

keep buying from their members and convert the unsold part into other durable products

like butter and ayib (local soft cheese).

Processor Collectors: Some of the dairy processors are established their own milk

collection centres in Selale area. Sebeta Agro Industry and Lame Dairy Enterprise have a

number collection centers. In some of their collection centers they have chilling units to

maintain the quality of the milk. Some of the processors are transporting the milk using a

truck equipped with cold tanker. These processors are collect for their own consumption

(processing).

The processors believed that the establishment of the collection centers helped them to

enhance bargaining power from the unions, had they have been fully dependent on them.

Processors like Family, Bora and Lema do not have collection centers in Selale area.

Processors: These categories of actors are classified into two categories. Large scale and

small scale processors. Small scale processors are mainly engaged in converting the raw

24

milk into formajo(cheese). Berta and Penguins are classified under this category. These

processors are mainly delivering to supermarkets and large hotels. The other group of

processors are mid and large size processors with a capacity of processing about 5000

litres per day. There are about six dairy processors in Addis and surrounding with a

processing capacity ranging from 5000 to 50,000 litre of milk per day. Those who

convert raw milks into pasteurised milk after skimming. During the pasteurization

process, the average fat content of 3.5 will be skimmed into a milk of 2.5 fat content.

Hence, cream will be the product after the pasteurised milk, which is also a saleable

product.

Most of the processors do not have their own dairy farm. Sebeta Agro Industry has its

own dairy farm which meets about 10% of its milk requirement2. All of the processors

are generally delivering the pasteurised milk using their own delivery vans to

supermarkets, kiosks. Some of the processors have their own sales outlets in different

parts of Addis Ababa.

Cafés and Restaurants: Local cafes in small towns of Selale are sourcing milk from local

collectors and farmers. Most of the cafes, hotels and restaurants in Addis Ababa are

sourcing milk from individual collectors.

There are large numbers of cafes, restaurants in all towns. Hot milk and ‘macchiato’ are

the famous drinks which triggers the demand for milk by cafterias and restaurants. Based

on the survey, cafes and restaurants purchase 10-20 liter of milk each per day. Large size

cafeterias are buying up to 40 liters per day. During fasting seasons their demand falls.

Most of the cafeterias and the restaurant use raw milk directly delivered from producers

and milk traders. When there is scarcity of whole milk, some cafes and restaurants use

powder milk, which are not often preferred by consumers. Pasteurized milks are not used

by Cafés and supermarkets.

2 Genesis farm, which is located at Debrezeit town, has its own dairy farm. It is not yet commenced pasteurized milk processing.

25

Regional Retailers: regional retailers are buyers from regional towns like Mekele, Dese,

Debre Zeit, Dire Dawa, Awassa, Nazareth and others. Most of them are collecting

pasteurised milk from the factory gate of processors. The processors themselves

distribute directly to some of these towns. Pasteurised milks of Sebeta Agro Industries is

the leading pasteurised milk favoured by regional retailers for its long shelf life (about

three days).

These retailers are further supplying village kiosks and mini markets at regional towns.

Supermarkets: There are about 100 supermarkets in Addis Ababa. These supermarkets

are buying a about 50 to 150 litres of pasteurised milk per day or every other day.

Because of the perishable nature of the milk, most of the supermarkets order the safest

stock size to avoid possible loss. Mama pasteurised milk is the only product (of Sebeta

Agro processing) where Supermarkets are willing to buy more as its shelf time is three

days (unlike a shelf life of one day).

In addition to local pasteurized milk and other dairy products, super markets are also sell

imported UHT and bottled milk.

Sales outlets: Few of the processors have their own sales outlets. Lame Dairy Enterprise

is well known for its milk shops with a brand name of Shola.

Kiosks: There are thousands of kiosks in Ethiopia. These kiosks are major sales outlet of

substantial volume of milk. The delivery vans of the milk processors are delivering milk

door to door to these kiosks. Households and individuals are major customers of these

kiosks. According to processors complain, these kiosks are enjoying the higher portion of

the profit margin from the final consumer price.

Consumers: Consumers are final users of milk. These are consumers at the level of

household and cafes and restaurants. Most of the household regular consumers are those

who can afford to expend Birr 120 and above. This threshold is the value of ½ litre of

milk per month. Most of the households prefer the whole milk supplied by house to house

26

suppliers of urban dairy cow holders. Most of these urban dairy cow holders are reside in

the outskirt of Addis Ababa.

Institutional buyers: These are big institutions like; hotels hospitals, universities and

airlines. Majority of them are sourcing from dairy processers. Lame Dairy Enterprise for

instance supplies Black Lion Hospital, and has special milk specifically pasteurised to

children attending at the children unit of the hospital.

Indirect chain actors Input suppliers are classified as indirect actors in the dairy sector. The most important

inputs in the production of milk are animal feeds, breeding service (bull and Artificial

Insemination) providers, Vet drugs suppliers and Vet service providers.

Vet Services providers: The Government is the main service provider in the region. There

is at least one vet clinic and few vet posts in each Woreda (The second level

administration unit higher than Kebele of regional governments). One development agent

at a post of assistant vet is assigned for three kebeles in all Woredas of the zone. There

are one or two private service providers in each Woreda with limited services like

injection and examination. All of these private vet service providers are drug store

operators.

Vet drug suppliers: There are few importers of vet drugs. All importers of vet drugs are

concentrated at Addis Ababa. There are one or two privately owned drug stores in each

Woreda, in addition to drug stores of the livestock office of the government. Their

average weekly sales is Birr 1200. Their sales reaches peak during a market day. There

are also illegal traders of vet drugs. Some of them are selling on open air in such manner

that the medicines are exposed to sunlight, heat and dust. Some are selling at their shops

just like the rest of the commodities without having the technical knowledge. The

livestock office of the government is in charge of controlling illegal vet drug suppliers

and ensures that genuine drugs are available at drug stores. According to the information

gathered from the Zonal Livestock Development, Health and Marketing Office, the

27

Government drug stores have annual revolving budget ranging from 20,000 to 70,000 for

the purchase of vet drug supplies.

Breeding Services: Breeding services are provided in two ways; the bull service and

Artificial Insemination (AI). The natural approach of bull service is provided by cross

bread bull owners (famers). The bull owners charge from Birr 20 to 40 per met. Artificial

Insemination (AI) service is provided by the agricultural offices. There is normally one

AI technician in each Woreda and some of the Woreda have two AI technicians. Because

of limited budget allotted for AI service, the annual AI service is between 600 and 1000

per Woreda. This figure represents below five percent of the demand. Government

charges Birr 4 per AI services. Based on the information from the National Artificial

Insemination center (NAIC) (state owned), the cost of production of a single AI service is

about Birr 38. NAIC is supplying AI main supplies (the semen and liquid nitrogen) to

agricultural offices for free and at a cost of Birr 4 and 7 for the semen and liquid nitrogen

respectively.

Feed: the major portion of feed supplies comes from hay. A Selale region is endowed

with hay supply. Other animal feeds like wheat bran, edible oil seeds cake, concentrates

and minerals are also required. Residue of local beer like drink (Tela) is also important

feed item. Processed animal feed suppliers are few in numbers. There are 3 to 8 retailers

of animal feed in each town of Selale region. For all of the traders, feed sales are a side

business in addition to their retail products. In addition, cooperatives also distribute

animal feeds to their members. Members are opting for the feeds of the cooperative for its

genuine quality and better price.

Machinery and Equipment Suppliers: There are few local suppliers for small dairy

equipments like cream separators. Heavy machines and equipments are imported from

Europe and Asia. With the devaluation of Birr, the import cost of these machineries (milk

processing units, chilling units, cooling tanks, Clean in Process (CIP) units, etc) is

becoming expensive. Suppliers of these machineries are often provided training and

technical assistance for erecting and commissioning of the plant.

28

Packing materials suppliers: Packing materials used for packaging of dairy products

including pasteurized milk are imported from abroad. Like the machines, depreciation of

Birr during the past few years increases the local cost of packaging. There are local

importers of packing materials who customized the packing to the individuals design.

Some of the processors are directly importing the packing by themselves.

5.2.2. Chain Supporter Microfinance Institutions (MFIs): There are about 30 MFIs in Ethiopia and most of

them are operating in specific regional states. About four MFIs are operating in Selale

area. As per Directive No. MFI/18/2006 of the National Bank of Ethiopia, the single

borrower limit of MFIs is to the extent of 1% of their paid up capital. In the same

directive, the group borrowing limit is to the extent of 4% of their paid up capital. MFI,

like Busa Gonofa, has reached to a level that it can provide a loan to a single borrower to

the extent of Birr 200,000. MFIs are suitable for rural borrowers as they don’t demand

physical collateral to extend the loan. According to NBEs directive3, MFIs are allowed to

provide loan without collateral. Based on the discussion made with some MFIs officers,

MFIs are mainly granting the loan against group collateral than without collateral.

From the focus group discussion made for this study, some farmers are not happy with

MFIs as they do insist for group formation for group collateral arrangement and that the

interest rate is much higher than the regular banks. Based on the interview made with

some of MFIs, they often limited their borrowing to a new client to an average of Birr

3,000. For their credit worthy long term customers, they extend loan to the extent of Birr

20,000. Dairy farmers seek loan for the purchase of annual feed supply and heifer. The

cost of feed and heifer is much higher than Birr 3,0004. Hence, MFIs are not generally

suitable enough even to primary level of the dairy value chain actors (the farmer

producers).

3 NBE Directive No 17/2002 4 One heifer costs from Birr 6500, or 15,000 if pregnant. Annual feed purchase price ranges from Birr 3,000 to 7000 depending on the number of milking cows the farmer has.

29

Commercial Banks: There are 15 banks in Ethiopia. Three of them are state owned and

the rest are share companies. In Selale area CBE has three branches (at Fitchie, Sululta

and Muketuri) and Oromia Cooperative Bank has two branches (at Sululta and Kuyu).

The borrowing share of private commercial banks is growing for the last 10 years. Public

banks are still leading in terms of borrowing size.

Commercial banks deal with businesses and traders with a good credit truck and who can

submit valid collateral for their loan. Unlike MFIs, commercial banks extending loan in

millions. Processors and retailers are getting financing from commercial banks. Loans are

provided to processors against valuable collateral like building. Based on the information

from Commercial Bank of Ethiopia, cooperatives and unions access loan from its branch

all over the country against guarantees of Regional Government.

The most valuable assets of commercial dairy farmers are their milking cows, heifers and

calves. Based on the survey, the current market value heifer in Selale area is above Birr

6000 and the market value of a pregnant cow is ranging between 12,000 and 15,000.

These assets should have to serve as collateral for getting bank financing. Based on the

survey made for this study, Ethiopian Insurance Corporation is the only insurance

company providing livestock insurance.5 Based on the survey, most of the farmers do not

aware of the livestock insurance.

Some Banks are providing loan against other collateral arrangements. Commercial Bank

of Ethiopia provide loan to farmer organization against regional government collateral.

Bank of Abyssinia provides loans to businesses against collateral of USAID for selected

small businesses. Some Banks, including Commercial Bank of Ethiopia are providing

loans against collateral of international organizations such as ICCO/Terafina, Oxfam

Novib/ and Cordaid (MicroNed 2005, MicroNed 2008).

5 Nyala Insurance is under pilot test for the provision of livestock insurance. Nile Insurance is not proving livestock insurance service.

30

There is a possibility of getting loan to farmers’ organizations to secure loan against

collateral of government, donors like USAID and international bank who are programs in

assisting SME and rural traders in developing countries.

Insurances: There are nine insurance companies in Ethiopia. Eight of them are private

companies and one of them is state owned. Most of these insurance companies are

insuring processors and retailers. Based on the survey dairy farmers and their dairy

cooperatives do not use insurance services.

NGOs: the role of NGOs in the development of the milk value chain is tremendous.

Organization like SNV, USAID (through land o’ Lakes), AgriTera and international

organizations like FAO are providing a lot of support in strengthening the milk value

chain. The type of support provided includes Capacity building through training, Facility

provision, financing, and other technical supports. The government of Finland (through

FINIDA) was responsible for the significant dairy development made in Selale area.

FINIDA had also granted a seed fund to farmers groups which later on transformed into

cooperatives. Selale Union has received financing support for working capital, revolving

funds and capital items from various donors including United Nation Development

Program (UNDP) (Getnet 2009).

Government: The role of government in the livestock sector is immense. Government is

the major service provider on Vet medical supplies, Vet services and AI services.

Recently an agency called Livestock Development, Health and Marketing is formed by

Oromia Regional State. This agency is dedicated to livestock and its structure reaches to

zones and Woredas. There is one development agent for live stock serving three Kebeke

in all Selale area.

Cooperative Agency and offices are providing technical support to the coops and union

on marketing, management, accountancy and auditing services free of charge. In addition

this structure also initiates and facilitates the formation of coops and union. Zonal and

Woreda Administrations are providing lands and other supports to coops and union.

31

National Artificial Insemination Center (NAIC) is the major provider of AI supplies

mainly the semen and nitrogen in the country. These supplies are provided by NAIC free

of charge to agricultural offices throughout Ethiopia. Farmers pay Birr 4 for a single AI

service where as the cost of AI service delivery excluding labor cost is about Birr 20. The

difference is subsidized by the Government of Ethiopia.

5.2.3. Chain Context

The chain context addresses the overall macro level issues which frame the scope of the

operation of the value chain. These include the relevant policies, proclamation, the legal

system and enforcement tools in place, the political system, national standards, the

infrastructure available, the economy, the security, and cultural issues. Some of the

relevant chain context to the Selale area milk value chain are described below.

The cooperative law (proclamation): The cooperation law has paved the way for the

formation of the coops and unions with a lot of incentives and support.

The legal system: The legal system is ensuring the compliance of contractual agreements

and maintenance of the harmony in business dealings. There are complaints however in

relation to the lengthy lead-time to get a verdict because of the capacity of courts.

National Standards: There are standards for dairy products developed by the Ethiopian

Standard and Quality Organization. During the survey some of the professionals in the

dairy sector expressed their concern on the weak or absence of enforcement on the

quality standard of pasteurized milk. The lack of enforcement could encourage unethical

processors to avail substandard products at the expense of consumers and fair

competition.

Infrastructure: The renovation of the road to Debre Markos has contributed a lot in

increasing the turnaround of trucks in delivering milk from Selale area to Addis Ababa.

The absence of road outside the main road has affected many households to reach the

32

milk market. Some are travelling up to two hours to reach the milk collection centers.

Based on the survey farmers and their organization claimed that the mobile technology

has helped them for a better communication. Lack of chilling centers at the various milk

collection centers considered as a major setback in expanding the milk collection radius

from the main road. Many of the towns along the main road (Selale area) have accessed

the hydropower electicity.

Economic Environment: the growth in the economy is expected to increase the

household income of the society which in turn increases the demand for milk products.

The demand for milk is increasing. It is however difficult at this point to claim that the

growth in milk demand is a result of the economic growth. There are contradicting

information gathered from consumers that the ever increasing milk price was the main

factor which forced them to stop buying of milk.

Culture and Society: The fasting seasons of the Ethiopian Orthodox Christians is the

slack season for the milk and milk products. Based on the survey conducted, the demand

for milk declines by about 25% during fasting seasons. There are about 200 fasting days

and out of which 65 days are seriously observed (Abiy and Filseta) by most of the laities.

5.3. Challenges and Opportunities

5.3.1. Financing Challenges and Opportunities

The magnitude of the financing problem varies from actors to actors. It is essential to

view the financing challenges by actors in the chain.

Processors: For established processors with a better collateral base and successful past

credit history, financing is not as such a challenge. Most of the processors are quite

comfortable in this regard. For new comers, however, financing is a challenge especially

when they don’t have the required quality of collateral.

33

There is a long tradition of buying milk on a 15 days credit term from milk suppliers.

New entrants into the business are enjoying this well established credit financing by milk

suppliers. As a result, the working capital requirement of processors is limited to packing

and other operating costs.

The credit cap (ceiling) imposed by Government of Ethiopia since the beginning of 2009

limit commercial banks to extend loan as much as they could (IMF 2010). As a result,

financing is a challenge to new entrants (processors). Most of private banks’ outstanding

loan is approached to the cap. It is leant that this cap is not applicable to Commercial

Bank of Ethiopia (CBE) if the loan is meant for agriculture sector. Some of new entrants

complain that the procedure for financing are more stringent in state owned banks than

private banks, and they feel that the challenge is remained a concern.

Based on the information from National Bank of Ethiopia, agricultural loan has grown in

the last ten years period from Birr 1.2 Billion in 2000/01 to Birr 5.7 Billion in 2009/10.

As shown in Figure 4 below, the growing trend of agricultural loan is halted since 2008.

This is mainly due to the loan cap policy issued by the government to control inflation.

Though there is increment on the share of agricultural loan (from 8% in 2000/01 to 11%

in 2009/10) it is much lower than what the sector deserves in terms of its coverage in the

national economy (about 45%) and representation (80% of the population).

Source: National Bank of Ethiopia

Figure 4: Loan provided to Agriculture sector by all banks between 2000/01 – 2009/10

Million Birr

Fiscal Years

34

Based on the discussion made with the credit managers, it is learnt that the limitation of

the appropriate staffing in every field of agriculture and the inherent risks associated with

it, the volume of financing service provided to the agriculture sector are low as compared

with other sectors.

Commercial Dairy Farmers: Commercial dairy farmers have access to commercial

banks. Most of their assets are dairy cows stock. The problem they often encounter is

collateral issues. Their physical assets are limited to ordinary barn and few types of

equipment. Some of the farmers are unaware on the possibilities of using the cows as

collateral. Based on the discussion made with Retail Team of Ethiopian Insurance

Corporation (EIC), tagging system is a must before granting the insurance policy. At the

level of commercial dairy farmers, tagging is more feasible than traditional dairy farmers.

Retailers: Retailers, mainly supermarkets, have access to bank loans mainly when they

have collateral for the loan. As much of their property is on inventory items, they are

known for no or limited valid collateral assets like building. As most of the retailers

stocks are fast moving, it is not convenient to get a merchandise loan. In addition, their

balance sheet is often show a large amount of current liabilities, which are resulted from

large credit purchases.

Retailers benefit from the consignment purchases. On a consignment arrangement,

retailers pay after they sell the product. Hot products are always sold on a cash basis.

Since the last two years, because of the rationing f foreign currency and a long waiting

line for currency permit, imported products are in short supply and importers are

distributing on a cash basis. As a result of this, there is a cash stress on retailers.

When it comes to dairy products, consignment sales are not convenient because of their

short shelf live. Because of this, some of the milk processors are selling their products on

a short credit period and some of the milk processors with ‘big’ band names are selling

on a cash basis. Some of the supermarkets are not willing to receive milk products during

the afternoon as they run out of cash. Some of the supermarkets prefer to finalize the

35

daily purchase issues during the morning session and spare the afternoon for other tasks.

These situations deterred the supply of milk products. Supermarkets on the other hand,

often run out of milk during late afternoon, which are peak hours for supermarket sales.

According to the experience of one milk processor, their frequent attempts to sell milk to

supermarkets during the afternoon were not successful because of the reasons mentioned

above. This contributes in creating a gap between demand and availability of the product

while supply is there.

Collectors: individual collectors buy milk on cash basis. Unlike the processor collectors,

they are not benefited from the 15 days credit purchase from the farmers. According to

the tradition, farmers are willing to deliver on credit only to established companies.

Hence, collectors have to finance themselves. These collectors are delivering their milk to

processors on a credit sales basis like the farmers are doing. Accordingly, they need to

have a working capital at least to the extent of 15 days milk purchase. For individual

collector with a daily milk collection of 500 liters need about Birr 37,0006. The source of

financing for many of these individual collectors is own equity and loan family or relative.

The traditional revolving savings scheme, which is called ‘Ekub’ is best used

approaching in raising working capital.

Cooperatives and Unions: Cooperatives need financing for expansion and purchase of

equipments. Some of the cooperatives have taken a loan from the Union. The purposes of

the loans were mainly for purchase of office buildings. Coops get credit facility for the

purchase of inputs (feed and vet supplies) from the Union. Coops also sell their products

to the Union on credit.

The annual dividend distribution from the union is among the important cash inflow

which improves the liquidity of the coops. Coops actually distribute part of the dividend

they received to their members. According to the existing coops proclamation, 70% of

the income is distributed as a dividend to members and the remaining will be retained by

the coops and unions.

6 A milk price of Birr 5 for 500 liters for 15 days.

36

None of the coops in this value chain are received loan from other sources. As the

amount of financing is higher than what the MFIs are wishing to borrow, and because of

the absence of strong collateral, their frequent attempts to get loan from banks were not

successful.

Farmers: In most of the cooperatives interviewed, credit and saving committee exists in

the organizational structure of the coops. Only few of them are functional. The size of the

loan and its administration differ from coops to coops. Some coops borrow to the extent

of Birr 2000. This loan is useful only for the purchase of animal feeds and small dairy

equipments. The loan is small to buy heifer. The expensive part of capital investment at

the level of farmers is purchase of heifer. Apart from the natural breeding out of the stock

they have, purchase of heifer is the short cut to expand the milking cow size.

Some coops provide loans to members as much as three times the amount of cash

deposited by the borrower.

Farmers, especially new entrants and members in the milk supply system, are suffering

from cash shortage for the purchase of day to day inputs, as they have to wait for 15 to 18

days to get back their money. Member farmers are often benefited from credit purchase

of feeds from coops with a credit period of 15 to 60 days. The credit period varies from

coops to coops.

Some farmers are not interested to take loans from MFIs as they believe that the interest

rates are so expensive (above 16%) and are short terms. In addition, some of them are not

happy with the group collateral arrangements.

5.3.2. Non Financing Challenges and Opportunities

Milk Quality

Milk quality problem is a concern to actors at all levels including the farmers themselves.

Though there are improvements over the years through the various interventions made by

different NGOs, Government and the coops, farmers are losing a lot of money because of

rejected milk at the milk collection centers because of quality. Most of the quality

37

problems are hygienic issues, milk handling, and other problems in relation with the

health of milking cows.

Adulteration is a concern in the milk value chain. Adulteration is an international mixing

of foreign matters to the milk to boost the volume of the milk. As the techniques adopted

for milk quality test at all levels are elementary, which are limited to accept and reject.

Some coop farmers believe that quality based payment system is essential to encourage

famers to be quality conscious in addition to individual farmers initiates to improve milk

handing activities.

Currently, milk quality projects are undergoing with the participation of coops, union and

international organizations.

Unfair competition

There is competition among farmers for buyers when milk supplies increases and there is

high competition among processors and collectors when supply is falling. Based on this

survey, the trust among the various actors in the value chain is not strong enough and

mired with fear and suspicion. Accordingly, the collaboration among actors is weak.

Marketing

The milk marketing issues is a paradox. Consumers are complaining about the shortage

of milk supply and whereas, producers, especially at farmers level are complaining about

the lack of market for their milk. Based on this study, the weak distribution system

deployed by milk producers is responsible for weak link of the supply to the needy

consumers. Uneven supply of milk, which is caused by the seasons (dry and wet seasons),

and the uneven demand of a certain group of consumers because of the fasting seasons

contribute a lot for the uneven delivery of milk. Some households do not think of milk in

their menu as it disappear often from the kiosks or supermarkets and do not noticed when

it is excessively supplied.

38

Weak consumption culture for Dairy products

Some household members also lack appropriate exposure to sustainable milk and other

dairy products are used to lead a life without consuming dairy products. As a result most

respondent professed that they are not familiar with dairy products and hopeful to enjoy

the product if things are improved and had the opportunity of to reach them. Some says

that: “I have never tried it” and some say that “I am afraid I may not like it”. Such

feelings are a result of weak popularity of milk in many households.

Population growth, urbanization and income growth are among the major factors that

result to an increase in milk demand. It seems that these factors are increasing increased

in the case of Ethiopia. However, the consumption of dairy product in Ethiopia is less as

compared to other African countries and far less than the world consumption. The present

national average capita consumption of milk is 19kg/year as compared to 27 kg for other

African countries and 100kg to the world per capita consumption7. The recommended per

capita milk consumption is 200 litters per year8.

There is initiative by SNV and USAID to increase consumption behavior on dairy

products. This includes creating awareness about the nutrition values of the product,

introducing more product varieties. Billboards and radio milk promotions are underway

in this regard. The demand development and inducement will certainly stimulate retailers

to buy more milks and this will intern encourages existing processors to expand and new

processors to enter into the sector. The increasing processing capacity encourages farmers

and collectors to work more in the area of production and collection (SNV 2009).

Feed cost and quality

The price of feed increases two fold in the year 2010 from what it has been three years

ago9. Apart from the price, farmers are complaining on the quality of the feed. Coops are

7 FAO, 2003 8 The milk per capita, based on the 2008/09 survey is 37.62 liter (CSA 2009). According to the forecast of FAO, the annual production is far below the survey made by CSA. During the period from 2001 to 2007, based on FAO forecast, cow milk production is growing at an average rate of 2.6%, which is equivalent to the Ethiopia’s population growth rate (2007 census). 9 UNIDO

39

striving to avail feeds from genuine sources. Because of the limitation with working

capital, the volume of feed supply per month per coops is between 50 to 100 quintals.

Road accessibility

There are number sites in Selale area with a high milk potential, but which are a bit far

from the main road. As the collection time at MMC is fixed, which is often at early

morning, many of the farmers at distant Kebeles could not reach on time.

Selale Union is considering establishment of chilling centers which enables the coops to

keep the milk for longer hours and to have the collection time more relaxed to allow

distant Kebele farmers to supply their milk. This plan is only improve slight portion of

the problem as the walking distance ranges more than 5 hours to some of the potential

suppliers from the collection centers, which will be unbearable to reach on foot walk.

Machinery Cost

The ever increasing foreign currency rate is becoming a challenge to new entrants into

the market a processor. Some of the equipment, including stainless buckets is expensive

to Coops and the Union let along to the farmers.

40

CHAPTER 6

6. CONCLUSION AND RECOMMENDATION

6.1. Conclusion

Chain Financing: Strong points

Different financing schemes are available to the milk value chain actors. The financing

schemes differ from actors to actors. Supplier credit (credit sales) is playing important

role in chain financing. Farmers are selling their milk products on credit to their coops,

coops are selling on credit to Union, and Union is selling to processors on credit. This

credit sales facility is not extended to the level of retailers. Limited working capital is

found to be one of the main causes which deter some of the supermarkets to buy more

milk during the afternoon.

There is a triangular relationship of credit financing between farmers and Union. Union

Channeled feed supplies on credit to farmers through coops. Farmers do not required to

settle their debt in cash, rather the value of the feed deducted from the value of milk to be

paid back to farmers. The Union withhold from the milk sales.

Generally speaking, there is a strong trustworthy and well established credit sales

management system. Farmers trust the credit sales system, and processors repay on time.

Credit and savings established within the coops are benefiting both the depositors and

borrowers of the coops when functioning well. The credit and saving brings interest

income and ensures accumulation of cashes for future investment. These investment

alternatives are purchase of heifers and dairy equipment or other non-dairy investments.

Members of the credit and saving scheme have the potential to borrow as three times as

they have deposited in the scheme.

41

Traditional Ekubs are well established cultural source of finance which enables farmers,

mainly town dwellers, to accumulate cash and possibly getting of such cash according to

a draw. The money involved in the Ekub scheme is dependent on the financial capability

of its members. Early winner of Ekub benefited from early receive of a non interest

bearing loan, and those who received at a later rounds are still benefited from a forced

Ekub payment.

Some of the coops and the Union has benefited from seed fund and capital financing. The

SDDP project has granted a seed fund for the establishment of farmers groups which

finally grown into cooperatives. Processors are supported by various NGOs on training

and technical advices which would have been a big investment to the processors.

Commercial banks finance dairy processors and retailers. Processors have access to

commercial banks and financing is not considered as a challenge to their business.

Chain Financing: Weak Points

A number of MFIs are operating in Selale area. Their loan amount is not big enough to

accommodate the financing requirements of the lower level actors, the farmer. Group of

persons are serving as collateral though this arrangement is not popular among the dairy

farmers.

Commercial Banks are not suitable to farmers, coops, the Union and other collectors

because of their demand for valid physical collateral. Apart from the collateral,

transaction costs of managing the loan is not affordable especially if they extend loans at

the level of farmers. As there are commercial bank branches operating in Selale area,

cost of managing loans to coops and the Union doesn’t seem expensive.

Though it is not applicable to CBE (for agricultural loans only), private banks have

reached the limit set by National Bank of Ethiopia for a loan cap. Hence, it is not an easy

task for actors who are new clients of commercial banks to access financing, even if they

managed to avail collateral, until such time that the loan cap is lifted.

42

It is evident that the success of banks customers, processors in this case, is dependent on

the success and efficiency of the whole value chain. Among the serious challenges to the

dairy sector is financing gap. Because of this, actors in the chain would either remain a

standstill or dropout of the chain. When actors are dropping out, it affects the price and

volume of milk supply. At times when some collectors are dropped out, processors were

forced to operate below breakeven.

Unlike private companies, cooperatives and unions are managed mainly by elected

executives with a limited term in office usually two terms of two to three years each.

There is no warranty that the passion and strength of the existing leaders will be

transformed to the new leaders. As a result of this, some of the financiers are worried

about the sustainability of management harmony, capability and governance of these

organizations. Such thinking has barred financier not to explore possible businesses with

coops and unions. In addition to financing, milk quality, unfair competition, marketing,

weak consumption culture for dairy products, feed cost and quality, road accessibility and

cost of machinery are among the challenges of the dairy value chain at Selale area.

Financing need is inter-related to the prospect of the milk and milk products marketing. If

the marketing issues are resolved, financing challenges will become more serious.

Otherwise, financing demand, especially at the lower level of the chain actors will

drastically decline as there is no reward for more investment in milking cows. It is a sign

of commitment from the government side to have an agency which is dedicated not only

to production and livestock health, but also to livestock marketing. If the efforts of

various stakeholders results in increase in demand for dairy products, financing will be at

the forefront in the least of challenges to the dairy sector.

43

6.2. Recommendation

1. To extend a loan to Union through processors, banks’ reputable customers.

The short sighted financing culture of commercial banks needs to be revisited. They need

to look beyond their credit worthy customers. It is important to look further and ensure

that the value chain where their customers are operating is sufficiently financed and

operating smoothly. By doing so, they will ensure that the business plan of their

customers is on the right truck. It is recommended that commercial banks to extend a loan

to Union through processors, banks’ reputable customers. The Bank provide the loan to

the Union, the Union repays the loan in the form of milk and milk products to the

processor. The processor withholds the loan repayment amount from the milk products

value and pay back to the bank. By doing so the bank will benefit from dealing with one

more organized customer while it is extending its credit services to wider scope in the

value chain. This relationship is depicted in Figure 5.

Figure 5: Proposed value Chain financing scheme with the involvement of

commercial banks

It is a win-win situation at all level. Under this proposal, processors will benefit from

having a reliable and financially strong Union. The Union will get a loan without

physical collateral. The commercial banks increased their outreach at a lower cost.

44

To implement this proposal, trust has to be build between the three parties (bank,

processors and Union). The Union needs to demonstrate organizational competence and

good governance. The initiate for the implementation of the scheme could come from any

of the parties.

2. Value chain financing with the involvement of Commercial Banks, MFIs,

cooperatives and farmers

To curb the financial capability of the MFIs, it is recommended that the MFIs and

commercial banks to work together using the established chain relationship between the

farmers and the cooperatives. Commercial Banks extend loan to MFIs and MFIs extend

loans to farmers, coops withhold the loan repayment from the milk payment and repay to

the MFI, MFI then settle their loan to commercial banks. Figure 6 depicted this

relationship.

Figure 6: Proposed value Chain financing scheme with the involvement of commercial banks and MFIs.

This proposal will work if commercial banks revise their years old collateral based

financing, at least when they are dealing with reputable MFIs. If collateral remain a

concern, international banks, organizations and Regional Governments are options for

loan guarantee. As indicated in the various part of this study, value chain financing is

beyond sector financing. It is all about the efficiency of the whole value chain. In recent

past, government was granting collateral guarantee for loans taken by coops and unions.

45

This collateral facility was available mainly for the purchase of agricultural inputs. It is

recommended that the facility need to be extended to financing of the coops and unions

for marketing problems too.

The suggested value chain financing enables commercial banks to reach more potential

borrowers in the sector with limited cost of loan management and shared risks. The local

knowledge and flexibility of MFIs will compliment the banks limitation and will simplify

the credit management. MFIs will save running costs as they do not need to travel to

collect repayments from the respective borrowers as coops are in charge of collection. As

a result cost of borrowing will be minimized at the level of MFIs.

Similarly, linkage could be created further between the Union and the cooperative. This

proposal is extension of the second proposal. MFIs are granting the loan to coops. Famers

are getting credit facilities for the purchase of feeds and other supplies from the coops.

MFIs are collecting the repayment through the Union. Unions are withholding the

repayment amount from coops when effecting payment for the milk delivered by the

coops. Coops further extend loan to farmers, to be settled from the milk payment. Figure

7 depicts this relationship.

Farmer (Producer) Cooperative Processors Super Markets

,kiosks and shops ConsumerUnion

Commercial BanksLoan provided

Loan Provided

Product Flow

Cash flow

Micro-finance

Repayment

Loan Provided

Figure 7: Proposed value Chain financing scheme with the involvement of Coops, Union, commercial banks and MFIs.

46

From figure 4, 5 and 6, one can understand that the value chain financing is benefiting

major actors in the value chain. In all the recommendations, retailers are not directly

benefiting from the value chain financing scheme. Based on the study, credit sales

financing to retailers will not bring a long lasting solution for low level of milk purchase

by retailers, mainly supermarkets. As the shelf life of milk is not more than three days,

and the liquidity problem of most of the supermarkets is significantly high than the value

of their daily milk supply, it is unlikely that such scheme will bring a long term

inducement to the volume of milk product purchases by these supermarkets. This doesn’t

mean that the value chain financing could not be technically feasible to this part of the

actors. Strong linkages, communication and trust building among the processors and

retailers needs to be established to ensure credit facilities are bringing more sales.

3. Other recommendations

Abolishing the credit ceiling: It is stated that the current credit cap is a problem of

commercial banks to provide more loans as possible. As the cap is a recent phenomenon,

with the objective of curbing inflation, it is assumed by many bankers as it will soon be

lifted (IMF 2010).

Improving the single borrower limit: Based on the research findings, the lower level of

dairy value chain is a missed sector for financers as it swings in the middle of MFIs and

commercial banks. Upgrading of MFIs’ single borrowing limit is a paramount importance

to address the financing gap of actors in the dairy sector especially those at the lower

level of the chain. This is achieved through increasing of the capital of the respective

MFI10, and lifting of a self imposed (internal policy of the MFIs) limits

Building a collateral base: It is recommended that coops and the Union to build their

fixed asset base to enhance their collateral capability. This can be achieved through

reducing the distributable profit of both the coops and the Union.

10 The Directive of NBE demands a maximum single borrowing of 1% of the capital of MFI

47

Sustainable management: Coops and the Union have to demonstrate their sustainable

institutionalized business management to a level where financiers could depend on

working with them and entering into a long term commitment.

Non-financing Issues: It is recommended to address other challenges of the value chain,

especially the marketing components through coordinated efforts by various stake holders.

Demand development, quality improvement, enforcement of standards, a national body

specifically concerned for dairy, like the Kenyan and Indian dairy board are

recommended course of actions. Recent effort in advertising and introduction of

nutritional value of milk need to be strengthened at least to reach the level where our

neighbors are achieved few years ago in terms of milk consumption per capita.

48

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