KAWERI COFFEE FARMERS ALLIANCE SUPPORT PROJECT

Transcription

1 KAWERI COFFEE FARMERS ALLIANCE SUPPORT PROJECT Establishment of the Uganda Coffee Farmers Alliance End of Project Report February 2005 February 2010 Stefan Cognigni Project Coordinator 1

2 Table of Contents Important Milestones... 5 Executive Summary... 6 Background... 8 The NKG Coffee Alliance Trust Project Implementation Project Area Project Beneficiaries Project Partners Field Set up Activities and Results Result 1: Project farmers are organized and their organizations act transparently and professionally in favour of their members Result 2: Farmers achieve higher yields in coffee production in a sustainable manner Result 3: Farmers produce and commercialize coffee of improved quality Overall Impact on Farmers Incomes Result 4: Professional coffee know-how is disseminated to other parts of Uganda Result 5: Farmers are being effectively assisted by project partners and in the long term have access to qualified support services supporting them in meeting their objectives Uganda Coffee Farmers Alliance Project Budget and Expenditures Conclusion

3 Table of Figures Diagram 1: NKG Coffee Alliance Trust Organizational Chart Diagram 2: Field staff organization Diagram 3: Levels of Farmer Organizations Diagram 4: Value Addition process Diagram 5: Extension set up Map 1: Map of Uganda showing project area Map 2: Map showing the 3 project zones Graph 1: Farmer Field Book results Table 1: List of DC Companies Table 2: Computation of Value Addition Table 3: DC Marketing Costs and Farmer Deductions Table 4: DC Company Overheads and Office Costs Table 5: Volume of Coffee bulk-marketed by DC Companies (Kg of Kiboko equivalent) Table 6: Demonstration Plot Yields Table 7: Cost of Production on Demonstration Plots Table 8: Farmer Field School Establishment Table 9: Adoption Levels of Good Agricultural Practices Table 10: UBOS statistics for adoption levels of GAP Table 11: Location of nurseries set up by the project Table 12: Comparison of screen size between project and conventional coffee Table 13: Different marketing situations for different farmers before and at the end of the project Table 14: Combined effect on farmers incomes resulting from value addition, improved marketing and from adoption of good agricultural practices Table 15: Effect of new planting on annual net income from coffee per farm in Ushs Table 16: UCDA Monthly Report for February '10 showing export value of coffee Table 17: FOT values of Robusta coffee exported Table 18: Project Budget in Euros

4 Acronyms and Abbreviations APEP ASPS CBO CFAU CFC COREC CWD DC EU FAQ FFB FOT GAP HRNS IPM KCFASP KCP LEAD LF MAAIF MOU MUDFA NAADS NAO NARO NKG NUCAFE OU PMU PO POT SFO STABEX UCDA UCFA UNADA WFP Agricultural Productivity Enhancement Program Agricultural Sector Programme Support Community Based Organization Coffee Farmers Alliances Uganda Company Formation Committee Coffee Research Center Coffee Wilt Disease Depot Committee European Union Fair Average Quality Farmer Field Book Free on Truck Good Agricultural Practices Hanns R. Neumann Stiftung Integrated Pest Management Kaweri Coffee Farmers Alliance Support Project Kaweri Coffee Plantation Livelihood and Enterprise for Agricultural Development Lead Farmer Ministry of Agriculture, Animal Industry & Fisheries Memorandum of Understanding Mubende District Farmers Association National Agricultural Advisory Services National Authorizing Officer National Agricultural Research Organization Neumann Kaffee Gruppe National Union of Coffee Agribusinesses Opportunity Uganda Project Management Unit Producer Organization Producer Organization Trainer Senior Field Officer Stabilization of Export Earnings Uganda Coffee Development Authority Uganda Coffee Farmers Alliance Uganda National Agro-Dealers Association World Food Program 4

5 Important Milestones 5

6 Executive Summary The Kaweri Coffee Farmers Alliance Support Project (KCFASP) was implemented over a period of 5 years (Feb 2005 Feb 2010) through a Grant contract with the NAO/EU. The KCFASP involved a number of different partners, both public and private, whose contributions have been crucial in the development of this project. The steering committee, composed of development and coffee sector stakeholders, was instrumental in guiding the project process. By addressing critical constraints, this project has created an environment where smallholder farmers are now able to develop their agricultural potential and to participate more prominently in the coffee value chain. This potential was always there, but was restricted due to a lack of knowhow and empowerment. The establishment of strong and transparent farmer organizations, with technical, managerial and entrepreneurial capacity, has unleashed this potential and created opportunities for farmers to significantly enhance their competitiveness. The project has successfully achieved the following: 14,574 Smallholder coffee farmers have organized themselves at primary level into 447 Producer Organizations (PO) and at secondary level into 24 Depot Committee (DC) Companies. Both these farmer organizations are 100% farmer owned; An Apex body, the Uganda Coffee Farmers Alliance (UCFA) has been designed, set up and registered; By primary processing and bulk marketing directly to exporters in Kampala, farmers have been able to add about 25% value (net of marketing costs) to their coffee. For the average project farmer this translates into a 44% increase in net income (from Ushs 147,000 to Ushs 211,500). If we also take into account current improvements in yields, farmers net incomes have increased by 212% (to Ushs 459,300). Once the large amount of new planting comes into production, the combined effect of value addition, yield improvement and new planting, will result in a 418% increase in farmers net incomes (to Ushs 761,508). DC Companies have become interesting commercial partners for financial institutions. Loans have already been granted to a number of them and further discussions on credit requirements for marketing and production are ongoing; Regular internal audits and a strong focus on transparency and accountability, has 6

7 been crucial to build trust among farmers and to generate active participation. This is of course key for the sustainability of the organizations; Further to coffee, a number of DC Companies have also engaged in bulk marketing of other crops such as maize and beans, seeking to enter into contracts with large buyers such as the WFP; Adoption levels of Good Agricultural Practices (GAP) by project farmers have more than trebled over the project period; The average production of farmers has more than doubled and production on most demonstration sites has quadrupled; Hulling outturns have increased from 48-50% to 55% on average. Outturns of up to 58% have also been registered; By delivering coffee directly to exporters in Kampala, DC Companies have achieved a price (average for the 09/10 main crop season) equivalent to 86% of the FOT export value of the coffee. After deductions of marketing costs and Company commissions, farmers still received a price equivalent to 77% of the FOT export value. This is a significant achievement compared to the farm gate price which is normally below 70% and as low as 50-55% of FOT value if the farmers are repaying loans with coffee; Availability of agricultural inputs has improved considerably in the project area. 14 out of 24 DC Companies have set up input supply schemes. Private stockists have also reported higher sales; With over 2 million new coffee trees having been planted by project farmers, Mityana and Mubende today rank among the districts with the highest replanting rate in Uganda; 6 nurseries and 7 mother gardens have been established, with a capacity to produce approximately 378,000 clonal plantlets per year; 447 Farmer Field Schools have been developed; The quality of the coffee produced has improved significantly. FAQ outturns, screen sizes and percentages of under-grades have all improved; the cup is cleaner with fewer defects; A Farmer Field Book monitoring system was tested with a sample of farmers. It is 7

8 now being revised to make it more adaptable to the local situation; Coffee has been selected as the priority crop in both Mityana and Mubende under the NAADS Prioritization of Enterprises Scheme; The project has been visited by a number of Government Officials and is often referred to as a model when designing new agricultural development programs; Stakeholders have shown keen interest and willingness to support the replication of this project in other districts in Uganda. The rolling out process has already begun in Luwero and Masaka districts; Successful elements are being shared with stakeholders, for example, through the National Coffee Production Campaign; The functional structures that have been established have become very appealing for other development organizations as well as for service providers and financial institutions. They provide a platform for the dissemination of information and services. A number of them are already taking full advantage of this. Background In close cooperation with the farmers in Mubende, the Ministries of Agriculture and Finance of Uganda, the Uganda Coffee Development Authority, the Secretariat of the Plan for Modernization of Agriculture, the Secretariat of the Medium Term Competitiveness Strategy, the European Commission, the Agricultural Productivity Enhancement Program, the Agricultural Sector Program Support Project, the Africa Project Development Facility and Neumann Kaffee Gruppe came together and designed this project for establishing the Kaweri Coffee Farmers Alliance (subsequently renamed as Uganda Coffee Farmers Alliance). The Alliance was designed to become a model for the collaboration between organized small holder coffee farmers and the international coffee business. The project was implemented over a period of five years and incorporated up to 15,000 coffee farmers in Mubende and Mityana districts. This 5 year period included a 3 year pilot phase and a 2 year consolidation phase. The initial plan was to set up a partnership between well organized farmer groups and the Kaweri Coffee Plantation (KCP). Such a partnership was meant to promote sustainable, 8

9 quality oriented coffee production and processing, and marketing of high quality Robusta coffee, taking advantage of KCP s direct links to the international market. However, early into the project it was agreed with project partners that for long term sustainability it was important for the farmers groups not to rely on KPC for marketing their coffee, but rather to remain independent and to develop their own processing and marketing skills. The decision to design this project stemmed from the identification of the following problems which hindered economic growth and competitiveness for smallholder coffee farmers: Low productivity and quality due to poor extension and training facilities on improved agricultural practices Lack of savings and access to finance to invest in coffee production and other income generating activities Reduced coffee tree population due to the devastating effects of Coffee Wilt Disease Poor and inefficient market access due to a lack of organizational structure and market information, and a strong dependency on middlemen preventing a move along the value chain All partners agreed that there were opportunities for these small holder coffee farmers to process and trade their coffee though their own professional groups, adding value to their product and fetching attractive prices for an improved quality coffee marketed in bulk. To make this happen, small holder farmers needed to be organized in viable production and processing units capable of effectively accessing coffee extension services, handling and marketing large quantities of improved quality coffee, implementing internal control systems to ensure transparency in operations and effectively negotiating with market players for adequate prices and other services. With this understanding and with committed support from a number of coffee and development partners, the implementation of the Kaweri Coffee Farmers Alliance Support Project (KCFASP) commenced in February The overall aim of the KCFASP was to increase on a sustainable basis net farm incomes of 15,000 dedicated smallholder coffee farmers in Mubende and Mityana districts. This was to be achieved through focused training and support on production, organizational development, value addition and market access. 9

10 The specific objectives of the project were therefore formulated as follows: To increase total coffee production of farmers participating in the Kaweri Coffee Farmers Alliance To improve the quality of coffee being produced and processed and to tap into international markets To establish commercially viable farmer organizations that operate in a transparent and professional manner in favour of their members To facilitate the establishment of an effective smallholder farmer controlled coffee processing and marketing structure in Mubende District and adjacent areas To serve as a model and generate best practices for private partnerships for the development of rural areas in Uganda that build around industry investments in the agricultural sector. The project would work closely with existing organisations like NAADS, NARO, UCDA, and the Ministry of Agriculture, and existing farmer support programmes, like APEP, ASPS, and later LEAD, significantly benefitting from their expertise, staff, infrastructure and financial contributions. The project approach was in line with Uganda s Plan for Modernization of Agriculture vision which was to eradicate poverty through a profitable, competitive, sustainable and dynamic agricultural and agro-industrial sector. The participatory approach of the project was also seen as relevant in enhancing beneficiary participation in project implementation and development. The NKG Coffee Alliance Trust The NKG Coffee Alliance Trust was established as a non-profit Trust under Ugandan law. As the Project Management Unit (PMU), it has been responsible for implementing the project and for coordinating the activities by the various partners. Project staff, including the Project Coordinator (who also acted as the Manager of the Trust), was employed by the Trust. 10

11 The diagram below shows the staff, employed by the NKG Coffee Alliance Trust, which has been active in the implementation of the project. Diagram 1: NKG Coffee Alliance Trust Organizational Chart Manager of the NKG Coffee Alliance Trust Project Coordinator Field Operations Manager Project Accountant Office Administrator Field Officers (3) Commercial Coordinator Data Base Officer Monitoring & Evaluation Officer Producer Organization Trainers (3) Field Office Secretary Driver Field Driver Office Assistant The Trust, with most of its trustees and employees being coffee professionals, had vast expertise, from production, to processing, to marketing, all key for the implementation of such a large scale project, the first of its size in Uganda. Under the umbrella of the Hanns R. Neumann Stiftung, the Manager of the Trust also had access to tools and approaches developed in coffee projects in other producing countries; he was able to share this information with the relevant project coordinators. The Trust was also responsible for the promotion of the project in Uganda and internationally. For this, it could rely on the extensive network of the Hanns R. Neumann Stiftung. The project was implemented under a Grant Contract signed between the NKG Coffee Alliance Trust and the National Authorizing Officer using STABEX funding provided by the European Union. The overall supervision over the beneficiary s activities within the framework of this agreement was devolved by the supervisor to the Uganda Coffee Development Authority, who acted as the supervisor s representative. 11

12 The Project Coordinator reported twice a year to a Project Steering Committee composed of members from key supporting partner organizations and stakeholders from the coffee and development sector. The Project Steering Committee Members included: Uganda Coffee Development Authority (as the Chair) Development Partners (EU, APEP, ASPS, LEAD) Ministry of Finance, Planning and Economic Development (through the NAO) Ministry of Agriculture, Animal Industry and Fisheries National Agricultural Advisory Services Farmer Representatives NKG Coffee Alliance Trust Trustees Kaweri Coffee Plantation Hanns R. Neumann Stiftung (through EDE Consulting) KCFASP management The PMU managed the project on the basis of annual work programmes and budgets which were endorsed by the Project Steering Committee and in accordance with EC rules and regulations. The PMU also produced half yearly progress reports. The overall project budget amounted to approximately Euro 4 million, of which the EU contributed Euro 2,309,840. Contributions from the other partners were both in kind and in cash. Annual financial audits were carried out, as well as 2 project evaluations: mid-term and final. Project Implementation Project Area The project area is located in the districts of Mityana and Mubende both of which are in the central region of Uganda. Mityana used to be part of Mubende district but in 2005 it was separated and made into a district of its own. Today, Mubende district covers an area of 4,645 sq. Km and has a population of 540,670 while Mityana covers an area of 1,953 sq. Km and has a population of 295,

13 In both districts, the prime activity is agriculture with over 70% of the population depending on subsistence farming as the main source of livelihood. The main food crops grown are sweet potatoes, beans, cassava, maize, bananas, ground nuts and a number of vegetables such as tomatoes, onions and cabbages. The main cash crops are coffee and tea. Livestock is also an important activity in Mubende district. Once covered by forests, excessive logging, production of charcoal and land clearing for agriculture, have changed the landscape into hills covered by sparse trees. Altitudes lie between 1,100 and 1,300 meters with an annual precipitation of about 1,200 1,500 mm. This optimal altitude together with adequate rainfall makes it an ideal Robusta coffee growing area, with two harvesting seasons. Map 1: Map of Uganda showing project area 13

14 Project Beneficiaries Project beneficiaries were typical smallholder farmers trying to make a living from an intercropped plot of land. Plot sizes varied between half an acre and 5 acres with coffee occupying only a portion of the land, and typically intercropped with Matooke and a few other crops. The average farmer had between 250 and 300 poorly managed coffee trees and in many cases totally neglected. Years of low prices, unattractive marketing opportunities and the devastating effects of Coffee Wilt Disease (CWD), which wiped out about 40% of the coffee tree population, did not provide the farmers an incentive to focus and invest in coffee production. Further to this, there was a scarcity of planting material to replace the trees that had died, and a lack of efficient extension. The poor condition of the coffee trees resulted in very low yields of about 1Kg of dry cherry per tree or approximately 500 Kg clean coffee per Ha. This was far below the potential of the trees which, if properly managed, could produce around 2-3 MT per Ha. With a lack of organizational structures, farmers were also not empowered to move further down the value chain and therefore released control of their coffee at farm gate earning the lowest possible price. This was a serious situation as income from coffee should pay for education, health and other basic needs. Project Partners The project was designed to be a multi-stakeholder initiative with partners from both the private and from the public sector. The organizations that were contacted found a lot of merit in the design and approach of the project, and were eager to contribute to it. All contributions received, whether in kind or in cash, were crucial towards the achievement of the project aim. The following were the main project partners: European Union (EU) The European Union was the main funder. They provided a grant that funded the PMU and a large part of the filed activities. 14

15 Uganda Coffee Development Authority (UCDA) The UCDA carried out a supervisory role on behalf of the Ministry of Agriculture and chaired the steering committee. They also promoted the project by organizing a number of field visits for Government Officials. Through the Coffee Replanting Program they provided a large number of seedlings to project farmers. Agricultural Productivity Enhancement Program (APEP) / USAID APEP have been instrumental in the organizational development process, providing Producer Organization Trainers, introducing a methodology that has proven very successful and facilitating farmer groups with tools and equipment. Further to this they have contributed to the establishment of demonstration plots and have funded a number of consultants and experts. Agricultural Sector Programme Support (APEP) / DANIDA Their contribution has been crucial in the establishment of coffee nurseries and mother gardens, in supporting the capacity building process of farmer organizations and in funding a number of consultants, experts and trainers. Kaweri Coffee Plantation (KPC) KPC provided technical expertise in the training of nursery operators and in the establishment of mother gardens. KCP has also made available high quality planting material for the mother gardens and a large number of cuttings for rooting in the nurseries. Livelihoods and Enterprises for Agricultural Development (LEAD) / USAID Even though the LEAD program started during the final project year, very important support and expertise was provided for the establishment of Farmer Field Schools which have rapidly encouraged farmer to farmer learning. LEAD will become a more prominent partner in the rolling out process. National Agricultural Advisory Services (NAADS) NAADS have contributed to agricultural extension and have provided additional coffee seedlings to project farmers. Ibero (Uganda) Ltd Ibero has provided market information to farmer groups and a market for their coffee. They have signed MOUs with microfinance institutions and DC Companies in order for 15

16 loans to be granted. They have also been promoting the project coffee internationally through their trading network. Field Set up In order to execute the project a field office was established in Mityana town and the project area was divided into 3 zones; Mityana, Kassanda and Buwekula, each comprising of approx 5,000 project beneficiaries. Map 2: Map showing the 3 project zones BUWEKULA Zone 1 KASSANDA Zone 2 MITYANA Zone 3 Some field staff such as the Field Officers and the Producer Organization Trainers were allocated to specific zones while others such as the Field Operations Manager, the Monitoring & Evaluation Officer and the Commercial Coordinator covered the entire project area. Additional support staff was based at the field office. Field Officers and Producer Organization Trainers designed weekly work plans which were approved by the Field Operations Manager. 16

17 With such an extensive number of beneficiaries to be reached, it was necessary to also involve a large number of farmers as trainers, such as Lead farmers, Demonstration Plot Holders and Depot Committee Extensionists. As such, the Trainer of Trainers approach was employed. The diagram below shows the organization in the field: Diagram 2: Field staff organization Field Operations Manager Field Office Support Staff Database Officer Zone 1 Mityana Zone 2 Kassanda Zone 3 Buwekula Office Administrator Driver Field Officer Producer Organization Trainer Field Officer Producer Organization Trainer Field Officer Producer Organization Trainer Monitoring & Evaluation Officer Commercial Coordinator Activities and Results The 5 specific results that were outlined in the project proposal were the following: 1. Project farmers are organized and their organizations act transparently and professionally in favour of their members 2. Farmers achieve higher yields in coffee production in a sustainable manner 3. Farmers produce and commercialize coffee of improved quality 17

18 4. Professional coffee know-how is disseminated to other parts of Uganda 5. Farmers are being effectively assisted by project partners and in the long term have access to qualified support services supporting them in meeting their objectives Hereunder, the activities and achievements are discussed under each of the Specific Results. Result 1: Project farmers are organized and their organizations act transparently and professionally in favour of their members Just as in most other districts, also in Mityana and Mubende the coffee cooperatives collapsed as a result of inefficient leadership that was not able to compete in a liberalized coffee market against new highly flexible and efficient private buyers and traders. However, whilst liberalization crated a relatively efficient internal marketing structure, it also enabled the development of many levels of coffee transfer and value addition between the farmers and exporters. Farmers, however, did not have the capacity and the infrastructure to move further along the value chain, and therefore released control of their coffee at farm gate earning the lowest possible value for it. It was thus necessary to reorganize producers into organizations that would enable value addition activities such as bulk processing and marketing, thereby reducing the dependency and vulnerability of farmers on middlemen and on their exploitative practices. Following the sensitization process, organizational development activities began immediately with the formation of Producer Organizations (PO) which grouped about farmers in each PO. POs were set up at village level. The Mubende District Farmers Association (MUDFA) collaborated in identifying the main coffee areas (parishes and subcounties) in the 2 districts that would benefit the most from this project. During the establishment of the POs, the concept of the Depot Committees (DC) was also introduced as a second tier structure, one that would focus mainly on value addition, access to a better market and that would provide additional services to the members such as access to extension, finance and inputs. A DC grouped approx POs. An Apex body, the Uganda Coffee Farmers Alliance (UCFA) was also established as a third tier level. The UCFA was established towards the end of the project as it was important for the POs and DCs to be properly functioning before this Apex body could be set up. The UCFA will be discussed more in detail later on in this report. 18

19 The diagram below summarizes the 3 levels of organizations, indicating for each, the main functions and the key staff: Diagram 3: Levels of Farmer Organizations Producer Depot Committee Uganda Coffee Organization (PO) (DC) Farmers Alliance (Groups of Farmers) Approx. 20 POs (Association of DCs) Area Village Level Parish Level Regional / National Level Key Bulking Bulking and Marketing Contact to Exporters Functions Extension Value Addition Marketing Support Locally Farmer Field School Market Information and Internationally Demonstration Plot Link to Agricultural Services Networking Link to Input Suppliers Technical Support to POs Link to Financial Services Code of Conduct Extension Key Staff Executive Committee Executive Committee Executive Committee Lead Farmers (2) Manager Manager Demo Holder Extensionist Office support staff FFS Facilitator Stockist Organizing farmers into these structures has been a step by step process. A lot of sensitization was initially carried out at village level to explain the importance of organizational development and the benefits that would result from it, such as: The establishment of an extension system where farmers would be trained in groups. The development of Farmer Field Schools which would provide a platform for farmers to meet regularly and to address issues of common interest, and to collectively discuss measures and solutions. The possibility of bulk marketing and value addition which would not be possible by individual farmers. The possibility of accessing services in groups, for example credit from financial institutions. 19

20 The establishment of the POs was, therefore, the first step before the formation of the DCs could be initiated. The time period between the formation of these two structures varied anywhere between 2 and 6 months. This depended on the speed of forming approximately 8-10 POs which is the minimum number for starting the process of DC formation. Therefore the main steps that were adopted in the development of the DCs were the following: Identification of a number of POs that were willing to come together Election of an executive committee Drafting of a constitution and bylaws Setting up an office/store for administrative functions and for collection of coffee Appointment of a Marketing Manager and an Extensionist Election of a Marketing Committee, a Finance Committee and a Legal & Disciplinary Committee Election of an audit committee to monitor transparency of operations In order to achieve the above, specialized training both by project field staff and by professional consultants was provided on the following topics: Election of leaders and group dynamics Professional conduct and good business practices Administration (documentation and record keeping) and logistics of bulking and marketing coffee Post harvest coffee handling and quality control Financial management, accounting and banking Auditing procedures During the 4 th project year a step further was taken in DC development and they were registered and incorporated as Companies Limited by Guarantee. Two studies were conducted by legal experts and both concluded that this status was the most appropriate. With the plan of eventually forming an Apex Organization, the legal DC set up had to also facilitate the establishment of the next level. The option of setting up a Cooperative at Apex 20

21 level would have been rather complex as the DCs would have had to become Secondary Cooperative Societies and the POs Primary Cooperative Societies. Further to this, farmers were not very keen on the Cooperative setup. The most straight forward and least complex setup was the Company Limited by Guarantee, where PO Lead Farmers became the founding members or promoters of each DC Company. DC Companies Chairmen (in some cases also Managers) then became the promoters for registering the Apex Organization. A total of 443 Producer Organization and 24 Depot Committee Companies have been established. All these structures are 100% farmer owned and managed. They are commercially driven and focused to achieve the best possible market and to provide their members with important services that will enable further development. Table 1: List of DC Companies Name of DC Company Buwekula zone Number of member Producer Organizations Number of member Farmers Kigando Coffee Farmers Company Naluwondwa Coffee Farmers Company Kitenga Agali Awamu Coffee Farmers Company Nak- kasambya Coffee Development Farmers Company Gayaza Coffee Growers Company Kijjumba Integrated Farmers Company Kasambya Coffee Growers Company Kanseera Farmers Company Namagogo Coffee Farmers Company Kassanda Zone Kiteredde Coffee Farmers Development Company Kaluma Coffee Growers Company Kassanda Coffee Growers Company

22 Kabulubutu Coffee Producers Company Bukuya United Farmers Company Kamaga Farmers Company Kizira Farmers Company Kiganda 1 Coffee Growers Company Mityana Zone Nabumbugu Coffee Growers Company Kakindu Integrated Coffee Farmers Company Kalangalo Integrated Coffee Development Farmers Company Manyi Coffee Farmers Company Miseebe Coffee Farmers Company Taanacopa Coffee Farmers Company Busiiki Farmers Company Total ,574 All DC Companies have elected a Board of Directors; recruited an Executive Committee (composed of a Chairman, a Vice-Chairman, a Treasurer, a Secretary, a Marketing manager and an Extensionist); set up control committees and have established a location (store/office) from where business is conducted. Over the 5 project years DC overheads and operating costs (office rent, stationery, staff costs, etc) have gradually been passed on to the DCs and to date they are all able to meet these costs. Their main form of income is from commissions charged to their members for the marketing service provided. 20 Out of 24 Companies now have operational bank accounts. The control committees have been set up to enhance transparency by involving a number of people in the decision making process. In the early stages of DC formation the Marketing Managers and the Treasurers were carrying out transactions without needing the prior approval of a committee; this led in some circumstances to personal interests overriding those of the DC. For this reason supervisory/control committees were set up with the committee members being rotated on a regular basis. 22

23 The 3 supervisory committees that were identified as important and necessary to enhance transparency and to provide sufficient assurance to DC members were the following: Marketing/Business Committee: Responsible for monitoring the performance of the Marketing Manager and for ensuring that the coffee is sold to the best possible market. This committee is also actively involved in mobilizing farmers during the harvesting season and in coordinating logistics and commercialization activities, as well as in negotiating with service providers such as transporters and hulling factories. Financial Committee: Their main responsibility is to approve and monitor financial transactions, and to participate in audit exercises. They also participate in the development of marketing budgets and manage bank accounts. Recently, they have also been coordinating with financial institutions for credit issues. Legal & Disciplinary Committee: Their role is to ensure that procedures and regulations within the Company are adhered to. They enforce professional conduct from the management and from member farmers. DC Companies prepare marketing budgets before each coffee harvesting season and carry out audits at the end of every season to ensure full accountability of all transactions carried out. As there are two coffee seasons each year, the audit exercise is carried out twice a year. In each project zone (Mityana, Kassanda and Buwekula) the audit team is composed of representatives from the finance committees of different DC Companies; this way DC Companies cross audit each other. Audit results are then discussed in DC council meetings with open participation for members. To date, these meetings have been supervised by project management, however, starting form the next season the supervisory responsibility will be passed on to the Manager of the Uganda Coffee Farmers Alliance (UCFA). The requirement for introducing internal audits became apparent as farmers needed reassurance that their leaders were managing their organizations in a transparent and accountable manner. Thus, training on auditing became a very important activity of the project. Auditing has, therefore, been instrumental for identifying loopholes and areas where controls needed to be enhanced. Further to this, it has also led to changes in the management of a number of DC Companies. It is a result of the audits that supervisory/control committees have been put in place. It is also a result of the audits that the mechanism for remunerating the Marketing Manager has been revised. Previously, Marketing Managers received a fixed commission for every Kg of coffee bulk marketed regardless of where it was sold; as such there was no incentive for achieving the best price. 23

24 Under the new system, Marketing Managers receive a percentage of the profits generated, and this provides them with an incentive to look for the highest price and to strengthen negotiations with service providers. Over the last year this system has resulted in an improvement in performance by a number of Marketing Managers. DC Companies are also discussing the importance of recognizing the efforts of the Lead Farmers who operate at PO level and who are at the first stage of the bulking process. They do not market the coffee but play a critical role in mobilizing farmers and in collecting the coffee at PO level. Therefore, it may be reasonable to motivate them through a small payment based on performance. Coffee marketing has evolved over the 5 project years and at each stage additional value was added to the product. During the first 2 years farmers delivered bulked dry cherries to 3 central warehouses (one in each zone) where they release ownership of the product to a number of different buyers: exporters, traders, hullers, etc. This already represented a step forward in comparison to the traditional practice of selling fresh or dry cherries directly at farm gate to middlemen. During years 3 and 4, DCs began hulling the dry cherries and selling FAQ coffee taking advantage of an improved hulling outturn (percentage of green coffee out of dry cherries). This practice added further value to the product and, coupled with an enhancement in quality, led to an increased competition amongst buyers which pushed prices higher. Unfortunately, most of the coffee purchased by local FAQ traders was then mixed with cheaper and lower quality coffee purchased outside the project area. Nevertheless, for project farmers it represented a further increment in income. In year 5, with the DCs registered as Companies, a significantly bigger step was taken and DC Companies began delivering FAQ coffee directly to the exporter s premises in Kampala, bypassing all the middlemen and traders. This move further down the value chain was prompted by an increased feeling of ownership and by a significant improvement in capacity with regards to coffee marketing and logistics. DC Companies took the initiative of setting up zonal marketing committees to coordinate sharing of trucks and collection of coffee. This process of delivering FAQ to exporters in Kampala, therefore, involves a number of steps: collection of dry cherries from member POs; quality control; processing into FAQ and transportation. These activities require coordination of coffee deliveries, record keeping, access to market information, negotiations with service providers (hullers and transporters) and financial management, all of which the DC Companies are now able to perform. The table below demonstrates the process of value addition as farmers progressed in their marketing through their Companies (computed with the average prices during the 09/10 main crop season): 24

25 Table 2: Computation of Value Addition Point of Sale / Buyer Farm Gate / Kiboko Middleman Hulling Factory / FAQ Trader FAQ Price Ushs/Kg DC Company Deduction Ushs/Kg Net FAQ price for farmers Ushs/Kg Net price *Kiboko equivalent Ushs/Kg Total value addition Ushs/Kg Kiboko , ,850 1, Kampala / Exporter 2, ,010 1, * Kiboko equivalent price has been computed taking into account the average hulling outturn during the season which was 55% Based on the above numbers, farmers achieve 14% additional value between selling dry cherry at farm gate and selling FAQ at the hulling factory, and an additional 10% by delivering the FAQ to exporter in Kampala. This is represented in the diagram below. Diagram 4: Schematic representation of the value addition process in Table 2 above Selling Kiboko at Farm Gate Selling + 14% FAQ at Hulling + 10% Factory Delivering FAQ to Kampala + 24% In the above calculations we have considered the farm gate Kiboko price for untied coffee, i.e. for coffee that is not handed over to middlemen in repayment of a loan, in which case the value would be significantly lower, probably as low as Ushs 600/Kg. 25

26 The 24% value addition computed above is therefore on a net basis, i.e. after deduction of marketing costs and Company commission. An approximate breakdown of the Ushs 235/Kg FAQ deducted by the DC Companies is here below. These are all costs associated with moving the coffee along the value chain, from the POs to the exporter and include handling, processing, transport and commissions payable. These costs will vary slightly from delivery to delivery and between DC Companies depending on location, distances, volumes, etc. Table 3: DC Marketing Costs and Farmer Deductions Deductions from the selling price to cover costs Ushs/Kg FAQ Collection from PO 15 Handling at DC Company 4 Transport to Hulling Factory 20 Hulling fee 80 Loading at hulling factory 2 Transport to Kampala 50 Marketing Manager Commission 14 Total Costs 185 DC Company Commission 50 Total Deduction 235 The DC Company commission will be used to cover Company overheads and office running costs. Here under is an example of the types of costs that are incurred by an average DC Company during the year. Table 4: DC Company Overheads and Office Costs Cost Item Unit Cost Units Office Furniture (over 10 years) Office and store rent General meetings Cost per Year Ushs 120,000 12,000 20, ,000 50, ,000 Board Meetings 30, ,000 26

27 Transport for Marketing Manager Salary of Extensionist Stationery Airtime / Communication Annual Audit Total 20, ,000 50, ,000 15, ,000 12, ,000 80, ,000 1,726,000 With a commission of Ushs 50/Kg the break even volume would be about 35 MT of FAQ. Even though this volume is currently not being fully achieved by individual Companies, it is expected that more and more farmers will be attracted by the additional income generated through the system: this would include both farmers that are already members but not yet active and new participants motivated by the developments. Company Directors and Executives are very confident that volumes will increase substantially during the next seasons for the following reasons: farmers who are already delivering will deliver more; farmers, who have not delivered so far, will soon begin not to miss out on the significantly improved prices; improved yields and new planting will increase the overall production volume. Further income is also raised by the Companies through sales of inputs and in some cases through membership fees. A marketing study, conducted in the project in 2009, segmented the project farmers into 4 main categories according to their marketing requirements: (A) 20% of Farmers Highest Price (C) 10% of Farmers Attachment to Trader (B) 55%of Farmers Available Payment on Delivery (D) 15% of Farmers Convenience Group A Highest price. This group represents the most loyal suppliers to the PO/DC structure as they deliver the majority of their production to the PO collection point. They are motivated in supporting the development of the POs and DCs, because they are aware that prices will fall again if the DC Companies fail to develop a sustainable business. Even when the value addition process was not as advanced as it is today, and prices offered by the DCs were only marginally higher than those offered by the middlemen, they still supported the DCs, confident that at some point in the future this differential would be significantly higher. This group tends to include the more wealthy farmers who are less 27

28 desperate for immediate cash. They can also be associated with first-movers; they support the idea before it has been proven successful. Group B Available payment on delivery. This group is the largest, and farmers in this group deliver very little to the POs. The main barrier for them is lack of pre-finance available by the DCs. They don t yet fully trust the system and are not comfortable in releasing their coffee without, at least, receiving a part payment. They are also sceptical about somebody else commercializing their coffee. This mistrust is probably based on previous experiences with the cooperative structure. Nevertheless, these farmers are very appreciative of the training and other services they receive from the POs and DCs. Many have adopted good agricultural practices and are already achieving important yield improvements. Group C Attachment to trader. The farmers in this group have a strong link or relationship with traders, especially with the smaller bicycle traders at village level. They may be related or may have financial connections. Farmers in this group are the most difficult for the DCs to attract. Group D Convenience. In this group there are farmers who look for the easier sale rather than the most rewarding one. In this sense, nothing is easier than handing over the coffee at farm gate, especially when the buyer is not concerned about quality. These farmers also tend to have immediate cash requirements due to bad planning. This (simplified) analysis should provide the DCs with an indication of priority, i.e. of their most important clients that they should focus on servicing first. Group A and group B, which comprise the majority of the members, should be priority. They also fit with the strategy of improving production and quality. Therefore, the main reasons which have been identified for which a relatively large amount of coffee, estimated at about 70%, still ends up in the hands of middlemen are the following. Most of these are already seriously being addressed by DC Companies and significant steps forward have already and been made in finding solutions: Farmers still depend heavily on middlemen for access to loans, and these are usually repaid in coffee. Not only will the farmer group lose out on the volume of coffee, but the exorbitant interest rate will result in a heavily discounted price to the farmer (up to 40-50%). A number of DC Companies are discussing the possibility of building a pool of funds that can be used to provide small loans to farmers so that they don t have to rely on 28

29 middlemen. Further to this, they are also encouraging the establishment of saving schemes (VSLAs) at PO level. In a number of DCs, for example in Kiteredde, and POs these activities are already in progress. Farmers require a part payment when delivering their coffee; however, most DC Companies do not have the funds to offer such payment on delivery. A link has been established between the DC Companies and Opportunity Uganda (OU), a microfinance institution subsidiary of Opportunity International. During the last main crop season a pilot was conducted and OU granted loans to 2 DC Companies: Ushs 6M to Naluwondwa Coffee Farmers Company and Ushs 8M to Kitenga Agali Awamu Coffee Farmers Company. Unfortunately these funds were only released in the middle of the marketing season and thus it has been difficult to determine the full effect of the loan on the volume of coffee bulk marketed. Other DC Companies such as Bukuya United Farmers Company and Kiteredde Coffee Farmers Development Company have been able to access loans of Ushs 3.5M and Ushs 2M respectively from Equity Bank. In some DC Companies, for example Busiki and Kakindu, funds were raised internally through contributions from some farmers who had no urgency to get cash. These farmers allowed the DCs to sell part of their coffee and to use the proceeds as a revolving fund to buy from other farmers who were in need of immediate cash. They were then repaid at the end of the season with a small interest. These members contributions ranged between Ushs 2-4 M in total. Lead Farmers who are at the first stage of the bulking process are not always motivated as they are not being remunerated for their work. DCs have realized that it is as important to compensate Lead Farmers as it is to compensate the Marketing Manager. A number of Companies, such as Busiki, will test a performance incentive for the Lead farmers during the next harvesting season. The fact that DC Companies have began transacting in a commercial manner with clear documentation and with payments being received in a bank account, has made them an attractive partner for financial institutions. Managers from a number of banks in Mityana and Mubende have held meetings with Executive Committees and Finance Committees to discuss financial needs. Opportunity Uganda is also determined to devise a system through which loans for inputs can be availed to individual farmers. These loans will be granted to POs in proportion to the volume of coffee delivered to the DCs during the previous marketing season. This condition is important as it will provide the POs with an incentive 29

30 to deliver more coffee in order to obtain a bigger loan the following year. Group guarantees will also be required for additional security. It is expected that higher incomes through improved yields, value addition and better market access will encourage more savings. This should in the medium to long term reduce the farmers dependency on external finance. The table below shows the volumes of coffee (in Kg of dry cherry equivalent) that have been bulk marketed by the DCs over the years. Table 5: Volume of Coffee bulk-marketed by DC Companies (Kg of Kiboko equivalent) Coffee Season Main Crop Oct / Feb Kg dry cherry Fly Crop June / Aug Kg dry cherry Totals Crop Kg dry cherry 05/06 142, , ,174 06/07 605, , ,744 07/08 667, , ,942 08/09 705, , ,921 09/10 491,068 The reduction in the 09/10 main crop is largely due to drought that has affected most parts of Kassanda and Buwekula zones. In fact, Mityana contributes to almost half the volume with 227,677 Kg while Buwekula and Kassanda with 130,049 Kg and 133,342 Kg respectively. The adverse weather conditions were also evident from the very small size of the beans (screen size) from these affected areas. Drought affected coffee tends to result in a poor FAQ outturn if hulled and very likely to yield a negative value addition if the outturn falls to 50% or below. It may therefore have been a calculated decision by some Companies not to bulk and process the Kiboko, but rather to sell the coffee as Kiboko to middlemen. All Companies have the instruments necessary to carry out hulling tests. In addition to marketing coffee, a number of DC Companies have also started to look into other crops such as beans and maize. These are crops that become attractive in large volumes and as such will acquire significantly more value if bulked. Companies such as Kalangalo Coffee Development Integrated Farmers and Nak-Kasambya Coffee Farmers Development have already approached the WFP for contracts to supply maize. Kitenga 30