Key success factors and best practices in working with smallholder outgrowers Lessons learnt from across the continent MARCH 2013
Agenda Overview of the Technical Assistance Facility (TAF) of the African Agricultural Fund (AAF) Outgrower models TAF lessons learnt and recommendations 2
Agenda Overview of the Technical Assistance Facility (TAF) of the African Agricultural Fund (AAF) Outgrower models TAF lessons learnt and recommendations 3
AAF overview Achieved first close at US$ 151 million, final close target at Q1 2013 Food/agri and Sub-Saharan Africa focused Managed by Phatisa Equity investment requirement of US$ 5 million to US$ 20 million Management buy-outs and buy-ins, expansions, acquisitions, refinancings and start-up new ventures with proven sponsors Majority or significant minority stakes, board representation and other meaningful shareholder rights SME sub fund of $30M (up to $4M per transaction) $80M committed to date 4
Introduction to TAF 10 Million grant facility Primarily funded by EU, managed by IFAD and implemented by TechnoServe with contributions from UNIDO, AGRA and the Italian Development Cooperation 5 years (2011-2016) Directly linked to AAF investments Purpose is to enable small businesses, small scale farmers, farmers organizations to benefit, either directly or indirectly, from the investments of the AAF Focus on funding outgrower schemes, BDS projects for SMEs and capacity building for rural finance institutions 5
Case study: Goldtree (Sierra Leone) Deal concluded in July 2011. US$ 10 million investment to build new palm oil mill in Daru, Sierra Leone Environmental Impact Assessment completed in 2009 and updated 2012 in line with Sierra Leone Environmental Protection Agency (SLEPA) requirements in order to obtain a license to operate Mill to be supplied by 8,000 outgrowers with an existing 30,000 hectares of palm trees TAF funding 3 projects: Outgrower Replanting Strategy Road Development Plan Outgrower Support Program 6
Agenda Overview of the Technical Assistance Facility (TAF) of the African Agricultural Fund (AAF) Outgrower models TAF lessons learnt and recommendations 7
If structured effectively, outgrower schemes can offer a win-win scenario for farmers and buyers alike FARMER: inputs credit & other financial services training/skills transfer post-harvest logistics transport BUYER: land labor access to produce BUYERS NEED & FARMERS OFFER: cost effective, secure and reliable sources of raw materials that can meet market specifications in terms of quality and volume FARMERS NEED & BUYERS OFFER: 1. access to assured markets; 2. affordable input credit; 3. technical skills and innovations that will help them satisfy market requirements. 8
Selective examples of (statistically proven) successful outgrower schemes Location Description of outgrower scheme Impact Source Senegal 32,000 growers supplied 40,000 tons of groundnuts to a processor Contract farmers earn 55% more from agriculture than that of non-contracted farmers Warning and Key (2002) Madagascar 10,000 farmers supplied vegetables to an exporter Contract farmers have higher and more stable incomes and more likely to adopt new technology Minten et al (2009) Malawi 5,000 to 7,000 farmers supplied tea to commercial estates Farmers with private contract 1.7 times more productive than other farmers Chirwa and Kydd (2006) India Farmers supplied poultry to private firms Less experienced farmers able to earn similar gross margin as more experienced counterparts Ramaswami et al. (2006) Taiwan 300 rice farmers supplied to private millers Average profit margin under contract is more than 50 % above those without contract Chang et al (2006) China 160 farmers supplied apples and onions to 4 private firms Contract farmers earn more than noncontract farmers; Apple farmers benefit through higher yield and onion farmers through higher price Miyata and Hu (2007) 9
There are broadly five types of outgrower models Informal Intermediary Centralised Multipartite Nucleus-Estate Speculative, seasonal sourcing on an ad-hoc or semi-formal basis Minimal firm/farmer coordination Little to no inputs or services provided Little to no product specification by buyers Semi-formal to formal sub-contracting by buyers to partner intermediaries who manage outgrowers & provide services Limited direct firm/ farmer interaction Enhanced but limited product specification by buyers Buyer provides TA/ inputs and production services (e.g., tillage, spraying) directly, purchases the crop, and handles many post-harvest activities (i.e., processing, packing) Farmers provide land & labor; high degree of firm/farmer coordination Strict product specifications monitored by in-house technical staff Often direct link to processing Buyer sources from farmers or farmer groups, but TA/input/ credit provision & grower management via third parties Often limited direct firm/farmer coordination Higher level of product specification necessitates close monitoring/supervision of production Buyer operates centralized production and processing (estate), supplementing throughput via direct contracting with peripherally-located outgrowers Buyers often own or control land used by farmers, who supply labor Buyer provides TA/ inputs/credit/services and closely monitors and supervises production via in-house technical staff 10
Agenda Overview of the Technical Assistance Facility (TAF) of the African Agricultural Fund (AAF) Outgrower models TAF lessons learnt and recommendations 11
Lessons learnt so far Access to finance is the most difficult issue to crack but it is critical Availability of inputs is a major challenge in less developed countries company often has to procure them on behalf of farmers Infrastructure: If roads are bad, farmers will struggle to get their produce to market so the company may need to intervene Stakeholder management: All players need to recognise that there is a need to balance company and farmer needs Farmer profiles: Incorporating poorest of poor is not always possible Side selling: is often a symptom of other issues but is also affected by number of buyers in the market Technical Assistance: International TA is expensive and sometimes oversold but local TA is often weak 12
Our preliminary and general advice to companies designing new outgrower schemes Farmer economics: Check the scheme will be profitable for farmers low volume, high margin crops work best, others will be tricky Choice of model: Analyse the context and choose your model accordingly Scale: Start small and expect it to take 2-3 seasons to get it right Farmer profiles: Be selective about which farmers to work with, especially in a pilot Pricing: Use a transparent pricing formula and communicate it regularly in simple terms Sustainability: Aim to make the program sustainable from the beginning profits to the business should cover the costs of running the scheme; if they don t, it s a CSR initiative Long term: Recognise that in the long term, farmers will grow and seek independence and that = success! 13
More particularly, how to mitigate side-selling? Indirectly through the outgrower scheme Use transparent and flexible formulas to develop prices and/ or engage outgrowers in determining prices and pricing formulas Provide bundled / embedded services (e.g. extension, input sourcing) Use simplified contracts Leverage group liability mechanisms Concentrate in economically isolated areas Pay the outgrowers on time Communicate with outgrowers regularly Indirectly through involving third parties to change the dynamics Work with local government to develop concession programs to protect larger investments Establish codes of conduct across the industry Establish a third-party entity to review and settle disputes 14
Choose the right model for your company: key factors to consider Factor What it affects Implications CSR initiative vs. core business operations Level of investment from company CSR initiatives require subsidies (either from third party or the company foundation or CSR budget) If its critical to business operations, the company will be prepared to take on higher level of risk/investment Availability of third party finance for outgrowers Farmer economics Number of buyers in the market Availability of inputs Whether or not company will need to provide credit to farmers If 3 rd party finance is not available the company will need to provide credit for the scheme to work (meaning centralised/nucleus estate model) Risks of side selling If the crop is not very profitable to the farmer, reconsider an outgrower scheme or choose a model where the company is not taking much risk e.g. multipartite or intermediary Risks of side selling If there are many buyers in the market, pick a model where the farmer is not forced to sell to you e.g. multipartite or intermediary If you are the only buyer in the area, the risk is lower and you can opt for nucleus estate or centralised model Level of investment required from company If inputs are not readily available in the market the company may need to be involved in procuring them - tends towards centralised or nucleus estate models 15
Appendix
TAF funds different technical assistance through its three funding components 1 SME Component (53%) 2 Outgrower Component (36%) 3 NOT EXHAUSTIVE Rural Finance Component (11%) Train staff on management and technical skills Improve financial management and controls Conduct market research and facilitate market linkages Support SME to obtain quality certification e.g. HAACP, ISO 22000, Organic Support SMEs to increase/ enhance inclusive business practices 18 Design outgrower schemes Build the capacity of smallholder farmers Provide technical assistance and training to farmer groups or co-operatives Develop donor proposals to secure funding for additional/ ongoing farmer support Facilitate access to finance/ inputs/support services for farmers Conduct financial services needs assessments for outgrowers supplying AAF companies Support new financial product and service development Map and disseminate information about rural finance in the areas surrounding AAF companies Facilitate training for rural finance institution staff Assist AAF companies to develop input financing schemes (value chain financing)
There are strict criteria for TAF funded projects TAF can fund projects worth up to $500,000 or 30% of the value of the AAF investment (whichever is smaller) per AAF investee company TAF projects can not last longer than two years TAF funds will not subsidize long-term operating costs or capital expenditures of the recipient beneficiaries Portfolio companies must demonstrate commitment to the outcomes of the projects and in some cases will be expected to provide match funding All TAF projects must deliver development outcomes with a particular focus on jobs created and income increases 19