AgDevCo’s Smallholder Development Unit (SDU) has been convening periodic virtual knowledge sharing sessions for its partner businesses, as we all work to understand the implications of the Covid-19 pandemic for African agribusiness and their smallholder producers and customers.
In a recent session, AgDevCo and SDU partner businesses explored how to build and scale effective aggregation mechanisms for quality smallholder produce. Our guest speakers have many years of operational experience and this article shares the common key elements of success they identified.
Scale is critical for many smallholder schemes to be commercially viable and sustainable. But it is unrealistic for agribusinesses to source directly from large numbers of individual smallholder farmers – the financial cost would be too high and the logistics too complicated. Instead, businesses use different mechanisms to scale their relationships with smallholder farmers and aggregate large volumes of production. Two key mechanisms to achieve this are:
1. Producer organisations
2. Market intermediaries, such as agent and sub-agent networks
Guest speakers Harriet Kindole from Taylor Winch Tanzania and Charles Oboth from the Gulu Agricultural Development Company (GADC) in Uganda have hands-on experience building reliable, loyal smallholder supplier bases using these mechanisms. Whilst they use different models to do so, they agree that there are common key elements for success:
Company background: Taylor Winch is Tanzania’s leading arabica coffee exporter. They purchase 25% of product directly from 15,000 smallholder farmers. The company is owned by Volcafe Ltd, one of the world’s biggest coffee traders, specialising in single-origin, high-quality coffee.
Country background: coffee is a high-priority export crop in Tanzania and growers are legally required to market their produce through Agricultural Marketing Cooperative Societies (AMCOS). These are tightly regulated by the Tanzania Co-operative Society Act 2013. AMCOS vary in size and volume, but generally cover approximately 200 farmer members, depending on geography.
“Due diligence is critical and takes approximately six months to be sure that there is no corruption or monetary mismanagement. We attend AMCOS annual general meetings to observe levels of transparency and leadership quality and speak with the responsible government Co-operative Officer. We consult with individual farmer members to identify gaps in the provision of extension services.
Once we engage an AMCOS, we invest heavily in building direct relationships with the farmers as well as the AMCO leadership. We have a network of field officers who are in regular contact with them and we assign a lead farmer to each AMCO, paid by Taylor Winch, who reports to a network of regional agronomists. These lead farmers receive training and technical support to pass on to AMCO members.”
Marketing and Project Manager
Given that demand for high-quality arabica coffee is extremely high, Taylor Winch is operating in an extremely competitive buying environment. AMCOS are free to sell directly to other customers or go to auction. Therefore, Taylor Winch invests heavily in building loyalty from AMCOS through three key activities:
1.Finance. Taylor Winch ‘tops up’ AMCOS’ ability to provide pre-finance to their members, either in cash or in-kind through the provision of fertiliser and crop-protection inputs. Checks and balances are in place to ensure appropriate use of the funds. For instance, all requests for inputs from AMCOS are cross-checked by Taylor Winch field teams. The Tanzanian Coffee Board safeguards Taylor Winch against AMCOS defaulting on their payments, by collecting outstanding debts from the AMCOS.
2. Training. Taylor Winch conducts training needs analysis and ensures that they support the AMCOS where most needed, through agronomic support and management training. Taylor Winch’s goal is to improve the quality of coffee available for them to purchase, as well as to raise standards across the Tanzanian coffee sector as a whole.
3. Good prices. Taylor Winch trains and funds AMCOS to get Fairtrade, Rainforest Alliance, Organic and UTZ certified, guaranteeing them higher prices at auction and through direct trade. Taylor Winch also facilitates direct marketing so AMCOS can sell their coffee directly to consumers who are willing to pay more for social impact.
Taylor Winch are continually strengthening governance capacity within the AMCOS they partner with, by providing them with finance and management training. Although Tanzania has a long history of supporting coffee farmers through cooperative structures and tightly regulating them, financial management and governance capacity differs across AMCOS. Taylor Winch realizes the value of investing heavily in strengthening the governance and financial management capacity of the AMCOS and monitors the success of this with field officers that are a constant presence on the ground.
Company background: GADC aggregates cotton and organic sesame from 60,000 smallholder farmers under contract, as well as cotton and conventional sesame from a further 80,000 smallholder farmers on the open market. They use a network of 400 buying agents and >2000 sub-agents as marketing intermediaries, with USD 1 - 2 million cash in the field as buying credit at any time. Agents are paid per kg of cotton delivered.
Country background: Cotton is Uganda’s third largest export crop after coffee and tea and is largely grown by smallholder farmers with no irrigation. The Cotton Development Organisation distributes seed and inputs to smallholder farmers, which are funded by the Cotton Development Fund via the Uganda Ginners and Cotton Exporters Association. For some producers, GADC also provides separate spray pumps to encourage the use of organic repellents and organic pesticides.
“Although this is a very high-risk model, the agent/ sub-agent model helps to spread risk by sharing out responsibility for managing relationships. Personal relationships are key: as we say at GADC, network is net worth. We have a lot of cash in the field (USD 10 million changes hands every year) but our default rate is less than 2%, thanks to our strong networks. From farmers, to police, to policymakers, we work hard to remain well-connected.”
GADC has identified that due diligence when recruiting agents is critical. They start with recommendations from the local leadership - councils and traditional leaders - then embark on a 3-4-month due diligence process. This includes speaking with a candidate’s friends and family, not only for character references but also to explain that the cash their buyers hold does not belong to them. It is key to encourage the whole family to think of the buying as a micro-business that involves and benefits them all.
During the due diligence process, GADC assesses a candidate’s financial management skills and once an individual has been appointed, s/he is given regular financial refresher training which his/her family is also welcomed to attend. Pre-finance is issued to buyers based on volume predictions in their operating area. This avoids having cash sitting idle.
In addition to risks associated with mismanagement of pre-financing, a key risk for GADC is the moisture content of the cotton sourced for GADC’s ginneries by the agents. As such, GADC provides training on how to measure moisture content in the cotton and enforces strict quality requirements. If an agent delivers cotton that is too wet, it is his/her responsibility to dry it!
Communication and monitoring are key: GADC has 20 area coordinators who monitor the buyers and gather local intelligence on volumes and prices from their competitors. During the buying season, agents communicate with GADC staff members on a daily basis, and GADC requires agents to provide an SMS update every evening. GADC also encourages buyers to communicate with each other, as well as to share tips and advice, as a way to foster a spirit of competitiveness to drive up volumes.
During the session, several relevant questions were raised:
1. How do businesses ensure buying agents are not using working capital/ pre-financing money to trade other more lucrative commodities and then failing to deliver the crop the cash was intended for?
The speakers stressed the importance of monitoring the spreadsheets for red flags! GADC noted that they track each buyer’s activity very closely. If an agent isn’t showing up with a delivery every 3-7 days, they know the money is being diverted. GADC’s network of field monitors know the buyers on a personal level, and this is key in monitoring what everyone is getting up to.
2. How do you prevent agents manipulating the weighing scales?
This is a hot topic within rural communities and there is a lot of hostility towards those that engage in these practices. SDU partner businesses have collectively found that by issuing agents with calibrated digital platform scales, they can verify the weights their sub-agents are delivering. In the case of GADC, their scales are checked and labelled by the National Bureau of Standards at the start of every season.
Still, SDU partners shared that the most important thing is to educate the farmers so that they are not turning up to the weighing scales naive about the risks of being cheated. SDU partner businesses teach smallholder farmers to be cautious of buyers who turn up with an unusually good price because there may be a risk that they are fiddling the scales!
3. What role does the law play in successful producer organisations?
In the case of Taylor Winch, the AMCOS are tightly regulated under Tanzanian law and Taylor Winch has seen a couple of incidences of individuals being imprisoned for misappropriating AMCOS funds. The heavy hand of the law helps maintain good governance, but Taylor Winch still has to invest in strengthening management structures. The strongest driver of quality is good pricing and consistent technical support. The law is an important framework, but better livelihoods is what motivates AMCOs to perform well in the end.