Since 2013, Feed the Future Partnering for Innovation, a USAID-funded program, has partnered with nearly 100 organizations working to commercialize agricultural innovations in smallholder markets. In each case, partners sought to fill unmet needs in the smallholder market, whether it was a lack of inputs, equipment, financing, or market linkages, and turn them into profitable business opportunities. As a result, these companies have developed a diverse array of business models to commercialize their agricultural innovations.
Through these partnerships, Partnering for Innovation has identified a number of different models and lessons learned on what factors facilitate or hinder success. Starting this week, we will explore four of these models: the aggregator model, the mechanization services model, the embedded rural advisory services model, and the consumer financing model. This week, we will discuss the aggregator model and factors that have made companies successful when using it, and in the coming weeks will explore the other the models.
Smallholder markets often lack linkages between agricultural suppliers and purchasers. Aggregator models introduce an intermediary actor that aggregates supply and often provides other ancillary services such as agronomic advice or access to inputs, thereby lowering transactions costs, reducing sourcing risks, and building farmer loyalty and retention. This model expands market access and increases productivity and income for smallholder farmers. Partnering for Innovation supports a wide range of aggregator models through partnerships with International Charity Fund Community Wellbeing (ICF CW) and Danone in Ukraine, Babban Gona in Nigeria, and Txopela Investments in Mozambique.
From the Real World
Danone buys raw milk from dairy farmers supported by the Ukrainian NGO ICF CW. These farmers are organized into ICF CW-facilitated cooperatives that assist in collecting and storing the milk. ICF CW provides training to cooperative and their farmer members on milk quality and hygiene, fodder production and animal feeding, farm and cow management, cooperative development, financial management, and milk marketing. ICF CW also provides critical assets to family farms such as milking machines, ventilation systems, and cold storage tanks. This aggregation of large volumes of milk benefits Danone and smallholders alike. Danone is able to reduce its supply and logistics cost, while farmers are connected to a cold value chain that ensures higher prices for their milk.
In Nigeria, Babban Gona organizes smallholder farmers into a cooperatives and provides good agricultural practices training, sells improved agricultural inputs, and offers financing and a market for their commodities. By aggregating these farmers, Babban Gona is able to sell inputs to farmers at a lower price and also earn a higher price for the goods it sources from farmers, allowing it to make a profit from increased margins. In turn, farmer members benefit from access to agricultural input loans, inputs, training, increased productivity, and a guaranteed, high-value market for their commodities. Babban Gona can secure premium prices for its members’ commodities by ensuring that they produce a high quality product and through aggregated volumes.
In partnership with the cooperative COPAZA, Txopela Investments is establishing an improved seed and commodity company in Mozambique. It uses an outgrower model where smallholder farmers not only expand production of Txopela’s certified seed but also sell their commodity back to Txopela to process and export. Through aggregation, Txopela is able to capitalize on both revenues from seed and commodity sales while its outgrowers benefit from access to quality seed, agronomic training, and a guaranteed end market for their output.
Through these three partnerships, Partnering for Innovation identified a number of factors that help aggregator business models succeed in commercializing products and services in smallholder markets. First, aggregators must be committed to investing in and building their relationship with farmers. Second, since they compete with middlemen, they must offer an attractive value proposition to farmers to discourage side-selling. Finally, the aggregator model succeeds when companies engage farmers on multiple levels through offering a range of services and products.
Given that individual smallholders have small-scale output and demand, aggregators play a key role in organizing farmers into groups that increase their overall profitability and economies of scale. Next week, we will discuss the mechanization services model and how companies can successfully implement it!