This is the final post in a series about real life case studies to demonstrate how companies can successfully develop and use business models that gain traction in smallholder markets. Last week, we looked at how local sales and service providers can help overcome distribution challenges. This week, we discuss how the outgrower model can benefit both companies and smallholders.
Smallholder farmers experience many challenges, including the inability to procure high-quality inputs, access knowledge about good agricultural practices, and access markets. This lack of accessibility can be improved by farmers developing long-term relationships with agribusinesses. To formalize these relationships, agribusinesses often adopt an outgrower model, where the business contracts with farmers to produce crops that the business will buy at harvest in exchange for providing farmers with services, technical assistance, and inputs during the rest of the season. This arrangement ensures that agribusinesses that require specific volumes and quality of harvested product have guaranteed production and farmers receive an agreed upon price. Outgrowing is most often adopted by agribusinesses using farmers to grow their certified seeds to buy back later, which they sell on to the wider rural population, and by agribusinesses procuring high value commodities from farmers for processing. Feed the Future Partnering for Innovation, a USAID-funded program, supports numerous companies that use an outgrower model, including Tolaro Global in Benin, Good Nature Agro Products in Zambia, and Txopela Investments in Mozambique.
From the Real World
Tolaro Global is a cashew processor in Benin that sources cashews from smallholder cooperatives. In addition to sourcing from them, Tolaro also provides advisory services to its 2,300 smallholder farmers, including training on tree pruning, organic composting, fertilizing, and cashew harvesting and storage techniques. Tolaro is formalizing its relationship with the farmers to ensure a high-quality product for its roasting and seasoning processing facility. Not only does Tolaro guarantee a market for the farmers’ cashews, it also gives these suppliers a unique profit-sharing opportunity by providing class B equity stock based on the volumes and quality of cashew nuts supplied.
In Zambia, Good Nature Agro Products is a supplier of certified legume seeds. Good Nature relies on an outgrower model with more than 5,200 smallholders to produce quality seeds. Good Nature, through its 200 private extension agents, provides technical and advisory support and high-quality foundatio seed to outgrower farmers. The outgrower farmers then produce their own seeds to sell it back to Good Nature. Good Nature cleans, sorts, and packages seeds to be sold on to retail and institutional buyers. For Good Nature, the outgrower model is essential to ensuring seed quality and volume.
Txopela Investments, an investment firm, and its partner COPAZA, a farmer cooperative, have co-invested in the creation of Sociedade Beneficiamento Sementes (SBS), which they are building into a profitable supplier of agricultural inputs in Mozambique. An integrated outgrower farming model to reach new customer segments with improved seed is part of the business strategy for making SBS profitable. Outgrowers produce basic seed, which they sell to SBS for sorting and processing. SBS then sells improved seed back to these outgrowers to use themselves for growing crops as well as to sell to other farmers in their community. This model enables farmers to grow more produce of better quality, which Txopela aggregates and sells to value-added processors.
Through these partnerships, Partnering for Innovation has identified several important considerations for companies wanting to adopt an outgrower model. First, successful outgrower models must be built on strong relationships between the outgrower farmer and the agribusiness. The relationship must be based on trust and fairness, with both parties financially benefitting. Agribusinesses making this investment must be committed to a long-term and mutually beneficial relationship. Second, formal agreements are not normally enforceable in developing countries, and so the agribusiness and outgrower must be open and transparent in their communication and expectations for the relationship. Third, the outgrower models work best when applied to high valued commodities and/or specialized agricultural inputs such as hybrid and improved seeds. These crops and inputs normally require a high level of quality and consistency to receive higher prices and margins. Finally, agribusinesses must be prepared to invest in their outgrowers both through technical extension services and financial support of and access to quality inputs.