Learn!

5 Posts authored by: matthewkrause

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, orgaprocessing_by_Tolaro.jpgnic 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.

This is the fourth 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 the consumer financing model. This week, we discuss how using local sales and service providers can overcome distribution challenges.


Rural smallholder farmers often lack the access and capacity to directly procure products and services from agricultural input companies. In turn, these companies face high costs and logistical difficulties reaching farmers. As a result, agricultural input distribution systems are nascent and limited in many developing countries, and unable to meet the needs of smallholders. To address this challenge, some agribusinesses identify and train local community members to act as sales and service providers. These entrepreneurs then independently sell and distribute the companies’ products and services into underserved rural communities for a fee. Feed the Future Partnering for Innovation, a USAID-funded program, supports numerous companies that incorporate local sales and service providers as integral components of their business, including The Metal in Bangladesh, TECAP in Mozambique, and Hello Tractor in Nigeria.


From the Real World

The Metal is a leading agro equipment distributor in Bangladesh. It hopes to capitalize on the unmet need for rice and wheat harvesting services in Bangladesh by introducing a low-cost, high-quality mechanized reaper. However, it realizes that while there are millions of smallholders, most of these producers have plots too small to justify investing in a reaper. To distribute its product, The Metal targets local service providers who can purchase reapers and then offer reaping services to local farmers. The Metal supports these providers with a comprehensive training and support program. To raise public awareness, The Metal complements its sales with a widespread marketing campaign that includes demonstrations in fields and at community bazaars to educate farmers on the reaper’s benefits.  The benefits of this business model are threefold: The Metal benefits by diversifying and expanding its mechanization equipment offerings, local service providers are able to earn additional revenue, and smallholders are able to reduce their labor costs.

pic.jpg

Tecnologia E Consult oria Agro-Pecuaria (TECAP) is a large supplier of improved agricultural inputs and mechanization services in Mozambique. Through its partnership with Partnering for Innovation, TECAP seeks to expand its geographic coverage and enter the smallholder market segment. To accomplish this, TECAP is establishing three new agro-input stores in Nampula, Tete, and Manica and investing in a distribution network of agrodealers, franchisees, and agriculture development agents (ADAs). TECAP trains ADAs in business development, enabling ADAs to operate as rural entrepreneurs receiving commissions on the sale of inputs and mechanization equipment. This rural market distribution strategy allows TECAP to reach

more farmers, serving as the impetus for future market expansion.


Similar to farmers in Bangladesh, Nigerian smallholders’ plots are small, meaning the need for individual tractor services is seasonal and limited. To solve this challenge Hello Tractor relies on a network of youth entrepreneurs who work as local service providers, or “agripreneurs” to sell its “smart tractor” services. Hello Tractor identifies and trains youth agripreneurs on financial and business management so they can earn income providing mechanization services to their communities. Hello Tractor’s smart technology allows smallholders to request tractor services as needed via SMS, enabling them to increase their productivity without having to invest in their own tractors.


Lessons Learned

Through these partnerships, Partnering for Innovation has identified several important considerations for companies planning to develop a distribution model based on local sales and service. First, it is important to identify the right entrepreneurs. Not only must these entrepreneurs be familiar with the communities they aim to serve, but they must also be highly motivated and passionate about improving smallholders’ productivity. They also must be risk takers and business-minded. Second, companies need to understand the capacity gaps of local service providers and develop a comprehensive training program to address these needs. Training must focus on business and financial management as well as technical information about the product or service. Third, companies must think through their strategy for helping scale their services providers’ businesses. With the proper support, local service providers can expand, purchasing more tractors, for example, and hiring employees of their own to expand their services. Fourth, companies must continuously raise public awareness among smallholders to generate demand for the products and services offered by the local providers. Only by ensuring an end market will the local service provider model be able to expand. Finally, companies must develop strong linkages with financial and government institutions. Local sales and service providers need access to financing to grow their businesses. This, coupled with government policies such as short term subsidies, greatly enhances the ability of local providers to succeed.


Next week, we will discuss how the outgrower model can help businesses to have guaranteed production and smallholders to have a guaranteed end buyer.

This is the third 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 embedded rural advisory services. This week, we discuss how consumer finance can be provided effectively and profitably to smallholders.


Smallholder farmers often lack access to finance, limiting their ability to invest in inputs and services that increase productivity. Innovative consumer financing includes a range of financial solutions tailored to the unique needs of agriculture, such as accounting for crop cycles and seasonal cash flows. These solutions expand credit access and limit a lender’s financial risk. Feed the Future Partnering for Innovation, a USAID-funded program, supports a number of innovative financial institutions that are bringing better banking services to smallholders, such as Opportunity Bank in Mozambique and Malawi and Musoni in Kenya.


From the Real World

In Mozambique and Malawi, Opportunity Bank, with support from the financial NGO Opportunity International, provides financial products to smallholder farmers who normally lack the access to savings or collateral required for loans by traditional banks. Opportunity Bank tailored its loan products to account for crop cycles and defrayed risk through group loans that hold farmers accountable for each other during repayment of the loan. Loans can be used for purchasing inputs, transport, or mechanization services. Through this model, the bank benefits by developing an underserved market while farmers acquire the financing they need to increase yield and take advantage of market opportunities.

consumer_financing.jpg

In Kenya, Musoni is a cashless, paperless microfinance institution committed to serving rural smallholders. With support from Grameen Foundation, Musoni developed the Kilimo Booster loan, a product tailored specifically for smallholders that offers flexible terms and a customizable grace period based on a farmer’s seasonal cash flow.  In addition, Kilimo Booster is designed for the farmer’s convenience. Loan officers visit clients at their farms, approved loans are dispersed within three days of applying, and everything – from application to repayment – happens through a client’s mobile money account. This is a major shift from how traditional banks work with smallholder clients, and is made possible by Musoni’s tablet-based mobile application software that streamlines the application and loan management process.


Lessons Learned

Through these partnerships, Partnering for Innovation can summarize several important factors that can help financial institutions enter smallholder markets. First, mobile technology can be an important solution to reduce high transaction costs while maintaining loyalty and retention through interactions. Second, financial institutions will be more successful if they work with other key stakeholders to further their reach and help mitigate risk. These include working with extension agents to provide technical and financial training and with offtakers such as traders, brokers, and food processors to ensure farmers get fair value and timely payment for their commodities. Third, financial institutions targeting rural farmers must build the capacity of field staff to better understand agriculture and the technical and business challenges that face smallholder farmers, collectives, and associations. Finally, any financial institution working with smallholders must build internal commitment to these clients for the long term from the senior management level down to field operators. It is important that shareholders and financial backers support this vision and are willing to take on higher risks and lower returns to generate social impact and develop an emerging market.

Last week, we used real life case studies to demonstrate how companies can successfully develop an aggregator model. This week, we will discuss how rural advisory services can be integrated into a profitable business model.


In developing countries, smallholder farmers often lack the basic agronomic and business knowledge to increase productivity. This knowledge gap is often the result of weak or absent rural advisory services. Agribusinesses are uniquely positioned to provide these quality rural extension services. Private sector-led rural advisory services can both help a company’s bottom line and provide farmers with essential agronomic and business knowledge. When farmers have access to better crop production information and advice, they are better able to take the risk of investing in improved agricultural inputs, leading to higher productivity and incomes. For companies, building the capacity of smallholder farmers builds stronger ties and loyalty, leading to increased sales revenue of agriculture input and offtaking services, and more reliable supply chains. Investing in extension services leads to long-term benefits for farmers, shareholders, and the business. Feed the Future Partnering for Innovation, a USAID-funded program, supports numerous companies who embed advisory services in their business models, including Phoenix Seeds in Mozambique, Opportunity Bank in Malawi, and Tolaro Global in Benin.


From the Real World

In Mozambique, Phoenix Seeds is identifying 200 lead farmers as distributors for their seeds and training them in establishing demonstration plots based on good agricultural practices. These demonstration plots showcase numerous growing practices to educate farmers on land preparation, spacing, and proper handling and application of agro inputs. These lead farmers also raise awareness of Phoenix Seeds’ products, facilitating seed sales to neighboring farmers.

Embedded_Rural_Advisory_Services.jpg

 

In Malawi and Mozambique, Opportunity Bank contracts third parties UT Grain, Greenbelt Fertilizer, and Catholic Relief Services to provide its smallholder customers with GAP training to improve their productivity and financial literacy training to improve their basic understanding of crop budgets as well as the advantages of saving and borrowing from Opportunity Bank. This results in increased bank business as well as lower default rates on the loans provided to more than 15,000 farmers.


Tolaro Global is a cashew nut processor in Benin that sources cashews from farmer cooperatives. Tolaro provides advisory services to 2,300 members of these cooperatives, including training on tree pruning, organic composting, fertilizing, intercropping, and cashew harvesting and storage techniques. It also registers these farmers through the Fair Trade certification program. By establishing a close relationship with its suppliers, Tolaro benefits by receiving a greater quantity of high-quality product from a more loyal supplier base while farmers benefit from greater productivity and a 15 percent price premium for Fairtrade certification.


Lessons Learned

Through these partnerships, Partnering for Innovation has identified several important considerations for companies looking to embed rural advisory services. First, private sector agribusinesses must conduct a cost-benefit analysis to determine if the costs of providing extension services will be outweighed by the benefits in the form of improved quality, greater volumes, expanded markets or lower overall costs of doing business. Second, these firms must decide if it is better to provide these services in house or to contract third party partners. While a company may not have the initial internal infrastructure to offer extension, third parties can be expensive and a disincentive to firms from investing in their own capacity. Finally, providing embedded rural advisory services that complement an agribusiness’s products and services can strengthen existing relationships and attract new clients – creating a win-win for the farmer and business’s bottom line alike.

Next week, we will discuss how the Consumer Financing Model opens up a new market for financial institutions and provides smallholders with the investments they need.

Introduction

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.


Aggregator Model

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.

Babban_Gona.jpg


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.


Lessons Learned

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!

 

Filter Blog

By date:
By tag: