Mastering the benefits of adding value to agricultural commodities

Like many well-intentioned phrases, ‘value addition’ is not just an expression. It is a practice whose dynamics are yet to be fully understood and embedded, especially in African agriculture. More than 80 percent of agricultural commodities in developing countries are consumed in a raw state. Lack of modern value addition technology makes it difficult to convince people that processing agricultural commodities can create more employment than raw commodities. Informal food markets continue to employ more people than processing plants. While a lot of resources are being directed at adding value to agricultural commodities, there is insufficient evidence-based analysis of the inherent benefits, challenges and opportunities.

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However, with adequate and appropriate investment, value addition can create more employment and lead to sustainable economic growth.  In most African countries, raw commodities like vegetables, fruits and tubers move from farming areas to the market and then to households and finally into the toilet. This shorter route does not add much value to the economy compared to a much longer value addition journey where commodities move through more steps: farmer – processor – retailer – wholesaler- consumer. When commodities travel a shorter distance from production to markets and consumers, enormous pressure is exerted on monetary circulation because commodities are consumed before they complete their cycle along the value chain. Ideally money in circulation should effectively exhaust all stages from processing to retailing and consumption or end-use.

Benefits of a longer cash circulation cycle

The speed and length travelled by money in circulation has to be long if it is to translate to Gross Domestic Product (GDP). An example of a long route is farmer – consumer –retailer – processor – trader – consumer. Such a distance is long enough to minimize inflation and stabilize prices.  For instance, if $100 worth of commodities move from the farmer to the trader, $20 is added to become $120.  When the same commodity moves from the trader to the processor, $30 worth of value may be added, translating $150. At the retailer level, another $30 can be added, becoming $180 and when end-users or consumers add $20 worth of value, the total value of the initial $100 becomes $200. Adding all these values defines GDP. Going through five cycles enables money to add value along the value chain unlike from farmer to consumer where only $20 is added.

When African agricultural economies limit themselves to raw commodities, they undervalue and underestimate their potential GDP. The revenue base cannot be meaningfully increased when commodities move a shorter route from the farmer to the trader. Value added tax (VAT) is generated through value that is added along a much longer route. At the moment, most horticultural commodities are not generating VAT yet farmers are using resources like dams and roads which need to be financed by the government.

The value of understanding and financing the entire system

Instead of continuously financing production, financial institutions and development organization should see the value of financing the whole system including processing and markets. This prevents scenarios where farmers have excess commodities than the market or processors can absorb in a given time. There are many cases where processors like Best Food Processors in Zimbabwe try to tap into the fresh market to supplement their stocks. The company requires more than 50 tons of tomatoes per day to keep its  processing machinery running.

However, negotiating relationships between processing companies and farmers should be done by a neutral knowledge and relationship broker. The broker will break the impasse where farmers want high prices for their commodities while processing companies want to pay low prices in order to be viable. Evidence-informed knowledge brokering can result in a win-win relationship between farmers and processors. While many processing companies enter into contractual arrangements with farmers, such relationships are often not sustainable because although farmers are guaranteed a market, prices offered are so low that most contracted farmers are not able to stand on their own feet. On the other hand, where processors want to colonize the whole value chain, they end up driving their costs causing them to offer low prices for farmers (10c/kg).  Ideally, processors should focus on processing while other actors handle logistics and production issues.  Why should processors employ agronomists when government extension departments and NGOs are available to offer the same services to more producers?  The cost of extension can eventually go down because farmers can share knowledge with their peers.

The power of aggregation

Aggregating agricultural commodities is the best way to sustain agro-processing.  Farmers become confident that the market is available while processors are assured that commodities will be available consistently. In recent years, many contractual arrangements have bred suspicion between farmers and contract companies. A few decades ago, market availability was more important than contractual arrangements. Farmers would grow their groundnuts fully aware that government parastatals would buy commodities with no need for contracts. A guaranteed market can compel financial institutions to offer short-term finance to farmers through a flexible financial facility that can reduce interest rates to sustainable levels.

On the other hand, consistent processing can result in processed products competing with raw commodities in ways that ultimately control the price of raw commodities.  For instance, when tomato sauce is used to eat rice, there will be less demand for fresh tomatoes- leading to fair prices unlike the current situation, for instance in Zimbabwe, where prices can swing between 50c and $10/crate. The more market options the more competitive the market will become. Gluts can suppress prices yet if there are options, gluts can be managed in ways that do not adversely suppress prices.  By rationalizing tomato prices, other commodities are rationalized as well given that tomato is a necessity which influences the performance of other commodities.  Usually tomato prices influence prices of other commodities.

Flexible finance for agile institutions

A financial facility should be put in place to enable purchasing and mobilization of agricultural commodities by commodity brokers. Rather than extend loans directly to farmers, financial institutions can be paid by the warehousing facility which morphs commodities from scattered farmers. It does not help to extend loans to farmers when they are still stuck with commodities looking for a market. There is the danger of farmers taking loans to complement little income from the existing market and try to break-even. It is like taking a loan to cover up for losses in the market.  For instance, if a farmers is expecting $10 000 and the market gives him/her $5000.00, receiving a loan amount to $5000.00 will be like subsidizing outcomes from the markets.

A facility that supports buying of commodities from farmers creates space for financial institutions to extend loans to farmers so that they continue growing.  This also ensures processors have consistent supply for up to six months as farmers quickly go back to the land.  Processors cannot keep stocks for a season because doing so is locking money in stocks. Processors generate income from consumers and that is why they should keep fewer stocks and supplement as consumers buy.  If they lock all their money in stocks, they will not have enough money for other requirements.

Charles@knowledgetransafrica.com  / charles@emkambo.co.zw / info@knowledgetransafrica.com

Website: www.emkambo.co.zw / www.knowledgetransafrica.com

eMkambo Call Centre: 0771 859000-5/ 0716 331140-5 / 0739 866 343-6

 

From Corporate Social Responsibility to Sustainable Agribusiness Modelling

The failure of donor-funded programmes to transform African agriculture is resulting in more attention turning to the private sector as a potential source of better agricultural outcomes. Several multi-million dollar donor programmes have been launched with pomp and media saturation but the end has often not been as loud as the beginning.  At the end of three or five years, most donor programmes quietly disappear or assume a new name.

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Limitations of challenge funds

In the past few decades, donors have begun to promote challenge funds as a way of luring innovative private actors into the agriculture sector. While this approach sounds noble, challenge funds are accessed by a few privileged applicants with access to reliable internet and based in urban centres. On the other hand, successful agribusinesses have not been built through pitching business ideas in front of judges most whom have no clue about contextual issues surrounding the idea being pitched. Agribusiness is more about passion than expressing business ideas through rehearsals and 10 – 15 minutes presentations.

 Unpacking Corporate Social Responsibility

The private has, for a long time, used Corporate Social Responsibility (CSR) as a route to supporting communities. Unfortunately, CSR has not benefitted farming communities. Most proceeds have been directed to non-agricultural sectors such as elite sport like cricket which are not found in farming areas. Resources that are used for CSR are normally generated through sales.  It is the same money that the company gets from consumers that is returned back as CSR.  It means every product has an embedded CSR component. If an agricultural company ploughs back US$1 million into a community that money will have come from the same pockets but is presented under a new name – CSR.

 Why not just offer better prices?

Where a company was supposed to buy sorghum or any agricultural commodity from farmers at $500/ton but decides to lower the price to $450 so that $50 is later used as CSR, it makes sense to offer better prices right from the beginning. Rather than a retail food chain store buying vehicles worth $1 million to be won by a few consumers, why not reduce prices of its products by $1 million so that more consumers and communities benefit?  It is also not clear who owns, generates and provides resources for CSR. In the case of agribusinesses, resources come from farmers or consumers. For instance, where a private company is dealing with farmers, it will either under-pay farmers so that it then comes back with CSR money as if it’s a bonus when the farmers should have benefitted from better prices. From a consumer perspective, the food chain store will over-charge consumers so that some of the proceeds come back as CSR. Instead of giving back US$1million in the form of prizes and presents to be won by a few consumers, more consumers would benefit if commodity prices are reduced by $1 million.

 Hidden motives

CSR has remained a marketing gimmick funded by resources from farmers and consumers. The private sector does not get CSR resources from other sources but the very same people who use its products.  It is like milking the same cow twice while giving it crumbs. Being profit-oriented, the main focus for companies embracing CSR is promoting a brand and widening the customer-base. CSR is an in-built blind-folding mechanism which makes farmers and consumers believe a favor is being done to them when it is their own money coming back with a different identity.  Besides being a marketing gimmick, CSR is probably used as tax evasion by some corporates.  If it is genuine CSR, who determines priorities? Who says funding cricket in urban centres is better than funding dam or road construction in farming areas?  To be more inclusive in sustainable ways, CSR has to be informed by societal needs.

 Towards Sustainable Business Models

Where a private company is contracting farmers to produce groundnuts or sorghum at $450/ton, it is better to offer $500/ton so that from every ton, $50 goes back to the community for local development.  What is the rationale of first getting all the money into a company’s coffers and then returning the crumbs? Moreso, CSR does not ensure benefits go back to people or communities that generated the income. If a company is working with farmers in Muzarabani or Hwange, benefits should go to these communities instead of funding cricket in urban areas. Rather than paying CSR at national level, why not decentralize the benefits to local levels so that benefits are extended to local customers? That is how agribusiness becomes a partnership where the essence of corporate does not just mean the whole ownership of the business is in the hands of the corporate sector.

While the corporate sector provides the market, communities contribute either as producers of raw materials or consumers of finished products. An inclusive business model should see corporates aggregating the market while producers and consumers continue contributing in various ways. While the corporate sector has power to mobilize income from producers and consumers, it should not personalize results or outcomes. Why would agricultural proceeds that should benefit producers end up subsidizing elite urban sport?  How can one person win a vehicle worth $50 000 when such income can go a long way in developing a community?  In a new world economy dominated by SMEs, corporates should re-think their CSR models.  CSR should come in the form of affordable services and products. Rather than donating to elite conferences, banks should just lower their interest rates in ways that benefit more borrowers.

Charles@knowledgetransafrica.com  / charles@emkambo.co.zw / info@knowledgetransafrica.com

Website: www.emkambo.co.zw / www.knowledgetransafrica.com

eMkambo Call Centre: 0771 859000-5/ 0716 331140-5 / 0739 866 343-6

How the market can inform better farmer characterization

In a rapidly changing knowledge economy, it no longer makes sense to continue characterizing farmers in developing countries by the size of land on which they produce agricultural commodities. Informal agriculture markets provide various ways through which African farmers can be characterized beyond the smallholder, communal, commercial and other forms which are becoming inadequate. For instance, a farmer’s participation in the market can better suggest the extent to which s/he is business-oriented than can be expressed through the size of land s/he owns.

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A smallholder farmer who consistently participates in the market is more commercial than one who owns a large commercial farm but does not regularly participate in the market. Factors that can be used in categorizing farmers include: seasonality of production practices; frequency of market participation as well as commodities and volumes supplied to the market.  Additional elements include market outreach (in which other market does the farmer participate, e.g., food chain stores, local markets and others? Payment method is also another important attribute. For instance, some farmers pay their labour using commodities.

 Characterizing through collective surplus at community level

At community level the best characterization is around collective surplus – how much surplus does the community produce for the market? In a community, it can be a mistake to characterize individual smallholder farmers through their individual production because high volumes of commodities by an individual farmer may not translate to surplus for the market. For example, if a family is large, subsistence consumption can exceed 80% due to the presence of more mouths to be fed.  On the other hand, a small family can produce three tons and consume one ton with the rest going to the market.

An ideal characterization approach can begin with identifying major commodities produced in a particular community. A quick survey can reveal how much of each commodity is produced and how much exists for the market, especially when aiming to set up a warehousing facility at community level.  Defining farmers by size of land excludes important factors like passion, experience, knowledge, household size, taste, household income and others. No farmer can produce every commodity and become a champion. One farmer can be good with groundnuts while another can be good with livestock. Consolidating diverse characteristics at community level can reveal investment opportunities in particular farming communities.  While climatic conditions can be given by nature, a good climate does not make farmers in a favorable climate commercial producers.

 

Characterization around value chains and networks

When characterizing from the market vantage point critical steps include identifying varieties and volumes of commodities that leave from a particular farming community straight to the urban farmer’s market where breaking bulk happens.  What is the proportion that goes into the wholesale market for eventual distribution to other markets in bulk?  If, for instance, 60% of butternuts travel from Harare to Bulawayo, there is justification for setting up a reliable commodity exchange to support this movement. In most informal markets, the wholesale market fulfils the role of aggregation, handling and rationalization with other markets. In all value chain nodes and networks, there is need for consolidating knowledge. Tracking volumes flowing into markets provides a framework for building consumption patterns, connected with prices.  A key question can be: For the past six months, which 10 commodities were moving together and competing in the market and which commodity, upon its entrance into the market, disturbed a necessity like a tomato?

In most informal food markets, vendors tend to be the biggest group that buys from farmers for onward selling to end-users. On the other hand traders with permanent stalls purchase commodities in bulk and often deal directly with communities. Farmers bring bulk produce into the farmers’ market where bulk is broken. Where buyers bring commodities straight from production areas, this volume is stocked in the wholesale market for other informal or formal markets like processors.  Bulk purchasing does not happen from the farmers market for commodities destined for high density areas.

On the other hand, individual consumer choices comprise food baskets. The market pulls together a food basket from bulk commodities coming from diverse farming areas. As it breaks bulk it mixes and matches commodities according to diverse consumer needs including nutritional factors.  This mixing and matching role needs to be understood as it influences consumption patterns. For instance when the consumer budget gets strained, some commodities are sacrificed. This is how commodities are given weight in terms of whether they are necessities or luxuries. Many farmers have learnt to stop producing commodities like lettuce, carrots, peas and fine beans in large quantities because they are sometimes considered luxuries not necessities.  However, necessities like tomatoes are rarely substituted fully because they participate in the preparation of many relishes.

 

Charles@knowledgetransafrica.com  / charles@emkambo.co.zw / info@knowledgetransafrica.com

Website: www.emkambo.co.zw / www.knowledgetransafrica.com

eMkambo Call Centre: 0771 859000-5/ 0716 331140-5 / 0739 866 343-6

How developing countries over-rate foreign currency

Many African developing countries have a deliberate bias towards exports in the hope that this can bring foreign currency that is expected to stimulate economic development. However, it seems foreign currency is a preserve of the elite who have developed a taste for foreign toys like large vehicles, expensive furniture, clothes, wine and other expressions of privilege. Smallholder farmers and ordinary people don’t give a damn about foreign currency. All they need is an ability to sell their commodities at a value that can enable them to meet household needs and pay school fees for their children. That does not require foreign currency but credible local means of exchange. No wonder barter deals are common in most remote agricultural communities.

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Single-minded pursuit of few commodities

A strong bias for foreign currency is seeing African national resources and energy being directed to a few agricultural commodities like cocoa, cotton, tobacco, flowers and, to some extent, beef. While West African countries like Ghana and Ivory Coast produce the bulk of the world’s cocoa (the main ingredient in producing chocolate), this commodity has failed to earn sufficient foreign currency that can ignite economic growth and reduce unemployment for the two countries and the continent. Kenya has a whole industry supporting the production of flowers for export. The situation was the same in Zimbabwe before the land reform, with the best resources going or flowers which meant completely nothing to local people. In spite of poor prices on the world market, Zambia, Malawi and Zimbabwe continue to put their faith in cotton and tobacco for export earnings. This is happening at enormous opportunity costs such as environmental degradation and destruction of ecosystems that support socio-economic insects like bees whose pollination activities are irreplaceable. Few commodities being prioritized are failing to address socio-economic challenges.

 The power of domestic markets

One of the key takeaways for developing countries from China and India is the power of strengthening domestic markets first before trying to please foreign markets. China has no doubt used its domestic market to globalize itself. That is why Chinese goods are found everywhere. Rather than exporting raw commodities, China is exporting finished commodities after meeting domestic needs.  On the other hand, behind India’s burgeoning medical tourism is a powerful domestic base through which diverse medical products and processes have been perfected before being globalized. The same can be said about the Chinese medical foray into the world. These two countries realized the fact that when your eyes are firmly on economic growth you should not be obsessed with foreign currency. It is when your domestic market is strengthened, that foreign currency will come on its own.

 Instead of putting all eggs in the export basket, African countries should leverage their broad natural resources base to produce products that cannot only satisfy domestic needs but lure foreign currency. It doesn’t help to continue chasing a few colonial commodities that have reached their ceiling in terms of demand and local productivity. The majority of African countries have hundreds of diverse agricultural commodities whose uniqueness is a selling point on the global market. Tons of local commodities are waiting to enter reliable commercial markets and environments. The current knowledge economy is about translating these resources into better lives for citizens and economic growth.

 Commodity aggregation as a starting point

With the right knowledge and attitude at policy level, African countries can aggregate a lot of their diverse commodities in ways that position them for earning foreign currency without sacrificing local environmental and human well-being. Aggregating commodities at local level will enable countries to fully understand domestic markets and exploit their resources in ways that enhance socio-economic justice and progressive outcomes. Unless you understand the market at a granular level you cannot link it with relevant commodities at the right time.

A sensible direction is harnessing the power of local markets to aggregate, control and allocate resources to different commodities. It is the local market that tells you what you can produce as a surplus. Therefore sustainable export mechanisms should be anchored on local markets. This will prevent the South African curse where an over-sized industrialization strategy has ended up producing commodities that are beyond the affordability of the majority of domestic consumers. The knowledge pathway from producers should pass through the domestic market on the way to negotiating with the export markets.

Local farmers and processors should master domestic standards first before dreaming about export standards. How can African smallholder farmers be expected to meet foreign standards when they barely understand standards in the domestic market?  The disjointed nature of most African interventions is seen in how individual companies want to get onto the export scene in isolation.  When things go wrong on the international market, these individuals dump commodities on the domestic market where they will not have created a relationship. For instance, Zimbabwean companies that have been pretending to have mastered foreign markets for peas have been found disruptively dumping peas on the informal market.

 Why not use parastatals to earn foreign currency?

Instead of dragging smallholder farmers, most of whom eke a living in precarious conditions, to produce cotton, tobacco and other commodities for export or manufacturing, African countries should assign   parastatals like Agricultural Rural Development Authorities to produce export commodities. Smallholder farmers should be left to deal with domestic markets until they understand them fully. If this approach is ignored, African countries and their smallholder farmers will continue to be slaves and labourers of foreign markets where price discrimination and other hidden barriers are beyond their control.  Building domestic markets will see these markets ultimately selecting commodities suitable for exports. Eventually the local market will enable farmers to slowly graduate into the export market without missing the most critical knowledge acquisition steps. Some farming communities will start willingly seeking knowledge and skills for venturing onto the export market rather than have this process foisted on them. Foreign is not a ticket out of poverty for the majority!

 

Charles@knowledgetransafrica.com  / charles@emkambo.co.zw / info@knowledgetransafrica.com

Website: www.emkambo.co.zw / www.knowledgetransafrica.com

eMkambo Call Centre: 0771 859000-5/ 0716 331140-5 / 0739 866 343-6