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Linking smallholders to buyers: the inclusive business model approach

In Kenya, the IBM approach was implemented in support of the cotton sector (© FAO)
In Kenya, the IBM approach was implemented in support of the cotton sector
© FAO

The adoption of the value-chain approach over the past decade has provided a broad framework for supporting smallholder-market linkages through improved value-chain partnerships. Building on this approach, more recent efforts have focused on 'inclusive business models' which focus on the weakest link in many value chains, the smallholder to first buyer linkage.

FAO, in partnership with local governments and partners, has been at the forefront in implementing the inclusive business model (IBM), which has been piloted in 16 countries across Africa, the Caribbean and the Pacific, with the support of the EU. This quick-start approach helps to identify context and commodity-specific solutions to local market obstacles. A cornerstone of the approach is to maintain focus on improving competitiveness through win-win solutions for the smallholder-to-buyer linkage rather than addressing the individual agenda or concerns of either actor.

Experiences from the cotton sector in Kenya

In Kenya, for example, the IBM approach was implemented in support of the cotton sector, focusing on building the commercial linkages between cotton cooperatives and ginners. Implemented between 2008-2010 in the cotton growing districts of Siaya and Nambale with the support of a local NGO, Farm Concern International (FCI), the project worked with 15 cooperatives, representing 18,000 smallholders, and four ginneries, and centred around four main areas of intervention.

For the cotton cooperatives, ten training modules were developed and delivered by FCI, covering various technical and managerial skills, to improve farmers' ability to reliably deliver good quality cotton to ginneries. Ginnery owners and managers were trained in modern business practices, including contract management and negotiation, logistics and operations management, financial management and marketing and sales. Financial service appraisals were also carried out, to identify potential sources of public and private sector funding for both cooperatives and ginners.

The project facilitated business seller-buyer forums (FAO)
The project facilitated business seller-buyer forums
FAO

Lastly, the project facilitated business seller-buyer forums to find solutions to grievances and bottlenecks between the parties. Late payment for cottonseed by the ginners had been a long-standing issue, frequently leading to side-selling by farmers. With the support of local financial service providers, shorter payment periods were agreed, with payments made directly into accounts held in district financial institutions. Through the forums, cooperative staff recognised the need to work with ginneries rather than in opposition to them, in order to tackle competition and market obstacles together. Farmers also came to realise the importance of bulking their cotton, both for their own bargaining power and to reduce buying and selling costs for themselves and the ginners.

While production inputs were not provided to farmers and increasing production was not a primary objective of the intervention, a marked increase in the acreage of cotton production did occur. This appears to have been caused by the newly trained cooperative staff making significant improvements to the services provided to their members. This included organizing collection points and transport to help with cottonseed bulking, training in post-harvest practices and the introduction of a quality control system from farm up to the point of delivery. Cooperatives staff were also better able to negotiate credit, to help farmers with the purchase of inputs. The increase in production also had knock-on efficiency benefits for the ginneries, which typically struggle at 20-50 per cent below full potential.

Lessons for the public sector

Through forums, cooperative staff recognised the need to work with ginneries rather than in opposition to them
Through forums, cooperative staff recognised the need to work with ginneries rather than in opposition to them

The overarching lesson from the implementation of the IBM approach is the important role that small and medium agro-enterprises (SMAEs) - such as the cotton ginners - play in providing smallholder-based organisations with reliable markets but without the high standards demanded by more commercial buyers. Their ability, however, to support the integration of smallholders in value chains is limited. Firstly, the risks of doing business with smallholders are considerable, ranging from inconsistent quality and quantity of supply to side-selling. Secondly, they struggle to provide the technical and financial assistance needed to bring smallholders' produce up to a standard which satisfies the market. Thirdly, both small buyers and farmer organisations are restricted by red-tape and taxes, which limit the level and ease of business between them.

Donors and NGOs can address the first two challenges, but public policy can go much further by introducing reforms that abolish over-bureaucratic rules governing the institutional, legal and administrative frameworks of both small businesses and membership based organisations. In addition to contributing to a general easing of doing business at the local level, such reforms will also play an important part in reducing many of the costs and risks faced by SMAEs when doing business with small farmer-based organisations.

Written by: Siobhan Kelly, Agribusiness Economist, Rural Infrastructure and Agro-Industries Division of FAO

Date published: November 2012

 

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Great ! Please tell me more about the process that led to th... (posted by: Bart Doorneweert)

 

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