aggregation models

1. Why is it important for smallholder farmers to aggregate?

1

Grow AfricA SmAllholder workinG GroupBriefinG pAper

aggregation models

from an off-taker perspective, aggregation is both critical and challenging. it is critical because engaging numerous individual and dispersed smallholder farmers – each producing small volumes – introduces high transaction costs, which need to be reduced to make sourcing viable. it is challenging because farmer groups are lacking in most regions, and those that do exist often have limited capacity. Building new groups and raising capacity tends to be expensive and time consuming.

Aggregation of smallholder farmers into groups both links producers with off-takers and helps achieve economies of scale along the value chain. it also helps smallholders to meet the standards and requirements of modern markets and address other barriers to access, and supports farmers to improve their productivity through increased access to services and markets, and enhances their competitiveness by reducing the transaction costs of companies choosing to work with them.

At macro level, aggregation is a key issue for the development of the agriculture sector, as it generates higher level efficiencies in the sector. However, only about 10% of the world’s smallholder farmers are aggregated in producer or other organizations, which shows just how challenging aggregation is to achieve.

hoW do off-takers and smallholder farmers use aggregation models to groW their businesses?

2. Why do private companies aggregate smallholder farmers, and Why do smallholders aggregate themselves?

The main reasons private companies aggregate smallholder farmers include:

• requirement of the business model - aggregation is a fundamental component of all business models, which are either fully or partially reliant on externally produced crop supply, and where smallholder farmers are the main producers. off-takers have a requirement to guarantee supply, while aggregation enables companies to provide the logistical capacity to collate the output of thousands of farmers scattered in remote rural areas. it also enables capacity building of those farmers through the provision of services that support on-time delivery at the required volumes and quality.

• cost-saving – aggregation presents several cost-saving opportunities, including:

• logistical support – aggregation reduces logistical costs of sourcing output from smallholder farmers. it may also be a tool for improving quality, as producer organizations can add value to crops through sorting, drying, storing and other functions, depending on their capacity.

• marketing and distribution of services – aggregation can reduce marketing, distribution, money-lending and servicing costs for companies selling inputs or financial services to smallholders.

• provision of training – training groups to increase productivity are generally more cost-efficient than working with farmers on a one-on-one basis.

• information dissemination – aggregation reduces the cost of collecting and disseminating information for companies seeking certified crops, by reducing auditing costs for example.

• market opportunities – there are various market opportunities created by using aggregation models. Aggregation can secure higher volumes, which enables off-takers to deliver to new market players. Aggregation of farmers gives input providers easier penetration of the supply of services and products direct to producers.

• finance supply – aggregation also allows for easier penetration of finance supply. Financing can be channeled through various points of aggregation in the value chain, such as producer organizations, warehouses, procurement networks and input providers.

The main reasons farmers aggregate themselves into groups or more formal producer organizations include:

• market access – a key constraint of smallholder farming is access to guaranteed markets for crops. when farmers are aggregated and have higher volumes to offer and greater bargaining power, they can diversify their off-taker base. intermediaries, can then promote the integration of their products in the international market.

• service provision – aggregation provides significant increases in income for smallholder farmers by providing demand-driven services. These facilitate increased productivity, including access to improved inputs and value added services (sorting, grading, drying, warehousing, credit provision).

• bargaining power – collective action gives farmers bargaining power to secure better prices.

• cost saving – aggregation enables smallholders to reduce transaction and overhead costs by purchasing inputs together, reducing the cost of transport per farmer and accessing discounts through bulk purchasing.

2

3. What are the different smallholder aggregation models?

in order to succeed, all aggregation models require an organized off-taker to provide consistent, high demand (or access to such off-takers) at the top of the supply chain. different models are established in order to meet different objectives, depending on which organization is driving the aggregation. The different kinds of aggregation model include:

a. off-takers

Some off-takers work directly with farmers and build an aggregation structure which is part of their operational system. The structure is owned by the off-taker, who makes a financial investment in both the set-up and running costs of the aggregation model.

examples of different structures used by off-takers to aggregate smallholder farmers directly include:

• farmer development centers – The ecom Group uses a decentralized model whereby each local ecom company develops sourcing and farmer development strategies that reflect the local needs of farmers and their business realities. ecom Ghana makes use of farmer development centers (fdc), whereby cocoa farmers are aggregated into groups which are serviced by the fdc. each fdc supplies sustainable farming techniques, financial literacy, and quality assurance methods to local smallholders. As farmers incorporate what they have learned, they can advance toward certification.

• farmer field schools – kenya’s largest smallholder cooperative, the kenya Tea development Agency (kTdA), introduced farmer field Schools in 2008 with support from unilever and idh. The objective was to help smallholders improve production practices and so improve their livelihoods; the program was combined with certification. By 2014, KTDA had set up over 1,600 Farmer Field Schools for its 560,000 farmers and had achieved Rainforest Alliance certification for its entire production. To date, 48,000 farmers have been trained through the program and yields are on average 36% greater than those who have not been trained, while also generating more income from other sources.

• cocoa development centers – mars has established a decentralized hub system in indonesia to provide services to thousands of cocoa farmers. cocoa development centers are models for sustainable cocoa farming, which aim to demonstrate how an “average” farm can be transformed into a high-yielding farm. They carry out applied research through field trials to learn about the effect of local conditions on new farming practices, and through capacity building of government agencies, local organizations and companies who can train farmers in good agricultural practices.

b. intermediaries

off-takers can also work through a range of intermediaries, which may establish different kinds of aggregation models, including:

• Warehouses – certain value-added services, such as storage, enable aggregators to meet the quality and other requirements of the buyer. These in turn integrate and strengthen smallholder farmers into the value chain, facilitate access to financial services and training on buyer requirements, and provide significant improvements in farmer incomes.

• input suppliers – Aggregation can secure access to predictable, stable and fair output markets by smallholder farmers, which is a necessary condition for them to take on the risk of using more and better inputs. models requiring mandatory usage of inputs by all farmers can lead to above average increases in farmer income.

• ngos – Off-takers may find the cost and complexity of establishing and supporting producer groups prohibitive; as a result, they may not task their field staff with this additional responsibility. instead, off-takers can partner with nGos. equally, nGos themselves may initiate partnerships between smallholder farmers and off-takers.

3

examples of aggregation models driven by intermediaries:

• Warehouses – in malawi, the Agricultural commodity exchange (Ace) operates a warehouse receipt scheme for farmers at a certified, central warehouse. They provide up to 70% of the value of the commodity on receipt to farmers. Ace provides significant training to farmers around pricing to support farmer groups to instruct Ace on selling their grain at an optimum time. The scheme currently has financing from first national Bank and is looking to secure additional finance to expand its support to a larger number of farmers.

• input suppliers – in Ghana, masara n’Arziki farmers’ Association (mAfA) is an industrial maize aggregator initiated by agro-dealers Yara and wienco. mAfA provided high quality inputs, advisory and training services on credit to around 10,000 smallholder farmers in 2014. It provides a guaranteed market to farmers on a contract basis, and sells to industrial processors (e.g. nestle) and large brokers. farmers are encouraged to complement maize production with sorghum, soybean, cotton and onion.

• ngos – in kenya, Africa harvest and icriSAT organized smallholder sorghum farmers into development and commercially focused production and marketing groups. farmers are linked with enduser markets, and the aggregator provides a central point through which financial services can be directed to farmers. A system of sub-aggregators (such as cereal traders) provides sourcing services for a fee and is used to deliver inputs to producers. developmental impact is expected through meeting household food security needs alongside commercial objectives.


c. producers

producer organizations play a crucial role in economic and social development in many local communities. producer organizations usually fall into two main categories:

• informal farmer groups – farmers who come together for collective benefit but are not registered as a group and do not have a formal governance structure or group accounts. for instance, individual farmers may gather at a milk purchase point owned by a dairy, which acts as a hub where trainings are held and information is disseminated about techniques to improve productivity and certification requirements. The group does not require members to have a shared purpose or even to trust one another.

4

• formal farmer organizations – a registered group with a functional governance structure, systems for managing cash, crops and inventory, and actively operating in markets. The organizations require trust in leaders and othermembers, as well as a shared purpose. formal producer organizations can support supply chain efficiency and reduce the costs of marketing inputs and purchasing crops. formal producer organizations can be driven by farmers, off-takers or intermediaries:

• farmer-driven – these can operate as independent businesses, driven by smallholder farmers. for instance, in latin America, there are many coffee cooperatives which have been established for several decades and do not have a link to a specific off- taker but instead sell to a range of buyers. Some of them have an export license, while others sell to local exporters (e.g. cepicAfe, see box).

• off-taker-driven – where an off-taker provides some initial financial support to farmers to establish formal producer organizations, but the ownership and the responsibility for running costs lies with the farmers (e.g. wilmar, see box).


farmer-driven cooperatives in latin america:

• cepicafe, la central piurana de cafetaleros, is a non-profit organization established in 1995, which organizes coffee, sugar, fruit, and cocoa around 7,000 producers in the northern region of peru in nearly 400 organizations. CEPICAFE offers a variety of services and support to the farmers organized within the region, 19% of which are women. cepicAfe received their FLO certification in 1997 to address a number of issues such as low quality of coffee and limited access to markets. now cepicAfe is the 19th largest exporter in peru, selling nearly uS$10 million worth of coffee per year to a number of exporters in europe and the united States.

off-taker-driven cooperatives:

• Wilmar has provided support for smallholder farmers to set up their own producer organizations in malaysia, partnering with the wild Asia Group Scheme. This is part of the roundtable on Sustainable palm oil initiative, which is an international certification system aiming to improve sustainability in the palm oil value chain. The scheme encourages smallholder suppliers to form cooperatives, facilitating the provision of training to them and encouraging them to adopt responsible agricultural practices.

5

different models may be adopted depending on which player has ownership of the model (i.e. bears the responsibility for set-up and management costs), the benefits accrued, and the risks involved. Additional drivers are the relationships between the players (new or existing), the timing (whether all players are starting at the same or different times), and the degree of maturation of the value chain (for instance, an off-taker needs to identify which transaction costs are worth investing in as the value chain matures, e.g. seed multiplication sites).

The tables below summarize the costs, benefits and risks associated with aggregating farmers at different points, according to which actor along the value chain is driving the aggregation. it is assumed that the actor driving the aggregation is responsible for the running costs (set-up costs can be financed separately). The aggregation point is where farmers come together to receive services or sell their produce, for example – it can be at the level of off-taker, intermediary or farmer.

4. What are the costs and benefits of the different models?

Aggregation point

off-taker system intermediary producer organization (po)

costs to off-taker

medium/high: less costly toestablish than a formal po, but ongoing management costs incurred by off-taker

low: intermediary covers most of the cost. potential cost to offtaker of entering into agreement which may preclude access to cheaper supply elsewhere

high: expensive and time consuming to establish, particularly where provision of working capital is necessary at start up. But no ongoing management costs for off-taker

Benefitstooff-taker

high: Efficiency and control of service delivery; off-taker able to support farmers through development of a direct relationship

medium: contracting out of smallholder capacity building strategy and management, which is complex and time consuming

high: when functioning well, relatively easy to work with. provides access to output of numerous smallholder farmers on acceptable terms

risks to off-taker

high: Side-selling reducescapacity of off-taker tocapitalize on the investmentmade in the aggregationmodel

medium: reliance on intermediary to deliver effective and timely services in line with off-taker business plan

low/medium: ownership and responsibility for running costs lies with producers, rather than off-taker

risks to farmers

medium/high: farmersoften lose negotiating power

medium: farmers may not receive relevant training and/or inputs may not be provided on time

medium: farmers still price takers rather than price makers, due in part to inadequate skills in accounting for production costs and marketing activities

Table 1: Off-Taker-driven mOdel, whereby Off-Takers aggregaTe farmers aT differenT aggregaTiOn pOinTs

6

Aggregation point - intermediary

costs to intermediary

high set-up and running costs: the cost of aggregating multiple smallholder farmers is usually higher than buying from a few larger farmers or plantations, and includes additional costs for other services, such as local storage provision, grading, sorting, etc.

Benefitstointermediary

high: Significant increases in farmer income from savings on transport, and provision of more value added services, often leads to greater buying power for farmers and increased marketing opportunities for intermediaries to expand their client base

risks to intermediary

medium: margins for aggregators are thin and volatile, mainly due to the cost of capital. Success hinges on securing reliable, high volumes. credit services to enable farmers to purchase inputs need to be accessed from a financial institution or supplied directly by the intermediary

risks to farmers medium: Ability of farmers to repay loans for high quality inputs can be weak

Table 2: inTermediary-driven mOdel, whereby The inTermediary aggregaTes farmers

4. What are the costs and benefits of the different models?

Aggregation point – producer organization

formal po informal po

costs to farmers

high: PO usually requires significant amounts of farmers training and mentoring over several production and marketing cycles

low: less costly to establish and manage

Benefitstofarmers

high: forward commitments with off-takers, premium pricing offers, and volume purchase agreements can significantly increase profitability of farmers. Formality provides accountability to members.

opportunity for rural employment as leaders or employees can bring enhanced status and voice in the community

medium: opportunity to pool resources, acquire agro-inputs, access services and information, and sell to markets that would otherwise be inaccessible.

Women’s groups can deliver social benefits to poorer members, including group savings schemes

risks to farmers

medium/high: Insufficient planning, poor investment decisions and weak management can impede potential. corruption can result in distrust at farmer level and threaten the viability of the business.

women undertake a large part of the agricultural work, but farmer’s organizations can have low representation by women, especially in leadership roles.

high: There is a risk that farmers fail to benefit if the group doesn’t become actively linked to markets, cannot function sustainably, or does not secure increased access to inputs and training. Ability to access finance is low as group is not registered

Table 3: smallhOlder farmer-driven mOdel, whereby farmers Organize Themselves inTO prOducer OrganizaTiOns

7

about the business

heineken international is a dutch brewing company, which owns more than 160 breweries in 70 countries and is the third largest brewer in the world. led by the heineken brand, the Group has a portfolio of more than 250 international, regional, local and specialty beer and cider brands.

main sustainability issues

in 2011, HEINEKEN committed to source 60% of the agricultural raw materials it needs for beer and soft drinks production locally in Africa, by 2020. The degree of local sourcing potential varies significantly by country, depending largely on climatic conditions and the level of development of the local value chain. heineken’s local sourcing strategy on the continent covers a wide range of crops, including barley, sugar, rice, maize, sorghum and cassava. where possible, these crops are sourced in-country for domestic beer production, but where this cannot be achieved, crops are also bought regionally within Africa.

local sourcing provides a long-term and reliable supply of raw materials. it also reduces exposure to vulnerabilities of the market, especially long delivery lead times of imported crops and exchange ratevolatility. The cost of locally sourced raw materials is comparable to imports, but imports are oftenimpacted by changes in import regulations.

in order to support the local sourcing strategy, heineken has established a number of public-private partnerships (ppp) with the dutch ministry of foreign Affairs. This enables heineken to provide extension services through partnerships with local nGos and MFIs. HEINEKEN is currently running a total of 16 projects in 11 countries, with more than 120,000 farmers’ households involved, benefiting a total ofaround 840,000 family members.

local sourcing has a positive impact on farming communities, with improved farming knowledge enabling improved productivity (quantity and quality of crops produced) to increase household incomes. This helps meet heineken’s objectives of supporting economic growth in the countries where the company operates.

5. the heineken case – ethiopia and nigeria

about the service delivery model

heineken needs to ensure that the required quantity and quality of raw materials are supplied to its breweries at the right time by thousands of smallholder farmers. This makes aggregation a fundamental component of the business model; the company therefore employs various strategies in differentcountries, depending on factors such as local government policy and the maturity of the supply chain.

8

Risksandbenefits

overall, heineken secures the supply chain through a flexible approach to aggregation. Established valuechains operate commercially to the benefit of all actors in the chain. fledgling value chains are activelysupported for the first 3-5 years to get them running effectively, often through ppp projects with the dutchgovernment.

in ethiopia, heineken has taken the lead on establishing the supply chain, identifying the differentplayers, and connecting them into chain – particularly where the company is buying barley, which requires an intermediary processing step. Starting with a small pool of 1,700 smallholder farmers has enabled the company to take time to understand the operating environment and structure the value chain accordingly, before scal-ing up to 20,000 farmers in 2017. heineken has built sustainability into the supply chain through developing relationships with the ministry of Agriculture and the Agricultural Transformation Agency (ATA), who are now actively supporting the value chain through provision of extension services. once the supply chain is well established and is operating on a fully commercial basis, heineken will reduce its direct involvement.

Around 60-70% of aggregation is carried out through existing and new cooperatives and unions, with 7around 20-30% through nucleus farmers and 10% from larger farmers. HEINEKEN is investing significantly to help establish the value chain in the first 4-5 years via training to improve farming practices and business skills, making it easier for farmers to access finance to invest in their businesses. The newly established barley-only cooperatives tend to be smaller (50-100 farmers), which can make them easier to organize and run than larger cooperatives, which often have severalhundred members.

A recent impact assessment carried out in ethiopia showed that farmer productivity has increasedsignificantly as farmers are now selling barley into a rapidly growing local beer market. findings fromother African countries show that increased income is invested into improved seeds and the use of inputs to increase productivity, as well as in food consumption, education and improvements to housing. As yields continue to increase and supply to the market expands, prices will be determined by market dynamics and farmers will need to be trained on how price is affected by changing supply. heineken will work to ensure that farmers continue to receive at least the market price and mitigate the risk of intermediaries reducing prices to the extent that farmers stop supplying.


9

The company seeks to establish sustainable aggregation structures that can operate on a commercial basis, often including cleaning, bagging and transport services. in the initial years, heineken willinvest in building new value chains and aggregation structures, often through ppps with the dutchgovernment. Two examples of different aggregation strategies in use in different countries are outlined below.

1. in 2011, heineken acquired two state-owned breweries in ethiopia; and in 2015, the company opened a new brewery in Addis Ababa. in line with the company’s local sourcing strategy, heineken started a ppp project with the dutch government in 2013 to establish a supply chain to deliver locally grown barley from smallholder farmers. ethiopian government policy encourages companies to partner with farmer cooperatives and unions. As such, heineken works with existing multipurpose cooperatives, and has worked with local nGos and mfis to establish around 20 new barley only cooperatives. To balance risk and ensure secure supply, heineken also procures from “nucleus farmers”, who have larger plots and can aggregate and deliver barley from their village neighbors. each aggregation model receives tailored support in both farming skills (including field days and demonstration plots) and in business management skills, to allow them to connect effectively with heineken’s supply chain.

2. heineken’s subsidiary, nigerian Breweries ltd, first established a local sorghum supply chain in the late 1980s in response to restrictions on the import of barley. over the last 25 years, an effective commercial value chain has been established. In 2014, more than 100,000 MT sorghum was procured from approximately 150,000 smallholder farmers across the country. The farmers sell their sorghum at local village markets, where it is bought by intermediary businesses that have contracts with nigerian Breweries to collect, store, clean, bag and transport the crop to their breweries.

After 25 years, the nigerian sorghum aggregation model requires much less day-to-day involvement from heineken, as the links between farmers and aggregators are well established and effective. There are still challenges with sorghum yields, and heineken has been working in collaboration with the nigerian government and research institutions to develop higher yielding varieties to further strengthen the value chain and secure long-term supply.


challenges

• The majority of heineken’s markets have value chains that were established within the last 5-10 years. These are still in the development phase and still need capacity-building support through nGos and mfi partners with expertise in areas that are outside heineken’s core business.

• local banks are not always prepared to lend to agricultural activities due to the high perceived risks. heineken is facilitating this process in ethiopia by providing a reliable long-term market for barley, and by providing farmer groups with some working capital. however, work must continue with international and local banks to allow farmers access to the finance they need, if they are to develop from subsistence to commercial farming.

• Side-selling can be high among cooperatives, particularly where management capacity is weak heineken is working to improve the contractual process to encourage farmers to sell only to the cooperative of which they are members. in addition to ensuring high visibility at village level and building trust with farmers by purchasing crops in a timely manner at harvest time, heineken is carrying out public signing of contracts to create a greater sense of obligation among farmers to meet the requirements.

10

6. key references

AGrA (2013) Africa Agriculture Status report. focus on Staple crops. nairobi, kenya

dalberg Global development Advisers (2012) catalyzing Smallholder Agricultural finance.

feed the Future (2014) From Smallholders to Shareholders. A Guide to optimizing partnerships withthe private Sector for Smallholder impact. uSAid & fintrac

ifc (2013) working with Smallholders. A handbook for firms building sustainable supply chains

monitor Group (2011) Smallholder farmer Aggregation models: commercial Viability and income impact. market-Based Solutions to poverty in Africa project

Technoserve (2013) The coffee initiative. lessons learned 2008-2011.

11

12

www.idhsustainabletrade.com

www.growafrica.com

Grow AfricA SmAllholder workinG GroupBriefinG pAper

aggregation models

aggregation models

Documents