europeaid/138-539/dh/ser/lk technical assistance to the modernisation … · 2020. 2. 27. · ctc...

Technical Assistance to the

Modernisation of Agricultural Programme in Sri Lanka

(TAMAP)

Government of the Democratic Socialist Republic of Sri Lanka

European Union

EuropeAid/138-539/DH/SER/LK Technical Assistance to the Modernisation of Agricultural Programme in Sri Lanka (TAMAP)

COMMERCIAL AGRICULTURAL BUSINESS MODELS FOR SRI LANKA December 2019

Submitted to: Delegation of the European Union to Sri Lanka and the Maldives 389, Bauddhaloka Mawatha, Colombo 7, Sri Lanka Ministry of National Policies & Economic Affairs Department of National Planning, The Secretariat, 1st floor Colombo 01, Sri Lanka This project is implemented by a Consortium led by Ecorys Nederland , B.V

Technical Report: COMMERCIAL AGRICULTURAL BUSINESS MODELS FOR SRI

LANKA

Project title: Technical Assistance to the Modernisation of Agriculture Programme in Sri Lanka

Project number: ACA/2017/389-911

Country: Sri Lanka

Address: Ecorys Nederland B.V Watermanweg 44 3067 GG Rotterdam The Netherlands

Tel. number: T: +31 10 453 86 76

Fax number: F : +31 10 453 87 55

Contact person: Bart Provost [email protected]

Date of report: 24 December 2019

Assignment period: 24th June – 31st October 2019

Authors of report: Adam Sendall & Dharme Bandara

Disclaimer. The content of this report does not reflect the official opinion of the European Union. Responsibility for the information and views expressed lies entirely with the author(s) and the consortium led by Ecorys Nederland BV for the implementation of TAMAP

PROJECT SYNOPSIS

Project Title: Technical Assistance to the Modernisation of Agriculture Programme in Sri Lanka

Project Details: Project Ref. No:

EuropeAid/138-539/DH/SER/LK Programme Manager

Dr Olaf Heidelbach

Date of project start:

8 January 2018 Contracting Authority

Delegation of the European Union to Sri Lanka and the Maldives 389 Bauddhaloka Mawatha, Colombo 7, Sri Lanka

Contract Duration:

36 months Name of contact person (Contractor):

Project Manager: Bart Probost Project Director: Nick Smart

Contract No:

ACA/2017/389-911

Contractor’s name, address, telephone numbers and e-mail address:

Ecorys Nederland B.V Watermanweg 44 3067 GG Rotterdam The Netherlands T +31 (0)10 453 88 00

[email protected] [email protected]

Total contracted amount:

EUR 4, 167, 000 Team Leader

Dr. Christof Batzlen Postal Address: Ministry of National Policies and Economic Affairs, Treasury Building, Lotus Road,

Colombo 01, Sri Lanka.

[email protected]

mailto:[email protected]

Technical Assistance to the Modernisation of Agriculture Programme in Sri Lanka

Commercial Agricultural Business Models for Sri Lanka Page i

DIAGNOSTIC REPORT: COMMERCIAL AGRICULTURAL BUSINESS MODELS FOR SRI LANKA

1 EXECUTIVE SUMMARY...................................................................................... 1

2 INTRODUCTION .................................................................................................. 4

2.1 Study Objectives .................................................................................................. 4

2.2 Methodology Employed ........................................................................................ 5

3 BACKGROUND ................................................................................................... 6

3.1 Structure of the Agriculture Sector ........................................................................ 6

3.2 Agribusiness & Trade Environment ...................................................................... 9 3.2.1 Government Policy & Market Intervention ............................................................ 9 3.2.2 Trade Agreements ............................................................................................. 11 3.2.3 Regulatory Framework ....................................................................................... 11 3.2.4 Transport Infrastructure ...................................................................................... 12 3.2.5 Support Services ................................................................................................ 12

4 BUSINESS ENTITIES ........................................................................................ 14

4.1 Farmer-Based Organisations (producers) .......................................................... 14 4.1.1 Farmer Associations........................................................................................... 14 4.1.2 Farmer Organisations ......................................................................................... 15 4.1.3 Farmer Cooperatives .......................................................................................... 15 4.1.4 Farmer Companies............................................................................................. 16

4.2 Agro-Enterprises (buyers) .................................................................................. 17 4.2.1 Traditional Local Traders .................................................................................... 17 4.2.2 Wholesale Markets ............................................................................................. 17 4.2.3 Supermarkets ..................................................................................................... 18 4.2.4 National Agribusinesses ..................................................................................... 18 4.2.5 Multi-National Corporations ................................................................................ 19

5 COMMERCIAL AGRICULTURAL BUSINESS MODELS .................................. 20

5.1 Traditional Supply Chain: wholesale market ....................................................... 20

5.2 Intermediary Model............................................................................................. 22

5.3 Agricultural Marketing Cooperatives ................................................................... 23

5.4 Federated Model ................................................................................................ 26

5.5 Collection Centres .............................................................................................. 27

5.6 Contract Farming ............................................................................................... 28 5.6.1 Out-Grower Schemes ......................................................................................... 29 5.6.2 Anchor Farms..................................................................................................... 31

5.7 Multipartite Model ............................................................................................... 32

5.8 Joint Ventures .................................................................................................... 33

5.9 E-Commerce ...................................................................................................... 34

6 COMPARARTIVE ANALYSIS OF AGRICULTURAL BUSINESS MODELS IN SRI LANKA ................................................................................................... 36


Commercial Agricultural Business Models for Sri Lanka Page ii

7 CONCLUSIONS ................................................................................................. 42

7.1 Income ............................................................................................................... 42

7.2 Business Models ................................................................................................ 43

7.3 Important Features for Inclusive Business Models ............................................. 44

7.4 Future Trends..................................................................................................... 44

7.5 Policy & Legislation ............................................................................................ 45

8 RECOMMENDATIONS ...................................................................................... 46

8.1 Preferred Business Models ................................................................................ 46

8.2 Policy & Legislation ............................................................................................ 47

8.3 The Way Forward: road map .............................................................................. 48


Commercial Agricultural Business Models for Sri Lanka Page iii

List of Annexes

Annex Name

Annex A Terms of Reference

Annex B Documents Reviewed

Annex C Persons Met

Annex D Interview Checklist

Annex E Legend for Business Model Diagrams

Annex F Wholesale & Retail prices

Annex G Results from the Farm Business Model workshop dated 18 October held in Colombo

Annex H Proceedings of the two trainings organised in Kandy and in Vavuniya

Annex J Training material in English (in Sinhala and Tamil can be obtained on demand)


Commercial Agricultural Business Models for Sri Lanka Page iv

List of Figures

Figure 1: Agro-Climatic Zones of Sri Lanka ............................................................................ 7

Figure 2: Main Crops Produced by Area (ha) ......................................................................... 7

Figure 3: Value of Agricultural Production (million USD) ......................................................... 8

Figure 4: Value of Agricultural Exports (thousand USD) ......................................................... 8

Figure 5: Value of Agricultural Imports (million USD) .............................................................. 9

Figure 6: Doing Business Ranking........................................................................................ 11

Figure 7: Enabling the Business of Agriculture Ranking ....................................................... 12

Figure 8: Wholesale Market Model ....................................................................................... 21

Figure 9: Intermediary Model ................................................................................................ 22

Figure 10: Cooperative Model .............................................................................................. 24

Figure 11: Federated Model ................................................................................................. 26

Figure 12: Collection Centre Model ...................................................................................... 27

Figure 13: Out-Grower Model ............................................................................................... 30

Figure 14: Anchor Farm Model ............................................................................................. 31

Figure 15: Multipartite Model ................................................................................................ 32

Figure 16: Joint Venture Model ............................................................................................. 34

Figure 17: E-Commerce Model ............................................................................................. 35

Figure 18: Farmer Income by Business Model...................................................................... 37

Figure 19: Farmer Ownership and Decision Making Power by Business Model .................... 38

Figure 20: Farmer Negotiating and Bargaining Power by Business Model ............................ 38

Figure 21: Services Provided by Business Model ................................................................. 39

Figure 22: Sustainability by Business Model ......................................................................... 40

Figure 23: Risk by Business Model....................................................................................... 41

Figure 24: Proportion of Final Retail Price Retained by Market Chain Segment ................... 42

List of Tables

Table 1: Comparative Analysis of Agricultural Business Models ........................................... 36

Table 2: Preferred Business Models ..................................................................................... 46


Commercial Agricultural Business Models for Sri Lanka Page v

ACRONYMS

⁰C Degrees Celsius

€ Euro

% Percent

ADB Asian Development Bank

ASMP Agriculture Sector Modernisation Project

CTC Ceylon Tobacco Company

DoA Department of Agriculture

e.g. exempli gratia

EU European Union

FAO Food and Agriculture Organisation

FDI Foreign Direct Investment

FTA Free Trade Agreement

GAP Good Agricultural Practices

GDP Gross Domestic Product

GMPs Good Manufacturing Practices

GoSL Government of Sri Lanka

ha Hectare (10,000 m2)

ICT Information Communication Technology

i.e. id est

ILO International Labour Organisation

ITC International Trade Centre

Km Kilometre

LKR Sri Lankan Rupee (currency)

Ltd Limited (company)

M&E Monitoring & Evaluation

mm millimetre

MNC Multi National Corporation

MOA Ministry of Agriculture

NGO Non-Government Organisation

PPP Public Private Partnerships

SACCOs Savings And Credit Cooperative Organisations

SAFTA South Asia Free Trade Area

SME Small and Medium Enterprises


Commercial Agricultural Business Models for Sri Lanka Page vi

SNF Solid Not Fat

SOFA Small Organic Farmers Association

SWOT Strengths, Weaknesses, Opportunities, Threats

TAMAP Technical Assistance to the Modernisation of Agriculture Programme in Sri Lanka

TEU Twenty Foot Equivalent (container)

ToR Terms of Reference

UNDP United Nations Development Programme

USA United States of America

USAID United States Agency for International Development

USD United States Dollar (currency)

WB World Bank

WFP World Food Programme


Commercial Agricultural Business Models for Sri Lanka Page 1

1 E X E C U T I V E S U M M A R Y

Objectives The Technical Assistance to Modernisation of Agriculture Programme (TAMAP) wishes to investigate the various farmer business models which exist in Sri Lanka and in other parts of the world with a view to income generation (availability of disposable income), risks the farmers are exposed to in their farming activities as well as socio-economic aspects. The objectives of this assignment are to study commercial agriculture business models and their profitability and sustainability for farmers; recommend the best business model(s); and prepare a way forward to facilitate establishment of the preferred business models between farmers and agro-enterprises. Methodology The short-term expert team reviewed relevant documents and met key business model stakeholders such as farmer organisations, wholesalers, supermarkets, processors and exporters in Colombo and eight districts across four provinces. Each model was assessed and scored using the criteria of farmer income, farmer ownership and decision making power, farmer negotiating and bargaining power, services provided, risk and sustainability. Comparative analysis was then carried out to rank the business models and identify the models best for commercialising smallholders. Key Findings Although there are no policy measures that exclusively and directly affect ‘business models’; policies that affect the wider agricultural and SME sectors can have an indirect and secondary impact upon business models. These include land law, trade policy and agreements, investments to increase agricultural productivity, upgrading national infrastructure and utilities, investing in research and development, easing the cost and risk of doing business (e.g. tax, business registration and licensing, contract enforcement, export procedures), access to finance and education and training. Overall, the macro-environment and regulatory framework is supportive of business model development. Adequate legislation exists for farmers to establish associations, organisations and cooperatives. Although there is no contract farming law, the Forward Sales Contract / Sales of Goods Act (1999) is used as the basis for formal contracts. However, it is widely recognised that contracts are difficult to enforce with smallholders and the challenge is to agree contracts which are compliable, rather than enforceable.

Nine types of agricultural business models were identified including traditional wholesale, intermediary model, marketing cooperatives, federated model, collection centres, contract farming (out-grower schemes and anchor farms), multipartite model, joint ventures and e-commerce. After assessing all the above models, key elements of smallholder inclusive business models were identified as:

• high value crops for which smallholders have a comparative advantage;

• clustering of farmers and aggregation of produce;

• less intermediaries between producer and end market to increase market chain income share for farmers;

• direct linkages between producer and buyer to build trust/loyalty and ensure quality and traceability for certification;

• the provision of services such as transport, inputs, credit and technical support;



• risk mitigation measures such as advancing inputs on credit, writing off credit if the crop fails, providing minimum prices, and buying all the crop;

• transparency measures such as (wholesale) reference prices during price determination, formal contracts or memorandum of understanding; and

• flexibility measures such as increasing prices if the reference price significantly increases to avoid side-selling and agreeing to buy areas of production not quantities.

After completing comparative analysis, contract farming, marketing cooperatives and collection centres were identified as the business models which satisfied most of the above criteria.

Recommendations

The main recommendation to improve the enabling environment is to review and update the Cooperative Development Act and Agrarian Services Act to enable cooperatives and farmer organisations to better engage with agro-enterprises on a commercial basis.

International experience considers that small-scale institutional innovations focusing on reducing inefficiencies in supplier to buyer commercial transactions, are more effective than macro-trade and price policy initiatives, which are often far removed from the realities and needs of district level businesses. Therefore, to facilitate establishment of the preferred business models between farmers and agro-enterprises, the following steps and activities are recommended:

1. Select crops for which smallholders have a comparative advantage, that are high-value and have an export demand. This may include fruit (papaya, mango), vegetables, spices (pepper, cinnamon, clove, nutmeg), specialty tea and marine fish.

2. Identify clusters of farmers producing the selected crop and facilitate the establishment of the simplest organisation as required by the business model. This can be as simple as an informal group with a nominated coordinator.

3. Identify agro-enterprises that buy the crops and sell to premium market segments.

Suitable agro-enterprises include supermarkets, processors, exporters and cooperatives.

4. Facilitate Producer/Buyer Forums where potential producer groups and agro-

enterprise buyers are brought together to design the best-fit business model based upon the key elements of smallholder inclusive business models described above.

5. Producers and buyers identify common priorities within the business model for

upgrading based around the four areas of product upgrading, organisational upgrading, process upgrading and linkage upgrading.

6. Upgrading activities could include the following:

• Product Upgrading: e.g. developing new high-value products, processing to add value; improving quality of products through better production and handling; preparing for certification (FairTrade, GlobalGAP, Organic, Geographical Indication, Rainforest Alliance, Marine Stewardship Council).

• Organisational Upgrading: e.g. improving business management skills; upgrading storage facilities.



• Linkage Upgrading: e.g. contract preparation with transparent pricing mechanisms, risk mitigation measures and flexibility; establishing collection centres / aggregation points; piloting new market development e.g. e-commerce for specialty tea and spices.

• Process Upgrading: e.g. providing relevant services such as quality inputs, bulk-buying inputs, credit, technical support, transport; introducing efficient payment systems for individual farmers e.g. mobile banking; reducing wastage.



2 I N T R O D U C T I O N

The Technical Assistance to Modernisation of Agriculture Programme (TAMAP) in Sri Lanka

commissioned a short-term expert team1 to assist the Government of Sri Lanka improve its support to farmers, farmer organisations and the extension service. Specifically, TAMAP wishes to investigate the various farmer business models which exist in Sri Lanka and in other parts of the world with a view to income generation (availability of disposable income), risks the farmers are exposed to in their farming activities as well as socio-economic aspects. Full terms of Reference are found in Annex A. Objectives of the overall assignment are to:

(a) Study commercial agriculture business models and their profitability and sustainability for farmers.

(b) Recommend the best business model(s). (c) Design training related to farmer operations in the selected business model(s). (d) Conduct training in best business model(s) practice for farmers and extension

workers.

2 . 1 S t u d y O b j e c t i v e s

This report relates to the first two objectives of the overall assignment. Specific objectives are to prepare a diagnostic study and analysis of agricultural business models which will:

• Assess a large number of farmer business models with a view to their applicability in the Sri Lankan context.

• Establish a ranking of preferred farmer business models for Sri Lanka.

• Establish an inventory of the required resources (financial means, legal framework, capacity building, etc.).

• Develop a road map for the way forward (which steps are required) until the preferred structure is in place.

The analysis will also explore the following key questions:

• Do farmers benefit from being members of farmer business models in terms of accomplishing and sustaining a certain income level or could they benefit more in a different institutional setting?

• Do farmers have sufficient say and decision-making power in the farmer business model they are organised, or could this be improved by being in a different legal structure?

• Do farmers actually know what the (potential) benefits are from being organised in a particular farmer business model?

• Does the current form of farmer business models give farmers sufficient bargaining / negotiating power compared to middlemen, exporters and agro-industry with a view to getting a decent price for their products / services?

• Do the current farmer business model farmers cover all the areas which are necessary to improve their livelihood? Or are certain areas omitted (e.g. marketing function or bulk input provision).

• Do farmers have sufficient ownership of their farmer business model making the operation and management of the farmer business model sustainable (will it exist in the next 15 years?).

1 Adam Sendall & Dharme Bandara



2 . 2 M e t h o d o l o g y E m p l o y e d

The short-term expert team reviewed relevant documents such as the ‘Assessment of Available Models of Farmer Organisations and Propose Suitable Models for Sri Lanka’ report prepared by the Agriculture Sector Modernisation Project (ASMP) and the draft ‘Development of Efficient and Effective Agriculture Extension System in Sri Lanka’ report prepared by TAMAP. A list of all documents reviewed is found in Annex B.

Key business model stakeholders, or business entities, were identified such as individual farmers, farmer organisations, cooperatives, local traders, wholesalers, supermarkets, processors and exporters. In addition to meeting agribusinesses in Colombo, field visits were made to Matale and Nuwara Eliya districts in Central province; Jaffna, Kilinochchi and Mullaitivu districts in Northern province; Anuradhapura and Pollonaruwa districts in North Central Province; and Monaragala district in Uva province to carry out semi-structured interviews with stakeholders. A list of all persons met is found in Annex C.

To assist in collecting information on business models an ‘Interview Checklist’ was prepared to guide the stakeholder interviews. The Interview Checklist is found in Annex D.

Each model was assessed and scored using the following criteria: farmer income, farmer ownership and decision making power, farmer negotiating and bargaining power, services provided, risk and sustainability for comparison purposes to identify the models best suited for commercialising smallholders. When comparing income, the wholesale price is taken as the baseline with which to compare, as it is the default market if others fail. Farmer ownership and decision making refers to how much of the model the farmer has control over i.e. just the production segment or trading as well. Farmer negotiating and bargaining power refers to how much influence the farmer has during price determination. Services provided are support such as inputs, credit, technical support and transport provided to farmers. Risk refers to transparency and complexity of the model. Sustainability refers to competitiveness of the model on international markets.



3 B A C K G R O U N D

Sri Lanka is a lower-middle income country with a Gross Domestic Product (GDP) of USD87.357 billion. It is an island nation covering 65,610km² with a population of 21.4 million

persons. Average GDP per capita is USD3,850 and official unemployment is 4.7%.2

The economy is transitioning from being predominantly rural-based towards a more urbanised economy, oriented around manufacturing and services. This is reflected in sector contributions to GDP with services accounting for 62%, industry 30% and agriculture 8%. However, 81% of the population live in rural areas and approximately 20% of the population

are reliant on the agriculture sector for a livelihood.3 Considering the small size of the domestic economy, any long-term sustained economic growth will be dependent on increasing exports, including agricultural exports.

Sri Lanka’s Human Development Index value for 2017 is 0.77, putting the country in the ‘high’ human development category and positioning it at 76 out of 189 countries and territories. The Gender Development Index value for Sri Lanka is 0.935, placing it in the ‘medium’ equality category. Youth (aged 15-25 years old) account for 15% of the population,

slightly lower than the global average.4

3 . 1 S t r u c t u r e o f t h e A g r i c u l t u r e S e c t o r

Business models arise as a response to the existing supply context and perceived market (demand) opportunities. This section provides a brief synopsis of the agricultural sector in Sri Lanka.

According to the last census of 2012, there were 4,291,395 people who were farmers or employed as agricultural workers. The agriculture sector in Sri Lanka is characterised by large plantations of coconut, tea and rubber; or mixed smallholdings. Smallholdings account for 80% of agricultural land use and are usually less than two hectares in size. Smallholders mostly grow food crops such as rice, maize, fruit and vegetables for domestic consumption but also grow some export crops such as pepper and cinnamon.

Two thirds of the agricultural area is located in the dry zone, which covers the northern, eastern and south-eastern parts of the country, where the bulk of the country’s irrigation infrastructure is located. In this area, the most common crops are irrigated paddy, maize, green gram, black gram, cowpea, soybean, banana, papaya, mango, pineapple, plantain and lowland vegetables. Figure 1 shows the main agro-climatic zones in Sri Lanka.

2 World Bank, 2017 3 Department of Census & Statistics, Sri Lanka 4 UNDP, 2017



Figure 1: Agro-Climatic Zones of Sri Lanka

The intermediate zone includes upland areas where temperate vegetables, spices, and coconut on the west coast are grown. Tea, rubber, roots and tubers are planted in the wet zone.

Figure 2 shows the main crops produced by area harvested and Figure 3 shows the main crops by output value. The livestock population includes cattle (1,000,880 head), goats (287,190 head), buffalo (283,550 head), pigs (95,120 head) and chickens (21,276,000

head).5 Sri Lanka also has 1,340km of coastline and fisheries production totalled 552,611 tonnes in 2017, of which 30,974 tonnes was farmed (aquaculture).6

Figure 2: Main Crops Produced by Area (ha)

Source: FAOSTAT, 2017

5 FAOSTAT, 2017 6 Department of Census & Statistics, Sri Lanka

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Figure 3: Value of Agricultural Production (million USD)

Source: FAOSTAT, 2016

Rice is the largest crop grown by area and value, all of which is consumed domestically. Coconut, tea and rubber plantations also account for a large proportion of area planted and value. Chicken meat is the third largest agricultural output by value. Spices such as pepper and cinnamon are also important. Figure 4 shows the value of agricultural exports. Rubber and tea are by far the largest exports by value, although fish is the third largest export earner. Other exports are mostly spices such as cinnamon, pepper, betel nut, clove and nutmeg.

Figure 4: Value of Agricultural Exports (thousand USD)

Source: ITC 2018

Main export destinations are USA (rubber, fish, cinnamon, coconut), India (pepper, betel nut, clove, nutmeg). Tea, the second biggest agricultural export by value, is exported to Turkey, Russia, Iran and Iraq. Figure 5 shows the value of agricultural imports. Cotton for the textile industry is the largest import. Imports of wheat, rice and dairy are also significant for consumption.

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Figure 5: Value of Agricultural Imports (million USD)

Source: ITC 2018

Most imports are sourced from China (cotton, fish, vegetables) and India (cotton, rice, vegetables, pulses). Wheat is sourced from Canada and Russia; and milk from New Zealand. Sri Lanka has successfully achieved self-sufficiency in rice and maize production, although a considerable amount of rice was imported in 2018 due to the poor 2017 harvest. However, achieving self-sufficiency has also meant that agricultural production has remained concentrated in low value food crops, resulting in low incomes for farmers. Export crops such as rubber, tea and spices, receive discounted prices on the international market and very little value addition is undertaken. It is now widely recognised the country should capitalise on the opportunity to diversify production out of the relatively low-value food crops and move towards high-value agriculture and promote agriculture exports.

3 . 2 A g r i b u s i n e s s & T r a d e E n v i r o n m e n t

Overall, Sri Lanka has a positive macro-environment for agribusiness with a long experience as a trading nation. Government policies and trade agreements are in place and although the regulatory framework could be improved, transport infrastructure and support services are available.

3 . 2 . 1 G o v e r n m e n t P o l i c y & M a r k e t I n t e r v e n t i o n

The National Agricultural Policy of 2006 has the following objectives:

1. Increase domestic agricultural production to ensure food and nutrition security of the nation.

2. Promote agricultural productivity and ensure sustainable growth. 3. Maximize benefits and minimise adverse effects of globalisation on domestic and

export agriculture. 4. Adopt productive farming systems and improved agro-technologies with a view to

reduce the unit cost of production and increase profits.

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5. Apply environmental friendly techniques in agriculture. 6. Enhance the income and the living standard of the farming community, and 7. Promote agro-based industries and increase employment opportunities. Specific

policy statements for agribusiness include:

a) Minimise problems associated with marketing of agricultural products through government intervention as and when necessary for price stabilisation.

b) Promote private sector investment to improve infrastructure facilities necessary for marketing agricultural products.

c) Explore and promote foreign markets for crops with high export potential. d) Encourage product branding, certification and use of geographical indicators for

products to enter competitive markets. e) Facilitate marketing information dissemination and marketing operations through

the establishment of district level agro-enterprise centres. f) Appropriately align the agricultural sector with the current multi and bilateral trade

agreements. g) Identify the requirements of agro-business enterprises to cater for the needs of

small farmers and promote public and private investments in such agro-business. h) Promote the involvement of producers in agricultural processing and marketing. i) Strengthen supply chain management to develop an efficient agricultural marketing

system.

Previous agricultural policy has prioritised food security through self-sufficiency. Border taxes were imposed on imports (e.g. rice) and exports of agriculture products. Export cesses are currently applied to tea, rubber, coconut, pepper, vanilla, cinnamon, cloves, nutmeg, mace, maize and rice. The taxes and cesses are used to subsidise farmers that are engaged in import-substituting activities, for example fertiliser subsidies for rice production. The high protection of importables, motivated by self-sufficiency in food crops, has restricted crop diversification and discouraged the production of exportables. The government owns and operates State Owned Enterprises including 18 plantations for rubber, tea and coconut. There are also parastatal processing and export companies for tea, milk, rubber and fish and further government intervention in price setting for rice and milk. Governments intervene in markets and establish parastatals when traditional markets are judged to be disorderly and parastatals would organise procurement, assembly and handling more efficiently. Parastatals are set up by government direction with government capital. While they may be autonomous in day-to-day operations, major operating decisions are subject to the approval of a designated government minister who will also nominate representatives to the board of directors. Parastatals are convenient vehicles for the application of public capital, implementation of government price policies and assignment of marketing monopolies where these are judged advantageous. For example, concentrating sales of produce through a particular processing plant to justify initial investment in the plant. However, globally, parastatals have met with little success and are often accused of undermining private sector development. Problems are largely due to lack of competition leading to inefficiency; commercially inexperienced managers on salaries; and the closeness

to government with the dilemma of meeting commercial and political objectives.7

7 Crawford (1997) Agriculture and Food Marketing Management, FAO



3 . 2 . 2 T r a d e A g r e e m e n t s

Sri Lanka is a member of South Asia Free Trade Area (SAFTA) which includes Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal and Pakistan. Sri Lanka also has a Trade and Investment Framework Agreement with USA, is a beneficiary of the EU General Scheme of Preferences and has Free Trade Agreements (FTA) with India, Pakistan and Singapore. A FTA is currently being negotiating with China.

3 . 2 . 3 R e g u l a t o r y F r a m e w o r k

Adequate legislation exists for farmers to establish associations, organisations and cooperatives, as described under Section 4.1. Although there is no contract farming law, the Forward Sales Contract / Sales of Goods Act (1999) is used as the basis for formal contracts. However, it is widely recognised that contracts are difficult to enforce with smallholders and the challenge is to agree contracts which are compliable, rather than enforceable.

The World Bank ‘Doing Business 2019’ report provides objective measures of business regulations and their enforcement across 190 countries. The analysis looks at domestic Small and Medium Enterprises (SME) and measures the regulations applying to them through their life-cycle. Sri Lanka’s overall score for doing business is 61 out of 100 and is ranked 100 out of 190 countries. Figure 6 shows the ranking for five criteria most relevant for agribusiness.

Figure 6: Doing Business Ranking

Sri Lanka ranks highly for protecting minority investors and reasonably well for starting a business and trading across borders, the latter of which is vital for a small country wishing to increase exports. However, Sri Lanka ranks poorly for enforcing contracts, which is a basic requirement for successful business models.

The World Bank ‘Enabling the Business of Agriculture 2017’ report ranks 62 countries across twelve topics relating specifically to agribusiness. Figure 7 summarises the ranking. Sri Lanka ranks comparatively well for production inputs such as seed, fertiliser and machinery, which is unsurprising considering previous policy priorities.

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Figure 7: Enabling the Business of Agriculture Ranking

However, Sri Lanka ranks poorly for finance, markets and Information, Communication, Technology (ICT) which are essential requirements for successful business models.

3 . 2 . 4 T r a n s p o r t I n f r a s t r u c t u r e

For international transport links, Sri Lanka has one international airport in Colombo, but no cold storage facility. Colombo also has a container port with 250,000 TEU capacity. Shipping connectivity to main global routes is good and there are additional ports at Jaffna, Trincomalee and Galle. For domestic connectivity Sri Lanka has 114,090 km of roads, of which 11,977 km is paved. Although road coverage and densities are good, many provincial and local roads are in poor

condition.8 The domestic rail network has 1,562 km of track and 130 locomotives, including ten for cargo purposes. The main purpose of the railway was to link inland towns with seaports, however, the rail network is now outdated and used mainly for passenger

transport.9

3 . 2 . 5 S u p p o r t S e r v i c e s

Business Development Services are well catered for. For example, daily wholesale market prices are available from the Ministry of Rural Economy website and other sources. There are universities such as Peradeniya, Rajarta, Ruhuna, Sabaragamuwa, Wayamba, Eastern and Jaffna providing agricultural education and training. Sabaragamuwa University also offers an undergraduate degree in agribusiness.

8 Sri Lanka Road Development Authority 9 WFP, Logistics Capacity Assessment

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In addition to commercial banks such as Bank of Ceylon offering agriculture and SME loans there are many credit cooperatives providing accessible savings and loan schemes. There are also occasionally larger loans available from government agencies such as the Department of Cooperative Development for registered cooperative societies and the Regional Development Bank.



4 B U S I N E S S E N T I T I E S

A ‘marketing system’ coordinates the processes that take place between the production and consumption of a commodity or product. ‘Business Models’ describe the different strategies employed by stakeholders within the marketing system to carry out the process. Business models have two distinct dimensions; firstly institutions, organisations and enterprises (entities) which participate in the market; and secondly, the functions those entities perform. ‘Functions’ of an agricultural marketing system include processing, storage and transport that transform and add value to raw agricultural commodities produced by farmers into foods eaten by consumers. The marketing system also provides a venue for a change of ownership of products. Along the marketing chain these include wholesale markets, commodity exchanges and retail outlets. Institutions can be ‘public’, such as a parastatal or Marketing Board, established to achieve public or social purposes. ‘Private’ institutions are usually commercial companies established for profit making purposes. These can vary in size from small family enterprises to Multi-National Corporations (MNC). Business entities central to every agricultural business model are farmers on the production side of the farm gate and agro-enterprises / buyers on the other side of the farm gate. This section first describes farmer-based organisations (producers), followed by agro-enterprises (buyers).

4 . 1 F a r m e r - B a s e d O r g a n i s a t i o n s ( p r o d u c e r s )

The average Sri Lankan farmer cultivates less than two hectares of land and grows a variety of crops depending on agro-climatic conditions, available resources and market demand. Furthermore, most smallholders grow cash crops for market, rather than food crops for subsistence. Although there are traditional supply chains linking individual smallholders with markets, this report focuses upon commercial business models that require the aggregation of smallholder produce. Hence, the emphasis upon farmer-based organisations not individual farmers.

4 . 1 . 1 F a r m e r A s s o c i a t i o n s

Farmer Associations are registered with the District Department of Social Services at the Divisional Secretariat Divisions, after which they are able to carry out business on behalf of members.

One example of a successful Farmer Association is the ‘Small Organic Farmers Association’ (SOFA) which functions as an umbrella organisation for 53 Farmer Societies with a total membership of 3,576 families. Main crops grown are tea and spices. SOFA is registered with the District Department of Social Services as it describes itself as a social enterprise which also carries out non-agricultural activities. The member Farmer Societies are informal groups of farmers established for coordination purposes.

SOFA has invested in the organic, Fairtrade and Bio-dynamic certification of its farmer members and uses the premium received from Fairtrade to fund community development projects for the member Farmer Societies. This has included community infrastructure such as wells, bridges and schools.



SOFA negotiates sales with exporters on behalf of its Farmer Societies and receives a commission to cover its costs.

4 . 1 . 2 F a r m e r O r g a n i s a t i o n s

There are an estimated 15,000 Farmer Organisations registered with the Department of Agrarian Development under the Agrarian Services Act. Many of the organisations have been established in irrigated agricultural areas for the purpose of organising farmers to operate and maintain the irrigation infrastructure and to distribute subsidised seeds and fertiliser. Farmer Organisations are also entitled to undertake other activities such as input supply, credit provision, value addition and marketing. However, most only carried out production activities such as canal repair and maintenance.

Farmer Organisations visited under the Mahaweli Authority of Sri Lanka are grouped into Blocks and the Blocks grouped into Zones, each with a coordinating Committee. Farmer membership fees are LKR3,300/year which includes funds for maintaining the irrigation infrastructure and elephant fencing, a welfare fund and workers’ salaries. One farmer organisation visited had entered a contract farming agreement with Sunfrost for gherkin production, indicating that Farmer Organisations can successfully engage in business models with the correct leadership and support.

4 . 1 . 3 F a r m e r C o o p e r a t i v e s

A Cooperative Society is an association of persons who voluntarily join together to achieve a common end through the formation of a democratically controlled organisation, making equitable contributions to the capital required and accepting a fair share of the risks and benefits of the undertaking in which the members actively participate (International Labour Office). Cooperatives were first established to provide small producers with more bargaining power against buyers/traders through collective action and counteract the increasing power of traders. The Rochdale Pioneers, an association of 28 weavers, created the first cooperative in northern England in 1844 based upon the principles of voluntary and open membership, democratic member control, member economic participation, autonomy and independence, education training and information, cooperation among cooperatives and concern for community. There are several types of cooperatives depending on the membership and purpose. For example, ‘consumer’ cooperatives often have their own shops providing lower prices or better quality to their members. ‘Producer’ cooperatives have a membership that produces the same produce e.g. dairy, fresh vegetables and sell collectively to achieve higher prices. ‘Credit’ cooperatives that provide small loans to members under less stringent lending conditions than commercial banks and ‘multi-purpose’ cooperatives that provide credit plus other services. There are also three categories of cooperatives. ‘Primary’ cooperatives have a base membership of individuals, for example farmers in a producer cooperative. Primary cooperatives may federate to establish a ‘secondary’ cooperative, which has primary cooperatives as its members and carries out services for its membership, such as processing or marketing. ‘Tertiary’ cooperatives are when secondary cooperatives unite to promote the interests, or lobby on behalf, of their membership.



Agricultural cooperatives increase the marketing efficiency of small farmers through groups so they can benefit from economies of scale in the use of transport and services and raises their bargaining power in sales transactions. Cooperatives are best suited to assembling standard non-perishable products, such as cereals, for sale on pre-established markets where the price risk is small and the distribution of standard non-perishable farm inputs, such as fertilisers, where pricing is pre-established. Long term policy and strategy of a cooperative is decided by membership during Annual General Meetings. Cooperative membership delegates operational control to a management committee, or Board of Directors, who are elected to supervise the work of the cooperative on behalf of its members. The committee or board may then employ managers and staff to carry out the day-to-day duties. Cooperatives are owned by its customers/members and are democratically controlled with each member having one vote, regardless of share ownership. The use and distribution of profits are restricted to one or more of the following purposes:

• Allocation to reserves, where it becomes collectively-owned capital and is thereafter non-distributable.

• For use on, or donation to a common-good, community project. • Distribution to members in proportion to the trade each member has done with the

cooperative. In other words, the distribution is made not in relation to capital held, but by declaring a bonus or dividend per cash unit of trade done.

Unfortunately, the promise of cooperatives and the extent of their development in many cases has fallen short of expectations. Low standards of performance, bad management, financial failure, corruption and use of cooperatives for political ends have been common features of cooperatives in many countries. As a consequence, a great deal of understandable criticism has been levelled at the cooperative system, and many have

become cynical as to its ability to play an effective role in the development process.10 In Sri Lanka, cooperatives are registered with the Department of Cooperative Development under the Cooperative Development Act. According to the Ministry of Cooperatives and Internal Trade, there are 10,002 cooperative societies with 6,303,306 members in Sri Lanka. Agricultural cooperatives include 171 tea/rubber/coconut cooperatives (38,000 members), 145 milk cooperatives (465,000 members), 50 livestock cooperatives (12,100 members) and

673 fisheries cooperatives (80,500 members).11

4 . 1 . 4 F a r m e r C o m p a n i e s

In dealing with agribusiness, groups of farmers may choose to formalise their alliance, legally incorporate into a company and enter into particular types of business (e.g. processing or marketing), sign contracts, gain access to finance, and limit the liability of individual members. Farmers’ associations or cooperatives may also choose to incorporate as a farmer-owned company limited by shares or by guarantee. These business structures may enable cooperatives to manage their collective assets and production more nimbly and with reduced risk to individual members, but does entail a loss of democratic process.

10 Crawford (1997) Agriculture and Food Marketing Management, FAO 11 MG Consultants (2018) Assessment of Available Models of Farmer Organisations and Propose Suitable Models for Sri Lanka, ASMP



In 1995 the National Development Council of Sri Lanka recommended the unification of small farmers under Farmer Companies to facilitate contract farming and farmer-agribusiness linkages. The Farmers Companies were registered as ‘Peoples Companies’ under the Companies Act. A large number of Farmer Companies were established, some of which were based on large irrigation schemes and also included the operation and management of those schemes.

Performance of the Farmer Companies was below expectations mainly due to politicisation, lack of managerial and entrepreneurial skills and mistrust between the Farmer Company management and farmer members resulting in poor farmer participation in commercial activities sponsored by the Company. Share ownership and investment regulations of the Company also limited the capital available for expanding commercial activities. As a result of

the above, none of the Farmer Companies are currently active for agribusiness purposes.12

4 . 2 A g r o - E n t e r p r i s e s ( b u y e r s )

As this report focuses upon agricultural business models, the description of agro-enterprises is limited to those that buy directly from farmers and, with the exception of supermarkets, does not include retailers.

4 . 2 . 1 T r a d i t i o n a l L o c a l T r a d e r s

Traditional Local Traders, or indigenous private enterprises, are the smallest marketing institution. They are owned and managed by an individual or family and specialise in buying small amounts of produce from individual farmers. In many cases the local traders also operate a shop in the district selling agri-inputs and other consumable goods to farmers. As such, the traders may provide inputs on credit to farmers in return for them selling their produce to the trader at harvest under an informal agreement, at which point the credit is deducted. The local trader collects, aggregates and assembles the produce from farmers paying a basic standard price for mixed quality. The trader may carry out some storage until the volume of produce is large enough to transport to the wholesale market or large buyer. Although local traders add little value, they carry out important aggregation and transport functions linking smallholders to the local retail and wholesale markets.

4 . 2 . 2 W h o l e s a l e M a r k e t s

Wholesale Markets assemble produce from a wide geographical area and can specialise in particular products such as fruit and vegetables, grains and pulses or meat. Wholesalers are either ‘Merchants’ who take ownership of the product, buying from producers and selling to retailers, or ‘Brokers’ who sell on behalf of producers and receive a ‘commission’ but never actually own the product. Prices are determined either by individual negotiation or ‘auctions’, where competitive bidding takes place amongst potential buyers. Wholesale markets can be publically or privately owned, or a mix of both. Many public sector markets are now managed by a managing authority controlled by a Board of Directors, often made up of representatives of private market users or businessmen. The markets are

12 Esham & Usami (2007) Evaluating the Performance of Farmer Companies in Sri Lanka: a case study of Ridi Benda Ela Farmer Company, Journal of Agricultural Sciences



required to be self-funding and operate on a commercial basis, therefore, wholesale merchants and brokers pay rental and/or commission fees to carry out business within the wholesale market. Main responsibilities for wholesale market management are to:

• Provide criteria and guidelines for market transactions to ensure fair and transparent competition among suppliers and wholesalers.

• Ensure compliance with standard weights and measures.

• Provide criteria for quality or grade standards.

• Provide controls for human health, and plant and animal pests and disease. In Sri Lanka, the largest fresh produce wholesale market is Dambulla in Central Province, which has average sales of 26,500 tonnes/week. The Ministry of Trade, Marketing Development, Co-operatives and Consumer Services owns and manages the market and has also established 13 District Economic Centres (wholesale markets) in Thambuththegama, Nuwaraeliya, Kappetipola, Kurunduwatta, Veyangoda, Welisara, Narahenpita, Ratmalana, Meegoda, Embilipitiya, Piliyandala, Kilinochchi and Ampara. The District Economic Centres are much smaller, for example, the Thambuththegama market has weekly sales of 2,800 tonnes, carried out by 56 wholesalers. Wholesalers typically supply the local retail market segment with average quality produce that has undergone very little value-addition since leaving the farm-gate. The markets at Dematagoda, Pettah, Borella, Nugegoda, Pelyagoda and Wellawatte are owned by the Municipal Councils.

4 . 2 . 3 S u p e r m a r k e t s

One of the most significant changes in recent years has been in retailing and the increasing power of supermarkets on supply chains. Supermarkets prefer to buy direct from large producers, often under forward contracts, bypassing wholesale markets. One implication for smallholder farmers in the rise of direct procurement systems is the need for farmer organisation and the changing role of cooperatives into professionally managed marketing

groups.13 In Sri Lanka, supermarkets include Cargill Food City and Keells. These supermarkets have Collection Centres in the production areas to purchase directly from farmers on a daily basis and source 70% of their fresh produce from the Collection Centres. Approximately 20% of Sri Lankans now buy their fresh produce from supermarkets due to increased income and urbanisation; increased concerns regarding quality and food safety; and an increased need for convenience due to more housewives working outside the home.

4 . 2 . 4 N a t i o n a l A g r i b u s i n e s s e s

Agribusinesses include processors and exporters for products such as tea (e.g. Biofoods), fruit (e.g. CR Exports), vegetables (e.g. Hayley’s), coconut (e.g. Tropical Life), poultry (e.g. Crysbro), fish (e.g. Taprobane) and rubber (e.g. Loadstar). The agribusinesses are mostly private limited companies, often family owned, medium to large in size and supply wholesalers and supermarkets overseas, as well as the domestic market. Some agribusinesses are vertically integrated producing on their own farms but most buy supplementary product from smallholders as a means of expanding their business (e.g.

13 McCullough et al (2008) The Transformation of Agri-Food Systems, FAO



Ellawala Exports). Other agribusinesses have expanded into horizontal markets supplying farm inputs (e.g. CIC Holdings) Exporters tend to buy only best quality produce to supply premium markets which requires quality control systems. In recent years exporters have been faced with the challenge of meeting international food safety standards and acquiring certification which requires traceability systems and shorter, closer upstream links to producers.

4 . 2 . 5 M u l t i - N a t i o n a l C o r p o r a t i o n s

Multi-National Corporations (MNC), or transnationals, have headquarters in one country but operate in one or more foreign countries. Agricultural MNCs include input suppliers such as Bayer and Monsanto and food processors such as Nestlé and Kraft. MNCs can mobilise large amounts of capital and introduce new technology proven in other countries. Strengths of MNCs include highly skilled management that improves efficiency and ensures high standards. Ready market access is provided, particularly to export markets, often under branded products. Although MNCs can provide much needed Foreign Direct Investment, they are regularly criticised for dominating markets due to their economies of size. MNCs are often registered ‘Public Limited Companies’ owned by shareholders and listed on stock exchanges. The Company employs directors and managers tasked with providing the highest financial returns possible to shareholders. Even though shareholders may have no direct involvement in the business or management of the company, long-term policy and strategy decisions are decided at shareholder meetings. As opposed to cooperatives, shareholders with more shares have more votes and therefore more power in decision making. MNCs have adapted and localised their organisational structures establishing joint ventures, indigenous companies or wholly-owned subsidiaries in host countries. MNCs are increasingly entering into contract farming agreements directly with producers, by-passing traditional wholesale markets and other intermediaries. One example in Sri Lanka is the Ceylon Tobacco Company, a subsidiary of British American Tobacco, which enters into contract farming agreements with tobacco farmers. Another example is Nestlé, the food and beverage processor. Nestlé has established a state-of-the-art production facility in Kurunegala, North-Western Province to process dairy products such as Nestomalt, Milo, Milkmaid, Nespray and Maggi. The factory purchases raw milk from dairy farmers and locally manufactures over 90% of their products sold in Sri Lanka.

https://www.nestle.lk/en/brands/beverages/nestomalt/home

https://www.nestle.lk/en/brands/beverages/milo/home

https://www.nestle.lk/en/brands/dairy/milkmaid

https://www.nestle.lk/en/brands/dairy/nespray-enriched

https://www.nestle.lk/en/brands/foods



5 C O M M E R C I A L A G R I C U L T U R A L B U S I N E S S M O D E L S

A business model describes how any given enterprise – large or small, informal or formal – does business, markets its products and sources inputs and finance. ‘Inclusive’ business models integrate smallholders into agricultural value chains and recognises the constraints of linking commodity-dependent smallholders and small enterprises to markets. The ‘business’ element relates to mainstreaming business tools and private sector approaches into agricultural development. The inclusive and business elements of an inclusive business model often involve competing forces and trade-offs sometimes have to be made if a business model, inclusive of small actors, is expected to generate profits and grow as an enterprise.

There are three main ‘drivers’ of smallholder business models. ‘Producer- driven’ models are often smallholders that produce a surplus and are looking for market opportunities beyond the farm-gate or local spot market, based on collective action for better participation in markets. ‘Buyer-driven’ models involve larger businesses organising farmers into suppliers, which can also include the provision of inputs and technical advice based on buyers’ needs, through contract farming or out-grower schemes. ‘Intermediary-driven’ models are commonly led by government and NGOs and involve the provision of technical assistance and agribusiness development to improve smallholder market linkages.

This section provides a description of the different agricultural business models in Sri Lanka and appraises farmer income, farmer ownership and decision making power, farmer negotiating and bargaining power, services provided, risk and sustainability of each model. The legend for the diagrams is found in Annex E. The small icons in the boxes indicate the services provided to farmers.

5 . 1 T r a d i t i o n a l S u p p l y C h a i n : w h o l e s a l e m a r k e t

Wholesale markets are the oldest form of business model and are widely used for fresh produce such as fruit and vegetables. The market is a venue for the exchange of products with prices determined by the wholesalers, based on supply and demand. Figure 8 shows wholesalers are supplied directly by larger farmers and by local collectors/traders who aggregate produce from smaller farmers. Traders and farmers telephone the wholesalers the day before to get an indication of price and volume required before travelling to the market. There is also horizontal trade with wholesalers from other regions in products not available in the area for agricultural or climatic reasons. Most of the buyers in wholesale markets are local retailers purchasing small amounts of produce on a daily basis.



Figure 8: Wholesale Market Model

• Farmer income Prices are determined on supply and demand and can change throughout the day. Wholesalers are adept at price setting based upon local supply/demand as well as supply/demand in the larger wholesale markets at Dambulla, Dematagoda and Pettah. Wholesalers supply the lower-value market segment, which is reflected in the prices paid to farmers. However, they do buy lower grade produce not accepted by premium markets.

• Farmer ownership and decision making power Farmers sell as individuals in the wholesale model and whilst farmers are responsible for deciding what to grow, wholesalers decide whether they wish to buy it or not dependent on market demand.

• Farmer negotiating and bargaining power Farmers are price takers as there are far more farmers with produce to sell than wholesalers to buy and farmer negotiating power is negligible.

• Services provided Wholesale markets do not provide any services for farmers other than ‘exchange’. Transport of the produce is carried out by the suppliers and buyers, produce is only stored for a day or two and no transformation or value-addition is carried out.

• Risk The wholesale model is simple and well understood by farmers, even though farmers claim there can be collusion between wholesalers to suppress prices. The wholesale model can



also be risky as it is a spot market and prices aren’t agreed until the point of sale. Farmers don’t want to return home with the produce, especially if it is perishable, so can be put in a ‘forced sale’ situation.

• Sustainability Although wholesale markets have been the dominant market channel in the past, supermarkets are increasing their market share of the fresh produce sector and carry out direct procurement, by-passing wholesale markets. Traceability systems are also difficult to implement through wholesale markets. However, supermarkets only buy best quality produce, so there will continue to be a need for wholesale markets to absorb the majority of lower quality produce.

5 . 2 I n t e r m e d i a r y M o d e l

The Intermediary Model is the most widely used by processors and exporters of tea, coconut and fruit. The agro-enterprises don’t have the capacity to develop linkages directly with large numbers of widely dispersed farmers so purchase through intermediaries, rather than wholesalers, to reduce costs. For fruit and vegetables, the intermediaries are often the larger collectors who also supply wholesale markets, as described above.

Figure 9 summarises the Intermediary Business Model. Processors and exporters make verbal purchase agreements with several intermediaries for a fixed quantity and quality at a fixed price, referenced to the wholesale market price. The intermediaries carry out the important function of aggregating and transporting produce from a large number of small farmers across a wide geographical area. In some cases the intermediaries also provide seeds, fertiliser or credit to the farmers with whom they buy from and there have been instances of tea farmers becoming heavily indebted to collectors through this type of credit.

Figure 9: Intermediary Model

• Farmer income The intermediaries pay farmers a price referenced to the price they receive from the agro-enterprise, discounted backwards to provide them with a profit margin. Generally, farmers



receive the same price as if selling to the wholesale market business model through local collectors.

The intermediary’s profit margin is made by paying a flat price for mixed quality produce from farmers then sorting it to sell better quality produce to exporters (for which they will receive a higher price) and selling the remaining produce to the wholesale market at an average price.

• Farmer ownership and decision making power Farmers sell as individuals and whilst they are responsible for deciding what to grow, intermediaries decide whether they buy it or not dependent on market demand.

• Farmer negotiating and bargaining power Intermediaries proliferate in remote areas with many dispersed small farmers who have no alternative access to market. Farmers are price takers as they are dependent on the intermediaries to transport the produce to markets.

• Services provided Intermediaries provide transport and buy at the farm-gate. They may also provide seeds, fertiliser or credit as a means of committing the farmer to sell to the intermediary.

• Risk The intermediary model is simple and reasonably transparent, especially for products such as tea and coconut. However, the uncertainty or irregularity of ad-hoc buying can result in unknown quantities of poor quality produce.

• Sustainability Certification schemes such as GlobalGAP are increasingly important on international markets. The use of intermediaries creates a barrier between the agro-enterprise and the farmer which makes quality management and traceability less certain. Business models with direct upstream linkages between buyers and producers are expected to replace intermediary models over the next decade.

5 . 3 A g r i c u l t u r a l M a r k e t i n g C o o p e r a t i v e s

Cooperatives are a business entity but can also be a business model, if in addition to production activities, they also carry out marketing services for their members. There are two important differences in cooperative business structure in Sri Lanka. A group of at least ten investors can establish a cooperative with themselves as the shareholders and are classified as ‘executive’ members. ‘Associate’ members are then asked to join the cooperative by paying a small joining fee allowing them to sell to the cooperative and avail of its services. This structure has a close resemblance to a limited company as only the executive shareholders receive dividends. The second type of cooperative is owned by all its members who are issued a share as part of the joining fee, are entitled to dividends and more closely follows the spirit of the Rochdale Pioneers.

Figure 10 shows that central to most cooperative models is the place at which individual farmer members aggregate produce, such as a fruit and vegetable packhouse, milk collection centre or fish landing site.



Figure 10: Cooperative Model

• Farmer income Cooperatives buy produce from their members or negotiate sales on their behalf. For example, one fresh produce cooperative pays farmer members based on the wholesale market price. A banana cooperative negotiates sales on behalf of their members and deducts a 3% service charge. A fishing cooperative holds auctions at their landing site and deducts 5% commission as a service charge. For milk, the farm-gate price is set by MILCO, a government-owned dairy company. It is also common for cooperatives to deduct small charges from member sales to put in a savings account or welfare fund. Very few cooperatives provide dividends. In most cases agricultural tools were distributed to members on an equal basis at the end of the year, regardless of trade throughput, which resembles a gift more than a dividend and doesn’t encourage increasing trade through the cooperative. Cooperatives are able to negotiate better sales prices through providing larger quantities of better quality produce than traditional traders but overall, farmers don’t receive better prices for the produce they sell through the cooperative. Deductions made are similar to the margins made by wholesalers, however, they receive services such as transport and access to saving and credit schemes.

• Farmer ownership and decision making power Cooperatives are owned by its customers/members and are democratically controlled with each member having one vote, regardless of share ownership. Long term policy and strategy of a cooperative is decided by membership during Annual General Meetings. Cooperative



membership delegates operational control to a management committee, or Board of Directors, who are elected to supervise the work of the cooperative on behalf of its members. The committee or board may then employ managers and staff to carry out the day-to-day duties.

• Farmer negotiating and bargaining power Agricultural cooperatives increase the marketing efficiency of small farmers through groups so they can benefit from economies of scale in the use of transport and services and raises their bargaining power in sales transactions.

• Services provided Cooperatives provide the critical core functions of aggregating produce from smallholders and then negotiating sales to buyers closer to the consumer than the wholesaler, for example hotels and exporters, capturing a higher proportion of the final price. However, the extra margin gained is consumed in operating and managing the cooperative. Most cooperatives provide services such as transport which is included in the service charge and also access to cheaper farm inputs through bulk-buying. Cooperatives rarely provide in-house technical support to members but coordinate training provided free of charge by relevant government departments such as the Department of Agriculture or donor partners. Many cooperatives provide savings and loans schemes and welfare funds. This can often be the main reason for joining a cooperative, as the farmers would not be eligible for credit from commercial banks. Some cooperatives have attempted diversifying into processing the raw materials bought from members to add value with mixed success. Machinery is often over capacity and target markets different from their usual buyers. Better results could have been achieved through partnerships with other cooperatives to create a specialised ‘secondary’ cooperative dedicated to processing.

• Risk Cooperatives can be bureaucratically complex which often leads to management failures. Nonetheless, transparency is ensured through the Cooperative Societies Law which requires annual activity plans, annual general meetings and audits by Department of Cooperative Development. Risks are low as investment is shared across the membership, limiting individual exposure to the nominal joining fee, which could be as little as LKR100.

• Sustainability Cooperatives often fail financially and face several challenges when wishing to expand business. Many of the reasons are due to the smallholder basis of membership. Joining fees are small and there are no annual subscription fees, which limits investment capital available to profits generated from trading. Many cooperatives visited had relied on grants from government and donors to purchase assets such as buildings and machinery. Increasing sales is constrained by the low throughput of smallholder members and unless the cooperative can buy from non-members, can only be increased through attracting more membership.



5 . 4 F e d e r a t e d M o d e l

The Federated Model is often used by cooperatives, however, the example in Figure 11 shows the federated model used by the Small Organic Farmers Association. The Farmer Societies are informal clusters of smallholders specialising in the production function and may carry out bulk-purchasing for its members, whilst the umbrella Federation specialises in marketing and sales on behalf of the Farmer Societies. The benefits of the federated model are that professional sales personnel are recruited and costs are shared across several societies. The federated model can also be used to provide processing and packaging functions for member societies.

Figure 11: Federated Model

• Farmer income Prices are determined by discounting back from the prices received by the Federated Association. The Federated Model inserts an additional layer of management, which may charge a commission of 4% for its services, similar to wholesalers.

• Farmer ownership and decision making power In principle the Federated Association is jointly owned by the Farmer Societies and its producer members, allowing farmers decision making powers similar to a cooperative.

• Farmer negotiating and bargaining power Federations increase the negotiating power of small farmers through groups and raises their bargaining power in sales transactions.

• Services provided The Federated Association provides the opportunity for small Farmer Societies to access services such as processing, sales and marketing which they would otherwise not have access to.

• Risk



Similar to cooperatives, multi-layered organisations increase complexity but risk is shared across several farmer societies.

• Sustainability Sustainability can be compromised due to the cumbersome bureaucracy of federations.

5 . 5 C o l l e c t i o n C e n t r e s

Supermarkets prefer to buy fresh fruit and vegetables direct from large producers, often under forward contracts, bypassing wholesale markets. However, under smallholder farming systems this can only be done through farmer organisations or establishing Collection Centres in production areas.

The Cargills Collection Centres are managed by Cargills staff. Demand in the supermarkets is well known and the Collection Centres know how much they need to buy of what produce each day. Only the best quality produce is purchased for which a premium is paid above the wholesale price and farmers have to carry out sorting before bringing the goods to the Collection Centres. There are no contracts or forward agreements on price or quantity with farmers and prices change daily, which are referenced to the daily wholesale price. Regular suppliers are registered with the Collection Centres in a move to introduce Sri Lanka GAP certification, for which traceability is required. Training is provided free of charge to these farmers. Otherwise no training, inputs or other services are provided to farmer suppliers.

Collection Centres are also used by rubber processors and dairy cooperatives for the aggregation of milk from smallholder farmers. For example Fonterra, a dairy processing company from New Zealand, has established ten milk collection centres which buys raw milk from large individual farmers, intermediary collectors or clusters of small individual farmers. Upon delivery, the milk is weighed and tested for microbial contamination and Solid Not Fat (SNF) content, then stored in a chilling vat until it is collected by bulk tanker and taken to a central factory for processing and packaging. Farmers are paid by bank transfer based on weight and SNF content. Figure 12 summarises the marketing chain for Collection Centres. Figure 12: Collection Centre Model



• Farmer income For fresh produce, prices are decided by the Collection Centre on a daily basis referenced to the wholesale market price. Collection Centres only procure first grade produce, for which a premium is paid, and the farmer saves the cost of transporting the produce to the wholesale market. Although farmers prefer selling to Collection Centres to receive higher prices, volumes required are limited to Cargills requirements only. Wholesalers are still important as buyers of the remaining lower quality produce.

• Farmer ownership and decision making power The Collection Centres are owned by the agro-enterprises, therefore farmers have no ownership or decision making power beyond the farm-gate.

• Farmer negotiating and bargaining power Prices are standardised and clearly displayed at the Collection Centre, after which there is no negotiation of prices.

• Services provided Collection Centres rarely provide services but do save farmer transport costs by locating themselves in production areas.

• Risk The Collection Centre model is simple, transparent and low risk for farmers as no investment is required. Prices are displayed on public notice boards at the Centres to improve transparency.

• Sustainability Collection Centres and up-country buying stations are becoming increasingly popular for agro-enterprises to establish backward linkages with producers to better control quality and achieve certification.

5 . 6 C o n t r a c t F a r m i n g

Contract farming can be described as an agreement between farmers and processing or marketing firms for the production and supply of agricultural products under forward agreements, frequently at predetermined prices. The arrangement also invariably involves the purchaser in providing a degree of production support through, for example, the supply of inputs and the provision of technical advice. The basis of such arrangements is a commitment on the part of the farmer to provide a specific commodity in quantities and at quality standards determined by the purchaser and a commitment on the part of the company to support the farmer’s production and to purchase the commodity. Side-selling and contract enforcement are the major weaknesses of smallholder contract farming models. However, side-selling can be prevented for crops which have a monopsony, as is the case with some export crops that have no domestic market. There also has to be some flexibility in contract provisions, allowing for the constraints faced by smallholders. Common features of contract farming are as follows:

• Farmer income Prices are determined by the buyer and are often discounted back from prices they receive when selling the product on. Income for farmers can be higher than other crops as they are supplying higher-value export markets or buyers closer to the end-market. There is also an



allowance to negotiate price increases if the wholesale market price significantly increases, to prevent side-selling.

• Farmer ownership and decision making power Under contract farming agreements farmers often provide land and labour with the sponsoring agro-enterprise providing inputs and strict guidelines on production methods.

• Farmer negotiating and bargaining power Farmers have very little negotiating or bargaining power as they are often unable to sell the product to any other buyer if it needs specialist processing or exported and not consumed domestically.

• Services provided A full suite of services is provided including inputs, technical advice and transport. The services are provided at a lower cost than if the farmers purchased them theirselves and are provided on credit, later deducted from sales income. The extension services provided through contract farming are usually very specific and effective for achieving high yields.

• Risk Simple formal contracts are made with individual farmers, enabling transparency. The contracts often set a minimum price to assure farmers they will at least cover their costs. A feature of some contracts is that any production credit is written off if there is a crop failure, reducing the risk for smallholders. One weakness of contract farming with crops for which there is a monopsony is that the agro-enterprise has to commit to buying all the crop as there is no alternative market for farmers.

• Sustainability Contract farming is likely to become more common in the future as it is an effective in increasing quality and traceability systems can be easily integrated in to the business model.

In Sri Lanka several of the larger agro-enterprises carry out contract farming with smallholders including Ceylon Tobacco Company, Sunfrost for export gherkins and Crysbro for broilers. Most contract farming models are out-grower schemes which have also included government contracts for rice, maize and soybean production. There is no contract farming law and most contracts are directly with individual farmers under the Forward Sales Contract / Sales of Goods Act (1999), even though the farmers may be clustered into groups for coordination purposes.

5 . 6 . 1 O u t - G r o w e r S c h e m e s

This is a vertically coordinated model where the agro-enterprise is not directly involved in agricultural production but purchases the crop from farmers and processes or packages and markets the product. Except in a limited number of cases, farmer quotas are normally distributed at the beginning of each growing season and quality is tightly controlled.

The level of involvement of the agro-enterprise in production can vary from a minimum where only the correct type of seed is provided, to the opposite extreme where the company provides land preparation, seedlings, agrochemicals and even harvesting services. Two examples are provided below.



Tobacco

The Ceylon Tobacco Company (CTC), a local subsidiary of British American Tobacco, enters into purchase agreements with tobacco farmers and drying barn owners before the planting season to agree the price and volume of tobacco to be purchased after harvest. CTC also provides fertiliser, plants and technical support on a cost-recovery basis, to ensure a sustainable supply of tobacco at high yields per hectare. Gherkins Sunfrost, one of the Hayleys companies, buys gherkins from smallholders after which it pickles and bottles them for export. At the beginning of each growing season Sunfrost representatives meet with Farmer Organisations and agree the area to be planted. Season-long prices are also agreed with respective quality requirements. It is understood all gherkin produced in that area will be sold to Sunfrost, which is easier to manage than stating volumes of production and allows some flexibility for smallholders regarding yields. As there is no other market for gherkin, Sunfrost has to buy all the produce but different grades and prices are set. One of the farmers from the Farmers Organisation is selected as a ‘Coordinator’ for which s/he is paid a stipend of LKR1/kg of gherkin sold by the Farmer Organisation to Sunfrost. Sunfrost provides inputs such as seeds, fertilisers and water pumps on credit for individual farmers that require them. Individual contracts are made between Sunfrost and each farmer which includes area to be planted, prices to be paid and any deductions to be made for credit. Each farmer must have a bank account and payments are made by electronic transfer. If there is a crop failure due to external factors such as flood or disease, the credit is written off. The gherkin contracts have been used by farmers to get bank loans. Figure 13 summaries an out-grower scheme based upon the gherkin example.

Figure 13: Out-Grower Model



5 . 6 . 2 A n c h o r F a r m s

Anchor farms are a variation of the out-grower model when the agro-enterprise also produces the crop, often on an estate plantation, which is usually close to the processing plant. The estate is often fairly large in order to provide some guarantee of throughput for the plant.

Crysbro, part of the Farms Pride group of companies, has its own broiler farm in Kandy District with 16 broiler houses containing 20,000 birds each. Crysbro also has a poultry processing plant with a capacity to process 6,000 birds/hour and supplies the domestic market with several poultry products. Crysbro supplements its own broiler production through out-grower contract farming agreements with 300 farmers. Broiler production is capital intensive, so tends to attract the larger wealthier farmers. The model for broiler production requires farmers to invest in broiler housing after which Crysbro provides the farmers with day-old-chicks, feed and medicine on credit and the farmers raise the birds according to strict instructions provided by the company. When the chickens reach the required weight, Crysbro collects the birds and pays the farmer according to performance (feed conversion ratio and mortality rate) and pre-determined price, after which they are processed, packaged and marketed. CIC Agribusiness uses an Anchor Farm model for rice and maize production, with the farms also being used for demonstration and training. CIC provides seed and training and signs a ‘buy-back’ agreement with farmers stating quantity, quality and a minimum price, although price increases can be negotiated based upon market prices at harvest. Agreements are signed with individual farmers, not farmer groups, but farmer leaders are hired to coordinate farmer clusters. Figure 14 provides a summary of the Anchor Farm Model.

Figure 14: Anchor Farm Model



5 . 7 M u l t i p a r t i t e M o d e l

The multipartite model usually involves statutory bodies and private companies jointly participating with farmers. Multipartite farming may have separate organisations responsible for credit provision, production, management, processing and marketing. For example, this may involve cooperatives organising farmer production, government providing credit and extension and an agro-enterprise providing processing and marketing.

Public Private Partnerships (PPP) are one example of a multipartite model. PPP for agribusiness development is defined as a formalised partnership between public institutions and private partners designed to address sustainable agricultural development objectives, where the public benefits anticipated from the partnership are clearly defined, investment contributions and risks are shared, and active roles exist for all partners at various stages throughout the PPP project lifecycle.

Agricultural PPPs are broadly promoted as having the potential to help modernise the agriculture sector and deliver multiple benefits that can contribute towards sustainable agricultural development that is inclusive of smallholder farmers. There are four common PPP types: i) partnerships that aim to develop agricultural value chains; ii) partnerships for joint agricultural research, innovation and technology transfer; iii) partnerships for building and upgrading market infrastructure; and iv) partnerships for the delivery of business development services to farmers and small enterprises.

In Sri Lanka, Ellawala Horticulture Limited exports mangos to wholesalers and supermarkets in Singapore. The company has informal seasonal agreements with established Farmer Organisations within the Mahaweli region to purchase all TJC mango produced according to three grades and prices. Agreements are informal as mango has a local market and it is impossible to prevent side-selling and enforce contracts. The model was established due to the Department of Agriculture supporting farmers to establish Farmer Organisations. As groups had been established, other agencies and NGOs provided skills training and inputs to the Farmer Organisation. Once a supply of quality mangos was available Ellawala Horticulture was able to provide market access, as summarised in Figure 15. Figure 15: Multipartite Model



• Farmer income To ensure a dedicated supply of mango, Ellawala agrees to buy all mango from the Farmer Organisation during the season and differentiates markets based on quality grades, with only the best grade being exported. Prices are negotiated on a daily basis and the Farmer Organisation is free to sell to other buyers. Prices are referenced to the wholesale market with higher prices paid for best quality mango and local collector prices paid for average quality, as these are then sold to the wholesale market.

• Farmer ownership and decision making power The multipartite model is based on partnership with each partner having ownership of the part of the model for which they are responsible.

• Farmer negotiating and bargaining power Each partner has some negotiating power based on their input to the business model.

• Services provided Often the central raison d’être for a multipartite model is the provision of free services, or investment required, to initiate the business relationship between farmers and agro-enterprises.

• Risk The main risk is the withdrawal of the free services by the government/NGO which are critical for successfully establishing the model, without ensuring a replacement provider is in place.

• Sustainability Whilst the multipartite model is good at establishing business relationships, it is not a permanent solution for providing sustainable services. Free services are only provided when budgets are available. If services will continue to be required, some form of in-house or external mechanism must be established to cover the cost of acquiring such services.

5 . 8 J o i n t V e n t u r e s

A Joint Venture is a business entity created by two or more parties, generally characterised by shared ownership, shared returns and risks, and shared governance. Companies typically pursue joint ventures for one of four reasons: to access a new market, particularly emerging markets; to gain scale efficiencies by combining assets and operations; to share risk for major investments or projects; or to access skills and capabilities.

In Sri Lanka, the Vavunia North Fruit Growers Cooperative Society Ltd first supplied fresh papaya to CR Export (Pvt) Ltd under the Marketing Cooperative Model. Both entities then decided to establish the North South Processing (Pvt) Ltd with 51% share ownership by the cooperative and 49% share ownership by CR Export. ILO funded the construction of a packhouse for the North South Processing Company. The benefits of the joint venture are that North South Company has increased packhouse/export capacity, reduced post-harvest wastage due to packing in the production area, has a guaranteed source of papaya throughput for the packhouse and farmers are able to increase papaya production with an assured market. The Cooperative would continue to supply papaya and CR Export would continue to provide marketing and sales services. Figure 16 summarises the relationship. Unfortunately papaya production stopped due to a virus infection, however, the strength of the model allowed for the company to invest in replanting disease free seedlings and resume export.

https://en.wikipedia.org/wiki/Shared_ownership

https://en.wikipedia.org/wiki/Economic_risk

https://en.wikipedia.org/wiki/Emerging_market

https://en.wikipedia.org/wiki/Emerging_market



Figure 16: Joint Venture Model

• Farmer income The Department of Cooperative Development and Department of Agriculture recommended a seasonal forward contract with a flat guaranteed price but this failed as farmers side-sold when the wholesale market prices increased above the contract price. The latest purchases were referenced to the wholesale price with a small premium paid for export quality papaya.

• Farmer ownership and decision making power As the joint venture company is jointly owned by the cooperative and its producer members, farmers have decision making powers. However, the day-to-day management of the company is carried out by professional staff.

• Farmer negotiating and bargaining power As the joint venture company is jointly owned by the cooperative and its producer members, farmers have negotiating powers.

• Services provided The joint venture combines the production and marketing functions of both entities under one management, which includes services normally provided by the cooperative (e.g. inputs) and the agro-enterprise (transport).

• Risk Joint ventures share the risk for major new investments between partners.

• Sustainability In principle, joint ventures provide opportunities for smaller business entities to access new skills, capabilities and markets.

5 . 9 E - C o m m e r c e

Electronic Commerce is the buying and selling of products and services on-line. ‘Govipola’ is one such platform in Sri Lanka where producers of horticulture produce can advertise their produce and buyers can search for produce to buy on line using a mobile-based app. It is mainly used for Business to Business transactions.

‘Alibaba’ is possibly the best known e-commerce company providing a platform for selling not only to the huge Chinese market but globally. Alibaba has also developed a whole trading



eco-system including support services such as transport, warehousing, secure payments and credit, as summarised in Figure 17.

Figure 17: E-Commerce Model

• Farmer income

As the producer is selling closer to the end market, income is higher than selling to the wholesale market.

• Farmer ownership and decision making power The seller has a large degree of control over the process.

• Farmer negotiating and bargaining power Prices are directly negotiated between the seller and buyer.

• Services provided E-commerce has the capability to integrate all inter-company and intra-company functions, (physical flow, financial flow and information flow) within a single platform. However, upstream services such as producer training are not provided within the model.

• Risk E-commerce is relatively simple and transparent and as support services are integrated, low risk. However, the product has to be ready for market as there is no business development support for emerging sellers.

• Sustainability E-commerce is increasingly being used for niche and boutique markets where producers can sell directly to specialist retailers for products such as specialty tea and spices with geographical indication.



6 C O M P A R A R T I V E A N A L Y S I S O F A G R I C U L T U R A L B U S I N E S S M O D E L S I N S R I L A N K A

The ToR posed six key questions regarding the effectiveness of the business models found in Sri Lanka. Table 1 summarises the comparative analysis of the agricultural business models based upon the six questions using the criteria of farmer income, farmer ownership and decision making power, farmer negotiating and bargaining power, services provided, risk and sustainability. Each model is scored on a scale of one to five, with ‘one’ being bad for farmers and ‘five’ being good for farmers.

For smallholders to integrate into commercial global supply chains there must be some means of aggregation to achieve a critical mass of product that is tradeable. Historically this has been carried out through often lengthy supply chains of collectors and wholesalers. Therefore, the wholesale model has been used as the ‘baseline’ for comparison with other business models, as this is the model most readily available to farmers.

Table 1: Comparative Analysis of Agricultural Business Models

Criteria / Business

Model

Farm

er

inco

me

Farm

er

ow

ners

hip

&

decis

ion

m

akin

g p

ow

er

Farm

er

neg

oti

ati

ng

&

barg

ain

ing

p

ow

er

Serv

ices

pro

vid

ed

Ris

k

Su

sta

inab

ilit

y

Sco

re

Ran

k

Traditional wholesale

3 3 3 2 3 3 17 5

Intermediary model

2 2 2 3 3 2 14 7

Marketing cooperatives

3 4 4 4 2 3 20 2

Federated model

2 4 4 3 2 3 18 4

Collection centres

4 3 2 3 3 4 19 3

Contract farming

4 3 2 4 4 4 21 1

Multipartite model

3 3 3 3 2 2 16 6

Joint ventures 3 4 4 3 2 2 18 4

E-commerce 4 4 4 2 2 2 18 4

Ranking: 1=Bad for farmers, 5 = Good for farmers

When ranked based on overall total score, contract farming scores the highest, marketing cooperative the second highest and collection centres third highest. Federated models, joint ventures and e-commerce score joint fourth highest. Traditional wholesale score fifth highest, whilst multipartite and intermediary models scored the lowest, ranked sixth and seventh respectively.

However, this does not mean the higher ranking models are the best models, as the scores are the cumulative total of all the criteria which are equally weighted. For instance, some farmers may rate income as being more important than ownership and decision making



power. More detailed comparative analysis is carried out below to answer the six key questions from the ToR.

1. Do farmers benefit from being members of farmer business models in terms of accomplishing and sustaining a certain income level or could they benefit more in a different institutional setting?

Figure 18 compares the income received by the farmer for each of the business models. Higher prices are received at collection centres, or by contract farming and e-commerce.

Figure 18: Farmer Income by Business Model

The main reason for these models achieving higher income for farmers is that they bring the farmer and the end-market closer together, reducing the number of intermediaries. For instance, collection centres and e-commerce supply retailers and contract farming supplies processors. Intermediary and federated models score least as they add in an extra layer to the supply chain. For the business models where farmers receive higher incomes, farmers act individually not collectively. However, there is some form of informal coordination through collection centres and contract farming which is instigated by the buyer agro-enterprise and there has to be a cluster of producers for this coordination to take place.

2. Do farmers have sufficient say and decision-making power in the farmer business model they are organised, or could this be improved by being in a different legal structure?

Figure 19 compares farmer ownership and decision making power between different business models. Marketing cooperatives, federated models, joint-ventures and e-commerce have the highest decision making power for farmers and the intermediary model the least.

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5



Figure 19: Farmer Ownership and Decision Making Power by Business Model

Marketing cooperatives and federated models (of cooperatives or societies) are based upon democratic membership and control. Farmers in joint ventures or e-commerce models also have more decision making power as they tend to be the larger farmers.

3. Does the current form of farmer business models give farmers sufficient bargaining / negotiating power compared to middlemen, exporters and agro-industry with a view to getting a decent price for their products / services?

Figure 20 compares farmer negotiating and bargaining power by business model. Farmers in marketing cooperatives, federated models, joint-ventures and e-commerce models have more negotiating power and intermediary, collection centre and contract farming models the least. Figure 20: Farmer Negotiating and Bargaining Power by Business Model

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5



Marketing cooperatives and federated models (of cooperatives or societies) are established to generate collective action and increase the bargaining power of smallholders. Whereas, farmers in joint ventures or e-commerce models have more bargaining power as they tend to be the larger farmers. However, for smallholders, having more decision making power does not directly translate into higher incomes, as shown in Figure 18.

4. Do farmers actually know what the (potential) benefits are from being organised in a particular farmer business model?

Farmers are aware of the potential benefits of being organised into different business models and most were seeking alternatives to the wholesale or intermediary model, even though their knowledge of alternative models was limited. Farmers are limited to what cooperatives or agro-enterprises are available in their villages and there is little farmer action to establish new models. Based upon this observation, it would appear agro-enterprises are required to drive the establishment of new business models.

5. Do the current farmer business model farmers cover all the areas which are necessary to improve their livelihood? Or are certain areas omitted (e.g. marketing function or bulk input provision).

Figure 21 shows the level of services provided by the business models. Contract farming and marketing cooperatives provided the most services such as inputs, credit, technical support and transport. Wholesale markets and e-commerce provided the least services. Figure 21: Services Provided by Business Model

All the other models provided some form of usually singular services. For example, intermediaries provided transport, federated and joint venture models provided marketing, collection centres were conveniently located in production centres to reduce transport needs, and multipartite models provided training.

The main constraint to providing services is cost recovery. Agro-enterprises that are confident farmers will sell their produce to them, are more willing to provide services as the

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5



costs can be deducted from prices paid for the produce. Transport services are the most common as costs can be immediately recovered as part of the negotiated sales price at point of purchase. Less tangible services, such as technical training, are most often provided free of charge by the Department of Agriculture or donor projects. Services required are very crop, producer and market specific and not all farmers need all the services.

6. Do farmers have sufficient ownership of their farmer business model making the operation and management of the farmer business model sustainable (will it exist in the next 15 years?).

Figure 22 shows the likelihood of the business models being sustained into the future based upon international competitiveness. Collection Centres and contract farming models are more likely to be sustained, whereas intermediary, multipartite, joint venture and e-commerce models are least likely to be sustained. Much of the ability to compete internationally is due to the agro-enterprise involved, not just the business model, and the agro-enterprises involved in collection centres (e.g. supermarkets, MNCs) and contract farming (e.g. national agro-enterprises) have a greater capacity and business acumen than the other entities. Figure 22: Sustainability by Business Model

Figure 23 shows the levels of risk of the business models. Contract farming is the least risky model for farmers; whilst marketing cooperatives, federated, multipartite, joint ventures and e-commerce are the most risky models.

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5



Figure 23: Risk by Business Model

Most of the risk for contract farming is borne by the sponsoring agro-enterprise. Inputs are advanced on credit, minimum prices are stated in the contract and losses are written off if the crop fails. Marketing cooperatives are risky as they are bureaucratically complex. Joint ventures and e-commerce are also high risk as they require significant investment from individual farmers as there is no cost sharing.

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5



7 C O N C L U S I O N S

• Most Sri Lankan smallholders grow cash crops for market, rather than food crops for subsistence, so are familiar with markets.

• Agricultural growth is largely dependent on increasing exports. Not only will there have to be increase in quality standards but also certification and traceability systems to compete internationally and meet the end market country requirements.

• Rice, coconut, chicken meat, spices (pepper, cinnamon, clove nutmeg) tea, rubber, fish (marine) and fruit and vegetables are the most important agricultural products based upon value of production and exports.

• The macro-environment and regulatory framework is supportive of business model development. Adequate legislation exists for farmers to establish associations, organisations and cooperatives. Although there is no contract farming law, the Forward Sales Contract / Sales of Goods Act (1999) is used as the basis for formal contracts. However, it is widely recognised that contracts are difficult to enforce with smallholders and the challenge is to agree contracts which are compliable, rather than enforceable.

7 . 1 I n c o m e

• Figure 24 shows the proportion of the final retail price retained by market chain segment. This is a general calculation as proportions differ spatially, temporally and between crops and business models. Examples of wholesale and retail prices are provided in Annex F and average wholesale mark-up was provided by triangulating across several wholesalers through direct questioning.

Figure 24: Proportion of Final Retail Price Retained by Market Chain Segment

• Internationally for fresh produce, retailers retain between 20% and 50% of the final retail price. This proportion may appear high but retailers have to account for waste. The wholesaler retains only 15% but this is compensated for by selling large volumes.

Farmer55%

Wholesaler15%

Retailer30%



Farmers in Sri Lanka retain about 55%, which is high when compared to European averages of about 15% for fresh produce.

• Cooperatives effectively substitute wholesalers in the marketing chain. Although they pay slightly higher prices in principle (similar to retail buying price), they deduct around 5% as a service fee.

• ‘Buyer’ driven business models, such as contract farming and collection centres, provide better income for farmers as they shorten the gap between producer and consumer, reducing the number of intermediaries.

7 . 2 B u s i n e s s M o d e l s

• The comparative analysis ranked the top three business models as follows: 1) contract farming, 2) marketing cooperative and 3) collection centres. However, within these models there can be many variations and there can also be a blending between models depending on the unique local situation. There is no ‘one-size-fits-all’, each model must be individually negotiated between producers and buyers.

• The intermediary model is most commonly used as it is the traditional means of aggregating produce from smallholders. However, the comparative analysis has shown that the intermediary model is ranked the lowest for most of the criteria and there is a need to diversify business models to increase global competitiveness. Nonetheless, the intermediary model could be ‘upgraded’ for agro-enterprises that don’t have a presence in the production area. Many local collectors also sell farm inputs to farmers and have built up trust with them. As such, they could be supported to become representatives of the agro-enterprise in the area, rather than a barrier between the producer and agro-enterprise.

• ‘Producer’ driven business models such as cooperatives are important if farmer decision making and bargaining power are objectives. However, cooperatives are bureaucratically cumbersome, incur management costs which can take away the price premium gained through collective action, and are prone to failure.

• Agro-enterprises also require support within business models as sourcing from smallholders incurs additional risk and cost.

• Not all cooperatives increase smallholder ownership and decision making power. Shareholding, voting and dividend rights are limited to ‘Executive’ members in some cooperative structures.

• Farmers often join cooperatives for the services provided such as transport and credit, rather than to receive higher prices.

• Most cooperatives are primary cooperatives. Rather than establishing secondary cooperatives with federated members to provide specialist services such as processing or credit, each primary cooperative tries to establish its own specialist services. For processing in particular this has often failed as it requires specialist skills and targets different market segments.

• Multipartite models often fail as no mechanism is put in place to provide the inputs or services provided by the government or donor that initiated the model, once their support stops.

• Joint ventures are only possible for the larger farmer/organisations so are not relevant for smallholders.

• E-commerce provides opportunities for producers to sell directly to retailers. However, the producer must have the capacity to produce a final product and the platform is most used for high value niche products such as specialty tea.



• Contract farming works best for crops which have a monopsony, such as export crops or for farmers which have been certified by an agro-enterprise, as this prevents side-selling.

• Contracts cannot be used to enforce agreements but are useful for improving transparency and trust.

• As each farmer’s requirements are different, contracts are made individually, not with groups.

7 . 3 I m p o r t a n t F e a t u r e s f o r I n c l u s i v e B u s i n e s s M o d e l s

• Smallholders require services such as transport, credit and technical advice. The cost of services must be recovered, which can often only be done through a formal contract.

• Transparency is required to achieve trust. Wholesale prices are widely known and are a transparent reference for negotiating prices between farmers and buyers. Clearly written agreements for contract farming are also useful.

• Trust leads to loyalty within the business model. The agro-enterprise must have a permanent presence in the production area to create trust.

• Smallholders are risk averse. Risk mitigation can be done through advancing inputs on credit, providing a minimum price so farmers know they will at least cover their costs and writing off debts if the crop fails. However, this requires some form of formal contract.

• Flexibility is important to stop side-selling in contract farming. For example, providing a contract proviso that prices can increase if the wholesale market price increases above a certain price.

• Most models require a central point of aggregation such as a fish landing site, milk collection centre or vegetable packhouse.

• There are several types of farmer organisations which differ by bureaucratic complexity and alliance to government department. Although all types of organisations are permitted to carry out business, most agribusiness support has been targeted at cooperatives. There remains a lot of potential to develop simpler business models with Farmer Associations and Farmer Organisations. Often all is needed are informal groups for coordinating farmers in business models, but this does require clustering.

7 . 4 F u t u r e T r e n d s

• Intermediary models will decline as they incur an additional cost and the use of intermediaries creates a barrier between the agro-enterprise and the farmer which makes quality management and traceability less certain.

• Supermarket market share will continue to increase for fresh produce as customer demands change. This will require an increase in quality standards.

• Wholesale markets will continue to play an important role for average quality produce for the local retail market that cannot be sold through supermarkets or exported.

• Export market standards and consumer demand for certification and traceability of products will continue to increase requiring direct linkages between producers and exporters.



7 . 5 P o l i c y & L e g i s l a t i o n

Within a relatively liberal market economy, when a market opportunity exists, private sector entrepreneurs will work around disabling environment factors to move their local businesses forward, albeit at a slow rate and with higher transactions costs. As such, if both players – suppliers and buyers - believe that the net economic value of the business partnership is worth more than the resources, time and effort invested in dealing with standard transactions costs, complex business registration procedures, local levies, or paying regular bribes, then growth will take place. It is therefore considered that small-scale institutional innovations focused on reducing inefficiencies in supplier to buyer commercial transactions, are more effective than macro-trade and price policy initiatives, which are often far removed from the realities and needs of district level businesses (Barrett, Bachke, Bellemare, Michelson, Narayanan, Walker, 2012). This conclusion is reinforced by international corporate strategic management thinking that growth and wealth creation do not necessarily transpire at the level of a sector or industry but in the ability of firms to create valuable goods and services

using efficient methods (Porter, Ketels, Delgado 2006).14 Nonetheless, public-sector investment in inclusive business models has the potential to provide the following benefits:

• Provide the opportunity to increase smallholder income and improve food security.

• Contribute to local agro-industrial growth.

• Create solutions that are scalable.

• Involve local private sector in national development.

• Mainstream market-oriented production skills.

• Transfer know-how between private companies and small actors.

• Attract private investment in agriculture. Although there are no policy measures that exclusively and directly affect ‘business models’; policies that affect the wider agricultural and SME sectors can have an indirect and secondary impact upon business models. These include land law, trade policy and agreements, investments to increase agricultural productivity, upgrading national infrastructure and utilities, investing in research and development, easing the cost and risk of doing business (e.g. tax, business registration and licensing, contract enforcement, export procedures), access to finance and education and training. However, legislation that could have a direct impact upon business models includes the Cooperative Development Act and the Agrarian Services Act, regarding the organisation of farmers, even though contract farming and collection centre models were agreements between agro-enterprises and individual farmers. For example, the Agrarian Services Act mainly covers irrigation and irrigation-related infrastructure and does not provide for farmer organisations wishing to engage in agribusiness.

14 Kelly (2012) Smallholder Business Models for Agri-Business Led Development: good practice and policy guidance, FAO.



8 R E C O M M E N D A T I O N S

Recommendations include a ranking of preferred business models followed by a road map describing how to facilitate establishment of the preferred business models between farmers and agro-enterprises.

8 . 1 P r e f e r r e d B u s i n e s s M o d e l s

The comparative analysis has shown the key elements of smallholder inclusive business models are:

• high value crops for which smallholders have a comparative advantage,

• clustering of farmers and aggregation of produce,

• less intermediaries between producer and end market to increase chain income share for farmers,

• direct linkages between producer and buyer to build trust/loyalty and ensure quality and traceability,

• the provision of services such as transport, inputs, credit and technical support,

• risk mitigation measures such as advancing inputs on credit, writing off credit if the crop fails, providing minimum prices, buying all the crop,

• transparency measures such as (wholesale) referencing prices during price determination, formal contracts or memorandum of understanding,

• flexibility measures such as increasing prices if the reference price significantly increases, agreeing to buy areas of production not quantities.

Table 2 identifies which business models possess the above qualities and correlates with the comparative analysis.

Table 2: Preferred Business Models

Business Model / Buyer

Wh

ole

sale

mark

et

Inte

rmed

iary

m

od

el

Mark

eti

ng

co

op

era

tives

Fed

era

ted

m

od

el

Co

llecti

on

cen

tres

Co

ntr

act

farm

ing

Mu

ltip

art

ite

mo

del

Jo

int

ven

ture

s

E-C

om

merc

e

High value crop

* * * *

* *

Clustering & aggregation

* * * * *

Sells to end market

* * * *

* *

Direct producer

buyer linkage

* * * *

*

Provides services

* * *

* * *

Risk mitigation

* *

* *

Transparent * * * * *

*

Flexible

* *

*



• For the above reasons, it is recommended contract farming, marketing cooperatives and Collection Centres are promoted as smallholder inclusive business models.

8 . 2 P o l i c y & L e g i s l a t i o n

The main recommendation to improve the enabling environment is the Cooperative Development Act and Agrarian Services Act are revised and updated to enable cooperatives and farmer organisations to better engage with agro-enterprises on a commercial basis. In addition to this, international experience provides the following policy guidance for fostering smallholder inclusive business models:

• Good governance and management systems: Avoid government driven farmer organisations that are dogged by political interference and nepotistic and paternalistic behaviour patterns.

• Inter-ministerial strategic planning and implementation: as agribusiness crosses several sectors.

• Formalisation of the shadow economy: The vast majority of agro-enterprises operating in the informal sector seldom grow sustainably, making informality a major obstacle to economic growth and major focus of public policy concern if agriculture is to be transformed into a legitimate and competitive sector for development and poverty reduction.

• Combine investments in commercialising agriculture with policies on strengthening farmer organisations.

• Fund local agro-enterprises to deliver local services such as training and inputs, rather than funding through public services.

• Ensure smallholder representation in commodity associations.

• Dismantle superfluous rules and regulations and not create over-bureaucratic legal rules for farmer organisations.

• Due care in not creating dependency syndrome: Any direct support to SMEs or farmer organisations in the form of subsidies, equipment or credit funds should not unduly subsidise activities that can create a dependency syndrome on public support and threaten the long-term sustainability of a business.

• Issues of access to finance need to be tackled from a value-chain position, with a view to long-term sustainability, rather than being resolved through punctual and isolated subsidies in the form of agriculture inputs, equipment, revolving funds, grants, etc. Practical public support can include brokering linkages with microfinance institutes and other commercial banking and investor groups; neutrally facilitated dialogue spaces that bring together financial providers and potential value-chain clients; technical assistance to farmer organisations or SME’s in compliance with bank criteria; facilitating linkages with exporters; and sound market outlets providing financiers with more lending confidence.

• Long-term public commitment with short-term interventions: Farmer-based organisations learn and grow, sometimes fail and in many cases take a long time to mature. Organisations need to know that they have the long-term commitment of the public sector, which is based on, when required, short-term sustainable interventions with clear exit strategies embedded.



• Support to broad-based innovation: Institutional strengthening of agriculture and

business service providers.15

8 . 3 T h e W a y F o r w a r d : r o a d m a p

The conclusions identified the most common business model in Sri Lanka is the intermediary model which provides lower incomes for farmers and is unable to satisfy the requirements of the modern day international market place. To improve Sri Lanka’s competitiveness on the global stage it is important to get the correct mix of product, producers and agro-enterprise within the most suitable business model. To achieve this, the following three-step process is proposed.

1. Identify Products & Partners

• Select crops for which smallholders have a comparative advantage, are high-value and have an export demand. Dependent upon value chain analysis, this may include fruit (papaya, mango), vegetables, spices (pepper, cinnamon, clove, nutmeg), specialty tea and marine fish.

• Identify clusters of farmers producing the selected crop and facilitate the establishment of the simplest organisation as required by the business model. This can be as simple as an informal group with a nominated coordinator.

• Identify agro-enterprises that buy the crops and sell to premium market segments. Suitable agro-enterprises include supermarkets, processors, exporters and cooperatives.

2. Facilitate Producer / Buyer Forums

• Facilitate Producer/Buyer Forums where potential producer groups and agro-enterprise buyers are brought together to design the best-fit business model based upon the key elements of smallholder inclusive business models described above.

• Producers and buyers identify common priorities within the business model for upgrading.

3. Support Forum Outcomes Once the above elements have been identified it is recommended business models are established or upgraded based upon four areas of product upgrading, organisational upgrading, process upgrading and linkage upgrading.

• Product Upgrading: e.g. new high-value products, processing to add value; improve quality of products through better production and handling; certification (FairTrade, GlobalGAP, Organic, Geographical Indication, Rainforest Alliance, Marine Stewardship Council).

• Organisational Upgrading: e.g., improve business management skills; upgrade storage facilities.

15 Kelly (2012) Smallholder Business Models for Agri-Business Led Development: good practice and policy guidance, FAO.



• Linkage Upgrading: e.g. contract preparation with transparent pricing mechanisms, risk mitigation measures and flexibility; establish collection centres / aggregation points; pilot new market development e.g. e-commerce for specialty tea and spices.

• Process Upgrading: e.g. provide relevant services such as quality inputs, bulk-buying inputs, credit, technical support, transport; introduce efficient payment systems for individual farmers e.g. mobile banking; reduce wastage.

Commercial Agricultural Business Models for Sri Lanka -Annexes

ANNEXES

Annex Name

Annex A Terms of Reference

Annex B Documents Reviewed

Annex C Persons Met

Annex D Interview Checklist

Annex E Legend for Business Model Diagrams

Annex F Wholesale & Retail Prices

Annex G Results from the Farm Business Model workshop dated 18 October held in Colombo

Annex H Proceedings of the two trainings organised in Kandy and in Vavuniya

Annex J Training material in English (in Sinhala and Tamil can be obtained on

demand)


Annex A

Terms of Reference


TERMS OF REFERENCE

Commercial Agricultural Business Models for Sri Lanka

1 BACKGROUND

Agriculture has been an important driver of poverty reduction through income and employment generation in Sri Lanka. Although Sri Lanka has a history of exporting agricultural products a large part of the agricultural population remained highly traditional with archaic relations to markets and commercial networks. Also, the share of GDP generated by agriculture sector decreased as other sectors gained more prominence. With the departure of labour force from the rural areas to urban areas and other economic activities it becomes increasingly urgent to modernize the farming sector. Promoting farming as a business has the potential to uplift rural areas and to augment farmer’s disposal income and hence, improve their livelihood. Improved connectivity to potential demand and markets, investment in agriculture to increase labour productivity and diversify production, reduction of wasteful use of resources and adding value to agricultural processes via processing and improved handling are all components of the modernization process. Over the last decades it has become increasingly clear that farming for a market cannot be promoted by stimulating the supply side. Modern commercial farming is part of a total system which gets its information from the demand side of the economy and leads this to the supply side where it sets the rules and regulations for participation of the farmers. This system operates in a regulatory environment set by policies and strategies of local and international governments and is supported by financial and non-financial services.

Farmers can produce as individuals but increasingly other business models are used to strengthen profits and profit sharing in commercial agriculture value chains. Frequently farmers are organised in outgrowing schemes where producers and processors and traders cooperate to achieve the highest quality and prices in the chains. Alternatively, elsewhere farmers organise themselves in associations or groups to achieve higher profitability of their business. Also, such associations or groups can evolve into a more formal business-orientation through formation of Cooperatives and Farmer Companies. In Sri Lanka, as for now it’s still largely unclear what should be the optimum business model to pursue for farmers in commercial agriculture and hence difficult for Ministry of Agriculture to design a proper strategy for the promotion of one or more business models based on evidence. From international research it is clear that the best type of business model for commercial agriculture is highly sector and geographically specific.

In 2018, the EU/World Bank funded project “Modernisation of the Agriculture Sector in Sri Lanka” contracted a Sri Lankan consultancy company to assess available models of farmer producer organisations and recommend suitable models for Sri Lanka agriculture. The draft report of November 2018, however, focusses strongly on one particular business model (Cooperatives) which is recommended as the preferred model to pursue without any financial or economical analysis that this model is the best for farmers. This lack of evidence is considered a main driver for the request of the proposed TAMAP assignment.

As such, currently the following farmer business models exist in Sri Lanka:

1. Cooperatives 2. Farmer Organisations 3. Farmer Companies 4. Outgrower models 5. Individual farmers


The ASMP funded study did not investigate the comparative advantages of the various farm business models from the farmers’ point of view and therefore, the Cooperative as preferred business model was recommended without sufficient evidence.

The ASMP study did not go into details of the strengths and weaknesses of the 5 prevailing farmer business models.

In many other countries other farmer business models exist such as associations, shareholding and equity-based models which could be considered in Sri Lanka and which could generate more benefits for the farmers as the proposed Cooperative model. In parallel, evidence from other countries suggests that Cooperatives have been very limited successful (in most of the developing and emerging countries they failed).

From the farmers’ perspective two issues are of importance: i) disposal income and ii) risk of farming. These aspects were not adequately addressed in the ASMP study.

Therefore, the Technical Assistance to Modernisation of Agriculture Programme (TAMAP) in Sri Lanka, proposes to take the study effort further by investigating the various farmer business models which exist in Sri Lanka and also in other parts of the world with a view to income generation (availability of disposal income), risks the farmers are exposed in their farming activities as well as socio-economic aspects.

Farmers and stakeholders might be interested to find answers on the following questions:

• Do farmers benefit by being members of these farmer business models in terms of accomplishing and sustaining a certain income level or could they benefit more in a different institutional setting of the farmer business model?

• Do farmers have sufficient say and decision-making power in the farmer business model they are organised, or could this be improved by being in a different legal structure?

• Do farmers actually know what the (potential) benefits are being organised in a particular farmer business model?

• Do the current form of farmer business models give the farmers sufficient bargaining / negotiation power compared to middlemen, exporters, agro-industry with a view to get a decent price for their products / services?

• Does the farmer business model farmers are currently organised cover all the areas which are necessary to improve their livelihood? Or are certain areas omitted (e.g. marketing function or bulk input provision)

• Do farmers have sufficient ownership in their farmer business model making the operation and management of the farmer business model sustainable (will it exist in the next 15 years?)?

In view of the above, TAMAP will commission a study which goes beyond what the ASMP study has done and

• will assess a larger number of farmer business models with a view to their applicability in the Sri Lankan context;

• establishes a ranking of preferred farmer business models for Sri Lanka

• establishes an inventory of the required resources (financial means, legal framework, capacity building, etc.),

• Develop a road map for the way forward (which steps are required?) until the preferred structure is in place.

The TAMAP contract contains four major result areas. The current ToR refer to Result Area 2 which reads as “Creating an Enabling Environment for Relevant Reforms and Policies for the Modernisation and Diversification of Existing Agricultural Production Implemented and Exports to Meet Expanding International Demands Promoted”.


2 DESCRIPTION OF THE ASSIGNMENT

2.1 Objective

The overall objective of the assignment is to assist the Government to improve its support to farmers and farmer organisation, including support to the extension service Specific objectives:

(a) Study commercial agriculture business models and their profitability and sustainability for farmers

(b) Recommend on the best business model(s) (c) Design training related to operations of farmers in selected business model(s) (d) Conduct training in best business model(s) practise for farmers

2.2 Requested services

The short-term expert team should review existing famer business models in Sri Lanka and in other countries in particular subsectors (value chains) such as export oriented value chains (e.g. tea, spices, horticulture, coconut), conduct SWOT analysis on these farmer business models from the smallholder farmer’s perspective, assess and recommend business models which could work in Sri Lanka and be profitable for the members of the farmer business models as well as for the entire organisation. Emphasis should be placed on business models for commercial farming, income maximisation, risk mitigation and ownership in terms of sustainable operation of the farm business model. The indicative tasks of the expert team (not limited to) are:

Expert 1

• Study the various business models for commercial agriculture in Sri Lanka and other countries, assess strengths, weaknesses, opportunities and threats from the viewpoint of the farmer’s opportunity to maximise profit and sustainability of social inclusion (men/women and youth/elder)

• Ranking of the preferred farmer business model taking into account parameters such as income maximisation, risk mitigation, ownership, minimisation of complexity of the legal set up and sustainability of its operation

• Assess how the recommended farmer business model can be linked to best practice agriculture extension service (e.g. farmer field schools and other models recommended in the TAMAP extension report)

• Present findings with recommendations related to the best business model(s) at a workshop with stakeholders and discuss the feasibility of scaling-up the best practices.

• Prepare training material for farmers related to the best business model practices

• Conduct training for selected innovative farmers and their organisations as well as extension workers in best business model practices

Expert 2

• Conduct farm income analyses of farmers operating in different farmer business models.

• Present findings with recommendations related to farm income analysis at a stakeholder workshop and discuss the feasibility of scaling-up the best practices.

• Prepare training material for farmers related to farm income analysis

• Conduct training for selected innovative farmers and their organisations as well as extension workers in farm income analysis


2.3 Required output

The expected outputs for this assignment are:

• Report on Best Business Model(s) for commercial agriculture in Sri Lanka

• Workshop on ways to scale-up the use of Best Business Model(s)

• Training material related to the Best Business Model(s)

• Three training sessions (North, Centre, South) for farmers and extension workers

• Farmer field schooling in best business models introduced to public sector extension service

With such research and training the capacity of GoSL to promote evidence based best business practices for farmers in commercial agriculture will be enhanced. It will provide leverage for understanding the types of policy interventions that will increase value of production and productivity as well as improve the fairness of distribution of value in the chains. It will also serve as background information which can be used as a resource for any future initiatives in the sector.

3 EXPERT PROFILE

The services of two short-term experts (one International/National Expert and one National

Expert) are required to carry out this assignment The required profiles are detailed in the

following.

Expert 1: International / National Short-term Expert (for 50 work days)

Qualifications and skills

1. A higher-level university degree, or equivalent, in Economics, Development Studies, Agriculture or a directly related discipline (Must Requirement = MR)

2. Specific knowledge of business models in commercial agriculture and their economics (MR)

3. Good training experience in the areas of agricultural business organisation, organisation of farmers, collective action and agriculture development (MR)

4. Excellent English communication and reporting skills (MR)

General professional experience

1. At least 10 years’ general professional experience in developing countries (MR) 2. At least 7 years’ experience leading relevant study teams (MR) 3. At least 5 years’ experience with agricultural business organisation, collective action

and farmer producer groups programmes/ projects (MR) 4. Professional experience in Sri Lanka and/or Asia (PR)

Specific professional experience

Out of the minimum 10 years of general professional experience required, the expert must have:

1. At least 7 years’ experience in analysis and design of business models for commercial agriculture, planning and implementation of projects in the agriculture sector (MR)

2. At least 5 years’ experience in in research project management of projects for public or

private sector covering lead farmer approach and/or farmer field schools (MR)

3. Experience of gender (MR) and preferably youth employment in agriculture


4. Experience in climate change issues and their impact on agriculture (PR)

Expert 2: National Short-term Expert (40 work days)

Qualifications and skills

1. A university degree, or equivalent, in Economics, Development Studies, Agriculture or a directly related discipline (Must Requirement = MR)

2. Specific training experience in the areas of business models for commercial agriculture, collective action and agriculture development

3. Good English communication and reporting skills (MR) 4. Knowledge of Singhalese and/or Tamil (PR)

General professional experience

1. At least 7 years’ general professional experience in developing countries (MR) 2. At least 5 years’ experience leading relevant study teams (MR) 3. At least 5 years’ experience with agricultural business organisation, collective action

and farmer producer groups programmes/ projects (MR) 4. Professional experience in Sri Lanka and/or Asia (PR)

Specific professional experience

Out of the minimum 7 years of general professional experience required, the Junior Non-Key- Expert must have:

1. At least 4 years’ experience in analysis and design of business models for commercial agriculture, planning and implementation of projects in the agriculture sector (MR)

2. At least 3 years’ experience in in research project management of projects for public or

private sector covering lead farmer approach and/or farmer field schools (MR)

3. Experience of gender and youth employment in agriculture (PR)

4. Experience in climate change issues and their impact on agriculture (PR)

4 LOCATION, DURATION AND INDICATIVE WORK PLAN

4.1 Location and Logistics

The assignment will be partly in Colombo and partly at different locations in the country. Transport will be provided by TAMAP.

4.2 Commencement and duration

The assignment would be conducted over a period of 4 months.

Indicative commencement: 1 August 2019

Indicative end: 30 November 2019

5 REPORTING / TRAINING / WORKING GROUP PARTICIPATION

The expert team is expected to do accomplish the following:


• Within the first two weeks of the assignment, the short-term expert teams will submit a brief action plan which would indicate timelines for the entire assignment period and include key outputs and milestones.

• Latest after 2.5 months the team will produce research and training reports as well as training materials including a manual

• Latest after 3 months the team will conduct 3 training sessions

• Latest 3 months after commencement a draft report has to be submitted to the Client

• A final report incorporating comments from the various stakeholders will be submitted 4 months after commencement of the assignment.

During this assignment, the experts will attend TAMAP working groups (WGs).

WG 1: During mid-term of the assignment, a WG will be organised in which the two experts will be given the opportunity to present their first preliminary findings. These will be thoroughly discussed with the WG members with a view to guide the experts. It is expected that the two experts will draw up PowerPoint presentations for the two WGs.

WG 2: Towards end of the assignment, the experts will update the WG members and will present their findings to the working group members These will be discussed and agreed upon with the stakeholders on the occasion of this WG allowing the two experts to indicatively budget the agreed strategic actions and to finalise this assignment.


Annex B

Documents Reviewed


ACDI/VOCA (2015) Public Private Partnerships in Global Value Chains: can they actually benefit the poor? USAID

Esham & Usami (2007) Evaluating the Performance of Farmer Companies in Sri Lanka: a case study of Ridi Benda Ela Farmer Company, Journal of Agricultural Sciences

GoSL (2018) National Export Strategy of Sri Lanka 2018 – 2022

ILO (2018) Future of Work for Tea Smallholders in Sri Lanka

Kelly et al (2015) Inclusive Business Models: guidelines for improving linkages between producer groups and buyers of agricultural produce, FAO

Kelly (2012) Smallholder Business Models for Agribusiness Led Development: good practice and policy guidance, FAO

MG Consultants (2018) Assessment of Available Models of Farmer Organisations and Propose Suitable Models for Sri Lanka, ASMP

O’Riordan et al (2019) Political Economy Analysis: modernisation of the agriculture sector in Sri Lanka, TAMAP

Rankin et al (2016) Public Private Partnerships for Agribusiness Development: a review of international experiences, FAO

Silva & Rankin (2013) Contract farming for Inclusive Market Access, FAO

TAMAP (2018) Development of Efficient and Effective Agriculture Extension System in Sri Lanka

Verité Research (2018) Desk Study on Agriculture Sector, Sub-Sector Assessment and Stakeholder Mapping, TAMAP

Vermuelen & Cotula (2010) Making the Most of Agricultural Investment: a survey of business models that provide opportunities for smallholders, IIED/FAO/IFAD/SDC

Will (2013) Contract Farming Handbook, GiZ

World Bank (2017) Enabling the Business of Agriculture 2017


Annex C

Persons Met


Name Designation Place Contact Buyers / Agro-enterprises Charindi Ranasinghe Dhammika Gunasekara Haridas Fernando Suresh Ellawala Waruna Madawanarachchi Danushki Hapuarachchi Dhammika Sunhil Rattna

Deputy Chairperson, CR Exports Ltd CEO, Tropical Life Ltd Group Manager, Cargills Ceylon PLC Director, Ellawala Exports Ltd CEO, CIC Agribusiness Ltd Head of HR & Sales, Taprobane Seafoods Ltd The Royal Mall Supermarket Fonterra Milk Collection Centre President, Thabuttegama Wholesalers Association Manager, Thabuttegama Wholesale Market

Mudungoda Colombo Colombo Colombo Colombo Colombo Kandy Kandy Anuradhapura Anuradhapura

[email protected] [email protected] [email protected] [email protected] [email protected] [email protected]

Farmers / Producer Organisations Anuradha Hettiarachchi Ranjith Silva Vipula Welagedara Bernhard Ranaweera E Thevarasa T Thabojanan S Kajendran T Kulasingham Pathinathan V Thirunayeswaran S Kajendran Kaleselvi R Vedanadan U Kiribakaran HD Dharmasena Gamini Jayarante Bandula Udayakumara AGA Ravinath W Lokubandara

Tea Smallholdings Development Authority Udunawara Milk Producers Cooperative Society Nuwara Eliya Agricultural Cooperative Society Agricultural Livelihood Development Multi-Purpose Cooperative Society Nuwara Eliya Floriculture and Entrepreneurs Cooperative Society Small Organic Farmers Association President, Small Organic Farmers’ Association Vali-East Plantain Producers’ Sales Cooperative Society Jaffna District Development Cooperative Society (YARLCO) Ambal Fisheries Cooperative Society Vinayagapuram Farmers Cooperative Society Iranaitivu Iranaimatha Nagar Fishermans Cooperative Society Educated Youth Cooperative Society Thiruvaiaru Lift Irrigation Farmer Organisation PTK Womens Enterprise Cooperative Society Palm Resources Development Cooperative Society Mullaitivu District Integrated Model Farmers Cooperative Society Vavunia North Fruit Growers Cooperative Society 306 D1 Eksath Farmer Organisation Discuss Entrepreneurial Farmer Organisation Yaya 20/28 D Canal Farmer Organisation Yaya 19 D Canal Farmer Organisation

Kandy Kandy Nuwara Eliya Nuwara Eliya Nuwara Eliya Matale Matale Jaffna Jaffna Jaffna Killinochchi Killinochchi Killinochchi Killinochchi Mullaitivu Mullaitivu Mullaitivu Vavunia Anuradhapura Polonnaruwa Polonnaruwa Polonnaruwa Polonnaruwa

[email protected]









DM Jayatilake TMB Trennakoon Sanjeewa Jagath Nirantha

Historical Mahasen Orubendi Siyambalawa Farmer Organisation Divuklapelessa Dedunu Agricultural Cooperative Society Serana Sirisumana Cooperative Society Welimada Floriculturists Cooperative Society Diriya Saviya Entrepreneurship Cooperative Society Business Development Cooperative Bank Women Floriculturists Cooperative Society Small Entrepreneurs Sanasa Society Aanapallama Handy Work Cooperative Society Mahaaragama Farmer Producers & Marketing Cooperative Society

Badulla Badulla Badulla Badulla Monaragala Monaragala Monaragala Monaragala Monaragala


Annex D

Interview Checklist


Interview Checklist for Agribusinesses (buyers)

1. Business structure

• Business name & address

• Person interviewed name, designation, contact details

• Year business established

• Legal structure (e.g. sole trader, limited company)

• Number of employees, gender, age

• Volume of annual turnover (e.g. tonnes of coconut)

2. Business conduct

• Type of business (e.g. wholesaler, supermarket, processor)

• What commodity does the business deal with? (e.g. poultry, vegetables)

• What does the company do to the produce? (e.g. aggregation, processing, packaging, export)

• What functions does the company carry out? (e.g. aggregation, marketing, processing, transport, storage)

2.a) Business relationship with suppliers

• Who buy from and how many suppliers? (e.g. farmers, traders)

• Buying requirements (e.g. volume, quality, packaging)

• Are there supply contracts with suppliers?

• If so, what conditions are stipulated in the contract? Is there any flexibility or risk sharing?

• Does the business provide any other services to suppliers? (e.g. transport, training, credit)

• Does the business have a local presence throughout the year, or just during the buying season?

• What is the level of trust with the suppliers?

• Who determines the price, are prices negotiable?

• How are prices paid to farmers calculated? (e.g. reference to wholesale price, deductions for services)

• What is the price paid today and how does it compare with other buyer prices?

• What are the risks when buying from farmers?

• What are the threats to (business) sustainability of buying from farmers?

• What is the long-term strategy for sourcing raw materials?

• Problems encountered when buying from farmers

• Recommendations to increase buying from farmers

2.b) Business relationship with buyers

• Who sell to and how many customers?

• Are there any forward sales contracts with buyers?

• Buying requirements (e.g. volume, quality, packaging)

Interview Checklist for Farmers / Organisations (producers)

1. Organisational structure

• Organisation name & address

• Person interviewed name, designation, contact details

• Year organisation established

• Legal structure (e.g. individual farmer, farmer organisation, cooperative)

• Share ownership, voting rights, dividend payments, management decision making

• Number of members, gender, age


• Volume of annual turnover (e.g. tonnes of coconut)

2. Organisational conduct?

• What commodity does the organisation deal with? (e.g. poultry, vegetables)

• What functions/services does the farmer organisation carry out? (e.g. production, marketing, processing, transport, storage, input supply, credit, training)

• How are members charged for the services? Are there any other charges? (e.g. subscriptions)

• Requirements when sourcing produce from members (e.g. volume, quality)

• How are prices paid to farmer members calculated? (e.g. reference to wholesale price, deductions for services, sales minus commission)

• Problems encountered when sourcing from farmers

• What are the main constraints faced by farmers wishing to produce commercially (e.g. access to inputs, credit, skills, access to market)

• What are the threats to (business) sustainability of the organisation (e.g. management skills, profitability)

• Recommendations to improve services provided to members

• Recommendations to increase supply of raw materials from farmers

• Costs of production for farmers

2.a) Organisational relationship with buyers

• Who sell to?

• What is the level of trust with the buyer?

• Does the buyer have a local presence throughout the year, or just during the buying season?

• What other buyers are available (e.g. wholesalers, supermarkets) and are they better or worse?

• Market requirements (e.g. volume, quality, packaging)

• Does the buyer provide any services to the organisation? (e.g. transport, training, credit)

• How are prices determined with buyers?

• Are there any forward sales contracts with buyers?

• If so, what conditions are stipulated in the contract? Is there any flexibility or risk sharing?

• What is the price received today and how does it compare with other buyer prices?

• What are the risks when sourcing from members and selling to buyers?

• What is the long-term marketing strategy of the organisation?

• Problems encountered when selling to buyers

• Recommendations to increase sales to market


Annex E

Legend for Business Model Diagrams


Business Entities

Big farmer

Small farmer

Group of farmers

Intermediary / local collector

Wholesale market

Wholesale (inter-district)

Wholesaler

Retail shop

Supermarket

Hotel

Processor

Cooperative packhouse

Collection Centre

Exporter


Services

Credit

Transport

Inputs

Sales & marketing

Training

Processing


Annex F

Wholesale & Retail Prices


Figure E.1: Tomato Wholesale & Retail Prices

Dambullah Market, 2018-2019

Figure E.2: Papaya Wholesale & Retail Prices

Pettah Market, 2018-2019

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120

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160

180

200

Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul

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/Kg

Wholesale Retail

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Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul

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/Kg

Wholesale Retail


Annex G

Results from the Farm Business Model workshop dated 18 October held in Colombo

Workshop Report

FINDINGS OF THE DIAGNOSTIC STUDY ON COMMERCIAL AGRICULTURAL BUSINESS MODELS

FOR SRI LANKA

18th October 2019, Colombo

BACKDROP

The Technical Assistance to Modernization of Agriculture Programme (TAMAP) in Sri Lanka

commissioned a short-term expert team to assist the Government of Sri Lanka to improve its

support to farmers, farmer organizations and the extension services. A large number of

agriculture business models were assessed with a view to their applicability in the Sri Lankan

context, established a ranking of preferred farmer business models for Sri Lanka as well as an

inventory of the required resources and finally a roadmap to achieve the preferred structure.

WORKSHOP OBJECTIVE

1. To verify the findings of the diagnostic study on Commercial Agricultural Business Models

for Sri Lanka with relevant sector stakeholders at the national level.

2. To identify possible implementing partners to promote and support inclusive commercial

agricultural business models in Sri Lanka.

MAIN RESOURCE PERSONS FOR THE WORKSHOP

• Adam Sendall – international expert

• Dharme Bandara – national expert

• Mahina Bongso – national workshop facilitator

PARTICIPANTS AT THE WORKSHOP

• Relevant government departments.

• Donor partners.

• Agro-enterprises

A full list of participants with names and designations can be found in Annex A.

SUMMARY OF PRESENTATIONS, DISCUSSIONS AND OUTCOMES

The workshop commenced with opening remarks by Dr. Christof Batzlen, the TAMAP team

leader. This was followed by presentations on the overview, which included an introduction to

inclusive business models, business entities and a comparative analysis of agricultural business

models in Sri Lanka. The international expert Adam Sendall and the national expert Dharme

Bandara who studied commercial agriculture business models for Sri Lanka made the

presentations. The second session (post-lunch) saw the experts sharing the conclusions and

recommendations of the diagnostic study while also explaining the way forward.

Discussions ensued with a focus on the different types of agriculture business models and the

comparative analysis undertaken through the diagnostic study of the two experts. Participants

were invited to share their experiences in working with business models, particularly contract

farming and the cooperative model, the main challenges encountered in implementing these

models in the agriculture sector of Sri Lanka and to verify the findings/recommendations of the

study.

Outcomes

• There was endorsement by the participants for the recommended business models: contract farming, producer cooperative societies and collection centres. However, there was an understanding that all models presented had its strengths and weaknesses.

• The need to integrate/merge business models in order to identify a workable model that would yield mutual benefits to producers and buyers was highlighted. There was consensus by participants that facilitating producer-buyer forums can yield benefits and provide a platform for conversation between farmers and buyers to formulate business models based on common priorities.

• Export-oriented agriculture requires traceability, which makes value chains become smaller, thereby creating a need for inclusive business models that, focuses on the farmer and the first buyer.

• Upgrading the intermediary model to include input suppliers/collectors as intermediaries between farmer organizations and agribusinesses. As agribusinesses do not have a presence in all productions areas, strengthening the input suppliers who have a permanent presence in the field and who have established close linkages/relations/trust with the farmers and the agribusiness can be useful.

• Price transparency and flexibility to establish compliable contracts. One way of doing this is to use wholesale prices, which are updated daily and widely available, as reference prices. Certification of export-oriented produce can also be used as a tool to ensure compliable contacts. Further, agri-business enterprises should provide clear requirements and guidelines on quality to farmers.

• Entrepreneurship development of farmers in order for any business model to be successful. Participants called on the need to empower farmers with information and basic business skills to enable quick decision-making and have adequate bargaining power if the country is to move towards commercial agriculture. This is however by no means to create competitiveness between farmers and agribusinesses. Changing attitudes of smallholder farmers to become organized, be business-ready, accountable and reliable partners is also an essential factor for business models to work and become mutually beneficial.

• In addition to providing physical inputs to farmers under each business model that were presented, ensuring the establishment of trust with the farmer. For example, agribusinesses such as CIC shared experiences of how building close relations with farmers over the years, such as through welfare programmes, has helped in winning their trust and respect that has to a large extent minimized side selling.

• Agri-businesses pointed out that in order to scale-up operations and infrastructure to meet the demands that stem from the commercialization of the agriculture sector, they require external support and that many programmes overlook the role played by agri-business while mainly focusing on the farmer. They called for incentives to be provided to encourage agri-businesses/exporters to work with clusters of farmers and implement sustainable business models. The Ministry of Primary Industries noted however that progress is being made in this regard to strengthen the infrastructure of agri-business enterprises such as matching grants for machinery and processing sites.

• In order to create an enabling environment for agriculture business models to operate, it is essential to have the necessary legislative and regulatory frameworks in place. Many participants from the relevant government departments highlighted that legislations were outdated and did not lend to the needs of commercialising agriculture, particularly for famers to engage in business. The Agrarian Services Act was mentioned as an example, noting that it mainly covers irrigation and irrigation-related infrastructure, and therefore requires revisions.

Annex A

List of participants at the workshop on findings of the diagnostic study on commercial agricultural

business models

NAME MINISTRY/INSTITUTE/COMPANY

Hans Van de Meerendonk TAMAP

Dr. Nihal Atapattu TAMAP

Olaf Heidelbach Delegation of the European Union

Chandana Hewawasam Delegation of the European Union

Aruna Weerakoon National Agribusiness Council

B.M.M. Bandula Department of Cooperative Development

Shirani Malkanthi Department of Cooperative Development

I.G. Tilakaratne ASMP – Agriculture Sector Modernization Project

Asoka Jayakody ASMP – Agriculture Sector Modernization Project

Suresh Ellawala Ellawala Horticulture LTD

Waruna Madawanaarachchi CIC Agri Produce Exports (Pvt) Ltd.

Lasantha Somaratne Hayleys PLC

Tharanga Buddhimal NIDRO Supply (Pvt) Ltd.

Nuwanthi Senarath Ceylon Biscuits Ltd

Indika Fonterra Sri Lanka – Fonterra Cooperative Group

Dr. Ajantha De Silva Ministry of Agriculture

I.U. Mendis Ministry of Agriculture

Dr. Kumudini Gunasekara Ministry of Primary Industries and Social Empowerment

Eng. S.M.D.L.K. de Alwis Ministry of Irrigation and Water Resources Management and Disaster Management

N.S. Wanasinghe Ministry of Plantation Industries

Iroshan Ministry of Plantation Industries

D.P. Indika Ministry of Provincial Councils and Local Government and Sports

H.D. Sisira Ministry of Lands and Parliamentary Reforms

D.A. Wiharepota Department of National Planning

Chellappah Gnanaganeshan Oxfam Sri Lanka

Rukmani Rathnayke Oxfam Sri Lanka

Kavinda C. Dissanayake Lanka Agri Produce Management Corporation

Hasitha Rathnaweera Lanka Agri Produce Management Corporation

T.U.R. Disanayake Institute of Post Harvest Technology

Thajul Falah ACTED


Annex H

Proceedings of the two trainings organised in Kandy and in Vavuniya

1

Training Program Conducted in

Vavuniya on 25 October 2019 in Kandy on 26 October 2019

2

Table of Contents

Farm Business Model Training in Vavuniya 25 Oct 2019 .......................................................................... 3

Who Leads Business Models ............................................................................................................... 3

SWOT Analysis .................................................................................................................................... 3

Group 01-Contact Farming ............................................................................................................... 3

Group 02-Cooperative ...................................................................................................................... 4

Group 03-Collection Centres ............................................................................................................. 4

Buyers and Sellers Priority ................................................................................................................... 4

Group 01-Fruits and Vegetables ....................................................................................................... 5

Group 02-Fisheries ........................................................................................................................... 5

Group 03-Field Crops ....................................................................................................................... 5

Evaluation of the Training Program in Vavuniya 25 Oct 2019................................................................ 6

Comments from the Participants-1 .................................................................................................... 6



Comments from the Participants-04 .................................................................................................. 7

Comments from the Participants-05 .................................................................................................. 7

Training Program Conducted in Kandy on 28 October 2019 ..................................................................... 8

Who Leads Business Models ............................................................................................................... 8

SWOT Analysis .................................................................................................................................... 8

SWOT Analysis - Milk Collection ....................................................................................................... 8

SWOT Analysis - Contract Farming .................................................................................................. 9

SWOT Analysis - Agricultural Cooperatives ...................................................................................... 9

Setting up of Priorities ........................................................................................................................ 10

Setting up of Priorities - Fisheries & Milk ......................................................................................... 10

Setting up of Priorities - Field Crops ................................................................................................ 10

Setting up of Priorities - Fruits & Vegetables ................................................................................... 11

Evaluation of the Training Program in Kandy 28 Oct 2019 .................................................................. 11

The Discussion that followed the presentation .................................................................................... 14

3

Farm Business Model Training in Vavuniya 25 Oct 2019

The purpose of the training program was first to highlight the need to understand mutually, the aspirations

of buyers and sellers. Second, to make the participants understand the path to commence round table

discussions between buyers and sellers to commence fair negotiations. Third to negotiate in reaching a

win-win situation, improving business relations through establishment and improvement of chosen three

business models; contract farming, cooperative societies and collation centre.

There were 35 participants representing Farmer Organisations and Agriculture Cooperative Societies.

There were 20 officers representing the Department of Cooperative Development, Department of

Agriculture, Department of Agrarian Development, Agriculture Sector Modernization Project and Oxfam.

Who Leads Business Models

A power point presentation was made in Tamil. There were three short group works included in the training

program supported by the presentation.

Three groups of participants were randomly identified and requested to list out advantages and

disadvantages of promoting business models in terms of inclusiveness and competitiveness. Chosen three

business models were 1) Government driven, 2) Buyer driven 3) Facilitator driven and 4) Producer driven.

The participants showed their keenness of participation. The presentations were not made due to time

restriction and the fact that all four drivers could be acceptable.

SWOT Analysis Three groups of participants were randomly identified and requested to do a SWOT analysis of chosen

three business models; contract farming, cooperative societies and collection centres. The results were

listed below. It was observed that the partisans were keen in doing the analysis and presenting the results

among other groups. This analysis revealed that the participants has a good sense on the three models

introduced at the training.

Group 01-Contact Farming

Strengths:- Able to receive stable income

Stable market opportunities

Fixed capital

Price decrease has no bad effect

Able to apply new technology

Weakness:- Price increase

No bargaining power

Decision making by a few individual

No store facilities

No chance for other options

Opportunities:- Stable market opportunities

Able to secure financial source

Extension plans

Able to get loan facilities

Suitable weather condition

Government policies

Able to expand human resources and technology

Able to get high yield

Skill development

Threads:- Independence may be limited

No chance to get welfare facilities

Climate Changing

No market for excess products

Government policies

Less utilization of resources

Land may be damaged due to same crop

cultivating

4

Group 02-Cooperative

Strengths:-

Members work as a team

Easy to get inputs (price)

Trust among members

Price determination

High income for members productions

Weakness:-

Delay to make decisions

Salary according to Income

Lack of advertisements

Opportunities:-

Easy to get services.(Bank loan, Other Govt.

Department)

Opportunity to get Technical knowledge

Product expand according to the market Demand

Threads:-

Affect from Competitors Company

Change of Climate/ Natural Disasters

Affect from Contract Farming

Group 03-Collection Centres

Strengths:-

Productions issues directly

Continuous income

Ability to export

Able to maintain Quality

Make decisions according to the market

Weakness:-

May be loosed according to market price

Gap in Communication

Affect by climate changing

No permanent agreements

Substitute products

Opportunities:-

Continuous distribution

More activities on Continuous productions

Able to create Competitive

Able to fulfil the customers need

Able to involve value adding Activities

Threads:-

Excess or shortage in productions

Insects damages & Technology

Government Decisions

Transport barrier (wild elephants, Others)

Inflation

Lack of labour force

Buyers and Sellers Priority

Regarding priority f buyers and sellers, the same three groups were asked to visualize the priority of

buyers and sellers. They were asked to identify the common priority at the presentation. Hence the

common prioritise have been recorded,

5

Group 01-Fruits and Vegetables

Buyers Priority Sellers Priority

Low Price

Quality

Quantity

Taste

Free from insect damage

Organic

Picketing

Credit Sales

High Price

Quality

Good will of Products

Standards (SLGAP)

Preference of Customer

Variety

Seasons (Festival)

Credit Purchase

Group 02-Fisheries


Quality Products

Low Price

Economy Picketing

All kind of products at a same place

Attractive display

Continuous Suppliers

High Price

Quality

Good will of Products

Selecting Place (By customers)

Continuous Customers

Expects whole sales & Retails

Group 03-Field Crops


Low Price

Quality Products

Attractiveness of the Products

Sales system

Discounts

High Price

Quality

Easy payments

Cost of sales

6

Evaluation of the Training Program in Vavuniya 25 Oct 2019

Individual participants were answered to two questions: 1) How useful the massages given at the

Training 2) How do they propose to implement the messages given at the Training... Among about 2/3

of the participants produced comments five of them have been listed, taken randomly.

In general they have understood the theme of the training. To have the benefit of training they need to

commence the procedure of IBM.

Comments from the Participants-1

01) How useful the massages given at the Training

o Able to understand business models

o How a business organization should do business

02) How do you propose to implement the messages given at the Training

o Able to understand farmers self determination



o We could be able to understand the Inclusive business model as well as we got the

points of how we can implement IBM at our Society

o What are the struggles we will face when we are trying to IBM and how can we overcome

from the struggles.


o We have to discuss about IBM with people who are involving with related business

o We need to do SWOT analysis

o We need to get Consultants /Specialists ideas regarding IBM

o If it’s possible to make/organize group to do such things.



o An agricultural producers gaps and challenges

o The challenges faced by the farmers and how to react to them

o Able to understand about inputs of a product

7


o Able to understand farmers self determination

o This IBM is a good model

o This model will help to uplift our farmers living standard


01. How useful the massages given at the Training

o Able to understand business strategy

o How to reduce production cost

o New business model

02. How do you propose to implement the messages given at the Training

o Very good discussion


01. How useful the massages given at the Training

o Able to understand progress of a business

02. How do you propose to implement the messages given at the Training

o Able to understand the techniques of a business

8

Training Program Conducted in Kandy on 28 October 2019

The purpose of the training program was first to highlight the need to understand mutually, the aspirations

of buyers and sellers. Second, to make the participants understand the path to commence round table

discussions between buyers and sellers to commence fair negotiations. Third to negotiate in reaching a

win-win situation, improving business relations through establishment and improvement of chosen three

business models; contract farming, cooperative societies and collation centre.

There were 25 participants representing Farmer Organisations, Agriculture Cooperative Societies. There

were 34 officers representing the Department of Cooperative Development, Department of Agriculture,

Department of Agrarian Development, Sri Lanka Mahaweli Authority, Agriculture Sector Modernization

Project and Oxfam.

Who Leads Business Models

A power point presentation was made in Sinhala. There were three short group works included in the

training program supported by the presentation.

Three groups of participants were randomly identified and requested to list out advantages and

disadvantages of promoting business models in terms of inclusiveness and competitiveness. Chosen three

business models were 1) Government driven, 2) Buyer driven 3) Facilitator driven and 4) Producer driven.

The participants showed their keenness of participation. The presentations were not made due to time

restriction and the fact that all four drivers could be acceptable.

SWOT Analysis Three groups of participants were randomly identified and requested to do a SWOT analysis of chosen

three business models; contract farming, cooperative societies and collection centres. The results were

listed below. It was observed that the partisans were keen in doing the analysis and presenting to the

participants. This analysis revealed that the participants has a good sense on the three models.

SWOT Analysis - Milk Collection

Strength Weakness

1 Financial strength 1 Middlemen interference

2 Facilities at the center 2 Grading

3 Transport and infrastructure 3 Production slandered

4 Information and communication 4 Insurance not availability

5 Sales network 5 Limited collection centers

6

6 Proper storage

7

7 Packaging methods

9

Opportunities Threats

1 Ability to expand 1 Government interference

2 Potential for organizing farmers 2 Importing of local produce

3 Availability of smallholder producers 3 Government policy 4 Re-export (import products to be exported

mixed with local products) 5 Price monopoly

SWOT Analysis - Contract Farming

Strength Weakness

1 Fixed market and price 1 Decisions are made by the buyer

2 Extension service and input 2 Inability to receive increased price of the market

3 Legal status 3 Monitoring weaknesses

8

8


1 Insurance at crop failure 1 Breaking the agreement by both the parties

2 Introduction of new crops 2 Target quantity variations

3 Expansion of extent cultivation 3 Not good for long-term agreement

4 Value added product promotion 4

5 Exportable products from smallholders

5

SWOT Analysis - Agricultural Cooperatives

Strength Weakness

1 Legal status 1 Less relations with line agencies

2 Organizing ability 2 Officers with low level of technological knowledge

3 Decision making ability 3 Not adopting new technology

4 Risk sharing 4 Abrupt interruption of value chain

5 Varies services offered 5 Less storage facilities

6 Easiness of sales 6 Less other infrastructure

7 Island wide sales network 7 Manager dependent progress

8

8


1 Government support 1 Weak government policies

2 International acceptance 2 Political interference

3 Private sector relations 3 Weather changes

4 Easiness of technology transfer 4 Competition with private sector

5 Social acceptance 5 influence of middlemen

10

Setting up of Priorities

Setting up of Priorities - Fisheries & Milk

Buyer Seller (Farmers)

1 Quality 1 Selling whole of the harvest

2 Minimum price 2 Maximum price

3 Demand of the market 3 Facilities provided by the buyer

4 Easiness of buying 4 Production cost

5 Maximize profit 5 Other competitors to purchase

6 Network of selling 6 Weather and climate effect

7 Market behavior 7 How to receive cash and the trustworthiness

8 Monopolistic prize

Common Priorities

1 Credit and insurance facilities

2 Infrastructure

3 Quality

Setting up of Priorities - Field Crops

` Buyer Seller (Farmers)

1 Quality 1 Cropping season

2 Minimum prize 2 Maximum prize

3 continuous supply 3 Maximum harvest

4 Crop 4 Stable market

5 Variety 5 Infrastructure

6 Maximum value in the value chain 6 Quick payment

7 Delayed payment 7 Other faculties

8 Agreement 8 Agreement

9 Trust 9 Crop

10 Financial strength 10 Variety

Common Priorities

1 Agreement (Prize, quantity and timing)

2 Market information

3 Investment

4 High productivity and high quality

11

Setting up of Priorities - Fruits & Vegetables

Buyer Seller (Farmers)

1 Produce with standard and quality 1 Fair profit

2 Fair price compared to the market 2 Crops that matches the market

3 Purchase only the requirement 3 Fair price

4 Some delay in payment 4 Sustainable cultivation

5 Financial concessions 5 Sell at the farm gate

6 Steady supply 6 Instant cash

7 7 Sell the whole harvest

8 8 Financial concessions

Common Priorities

1 Quality products

2 Continuous production

3 Financial concessions

4 Fair prize

5 Fair profit

Evaluation of the Training Program in Kandy 28 Oct 2019

Individual participants were answered to two questions: 1) How useful the massages given at the

Training? 2) How do they propose to implement the messages given at the Training.?. Out of 64

participants of the training program in Kandy 27 responded for two questions asked, the comments five

of them have been listed, taken randomly.

In general they have understood the theme of the training. To have the benefit of training they need to

commence the procedure of IBM.

Responses of five individuals are listed each of two questions:

Q1. What are the useful the messages given at the training? Response of four individuals

Response of five individuals are listed below:

1) How to identify priority needs of farmers (sellers) and buyers, listing and prioritization of

common priories

The business models of which the farmers could be organized and the good and bad aspects of

the models

2) Understand the pathway to modernize agriculture

Develop agriculture through mutual understanding of players in the value chain

12

Formulate a systematic plan of activities through developing a dialogue between producer and

buyer

Rescue the farmers from the grip of intermediary traders

3) Build good relations between producer and buyers through contract farming, cooperative

method and collection center in implementation of set of activities to increase income of both

the parties.

There is an ability produce and market by inclusive actions of all parties including line agencies.

4) It is useful to identify commercial agriculture business models, its process, concerns and

procedures.

Also highlight the importance of IBM being inclusive to include women and marginalized people,

5) Upgrading of agriculture produce

Formulation of mechanism for marketing through improving the quality of produce

Increase economic profit level

Q2 How do you propose to implement the messages? Response of four individuals

Response of five individuals are listed below:

1) By encouraging and inspiring the organized community in cooperatives

By encouraging an inspiring the communities who are in the process of establishing cooperatives

Training and guiding the high level agricultural cooperative societies

2) Identify the business activities

Adopt agreements

Identify the market

Identify the price

Standardize the product for exporting

Relations building between produces and establish a dialogue between them

Organize an implement future activities with a proper dialogue among the Government, private

sector and cooperative sector.

These activities are implemented through agricultural cooperatives.

3) By developing Farmer Organizations as entrepreneurial Farmer Organizations (in Mahaweli

Systems) and implement the proposed program.

4) For the gender mainstreaming in agriculture in Sri Lanka, knowledge of IMB is very important

Understand the buyer and seller perspective

5) Organize producers through awareness creation

Change the attitude of the producers leading to organize them

Use all line agencies in organizing producers

14

The Discussion that followed the presentation

Sri Lanka Mahaweli Authority informed that they already have a mechanism of meeting producers and

buyers at the commencement of each season. At this meeting agribusiness companies are represented

and they are given an opportunity to address the farmer representatives and officers of the irrigation system.

Accordingly, production is coordinated and Agribusiness Company purchase the produce from the farmers.

The training program however, aimed at further improvement of this discussion which has been taking place

in irrigation systems, for many years. Accordingly strong relations are expected between sellers and

buyers.

The role of Farmer Organizations were analysed by the participants and some highlighted the role played

by the Entrepreneurial Farmer Organizations identified by the Mahaweli Authority. The limitation felt even

by the Entrepreneurial Farmer Organizations in the Mahaweli Systems was discussed. The Agriculture

Cooperative Societies were considered an entity to represent and do business for organised farmers. There

were some concerns among the participants, regarding prevention of political interferences on agricultural

cooperative societies. Political interferences may be highlighted only in Cooperative Shops than that of

agriculture cooperative societies. The Cooperative Society could introduced a suitable set of amendments

to the by law at its Annual General Meeting. Accordingly, negotiations may be held between an

agribusiness company and a Farmer Organisation, a group of farmers or an Agricultural Cooperative aiming

at establishment of an IBM business model of their choice.

Participants in general agreed with the need for development of IBM in Sri Lanka.


Annex J

Training material in English (in Sinhala and Tamil can be obtained on demand)

24/12/2019

1

COMMERCIAL AGRICULTURAL BUSINESS MODELS FOR SRI LANKA

Training

Agenda:

1. What are ‘inclusive’ business models?

2. Farmer organisations – historic overview.

3. Commercial agricultural business models found in Sri Lanka.

4. SWOT analysis of business models (group work).

5. How to support inclusive business models & guiding principles.

6. Common priorities & upgrading (group work).

1

2

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2

Inclusive Business Model (IBM)

Connect smallholder producers to agricultural value chains

3

4

24/12/2019

3

A business model…

implies how an enterprise does business, markets its

products and sources inputs and finance (FAO)

Inclusive Business Model (IBM)

Connect smallholder producers to agricultural value chains

5

6

24/12/2019

4

Inclusive can refer to…

• vertical and horizontal linkages between different actors

• accessibility for farmers with fewer assets, women, vulnerable groups

• trading practices according to needs of stallholders

• fair distribution of benefits

• shared decision making

• common goals and responsibilities

IBM Definition

Enterprises that adapt their buying practices, supply chain,

marketing strategy and company operations for smallholder

sourcing – Oxfam

7

8

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5

Why the business community should invest in inclusive business models

Sourcing from smallholders is good business

• Diversify suppliers

• Local suppliers (reduce transportation cost)

• Smallholders have comparative advantages

(No alternative sources of supply, Access to agro- ecological knowledge

and land and Access to family labour and inputs)

• Corporate responsibility to invest in local development and

• Positive branding

Why the public sector invests in inclusive business models

Development rationale…

Provide the opportunity to increase smallholder income and improve food security

Contribute to local agro-industrial growth

Create solutions that are scalable

Involve local private sector in national development

Mainstream market-oriented production skills

Transfer know-how between private companies and small actor

Attract private investment in agriculture

9

10

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6

The role of buyers

Not all buyers are the same

Types of activities: trading, processing, wholesale, retailing

Size: individuals, small-medium-large enterprises

Origin: local, foreign

Type: public, private, formal, informal

11

12

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Challenges for IBM for large Companies

Have a business model already

Difficulties in sourcing from smallholders

Geographic dispersion of smallholders

High transport and administrative costs

Meeting product requirements, standards and consistent supply

Formal procurement mechanisms not friendly to smallholders

Challenges - SMEs

• External challenges (same as for large companies)

• Internal challenges

13

14

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Inclusion Principles

• Challenges -Traders and middlemen

- Bad image – exploitation of smallholders

- Challenges of working in the informal sector

– Not legally registered

– Food safety and quality standards not enforced

– Pricing mechanisms

– Access to finance

– Limited business capabilities

15

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Inclusive Business Model Drivers

Refers to who leads or pushes the business model:

Government Driven

Intermediately (NGO) Driven

Private buyer-driven (agribusiness, agro-processor, individual

investor)

Farmer Organization Driven

17

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Inclusiveness

Government-Driven (group 1)

Buyer-Driven(group 2)

Facilitator-Driven(group 3)

Producer Driven(group 4)

Advantages

Disadvantages

Competitiveness

Government-Driven (group 1)

Buyer-Driven(group 2)

Facilitator-Driven(group 3)

Producer Driven(group 4)

Advantages

Disadvantages

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11

21

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The IBM approach looks close-up at the

relationship between the farmer and the first buyer

Thinking behind IBM Approach

• Focus on key value-chain problems

• Reliability of supply

• Buyer’s ability to do business

• Strengthen the people who make the economy grow

• Business managers know their market

• Create business

• Maintain business thinking among producers, FOs, SMEs

23

24

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Session 2

How are farmers currently organized in commercial

agriculture in Sri Lanka including a brief historic

overview

25

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How are farmers currently organized in commercial agriculture in Sri Lanka

Collectors

Organized transportation for the wholesale market

Contract farming

Collection Centers

Producer Cooperatives

Farmer Organizations

Producer Associations

The History of Farmer Organizations in Sri Lanka

Gal Oya Water Management Project (1979 – 1985) funded by the USAID

included a Farmer Organization component for the first time in Sri Lanka

jointly done by the Department of Irrigation and Agrarian Research and Training

Institute (ARTI) with the support of the Cornell University of the USA

27

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Irrigation Management Division (IMD) created in 1984 after experiences from Gal Oya

Expanded Farmer Organization programs in all major settlement schemes Expanded to cover other

agricultural settlements and the Mahaweli Development Project.

Promulgation of the Agrarian Services Act No. 4 of 1991 made provision for the registration of

Farmer Organizations with body corporate status and the power to sue and be sued.

The History of Farmer Organizations In Sri Lanka

The History of Farmer Organizations In Sri Lanka

Main concepts of Farmer Organization Program • the bottom up approach to planning and organization

• building organizations based on hydrological boundaries

• use of trained catalysts to facilitate the organization of farmers and

• promote self-reliance of the farming community.

• Procurement and distribution of agricultural inputs on a cooperative basis,

• efficient water management,

• adoption of innovative cultivation methods for greater productivity,

• development of credit and marketing skills and

• resolution of farmer conflicts

• However no marketing (buying and selling) involvement in the scope of these entities.

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Present Situation Regarding Farmer Organizations

• under irrigation projects the Farmer Organizations solely oriented in

managing irrigation water

• rarely involved in commercialized operations

• farmer organizations are registered under Agrarian Development Act,

therefore, cannot be treated as companies in legal terms.

• No or limited access to credit

International Cooperative Alliance https://www.ica.coop reports that cooperatives are

people-centered enterprises owned and run by and for their members to realize their

common dreams. Profits generated are either reinvested in the enterprise or returned to

the members.

Members share equal voting rights regardless of the amount of capital they put into the

enterprise

As businesses driven by values not just profit, cooperatives share internationally

agreed principles and act together to build a better world through cooperation.

Cooperatives in the World

31

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https://www.ica.coop/

https://ica.coop/en/whats-co-op/co-operative-identity-values-principles

24/12/2019

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Cooperative Societies of Sri Lanka

• The Cooperative Societies System of Sri Lanka started in 1906 during the

period of British rule in order to fulfil the economic needs of rural farming

community by granting loans.

• Since the number of Cooperative societies was increased Cooperative

Societies Ordinance No. 7 of 1911 was enacted to provide guidance and

observation.

• The government was involved in the Cooperative movement of the country in

the same year.

• It has been documented that ‘Dumbara Mitiyawatha Cooperative Society’

was the first Cooperative society to emerge in Sri Lanka. The post of

“Registrar of Cooperative Societies” was created with government

involvement to this. The Director of Agriculture at that time was appointed

to this post and held it for the period from 1911 to 1930.


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• Cooperative Department was established as a separate

department on 01 October 1930.

• The first Registrar of Cooperative Societies was Mr W.K.H.

Cambel. It was renamed as Department of Cooperative

Development in 1945.



• Multi Purpose Cooperatives (Shops) were developed in 1957

• The subject of Cooperatives became a provincial subject with the 13th

amendment of the Constitution in 1989.

• Subsequent to the de-centralization of these activities, Provincial Department

of Cooperative Development has undertaken the activities of the Central

Government.

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• In Sri Lanka, the Cooperative organizations/enterprises are largely and

actively engaged in multiple economic and social activities.

• The sectors of the Cooperatives vary in fields such as agriculture,

consumer retailing, insurance, banking, medical, fishery, garment

production, wholesaling, printing, transport, and funeral services.


• Cooperatives promote farm diversification, value-added processing and marketing

by small rural producers while reducing associated business risks.

• Cooperatives in Network for the Development of Agricultural Cooperatives in Asia

and Pacific (NEDAC) member countries have brought together hundreds of

thousands of small rural producers to form large business ventures exporting a

wide range of agricultural, horticultural and dairy products.


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Producer Associations registered with the Divisional Secretariat

Divisions could carry out business (buying and selling)

Producer Associations

Session 3

Business Models in Sri Lanka

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3. Commercial Agricultural Business Models found in Sri Lanka.

• Traditional supply chain: wholesale market

• Intermediary model

• Cooperative model

• Federated model

• Collection Centre model

• Contract farming: out-grower model, anchor farm model

• Multipartite model

• Joint venture

• E-commerce

Traditional supply chain: wholesale market

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Intermediary model

Cooperative model

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Federated model

Collection Centre model

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Contract farming: out-grower model

Contract farming: anchor farm model

47

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Multipartite model

Joint Venture

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E-commerce

TEA

51

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4. SWOT Analysis of Business Models (Group work)

• Contract farming

• Cooperatives

• Collection centres

Criteria for comparison:

• Farmer income.

• Farmer ownership and decision making power.

• Farmer negotiating and bargaining power.

• Services provided.

• Risk.

• Sustainability.

Each of three Models are assessed for their Strength, Weakness, Opportunities and Threats

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Presentation of group work

LUNCH

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How to support inclusive business models & guiding principles.

• high value crops for which smallholders have a comparative advantage,

• clustering of farmers and aggregation of produce,

• less intermediaries between producer and end market to increase chain

income share for farmers,

• direct linkages between producer and buyer to ensure quality and

traceability,

• the provision of services such as transport, inputs, credit and technical

support,

How to support inclusive business models & guiding principles

• risk mitigation measures such as advancing inputs on credit, writing off credit if the

crop fails, providing minimum prices, buying all the crop,

• transparency measures such as (wholesale) referencing prices during price

determination, formal contracts or memorandum of understanding,

• flexibility measures such as increasing prices if the reference price significantly

increases to avoid side-selling, agreeing to buy areas of production not quantities.

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A business model is never finished, need always adapt

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Moving forward on inclusive business

Integrating smallholders in markets should involve different linkage models

Risk of over-dependence on single-market outlet, buyer and crop

Appraising the quality of inclusion with a common set of indicators

Designing projects that address short-term needs without undermining

sustainability

What is the offer to the market?

Start looking at the business from the perspective of the needs

of the customer:

1. What are the products and services offered?

2. What is the value of the product/service for the customer?

3. What is the problem it solves?

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Business Model Analysis

1. What does the enterprise do?

2. How does it do it?

3. Who does business with whom, for whom?

4. How competitive is the business model?

How to understand the BM

• Open interviews with: – Producers, – Buyers– Stakeholders & partners

• Speak to more than one person -> variety of answers

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1 Business Model Description

1. Product2. Producers3. Buyers4. Activities*5. Resources*6. Logistics7. Suppliers/Partners8. Pricing and revenue

*Analysis for both producers (producer groups) and buyers

2. Producers

• How are the farmers organized?

• Who are the producers: men and/or women?

• Where are they located?

• Size of the land to grow crops?

• Is land owned or rented?

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3. Buyers

• Who buys the products?

(e.g. traders, wholesalers, supermarkets, hotels, exporters)

• What amount of product do they buy?

• Why are they interested in procuring from smallholders?

• Whom do they sell the product to (final clients)?

4. Key Activities

Producer Organization

• What activities generate income for the producer organization?

• What services does the producer group provide to producers and/or buyers?

– Processing, marketing, logistics, quality control, payments

Buyers

• What activities generate income for the buyer?

• What types of services do buyers offer to farmers and/or the producer

organization?

-Training, seeds, inputs, credit, transportation

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5. Resources

Producer organization

• What is the infrastructure needed to perform activities?

• What is the knowledge needed to perform activities?

Buyers

• What is the infrastructure needed to perform activities?

• What is the knowledge needed to perform activities?

6. Logistics

• How are products collected from the farmers?

• How are products transported to buyers?

• Where are they stored?

• For how long can products be stored?

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7. Suppliers/partners

• Who are the direct partners that support the BM (e.g. transporters, input suppliers)?

• What services do they provide?

• Are there any indirect partners that support the BM (e.g. financial institutions,

research centers, NGOs, public organizations)?

• How is the relationship with partners?

8. Pricing and revenue

• What are the pricing mechanisms?

• How do the buyers pay?

• How stable are sales between producers and buyers?

• Is the price fair according to the production costs?

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Identifying common priorities

Common upgrading priorities

• Why identify common upgrading priorities?

• Contribute to collaborative business partnership

• Both sellers and buyers move forward more effectively

• Communicate to partners priority areas for attention/funding

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Process to identify common upgrading priorities

Priority areas for producers

Priority areas for buyers

Compare them

Identify converging points

Tools for consensus on priorities

Desk review of existing markets studies, value chain mapping

Surveys and focus group discussions with buyer(s) and FBO(s)

Producer-buyer forums informed by results of market appraisals with a

neutral convener

Neutral facilitator to bring consensus between two actors.

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Forum/Round-table

Agenda elements:

1. Presentation of business model analysis

2. Plenary discussion of analysis (validation)

3. Group work: buyers and sellers identify their own upgrading priorities

4. Presentation of buyer and seller priorities

5. Facilitation of discussion

– Common areas

– Priority ranking

Identifying priorities

Buyer priorities Seller priorities

Group work three

Fruits & VegetablesField CropsFisheries & Dairy

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Example

Buyer priorities –

Reduce purchase price of fruits

Increase total volume of fruits delivered - reduce rejections (5-10%)

and side-selling

Obtain steady supply of fruits

Improve quality of fruits delivered

Seller priorities

Obtain higher price for fruits

Increase volume of sales

Receive fast payments

Reduce production costs

Designing upgrading activities

What can be done to address common upgrading priorities?

Identify activities to improve business model

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1 Linkage upgrading – activities

• Organize regular business meetings between producers and buyers

• Develop a pricing mechanism/contract

• Develop and maintain information-sharing mechanisms – price,

quantity required, dates, contractual details

• Facilitate linkages with financial institutions

2 Organizational upgrading – activities

Acquire storage facilities

Improve storage management (training)

Improve financial management (hiring personnel, training)

Sell unsustainable assets

Develop contract with a service provider (transport, accountant)

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3 Product upgrading – activities

Develop new product

Improve quality of products (planting techniques, seeds, yields)

Improve environmental sustainability of products (climate-smart

farming techniques, efficient resource management, pursuit of

environmental standard certification)

Change characteristics of product

Offer additional services (transport, storage)

4 Process upgrading – activities

Reduce time for product transportation (collection points)

Organize collective marketing

Improve cleaning and packaging processes

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Priority 1: Price

Buyer: Purchase at favorable price to compete in the market

Seller: Sell a high price to maximize profit

Activities

Develop pricing mechanism

Establish clear criteria for increases/reductions in prices as response to market

variations, weather, costs of inputs

Organize periodic meetings between producers and buyers

Priority 2: Quality

Buyer: Improve quality of products delivered

Seller: Reduce production costs for required quality

Activities

o Strengthen support from technical team (training, quality

mechanism)

o Work with cooperative to increase production support

o Design price mechanism that rewards for high-quality products

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Priority 3: Volume

Buyer: Increase volume delivered – decrease side-selling and

rejections

Seller: Increase volume of sales Activities

Mechanism to access seeds with better yields

Set up collection points to aggregate sales and facilitate

transportation

Design process to reduce product damage during transportation

Thank You

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