The FAIDA Market Linkage approach: Facilitating sustainable linkages between smallholders and agricultural companies

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1 Author: John Bet Editor: Marest Artist: Rey DTP: Jeff 3rd Draft #15 The FAIDA Market Linkage approach: Faciitating sustainabe inkages between smahoders and agricutura companies BEFORE AFTER FAIDA MARKET LINKAGE S tate interference in economic ife diminished drasticay in Tanzania after the impementation of structura adjustment and market iberaization poicies. Farmers were confronted with a sudden coapse of government services such as input suppy, credit provision and purchase of output. However, the process aso created new economic opportunities such as growing aternative, more remunerative cash crops. Unfortunatey, it appeared difficut to materiaize these opportunities due to factors such as: ack of information on concrete enterprise opportunities; underdeveoped and non-competitive output markets; bad performance of input and financia markets in rura areas; and no inkages with potentia buyers. Likewise, agricutura companies faied to capture the new commercia opportunities, among others, due to: ack of reevant business information; unsure and irreguar suppy of raw materias; difficuties to access finance; and no inkages with farmers. What is FAIDA? FAIDA is a microenterprise deveopment project operating in the Northern Zone of Tanzania. The Netherands Deveopment Organization ( SNV ) executes the project. FAIDA assists providers of Business Deveopment Services (BDS), deveops mechanisms for effective financia assistance, and faciitates Market Linkages between smahoders and agricutura companies. FAIDA is the Swahii term for profit or added vaue. Overseeing the situation, FAIDA started to experiment with faciitating contacts between smahoders and agricutura companies, thus, bringing together actors at the suppy and demand side in an attempt to catayze a specific enterprise deveopment. THE FAIDA MARKET LINKAGE APPROACH: FACILITATING SUSTAINABLE LINKAGES BETWEEN SMALLHOLDERS AND AGRICULTURAL COMPANIES 1

2 The Market Linkage approach The Market Linkage approach is a too to bring together sma-scae farmers (suppy side) and agricutura companies (demand side) under the objective of deveoping a specific enterprise. In this approach, a faciitator acts as a catayst or broker and focuses on buiding trust between both parties. The faciitator: introduces the parties to each other; assists in obtaining reevant information and providing taior-made training; and is instrumenta in deveoping the enterprise as a whoe. The eading concept is that farmers and companies deveop sustainabe commercia enterprises that are mutua beneficia. The faciitator merey assists in the start-up and initia deveopment of this process and is, therefore, ony temporariy invoved. In a typica FAIDA Market Linkage scheme, farmers receive inputs (i.e. seeds, fertiizers, etc.), extension services and a sma oan from the company whie being assured they can se the output to this company. The farmers are assisted by the faciitator to organize groups with feow farmers operating in the same scheme. In order to minimize transaction costs, the distribution of inputs, deivery of extension services and the coection of output is organized through these farmer groups. Normay farmers open a group savings account, which functions as a coatera for the inputs and oans provided by the company. The company is assured of its raw materia suppy and can pan its business accordingy. Typicay, the company is not merey a trading firm but invoved in processing or other vaue-added activities. The faciitator can assist the company to access additiona credit sources to be abe to finance the scheme. The faciitator keeps a cose eye that the inkage is a fair dea for both parties, and eads to a cear win-win situation. The Market Linkage Approach unsecured market outet for produce ow uaity of inputs financia constraint imited commercia skis no access to market info imited access to extension Sma-scae farmers Faciitator assist in deveoping trust among partners taior-made assistance/training assist in tapping business opportunities Company no reguar suppy of raw materia no expertise in deaing with farmers difficut to pan production imited access to finance not a business skis in pace 2 Best Practices and Strategies in Microenterprise Deveopment

3 The main steps of the Market Linkage Approach Main steps Main activities faciitator Critica issues 1 Enterprise choice 2 Seection of company 3 Seection of farmers 4 Bring parties together conduct market research review profit prospects for farmers and company review environmenta issues review company s expertise and business skis gather information from cients review end markets review if cimate is suitabe participatory review farmers expertise/ resources base review economic activities expain the contract agree on responsibiities of a the partners invoved ensure a sign the contract totay new enterprise is difficut to hande market dynamics aternative outets exist good track records openness/provide information wiingness to engage in cost sharing farmers eager to participate continued food production environmenta concerns gender issues everybody understands the contract and its conditions cear activity/time schedue deveop trust among parties 5 Assistance to company assistance to further deveop key business skis assist in obtaining finance anayze market outets company wiing to provide inputs, finance, extension buying/payment procedures ong-term perspective 6 Assistance to farmers business skis training group formation ensure extension services promote savings/credit group eadership appropriate extension food production side seing 7 Invove others ink with reevant GOs and NGOs share the work train other organizations positive attitude to private business active invovement repicate/adapt approach 8 Support to inkages find soutions for probems that arise intermediate in conficts ink to specific expertise strong commitment of a parties invoved deveop trust fexibe assistance 9 Monitoring & evauation participatory review of experiences impement improvements joint panning of foow-up systematic data coection by farmers and company earn from mistakes ong-term perspective 10 Faciitator withdraws stay in touch with further deveopment of the inkage approach new partners start new inkages pu-out strategy is known to a parties from the start aow partners to do the job review experiences THE FAIDA MARKET LINKAGE APPROACH: FACILITATING SUSTAINABLE LINKAGES BETWEEN SMALLHOLDERS AND AGRICULTURAL COMPANIES 3

4 FAIDA Market Linkages in practice FAIDA has appied the Market Linkage approach since It has continuousy improved its methodoogy by criticay reviewing its experiences. Some inkages became successfu and are sti continuing today without any invovement from FAIDA. Other schemes proved to be ess successfu due to a variety of reasons such as drastic changes in end markets, adverse weather conditions, farmers switching to another enterprise and under-performance of the company. Beow is a summarized overview of Market Linkages faciitated by FAIDA. INDICATOR Chii Common Beans Sunfower/ Saffower Coffee Fower seeds Starting year /2000 End year /2003 No. of farmers: Start Hafway End /35 76/? 50/? Type of company Loca exporter Loca trader Loca processor Processor/ exporter Speciaized exporter Other actors activey invoved no Research center Grassroot NGO Coffee center no Emergency market outet avaiabe for farmers imited yes yes yes no Side-seing by farmers no no some yes no Commitment of company /+ Cost-sharing arrangement no yes yes yes no/ yes Environmenta impact Gender baance Impact farm eve: income jobs - or Impact company eve: income FAIDA s resources REMARKS Low production due to heavy rains; exporter ost orders; FAIDA had to identify new company; this inkage sti exists. Farmers cutivated improved, high productive variety; high farmgate price; ater end market fooded; sae price for entrepreneur ow. Intensive farmer training/ group formation; weak management and marketing skis starting entrepreneur endangers the inkage; number of farmers dropped because of drought. Focus on uaity improvement at farm eve; weak group eadership; coffee prices extremey ow; input suppy company suboptima. Extension is crucia for this new crop; uaity reuirements strict; exporter is ony buyer; inkage covers sma share of his business; good returns for farmers. 4 Best Practices and Strategies in Microenterprise Deveopment

5 Strengths and weaknesses Strengths Weaknesses Farmer Leve Creation of additiona/aternative market outets. Access to inputs, finance and extension services. Improvement of business skis. Economic empowerment of farmers and farmers groups. Formation of new and strengthening of existing farmer groups. May depend strongy on the company when no aternative outets exist. Side-seing undermines the trust among the partners and endangers deveopment of ong-term reationships. Some farmers are sti tempted to regard the distributed inputs and oans as gifts. Many expect that faciitator soves a probems and subsidizes a operations. Company Leve Guaranteed/ reguar access to raw materias and proper panning of operations. Deveopment of a network with farmers Assistance/ Training to improve business skis. Many tend to be too weak in panning/finance/ marketing to engage successfuy in a market inkage. Uneasiness about providing information and ca for assistance. Many expect that faciitator soves a probems and subsidies a operations. Faciitator Impement cost sharing arrangements to recover (part of) costs Focus on commercia sustainabiity since a parties know support is temporary. No bue print but fexibe approach. Easiy tempted to save the inkage and take up roes/responsibiities of farmers/ company Needs to have very strong commercia skis and ampe business experience. Faces high costs, yet does not reap any financia benefits when the inkage is successfuy sustained. Market Deveopment Deveopment of ong-term reations between farmers and company Emphasis on the creation of mutua benefits for farmers and company. Lower transactions cost for both the farmers and the company. We-suited to deveop niche markets such as aternative, high-vaue crops. Active pursue business opportunities under imperfect market conditions. End-markets can be voatie, thereby endangering the whoe scheme. Others Link to obby for an improved poicy environment. Active invovement of other organization from governmenta/ngo/financia sectors. Approach aows for repication by other organizations. There is a very weak ega backing for farmercompany contracts. Lessons earned The faciitator pays a crucia roe in deveoping a sustainabe Market Linkage. The faciitator shoud be particuary sensibe to support a inkage that is sustainabe and therefore, carried by the farmers and the company. FAIDA earned that it is very important to focus on merey faciitating the process and not to engage in any of the core activities of the farmers or the company themseves. The faciitator shoud never become a pure probem-sover or the every-ready saver of the scheme. The faciitator shoud stress that her/his partners need to compy with the agreed roes and responsibiities, and not simpy transfer their probems to the faciitator. Notwithstanding, the faciitator has to be fexibe and shoud THE FAIDA MARKET LINKAGE APPROACH: FACILITATING SUSTAINABLE LINKAGES BETWEEN SMALLHOLDERS AND AGRICULTURAL COMPANIES 5

6 hep to find soutions to probems that may arise, incuding conficts between the inkage partners. It is important that the faciitator stresses his exit strategy from the start. FAIDA is normay invoved for two or three years. The faciitator shoud not aow himsef to get trapped into a inkage that does not perform we and needs his continuous attention, whie more promising inkages are waiting to be expored. We want sunfower oi. Sunfower? I don t have it. Faciitator Entrepreneur Farmer 6 Best Practices and Strategies in Microenterprise Deveopment

7 In a successfu inkage, a parties are convinced right from the start that it brings them benefits. Farmers, company and faciitator need to be totay committed to the inkage. In addition, rather than going for uick, short-term gains, the parties shoud be wiing to engage in a ong-term reationship. One way to test if farmers and company are serious and convinced of the potentia benefits of a inkage, is to ask about their wiingness to contribute to the faciitators costs. A inkage stands stronger when both farmers and company eventuay have aternative outets and suppy sources at hand. In effect, a tota dependency reationship shoud be avoided. For instance, if a company goes bankrupt, farmers need to find an aternative market. Likewise, when the harvest fais, the company needs to find aternative suppiers to remain in business. The strength of the company is a decisive factor in a successfu inkage. When a singe farmer cannot fufi the reuirements, a inkage may not necessariy be in danger. However, when the company is in difficuty, the inkage is seriousy chaenged. The faciitator shoud check carefuy the company s performance and its abiity to engage fuy in a Market Linkage. He shoud especiay have a cose ook at how the company has ensured its access to end markets. The faciitator shoud make sure that the company beieves in the win-win situation, and is wiing to provide a fair dea for the farmers. Market Linkage is a good way of promoting and strengthening farmer groups. Farmer groups experience the simpe economic principe of economies of scae when they jointy organize input distribution, extension and output coection. This generay resuts in a strong basis to buid business-oriented farmer groups. With this basis firmy estabished, the groups can be further strengthened in areas such as savings and credit, coection of marketing information, reviewing new business opportunities etc. Additionay, groups coud work together for specific purposes such as obbying poicy makers, acuire donor funding, joint infrastructura investments, etc. The Advantages of Working in Groups THE FAIDA MARKET LINKAGE APPROACH: FACILITATING SUSTAINABLE LINKAGES BETWEEN SMALLHOLDERS AND AGRICULTURAL COMPANIES 7

8 There is no bue print Market Linkage approach. A Market Linkage is infuenced by conditions such as the characteristics of the product (i.e. storabiity, uaity reuirements) and the market (i.e. niche or buk market, fuctuating or stabe prices, one or severa buyers). In addition, the existing socia and cutura structures are euay important (i.e. strong community networks versus high esteem for individuaity; ways how farmers and company communicate with each other). The faciitator needs to be fexibe whie bringing the Market Linkage approach in practice. References FAIDA, Linking Farmers to Markets: Appying the Market Linkage Approach at Farmer, Company and Faciitator Leve (in prep.). Oxfam, Good Practices in Faciitating Linkages Between Farmers and Markets, Report of a Workshop hed in Harare, October Prepared by: John Bet RESOURCE BOOK PRODUCED THROUGH A PARTICIPATORY WRITESHOP ORGANIZED BY THE INTERNATIONAL INSTITUTE OF RURAL RECONSTRUCTION (IIRR) WITH SUPPORT FROM THE CITIGROUP FOUNDATION, SMALL ENTERPRISE EDUCATION AND PROMOTION (SEEP) NETWORK AND SWISSCONTACT. NOTE: The origina term used in this artice is Micro and Sma Enterprises (MSEs) 8 Best Practices and Strategies in Microenterprise Deveopment