IFC – NAMC Expert consultation on Contract Farming

1. IFC – NAMCExpert consultation on Contract Farming CHEETAH PAPRIKA Zambia, Malawi & Mozambique Mark Terken Johannesburg, May 2009

2. CHEETAH PAPRIKA

3. Contract Farming • What is an enterprise • Cheetah Paprika, business background • Contracting systems and evolving model • Example of NGO involvement • Improvements & recommendations • Control Side selling • How to Limit Input diversion • Trust CHEETAH PAPRIKA

4. Entreprise Definition; organized set of business activities aimed specifically at growth and profit a new, often risky, venture that requires confidence, initiative and resources CHEETAH PAPRIKA

5. Warning • ENTERPRISE requires the provision of goods or services • To a market which is within reach of the enterprise • Supplied in volumes in relation to the market size offered • Produced and delivered at price higher than the cost of production (= for profit) • Offered at a competitive price (your client has to earn with the goods or services supplied) • On a growth and sustainable basis CHEETAH PAPRIKA

6. Differentiate ‘ENTERPRISE’ from activities or organizations which do require continued support; • Local or international NGO supported projects or activities • Most humanitarian work • Relief programmes • Charities • Many donor projects and other public sector interventions ACTIVIES DEVELOPED WITHOUT THE UNDERSTANDING OF • LOCATION OF PRODUCTION IN RELATION TO LOCATION OF MARKETS • VOLUME AND QUALITY REQUIREMENTS OF MARKETS • VALUE (AND PRICE VOLATILITY) OF COMMODITIES • REAL COST OF PRODUCTION OF GOODS OR SERVICE CHEETAH PAPRIKA

7. CHEETAH PAPRIKA

8. Cheetah group of companies • Private company established in 1995 • Exporting Paprika and Chilli products from Zambia , Malawi and Mozambique • After establishing agronomical suitability and international competitiveness • Operating an outgrower scheme for the supply of raw materials • Peaking in 2003 with 20,000 Contracted farmers offering • An alternative cash crop with growth opportunities • Contracts with Guaranteed market, regional sales points • Price stability • Quality Seed and Agrochemicals on – part – credit • Training and extension services inclusive of materials CHEETAH PAPRIKA

9. Key Economic Factors for Cheetah as a business • Volume > 500,000 kg dry paprika per country • Quality standards set by clients • Competitive purchase price, to be able to compete on global markets • Can this be achieved with smallholder farmers in a complex and demanding social, political and economical environment? CHEETAH PAPRIKA

10. Peru US Politicians Export Market CHEETAH India Zimbabwe Structure Employees Spain CEO Brazil China Distribution Extension and Procurement Sales and Marketing Finance and Admin Quality Control Productions & Operations SA Govt Processes Competitors Issues International Competitors Issues Issues Competing for Market Issues Issues Issues Socio-Economics CHEETAH PAPRIKA

11. THE CHEETAH MODEL • Group formation • Dollar based pricing • Pre-season agreements – guaranteed minimum price and market • Seeds on credit (limited input packages) • Extension materials and training • Availability of agro-chemicals • Provision of packaging materials • Crop collection and depots close to farmers CHEETAH PAPRIKA

12. Contracting Systems • Direct through own extension network system, with or without group leaders / distributors • Traders • NGO’s and other collaborating partners CHEETAH PAPRIKA

13. Direct • Close collaboration with farmer groups • Intensive training per farmer group • Control over quality and quantity CON • High overhead costs per kg • Management intensive • Short term employment requirements • Cash payments in fields – risks CHEETAH PAPRIKA

14. Trader PRO • Little risk for Cheetah • Operate in remote, non viable areas for Cheetah CON • Intermediate Buyers • Short term advantage  Farmer may be neglected especially during seasons of low pricing • Unreliable - limited supply security even with contract in place CHEETAH PAPRIKA

15. NGO’s and other dev. Partners PRO • Rapid volume expansion • Potential for good quality  input finance • Central training of NGO’s extension staff • Sub-contracting procurement – absorption Extension and procurement costs CON • Subsidizing business costs – unfair competition • NGO’s vulnerability to political pressure • Different agenda, especially on exit CHEETAH PAPRIKA

16. CLUSA > POTC • Created production of 140,000 kg of high quality paprika within 3 year period, in one province • Strengths • Vast amount of resources; • Management & Extension personal • Large fleet of vehicles and motor cycles • Group formation & training • High level of input provision; seeds, agrochemicals and fertilizers • Central organization and crop collection CHEETAH PAPRIKA

17. CLUSA, POTC • Weaknesses • Temporary nature of NGO involvement, activity or project • Over extending credit to farmers • Providing too many services – creating a situation not realistic both to farmer and to Cheetah • Transferring NGO contract price, this meant a farm gate price 20-25% above real market value price (nice for farmers but not sustainable) • No long term agreement in place – year to year negotiations – uncertainty for Cheetah • The NGO making selection of the commodity, rather than collaborating farmers • No MOU detailing an exit strategy in place, basically 4 years work and a lot of capital (incl. public funds) lost… CHEETAH PAPRIKA

18. CHEETAH PAPRIKA

19. Evolving Cheetah model • From group contracting (1 per group) to individual farmer contracts • From mass recruitments to selected group formation and selection • From supply of seed and packaging materials on full credit basis to down payment system by farmer • From contracting and extension services provided by Cheetah personel to provision of these services by empowered groupleaders, Cheetah personel having role of coordination and technical training of group leaders • Reduction of company overheads by providing income to group leaders, who receive income based on seed sales / contracts, credit recovery and crop volumes / grading CHEETAH PAPRIKA

20. Why stop Zambian operation • Lack of Long Term Vision Government support to agribusiness • Limited enabling environment • Corruption • Lack of competitiveness on Global Market CHEETAH PAPRIKA

21. Improvements required on Cheetah model • Create greater efficiencies; concentrate farmer groups • Select farmers with greater potential and grow the ability of the farmer • Create a better understanding by the contracted farmers of the annual agreements in relation to product quality, grading, price and payment modalities • Ensure consistent payment within 1 week after purchase • Empower Group leaders to become Entrepreneurs • Provide higher level of inputs provided that credit recovery rates increase to acceptable levels (> 80%) • Grow farmer volume from 50 – 100 kg paprika to 250 – 500 kg • Government to assist in agreements enforcing, reduce side selling / side buying activities, create enabling environment CHEETAH PAPRIKA

22. Recommendations • Carry out feasibility on products and markets • Choose winning products, producers and markets, be realistic • donor & government support is key in dev phase • Agree with long term partners – decide on exit strategies in case of temporary support or funding, • Drop loosing products, producers and short term clients • Ensure that participants invest from own resources, even when they are small • Well managed and monitored extension staff CHEETAH PAPRIKA

23. How to limit side selling • Buy Farm gate • Offer highest price • Cash payment • Offer most inputs; seed, fertilizers, chemical, packaging • Offer training & materials • Be lenient in product grading ………….. CHEETAH PAPRIKA

24. ……… = WISH LIST • The above can only be realized if your business is market leader in extension, procurement, processing and marketing • … which creates a problem as perception of monopolist is created • … which in turn creates lack of government support & • … reduces Donor, NGO & project support = tight rope walk & demands balancing act CHEETAH PAPRIKA

25. How to avoid input diversion • Create Trust • Monitor, monitor, monitor • Well managed recording & data management systems in place • Ensure that farmer applies at appropriate rates and times and let him experience the reduced losses, growing margins over a period of 3 years CHEETAH PAPRIKA

26. How to promote trust • Be in the business for a number of years • Be visible • Offer a 2 way purchase agreement which is fully understood and agreed by farmer • Agree on grade & weight at time of transaction , not afterwards with results Issue clear Goods Received Notes • Pay within 7 days of product collection • Host field days & carry out regular training • Extension staff relationship CHEETAH PAPRIKA

27. CHEETAH PAPRIKA CREATING MARKETS TRAINING PEOPLE AND EMPOWERING COMMUNITIES ZIKOMO, Mark Terken CHEETAH PAPRIKA