One of the six key principles of an inclusive business relationship is related to transparency and fairness throughout the agricultural value chain. Is there open communication with clear commitments between parties in the chain, either formally or informally? Does the way companies and farmers’ groups do business contribute to less price volatility and more equitable sharing of risks and profits? Below, we give some examples about how transparency and risk-sharing are reflected in the governance of specific business cases brokered by Rikolto.
Cultivating more trust and transparency in the agricultural value chain
Indonesia: open communication in regular business meetings
In almost every case, we see that the initial phase, the process of matching up farmers and buyers, can take quite some time. But this is essential in order to build trust between the people involved and to ensure they all share the same vision of the future.
In Indonesia, our colleagues facilitate regular face-to-face business meetings, as they see this as the most effective communication channel. Buyers can hear directly from farmers what’s going on in the villages and what kind of technical support they need. This is also an opportunity for buyers to provide regular and up-to-date information on market prices and give feedback on product quality. It is during these meetings that they come to an agreement on what constitutes a fair price, when the produce will be delivered, volume quotas and risk-sharing.
With clear information on costs and quality demands, cooperatives are able to develop business plans to mitigate the risks involved.
“In the cocoa sector in Sulawesi, for example, we see that Kalla Kakao Industri provides clear information on differential costs, e.g. what it costs them to unload the cocoa beans at their warehouse, so that the farmers are aware of this aspect,” explains our colleague Peni Agustijanto. “Quality is also an important topic of discussion. Targeting specialty markets is more profitable but very demanding and entails more risks (if quality doesn’t meet the expected standards, produce will be rejected). With this information, cooperatives are able to develop accurate, detailed business plans to mitigate the risks involved.
During those business meetings, especially at first, we could see that farmers’ representatives were not used to communicating in a clear, professional, business-like way. It took them a while to grow into it.
Secondly, the farmers’ organisations had problems calculating the production and collection costs and, based on those, determining the selling price. And lastly, farmers involved in the export business have to cope with the complexity of importer-exporter partnerships: they have to find their way through the complex web of paperwork and registration. For all these issues, even after years of working together, Rikolto staff are still needed to provide general feedback and advice or more specific support,” adds Peni.
Tanzania: challenges in the non-cash sector
Our colleague Kain Mvanda outlines the situation in Tanzania: “In general, the biggest challenges for fair governance of chain relationships are in the non-cash crop sector. We can see that the pricing mechanisms are not well structured and not so transparent compared with cash crops. In the pulses sector, pricing is usually based on a mutual agreement with no formal contract.
In the pulses sector, pricing mechanisms are not well structured and not so transparent compared with cash crops.
The buyers will always tell farmers that they’ll buy at the market price prevailing at that particular time. Uncertainty about the weather and therefore harvests, the unpredictable export market and an unstable business policy put farmers at high risk. We are therefore investing, for example, in combining produce and storage facilities to ensure that farmers do not have to sell their produce immediately after harvest and can wait for the price to rise. This increases their bargaining power. But there’s still a lot of work to be done to achieve a more stable and organised business environment.”
Senegal: crucial involvement of the agricultural bank of Senegal
The relationship between a farmers’ organisation and a buyer in the rice sector in Senegal is a good example of how a more stable business environment has been created, leading to wins for both parties. SODEFITEX is a rice buyer: it has mills to process the paddy rice from farmers. The company regularly faced supply shortages: the rice mills were not operating non-stop and so the processing factory was not profitable. FEPROBA (Federation of Producers of the Anambé Basin) is a rice farmers’ organisation. Their members had trouble obtaining loans to buy the necessary inputs at the beginning of the season.
“We’ve now set up a seasonal meeting, in which the rice price is negotiated between SODEFITEX and the farmers’ organisation in the presence of the agricultural bank of Senegal and other partners such as Rikolto,” explains Mame Birame Ndiaye, Rikolto’s rice project manager in Senegal.
“The price is based on the operating account of the producers (FEPROBA) and that of the paddy processing plant. The result is that the price of paddy and the quantities to be delivered are set according to a fixed schedule.
Since the bank is assured a profitable market, it releases the credit to the farmers. This is necessary in order to obtain the production volumes required, guaranteeing stocks for the buyer. A formal contract between buyer and seller is signed in the presence of all partners.
“Since the bank is assured a profitable market, it releases the credit to the FEPROBA farmers. This is necessary in order to obtain the production volumes required, guaranteeing stocks for the buyer. A formal contract between buyer and seller is signed in the presence of all partners. Risks are also shared to a certain extent. The producers are responsible for stocks during transportation from the individual farmers to the storage facility, and the buyer is responsible from the moment the rice leaves storage and goes to the processing factory.”
In 2015, before this process was established, FEPROBA only cultivated one-third of the available rice land because of lack of access to inputs. Now that credit is guaranteed, producers are able to work all the available acreage. Trading volumes of paddy rice have almost doubled. In 2018, the members of FEBPROBA collectively sold 1000 MT of husked rice.
Honduras: minimum and maximum prices to reduce price fluctuations in horticulture sector
In Honduras there is a “price band” mechanism to reduce the uncertainty stemming from seasonal price fluctuations for fresh vegetables. The relationship between the Agrocomercial Consortium (five organisations of smallholder producers of fresh vegetables) and Supermarket La Colonia (the country’s largest food retailer) is based on a purchase intention agreement, in which they state that the price cannot drop below a minimum and cannot exceed a predefined maximum (the “price band”).
“The minimum price is set after calculating production costs (labour, inputs), plus loan interest, agricultural insurance and debt insurance included in the producer´s investment plant,” says our colleague Napoleón Molina. “The minimum price should ideally allow the producer to get at least 25% of net income after calculating these costs and of course having the market price of vegetables as reference. The maximum price is the minimum price +35%.”
The minimum price should ideally allow the producer to get at least 25% of net income after calculating these costs and of course having the market price of vegetables as reference.
The scheme works for 35 vegetables. Specific sales contracts are concluded based on the overall agreement. Prices are negotiated according to market conditions, offering producers a secure market throughout the year.
We see the same principles recurring in the case of the collaboration between the Belgian retailer Colruyt Group and the Congolese coffee cooperative Kawa Kabuya: there's a long-term agreement on price, offering a premium on the New York market price. At the same time, they have agreed on a minimum (2 dollars/pound) and a maximum price (2.5 dollars/pound), so that both parties are protected from market volatility.
Different crops, different contexts… Yet these examples show that we can overcome price volatility and uncertainty in the market through practical action and collaboration. We’re also eager to find out about other experiences!