IFC – NAMC Expert consultation on Contract Farming CHEETAH PAPRIKA Zambia, Malawi & Mozambique Mark Terken Johannesburg, May 2009

IFC – NAMCIFC – NAMCExpert consultation Expert consultation on Contract Farmingon Contract Farming

CHEETAH PAPRIKA CHEETAH PAPRIKA

Zambia, Malawi & MozambiqueZambia, Malawi & Mozambique

Mark Terken Johannesburg, May 2009Mark Terken Johannesburg, May 2009

CHEETAH PAPRIKACHEETAH PAPRIKA

Contract FarmingContract 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



EntrepriseEntreprise

Definition;

organized set of business activities aimed specifically at growth and profit

a new, often risky, venture

that requires confidence, initiative and resources


WarningWarning

• 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


Differentiate ‘ENTERPRISE’ from Differentiate ‘ENTERPRISE’ from activities or organizations which do activities or organizations which do

require continued support;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 group of companiesCheetah 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


Key Economic Factors for Cheetah Key Economic Factors for Cheetah as a businessas 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

Competitors

International Competitors

Export Market

Employees

Structure

CEO

Extension and Procurement

Sales and

Marketing

Finance and Admin

Quality Control

Productions & Operations

Distribution

Processes

Politicians

Govt

Competing for Market

Zimbabwe

Peru India

China

Brazil

SA

USSpain

Issues

IssuesIssues

IssuesIssues

Issues

Socio-Economics


THE CHEETAH MODELTHE 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


Contracting SystemsContracting Systems

• Direct through own extension network system, with or without group leaders / distributors

• Traders

• NGO’s and other collaborating partners


DirectDirect

• Close collaboration with farmer groups• Intensive training per farmer group• Control over quality and quantityCON • High overhead costs per kg• Management intensive • Short term employment requirements• Cash payments in fields – risks


TraderTrader

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


NGO’s and other dev. PartnersNGO’s and other dev. PartnersPRO• Rapid volume expansion• Potential for good quality input finance• Central training of NGO’s extension staff• Sub-contracting procurement – absorption

Extension and procurement costsCON• Subsidizing business costs – unfair

competition• NGO’s vulnerability to political pressure• Different agenda, especially on exit


CLUSA > POTCCLUSA > 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


CLUSA, POTCCLUSA, 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…



Evolving Cheetah modelEvolving 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

Why stop Zambian operationWhy stop Zambian operation

• Lack of Long Term Vision Government support to agribusiness

• Limited enabling environment

• Corruption

• Lack of competitiveness on Global Market



Improvements required on Cheetah Improvements required on Cheetah modelmodel

• 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


RecommendationsRecommendations• 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

How to limit side sellingHow 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 …………..


……… ……… = WISH LIST= 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


How to avoid input diversionHow 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


How to promote trustHow 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 PAPRIKACREATING MARKETS

TRAINING PEOPLE AND

EMPOWERING COMMUNITIES

ZIKOMO, Mark Terken

Documents

IFC – NAMC Expert consultation on Contract Farming CHEETAH PAPRIKA Zambia, Malawi & Mozambique Mark Terken Johannesburg, May 2009