2. The following presents synthesized findings from a recent study looking at global
experiences in developing and operating outgrower schemes
PURPOSE: To promote a better understanding of how to design scalable/sustainable outgrower programs
in Africa with broad impact.
KEY OBJECTIVES:
1. Assess global best practices in developing and operating outgrower schemes to identify key factors that
contribute to success/failure.
2. Identify underlying economics that drive businesses to contract with smallholders and some of the
specific challenges they face.
METHODOLOGY:
• Review of existing literature.
• Phone-based consultations to solicit direct input from stakeholders, emphasizing buyers in Asia and
Latin America.
• Development of an online survey to broaden/deepen stakeholder input and to generate
statistical data.
3. The following analysis is largely based on insights provided by leading practitioners
with broad experience in developing and managing outgrower schemes.
4. High agri-commodity prices and improving terms of agriculture trade provide production
opportunities that were until recently only marginally competitive.
The FAO price index (tracking 55 food commodities for export) rose 3.4 percent in January 2011, the 7th
consecutive month of price increases and the highest level recorded since tracking began in 1990.
Prices for major commodities including wheat, coarse grains, vegetable oils, and dairy products will be 15-45
percent higher over the next decade vs. 1997-2006 (OECD-FAO Agricultural Outlook 2010-2019).
Consumer preferences/trends (i.e., fair trade and organics, supply chain sustainability, product
differentiation, “origin” branding, traceability) increasingly impacting buyer behavior
Recent mainstream moves toward ethical/sustainable sourcing by leading multinationals such as Cadbury,
Starbucks, Ben Jerry’s, Green and Black’s, Nestle, Sainsbury’s, Tesco and Tate Lyle.
Growth of self-regulation (e.g. Unilever, Starbucks, Nestle) and multi-stakeholder initiatives
(e.g., RSOP ) committed to externally defined standards
“By 2020, we will link more than 500,000 smallholder farmers and small-scale distributors into our supply
chains.” – UNILEVER
Increasing purchasing power, rapid urbanization and growing integration of regional markets fueling
stronger local and regional market demand
Africa’s urban population will reach 742 million by 2030, an increase of 152% from 2000 (UN-HABITAT)
Improving infrastructure (e.g., ICT, ports) and business environment in many countries
Among the top 30 top Doing Business reformers globally, one-third are in Sub-Saharan Africa (Doing
Business 2011).
Proliferation of public/private funds in recent years targeting large-scale investments in Africa’s
agriculture sector
Examples of recently launched private equity funds include the Silverlands Fund, the African Agricultural Fund,
the Atlantic Coast Regional Fund,African Agricultural Capital Fund, ManoCap Soros Fund,Agri-Vie Fund,
Beltone Private Equity, Emerging Capital Partners Africa Fund III, Actis Africa Agribusiness Investment Fund,
and FanisiVenture Capital Fund
Several trends are leading to growing opportunities for smallholder farmers
to link to markets via outgrower schemes:
50
90
130
170
210
250
06 07 08 09 00 01 02 03 04 05 06 07 08 09 10 11
FAO Food Price Index
SOURCE: FAO, January 2011
210
250
FAO Food Price Index
2002-2004=100
125
200
275
350
425
J F M A M J J A S O N D J
Food Commodity Price Indices
Meat Dairy Cereals
Oil Fats Sugar
SOURCE: FAO, January 2011
2002-2004=100
5. FIRM
FARMER
• Difficulties acquiring land for commercial production at
sufficient scale due to policy and/or resource restrictions
• Constrained access to qualified, affordable labor
• High exposure to risks related to ruptures in supply
(i.e., crop failure, import delays/bans)
• High costs of importing raw materials vs. local sourcing
• High fixed costs (infrastructure, equipment) and variable
costs (labor, inputs) related to direct commercial production
• Fragmented supply chains that lead to high procurement
costs and low product quality
• Proliferation of stringent product quality/safety/
procurement regulations and standards
• Underutilization of land and labor
• Poor access to affordable finance adapted to seasonal/
household needs
• Limited access to affordable/quality seeds, fertilizers,
pesticides due to weak competition and demand in input
markets
• Limited exposure to technology/productivity innovations
(extension advice, training, improved tools, etc.)
• Poor access to irrigation infrastructure/equipment
• Limited access to timely/reliable market and price
information
• Limited and unreliable access to outlet markets
• High exposure to market/production risks
(i.e., prices, crop failure)
Buyers and small-scale farmers face formidable challenges in responding to
market signals/demands
Inability to cost-effectively and reliably procure
products/raw materials of sufficient
volume/quality
Weak productivity and poor output quality
hinders smallholder competitivity
and market access
HIGH LEVELS OF MARKET UNCERTAINTY
LOW PROFITABILITY
6. Outgrower schemes are driven by stakeholder interest in achieving a shared
objective – reducing overall market uncertainty while maximizing ROI
If structured and
managed effectively,
outgrower schemes
=
WIN-WIN
BUYERS NEED
FARMERS OFFER:
cost‐effective, secure and reliable
sources of raw materials that
can meet market
specifications in terms
of quality and volume
FARMERS NEED
BUYERS OFFER:
1. access to assured markets;
2. affordable input credit;
3. technical skills and innovations
that will help them satisfy
market requirements.
• inputs
• credit
other financial
services
• training/skills
transfer
• post-harvest
logistics
• transport
• land
• labor
• access to
produce
7. Outgrower schemes are organizational frameworks designed to meet essential needs
via sharing economic risks/rewards to mutual benefit. Unique benefits can include:
TO BUYER
TO FARMER
• Ability to develop reliable, local supplies of raw materials
that meet rigorous standards (i.e., size, color, shape,
consistency, quality) and volume requirements
• Overcoming land access constraints
• Cost-savings via reduced investment in centralized
production (i.e., land, infrastructure, equipment, labor)
• Enhanced control over supply (i.e., variety, quality control,
timing, food safety, traceability) vs. traditional sourcing
arrangements
• Enhanced flexibility to target new market segments with
specific qualitative specifications (e.g., fair trade, organic)
• Diversifying production risks (e.g., plant disease,
microclimate) via dispersed and diverse production areas
• Greater sourcing flexibility to respond to market signals
• Improved public relations with host governments and the
public sector
• Enhanced transactional efficiencies and reduced
procurement costs via direct sourcing linkages
• Access to new revenue streams via input supply and
other services to farmers
• Improved access to credit for the sourcing of needed
inputs, or access to pre-financed inputs
• Access to new, higher value markets
(e.g., processing, export, niche)
• Improved access to extension services and post‐harvest
technical assistance and range of embedded services from
buyer and other partner service providers
• Better access to new technical and management skills
required to satisfy market requirements
• Improved access to market and pricing information
• Potential for reduced, direct fixed (e.g., equipment) and
variable costs (e.g., inputs, transport)
• Potential for higher income due to improved yields and/or
quality related price premiums
• Greater potential for higher farmgate prices via direct
supply linkages to buyers
• Access to guaranteed markets and improved pricing
reliability and transparency
8. Outgrower schemes can also present unique challenges for participating
stakeholders. These include:
FOR BUYER
FOR FARMER
• Risk of farmer side-selling to other buyers and/or
strategic default
• Risk of farmer defection/crop switching
• Managing price volatility and ensuring attractive
farmgate price
• Identifying/fielding sufficient number of qualified
extension agents
• Higher transaction costs with geographically dispersed
smallholders
• Difficulties with product delivery timing/volumes
• Slow farmer uptake of new productivity-enhancing
technologies
• Identifying suitable/sufficient production areas/
farmers (proximity, skills) for scale up.
• Low levels of smallholder productivity
• Over-dependency on a single buyer as market outlet
• Over-concentration on a single crop/product
• Delayed payment from buyer following product delivery
• Contract price falling below market price
• Higher costs (i.e., labor) and risks associated with
testing/adopting productivity-enhancing innovations
• Buyer failure to purchase contracted volumes
• Meeting stringent buyer standards (i.e., quality,
food safety)
9. Outgrower schemes encompass incredible diversity in both products and the way
they can be structured and managed
• 5 basic organizational models illustrated above offer a useful point of reference for conceptualizing full range
of organizational arrangements.
• A scheme’s structure and the level of a buyer’s investment depends largely on:
① nature of the product (i.e., high vs. low value/volume);
② input intensity and technical sophistication required for production/processing; and
③ complexity of end market requirements (i.e., health/product safety standards, packaging/labeling
requirements).
• Generally speaking, crops/products targeting higher value markets tend to be more input-intensive, requiring
more buyer investment in outgrower production.
• Organizational/operational structures within a given outgrower scheme are not exclusive to one particular
model and often transition over time as the project develops from start-up to scale up.
• Increasing buyer investments in outgrower production decreases risks of inconsistent
supply and side-selling.
increased buyer investment
increased risk of inconsistent supply
Nucleus-Estate ModelMultipartite Model
MFIs/
Rural Banks
NGO/
gov’t agency
input
suppliers
buyer
buyer
buyer
Centralized ModelIntermediary Model
buyer
Informal Model
inputs
outputs
processing
buyer
10. SUMMARY: Speculative, seasonal sourcing on an ad-hoc or semi-
formal basis with minimal firm/farmer coordination; little to no inputs or
services provided to little to no product specification by buyers
KEY CHARACTERISTICS
• Based on spot market transactions
• Limited firm/farmer coordination
• Little to no product specification
• Buyer sources directly from individual farmers
PROS
• High level of sourcing flexibility (i.e., low-cost supplier switching)
• No advanced capital and input/technical support required
CONS
• Limited control over production (i.e., products, varieties, quality);
• Significant risk of supply ruptures
• Strong buyer competition
• Relationship based purely on price signals
Common Organizational Structures - Informal Model
buyer
Input/Credit
Extensionservices
Useofcontracts
Farmergrouping
Growermanagement
Centrlaizedproduction/
processing
Post-harvestlogisitcs
(packaging,transport)
Never
Rarely
Somtimes
Often
Always
11. Common Organizational Structures - Intermediary Model
Input/Credit
Extensionservices
Useofcontracts
Farmergrouping
Growermanagement
Centrlaizedproduction/
processing
Post-harvestlogisitcs
(packaging,transport)
Never
Rarely
Somtimes
Often
Always
buyer
SUMMARY: Semi-formal to formal sub-contracting by buyers to
partner intermediaries who manage outgrowers provide services;
limited direct firm/farmer interaction; enhanced but limited product
specification by buyers
KEY CHARACTERISTICS
• Low degree of explicit firm/farmer coordination vs. informal
• Product specifications often set by buyer in advance
• Appropriate for basic or semi-complex products and small-scale
agribusiness
• Farmers may participate individually or through farmer groups
• Contract transaction is often operated through intermediaries
(e.g., lead farmers, farmer groups, traders, buying agents)
• Loose contract arrangements, often verbal
• Relationship most often based on trust and price signals
PROS
• Marginally reduced supply chain risks
• Minimal buyer investment in technical/financial support
• Marginally improved supply chain management vs. informal
• Low-cost switching to new partners
CONS
• Potential for reduced buyer visibility among farmers; high risk of
side-selling
• Marginal control over production (i.e. quality) and high uncertainty in
supply chain management (i.e., timing, volumes)
• Due to contracts informality, no mechanisms for crop insurance
EXAMPLE: Blommer Chocolate/Olam International (SAFOB) with
27,000 cocoa smallholders in Indonesia
12. SUMMARY: Buyer sources from farmers or farmer groups, but TA/
input/credit provision grower management via third parties; often
limited direct firm/farmer coordination; higher level of product
specification necessitates close monitoring/supervision of production
KEY CHARACTERISTICS
• Often operated through cooperatives and farmer groups
• Appropriate for annual crops (paddy, vegetables, cotton) to perennial
crops (fruit, cashew-nut, coffee) and medium- to large-scale buyers
• Often high value/low volume products targeting specialized markets
• High level of collaboration to monitor and supervise farmer
production process
PROS
• Limited investment reduced costs due to partner cost-sharing
• reduced risks (vs. commercial production) due to geographic disperal
of outgrowers
CONS
• High risk of side-selling due to reduced buyer visibility among farmers
• No core production, 100% reliant on outgrower production
• Difficulties in managing multi-partner platform and keeping
interests aligned
Common Organizational Structures - Multipartite Model
Input/Credit
Extensionservices
Useofcontracts
Farmergrouping
Growermanagement
Centrlaizedproduction/
processing
Post-harvestlogisitcs
(packaging,transport)
Never
Rarely
Somtimes
Often
Always
MFIs/
Rural Banks
NGO/
gov’t agency
input
suppliers
buyer
EXAMPLE: SABMiller’s “Progress Through Partnership” program with
8,000 barley outgrowers in India
13. SUMMARY: Buyer provides TA/inputs and production services (e.g., tillage,
spraying) directly, purchases the crop, and handles many post-harvest
activities (i.e., processing, packing); farmers provide land labor; high degree
of firm/farmer coordination; strict product specifications monitored by in-
house technical staff; often direct link to processing
KEY CHARACTERISTICS
• High level of firm/farmer coordination; direct buyer contact with farmers
and/or farmer coops
• Strict product specifications set by buyer in advance
• Appropriate for large-scale enterprises and complex products
(e.g., perennial and high value/low volume, capital intensive crops
• High degree of production supervision by in-house technical staff
• Outgrower production typically linked to downstream value-added
processing
PROS
• Enables high level of control over production (i.e., quality, varietals,
crop management)
• Increased farmer dependency and frequent firm-farmer interaction
(facilitating close farmer monitoring and direct feedback) encourages
loyalty and curtails side-selling risks
• Improved flexibility to respond strategically to market signals
CONS
• Requires high level of investment in localized infrastructure, technical
staffing and pre- and post-harvest logistics
• Reduced flexibility due to high investments in
outgrowers and associated switching costs
Common Organizational Structures - Centralized Model
Input/Credit
Extensionservices
Useofcontracts
Farmergrouping
Growermanagement
Centrlaizedproduction/
processing
Post-harvestlogisitcs
(packaging,transport)
Never
Rarely
Somtimes
Often
Always
buyer
EXAMPLE: Pif-Paf Alimentos sourcing broilers under 600 contracted
farmers in SE Brazil; Hayleys Group sourcing from 10,000 gherkins/
pepper outgrowers in Sri Lanka; Nestle Pakistan sourcing from 150,000
dairy farmers.
14. SUMMARY: Buyer operates centralized production and processing
(estate), supplementing throughput via direct contracting with peripherally-
located outgrowers; buyers often own or control land used by farmers, who
supply labor; buyer provides TA/inputs/credit/services and closely monitors
and supervises production via in-house technical staff
KEY CHARACTERISTICS
• High level of direct buyer contact with farmers and/or farmer coops
• Sourcing arrangements based on formalized contracting with farmers
• Pricing typically based on floor with actual purchasing price fixed annually
• Sponsors own or control land used by farmers
• Often linked to privatization of state-owned farms, commercial
concessions, or land resettlement programs
• Rigorous product specifications set by buyer in advance
• Most appropriate multinationals and capital intensive crops like perennials
(e.g., oil palm and rubber)
• Outgrower production ensures sufficient throughput for downstream
value-added processing
PROS
• Highest level of control over supply chain; simplified TA/extension/farmer
oversight
• Lowest risk of supply ruptures and side-selling
CONS
• Requires heavy investments in production (i.e., land, labor)
• Highest crop-related risks due to geo-concentration of production
• Limited flexibility in selecting outgrowers
• Commitment to purchase 100% outgrower
output raises market price risks
Common Organizational Structures - Nucleus-Estate Model
Input/Credit
Extensionservices
Useofcontracts
Farmergrouping
Growermanagement
Centrlaizedproduction/
processing
Post-harvestlogisitcs
(packaging,transport)
Never
Rarely
Somtimes
Often
Always
buyer
EXAMPLE: Wilmar International manages 34,000 hectares of
smallholder oil palm production in Indonesia
15. Seven key aspects can be used to define these models and any of the myriad
hybrid variations that exist
1.
Input/Credit
2.
Extension
Services
3.
Use of
Contracts
4.
Farmer
Grouping
5.
Grower
Management
6.
Centralized
Production/
Processing
7.
Post-harvest
Logistics
BUYER CONSIDERATIONS
How input-intensive is the target product/crop? Are specific inputs necessary to meet buyer or market specifications?
Commodities destined for specialized export markets or for downstream processing (e.g., fine beans, chili peppers, pineapples, poultry) typically require specific
inputs (i.e., seed varieties, high quality fertilizers and other agrochemicals, animal feeds, medicines) to achieve buyer/market requirements.
How competitive are local input markets? Are required inputs available on the market at affordable prices? If not, what are possible
direct/indirect delivery mechanisms?
Extensive state involvement in input markets and burdensome regulations can restrict farmers’ access and/or the development/introduction/use of specific inputs.
How developed is the local financial services sector? Are there rural banks or other institutions that cater to smallholder farming
communities? What percentage of farmers use formalized credit?
In the absence of formalized credit, buyers may need to consider providing credit directly to their outgrowers and ensuring effective systems for repayment.
What is the extent of demand for the target crop/product in local/regional/global markets? Does the investor benefit from
competitive advantage in sourcing?
If a “captive” market where outgrowers have few alternative market outlets, relying on direct input credit is less risky due to decreased side-selling risks
BUYER OPTIONS
1. Partnering with credible national/regional research institutes, agricultural universities (e.g., SAB Miller/India);TicoFrut/Costa Rica) and input supplier networks
where possible can be a cost-effective way to provide required inputs to outgrowers.
2. Distributing inputs directly via close-proximity outlets (ICT Limited/India) facilitates: 1) new revenue streams; 2) increasing farmer trust and loyalty; and 3) timely
delivery of required inputs and payment.
3. Providing inputs on credit at the start of the planting season (either at prevailing market prices or at a subsidized price), then recouping the loan by: 1) deducting
the value of the inputs; or 2) obtaining full cash repayment at harvest. In either case, efforts to manage side-selling risks via maximizing firm-farmer interaction are
essential.
4. Partnering with financial institution, using market power to secure formalized credit, thus avoiding default risks
(e.g., ITC Limited/State Bank of India)
16. Seven key aspects can be used to define these models and any of the myriad
hybrid variations that exist
1.
Input/Credit
2.
Extension
Services
3.
Use of
Contracts
4.
Farmer
Grouping
5.
Grower
Management
6.
Centralized
Production/
Processing
7.
Post-harvest
Logistics
BUYER CONSIDERATIONS
How complex is the product/crop? What technology and level of skills are required to produce the product/crop competitively (i.e.,
yield) and to buyer/market specifications? What is the existing skill-base among local farming communities?
Products/crops destined for specialized export markets or for downstream processing (e.g., cocoa, fine beans, oranges, cashews) typically require specialized
technical advisory and modern agronomic practices (i.e., cropping techniques, crop management, post-harvest handling) to achieve buyer/market requirements.
The introduction of productivity-enhancing innovations (e.g., seed varieties, irrigation equipment), in particular, often necessitates extensive training to ensure
appropriate/effective uptake of input package by farmers.
When introducing new products, buyers might start with more fault tolerant crops so that farmers can “ramp up” to more input-intensive ones over time.
How effective are state-run extension services? Are there enough agents to cover target outgrower communities and do agents
possess the required technical skills? What is the appropriate agent/farmer ratio? What are optimal services delivery mechanisms?
State regulations in some countries may restrict direct provision of services by the private sector or otherwise mandate central role for national agencies.
Public extension agencies are typically underfunded and understaffed, fielding agents who are poorly equipped to assist farmers. Agents may need training to
ensure that they possess the appropriate skills to transfer technologies and knowhow effectively to farmers.
Buyer may not have sufficient in-house capacity (i.e., technical, resources) to deliver effective extension directly.
BUYER OPTIONS
1. Developing in‐house extension staff and related infrastructure (e.g., demonstration plots, training centers). Benefits may include: 1) improved farmer oversight
related to product quality (i.e., traceability) and compliance with food safety regulations (i.e., Global GAP, ISO:22000); and 2) increased firm visibility and credibility
among farming communities.
2. Outsourcing TA services via subcontracting to private companies, NGOs, and/or state-run agencies. Benefits may include: 1) cost-savings via outside donor funding;
and/or 2) improved farmer technology uptake and performance due to higher competency of partner vs. firm. Under this arrangement, maintaining high firm
visibility among outgrowers is critical to sustaining credibility and keeping side-selling in check.
3. Partnering with local academic institutions (e.g., FieldFresh and Punjab Agriculture University) can help facilitate a continuous
cycle of RD and access to the best trained talent for scale up.
17. 1.
Input/Credit
2.
Extension
Services
3.
Use of
Contracts
4.
Farmer
Grouping
5.
Grower
Management
6.
Centralized
Production/
Processing
7.
Post-harvest
Logistics
Seven key aspects can be used to define these models and any of the myriad
hybrid variations that exist
BUYER CONSIDERATIONS
What is the scale of anticipated buyer investment in outgrower production (i.e., inputs, technical assistance, logistics)
and how can formal/informal contracting be used effectively to mitigate risks?
• For capital-intensive perennial crops, contracts typically take the form of formal, multi-year agreements between buyer and outgrowers to account
for extended gestation cycles, higher investments, and delayed ROI.
• Elsewhere, formalized contracts may offer few advantages vs. more informal agreements (e.g., MOUs) given weak enforcement measures and
common bias among local government officials in protecting farmers in cases of contract default.
What is the level of education/literacy and contracting experience among target outgrower communities?
• To maximize transparency and avoid disputes, contracts should be kept simple and straightforward, with easily understood, measurable indicators
for meeting technical standards/requirements.
How can farmer pricing expectations be managed effectively?
• Whether based on either a pre‐negotiated fixed price or on a flexible arrangement (one in which the price is fixed to the market, but can fluctuate
up/down based on other variables such as quality attributes), pricing mechanisms should be transparent and as straightforward as possible. Ideally,
they should be tied to some sort of externally fixed benchmark (e.g., import/export parity price) to which all parties agree to in advance.
BUYER OPTIONS
1. Fixing guaranteed price/volume minimums, where feasible, and flexible price setting (i.e., negotiating prices at the time of delivery) can greatly improve
farmer interest in participation and long-term loyalty.
2. Pursuing direct, participatory discussions with farmers (with participation from non-judicial community leaders and local government
representatives, where feasible) during contract development and finalization raises transparency and helps
build consensus among farmers on contract terms, thereby reducing default rates.
18. 1.
Input/Credit
2.
Extension
Services
3.
Use of
Contracts
4.
Farmer
Grouping
5.
Grower
Management
6.
Centralized
Production/
Processing
7.
Post-harvest
Logistics
Seven key aspects can be used to define these models and any of the myriad
hybrid variations that exist
BUYER CONSIDERATIONS
How can the firm efficiently/effectively manage services delivery (e.g., technical assistance, logistics) and procurement
with geographically dispersed, individual farmers while keeping costs in check?
Engaging with individual outgrowers at the group level via farmer associations or other grouping arrangements can help buyers reach important
economies of scale.
Farmer groups can take on a range of roles including the monitoring of technical standards, coordinating the harvesting schedule, facilitating
members’ credit access, building consensus among farmers on contract terms.
What percentage of target outgrowers is represented by existing farmer groups and how effective are these groups in
managing member resources? Is membership a precondition of eligibility?
• Many existing farmer cooperatives are plagued by poor leadership and weak member cohesion. Significant investments in strengthening their
capacity is often necessary to ensure their role as reliable partners.
What are possible alternative arrangements? Are there advantages to be gained by looking beyond traditional
farmer cooperatives?
BUYER OPTIONS
1. Leveraging existing farmer groupings and providing capacity-building support (either directly or via third-parties) to improve services delivery.
2. In cases where traditional farmer organizations do not yet exist or fail to offer viable organizational conduits, buyers can take it upon themselves
to organize individual farmers from scratch into commercially‐oriented farming groups, in cooperation with local NGOs, state agencies, or other
third parties.
3. Identifying and working through commercially-oriented “lead farmers” as intermediary agents, who are
contracted to develop and manage their own sourcing arrangements with individual outgrowers.
19. 1.
Input/Credit
2.
Extension
Services
3.
Use of
Contracts
4.
Farmer
Grouping
5.
Grower
Management
6.
Centralized
Production/
Processing
7.
Post-harvest
Logistics
Seven key aspects can be used to define these models and any of the myriad
hybrid variations that exist
BUYER CONSIDERATIONS
How to identify the right farmers to participate from the outset so as to avoid problems down the road?
• The process of selecting the right growing areas and farmers is a crucial step during the development and later scale up stages and should be
handled directly by the buyer.
• Favorable farmer proximity should be among priority criteria so as to minimize costs related to input/service provision, farmer oversight, and post-
harvest logistics.
• Concentrating in isolated areas where farmers have limited alternative income-generating opportunities significantly increases a project’s chance
for success by reducing side-selling risks and increasing farmer commitment via dependency.
What is the best way to secure and sustain farmer commitment to the relationship over the medium- to long-term?
• Price volatility and strong competition from other buyers are just some of the challenges that can weaken farmer loyalty and encourage side-selling.
• Where possible, offering price premiums over market is often the most effective way to combat such challenges. Other strategies include
exclusivity programs and buyer differentiation via brand value or service delivery.
BUYER OPTIONS
1. Developing a predetermined set of criteria to ensure optimal selection of suppliers at inception.These can include: 1) close proximity to buyer and/
or other farmers, facilitating supervision and reducing transport costs; 2) demonstrated capacity for reliability; and 3) favorable repayment track
record. Replacing non-performing farmers helps promote optimal performance.
2. Raising firm visibility via: 1) bundled services offerings (i.e., extension, inputs, market information) directly or via partners; 2) staging town hall
meetings and other localized events at regular intervals; or 3) setting up localized, transparent weighing systems and ensuring prompt payment
increases buyer credibility and reinforces buyer/farmer bonds, as does developing good relations with local leaders.
3. Loyalty programs that reward farmers for improved performance (i.e., quality) or consistent supply can
be equally effective in sustaining farmer commitment.
20. Seven key aspects can be used to define these models and any of the myriad
hybrid variations that exist
1.
Input/Credit
2.
Extension
Services
3.
Use of
Contracts
4.
Farmer
Grouping
5.
Grower
Management
6.
Centralized
Production/
Processing
7.
Post-harvest
Logistics
BUYER CONSIDERATIONS
What is the competitive advantage of employing outgrowers vs. developing/expanding commercial production
or sourcing from commercial farmers?
• Under this scenario, a firm owns/operates a commercial farm and/or processing center. It leverages outgrower capacity: 1) to meet
specific volume requirements that go beyond core production capacity; and/or 2) to secure sufficient and consistent throughput and to
minimize ruptures in supply. In cases where access to land is limited, employing outgrowers might be the only feasible option.
• Advantages can include lower cost production per hectare due to lower capital requirements and higher achievable productivity and/or
better quality output due to the intensive management of small areas of production.
Are there a sufficient number of farmers in close proximity to the commercial farm/processing center?
• The proximity of participating outgrowers relative to the core farm/processing center is critical. Long distances can make transport and
other pre- and post-harvest logistics prohibitively expensive.
• Price fluctuations related to fuel, electricity and other variable costs can bring an added element of uncertainty that can easily threaten
the reliability of supply and a project’s economic viability.
BUYER OPTIONS
1. Conducting a feasibility study evaluating the relative benefits of direct production vs. outgrower sourcing.This would include among
other elements an assessment of local land tenure policy and land suitability.
2. Identifying all costing elements (i.e., production, logistics, infrastructure) in advance and running the numbers to ensure the economic
viability of the project before any investments are made.
21. 1.
Input/Credit
2.
Extension
Services
3.
Use of
Contracts
4.
Farmer
Grouping
5.
Grower
Management
6.
Centralized
Production/
Processing
7.
Post-harvest
Logistics
Seven key aspects can be used to define these models and any of the myriad
hybrid that exist
BUYER CONSIDERATIONS
What level of post-harvest support services do outgrowers need to successfully meet buyer/market
requirements (i.e., grading, food safety)?
• The extent of a buyer’s involvement in providing postharvest logistical support such as grading, packaging and labeling, traceability, cold
chain infrastructure, and transport largely depends on the type and relative value of the end market product.
• Such activities typically require a level of technical/managerial knowhow and sophistication that is rarely found among smallholder
farmers or farmer associations.Thus, buyers are obliged to take on this role.
Will existing infrastructure (e.g., road networks, electrical grids) be able to support efficient and cost-effective
logistical services? What upgrades are needed?
Will value chain margins be sufficient to support significant investments in related infrastructure (e.g.,
localized handling centers, cold chain transport/storage) and staffing? What about variable costs?
• Anecdotal evidence suggests that buyers often underestimate the high costs associated with providing logistical support to
geographically dispersed farmers. Mounting costs can significantly and rapidly undermine a firm’s bottom line.
BUYER OPTIONS
1. Maintaining good relations with local and national governments to better secure support for needed infrastructural upgrades that can
help reduce costs and streamline post-harvest procedures.
2. Providing training directly (or indirectly via credible partners at the local level) to farmers/farmer groups
and rudimentary equipment to enable them to facilitate basic procedures (e.g., tagging/tracing, grading, handling) as cost-cutting measure.
3. Conducting a full costing analysis in advance so that all costs can be incorporated into the planning phase.
22. The following is based on feedback to an online survey of buyers with experience
in operating outgrower schemes:
Q: Which crops are best suited to outgrower production?
A: Due to their “captive” nature and reduced side-selling risks, crops “targeting specialty markets” were deemed best suited to
outgrower schemes.
Q: What is governments’ role in promoting outgrower development?
A: Respondents highlighted as a top priority the need to upgrade production and marketing infrastructure, which they see as
“critical” to the success of their outgrower programs.
Q: What is the best way to promote and sustain farmer participation?
A: Maintaining a constant field presence and paying price premiums is the most effective ways to maintain farmer loyalty.
Q: What cost would you consider appropriate to pay for a timely and consistent supply of raw materials?
A: Four out of five respondents indicated a willingness to pay “up to five percent above average market prices” for a timely and
consistent supply of raw materials. A large majority were willing to pay up to 10% above average market prices.
Q: How important is technical extension to your outgrower scheme?
A: Two-thirds of respondents indicated that technical extension services were “critical” in enabling them to source the quality and
volume they required.
Q: What cost would you consider appropriate to pay for effective extension?
A: A majority of respondents indicated a willingness to pay up to 10% of the value of the good sourced from smallholders for
effective extension.
Q: What are the biggest challenges to scaling up?
A: Limited access to qualified extension agents (and physical distance (i.e., logistical costs) were rated as
the most important factors impacting the size of their outgrower schemes.
23. While avoiding over-regulation, host governments have a key role to play in helping
firms to develop sustainable outsourcing arrangements with smallholders
CONSTRAINT
PROPOSED ACTION
Poor infrastructure
New spending on infrastructural upgrades (i.e., water, roads, power and communication),
particularly in rural areas, will make it easier for buyers to do business with rural farmers by
reducing transaction costs and improving the competitivity of locally produced goods.
Slow pace of reforms
Expediting the reform process to create a safe and predictable environment for businesses will
catalyze future investments in the agriculture sector as policy barriers are lifted and firms are
encouraged to explore new opportunities.
Weak legal frameworks
Modernizing rules an regulations governing contracting and ensuring that fair and transparent
enforcement mechanisms are in place to protect the interests of all stakeholders will make it
easier for buyers to formalize sourcing relationships with smallholders via contract farming.
Underdeveloped financial
and insurance markets
Stimulating markets for rural credit and crop insurance will improve farmer access to working
capital loans for inputs and risk management tools. This includes supporting the growth of
buyer-driven credit schemes tied to purchase contracts.
Opaque and inefficient
input markets
Lifting restrictions on private sector participation and/or reducing government involvement that
crowds out private investments can stimulate competition in input markets and make seeds,
equipment, fertilizers, etc. more affordable/accessible for farmers.
Insufficient investment
promotion
Offering targeted incentives (e.g., tax breaks, land concessions) to buyers can help galvanize new
investments in smallholder production. This is particularly true for perennial crops and new sub-
sectors that have yet to be demonstrated as commercially viable.
Lack of Research/
Extension
Increasing investments in research and extension hardware and services will strengthen
smallholders’ capacity to respond to buyer needs and facilitate buyer engagement.
24. High risk of side-selling due to well-developed local/export markets
Technical expertise/assistance is not required to meet market requirments
Specific varieties are not required to meet buyer/market specifications
Commodity is not input intensive
Smallholder production has no advantage over commercial production
Poor potentail for price differentials (i.e. quality, certifications)
Crop has strong links to food security
low
suitability
high
suitability
Staple crops
(millet, sorghum, wheat, maize, rice, barley, teff)
Tubers/Pulses
(sweat potato, cassava, sugarcane, etc.)
Legumes
(haricots beans, groundnuts, soyabeans, cowpeas, etc.)
Oil Seeds
(sesame, rapeseed, sunflower, castor, etc.)
Tree Crops
(coffee, tea, cocoa, cashew, mango, banana, orange, etc.)
Horticulture
(Strawberry, tomato, garlic, onion, chili pepper, paprika, etc.)
Cash Crops
(tobacco, cotton, etc.)
Livestock/Poultry/Aquaculture
(pigs, chickens, fish, prawns, etc.)
A mini-diagnostic assessing the relative suitability of specific crops to outgrower
production suggests that indeed some crops are more suitable than others
1. Product with limited market outlets (e.g., those targeting specialized, downstream markets) have a lower risk of side‐selling.
2. Products derived from tree crops can be poorly suited to outgrower production, unless the initial capital investment (including costs of caring for saplings) is
assumed by the buyer. This due to, limited intercropping opportunities (initially) and extended ROI lead times (i.e., 5-6 years to reach commercial production).
3. Crops that generate a high premium for improved quality (including most fruits and fresh vegetables, coffee, cocoa, tea, tobacco, cotton, and paprika) are generally well
suited. In some cases, small-scale producers may have a competitive advantage due to higher levels of quality that are achievable under small areas of production.
4. High volume, low value products (including many staples and some root crops) are particularly sensitive to transport costs and side‐selling risks and are generally
unsuitable for outgrower schemes, unless directly linked to downstream value added processing.
5. Low volume, high value products such as fresh produce and processed non‐traditional crops generate higher value chain margins to
support upstream investments, and thus, are generally more suitable for outgrower production.
25. Which sub-sectors and/or crops offer promising prospects for outgrower
development in Africa
STAPLE CROPS
• Productivity improvements in recent decades have driven investments by several multinationals in
sorghum as a commercially viable alternative to imported barley for malted beverages (Digaeo in
Ghana; SABMiller in East Africa). It also holds strong potential as a key ingredient for animal feeds due
to its high nutrient content, particularly as costs of alternatives (e.g., corn) rise.
• Demand for millet, and processed and semi-processed food preparations derived from millet, has been
growing, particularly in parts of West Africa.A nascent yet rapidly expanding food processing sector
will need reliable sources of high quality coarse grains like millet and sorghum, grains traditionally
dominated by smallholder production.
TREE CROPS
• Africa’s smallholders supply much of the world’s cocoa beans (70%) and high quality Arabica coffees.
Prices for both commodities have increased considerably over the past several months amid supply
concern (the “C” market price has nearly doubled since February 2010).These trends coupled with
growing consumer interest in ethical sourcing, environmental sustainability, and product differentiation
(i.e., origin branding) will continue to spur upstream investments by buyers.
• The region’s budding fruit juice processing sector shows promise to drive investments in outgrower
production. One example is africaJUICE, which is developing 1,300 hectares of passion fruit, mango and
papaya in Ethiopia using outgrowers and is looking to expand its presence in the region.
• Jatropha and other biofuels that do not compete with food crops for land have strong potential in
Africa for outgrower production among a growing number of processors/refiners looking to cash in on
the estimated $41 billion global biofuels market (Visiongain, 2010).
HORTICULTURE
• Due to quality advantages that can be attained via small-scale production, firms will likely continue to
invest in outgrower production as a competitive and cost-effective sourcing strategy for a range of high
value fresh vegetable exports including fine beans, paprika, and tabasco chili peppers.Access to year-
round water and ensuring that outgrowers can adhere to meeting GLOBALGAP standards will remain
the most formidable challenges facing buyers.
26. Key buyer challenges and considerations when scaling up outgrower programs
Timing it right - Buyers should resist expanding to meet short-term needs and ahead of sufficient
planning. Scaling too quickly risks overwhelming existing institutional capacity to properly identify,
administer and monitor new farmer participants [Ex: Oil Crop Development Ltd in Kenya embarked on an
ambitious 2-year expansion of a successful pilot that envisioned 20,000 sunflower outgrowers.The project
quickly derailed as a result of high credit default rates and farmer defections.
Identifying new farmers – The process of farmers selection should ideally prioritize farming
communities located in relative close proximity to existing operations. Expansion to new geographical areas
risks mounting logistical costs that can quickly eat into value chain margins. Scaling horizontally within
existing farming communities via peer identification can be a useful strategy.
Ensuring sufficient extension – Poor availability of qualified extension agents is one of the most oft-
cited challenges to scaling up. Based on anecdotal evidence, one agent per 100-150 outgrowers is an
appropriate ratio to ensure required level of skills/technology transfer. Before scaling, buyers should first
ensure that they will be able to field a sufficient number of qualified agents to meet growing TA needs.
Related costs can often be subsidized via partnerships during the initial stages.
Securing sufficient resources – Scaling up requires considerable investments in new equipment,
materials, staff, and training. Before expanding, buyers should carefully assess their finances and evaluate new
sources of funding to meet rising costs and avoid gaps that could derail the overall project. [In 2005, Olam
International successfully expanded its SAFOB in Indonesia from 2,100 to 27,000 cocoa outgrowers after
securing donor funding (USAID) that enabled the company to recruit and field new extensions agents to
reach more cocoa farming communities].
27. “We believe in and are focused on leveraging the core
competencies of external partners that already exist in
the market rather than developing in-house services.
Banks have a core competency of financing. Our core
competency is building our sourcing network and selling
agri-inputs.”
-- Nirmal Reddy
ITC Limited (India)
Agri-Business Division
“We feel strongly that the best approach is Olam, and
that is Olam and its staff, working directly with these
communities.”
-- Chris Brett
Sr. Vice-President
Olam International
“One key advantage of working with outgrowers (vs.
commercial production) is lower overheads. We save a
lot on our labor costs.”
-- Ruwan Rajapakse
Hayleys Group
(Sri Lanka)
What buyers are saying…
“[Sourcing from farmers who are in close proximity to
our processing facilities] gives us great leverage because
corn prices don’t fluctuate so much, but transportation
costs do.”
-- Pedro Padierna
President
Pepsi Co. (Mexico)
28. A pioneer in India, food retailer ITC Limited was one of the first
Indian companies to enter into large-scale, direct procurement
arrangements with smallholder farmers.Today, the company has
the established capacity to source from more than 4 million
farmers across the country via an extensive network of rural
community “e-choupal” platforms. ITC is currently focusing on
diversifying the range of products and services it offers to
outgrowers as a strategy to broaden and deepen its farmer
relationships and to remain competitive. For example, the firm is
facilitating local access to weather forecasting and market
information, as well as supplying high quality seeds, fertilizers and
other inputs through more than 6,000 rural outlets. It has also
partnered with the State Bank of India to make affordable input
loans available to farmers. Under the arrangement, ITC facilitates
all documentation and verification procedures, thereby reducing
associated costs to the bank and allowing the bank to offer more
favorable loan terms to more farmers. For providing this service,
the company receives a nominal commission at loan disbursement
to help defray the administrative costs that it incurs. Since the
program was launched in 2008, ITC has helped to facilitate nearly
US$ 65 million in credit to more than 70,000 of its suppliers.
SOURCE: Interview with ITC Limited, January 2011
Case studies highlighting the importance of raising farmer interest/loyalty via
effective technology and bundled services
29. Building on the company’s success using similar business models in
Africa, beer brewer SABMiller launched the “Sanjhi Unnati” project
in 2005 in Rajasthan, India.The dual aim of this project was to
secure a reliable source of locally grown malt-quality barley and to
identify higher yield varieties with superior brew house
performance. In partnership with Cargill, the state government, local
NGO Morarka Foundation, and the Indian Council for Agricultural
Research, SABMiller set up a dozen localized centers to provide
seed stock, conduct agricultural training and extension activities,
and to procure properly weighed crops at the best price with same-
day payment. In addition to premium seeds (subsidized at 50%) ,
local farmers were offered access to specialist agronomists and a
range of other services, including insurance, pesticides and
fertilizers.The initial 3-year project also conducted awareness-
raising campaigns through farmer meetings, leaflet droppings and
“jeep campaigns”. Encompassing 2,100 farmers initially, the project
has since expanded to include new growers, partners and activities.
One example is ICICI Bank and the development of an innovative
credit program for participating farmers. Today, more than 7,000
outgrowers are supplying SABMiller with approximately 15,000 tons
of high quality barley, compared to fewer than 2,000 tons when the
project was launched.
SOURCE: Interview with Cargill, January 2011; SAB Miller corporate website
Case studies highlighting the importance of raising farmer interest/loyalty via
effective technology and bundled services
30. FieldFresh Foods Pvt. Ltd. established in 2003 a $10 million, 300-
acre crop development facility, called the Agri Center of Excellence
(ACE) in Ladhowal, with support from the State Government of
Punjab. The company wanted to develop a center where
appropriate farming techniques could be demonstrated and
supported by post-harvest infrastructure.The company took
advantage of the center’s close proximity to Punjab Agriculture
University (PAU), a world class agriculture university. ACE now
serves as a critical RD platform that feeds directly into the
company’s sourcing operations.As part of its long term
collaboration with PAU, FieldFresh provides scholarships to a select
number of students who are pursuing post-graduate degrees in
horticulture. Upon graduation, many of these students join the
company, which helps to ensure a steady pipeline of high caliber
talent for the scaling up of its business.The company also leverages
ACE as a training center to expose its suppliers to the latest
agriculture techniques and to promote better understanding of
quality and certification requirements. In addition, FieldFresh is
making index-based weather insurance products available to its
suppliers to help mitigate production risks.
SOURCE: Interview with Field Fresh Foods, February 2011; company materials
Case studies highlighting the importance of raising farmer interest/loyalty via
effective technology and bundled services
31. The following are some notable strategies that buyers have implemented in the
field to address some of the key challenges in operating outgrower schemes.
CHALLENGE
OPTIONS
EXAMPLES OF “BEST PRACTICE”
Poor farmer access
to credit
1. Leveraging buyer-driven credit
schemes via institutional
partnerships
• ITC Limited has helped to facilitate nearly US$ 65 million in commercial credit via a strategic
partnership with the State Bank of India.
• Unilever provides interest-free loans to 5,000 Indonesian soyabean producers, repaid at harvest.
Reducing Side-
Selling Risks
1. Bundled/embedded services
2. Concentrating in economically
isolated areas
3. Transparent pricing
mechanisms
4. Use of simplified contracts
5. Leveraging group liability
mechanisms
• Pif-Paf of Brazil maintains a “depreciation” (savings deposit) fund for each farmer to be used for
infrastructure maintenance/upkeep.
• ITC Limited relies on informal contracts and announces purchases prices on the eve of market
day via media outlets to offer maximum flexibility and relies on bundled/embedded services to
promote strong loyalty among its suppliers.
• Jain Irrigation Systems of India guarantees a “minimum” price to 2,300 onion farmers in India. If
market prices go up, the company covers the difference.
Ensuring Economic
Benefits
1. Improving farmer productivity
(i.e., yields)
2. Improving product quality
• PepsiCo promoting access to drip irrigation and direct seeding machine to lower costs and
increase productivity among potato outgrowers in India.
• SABMiller via partnership with 3 agricultural universities has developed an innovative varietal
seed development program to identify high-yielding seeds for its 8,000 Indian barley outgrowers.
• Cargill-led extension training contributed to 20-55% improvement in incomes among 15,000
Indonesian cocoa farmers via quality premiums and higher yields.
Identifying the
right Farmers
1. Leveraging existing
relationships via input
suppliers, extension agents,
NGOs etc.
2. Developing strategic
selection criteria
• Nespresso AAA Sustainable QualityTM program rewards farmers with price premiums and
other benefits for delivering improved quality coffee beans.
• Pif-Paf of Brazil replaces non-performing farmers with new farmers, with a 5% annual turnover
rate.
• PepsiCo recruits potato farmers in India based on a referral system. Progressive farmers help
identify new program participant.
Fielding qualified
extension agents
1. Partnering with academic/
research institutions
• FieldFresh Foods of India developed a strategic partnership with Punjab Agriculture University
(PAU) to leverage cutting-edge RD expertise for its Agri Centre for Excellence (ACE).
• Olam International and Blommer Chocolate partnered with USAID in Sulawesi to train/field
new extension staff to reach new cocoa suppliers, effectively doubling procurement.
Managing Price/
Production Risks
1. Promoting farmer access to
crop insurance
• PepsiCo’s partnership with ICCI Lombard to promote use of weather-related index insurance
products among 15,000 potato farmers in India.
32. What are some of the key factors common to successful outgrower schemes based
on to-date experience?
Avoiding over-
reliance on
input credit
Avoiding over-
reliance on input
credit
Ensuring
attractive
output price
Concentrating
in areas where
farmers have limited
alternative income
earning
opportunities
Consistent
investments to
grow market
outlets and
product
competitiveness
Avoiding
mono‐cropping
systems,
especially low
value, high
volume annuals
Building/sustaining
credibility and
trust among
farmers via regular
direct firm/farmer
interaction
Use of
simplified
contracts based
on direct,
participatory
negotiations
Maintaining
clear,
transparent
pricing
mechanism
Supporting
complementary
farmer
income streams (e.g.,
commercialization
of byproducts,
intercropping)
Well-prepared
land use
planning and
selection of
contract farmers
34. • Good market fundamentals are essential. Outgrower production must competitively feed into a viable market opportunity with long-term
prospects for growth.
• The scale of upstream investments required by the buyer depends on end market requirements (i.e., quality, food safety, packaging/labeling)
and the uptake capacity of local farmers in adopting new technologies needed to meet those standards.
know
your
end market
Following is a list of key issues that buyers scoping investments in outgrower
programs should consider:
• Firm credibility and familiarity with local markets, communities, and the overall enabling environment is critical.
• If not a “captive” market, considerable upstream investments in input supply, extension and other services may be required.
• Securing strong advanced support for the project from local governments and communities can pay large dividends over the long run.
know
your local
environment
• Not all products are suitable for outgrower production. In addition to product value, other factors that impact suitability are product
complexity (i.e., production inputs, technical requirements), food security links, and size/scale of outlet markets.
• Low volume/high value products (vs. high volume/low value) tend to be more suitable. If the latter, the value chain must be able to generate
sufficient margins via strong competitive advantage (i.e., landlocked country, brand value, upstream processing) for upstream investments.
know
your
product
• Choosing the right farmers is critical to successful startup and scaling phases and buyers should maintain strict oversight of the process.
• Engaging local partners (i.e., input suppliers, NGOs, extension agencies) familiar with local farming communities is advisable, where feasible.
• Farmer proximity to buyer (and other farmers) and capacity for innovation uptake are two critical factors that will directly impact the
affordability of input/service delivery mechanisms and overall logistical costs.
know
your
farmers
• Partnering can be an effective strategy to mitigate risks and costs in developing and scaling up outgrower programs while leveraging existing
competencies in the marketplace such as accessing production and credit provision innovations.
• When partnering, it is important for buyers to maintain a high level of visibility among outgrowers, thereby promoting/sustaining crucial
credibility, trust and long-term loyalty.
Know
your
partners
know
your
capacity
Know
your
ROI horizon
• Outgrower schemes are not an appropriate strategy for every buyer. Crucial to success is the capacity to quickly adapt to ongoing
challenges and constantly changing market dynamics.
• Buyers should consider all possible sourcing options in advance and fully evaluate their short‐term and long‐term goals before investing in
outgrower arrangements.
• Success does not happen overnight and buyers need to set in advance realistic time/financial investment expectations.
• Timeframes for achieving profitability should be appropriately long‐term, allowing for a pilot phase (2‐3 years minimum) to test and
validate innovations before program scale up.
• Profitability may not be a realistic expectation during the start up phase but it must be a key driver of a firm’s long-term strategy.
