Organic Business Guide/Organising producers for the market

Organising producers for the market

Traditionally, producers are organised in cooperatives or farmer groups in order to negotiate better prices, like having a union. In organic value chains, farmers are organised for extension, certification and marketing. This helps to make the supply chain more efficient, which in the end is better for all parties.

Producer organisation versus company set-up

Table 8: Advantages (+) and disadvantages (-) of a producer organisation versus a company set-up.

Producers can be organised in different ways in relation to the unit that is marketing their products. They can form a cooperative or a similar type of producer organisation that takes the raw material from the individual members and looks after the marketing. They can also be organised and contracted by a company or trade house which buys and sells the product. Both set-ups have their advantages and disadvantages (Table 8). A third option is that farmers participate as shareholders in a company (see chapter "Developing an internal control system").

Producer cooperatives A producer cooperative is a marketing organisation that is owned by the farmers who are the members of the cooperative (Figure 15). The management and staff hired by the cooperative organise production, extension, the internal control system and sales, and possibly also processing of the product. As the cooperative is the owner of the certificates, it is free to sell to whichever buyer it wants. The advantages of a producer-based set-up are that farmers are involved in decision making (via the general assembly and their representatives in the board of directors) and that the profits of the operation belong to them. Equally, in case of losses farmers risk getting paid less than what had been planned.

As it is their own organisation, farmers could be expected to adhere to the rules and to sell their produce to the cooperative only. This is not always the case. Many cooperatives lack management skills and entrepreneurial spirit. Due to the cooperative structure, decision making may be slow. In addition, there is a tendency that imbalanced focus is given to farmers' interests, especially when it comes to pricing, which can put the profitability and competitiveness of the operation at risk. Quality differentiated pricing is not always possible as farmers expect the cooperative to take all produce for the same price.

Figure 15: Typical set-up of an organic producer organisation.

Inefficiently managed cooperatives can be quite expensive intermediaries through which farmers may earn less than when selling to private buyers. There is also a risk that farmers do not really have a say in their cooperative, because board members may not represent their interests. Not all board members always understand how the business works.

As it is their own organisation, farmers could be expected to adhere to the rules and to sell their produce to the cooperative only. This is not always the case. Many cooperatives lack management skills and entrepreneurial spirit. Due to the cooperative structure, decision making may be slow. In addition, there is a tendency that imbalanced focus is given to farmers' interests, especially when it comes to pricing, which can put the profitability and competitiveness of the operation at risk. Quality differentiated pricing is not always possible as farmers expect the cooperative to take all produce for the same price.

Inefficiently managed cooperatives can be quite expensive intermediaries through which farmers may earn less than when selling to private buyers. There is also a risk that farmers do not really have a say in their cooperative, because board members may not represent their interests. Not all board members always understand how the business works.

Company relating to producers through a contract farming basis
In this set-up of an organic business, the company contracts farmers for the supply of raw material. It organises input supply, extension, ICS, first level processing and sales. As the company holds the organic certificate, the farmers can sell their produce as organic to that company only. As the company feels that they take all the risks, they also take the profit. Any commercial enterprise will have a strong risk reduction strategy. What that means for the farmers is that the company will buy the produce for as little premium as they can get away with. They may be willing to share some of the profits after the business is done to build loyalty among the farmers, but this is the exception rather than the rule. As a result, farmers often sell a significant part to other buyers (at least the low quality part). They may also try to link up with other companies that can offer a better price as they did not have to invest in the development of the farmers.

The advantages of a company set-up are that the entire operation is strongly focused on competitiveness and profitability. The owners therefore have an interest in hiring a professional director and staff, and decisions are usually taken in a quick and flexible way. Of course there are also examples of companies that are not efficient, competitive or profitable. They usually do not stay in business for very long.

Which structure to choose?
Because of the traditional stand off between farmers and buyers, it is necessary to look for new ways of cooperating. Unfortunately, there are still too many mutual apprehensions between entrepreneurs and companies on the one side, and farmer organisations and development agencies on the other side. Many development agencies and farmer organisations have a very exclusive focus on the farmers. Rather than encouraging collaboration with entrepreneurs and companies, they feel that farmer organisations should do everything from production to exporting. That is a very challenging task.

On the other hand, companies tend to focus too much on their own profit rather than on paying farmers a good price. As their main business is to trade, they may not be very familiar with agricultural production. Organising farmers, training and guiding them in organic methods, and building internal control systems which involve farmers is alien to many entrepreneurs.

It is therefore a question as to whether one should engage both in farming and in the export business. These are two very different worlds, and require quite different sets of skills and mind sets. Doing everything at the same time - organising production, getting certified, improving quality, processing, financing, exporting etc. - may just be too much. A reasonable division of tasks could be that the producer organisation is in charge of production, extension, ICS and bulking, and then sells the raw material to a company that covers trade finance, packaging, marketing and export. Certain functions like the provision of inputs, quality management and first-level grading can also be initially covered by the company, and then transferred to the farmer organisation. A crucial question is whether the company or the producer organisation holds the certificate (see chapter "Certification and internal control systems").

Whatever set-up you chose, make sure that:

• the management is professional and experienced
• financial matters are managed in a professional way
• the overall responsibility for the ICS is clearly defined
• skilled staff is in charge of sales and marketing

Involving farmers

Whether you are a company or a cooperative, the farmers are your production base. You need to invest in them, you want them to sell to you, and you depend on them. Consider yourself close to being married with "your" farmers. It is important that there is a strong trust relationship between your business and the associated farmers. In this relationship, both sides have certain rights and duties.

Building ownership and trust
A top-down approach is not likely to work with farmers; a partnership approach has better prospects. If farmers feel that it is also "their" business and that they have a stake in the success (or failure) of the operation, they are more likely to collaborate than if they are mere raw material suppliers. Think about how you can involve farmers in designing the business - for example by regularly consulting with farmer representatives or by involving them in the governing body (for producer cooperatives this is anyway a must). Think about how the management of the business can stay in touch with the farmers, and about how part of the profits can be shared.

Building trust and loyalty with farmers requires:

• timely and transparent information on prices and market developments etc.
• honouring agreements concerning purchases, prices and payments
• transparency; open-book calculation of profits and margins
• tangible impacts and benefits for farmers

Farmers as shareholders?
If you are a private company, you may consider the option of involving farmers as share holders. The company operates as a privately owned profit-oriented entity, but farmers or farmers’ organisations hold part of the shares. They can participate in decision making in the annual meeting of shareholders and through their representatives in the board of directors, thus ensuring that farmers' interests are taken into consideration. They participate in profits - and losses - of the company as per the value of their shares. The shares in the company may act as collateral when getting loans, for example for building collection stores. Profits are shared in the form of dividends.

As the farmers are co-owners of the company, they are more likely to be loyal than if compared to a pure contract farming set-up. Despite these advantages, there is also a risk that the participation of farmers in strategic decision making may interfere with the business interests of the company. It is not always easy to find the right balance between paying farmers a high price and being competitive in the market. There are relatively few examples of this type of set-up, in organic as well as in conventional business.

Collaborating with farmers
There are different types of farmers, and you should be careful to associate with the ones who fit with your business. Working with larger and wealthier farmers may make it easier for you to start, as they are more likely to try out new things, and organising them is easier than with smaller and poorer farmers. However, the "early adopters" are usually also the first ones to break off and go their own way. By working with the poorest of the farming community you can make a real impact on their livelihoods, but it can also mean that you are working with the weakest farmers in terms of productivity, which may affect the profitability of your business.

One approach is to work on a community base - a village or existing farmer group - and leave it to the group to decide about whom they include. Clusters of 10-20 farms/families who trust each other seem to work well. However, this can lead to social exclusion of certain marginalised communities. Discuss this issue with the concerned farmers, and find ways together in which the different sections of the farming community can participate. In many cases, traditional leaders (elders) or lead farmers are suitable entry points to win the hearts and minds of entire groups of farmers. On the other hand there is a risk that the leaders become too domineering, or start to pursue their own interests through the organic business.

As some of the farmers who join the initiative may leave after some time, it is advisable to start with a somewhat larger producer base than what is required for the planned production. On the other side, farmer groups usually want to keep all their members in, even the less well performing ones. In order to achieve good product quality and to keep the operation efficient, however, you may need to be able to exclude non-performing farmers. Set clear and transparent conditions at the beginning of the cooperation period, and explain them to the farmers.

Another issue is the spatial distribution of the farmers. If they are spread over too large an area, or located too far away from the processing factory or transport infrastructure, high transaction costs may jeopardise the profitability of your business. Having clusters of farmers in the same location is particularly important for organising extension and internal control in an efficient way. Although connections are getting better (e.g. via cell phone), if the producers are several hours away from the office, you need competent field supervisors who are able to make decisions on their own.

Predators or just … competitors
There is always a risk that once you have organised and trained the farmers, competitors will come in and take over. You may have invested in a group, provided them with equipment and training, and still the group may break away. It is not very efficient to contract all the farmers in a region, thinking that it will prevent them selling to your competitor. A contract does not say very much if you don’t actually buy all their products for a sufficiently high price. In the end, the only way to avoid farmers switching to a competitor is by being a better buyer, and by building loyalty with the farmers, e.g. by making them shareholders of the company. Diversification into more crops might also help, as farmers see the advantage of being able to sell a larger part of their production through you.

Building up an extension system

An organic business needs to have some sort of extension system in place, and it needs to be performing sufficiently well to achieve the desired results. Running an extension system costs money (for salaries, transport, equipment etc.), but also brings benefits. This sub-chapter provides some practical advice on how to develop and manage an effective and efficient extension system.

Roles and functions of the extension system

Figure 16: Set-up and roles within the extension and internal control system of an organic business. In practice the roles may be divided during part of the year only.

The extension system ensures that farmers are able to produce in a way that is complying with the organic standards, and at the same time achieve good yields and products of high quality. The extension staff provides the link between the company or cooperative and the individual farmer.

The extension system in an organic farming initiative is usually closely linked to, but not identical with the internal control system (see Figure 16): while the extension staff trains and advises the farmer to produce in the best possible (organic) way, the internal inspector has the responsibility to control whether the farmer sticks to the organic standards (see chapter "Developing an internal control system"). If staff fulfil both functions, it is advisable that they do the internal inspection of farmer groups in a different location from their work as extension officers.

Many organic projects involve farmers in the extension and internal control system. These are group leaders or farmers who are particularly well versed with organic farming practices, and who are ready to support their fellow farmers by providing advice or assistance in filling in the forms. The service can either be delivered on a voluntary basis or for a small payment. These lead farmers are trained and supervised by the extension staff of the project.

Extension approaches that work
It is obvious that top-down, class-room type lecturing is not a very suitable approach to building practical know-how among farmers. Nor do farmers read much in the way of manuals or technical leaflets. Training farmers therefore needs to be very practical, involving illustrations, demonstration of the proposed methods, and experimentation. Simple but appropriate extension material, prepared in a language and style understood by the farmers can support this process. Illustrated posters or calendars, for example, are more suitable than plain text.

The content of training and technical advice should match the needs and interests of the farmers, male and female. It is not of much use to repeat trainings on compost production and the preparation of botanical pesticides if the main challenges for the farmers are related to crop diseases, weed management or irrigation. Try to find out why farmers are not applying the proposed methods, identify the underlying obstacles, and encourage them to develop solutions that can work.

Key elements of successful extension

• apply practical, interactive training methods
• use illustrations rather than text
• focus on what problems farmers are actually facing, not on what you want to teach
• facilitate farmer-to-farmer exchange
• "seeing is believing" - organize visits to pilot farms or model farms
• stimulate experimenting with innovative ideas
• get inspiration from suitable guide books and from exchange with other initiatives

Extension is not limited to training farmers and providing technical advice. Extension also means mobilising resources that are lying with the farmers: their traditional knowledge, their ability to experiment and observe, and their interest to share their know-how and experience with fellow farmers. Farms of successful members that use innovative and good organic agricultural practices may serve as an example for other farmers (pilot farms). Farmers are more liable to try out techniques that they see are working at fellow member’s farms, than techniques propagated by the extension officer. Methods like farmer field schools and participatory technology development can easily be adopted for organic extension. It is not the scientist, not the field officer, but the farmer who is the best researcher.

Financing extension
Extension services involve costs, which either are paid by the farmers themselves, by public funds or by the organic business It is obviously rather difficult to convince farmers to pay for extension services, even if they will benefit from an organic premium. Most organic businesses therefore will need to cover these costs from their sales margin. In both cases, you want to make sure that the services are cost efficient and useful.

Systems that work with result-based payments pay a part of their staff's salary depending on the achieved output. This can be linked to an annual assessment of the training and advisory services by the farmers. Being assessed by those who are supposed to benefit from the service can make the extension system more accountable.

Outsourcing extension services?
Some organic production initiatives involve official agricultural advisory services which are funded by the government. This can be an efficient and cheap way of organising extension - why should it only be the conventional farmers that benefit from these services? This only works providing that the quality of the extension and the conveyed contents are appropriate. In many cases, the official agricultural extension services are strongly linked to conventional farming practices and inputs.

It is quite a change to switch from promoting 'modern' agrochemicals to nurturing farmer experimentation and using locally available 'dirty' materials like manure. Some agricultural extension officers clearly have difficulty telling another story. In some countries, organic businesses have given up employing former agricultural extension workers and prefer to employ young, untarnished college graduates as field agents instead. Keep in mind that, if you outsource extension and internal control, you have fewer opportunities to take corrective measures than if they are under your direct control.

Staff development

The most critical factor in any plan is that the right people are in place: the people who will make it happen. You need people who are competent and committed, and who can take and handle responsibilities. This is particularly true for your field staff. An organic business comes with a whole set of extra tasks. It is therefore important to get the right field staff, prepare them well for their tasks, and motivate them to stay with your business.

Recruiting field staff
Your field staff needs to be able to closely interact with the farmers, to understand their problems and assist them in finding solutions. This requires practical people, ideally with an agricultural background. On the other hand your field staff needs to be good at working with figures and forms, understand manuals and writing reports. The ideal extension staff member is also a good facilitator who stimulates farmers to try out new things and who creates opportunities for farmer-to-farmer exchange.

When recruiting field staff try to get candidates who speak the language of the concerned farming communities. Take care not to exclude certain ethnic minorities because your field staff does not speak their language, or does not like to interact with them for social reasons. In order to encourage participation of women in the organic business, strive to have a gender balanced extension team.

The more challenging the project, the larger the distance to cover and the worse the roads are, the better your field staff needs to be; but also the fewer the people to choose from, as most capable people probably take up jobs that are less strenuous and better paid. Don’t think that your field staff is cheaper in remote areas - on the contrary: their training and the incentives need to be better.

Training of field staff
It is very rare that you are able to hire field personnel who are already experienced in organic farming. In most cases, you will need to train them. The training should not be limited to your focus crop, but cover the entire farm which needs to be managed in an organic way. There are a couple of training manuals that you can adapt and use for this purpose. In addition to technical agronomic know-how, field staff also needs to be trained on extension methods.

HIV/Aids
Don’t think that this has nothing to do with your business. Your staff and your farmers could get infected with this disease. No need to say that your staff or your farmers suffering from this disease will seriously hamper the development of the business. It therefore makes perfect business sense to deal with this issue, to make your staff aware of HIV/Aids and to sensitize the farmers before it becomes a real problem for your business. In many countries there are funds and institutions that can help you with training material for awareness creation, and with formulating a workplace policy (see http://www.ilo.org/aids).

Start with a thorough and systematic training of all new staff, and also ensure that they continuously update their know-how. If you provide experienced staff the opportunity to become experts in a specific field, they are more likely to stay with you. At a certain size, the organisation should have sufficient capacity of its own to train new staff. Do not remain dependent on development agencies or service providers for training.

Motivating your field staff to stay
Besides the producers, your field staff will become one of the most valuable assets of your business. They know the farmers and their problems; they know how the business functions and what needs to be done to make it a success. It therefore can be a disaster for an organic business if field staff members leave. A particularly bad situation is when your staff members leave you in order to start a competing business for themselves.

However, it is also quite natural that people will look for new opportunities. Therefore, it pays off to think early on about how you can provide experienced staff with the opportunities to take up additional responsibilities within the organisation. Exposure visits to other organic businesses or attendance at external training programmes are important incentives for staff to stay.

Ways to motivate your staff to stay

• Pay competitive salaries that match the tasks
• Provide opportunities for training and exposure
• Involve your staff in decision making
• Provide opportunities to grow and develop within the business
• Let your staff participate in the success of the business (via shares, or a bonus system)

Handling pricing, premiums and payments for farmers

Whether you are a company or a cooperative, the relationship between you and the farmers associated with your business first of all is a commercial one. It is based on a transfer of goods against payments. The way prices are set and payments are handled will be crucial for the success of this relationship.

Defining the price for the producer
The price that the company or cooperative pays to the individual farmer for the organic raw product should be high enough to cover the production costs the farmer encounters (variable and fixed costs), and to enable the farmer to make a reasonable profit that ensures a decent living. This is the basic idea of the Fair Trade concept, but should also be applied in organics. The price paid to the farmer is one of the main factors in the cost price calculation of the final product (see chapter "Financial planning and management"). If the price is too high, the final product may not be competitive in the market.

At the time of harvest, you may not yet know the price you will receive from your buyers for the final product. This makes it difficult to define the price that you pay to the farmers. Even if you have a clear idea of your cost price, and have signed contracts with buyers who are ready to pay at least this price, you may not be able to sell the entire production at this price. In addition, costs may turn out higher than expected, and exchange rates may change to your disadvantage. Committing a certain price to the farmers is part of your entrepreneurial risk. You therefore need to be careful with offering farmers a high price at the beginning of the season that can ruin you when frame conditions change - especially if your sales are not yet fully covered by sales contracts.

On the other hand, if the price you offer to farmers is too low, they may leave the programme and sell to someone else. Sometimes, local market prices may temporarily rise to a level beyond the price you offer, so that farmers prefer to sell in the open market. It is therefore important to define a price that is attractive to farmers and that allows some flexibility to increase it in case the market prices rise. Alternatively, be prepared to lose some volume by not following the (temporarily higher) local price.

It is most important that prices are set in a clear and transparent way, and that you communicate this well to the farmers you work with. Nowadays farmers understand that prices fluctuate. Try to find out who else is buying locally, and how to best address local price fluctuations. Explain the buying mechanism to the farmers, including the quality differential (see chapter "Getting quality produce from the farmers").

Side-selling
You can not - and should not try to - force farmers to sell their products to your business or cooperative; but there are ways to motivate them to sell to you instead of selling to other buyers (see box). You can, for example, try to tie farmers to your business by offering good services (pre-financing, immediate payment on delivery, attractive premiums etc.), but farmers may still sell to the buyer who offers the highest price at the time of harvest. It can be difficult to convince the farmers that a long term engagement with a buyer who regularly pays adequate prices including in years of low price-levels, is better than a buyer who pays a high price once but disastrously low ones in the following years. But it is worth trying! If the "capture rate" is low, you have invested in extension and ICS without the likelihood of recovering these costs from your sales margin.

How to motivate farmers to sell to you?

• Offer them contracts with attractive conditions
• Commit to paying a price that is higher than the local market price
• If local prices go up, increase your price offer and communicate this to the farmers in time
• Pay cash against delivery
• Support linkages with micro-credit schemes and encourage saving, so that farmers do not need to sell produce for urgent cash needs
• Make provisions to buy small volumes at village level even before the main purchase activities start

Pricing based on the FLO system

Figure 17: Pricing according to the FLO system.

If the produce is certified "Fair Trade" in line with the FLO system, the FLO minimum price and Fair Trade premium need to be taken into consideration. These are defined for specific products and regions. If market prices are higher than the Fair Trade price, the market price shall be paid (Figure 17). In addition to this price, the producer group receives a Fair Trade premium that shall be used to improve their social, economic and environmental conditions.

Be careful that you are sufficiently covered by Fair Trade sales contracts, so that you can pay the farmers both the Fair Trade minimum price and the organic premium. In the beginning it is difficult to explain to farmers that for any produce for which you do not get a Fair Trade buyer, you can only pay an organic price. It may also not be accepted in Fair Trade certification for all products and situations.

It is often overlooked but important to note that the FLO minimum price usually defines what the producer organisation needs to get ("ex works producer organisation" or "farm gate producer organisation"), and not the price for the individual farmer. This means that the FLO minimum price includes the costs of all activities necessary to produce the certified organic & Fair Trade product. This includes costs of extension, ICS, certification, bulking and - if done by the producer organisation - cleaning, grading and packaging. The producer organisation can deduct these costs from the Fair Trade minimum price and pay the remainder to the farmer.

Defining and handling premiums for farmers
The premium is what you pay to farmers in addition to the normal market price. There are three types of premiums relevant in this context: the organic premium, the Fair Trade premium and the premium for high product quality.

The premium you pay to the farmer is often similar to the premium you fetch in the market. If you expect an organic premium of 15% on the exports, it is usually safe to pay the farmers 15% on the farm gate price. That is, when you have a sufficiently large operation. If you deal with in-conversion products, it is a good idea to pay farmers a certain (but lower, e.g. 5-10%) premium during the first two years of conversion. This provides farmers with an incentive to engage in and stick to organic production. If you manage to achieve a better product quality through your extension and internal control system, you in turn should be able to get this premium even when selling the in-conversion produce in the conventional market.

If you follow the FLO Fairtrade system, your clients need to pay the Fairtrade premium. The full Fairtrade premium needs to be used for community projects decided by a body representing the producers. If the Fair Trade premium is managed at the level of individual primary cooperatives, the central producer cooperative needs to distribute the Fairtrade premium to the primary cooperatives according to the product volume they produced.

It is a good idea to pay farmers a premium for better product quality. This will motivate them to engage in quality management and deliver products of high quality, which in turn allows you to obtain a better price in the market (see chapter "Getting quality produce from the farmers").

Handling payments to farmers
The exact price you can get in the market, and the volume you can sell as Fair Trade, are not usually known at the time of buying the produce. Therefore it may be a good idea to pay farmers in two instalments:

• 1st payment: the minimum price you offer farmers for their organic produce (needs to be at least as high as local market prices);
• 2nd payment: premiums for organic, Fair Trade and quality, depending on actual sales.

Most organic businesses open up buying stations in the villages. You can also delegate the bulking of the crop to a village level farmers organisation. In some set-ups, farmers are required to deliver their production in groups to a larger buying store or warehouse.

Whatever the construction, it is important that the buying staff is properly instructed, that the weighing scales have been calibrated in the presence of some farmers, and that the approved farmers have received an ID card and a buying record. In most organic businesses, farmers are paid cash in hand upon delivery, which involves certain risks. Make sure that payments are done in a transparent and traceable way, and investigate any allegation of cheating by your buying staff. Where possible, payments into the farmers' bank accounts are even better, as it reduces the risk of carrying money. Obviously, these bank transfers also need to be done promptly.

Summary of recommendations

• Producer cooperatives should be careful with handling business activities that go beyond their management capacity. Companies should ensure that farmer interests are taken care of and that they can participate in decision making.
• In order to build trust and loyalty with your producer base, communicate transparently, honour agreements and ensure that farmers benefit.
• When selecting farmers for participating in your business, ensure that the different groups of the farming community can participate, and that they are geographically not too dispersed.
• Define clear roles within the extension and internal control system and make sure that the services are delivered according to the needs of the farmers.
• Make sure that the right people are in the right positions. Provide suitable incentives so that qualified staff members are motivated to stay with your business.
• Set farm-gate prices in a way that they are high enough to motivate farmers to sell to you, without jeopardising the profitability of your business.
• If you are not sure whether you can sell all your produce with the expected organic and possibly Fair Trade premium, agree with farmers that part of the premium is paid at a (defined) later point of time.