Viability_of_a_Market_Approach_to_Supporting_Smallholder_Agriculture_Care_Kenya__Reap

  VIABILITY OF A MARKET APPROACH TO SUPPORTING SMALLHOLDER AGRICULTURE Care Kenya: REAP By Yuan Li Introduction When it comes to marketing farm production, smallholder farmers have always been at a disadvantage when dealing with unscrupulous traders who offer low prices. Most of the rural poor are smallholder farmers, who depend on subsistence agriculture and food safety nets. The Kibwezi region of Kenya was particularly poor and vulnerable to economic and climate fluctuations. In this area, smallholders face many constrains, such as poor resource base, out-of-date infrastructure, limited access to markets, technology, information, capital, and private and public sector services. These constrains have led to a significant decline in both production and income for farmers. Background and the Model Through a good development model of education and infrastructure development, CARE's agricultural projects in Kenya, many smallholders have improved crop yield and efficiency. However, this model is not commercially sustainable if the donors’ preferences shift and the project will have to close. A series of analysis and research by CARE concludes that numerous structural barriers impede farmers from entering the formal economy and selling their goods. That's why the CARE Rural Enterprise and Agribusiness Promotion (REAP) project was initiated in early 2000. Originally, the REAP project in Kenya was funded by the International Fund for Agricultural Development (IFAD) grant under CARE Canada’s Rural Organization and Agri-Services Development (ROAD) programme. Other donors supporting the project are Canadian International Development Agency (CIDA) and CARE USA through Africa Fund. With these funding, CARE started the REAP by using a market-driven model to target smallholder irrigation farmers living below the poverty line in Kibwezi, Kenya. CARE took a multi-step approach. First, CARE established the Central management Unite (CMU) as a small consultancy. For the private sector, it provides an interface to work with farmers and guarantees that the farmers will meet market contracts and standards. For farmers, it provides initial access to capital and production technology against the contracts. Then the CMU established farmer Production Unites (PUs). Farmers paid for legal corporation of the PUs as either limited liability corporations or co-operatives. However, the farmers don’t share ownership of the company. Next, the CMU negotiated forward contracts from the market on behalf of the PUs, and then linked them to private-sector service providers to get inputs and services to help them meet forward contracts. Moreover, CARE's CMU offered farmers micro-credit and working capital loans for inputs, market access and technical training in agronomy. George Odo, the planner of the REAP project, had expected that the interest from the loans and the management fees would cover the expenses of the CMU, which refers to the REAP project. Once REAP was profitable, it would be left to operate as a self-sustaining unit. REAP's success and challenge From the smallholders' perspective, REAP was successful because it increased farmers' earning by linking them to markets. By 2003, 137 participating households earned an average of US$ 100 per month, and 413 households earned US$40 per month, up from US$12 per month before REAP. On the other hand, most of the PUs were making profits. Farmers can afford to school their children, buy medicines and necessities, and re-invest in personal assets, thereby break the cycle of extreme poverty. On the downside, while most of the PUs were making profit, the CMU had never been profitable. This market-driven model had failed to make the CMU financially sustainable. By looking at the REAP's financial statement, the CMU was running much deficits since 2002 and was only projected to make modest profit of just over KSh 1 million in 2006. REAP's financial model CARE has a propensity for funding projects through grants and covering the CMU costs by interest from loans and the management fees. This financial model was unable to make REAP commercially viable. REAP solely relies on grants from IFAD, ROAD, CIDA and CARE USA, which are short-term limited and would eventually come to an end. REAP's another revenue resource, interest and management fees, which has relatively low income-generating capacity compare to the cost of REAP. In addition, REAP's relatively loose lending criteria had resulted in loans that exceeded its clients' ability to repay. Performance-related issues also result contracts with exporters were not always fulfilled. As specified in the contracts, Farmers' profits were based on their own ability to grow crops and control their costs. Without a management system to oversee the farm operation and production, farmers were unable to maintain a stable output and productivity. These over-lending and performance-related issues increased CMU's bad debts. Limited revenue resources are one of the main problems of the REAP' s financial model that is unable to be commercially feasible. By looking at the financial statement of the CMU, it indicates that the cost of staff, administration and operation is far more than the total revenue from interest and management. Although the CMU had modest profit in 2006, in general these two types of income could not guarantee the long-term stable growth of the revenue. It's clear that if CMU only relies on these two income resources, it is difficult to be profitable. However, profit is part of any organization's economics. Without profit, REAP project could collapse once the grants or other fundings shift away. Through the financial statement of the CMU, staff costs account for a large portion of total costs. It infers that the CMU used a lot of personnel to provide services to smallholders. These staffs’ salaries, benefits, allowances and consultants fees formed a huge burden on CMU. In addition, the CMU's losses were all absorbed by REAP through debt for which CARE was liable. It means that the CMU has to take all the risks by itself. Risks can result from insufficient internal controls or fundings go away. Not all financial risk is avoidable of course, but being prepared and shared more equitably would be the key to a healthy and sustainable organization. Moreover, EurepGAP could be just one of market standards. There are more and more strict market standards emerging. It's unrealistic for CARE to provide funding support of every market standards for smallholders. Improvement CARE needs to consider more streams to increase revenue. External fundraising is one way to bring in more money to REAP. While projecting new revenue streams, reducing cost is also a good method to increase the REAP's financial strength. The CMU can develop a practical partnership in Kibwezi with existing development players in the region who help train the farmers and advice the CMU. With shifting some consultant and training services to private sector exporters, like Eastern African Growers, Vegpro Kenya Ltd etc, the CMU can reduce a lot of staff costs. The CMU can also establish linkages with local input suppliers in the region as well as multinational input suppliers in the nearby bigger cities and areas who can offer services to smallholder farmers' groups. Choosing a new approach to the production planning, budgeting and monitoring with farmer can yield better performance on the farm. The CMU can develop a farm management leader to oversee and guide the PUs. Involving the farmers in the planning, budgeting and performance monitoring creates a feeling of ownership. The ability of the farmers to link the production targets to the financial performance and profitability can achieve greater participation among the farmers. Those farmers who are under farm management are able to meet the production targets faster than the groups that do not attend to farm management. It’s not wise for the CMU to take all the risks by itself. The CMU needs to share risks more equitably by distributing to smallholders and private sectors. In addition to providing smallholders with professional farm production knowledge and marketing information, REAP can also assist the farmers to make a business and investment plan to help build their financial base. Export companies began to compete for the privilege of working with CARE on the REAP project because farmers who worked with CARE had better quality production and were more reliable than those who didn’t. Thus they can be one good source to provide market standard services to their members on funding grants. Conclusion REAP project aims to pull the targeting smallholder irrigation farmers out of poverty line by assisting them to access to the formal market. However, its initial financial model was unable to be long-term commercially viable. It needs a more locally customized and business-oriented approach to make REAP commercially feasible. Source: Case Study, Care Kenya: Making Social Enterprise Sustainable, Richard Ivey School of Business, University of Western Ontario, Ivey Management Services