IFC – NAMC
Expert consultation
on Contract Farming
CHEETAH PAPRIKA
Zambia, Malawi & Mozambique
Mark Terken
Johannesburg, May 2009
CHEETAH PAPRIKA
Contract Farming
•
•
•
•
•
•
•
•
What is an enterprise
Cheetah Paprika, business background
Contracting systems and evolving model
Example of NGO involvement
Improvements & recommendations
Control Side selling
How to Limit Input diversion
Trust
CHEETAH PAPRIKA
Entreprise
Definition;
organized set of business activities aimed
specifically at growth and profit
a new, often risky, venture
that requires confidence, initiative
and resources
CHEETAH PAPRIKA
Warning
• ENTERPRISE requires the provision of goods
or services
– To a market which is within reach of the enterprise
– Supplied in volumes in relation to the market size
offered
– Produced and delivered at price higher than the cost
of production (= for profit)
– Offered at a competitive price (your client has to earn
with the goods or services supplied)
– On a growth and sustainable basis
CHEETAH PAPRIKA
Differentiate ‘ENTERPRISE’ from
activities or organizations which do
require continued support;
•
•
•
•
•
Local or international NGO supported projects or activities
Most humanitarian work
Relief programmes
Charities
Many donor projects and other public sector interventions
ACTIVIES DEVELOPED WITHOUT THE UNDERSTANDING OF
• LOCATION OF PRODUCTION IN RELATION TO LOCATION OF
MARKETS
• VOLUME AND QUALITY REQUIREMENTS OF MARKETS
• VALUE (AND PRICE VOLATILITY) OF COMMODITIES
• REAL COST OF PRODUCTION OF GOODS OR SERVICE
CHEETAH PAPRIKA
CHEETAH PAPRIKA
Cheetah group of companies
• Private company established in 1995
• Exporting Paprika and Chilli products from Zambia ,
Malawi and Mozambique
• After establishing agronomical suitability and
international competitiveness
• Operating an outgrower scheme for the supply of raw
materials
• Peaking in 2003 with 20,000 Contracted farmers offering
– An alternative cash crop with growth opportunities
– Contracts with Guaranteed market, regional sales points
– Price stability
– Quality Seed and Agrochemicals on – part – credit
– Training and extension services inclusive of materials
CHEETAH PAPRIKA
Key Economic Factors for Cheetah
as a business
• Volume > 500,000 kg dry paprika per country
• Quality standards set by clients
• Competitive purchase price, to be able to
compete on global markets
• Can this be achieved with smallholder farmers in
a complex and demanding social, political and
economical environment?
CHEETAH PAPRIKA
Politicians
Issues
India
Peru
China
Govt
Issues
US
CHEETAH
Issues
SA
Issues
CEO
Extension and
Procurement
Sales and
Marketing
Spain
Export
Market
Structure
Employees
Distribution
Brazil
Issues
Competing for
Market
Competitors
SocioEconomics
Zimbabwe
International
Competitors
Finance
and Admin
Processes
CHEETAH PAPRIKA
Quality
Control
Productions &
Operations
THE CHEETAH MODEL
• Group formation
• Dollar based pricing
• Pre-season agreements – guaranteed minimum
price and market
• Seeds on credit (limited input packages)
• Extension materials and training
• Availability of agro-chemicals
• Provision of packaging materials
• Crop collection and depots close to farmers
CHEETAH PAPRIKA
Contracting Systems
• Direct through own extension network
system, with or without group leaders /
distributors
• Traders
• NGO’s and other collaborating partners
CHEETAH PAPRIKA
Direct
• Close collaboration with farmer groups
• Intensive training per farmer group
• Control over quality and quantity
CON
• High overhead costs per kg
• Management intensive
• Short term employment requirements
• Cash payments in fields – risks
CHEETAH PAPRIKA
Trader
PRO
• Little risk for Cheetah
• Operate in remote, non viable areas for Cheetah
CON
• Intermediate Buyers
– Short term advantage  Farmer may be neglected
especially during seasons of low pricing
• Unreliable - limited supply security even with
contract in place
CHEETAH PAPRIKA
NGO’s and other dev. Partners
PRO
• Rapid volume expansion
• Potential for good quality  input finance
• Central training of NGO’s extension staff
• Sub-contracting procurement – absorption
Extension and procurement costs
CON
• Subsidizing business costs – unfair
competition
• NGO’s vulnerability to political pressure
• Different agenda, especially on exit
CHEETAH PAPRIKA
CLUSA > POTC
• Created production of 140,000 kg of high quality
paprika within 3 year period, in one province
• Strengths
– Vast amount of resources;
• Management & Extension personal
• Large fleet of vehicles and motor cycles
• Group formation & training
• High level of input provision; seeds,
agrochemicals and fertilizers
• Central organization and crop collection
CHEETAH PAPRIKA
CLUSA, POTC
• Weaknesses
– Temporary nature of NGO involvement, activity or project
– Over extending credit to farmers
– Providing too many services – creating a situation not
realistic both to farmer and to Cheetah
– Transferring NGO contract price, this meant a farm gate
price 20-25% above real market value price (nice for
farmers but not sustainable)
– No long term agreement in place – year to year
negotiations – uncertainty for Cheetah
– The NGO making selection of the commodity, rather than
collaborating farmers
– No MOU detailing an exit strategy in place, basically 4
years work and a lot of capital (incl. public funds) lost…
CHEETAH PAPRIKA
CHEETAH PAPRIKA
Evolving Cheetah model
• From group contracting (1 per group) to individual farmer
contracts
• From mass recruitments to selected group formation and
selection
• From supply of seed and packaging materials on full
credit basis to down payment system by farmer
• From contracting and extension services provided by
Cheetah personel to provision of these services by
empowered groupleaders, Cheetah personel having role
of coordination and technical training of group leaders
• Reduction of company overheads by providing income to
group leaders, who receive income based on seed sales
/ contracts, credit recovery and crop volumes / grading
CHEETAH PAPRIKA
Why stop Zambian operation
• Lack of Long Term Vision Government
support to agribusiness
• Limited enabling environment
• Corruption
• Lack of competitiveness on Global Market
CHEETAH PAPRIKA
Improvements required on Cheetah
model
• Create greater efficiencies; concentrate farmer groups
• Select farmers with greater potential and grow the ability
of the farmer
• Create a better understanding by the contracted farmers
of the annual agreements in relation to product quality,
grading, price and payment modalities
• Ensure consistent payment within 1 week after purchase
• Empower Group leaders to become Entrepreneurs
• Provide higher level of inputs provided that credit
recovery rates increase to acceptable levels (> 80%)
• Grow farmer volume from 50 – 100 kg paprika to 250 –
500 kg
• Government to assist in agreements enforcing, reduce
side selling / side buying activities, create enabling
environment
CHEETAH PAPRIKA
Recommendations
• Carry out feasibility on products and markets
• Choose winning products, producers and
markets, be realistic
• donor & government support is key in dev phase
• Agree with long term partners – decide on exit
strategies in case of temporary support or
funding,
• Drop loosing products, producers and short term
clients
• Ensure that participants invest from own
resources, even when they are small
• Well managed and monitored extension staff
CHEETAH PAPRIKA
How to limit side selling
•
•
•
•
Buy Farm gate
Offer highest price
Cash payment
Offer most inputs; seed, fertilizers,
chemical, packaging
• Offer training & materials
• Be lenient in product grading …………..
CHEETAH PAPRIKA
……… = WISH LIST
• The above can only be realized if your
business is market leader in extension,
procurement, processing and marketing
• … which creates a problem as perception
of monopolist is created
• … which in turn creates lack of
government support &
• … reduces Donor, NGO & project support
= tight rope walk & demands balancing act
CHEETAH PAPRIKA
How to avoid input diversion
• Create Trust
• Monitor, monitor, monitor
• Well managed recording & data
management systems in place
• Ensure that farmer applies at appropriate
rates and times and let him experience the
reduced losses, growing margins over a
period of 3 years
CHEETAH PAPRIKA
How to promote trust
• Be in the business for a number of years
• Be visible
• Offer a 2 way purchase agreement which
is fully understood and agreed by farmer
• Agree on grade & weight at time of
transaction , not afterwards with results
Issue clear Goods Received Notes
• Pay within 7 days of product collection
• Host field days & carry out regular training
• Extension staff relationship
CHEETAH PAPRIKA
CHEETAH PAPRIKA
CREATING MARKETS
TRAINING PEOPLE AND
EMPOWERING
COMMUNITIES
ZIKOMO,
Mark Terken
CHEETAH PAPRIKA