Economic Opportunity Mailing List Archive

["Vinay Chand" <<address removed>>]

In response to Andrew's contribution, I can add a bit to my earlier comments. 

In most countries there are imaginative entrepreneurial farmers, I like to call 
them gentlemen farmers with no disrespect, usually but not always retired 
enthusiastic Public servants. Recent examples I found a senior civil servant in 
Himachal Pradesh, India, who set up a very good mushroom production network 
with small farmers and sells to local markets. In Sri Lanka one of the very 
best producers of essential oils was a retired Chief Chemist for the country. 
In Cambodia, a long term Consultant to a Ministry set up a lemongrass oil 
operation. These small operations can sell direct to local markets or to 
traders in other countries who aggregate before sending them on to major 
markets.

NGOs are often very active in imaginative schemes along similar directions but 
can face marketing problems. In most poor countries the idea of growing 
medicinal plants as a high value diversification is all the vogue at present. 
But selling them in low volumes to the domestic market often leads to unviable 
prices. You would think that with all this broad interest someone would have 
financed a good global supply and demand assessment but no one has. In the 
absence of one, it can be a dangerous diversification. 

For higher value fruits and vegetable diversification the key is costs. First 
of all what matters in my opinion is the ratio between farm gate and retail 
prices, in Europe we consider 1:3 to be efficient, 1:4 normal, 1:5 inefficient 
or excessive. In developing countries with inefficient value chains and 
distribution systems, ratios of 1:10 or even 1:20 are not uncommon. For 
developers there is little point in setting up parallel systems except for risk 
reduction through diversification although it astounds me how many try it. It 
is not enough to throw in one isolated advance such as a cold store or a better 
market facility, that increases costs more than revenue. The existing system 
gives existing margins. To give the farmer better returns at farm gate, you 
have to offer prices that require an increased level of efficiency from 
planting material to retail. I worked on a model with a cold chain, tissue 
culture lab and nurseries that requires a capital investment of a million 
dollars. This means that the system would have to deal in over 1,000 tonnes 
working with more than 300 farmers of one ha and more if it is to operate on 
tight margins. The task becomes far easier if there are premium quality markets 
and if farmers have more than 2 ha each.

As to who would organise that is a difficult question. Wherever you go, it is 
fashionable to warn you against co-operatives. They appear to have got a bad 
name mainly because of politicians controlling and using them for their 
purposes. But the same politicians are probably running the country and will be 
a hindrance in whatever you do. Instead, there is a requirement use other words 
or phrases such as self help groups, farmer associations etc. What is clear is 
that you need to organise farmers and let the operation be run by the private 
sector. It is potentially very profitable but requires development finance 
initiative to get it up and running. 

Contract farming is also back in vogue. There are a lot of broad claims if less 
analysis or understanding. A lot of people use the phrase when they really mean 
contact farming. In reality contract farming can be a good procurement 
mechanism for processing operations but depends on developing processing 
capacity, seasonality of supply and markets. Pepsi Cola undertook a 
particularly successful tomato project in Punjab, India (under regulatory 
duress) which gave farmers lower unit prices but left them with a surplus they 
could sell to others.

There is considerable interest from larger firms in India in contract farming 
linked to processing but here critical mass becomes all important although it 
does not rule out working with small farmers. You could for example set up an 
palm oil processing plant but need 10,000 ha of oil palm to make that viable 
and similarly you would need 20 million coconuts to justify a Tetra Pak line 
for coconut milk. In Cambodia investors started to do just that for palm oil 
but for financial reasons had to stop at 4,000 ha until now which meant no 
plant yet. India has a shortfall of edible oils but the risk of undertaking an 
oil palm type operation has discouraged investors particularly because a number 
of schemes failed. If the risk were reduced in India through participation by 
CDC or IFC there are excellent prospects for oils, juices and canning. Punjab 
has a basket of large integrated projects which would help diversify from rice 
and maize which have depleted water resources to an unacceptable level and 
could absorb $300 million but needs someone with imagination to prepare the 
project and inject minority international development money. The need to 
coordinate with a number of parties in the private sector is often daunting for 
international development banks despite their public relations support for the 
approach. 

Finally, perhaps the problem with widest implications is that when advocating 
increased production or diversification or support infrastructure, you should 
start with the market rather than puzzle over who to sell to once you have the 
production. We all subscribe to 'market driven' projects but those who fund and 
beneficiaries pay scant regard to markets and marketing. It is easier for them 
to concentrate on facilities in isolation to the system, such as markets, cold 
stores and warehouses. Using India as an example again, all over the higher 
altitudes in northern India there is a potential for diversification into 
fruits, vegetables and herbs for both, the domestic and export markets, but 
very little has actually been done to see which would enjoy market demand, to 
target varieties and seasonality and then to have the infrastructure to allow 
you to achieve that. This is the sort of technical assistance that would be 
really useful particularly if it also looked at the relative roles that could 
be played by NGOs, public and private sectors.


Best wishes,

Vinay Chand,
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