10 August 2006

1
Best Practice Marketing for Communities in
Mountainous and/or Drug-Crop Producing Regions
Analysis of Marketing Systems
10 August 2006
2
DOCUMENT OVERVIEW

• - The Basic Organization Types
• Integrated Marketing Organizations
• Principles of Common Commercialization
  Activities

3
There are two basic models for produce marketing,
which can be shown as variations of the same
general framework
GENERAL FRAMEWORK FOR MARKETING PROCESS
Technical Services Providers
Certification Agencies
Producers and Producers Groups
MARKETING SYSTEM
Customers
Financial Institutions
Donors
4
In the first model, the marketing system is a
network of traders and development interventions
usually target the farm level
TRADE NETWORK APPROACH TO MARKETING PROCESS
Flow
Technical Services Providers
Certification Agencies
Financial

• Government Extension Agencies
• Research Organizations

Research, extension organizational development
Goods
Information
Certification
Payment
Finished produce
Marketing System
Producers and Producers Groups
Produce

• Small and large traders
• Wholesalers
• Industrial buyers

Customers

• Individual farmers
• Simple farmers organizations

Payment
Payment
Payment
Micro-credit finance for asset investment
Financial Institutions
Donors

• Government-owned agricultural banks
• Non-profit/NGO micro-finance organizations

• Government-owned agricultural banks
• Non-profit/NGO micro-finance organizations

5
In the second model, there is an Integrated
Marketing Organization (IMO), and development
often focuses on both the farmers and the IMO
INTEGRATED MARKETING ORGANIZATION (IMO) APPROACH
Flow
Technical Services Providers
Certification Agencies
Financial

• Government Extension Agencies
• Research Organizations

Research, extension organizational development
Goods
Information
Certification
Organizational development strategy
Payment
Marketing System
Finished produce
Producers and Producers Groups
Produce

• Contract farming companies
• Farmer-Owned Agribusinesses
• Marketing Foundations

Customers

• Individual farmers
• Simple farmers organizations

Payment
Payment
Working capital asset investment
Startup capital, loan guarantees
Payment
Micro-credit finance for asset investment
Financial Institutions
Donors

• Government-owned agricultural banks
• Non-profit/NGO micro-finance organizations

• Government-owned agricultural banks
• Non-profit/NGO micro-finance organizations

6
Each model has different strengths and
weaknesses, but both can be made to function very
effectively
STRENGTHS AND WEAKNESSES OF MARKETING MODELS
Trade Network
Element
IMO

• Areas with competitive agri-business sector
• Areas with no tradition of farmer cooperation

• Areas without strong competitive agri-business
  sector
• Areas with strong tradition of farmer cooperation

• Arises with minimal intervention or support
• Creates a diversified rural economy

• Achieves large scale
• Shares risk across entire value chain
• Creates social capital (when there is farmer
  participation)
• Creates an effective channel for delivering aid
  to large numbers of farmers

• Difficult to regulate, influence, or deliver
  services to
• Individual players in chain can gain and abuse
  positions of power

• Can economically and socially dominate areas
• Expensive and complicated to develop

• Value-chain efficiency
• Capability of farmers to deal with private
  sector

• Sustainability of business plan
• Adequacy of external support
• Sanctity of supply contract

7
DOCUMENT OVERVIEW

• - The Basic Organization Types
• Integrated Marketing Organizations
• Ownership
• Management
• Principles of Common Commercialization Activities

8
There are at least four distinct models for the
ownership of a marketing organization
OWNERSHIP MODELS FOR INTEGRATED MARKETING
ORGANIZATIONS
Element
Description
Advantages
Disadvantages
Association of smaller associations, or
second-level association

• High farmer participation
• Tax and development incentives in some countries

• Hard to start and develop
• Poor access to capital and investment
• Slow decision-making

Traditional Association
Private company in which shareholders are some or
all of the suppliers (farmers or 1st-level
organizations)

• Streamlined management
• Access to benefits of incorporation, e.g.
  limited liability, private investment

• Excludes non-shareholders from participation

Farmer-Owned Company
Privately owned company with shares owned by
farmers/1st level organizations and also private
sector or government

• Streamlined management
• Good access to startup capital
• Access to expertise of outside shareholders
• Access to benefits of incorporation

• Excludes non-shareholders
• Some risk of conflicting interests

Farmer-Outsider Joint Venture
Non-farmer-owned organization in which farmers
are only suppliers, e.g. contract-farmign
companies or NGO-type marketing organizations

• Highest levels of capital
• Highest levels of technical and commercial
  expertise
• Minimal levels of farmers organization needed

• Excludes farmers from governance
• Lack of farmer participation can weaken supplier
  relationship
• Risk of conflicting interests and/or exploitation

Outside-Owned Organizations
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Bolivias El Ceibo is a very successful
traditional farmers association, with millions
of dollars of assets and annual sales
EXAMPLE TRADITIONAL ASSOCATION EL CEIBO, BOLIVIA
Element

• Established 29 years ago in province of Yungas,
  in Bolivian Amazon
• Created to improve product quality and product
  price

Background

• Individual farmers produce organic, conventional
  and Fair Trade cocoa
• Cocoa is sold to El Ceibo and transported to
  1.6m Agro-Industrial Facility in La Paz
• Cocoa is processed into Cocoa powder, Cocoa
  butter, Cocoa liquor and chocolate

Production Practice

• Includes 34 Cocoa farmers associations
• Organized into a General Assembly,
  Agro-Industrial Division and Production Division
• All key management positions held by farmers or
  family members of farmers

Organization

• Annual Sales of 2m per year, growing at 15
  p.a.
• Exports bulk cacao (30) and semi-finished
  produce to foreign buyers and sells chocolate
  etc. to domestic market
• Marketing executives, who are farmers or family
  members, attend international trade fairs and
  maintain customer relationships

Marketing
10
Perus Olamsa Oil Palm Company is a very
profitable and fast-growing farmer-owned company
EXAMPLE FARMER-OWNED COMPANY OLAMSA, PERU
Element

• Established by 320 oil-palm producing families
  in Tarapoto region of Peru
• Created to manage processing and marketing

Background

• Individual farmers including 180 non-shareholdes
  produce Oil Palm on 10 hectares of land and sell
  to Olamsa
• Oil Palm is delivered to 2m processing plant
  for oil extraction

Production Practice

• 5 committees of producers appoint 5 members to
  Executive Committee
• Executive Committee creates strategy and
  appoints General Manager
• General Manager is outsider with experience in
  industry

Organization

• Produce is transported to Lima by road
• Sold to refiners and animal-food producers
• Very high demand for locally produced oil, so
  produce sells itself
• Net profits 400,000 per month

Marketing
11
Colombias Fruitimacizo is an innovative example
of a farmer-outsider joint venture
EXAMPLE FARMER-OUTSIDER JOINT VENTURE
FRUITIMACIZO, COLOMBIA
Element

• Joint Venture between 4 associations of tree
  tomato growers and the Colombian government
• Farmers purchased share in business by selling
  orchards to the Joint Venture

Background

• 450 families produce tree tomatoes for
  Fruitimacizo in exchange for wages and profit
  sharing
• Produce is taken to local collection centres,
  cleaned, and graded, and then to central
  collection area where it is cleaned, graded again
  and the top grade is packed
• Production about 2,500 tonnes per year

Production Practice

• Organization as a General Assembly and Executive
  Board, with mixed farmer and government
  representation
• Has 29 technical, management and sales staff,
  who are all outsiders
• Has scheme to let farmers buy out government
  share with 50 of farmers share of profits

Organization

• Produce sold to processors, wet markets and
  up-market supermarkets
• Commercial Representatives in 4 main market
  centres in Southern Colombia maintain
  relationships with supermarkets and other key
  buyers

Marketing
12
Thailands Royal Project Foundation is an
excellent example of an outside-owned marketing
organization
EXAMPLE OUTSIDE-OWNED ORGANIZATION ROYAL
PROJECT, THAILAND
Element

• Established in 1969 by Thailands King to help
  farmers to adopt temperate-zone cash crops as
  alternative to opium
• Established marketing division in 1985 to sell
  crops introduced by Research and Development
  sections

Background

• Approximately 30,000 families produce on
  multiple plots with average total size of 2.5
  Hectares
• Most popular crops are temperate-zone
  vegetables, fruit and flowers
• 50 of produce is grown for the Royal Project
  Foundation under contract and delivered to one of
  7 post-harvest centres in highlands

Production Practice

• Royal Project Foundation is under leadership of
  HSH Prince Bhisatej Rajani
• Organization includes research, development
  (extension, land development, social projects)
  and marketing
• Staff are specialist staff and volunteers from
  government and universities
• Marketing division manages cold chain,
  distribution network and sales process

Organization

• Low grade produce is sold to wholesalers
• High grade produce is sold to caterers,
  supermarkets, hotels and restaurants and in own
  Doi Kham stores
• Annual sales more than US9m

Marketing
13
DOCUMENT OVERVIEW

• - The Basic Organization Types
• Integrated Marketing Organizations
• Ownership
• Management
• Principles of Common Commercialization
  Activities

14
The most effective way to develop an IMO is to
create a working agribusiness and then phase in
farmer participation later on
IDEAL MODEL FOR ORGANIZATIONAL DEVELOPMENT
Introduce farmer governance
Strengthen farmer governance
Establish business
Years 1-4
Years 5-8
Years 9-12

• Develop a normal contract farming business
  using local farmers associations as suppliers
• Appoint external managers to all key positions
• Provide credit and technical support in exchange
  for guaranteed supply
• Develop quality and consistency of production
• Establish markets and customer relations
• Reinvest profits in growing business

• Start to create farmer ownership and governance
  of organization
• Help farmers associations to elect members to
  shareholders assembly and oversight committees
• Let external managers mentor farmer-leaders
• Create understanding of downstream processes
  (processing, marketing) in associations
• Encourage sense of ownership amongst
  associations
• Continue to manage and develop business

• Reduce external support for organization
• Hand over management positions to farmer-leaders
  whenever possible
• Continue to provide advice and technical support
  (e.g. extension, equipment maintenance)
• Give farmers the vision of sending children to
  study marketing, engineering, etc. and returning
  to work as technical specialists in organization
• Continue to manage and develop business

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This kind of organization should balance skilled,
focused management with broader beneficiary
ownership and governance
ORGANIZATION CHART FOR FARMER-GOVERNED IMO
Farmer participation and oversight
Producers Groups
Provide produce and members of assembly and
committees
Ensure that General Assembly, Executive Committee
and General Manager act in accordance with
Charter and with legal obligations
General Assembly
Exercise oversight over Executive Committee and
General Manager, Make landmark decisions
Develop strategy of business, manage
organizational development, appoint General
Manager, exercise oversight over General Manager
Executive Committee
Oversight Committees
Agribusiness management
Manage agri-business, hire/appoint staff,
represent organization with other institutions
General Manager
Manage tasks essential for running of
agri-business, e.g. extension, processing, sales
Technical Director 1
Technical Director 2
Technical Director 3
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Any marketing organization should have financial
management capacity- at the very least basic
monitoring of costs and revenues
SIMPLIFIED FINANCIAL MANAGEMENT SYSTEM
Monitor each kind revenues and costs for the
organization
Compare the size of each item by stating each one
as a percentage of sales
Divide net profit by Invested Capital to
calculate Return on Invested Capital
Calculate the annual growth of each line-item
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To buy and sell produce, a marketing organization
must invest funds in its working capital
CASH FLOW MANAGEMENT FOR MARKETING ORGANIZATIONS
Key
Sales
1800
Normal management
Net working capital
1600

• Customers pay in 14 days
• Stock kept for 45 days
• Pay farmers in 7 days
• Net working capital is 14 of sales

1400
1200
Sales ( 000)
1000
800
600
400
200
0
Month

• When an organization has a cash flow shortage,
  it can create cash by reducing stocks, paying
  suppliers later and getting quicker payment from
  customers
• This has to be done without damaging the
  business or key relationships

1800
Improved management
1600

• Customers pay in 7 days
• Stock kept for 14 days
• Pay farmers in 14 days
• Net working capital 2 of sales

1400
1200
Sales ( 000)
1000
800
600
400
200
0
Month
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DOCUMENT OVERVIEW

• - The Basic Organization Types
• Integrated Marketing Organizations
• Principles of Common Commercialization
  Activities

19
Packing and grading are essential activities for
serving modern customers- the parties that do it
are allowed to get a return on their investment
ILLUSTRATIVE PACKING AND GRADING PROCESS GENERIC
VEGETABLE
Urban Packing Centre
Location
On-farm
Near Farm
Loose, unclean, mixed grade produce
Partially graded and cleaned produce
Graded and cleaned produce
Checked, graded, cleaned and packed produce
Produce Form
Produce Value
20 cents/kilo
25 cents/kilo
40 cents/kilo
80 cents/kilo
Small working area, sorting and grading tools,
storage containers, cleaning facilities
Large packing house, sorting and grading tools,
storage containers, packing materials and
equipment, storage rooms
(Farm), Harvesting Tools, Storage
Invested Capital
Farmer
Small Trader
Large Trader
Agribusiness
Implementer
Integrated Marketing Organization
INCREASING COST, BREAK-EVEN VOLUME AND COMPLEXITY
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Processing has a similar logic- it allows the
capture of economic rents as a reward for
investment in assets needed to transform produce
ILLUSTRATIVE TRANSFORMATION PROCESS COFFEE
Packing Centre
On-farm
Collection Centre
Location
Roasted, ground and quality-tested beans
Packed, roasted, ground and quality tested beans
Produce Form
Dried, fermented and graded beans
Loose beans
Produce Value
30/tonne
130/tonne
4000/tonne
3000/tonne
(Farm), Harvesting Tools, Storage
Drying Equipment, Fermenting Equipment
Storage, Roasters, Grinders, Q.C. Labs
Storage, Vacuum-packing, Labeling material and
equipment
Invested Capital
Farmer
Coffee Processor
Implementer
Integrated Marketing Organization
INCREASING COST, BREAK-EVEN VOLUME AND COMPLEXITY
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Thank You