Industries must seize supply chains

04 Oct, 2019 - 00:10 0 Views

eBusiness Weekly

As farmers and electricity consumers start gazing at the sky waiting for rain, farmers are also seeking inputs and after a drought year very few will be able to buy these with their own resources so almost all will be seeking contracts.

Only one agricultural sector is well-organised in this regard, tobacco. The industry was forced to reinvent itself at the start of the millennium as a result of land reform. At the end of the 1990s almost all tobacco was grown by around 2000 large-scale commercial farmers who sourced funding for inputs from the banking sector, although many were able to mobilise a significant proportion of their requirements from retained earnings and working capital. Banks had specialised agricultural units, staffed by officers with degrees in that discipline, who drove out to their clients to physically examine the farms, as well as studying well-kept farming records.

The crop, after curing and grading, was taken to one of three auction floors and sold, with banks then getting their loans back. Merchants had very little contact with the farmers.

Almost 20 years later a larger crop is brought in from more than 40 000 farms, with some growers planting less than a hectare. A quite different financing system has been developed, contract farming. Most growers obtain inputs of fertiliser, chemicals and seedlings from one of the major tobacco merchants and deliver their cured and graded crop to that merchant. Small auctions set the price to implement the final stage of the contract. Now merchants and farmers are exceptionally close.

Everyone knows the potential risks of contract farming. Those contracting for crops are basically looking for farmers who can fulfil two essential criteria. The farmers have to be competent, that is they can grow the crop with the required quality and quantity, and they have to be honest, that is that they will use the loaned inputs to produce a crop, rather than sell them off, and will deliver their crop to the company that put up the inputs and not cheat. Over two decades honest merchants have built up lists that total more than 40 000 farmers who can produce what is one of the more complex crops and who do not cheat. Those lists are an invisible, but rather important asset for merchants, even if they cannot be put in the accounts.

One major industrial company, Delta, has done the same. Delta sources almost all its raw materials in grains in Zimbabwe using Zimbabwean farmers under contract. It has been doing this for a long time but the land-use changes meant it had to extend its contract system to include all its requirements for barley, sorghum and maize. Delta too has that invisible asset of a list of competent and honest farmers. And in return for its investment it has an assured source of raw materials, without having to worry about imports, and since it supplies the inputs it is assured that the grains are exactly the right type and variety it needs.

Other agri businesses are less well off. Some, to their credit, have started contract farming but the percentages are still very low and a lot of progress is needed. There are a number of constraints.

First, these city industrialists need to find farmers who are both competent and honest. This is less difficult than it sounds thanks to the work of the tobacco merchants and companies like Delta. If someone can grow decent tobacco and can grow grains that meet the requirements of an exacting master brewer then they can easily diversify and grow other crops as well, building up their farming business, no matter how small. In fact, the old commercial tobacco farmers were the mainstay of the soya production in the days when Zimbabwe grew its own soya, finding the legume a critical component of good crop rotation. There is no reason why the smallholder tobacco farmers cannot do the same and end the senseless import of raw materials that we can grow ourselves. Soya processors could start finding their farmers by inviting those with track records in tobacco to apply.

At one time the Cotton Marketing Board, the only one of the old marketing boards set up by settlers that obtained most of its crop from smallholders, had the interesting policy of using farmer clubs, groups of smallholder farmers who would each guarantee each other. The management rather smugly noted that a community of shrewd, competent and honest farmers would only allow in a new member whom they could trust, and as that young person had probably grown up in the community they could make a largely risk-free assessment of ability and willingness to work. It was a practical way of ensuring that they contracted only able and honest farmers without the unviable high administrative costs of visiting and researching every applicant for input assistance. Such community centred groups have been used in the same way in many advanced countries with a lot of small farms, such as France.

The second problem, the need for finance to both purchase the bulk inputs and then buy a crop that has to be stored for months before use, is not insoluble. Zimbabwe’s banking sector, and especially its merchant banking, became a fairly sophisticated operation largely because of the need to finance first farmers to grow crops and then finance merchants and industrialists to buy, process and store those crops. The critical factor in making everything work was the reduction in risk to acceptable levels by ensuring that all the farmers involved were competent and honest. This is one of those times when a list of such farmers has value in the eyes of accountants and bankers.

Command Agriculture has filled some gaps. But there have been problems. There is plenty of anecdotal evidence that some farmers obtained inputs and sold them. There are stories of side marketing, with dubious characters driving around paying instantly for crops that should be delivered to the Grain Marketing Board. And there is a general belief that a significant number of farmers under the scheme do not see any reason to pay back the Government, because it is the Government rather than a private bank.

Minister of Finance and Economic Development seemed to accept this criticism in his supplementary budget. He made it clear that the Government would continue with Command Agriculture, and even upgrade it. But this time the management was going to be a lot tighter to eliminate abuses.

Command Agriculture could also be of use to the private sector. A farmer with a decent track record in the Government scheme, backed up by the required documentation, would obviously be the sort of person a decent private company would like to consider when selecting its own contract farmers. The Government has suggested that its major intervention was a short-term effort and it expected the private sector to move in and play a far larger role. So for once there is no problem of poaching.

The events and economic problems of the last couple of years have probably made many agri-industrialists in Zimbabwe realise just how vulnerable their supply chains can be when they are dependent on imports. Taking possession of their supply chain is an obvious strategy, although for many it requires a change in the corporate culture, moving into the community for supplies, as well as for customers. The days of just being the processor and packer are probably numbered.

But Delta tops the ZSE market value rankings for a reason. It has a largely local supply chain and has a logistics system to get products to customers that is the envy of many. It is not just a producer reliant on others for material supply and for distribution. It controls its entire business from growing crops to getting the bottles into remote bars. And as a result it pays dividends even during economic thunderstorms.

Others need to do the same. 

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