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Understanding Value and Supply Chains in Agriculture by CJ Jones

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A better understanding of value and supply chains
A start up toolkit analysis
Some ideas for practical ways to use the toolkit

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Understanding Value and Supply Chains in Agriculture by CJ Jones

  1. 1. Understanding Value and Supply Chains
  2. 2. WHAT WE SHOULD GET OUT OF TODAY?
  3. 3. STARTING THE JOURNEY…..
  4. 4. SECTION 1 WHAT IS AVALUE CHAIN AND HOW DOES IT LINK TO A SUPPLY CHAIN 1. Definitions of ‘value chains’ 2. Pro Poor applications of value chain approaches – the pro poor lens
  5. 5. A range of activities required to transform a product or service from conception through different phases of production to delivery to final consumers (Kaplinsky 1999) A value chain exists when all of the actors work in a way that VALUE is generated all along the chain What is a value chain ?
  6. 6. UNDERSTANDING THEVALUE CHAIN  There are two ways to view a value chain  In a narrow lens - where you only consider the activities performed on one farm, within one firm or business. This is effectively a chain that links producers to consumers.  In a wide angle lens – a systems approach that looks at a broad range of activities and actors. For this we start with the production system of raw materials and moves through all the processes that take the product to consumers. At each stage in the systemVALUE is added.  Both backwards and forwards linkages examined with this lens, does not look at the activities of a single enterprise but rather a cluster of activities that make a value chain active and sustainable This is the most valuable lens when adopting a pro poor approach
  7. 7. Why consider pro poor value chains?
  8. 8. PRO POORVALUE CHAIN ANALYSIS  VCA is a valuable tool in the design of programs and projects reinforcing specific/desired development agendas  EG… increasing levels of income (lower income quintiles), generating maximum employment (youth), positive uplift for a vulnerable group (women, refugees, disabled), use of locally produced raw materials (crafts, indigenous vegetables) development of a vulnerable area or region (growth corridors,Arid and semi-arid lands, poverty pockets)  The entry point for theVCA is directly related to the desired development outcome
  9. 9. BUILDING UNDERSTANDING AND CREATING CRITERIA  First steps to build criteria is to understand which PROBLEMS you are trying to solve. Am I trying to integrate the poor into markets? Am I trying to alleviate poverty with this activity or product? Am I trying to increase employment opportunities Am I trying to lower entry barriers for the poor? Am I trying to develop a value chain that has a low risk for development ? Am I trying to address the incidence of absolute poverty – that is am I targeting the truly vulnerable  You can also ask questions that focus more on access to markets, the environment, national investment strategies or gender
  10. 10. WEIGHTING  Once you have decided the criteria on which you will build yourVCA you need to decide on some sort of weighting for these criteria You can do this on your own but you might jeopardize the credibility of your decisions. If possible try to get the ‘buy in’ of the community in the final decision on the weightings  Two ways to weight- simple numeric or proportional. Higher weightings should be given to criteria that support greater pro poor characteristics
  11. 11. IDENTIFYING PRODUCTS OR ACTIVITIES  Key to success is participation but beware the crazy idea and the overly long discussion processes. Manage the processes by creating short lists based on your research and own, independent landscaping!!  Core questions to keep in mind:  Is the product already produced in the area?  Is there a ‘cluster’ of support activities or consumers to support the value chain  Is the selected commodity/activity feasibly possible in the area?  Does the value chain and/or the products have a pro poor focus?  Is there demand?
  12. 12. MAPPING CORE PROCESSES  This is an initial step inVCA – not an end result rather it provides the core of your on-going analysis  Don’t overly complicate the process at this point – it gets complicated enough as you proceed and add layer on layer of detail  6 to 8 elements are enough  Core processes will change according toVC you are analyzing. Industrial processes are different from agro-processes Example of a simple set of core processes in an ag. value chain Not all value chain mapping needs to be lineal. We can also create parallel process maps which are more complex and detailed
  13. 13. CASSAVA Value Chain Confused An unclear picture? And then ... What does it look like if we map a single product with multiple processing ends or consumer destinations.... Where do I fit in this?
  14. 14. WHAT THE …..
  15. 15. MAPPING ACTORS  Easiest to map actors according to the main function or occupation within the chain  For greater depth in your understanding of the actors you could also consider different classifications – legal status, size (employees etc), poverty ranking, location In pro poor VCA it is important to identify the position of the poor as actors at various processes or levels of the chain. Do not assume that the poor are always the producers – they can also be suppliers of services to others in the chain . Weak value chains often mean one actor can have more than one role
  16. 16. EXAMPLE: MAPPING OF SPECIFIC ACTIVITIES UNDERTAKEN BY ACTORS IN CORE PROCESSES IN A THATCHING GRASSVALUE CHAIN
  17. 17. Northern Uganda maize value chain 18 Financing Production Storage Milling Commercial- ization • Access to credit for purchasing inputs • Inputs such as seed, fertilizer, herbicides • Skills training, and technical assistance • Planting and harvesting of maize • Transport a-tion and aggregatio n of maize • Collection and storage of maize • Transformati on into maize products (e.g maize flour) • Domestic and international distribution of maize Input Supply/ Services Source: Interviews, TNS Analysis Description Traders/ Brokers Types of player s • Financiers • Banks • Micro- credit • Cooperativ e • Providers of - Certified seed - Fertilizers - Pesticide - Fungicide • Agro-Input Dealer providing training - Cooperati ve governanc e - Business mgmt - Technical assistanc e • Small-scale farmers (0.2-0.8 ha) • Medium- scale farmers (0.8-2.0 ha) • Large-scale farmers (>2.0 ha) • Rural traders/ brokers • Urban traders • Large scale traders • Farmer’s home (majority) • Satellite Collection Point • Licensed Warehouse Receipt System (WRS) warehouse s - Cleanin g - Drying - Sorting - Pkging • Small-scale millers (<10MT/day ) • Medium- scale millers (<50MT/day ) • Large-scale millers (<150MT/da y) • Super- markets • Local markets • Distributors • Exporters • Retailers • Wholesaler s • Town trader EXAMPLE FROM THE FIELD
  18. 18. MAPPING CONSTRAINTS AND SOLUTIONS  Identification of constraints can help understand some of the barriers facing the poor when they try to enter a value chain  Important to map the constraints at level point in the chain  Possible to see solutions more clearly when constraints identified. inputs production procurement processing Activities Actors Difficulties Solutions
  19. 19. Northern Uganda Maize value chain constraints 20 Financing Production Storage Milling Commercial- ization • High transaction cost • Lack of access to credit for youth farmer • Excess capital use for consumption good • High perceived cost of improved seed and fertilizer • Lack of farmer trusted seed source • Lack of knowledge around newly introduced higher quality varieties • Lack awareness of farming benefits or poor perception of farming • Subsistence mindset • Lack of organized youth • Inadequate production • Youth work ethic • Lack of public price discovery among farmers • Lack of reliable weight scales • Collusion of traders on prices drive down rural farmer margins • Lack of quality premiums • Lack of proper post harvest techniques and equip- ment • Lack of adequate on farm storage leading to post-harvest losses (25- 30%) • Lack of demand for WFP Gulu • Limited working capital to procure sizable maize volumes • Dilapidate d technolog y leads to poor quality and low flour yields • Poor machines that raise operation costs • Inconsistent maize quality • Lack of market awareness • Lack of organized commercial export • Lack of access to market Input Supply Source: Interviews, TNS Analysis Constr- aints Traders/ Brokers Note: Milling constraints not discussed on subsequent slides EXAMPLE FROM THE FIELD
  20. 20. RELATIONSHIPS, LINKAGES AND TRUST  Three key interconnections exist between actors in the value chain 1. Relationships – social connection between actors 2. Linkages – business relationship between actors 3. Trust – social capital between two parties enabling more effective linkages through reductions of transaction costs  Linkages can be both vertical and horizontal. Vertical exist between actors along the chain while horizontal exist between actors at the same level in the chain  Important to map linkages as it shows hidden constraints and possible market failures  Mapping relationships and linkages helps identify the power distribution in the value chain
  21. 21. OTHER OPTIONS FOR MAPPING THERE ARE MANYWAYS TO ANALYZE AVALUE CHAIN
  22. 22. IMPORTANCE OF COSTS AND MARGINS  Key questions to be asked in this analysis:  What are each of the actors costs – fixed and variable?  What are the required investments for entering the value chain?  What are each actors revenues (sales volumes and selling prices)?  What are each actors net profits, margins and break-even points?  How are investment costs changing over time?  How are investments, costs, revenues, profits and margins divided between the actors? What are the underlying causes of these divisions?  How do the various costs compare to other value chains? Are they higher or lower than other chains?
  23. 23. Step out of the box – this is business in Africa – there are costs and critical margins here. The smaller the business the more critical cost analysis can be
  24. 24. UNDERSTANDING COSTS AND MARGINS  Understanding costs and margins allows practitioners to determine how ‘pro poor’ a value chain really is  We need to understand both actual costs and margins, as well as historical costs and margins.  An effective pro poor value chain will result in greater improvements in income and wealth for the poor in the chain relative to other actors Allows us to understand if the value chain is really a good source of income Enables us to understand if there were positive income trends over time in the value chain and gives clues to potential growth
  25. 25. COSTS AND MARGINS THINGS TO BEWARE OF!  What is ‘poor’?  You must treat your client as a micro entrepreneur – business vs. subsistence farmer …… BIG DIFFERENCES  You need to understand the difference between opportunity costs and financial costs  A good value chain analysis should get a real handle on the real opportunity costs faced by farmers because they affect real choices that a producer and possibly his family will have to make - real choices … a bag of fertilizer or school fees, new technology or medical bills, cash crop vs. food crop  It is CRITICAL to assign a realistic estimated value for the hidden costs that a poor producer will face – costs of family labor, land, savings, ecosystem services (water, retained soil nutrition etc)  Don’t get hung up on an accounting style accuracy – you need to be close but this won’t be audited. Get as close to the truth with interviews and through other indirect methods
  26. 26. OPERATING COSTS  Two cost types:  Variable Costs and fixed costs  Variable Costs: costs that change in direct proportion to the level of production. In pro poor value chains this is important because you do not want over extend or scare (!!) your clients with too much debt or impact on opportunity costs at the beginning of the process  Fixed costs: costs that remain constant no matter the level of production – registration, costs of co-op membership, cost of certification  Not all costs can be easily categorized so AGAIN don’t get hung up on the categories – rather make sure you have ALL costs captured – eg. Operational Costs Transaction Costs Regulatory Costs Investment Costs Variable Fixed Formal Informal $$$$ $$$$ $$$ $$$ $$$ $$$
  27. 27. OTHER CONSIDERATIONS  Losses in production – poor handling, spoilage and waste all impact the cost of production  What are the losses in this milk value chain? Where do they start? What are the opportunity costs?
  28. 28. OTHER ISSUES  Revenues per actor an important calculation – we often look at a community based intervention but this can make us overlook the vulnerable in the community – always consider impact on the INDIVIDUAL  Consider revenues over time – don’t allow the high season process to dictate expectations – do the calculations for the entire season and then created an average weighted price. You might be surprised by outcomes – perhaps production is NOT the issue impacting income  Always work with the NETT values and share these workings with your clients – everyone (evenYOU!!) seize on the bigger returns forgetting subtleties like taxes and ‘hidden’ or opportunity costs  Always consider the relative position of your client in the value chain Questions for you  Can your client afford to participate? If not what restricts their ability to participate? Can that failure be ‘fixed’. If they do participate what then – do they make a meaningful income?  Consider who makes what on the chain
  29. 29. ANALYSIS OF INCOME DISTRIBUTION  Gives us insights  Into where and how the poor can participate in the value chain  Into effectiveness as a poverty alleviation activity for the individual and the community  Highlights other ‘gaps’ – governance, infrastructure • Have your clients participate in the information collection – questionnaires, interviews • Beware an answer that points to a single income source – most poor families and individuals usually have more than one income source • Understand the place of income in livelihood strategies
  30. 30. Typically, the brokers and traders make the greatest margins while adding very little value in the value chain 31 Source: USAID, interviews Ugandan value chain/ cost structure (UGX/kg) Margin (UGX/kg): % margin: 35 90 10 0 40 40 30 N/ AN/ A 18 29 23 8 7 5 Note: Subsistence farmer, traders/brokers main value addition is transportation EXAMPLE FROM THE FIELD
  31. 31. Understanding Employment in the value chain
  32. 32. EMPLOYMENT  Impacts not just the producer  Has wider community based implications  The greatest danger point for unintended consequences  Is variable over time – most rural producers also sell labor at some time in the year  Employment is often very important to youth in communities  Gives you useful insights into gaps and perhaps, how to involve the communities most vulnerable
  33. 33. Walk and wait Cope with appalling infrastructure Queue and wait some more ….. Carry/drag the 90 kg. of maize bag home … maybe on your head FOOD AID DELIVERY (SERVICE) VALUE CHAIN
  34. 34. LOOKS BAD EH?? But things are NEVER what they seem …..

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