Organic Business Guide/Developing organic value chains

Developing organic value chains

An organic business can only function if it is part of one or several supply chains that link production and consumption. This chapter will help you to define your role in an organic value chain and how to collaborate efficiently with other stakeholders.

What is an organic value chain?

Figure 7: Typical value chain of agricultural commodities

A value chain consists of all the actors involved in the production, processing, trading and selling of a specific product (Figure 7). It is more or less the same as a supply chain, with the difference that the term supply chain implies that the perspective is from a buyer sourcing raw materials, while the value chain puts more focus on the value added at each step, and on the collaboration between the different value chain actors. The value chain operates in a certain context or business environment, and relies on different types of services (financial services, certification services, technical advice etc.).

Quite a lot of work has been done on how to facilitate and manage effectively both value chains in general and agricultural value chains in developing countries in particular. Some useful references are provided in the Annex "Value chain facilitation".

Different products, different value chains
Different agricultural products and their value chains have different characteristics. Perishable products like fresh fruits and vegetables, for example, require more sophisticated logistics and efforts in timing than non-perishable products like rice or sesame. Bulk commodities like cotton and coffee need a certain scale of production (i.e. larger farmer groups) in order to break even, while production of high-value niche products like medicinal plants can be viable at a much smaller scale. From a development perspective, different value chains may have different socio-economic impacts. Crops which require high initial investment, like fruits or tea, are likely to exclude marginal farmers. Some products particularly benefit women, like shea or lemon grass (see chapter "Gender isuues in organic value chains").

Who plays which role in a value chain?

Organic businesses want to bring organic products to promising markets. In doing this, they depend on a number of other players directly involved in their value chain: input suppliers, farmers, store keepers, transporters, processors, traders, retailers. The value chain will only function well if each chain actor does a good job in playing his/her role, thus adding real value to the product, and if each actor can do this in a profitable way. Both in organic and Fair Trade value chains there are usually fewer intermediaries, because of the transparency and traceability requirement. As traceability and integrity of the organic products need to be ensured, suppliers and processors cannot be replaced that easily. All chain actors need to know their role and cooperate well in order to succeed. It requires that all are committed to a long-term perspective.

One of the most important factors for the smooth and efficient functioning of a value chain is that each actor involved plays a role that suits his/her capacities and structure s/he is operating in. A farmer organisation may expand its activities from organising farmers to bulking and first-level processing, but is it also able to develop markets and pursue commercial contacts with buyers abroad? Local processors may perform well when subcontracted by a company or cooperative to do a job, but may find it difficult to purchase and sell raw materials at their own risk. An NGO may be good at training farmers and setting up extension services, but may be less experienced in advising a commercial business.

Finding a role that fits you
There is no general rule on who should - or should not - take up a specific function, but there is a tendency that organic businesses try to do more than they actually can manage. Before absorbing a new role, it is therefore wise to thoroughly and honestly check the following points:

• Do you have the necessary technical know-how?
• Do you have sufficient professional experience and managerial skills?
• If not, are you ready to employ professional staff who have these experiences and skills?
• Are you sufficiently familiar and connected with the target markets?
• Does the new role result in conflicting interests that could affect effective implementation?
• Are you able to react quickly and take business-minded decisions?
• Do you have access to the necessary capital for investment and trade finance?
• Can you take the risks involved in playing this role?
• Do you have the necessary checks and balances to handle large amounts of money?
• Are you sufficiently service oriented?
• Do you have the necessary communication skills (language!) and connections?

Often there is a "lead agency" that mobilises the value chain and ensures that all required chain links are in place. In organic value chains, this can be the producer organisation, the processing company or the exporter.

Value chain supporters

Figure 8: Example of a value chain map for organic cotton, from inputs to consumption

Besides the actors directly involved in the chain, there are a number of stakeholders supporting the set-up or functioning of the value chain (see example in Figure 8). Typical supporting functions that are needed for an organic value chain are:

• business development and consultancy services
• financial services (micro-credit, investment, trade finance)
• certification services (organic and possibly also Fair Trade)
• farm extension and advisory services (preferably integrated in the chain)
• transportation and storage services
• sales agents and brokers

Drawing a value chain map like the one in Figure 8 is very useful in order to get an overview of the stakeholders involved to clarify the role of each one, and to distinguish clearly between value chain actors and supporters. The distinction is quite simple: chain actors own the product at a certain time (they produce, process, buy or sell), while supporters don't.

Development NGOs and donors can facilitate the initial development of an organic business or value chain, withdrawing once these can function independently. They usually work in projects of a given duration. As they thus only play a temporary role, development NGOs should be careful with taking on a role that is crucial for the functioning of the value chain (see chapter "Facilitating the development of organic value chains"). They should particularly refrain from engaging in buying and selling. The role of local governments and facilitators in creating an enabling environment for the development of organic value chains is dealt with in chapter "Creating a conducive environment for organic business".

Building partnerships along the chain

The organic value chain - and thus your business - will only function well if all stakeholders involved cooperate. Partnerships between the different stakeholders therefore play an important role.

Partnerships between farmers and businesses
The relationship between the farmers who produce the product and the entity that buys it from them - be it a company or their own marketing cooperative - is of crucial importance. For the export company this is not always a natural thing. Many entrepreneurs do not really know what is going on in the countryside. An entrepreneur who has turned organic needs to learn and understand the plight of the farmers: this is a sensitive relationship. Farmers have plenty of stories of how they were ripped off by traders or their cooperatives, receiving promises, but none of them were kept. Many farmers will be wary of yet another great project. In an organic business, where substantial time and effort is needed to convert from conventional to organic farming, it is of particular importance to develop a trustful and loyal relationship with the farmers. How this can be done is dealt with in detail in chapter "Involving Farmers".

Partnerships between businesses and clients
Equally important is the relationship between the seller (the cooperative or company) and the buyer (importer, processor or retailer). In many cases there is distrust between them. There are cases where trade finance disappears, or delivered produce is not paid for. As a seller, you have to choose between speculation on the spot market and developing business relationships where benefits and risks are shared; or finding a balance between these two (see chapter "Marketing").

Building a trade relationship is a whole lot more than agreeing on a price (see box). In chapter "Building and maintaining client relations" you find detailed recommendations on how to successfully build - and maintain - client relations.

Doing business together
In country X, exporter Z insisted on getting at least the cost price, which he had calculated at US$ 0.42. Buyer D offered only US$ 0.37/kg, but also wanted to support the organic initiative in several ways. He wanted to donate 5 cents of the retail price of each product sold to a fund supporting the project. He also thought that he could find funds for buying new motorcycles for the field officers. He wanted to start an information campaign in Europe about the organic initiative, and visit it with representatives of an important customer of his, an American retailer. Apart from buying all that was in stock, D wanted to order 250 tons of the produce for next season.

For that the project needed to expand. D was willing to provide the working capital to pay for the field staff during the season. Based on a realistic crop estimate, he could free up trade finance, so that the exporter could pay the farmers the full price cash in hand the moment they delivered. D wanted to take the product directly after harvest, so no storage costs and risks, and limited costs of capital (interest). He would pay 95% FOB and the remaining 5% following a quality check upon arrival.

Still, Z insisted on getting the cost price, and refused the offer. In the end the business did not happen, and Z was still sitting on the product by the time the next harvest came in, and he did not have the trade finance to buy it from the farmers.

The vertically integrated supply chain

Figure 9: Downstream integration of processing, packing and exporting

Vertical integration means becoming part of, or engaging yourself, in operations that are upstream or downstream of your present core business. A producer cooperative may for example start processing and marketing the produce of their farmers (Figure 9), or an exporter may directly contract farmers and provide them with farm inputs. Vertical integration has the advantage that routes get shorter (avoiding middle-men), controlling quality and traceability becomes easier, and management systems can cover a larger part of the chain.

In the ideal case this leads to higher transparency and efficiency. On the other hand, the risk increases, too. An entity that tries to take care of everything may not be able to manage each step in an appropriate and professional way (see chapter "Setting up your operation"). A trader may not be very good in organising agricultural extension, and a farmer organisation may find it difficult to manage sales and cash flows. Taking up more functions also means absorbing more financial risk. A natural move over time for an organic project is to progress from being a supplier to a general trader, or to becoming a preferred supplier of a processing company or a retailer producing with advanced contracts (thus being part of a vertically integrated supply chain), and perhaps to being an exporter of semi-processed products selling to different clients.

Collaboration with service providers
For part of your operations such as transport and processing it may be more efficient to use commercial service providers rather than developing these capacities within your own organisation. If this involves handling the product (e.g. transport, storage, cleaning, processing), you need to make sure that appropriate measures are taken to avoid contamination and co-mingling of the organic product. In order to ensure traceability of the product flow, these services need to be covered by the internal control or quality management system (see chapter Transport and storage of raw material" and "Processing and value addition"). You may also think of outsourcing agricultural extension and internal control to a service provider - a private business or an NGO - or to involve the official agricultural extension service. If you do so, make sure the provided service really matches with the needs of the farmers concerning organic production (see chapter "Building up an extension system").

Certification and financial service providers
Unless the main client insists on a specific certification body, organic businesses can usually chose from a range of certification agencies operating in their country. Criteria to select your certification body can be: price, recognition in the market, or reliability and commitment to quality (see chapter "Certification and internal control systems"). It usually pays off to stick to one certification body for a period of time and to work jointly on improving the internal control system. If the certification body knows and trusts your business, they can do their job more efficiently, which may result in less cost and troubles. If there is one thing to compare notes with fellow organic businesses in your country on, it is about how the different CBs perform.

Most probably you will require credit to finance investments, perhaps for working capital during the season, and for trade finance. Your relation with financial service providers will thus play a crucial role in your business. Select a bank that understands your plans and requirements, and offers suitable services at reasonable conditions. If you can not find such a service provider locally, you may want to check the programmes that some of the international banks have specifically designed to support organic and Fair Trade initiatives. For more guidance on how to finance your business, see chapter "Financing your organic business" In any case, to build trust with your financial service provider you will need to present a convincing business case (see chapter "Planning and managing your business").

Dealing with local authorities
When starting an organic business, you need to develop a relationship with local authorities. At the very least you should inform them about the initiative, and ensure that they cooperate and do not block your activities. It is quite normal that local politicians will take a keen interest in your venture. Once they understand the potential benefit that the initiative can have for the local population, they may even decide to support it.

Local politicians and officials, however, sometimes try to "adopt" a project. If it goes well, they may want to be credited for having brought it to the district. Be very careful, however, with getting into a dependency situation. Officials may change after the elections, and you may have to build up your relationships once more. If they are against you, they can make things difficult for your business.

Lack of good governance as well as a lack of local infrastructure like feeder roads, electricity and water supply can be severe obstacles to developing your business. You are hopefully not the only one in your region trying to set up an agri-business, and it may be a good idea to identify points of common interest with fellow entrepreneurs in order to get things done at district level.

As a successful and respected business, the authorities should actually be keen to hear from you about your worries, and see how they can be of service (i.e. being part of the enabling environment, see chapter "Creating a conducive environment for organic businesses"). If they are not, you may need to get together with like-minded individuals, companies and organisations and lobby together for better business conditions. This can involve:

• lobbying against policies that make the development of organic businesses difficult (e.g. mass spraying programmes, mandatory fumigation in ports)
• lobbying for supportive policies (like start-up support, research, promotion, subsidies for fertilisers to include organic fertilisers)
• lobbying for organic agriculture to be included in the national agricultural policy, or in a food security or poverty reduction strategy

Competent technical support?
There are a number of NGOs, development agencies and consultancies engaged in facilitating the development of organic value chains. Earlier, many of the development-oriented organisations have tended to focus solely on strengthening the position of farmers. Nowadays, most have changed their approach; they support the development of viable value chains in which different actors act responsibly and make a profit.

Assisting producer cooperatives and local entrepreneurs to become viable organic businesses and linking them into a fair arrangement with clients are challenging processes. There are local and international consultancies specialised in this field who offer their assistance (see Annex "Consultancy for developing organic value chains").

Gender issues in organic value chains

Do organic production and processing inherently empower women or shift gender relations within households, in farmer cooperatives and processing facilities? Probably not. So why raise this issue in a book for organic businesses and service providers? Why work towards the empowerment of women within an organic business?

Attention to gender dynamics and impact is far more than a fall-back to a misty-eyed view that organic agriculture is an idyllic alternative to conventional mainstream agriculture. Besides the developmental reasoning for addressing gender issues, and the motivation to appease donors or particular segments of consumers, there is a compelling economic and efficiency-based case to make. Engaging women and recognising the whole family’s efforts on smallholdings has an efficiency value as well as allowing the full costs and benefits of organic production and processing to be made visible. This should appeal to the social entrepreneur – to businesses that are concerned about efficiency and mobilising human capacities to the maximum in order to build up the chain that they depend on.

This short chapter approaches gender in the organic sector from these two angles: the developmental perspective directed primarily towards service providers and supporters, and the economic case. It explores some of the challenges and possibilities for positive change for women through involvement in the organic sector.

Gender relations in agricultural value chains
Some gender, power and inclusion issues are common to a particular country or commodity context while others are specific to organic chains. For example, organic production often demands more labour than conventional, such as for weeding. This ‘extra’ workload is usually borne by the family, especially the women. Increases in labour are in addition to ‘normal’ workloads in the field and in the home.

That said an often cited positive impact of participation in organic production and processing is that there are increases in family income and health. Yet constraints to the full participation of women in farm level activities, benefits, and decision making are important to note so that they can be adequately addressed. Women have a critical role in farming, as a workforce in charge of hoeing, sowing, weeding, harvesting, but often also as the family member responsible for food production and preparation. Female involvement in any organic production initiative is thus vital, though often disappointing, overlooked or marginalised.

Transforming the role of women in organic value chains
How can gender issues be approached in organic value chains? Can (and should) participation in the organic chain contribute to women’s empowerment and shifting power relations? What transformative role is expected of organic or Fair Trade certification? A key issue is the assurance that auditors, producer organisations and processing plants are at the very minimum not worsening the position of women or being blind to the impact of participation in the organic sector.

While it is perhaps unrealistic and overly idealistic to imagine that organic production, processing and certification will radically change gender relations for the better, or have a significant impact on the position of women within a given societal context, it is reasonable to work towards gender awareness and a positive impact. There are limits given that organic production and processing operate within a larger societal context, which may not support shifts in gender relations. What impact can organic systems have in this setting?

Towards the empowerment of women in the organic initiative
Development agencies and other stakeholders in the organic sector often have developmental objectives driving their support. They play an important role in triggering the transformative power of organic agriculture. But how can these and other initiators (companies, cooperatives) work towards gender equity? There are several levels at which gender issues can be addressed:

• Household and community level: access to land and employment, division of labour (usually the less valued tasks are reserved for women), social constraints on women’s mobility
• Producer support level: access to support schemes, participation in trainings (including training on business and leadership skills)
• Institutional level: access to financial services (possibly hindered by having no land or property in her name), women to have opportunities in leadership positions, participation of women in planning and decision-making
• Policy level: legislation for cooperatives, labour rights (including equal pay, maternity leave, childcare facilities) and creating standards that compel producers and processors to meet basic gender criteria.

Starting points for managing gender issues responsibly
The approaches mentioned above aim to empower women in the long term. There are several ways in which you can contribute to empowerment of women in your organic business:

Capacity Development: Women need to be able to attend training for organic production methods, processing techniques and commercial know-how, as well as leadership and organisational development sessions. Experience demonstrates that little transfer of information occurs from a man attending training on to his wife. In some cases, women are even unaware after a number of years of certification that their farm is organic! This is particularly impressive when we consider that much of the work related to organic production – planting, weeding, harvesting, marketing – is done by women. It not only represents inequity between men and women, but creates a weak link in an organic system. How can the system be robust if the people doing much of the work in an operation are unfamiliar with the essence of that system? From a business perspective, this presents a risk. By building capacities of both men and women, quality can be better ensured.

Appropriate timing: Organise meetings and trainings in a way that they fit the rhythm of women's responsibilities. For example, a women’s training may require child care support or may need to be in the evening, after the evening meal is served – or at another convenient time.

Extension and ICS staff: Female field staff are needed not only as role models, but because they will better be able to engage with the women in a producer organisation and women in the fields. As women are doing a disproportionate amount of the work related to production, their perspectives are absolutely critical to the good functioning of the system. Organic businesses and producer organisations should therefore employ female field staff. Especially in more traditional contexts, female staff members communicate differently with women in the village than male field officers, and may well be perceived as more approachable by women.

Women’s groups: Often women in a village or in a processing facility talk to each other, share ideas and compare experiences. Creating and supporting women’s groups can strengthen this exchange. Allowing women’s groups to define the issues that they want to address, and monitor the company’s or cooperative's development on these issues is a positive way of triggering participation and loyalty. Communication can only strengthen the organic system.

Leadership: Often it is assumed that gender issues are better addressed within organic agriculture than conventional. In many cases, women are indeed initiators or a driving force behind organic initiatives. To strengthen this, women also need to be in leadership positions within a producer organisation or agri-business. This requires building leadership and management skills among women.

Registration as an Organic Farming Couple. Women should be co-registered alongside their husbands as an organic farming couple. This empowers the women to exert influence over their husbands to take farming more seriously. And it allows women to be aware of the income derived from organic and how it is spent or allocated.

Women-only activities: In some cases, it may make sense to have women-only value chains in order to preserve the integrity of women’s roles in that chain, avoid exploitation and provide opportunities otherwise unavailable. This happens for some commodities for some of the links in the chain in an unplanned manner, where certain activities are reserved for women. For example, women collecting shea nuts, while the men in the community produce cotton and sesame, or women drying mangoes. However, a women-only chain (or link in the chain) can also be intentional. Some innovative companies are experimenting with women-only chains. The idea is to build up capacity and leadership amongst women at each step in the process.

Addressing gender issues in value chains, and specifically, organic value chains is a bustling area of change at the moment. If you want to learn more about gender issues in organic agriculture and in value chains, consult the references in Annex "Useful references and websites".

Summary of recommendations:

• Get a clear idea on who plays which role in and around a value chain, e.g. by drawing a value chain map.
• Ensure that the different stakeholders involved in an organic value chain each play a role that really suits them.
• Temporary facilitators like development NGOs should not take up tasks that are permanently needed, and should especially refrain from buying and selling the produce.
• Invest in building trustful and loyal long-term partnerships with producers and buyers.
• Take care to integrate only those upstream or downstream processes into your business that you are able to manage well.
• If you outsource any services, make sure that product integrity is guaranteed and that the providers really match with the needs of your business.
• Carefully select certification and financial service providers that understand your requirements and that offer suitable conditions.
• Make sure that local authorities have a supportive attitude towards your business, without getting dependent on them.
• Encourage participation of women in the organic business. Ensure that women can participate in capacity building activities and that they can take up positions within the organisation (as extension staff, board members etc.).