Understanding Value and Supply Chains in Agriculture by CJ Jones

Understanding Value and

Supply Chains

WHAT WE SHOULD GET OUT OF TODAY?

STARTING THE JOURNEY…..

SECTION 1 WHAT IS A VALUE 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

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 ?

UNDERSTANDING THE VALUE 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 system VALUE 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

Why consider pro poor value chains?

PRO POOR VALUE 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 the VCA is directly related to the desired development outcome

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

WEIGHTING

Once you have decided the criteria on which you will build your VCA 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

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?

MAPPING CORE PROCESSES This is an initial step in VCA – 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 to VC you are analyzing. Industrial processes are different from agro-processesExample 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

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?

WHAT THE …..

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

EXAMPLE: MAPPING OF SPECIFIC ACTIVITIES UNDERTAKEN BY ACTORS IN CORE PROCESSES IN A THATCHING GRASS VALUE CHAIN

Northern Uganda maize value chain

18

Financing Production Storage MillingCommercial-

ization

• Access to credit for purchasing inputs

• Inputs such as seed, fertilizer, herbicides

• Skills training, and technical assistance

• Planting and harvesting of maize

• Transporta-tion and aggregation of maize

• Collection and storage of maize

• Transformation into maize products (e.g maize flour)

• Domestic and international distribution of maize

Input Supply/ Services

Source: Interviews, TNS Analysis

De

sc

rip

tio

n

Traders/ Brokers

Types of players

• Financiers

• Banks

• Micro-credit

• Cooperative

• Providers of - Certified

seed- Fertilizers- Pesticide- Fungicide

• Agro-Input Dealer providing training

- Cooperative governance

- Business mgmt

- Technical assistance

• 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) warehouses

- Cleaning

- Drying- Sorting- Pkging

• Small-scale millers (<10MT/day)

• Medium-scale millers (<50MT/day)

• Large-scale millers (<150MT/day)

• Super-markets

• Local markets

• Distributors

• Exporters

• Retailers

• Wholesalers

• Town trader

EXAMPLE FROM THE FIELD

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

Northern Uganda Maize value chain constraints

20

Financing Production Storage MillingCommercial-

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

• Dilapidated technology 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

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

OTHER OPTIONS FOR MAPPING THERE ARE MANY WAYS TO ANALYZE A VALUE CHAIN

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?

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

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

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

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

CostsRegulatory

CostsInvestment

Costs

Variable

Fixed Formal Informal

$$$$ $$$$ $$$ $$$ $$$ $$$

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?

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 (even YOU!!) 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 chainQuestions 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

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

Typically, the brokers and traders make the greatest margins while adding very little value in the value chain

31Source: USAID, interviews

Ugandan value chain/ cost structure(UGX/kg)

Margin (UGX/kg): % margin:

35 90 100

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

Understanding Employment in the value chain

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

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

LOOKS BAD EH??

But things are NEVER what they seem …..