Mastering The Benefits Of Adding Value To Agricultural Commodities
Like many well-intentioned phrases, ‘value addition’ is not just an expression. It is a practice whose dynamics are yet to be fully understood and embedded, especially in African agriculture. More than 80 percent of agricultural commodities in developing countries are consumed in a raw state. Lack of modern value addition technology makes it difficult to convince people that processing agricultural commodities can create more employment than raw commodities. Informal food markets continue to employ more people than processing plants. While a lot of resources are being directed at adding value to agricultural commodities, there is insufficient evidence-based analysis of the inherent benefits, challenges and opportunities.
However, with adequate and appropriate investment, value addition can create more employment and lead to sustainable economic growth. In most African countries, raw commodities like vegetables, fruits and tubers move from farming areas to the market and then to households and finally into the toilet. This shorter route does not add much value to the economy compared to a much longer value addition journey where commodities move through more steps: farmer – processor – retailer – wholesaler- consumer. When commodities travel a shorter distance from production to markets and consumers, enormous pressure is exerted on monetary circulation because commodities are consumed before they complete their cycle along the value chain. Ideally money in circulation should effectively exhaust all stages from processing to retailing and consumption or end-use.
Benefits of a longer cash circulation cycle
The speed and length travelled by money in circulation has to be long if it is to translate to Gross Domestic Product (GDP). An example of a long route is farmer – consumer –retailer – processor – trader – consumer. Such a distance is long enough to minimize inflation and stabilize prices. For instance, if $100 worth of commodities move from the farmer to the trader, $20 is added to become $120. When the same commodity moves from the trader to the processor, $30 worth of value may be added, translating $150. At the retailer level, another $30 can be added, becoming $180 and when end-users or consumers add $20 worth of value, the total value of the initial $100 becomes $200. Adding all these values defines GDP. Going through five cycles enables money to add value along the value chain unlike from farmer to consumer where only $20 is added.
When African agricultural economies limit themselves to raw commodities, they undervalue and underestimate their potential GDP. The revenue base cannot be meaningfully increased when commodities move a shorter route from the farmer to the trader. Value added tax (VAT) is generated through value that is added along a much longer route. At the moment, most horticultural commodities are not generating VAT yet farmers are using resources like dams and roads which need to be financed by the government.
The value of understanding and financing the entire system
Instead of continuously financing production, financial institutions and development organization should see the value of financing the whole system including processing and markets. This prevents scenarios where farmers have excess commodities than the market or processors can absorb in a given time. There are many cases where processors like Best Food Processors in Zimbabwe try to tap into the fresh market to supplement their stocks. The company requires more than 50 tons of tomatoes per day to keep its processing machinery running.
However, negotiating relationships between processing companies and farmers should be done by a neutral knowledge and relationship broker. The broker will break the impasse where farmers want high prices for their commodities while processing companies want to pay low prices in order to be viable. Evidence-informed knowledge brokering can result in a win-win relationship between farmers and processors. While many processing companies enter into contractual arrangements with farmers, such relationships are often not sustainable because although farmers are guaranteed a market, prices offered are so low that most contracted farmers are not able to stand on their own feet. On the other hand, where processors want to colonize the whole value chain, they end up driving their costs causing them to offer low prices for farmers (10c/kg). Ideally, processors should focus on processing while other actors handle logistics and production issues. Why should processors employ agronomists when government extension departments and NGOs are available to offer the same services to more producers? The cost of extension can eventually go down because farmers can share knowledge with their peers.
The power of aggregation
Aggregating agricultural commodities is the best way to sustain agro-processing. Farmers become confident that the market is available while processors are assured that commodities will be available consistently. In recent years, many contractual arrangements have bred suspicion between farmers and contract companies. A few decades ago, market availability was more important than contractual arrangements. Farmers would grow their groundnuts fully aware that government parastatals would buy commodities with no need for contracts. A guaranteed market can compel financial institutions to offer short-term finance to farmers through a flexible financial facility that can reduce interest rates to sustainable levels.
On the other hand, consistent processing can result in processed products competing with raw commodities in ways that ultimately control the price of raw commodities. For instance, when tomato sauce is used to eat rice, there will be less demand for fresh tomatoes- leading to fair prices unlike the current situation, for instance in Zimbabwe, where prices can swing between 50c and $10/crate. The more market options the more competitive the market will become. Gluts can suppress prices yet if there are options, gluts can be managed in ways that do not adversely suppress prices. By rationalizing tomato prices, other commodities are rationalized as well given that tomato is a necessity which influences the performance of other commodities. Usually tomato prices influence prices of other commodities.
Flexible finance for agile institutions
A financial facility should be put in place to enable purchasing and mobilization of agricultural commodities by commodity brokers. Rather than extend loans directly to farmers, financial institutions can be paid by the warehousing facility which morphs commodities from scattered farmers. It does not help to extend loans to farmers when they are still stuck with commodities looking for a market. There is the danger of farmers taking loans to complement little income from the existing market and try to breakeven. It is like taking a loan to cover up for losses in the market. For instance, if a farmers is expecting $10 000 and the market gives him/her $5000.00, receiving a loan amount to $5000.00 will be like subsidizing outcomes from the markets.
A facility that supports buying of commodities from farmers creates space for financial institutions to extend loans to farmers so that they continue growing. This also ensures processors have consistent supply for up to six months as farmers quickly go back to the land. Processors cannot keep stocks for a season because doing so is locking money in stocks. Processors generate income from consumers and that is why they should keep fewer stocks and supplement as consumers buy. If they lock all their money in stocks, they will not have enough money for other requirements.
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