Session 6: The Rapid Rural Agricultural Commercialization Framework

1
Building Development Oriented Rural Enterprises
Training and Project Development Workshop
Session 6 The Rapid Rural
Agricultural Commercialization Framework
Workshop Presentation
2
DOCUMENT OVERVIEW
CONCEPT OF RRAC AN EXAMPLE RRAC PROJECT RAPID
ECONOMIC APPRAISAL HOW TO CREATE A RRAC
PROJECT GROUP WORK
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RRAC PROCESS
Strengthen the Business
Set Up Local Agribusiness
Transfer business to community

• Appoint management team
• Install basic infrastructure
• Set up basic postharvest process
• Make purchase agreements with farmers
• Give credit and basic agricultural extension
• Sort, grade and pack received produce
• Develop farmers into suppliers groups

• Improve and control production and postharvest
  process
• Provide more agricultural extension
• Develop new and better customers
• Strengthen management and organization
• Build capacity of local people to participate in
  management and governance

• Transfer selected management positions to local
  people (if possible)
• Set up community groups as Shareholders
  Council/General Assembly
• Create farmer-staffed Board/Management committee
• Transfer formal ownership from project to
  beneficiaries

4
COMPARISON OF RRAC TO OTHER METHODS
Top Down
Bottom Up
RRAC
e.g. state-owned or private contract farming
i.e. gradual build-up of Cooperative or Farmers
Group
i.e. build and manage business then transfer to
community
Poor- farmers excluded from management
Excellent- farmers manage all processes
Good- farmers manage all/most processes in time
Participation
Poor- company tends to retain value created
Excellent- farmers retain all value
Excellent- farmers retain all value
Value-Sharing
Poor- business usually lacks assets and finance
Excellent- has all needed assets and finance
Good- should have most needed assets and finance
Access to Capital
Poor- farmers forced to learn difficult new skills
Excellent- has access to professional managers
Excellent- has access to professional managers
Access to Management
Poor- Coop usually does not have enough capital
for guaranteed purchase
Excellent- company provides certain market and
guaranteed purchase
Excellent- company provides certain market and
guaranteed purchase
Market Channel Attractiveness
5
DOCUMENT OVERVIEW
CONCEPT OF RRAC AN EXAMPLE RRAC PROJECT RAPID
ECONOMIC APPRAISAL HOW TO CREATE A RRAC
PROJECT GROUP WORK
6
LOCATION OF CHAK-WARDAK
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PRODUCTIVE AND PHYSICAL BACKGROUND
Production

• Produces approx 2,600MT p.a. apples, 600MT p.a.
  apricots and 1,500MT p.a. potatoes
• About 800Ha irrigated land and 100Ha unirrigated
  land (some land used for field crops and
  livestock)
• Apple variety is commercial with saplings
  produced using good cultural practice in local
  nurseries

Marketing

• District centre only 80km away from Kabul
• Secondary road poor quality but primary road is
  excellent
• Marketing is done through networks of small and
  medium traders
• Much of produce exported to Pakistan, sorted,
  packed and graded and then re-imported to
  Afghanistan
• Farmers do almost no value-adding
• Poor postharvest handling and secondary road
  cause very high postharvest losses

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PRODUCTIVE AND PHYSICAL BACKGROUND
Population Living Conditions

• 120,000 people in Chak
• Pashtun ethnic group
• Average income is AF80,000 p.a.
• Low level of food security due to low cultivated
  land areas (food shortages 3-6 months per year)

Capabilities Attitudes

• Low levels of formal education (30 of men and
  8 of women have received primary schooling)
• 80 of men and 16 of women are literate
• Most men do off-farm work due to small farm
  sizes, with many doing skilled and semi-skilled
  tasks
• Community leadership has good understanding of
  value chain for produce and need to address
  marketing issues

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BUSINESS PROCESS
4. Makes payment (less cost of inputs)
7. Delivers produce needed for fulfillment of
order
8. Delivers produce as ordered
3. Delivers produce as contracted
Kabul Distribution Centre
Chak Packing House
Horticultural Exporters in Kabul
Suppliers Groups
1. Makes production contract with farmers and
supplies inputs
6. Conveys customer order
5. Places order
9. Makes payment
2. Provides agricultural training to improve
quality
On-Farm Improvements Unit
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POSTHARVEST PROCESS
Farmer Field Handling
Chak-Wardak Packing House
Kabul Distribution Centre

• Farmers harvest produce using good practices
• Morning or evening harvest
• Proper harvesting tools
• Proper harvesting indices
• Farmers conduct basic field handling
• Remove damaged produce
• First round of grading
• Farmers deliver to Chak-Wardak packing house
  using good practices
• Rapid delivery
• Proper packing

• Produce dumped
• Damaged produce removed
• Washed in chlorinated water
• Produce prepared for storage
• Trimmed
• Sorted and graded
• Packed for immediate transport or long-term
  storage
• Produce entered into cold storage or shipped to
  Kabul distribution centre

• Produce packed for delivery
• Final quality grading check
• Packed in cardboard boxes
• Produce delivered to customers

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CHAK PACKING CENTRE
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ORGANIZATION CHART
Provincial Governor, Ministry Directorates,
Ministry of Counter-Narcotics Representative,
Donor, Afghan Development Association (ADA)
Managing Director, Royal Project representative,
community representatives

• Approving strategy and management
• Reviewing performance

Steering Committee

• Formulating strategy
• Reviewing performance
• Supporting General Manager

Management Group
General Manager, 3 line managers, ADA project
manager, 3 ADA technical specialists, community
representative, Royal Project advisor

• Implementing strategy
• Monitoring line-managers
• Managing community development

Office of General Manager
Agricultural Extension Manager
Supply Chain Manager
Sales Manager

• Managing extension program
• Managing demonstration orchard, training centre
  and nursery
• Helping farmers comply with quality and handling
  standards

• Making and managing production contracts
• Managing Chak Packing Centre
• Managing transport to Kabul

• Generating and fulfilling orders
• Managing Kabul distribution centre
• Managing customer relationships

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EXTENSION STRATEGY
Suppliers Groups
On-Farm Improvement Manager
Royal Project/HRDI
Training
Group 1
Management
Capacity-Building
Capacity-Building
ADA Contractors
Permanent Staff
Group 2
Afghan Development Association
Ministry of Agriculture staff
Other external staff
Group 3
Extension services to include Soil management,
water conservation, pest management, pruning,
harvesting practices, field handling
Extension Project Teams
Group n
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BUSINESS DEVELOPMENT PROCESS
Rapid Roll-Out
Stable Business
Years 3-4
Years 1-2

• Basic Management Information
• Simple performance management, strategic planning

• Complete Management Information
• Best Practice performance management and
  strategic planning

Management Systems

• Basic packing house and distribution centre
• Informal controls of handling processes

• Fully fitted packing house and distribution
  centre
• Formal systems for controlling handling

Infrastructure Postharvest Process

• Basic contract with minimal production and
  handling requirements
• Informal evaluation

• Comprehensive contract specifying production and
  handling requirements
• Formal and participatory evaluation

Purchasing/Contracts

• Sale to any buyer if necessary, at a loss if
  necessary
• Limited adjustment of system to fit buyer needs

• Sale to profitable long-term strategic partners,
  probably exporters
• Continuous adjustments to maintain customer
  satisfaction

Marketing

• Programs selected to increase customer
  satisfaction and strengthen business
• Programs provided to assist farmer compliance
  with contract

• Quick fixes to increase quality and generate
  farmer enthusiasm
• No integration with contract

Extension
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COMMUNITY DEVELOPMENT PLAN
Training
with these programmes
can produce
All Suppliers Group members, Womens Group
members

• Functional literacy and numeracy
• Basic record-keeping
• Basic meeting skills

Group Leaders

• Group management skills
• Leadership and negotiation
• Basic agribusiness management

Owners Assembly Members
Group leaders

• Agribusiness management
• Management Mentoring scheme

Owners Assembly Members
Line Managers/ Assistant Line Managers

Owners Assembly is the farmers organization
that will eventually replace the Steering
Committee
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GOVERNANCE TRANSITION PLAN
Element
Start of Project
Target for End of Project

• Mainly external stakeholders, e.g. local and
  central government representative

• Owners Assembly comprising leaders of
  Cooperatives and CDC

Steering Committee

• General Manager, Line Managers
• ADA staff
• Royal Project advisor

• General Manager, Line Managers
• Farmer representatives appointed by Owners
  Assembly
• ADA advisor (if requested)

Management Group

• Experienced Agribusiness professional

• Either an experienced Agribusiness professional,
  or a star graduate of the mentoring/management
  training program

Office of GM

• Experienced Agribusiness professionals

• Mixture of experienced professionals and strong
  graduates of mentoring/management training program

Line Managers
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TRANSFER OF OWNERSHIP COMMUNITY BUYOUT
End of Stabilization/ Start of Handover
Start of Rapid Roll Out Phase
Start Of Stabilization

• Business is 100 owned by Trust Fund under
  management of Project Steering Committee
• Initial value of the business is equal to
  initial investment by donor (2.1m)
• Any profits not needed for re-investment in the
  business are paid back into the Trust Fund

• Community is given loan by Trust Fund to
  purchase 49 of business from Trust Fund
• Business is owned 49 by community and 51 by
  Trust Fund
• Any profits not needed for re-investment in the
  business are paid back into trust fund
• - 51 is a dividend
• - 49 is used to repay loan

• Community is given loan by Trust Fund to
  purchase remaining 51 of business from Trust
  Fund
• Business is 100 owned by community
• Any profits not needed for re-investment are
  paid back into trust fund, with 100 used to pay
  down debt

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NET PRESENT VALUE OF BUSINESS (,000)
Free Cash
Present Value of Free Cash
NPV 621k
2008
2009
2010
2011
2012
Continuing Value
NOTE
17.5 discount rate. Cash flow for continuing
value was calculate by making a forecast for a
final, representative year after 2012 and
applying the formula for a growing perpetuity
(dividing final cash flow by discount rate minus
continuing growth rate of 5). Actual NPV may be
approximately US300,000 higher as this
calculation does not reflect the tax benefits of
the loan repayment
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IMPLEMENTATION YEAR ONE
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Recruit management and technical team
Build training centre, packing house
distribution centre
Make production agreements/contracts
Provide credit, extension and group training
Trial Run
Recruit and train labour and administrative staff
Generate orders from customers
Potato harvest starts
Apple harvest starts
Receive produce, handle and ship to Kabul
20
DOCUMENT OVERVIEW
CONCEPT OF RRAC AN EXAMPLE RRAC PROJECT RAPID
ECONOMIC APPRAISAL HOW TO CREATE A RRAC
PROJECT GROUP WORK
21
BREAKEVEN ANALYSIS CONCEPT (I)

• Running my business coffee shop costs me 1000
  per year
• I make 50 cents profit every time I sell a cup
  of coffee
• How many cups of coffee do I need to sell to
  break even (make neither a loss nor a profit)?

Question

• -1000 (2000 cups 50 cents profit) 0
• Therefore, I have to sell 2000 cups of coffee to
  break even

Calculation

• The breakeven level is the level of sales,
  which, given the profit per sale, will cover the
  running costs of the business

Conclusion
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BREAKEVEN ANALYSIS CONCEPT (II)

• Running my business coffee shop costs me 2000
  per year
• The ingredients for a cup of coffee cost 50
  cents and I sell the cup of coffee for 1
• How many cups of coffee do I need to sell to
  break even (make neither a loss nor a profit)?

Question

• -2000 (4000 cups 50 cents profit per cup)
  0
• Therefore, I have to sell 4000 cups of coffee to
  break even

Calculation

• The breakeven level is the level of sales,
  which, given the difference between the input
  cost and sale price per unit, will cover the
  running costs of the business

Conclusion
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STRUCTURE OF CALCULATION EXAMPLE
Operating Costs

• Salaries wages
• Rents
• Fuel and utilities
• Admin costs

200,000
Fixed Costs
250,000
Capital Charge

• A charge of 20 of total invested capital (a
  return for the capital provider)

50,000
Breakeven Level
500,000 units
Sale Price Per Unit

• Average price achieved from a sale

1.50
Profit Per Unit
0.50
Input Cost Per Unit

• Primary input cost
• Other inputs cost
• Cost of packing material, etc

1.00
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BREAKEVEN CHART EXAMPLE
Breakeven point goes here- the level of sales
that results in neither profit or loss
Fixed cost goes here- this is the loss the
business will make it if makes no sales
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HOW TO USE BREAKEVEN ANALYSIS

• Breakeven Level is a measure of required scale,
  and therefore also of risk
• We want to start businesses that have a
  reasonable breakeven level given
• Total production available for purchase
• Expected level of contract violation
• If the breakeven level is too high we need to do
  one of the following
• Cut cost or investment from the business
• Improve price (without adding cost or
  investment)
• Change the business model

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DOCUMENT OVERVIEW
CONCEPT OF RRAC AN EXAMPLE RRAC PROJECT RAPID
ECONOMIC APPRAISAL HOW TO CREATE A RRAC
PROJECT GROUP WORK
27
STEP 1 PICK A CUSTOMER PRODUCT
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STEP 2 IDENTIFY THE HANDLING PROCESS
Customer Requirement

• Good quality produce, cleaned and well-presented
• Consistent grading by size and colour
• Delivered in cardboard boxes
• Long shelf-life
• No need for formal certification (i.e. organic
  or GAP)

Once you have chosen the target customer, you can
summarize their requirements for quality,
grading, presentation, and so on
Once you know the requirements, you work
backwards to figure out how to get the produce in
the form that your target customer wants it
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STEP 3 PLAN BUSINESS DEVELOPMENT
Divide into two periods- the rapid roll-out
when you do only the essential things, then the
stable period when you improve the business
What assets will you add in the second phase? How
will you improve the handling process?
Who will you buy from in the two phases? Will you
use contracts? How will the contract arrangement
work, and how will it change?
Who will the customers be, and how will you
manage them? Will you change customers or manage
them differently in the second phase?
What will happen in the extension program and how
will you manage it? Will you change the extension
program in the second period?
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STEP 4 CALCULATE BREAKEVEN LEVEL

• Do a quick breakeven analysis using rough
  estimates for costs and prices
• Spend no longer than 20-30 minutes when you do
  this the first time
• Compare the breakeven level with a realistic
  estimate of what you can purchase in the first
  few years
• Go back and change the plan if the breakeven
  level is too high

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STEP 5 MAKE AN ORGANIZATION CHART
1. Choose the split between the Ultimate
Authority, Management Group and Day-To-Day Manager
2. Identify the main responsibilities of the
governance groups and where the members come from
(e.g. what organizations or groups)

• For each unit, specify whether the units is
• From the community or an outsider (e.g.
  professional or from development agency)
• An individual or a committee/group

3. Choose the division of line management units
and assignment of responsibilities
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STEP 6 PLAN DEVELOPMENT OF GOVERNANCE
2. Write down who or what groups will play these
governance roles at the beginning of the project
1. Put the main groups involved in the
organization and management of the business here
3. Write down who or what groups will play these
governance roles at the end of the project,
taking into account community capacity,
willingness, etc
4. Write down how you will make transition from
one to the other, e.g. what training will be
given, when the handover will be made
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DOCUMENT OVERVIEW
CONCEPT OF RRAC AN EXAMPLE RRAC PROJECT HOW TO
CREATE A RRAC PROJECT RAPID ECONOMIC
APPRAISAL GROUP WORK
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TASK CREATE A RRAC PROJECT CONCEPT

• You will be given a case study describing a
  situation in which an RRAC project is going to be
  set up
• Using the information from the case, this
  presentation, other workshop material and your
  knowledge,
• Choose one crop to commercialize and one
  customer
• Design a handling/processing system
• Estimate the breakeven level and check that it
  is not too high
• Create a business development plan
• Draw the organization chart
• Make the governance development plan
• All groups will be asked to present their RRAC
  project

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Thank You
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INPUT COST CALCULATION
Quantity Used Per Unit

• Quantity of the main ingredient used in a single
  unit (the one purchased from the farmer)

1.5kg
Primary Input Cost
0.60
Adjusted Cost Per Unit

• The price paid per kilo to the farmer, adjusted
  for shrinkage (e.g. if there is 50 shrinkage the
  price is doubled)

0.40/kg
Input Cost Per Unit
1.00
Secondary Input Costs

• The cost of other ingredients added to produce a
  unit

0.30
Other Direct Costs
0.40
Packaging Costs

• The cost of packaging and other materials

0.10
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VALUE CREATION CONCEPT

• I break even when I sell 4000 cups of coffee
  and I make a profit of 0.50 per cup
• Each cup uses 10g of roasted coffee beans
• After I have broken even, how much value do I
  create for each ton of coffee that I buy?

Question

• 1MT of coffee beans will make 100,000 cups
• Every cup makes 0.50 of profit
• After breakeven, every ton of coffee I buy will
  create 50,000 of value (profit net of all costs
  including capital charges)

Calculation

• The breakeven level is the level of sales,
  which, given the difference between the input
  cost and sale price per unit, will cover the
  running costs of the business

Conclusion
38
POST-BREAKVEN VALUE CREATION
Produce Used Per Unit

• Quantity of the main ingredient used in a single
  unit (adjusted for shrinkage)

2kg
Units per Ton of Produce
500
Kilos per Ton

• The number of kilos per ton

Value Created Per Ton Purchased
1000
250
Profit Per Unit

• Profit per unit as calculated previously

0.50
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HOW TO USE VALUE-CREATION CALCULATION

• Value Creation measures the economic value
  created by the DORE for every ton of local
  produce it purchases after it passes the
  breakeven point
• Value Creation measures the potential benefit
  once suitable scale has been reached
• Value Creation should balance Breakeven level-
• - DOREs with low breakeven will usually not add
  much value
• DOREs with high breakeven will usually add much
  more value