Uganda

The Agribusiness Sector and its Support Institutions

The Ugandan Economy is dominated by the agricultural sector. Agriculture provides most of the raw materials to the mainly agro-based industrial sector comprising of coffee hurling, cotton ginning, tea and dairy processing among others (MAAIF and MFPED, 2000). Agriculture contributed 42 percent to Uganda’s GDP and 60 percent of total Uganda’s export earnings in 2000. Coffee exports accounted for 27.6 percent of total exports whereas flower exports accounted for 2.82 percent (MAAIF and MFPED, 2000). Uganda has no significant exports of dairy and dairy products.

The vast majority of Ugandan farmers are subsistence or semi-subsistence producers. In 1996, 25 percent of all Ugandan farmers consumed all they produced. Another 70 percent sold less than 20 percent of their output, leaving only 5 percent who sold 20 percent or more of their production. The level of external input usage in Uganda is equally low with the hand hoe and machete still the predominant technology. In 1996 only 8 percent of Ugandan farmers had access to animal traction, 7 percent used fertilizers or other agrochemicals and 8.5 percent had an outstanding loan. Furthermore, the national average application of plant nutrients is 1kg per ha, less than 30 percent of Ugandan farmers use improved seed and less than 10 percent use some kind of plant protection measures. Recent strategies and programmes to eradicate poverty by transforming subsistence agriculture to commercial agriculture in Uganda include the National Agricultural Advisory Services (NAADS) and the Marketing and Agro processing Strategy (MAPS).

Case Studies

The Horticultural Sub-Sector

Other than small scale production of fruits and vegetables to meet domestic demand, commercial horticulture production in Uganda is dominated by floriculture production largely for export to the EU market. The local market for cut flowers exists but it is still small. Commercial floriculture too is still a new industry in Uganda dating back to 1993. The industry mainly focuses on cut flowers, cut foliage and to a lesser degree, pot plant cuttings. Cut flowers include a variety of Roses, Chrysanthemum cuttings, carnations and summer flower (Kaija, 1999).

Commercial flower growing for export in Uganda started in 1993 with only one exporter and about 2 hectares under production in 1993/1994. The flower industry expanded rapidly in a span of only 5 years to over 85 hectares under production and 22 exporters. There has been significant growth since 1995 in a number of flower exports, export volumes and values as well as employment (Table 7). Even in terms of contribution to GDP, there has been a significant increase in the share of the flower to total exports (Mwesigwa and Niwamanya, 1999).

Table 6: Number of farms, area, output, employment and export of flowers in Uganda

Source: Compiled from Uganda Flower Exporters Association (UFEA) and ADC/IDEA Project reports.

Linking arrangements

Commercial horticulture production in Uganda is dominated by the flower industry (floriculture). Commercial vegetable production is largely for the local market. This study was unable to find clear farm-agribusiness links in vegetable production. The flower industry in Uganda is also in its infancy with few individuals/companies involved. The key players are mainly exporters who are themselves flower producers selling in both local and international markets. The exporters operate mainly as limited companies, with no direct linkages with individual farmers or farmer groups.

Flower production in Uganda is largely associated with high entry and operation costs and limited market access. Large companies, enjoy scale economies in procuring inputs such as seeds (imported mainly from Holland) and accessing the world market than individual farmers. There are currently 22 flower farm exporters operating independent of individual farmers. However, in an effort to attract farmers to the floriculture industry, the Uganda Floriculture Association (UFA) was created to bring together all flower producers and dealers (florists) as a pressure group.

UFA is a non-governmental organization founded to promote and encourage floricultural production for the domestic and export markets. UFA became functional in 1991 and was officially inaugurated in 1992. It is supported by the Danish International Development Agency (DANIDA). In addition to promoting and streamlining floriculture production and marketing, UFA arranges competitive flower shows in the country, organizes training courses and seminars on floriculture and carries out research in floriculture production and marketing.

UFA membership is open to farmers dealing in floricultural production and marketing who are willing to participate fully in its training sessions and seminars. The association initiator and the current chairperson, is a proprietor of a flower firm, Bamuhalu florists. Bamuhalu florists firm links directly with small scale farmers. The firm currently links with four groups of farmers (mainly women) whose membership ranges from 20-60 persons. Farmers join and carry out production activities as individuals but operate as a group in marketing and skills acquisition (training) areas.

The linkage between farmers and the association has several mutual benefits. Member farmers receive training and extension services in flower growing and management, post harvest handling activities (packaging and preservation) and access inputs such as seed mainly on credit. Farmers are assured of a ready market and full time free flower production and marketing consultation.

The firm on the other hand is assured of timely and reliable supply of flowers. Highly demanded flowers are grown, especially chrysanthemums. Farmers are informed of pricing procedures in advance, implying that farmers are price takers. The firm determines the offer price based on cost of production and market conditions. Farmers are hence protected from the risk of price fluctuation. However, the firm appears to have a market information advantage over the farmers and may set near monopsony prices. Bamuhalu florists are one of many florists serving the greater Kampala area, capital city. Others seem to have no direct linkages with farmers other than purchasing flowers delivered to their shops. The discussion on challenges to farmer agribusiness linkages hence revolves around Bamuhalu florists.

Constraints and opportunities

In order to synchronize production to achieve timely harvesting and marketing, farmers are required to raise seedlings as a group. Farmers are hence not free to operate independently and they are also price takers. The group lacks effective means of communication with group members and access to market information. This linkage between Bamuhalu florist and farmer groups appears to be of an informal nature. There are no clear rules, regulations and responsibilities. Such an arrangement could very easily work to the advantage of the firm.

Bamuhalu florist firm too is faced with limited capital. This has led to reliance on local technology to preserve flowers by dipping them in water, which severely reduces their shelf life to one week after which the flowers loose market value.

The Dairy Sub Sector

The livestock subsector of Uganda contributes 17 percent to 19 percent of the Agricultural Gross Domestic Product (AGDP) and 7-9 percent of the National GDP. Dairying is an integral part of the agricultural system of most parts of Uganda. It is estimated that small holder farmers engaged in mixed farming and pastoralists together own 90 percent of the national cattle herd. From an economic point of view, cattle are the most important of all the livestock, although goats and to a lesser extent sheep, pigs and poultry make significant contributions to the economy and the diet. In 2001, milk export earnings were estimated at US$ 3 million. Milk export earnings are expected to drop because of the restrictions recently imposed by Kenya and Rwandese authorities on their markets. Even then the dairy industry has great potential to contribute significantly to the social and economic development of Uganda, including boosting food security.

There has been a steady recovery in the animal population with an estimated population of 5.8 million in 2000, after a decline since 1972 because of looting and civil war through the 80’s. Uganda’s estimated total milk production for 2001 was 900 million litres. Out of this, 450 million litres was offered for marketing. Of the 450 million litres, 80 percent was sold unprocessed through the informal market. Approximately 90 million litres was processed into liquid milk and milk products of which 90 percent was consumed locally and the remaining 10 percent was exported to regional markets. The annual growth rate of milk production is estimated at 7-10 percent. Despite these promising figures, the dairy industry in Uganda is still faced with some problems. The low milk price combined with reduced off take from rural farms has negatively impacted efforts to improve the quality of the existing breeds for higher milk production.

However, liberalization of markets and the increased participation of the private sector in input supply and marketing are expected to give farmers greater incentives to adopt improved technologies. Improved animal productivity has been identified as one of the options for increasing the income of the rural communities. Uganda has a comparative advantage in dairying and so there is considerable potential for developing it. Dairy development has received the greatest attention in the development of the animal industry in Uganda. Consequently, total national milk production has grown from 365 million litre in 1991 to 900 million litre in 2001, per capita consumption has increased from 16 litre in 1985 to 40 litres in 2001 and the effective demand is satisfied especially during the wet season.

Uganda still experiences a deficit of dairy products, amounting to a short fall of between 100 and 200 million litres per annum of milk needed to minimum nutritional standards (MFPED, 1996). This deficit represents an opportunity for continued expansion of market-oriented smallholder dairy production. This is attainable given the liberalization of the economy and of the input and output markets needed to sustain dairy production.

The Uganda Private Sector Dairy Industry Development Activity, which is a $5.8 million three year activity funded by USAID is being implemented by a consortium of partners including Land ‘O’Lakes (LOL), Heifer Project International (HPI), and World Wide Sires (WWS). This activity has the specific objectives of leading to increases in on-farm productivity levels and dairy processing, domestic consumption of processed dairy products, volume of milk entering cold - storage/bulking system, availability of milk and milk products in the North and East and exports.

The private sector in the dairy industry is extremely weak because only two processing companies are involved in exports and which companies are plagued by problems of funding and management. Despite the potential Uganda as a country has, it is not making use of its locational advantage to exploit the surrounding markets. For this to be done in good time, the government needs to take lead in milk processing and exports, or deliberately empower the private sector to do this. Milk production and marketing offers the advantage of a product with higher income elasticity of demand and relatively higher level of consumption by urban population (ILRI et al, 1996).

The government has liberalized the dairy sub-sector and the monopoly of the Dairy Corporation has been removed. As a consequence, a number of private milk processing facilities have started operating in several areas (MAAIF & MFPED, 2000). At the same time, there has been increased expansion of informal milk markets, which nationally supply 90 percent of milk in urban areas. The informal market channels vary greatly, from “producer - consumer” sales to multiple-intermediary channels involving some processing and an organized system of milk vendors. However, cooperatives near urban centres frequently report inability to sell all their milk, implying very little is known about relative importance of the alternative channels within the informal milk markets (ILRI et al, 1996).

Linking arrangement

As a consequence of economic liberalization, a Dairy Development Authority (DDA) has been established to provide proper coordination and guide the implementation of the policies designed to achieve and maintain self-sufficiency in the production of milk. Activities of the DDA include promoting production and competition in the dairy industry and monitoring the market for milk and dairy products. The DDA also aims to establish liberal but harmonized dairy markets and to promote competition in milk collection, processing and marketing. Key players involved in the dairy industry include farmers, middlemen, processors, government institutions and non-governmental organizations.

Most of the small scale farmers are organized in dairy cooperative societies with a small percentage comprised of medium and large scale farmers operating as individuals. Farmer cooperatives also operate milk cooling facilities and also participate in milk marketing. The DDA recently drawn strategy doesn’t appear to directly target strengthening farmer agribusiness linkages as a way of achieving its objectives.

Milk processors and other middlemen ensure stable supply of milk and milk products in both peak and off peak production period. They preserve milk in form of pasteurized milk and processed milk products such as yoghurt, ice cream, cheese and ghee to satisfy the increasing demand as a result of rapid population growth and changing consumption patterns.

The involvement of non-governmental organizations (NGOs) in dairy industry is two pronged. First, NGOs are involved in expanding and developing the dairy sector from subsistence to commercial production. Secondly, they are involved in promoting competitiveness in the dairy sector to ensure farmers find a ready market and consumers have access to safe nutritious milk and milk products.

The existing market structure at production level is that farmers are organized formally either as groups or limited companies or cooperative societies and registered with the dairy regulatory arm of the government. The registered farmers are free to establish linkages with support agencies including NGOs such as Land ‘O’Lakes, Heifer International Project, World Wide Sires (WWS), DANIDA, and many others.

Benefits

Existing farmer agribusiness linkages in the dairy sub sector appear to be limited to a nature of producer versus buyer or procurer. Even though on occasions, credit and inputs are involved. The Dairy sub-sector linkages among key players have several advantages. Members are assured of a ready market for their milk even in peak production periods during the rainy season when non-members face a problem of milk surplus. Member farmers also have access to credit services from their respective organizations. Credit is mainly provided in form of dairy inputs including access to veterinary services (such as drugs, artificial insemination services) and animal feeds. Cash credit is at times offered.

Furthermore, as agribusiness organizations, farmer groups, limited companies and cooperative societies involved in the dairy sector have access to various services from development agencies and government institutions. They mainly receive extension and training services in animal husbandry, marketing, processing and business management. They have access to farm development support such as acquiring improved breeds from support agencies such as Heifer International Project, Send a Cow Project. They may also access farm inputs such as cooling machines and milk cans on credit.

Finally dairy farmer organizations are able to negotiate better milk prices through collective bargaining. Members are assured of market mainly from milk processors wishing to buy in bulk. One additional advantage to members is that groups, limited companies and cooperative societies provide a reliable milk outlet for their farmer members.

Constraints and opportunities

The dairy sub sector, in general, and farmer agribusiness linkages in particular continue to face a number of challenges. Generally, there is scope for increasing milk production, processing and marketing in Uganda. Many farmers still rely on traditional methods of production and hence do not realize full potential from their production activities. There is need for innovative ways to promote technology adoption in the dairy sub sector. There is also a need to develop viable farmer groups or promote linkages that would enhance vertical integration into dairy processing and marketing. This would enable farmer-producers to benefit from value addition in the marketing channel.

Market constraints. The dairy retail market is largely controlled by milk middlemen who procure it from large distances. These agents tend to indulge in milk adulterations including adding water to increase volumes and adding chemicals to prevent the milk to turn sour. There is need to organize these middlemen into an association that would allow for self policing since many of these vices are difficult for the ordinary consumer to detect.

Milk consumption habits in Uganda are also still low. There is need for a concerted effort to promote milk production. This would enhance domestic milk demand and lead to a healthier society.

Many farmer organizations involved in the dairy sector also lack a ready market for fresh milk and have no access to modern technology to process milk into milk products such as cheese, ice cream, yoghurt and powdered milk to solve the problem of excess supply. During off peak periods when demand is high and prices are good, some members divert their milk to open market sales.

Information asymmetry between producers and marketers remain a problem. This leads to over-priced inputs and under-priced outputs discouraging increased production. Stronger farmer agribusiness linkages (supported by the DDA) could help increase information flow and highlight the mutual benefits of cooperation. Stronger linkages among stakeholders in the dairy sub-sector could also enable harmonization of activities, elimination of duplication and harnessing of the ensuing synergies.

Power Imbalances. The current imbalance in participation in the dairy sector also needs to change. The formal sector remains weak and small while the informal sector (milk traders) is large (about 80 percent) and fairly aggressive. The informal sector is also to some extent in-disciplined. Supportive measures and incentive structures are needed to encourage more formal sector participation in the dairy industry.

Cost of Production. Farmers are assured of ready market for their milk but are faced with a problem of low milk prices to the extent that they hardly break even. Farmers remain largely price takers with prices determined in a market where supply far exceeds demand resulting in low prices. During milk peak production periods, supply exceeds demand, and excess milk is always considered as loss or disposed of at lower prices regardless of the unit cost of production.

In some cases farmers are also faced with a problem of delayed payments from their organizations. Farmers are not always paid promptly which hampers their production programs such as not meeting urgent animal management demands/problems. Many of the dairy based agribusiness organizations are capital constrained. As a result they hardly access modern farm inputs such as milk processing and preserving equipment. The situation has of recent worsened mostly for cooperative societies that no longer access financial credit. The source of funding was mainly loans from the now defunct Cooperative Bank.

Opportunities. A number of plans have been envisaged in order to strengthen farmer agribusiness linkages in the dairy sub-sector. Most importantly the focus is on establishing milk processing plants and milk collecting and selling centres countrywide. This is aimed at widening the market for fresh milk and milk products. This move is expected to translate into easier access to inputs and advisory services and better prices for raw milk. Better linkages should improve access to capital inputs and training services in production, processing and marketing aspects and access to domestic markets such as local institutions and export markets.

The Coffee Sub- Sector

Coffee has been for decades, and still is the main stay of the Ugandan economy. However, it is notable that World coffee prices have dropped since a peak in early 1990s. Presently the world’s supply of coffee is significantly (about 20 percent) higher than world demand. This oversupply has depressed prices to around US $380 per metric tonne or less depending in large part on quality.

Prior to liberalization, in 1991, the Coffee Marketing Board (CMB), a parastatal organization, controlled coffee business, especially exports. Farmers were required to sell most of their coffee to cooperative societies, which served as the local agents of the CMB. Though farmers had the option to sell their coffee to private buyers, they were paid less than the official government price when they did so. Since CMB was the sole processor and exporter of Ugandan coffee, private buyers were required by law to sell the coffee obtained from farmers to CMB at the government-mandated price.

Linking arrangements

The liberalization of coffee market made the coffee business attractive to a number of players. Consequently, competition has led to bidding up of prices at procurement stage. More farmers are increasingly integrating forward. They are by-passing the local stores and private buyers and are hiring processing facilities where they process their coffee at a fee and sell it to exporters or their agents. In addition, due to the ever-increasing competition, many exporters have adopted strategies aimed at a more vertically integrated trade structure. They tend to set up or hire hulling facilities, open stores/buying stations in the countryside in order to cut costs and increase the volume of procurement. Some of the indigenous exporters are also farmers.

A schematic representation of the current coffee marketing structure is found below.

Figure 1: The current coffee marketing structure in Uganda

*UNEX is the marketing arm for cooperatives unions, representing various coffee farmers in the coffee growing area.

Formerly coffee farmers were depended on coffee buyers for credit services and advance payments although these services are no longer available due to unreliable coffee supply. In addition, farmers have been forced to sell fair average quality coffee, which is then processed by the buyer/exporter at a fee. This implies that the risk of quality losses is incurred by the farmers/middlemen. This arrangement in a way gives an opportunity to the buyer/exporter to dictate the price offered to the farmer.

Out of ten coffee exporters/processors that participated in the current study, only one exporter/processor, namely Kawacom, has some direct linkages with farmers. The company deals in both organic and non-organic coffee. With non-organic coffee business the company is not different from other companies in terms of business linkages. However, it is actively engaged with those farmers involved in organic coffee production. The company initiated the idea of organic coffee farming in 1999 as a result of declining coffee production due to declining soil fertility. The main aim was to expand its procurement capacity of high quality organic coffee, which has niche markets in the EU and fetches a higher price.

Benefits to farmers are currently limited to training services in organic coffee production and provision of inputs such as organic chemicals, coffee pulpers and an assured market at a reasonable good price. In order to increase their say in coffee post-production activities, coffee farmers have organized themselves into an umbrella association called Uganda Coffee Farmers Association (UCFA). This association was established in 1995 to link coffee farmers with post harvest players and other service providers.

UCFA links with farmers who are organized in associations. Currently it deals with 50 grass root coffee farmers’ associations with a total membership of 5,000 coffee farmers. UCFA carries out training programmes for farmers in modern agricultural practices, post harvest handling practices. Farmers have been sensitized about wet processing for value addition, quality improvement and mould prevention and have been introduced to commodity risk management. The umbrella Association also facilitates farmers to access input and credit services and serves as an intermediary between coffee farmers and input suppliers as well as marketing of farmers’ output. The association also lobbies with donor agencies and government for financial support for its member associations.

Through linkages with UCFA, member farmers have benefited from better coffee prices than non-member farmers. This is because the training acquired has enabled member farmers to improve the quality of their coffee through better post harvest handling. Farmer members are also able to enjoy economies of scale by bulking their coffee making it easier for coffee buyers. Non-member farmers on the other hand normally incur most of the transaction costs.

However, UCFA still faces a problem of lack of a reliable and efficient market information system. Furthermore, the association still lacks a strong financial base to run the association activities. With low coffee prices, coffee wilt disease, old age of coffee trees, many farmers are finding it increasingly difficult to meet their subscription and other association obligations.

UCFA is strongly linked to the Uganda Coffee Development Authority (UCDA). UCDA aims at improving the quality and yield of Ugandan coffee at farm level by empowering and building coffee farmers’ capabilities. Other than facilitation offered to coffee (clonal) nursery operators, UCDA appears not to directly target promoting and strengthening farmer agribusiness linkages in the coffee sub sector.

Constraints and Opportunities

Macro-Economic Policy Changes

The macro economic policies of liberalization and privatization have had different impacts in the three sub sectors of interest to this study. The coffee sector has seen decentralization of postproduction activities. Coffee buyers and sellers have relocated into production areas and increased their buying centres. The dairy sub sector has also become more competitive with many active players. The sub sector has seen physical concentration of milk buyers and sellers especially in urban areas. The horticulture sub sector appears to have undergone vertical integration with producers taking over virtually all post harvest activities.

Limited Organizational Arrangements

There is limited formal organizational arrangement between farmers and postproduction players. As a result, agribusiness players active in post-production activities are faced with substantial limitations regarding access to farm commodities. One of the major constraints to the post-production agribusiness players is the supply fluctuation and unpredictable quality of raw materials. During peak production periods, farmers are faced with the problem of surplus agricultural production. For instance in peak production period for horticultural and dairy sectors, farmers are faced with a problem of excess surplus that is always disposed at a give away price or wasted due to high degree of perishability of the products.

Lack of Markets

The agribusiness sector is also constrained with limited or lack of ready market for products coupled with price instability. Coffee and horticultural products are currently sold both locally and in international markets. One of the reasons coffee fails to meet international standards is because it is not adequately processed. Locally manufactured dairy products that are largely sold domestically are also encountering stiff competition from imported products perceived to be of a higher quality.

Insufficient Information Flows

There is inadequate production and market information flow in all the three sub-sectors. This hampers the ability to take advantage of potential markets and to produce commodities that meet consumer tastes and preferences.

Conclusions and Recommendation

Currently farm-agribusiness linkages in the coffee, dairy and horticulture sub-sectors in Uganda are organized in a complex manner. Many of these linkages have been stimulated by the need to achieve efficiency and increase market power as a result of government policies of liberalization and privatization.

There seems to be little doubt that integrated production and marketing in all the sectors has resulted in improved operational efficiency. It is not clear how these linkages have affected pricing efficiency. There is still a need to promote integration and coordination in the three sub sectors studied.

In order to modernize Uganda’s agriculture and hence reduce poverty, both the public and private sectors have a role to play. It is important that their roles are both coordinated and complementary. The private sector is responsible for the production, processing and marketing of agricultural products. The public sector should create a conducive environment by formulating appropriate policies, removing barriers at all levels, improving infrastructure and putting in place an appropriate legal and regulatory framework.

References

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