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Factors Influencing the Strength of the Link

The type and strength of linkages formed between different players depends in part on their mutual interest in forming and maintaining agreements, but also on other factors including the physical and institutional environment, and the types of products or processes involved. In general, good communications and transport promote stronger linkages between farmers and traders or processors while adequate utility services support the development of agribusinesses near to producers.

Nature of Product

The nature of the product is an important factor determining the collaboration between producers and processors. Highly perishable, labour intensive crops, which do not have an alternative market, ensure very close collaboration between farmers and agribusiness firms. This is clear from the involvement of the agro-processor in production matters such as the provision of seeds, agro-chemicals, credit, extension services, as well as providing assistance in establishing produce collection centres. Where a product is not highly perishable, sensitivity towards important aspects of the product supply and marketing may not be given the necessary importance.

Box 7: Blue Skies, fresh fruit preparations’ exporter, Ghana

Blue Skies is an exporter of ready-to-eat fruit preparations near Accra. The company has performed very well since its start in 1998 and exports every week about 35t of chilled fruit salads by air. The company cuts and slices fruits and exports them within 24 hours of delivery to the processing factory.

Within a short period of time the processor managed to establish close links to the farming community. Through intensive training and continuous extension service provision, all suppliers have become able to meet the strict quality requirements. Good agricultural practice certification for the European retailers (Eurep GAP) has been successful for many Blue Skies suppliers.

Support of Farmers' Organizations

The existence of farmer's organizations such as producers' co-operatives or associations and agricultural lobby groups are beneficial to commercialization of agriculture and agribusiness development. Farmers as individuals especially in small holding systems are at the weak end of the economic exchange system. They therefore have to evolve strategies to enhance their market power. Farmer's associations can be responsible for configuring its members with market requirements including training, extension, technology acquisition, provision of commodity inputs and co-coordinating harvesting-delivery schedules.

On the other hand agribusiness firms can deal more efficiently with farmers association by acquiring representation in the management structure, as well as, allowing the producers’ association to be represented in its own management structure. The agribusiness company, moreover, can further influence the efficiency of the farmers association by ensuring this body maintains records, has no political agenda, and is limited in size and that it contains sufficient professional management.

Role of the Initiator of the Link

Successful farm-agribusiness development depends on the role played by the initiator. In generals, linkages are initiated by either a business entity or more traditionally, by a government agency responsible for the development of a particular commodity. Where profit making for the initiating entity is essential, the initiator plays a greater role in developing farm-agribusiness linkages. Private sector enterprises have proven faster in establishing linkages with the agricultural sector than public institutions. However there is a trade off for profit making entities between developing sustainable relationships and the costs associated with providing farmers with necessary incentives to produce.

Box 8: Less intervention by Kenyan Government in business affairs

Policies need to be clearly indicated, and the respective roles of the major actors well focused. A case study in Kenya indicates that linkages in the horticultural sector have a longer life span of progressive growth, owing to the fact that the role of government in this sub-sector has been more regulatory and indirect, using lobby organizations. Where government involvement was heavy through direct participation as the sponsor of the agribusiness linkage, such as in irrigated rice production, growth has tended to be slow and less dynamic. This is probably due to the very nature of government inclination towards efficiency in production and distribution, as well as the amalgamation of different objectives in a given enterprise. These objectives could be social equity, food self-sufficiency and the generation of income for a given constituency of the population. In the face of liberalization and the changing world economic order, farm-agribusiness linkages with heavy government control are unlikely to fare well. This means that governments have to be sensitive to changing economic climates and reduce their presence to policy and regulatory work.

Creation of Asset Specificity

Other factors that favour the creation of stronger linkages include greater product specialization by farmers and processors. The creation of mutual asset specificity reduces uncertainty and raises the exit costs of both sets of contracting partners. Asset-specificity is high in tree crops for example due to long production cycle compared to annual crops. Capital intensive processing equipment with a long amortization period creates a high specificity and increase exit costs.

Box 9: Effect of asset specificity in the South African Sugar Industry

Mutual asset specificity can be pursued by way of farmers associations undertaking the purchase of industry specific capital inputs. The Swaziland sugar farmers associations appear to have increased mutual asset specificity by investing in sugar specific plant and equipment that is too lumpy for the individual farmer. The agribusiness can attempt to act as a facilitator of finance, in this regard, to increase the interlocking nature of the arrangement. Finally, the agribusiness can examine other ways of influencing mutual asset specificity by way of configuring the technology of the grower-processor operations in such a way that only the agribusiness possesses the technology to perform a specific element of the growing operation. Contracted growers, for instance, in the processed tomato sector, require specific harvesting technology that can be owned and operated by the agribusiness.

NGO Facilitation

Institutional facilitation by international NGOs has assisted mutual beneficial links. With under-funded government extension services and limited knowledge, experience and financial strength of many agribusiness companies, NGOs can play a fundamental role in establishing and maintaining farm agribusiness linkages. This involvement has a large component of providing advisory and extension services to farmers in the absence or inadequacy of public advisory services. However NGOs should be aware of not to create unfair competition by offering subsidized, and hence long-term unsustainable incentives, such as subsidized farm-gate price, credit, inputs etc.

Box 10: The Farmer-Ownership Model for pineapple exports supported by Technoserve, Ghana

Under a World Bank Loan, pineapple farmers were organized into legal entities such as co-operatives. A limited liability company was formed by the farmers' co-operatives to carry out all post harvest aspects including exports. The co-operatives got financial support to acquire 80 percent of the shares in the company. Two established pineapple exporters acquired 10 percent of shares each. A Board of Directors was formed as well as a management team. One years' working capital was provided to the farmers and the company in the form of a loan from the donor.

Contractual agreements have been made between the company and the co-operatives in regard to pineapple production, input supply, and pineapple sales. The company through the co-operatives provides farming inputs on credit, as well as extension services. Profit sharing is done in form of dividend payments to the farmers' co-operatives.

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