Using ICT to integrate smallholder farmers into agricultural

value chains: The case of DrumNet in Kenya

Julius J. Okello, Edith Ofwona-Adera and Oliver L.E Mbatia

Paper presented at IAAE eARN Africa Symposium, Beijing, August 19, 2009

Julius J. Okello, Edith Ofwona-Adera and Oliver L.E Mbatia

Paper presented at IAAE eARN Africa Symposium, Beijing, August 19, 2009

University of NairobiUniversity of Nairobi

Smallholders and market linkage

Smallholder farmers continue to experience difficulties being linked to markets in Africa

Most of them face poorly functioning input markets/failed market for essential inputs, e.g., Credit (& certified seeds) InformationTechnical advice

Smallholder farmers and market linkage contd…

Small farmers are also not able to integrate into better paying output markets

Output markets fail for such farmers because they are: Widely scattered hence high assembly costs Many and poorly organized Tend to trade in small volumes

These factors make it costly to do business with small farmers. Worsened by lack of market information

Small farmers’ market place

Typical volumes traded by most smallholder farmers in Africa

What’s the point?

Input markets fail for smallholder farmers Output markets also fail. And are:

Fragmented Offer poor prices Are thin (only handles small volumes) Relational transactions – personal exchange

Hence smallholders are poorly linked to both input and output market

Poor market linkage contributing to the low-equilibrium poverty trap low investment, low harvests, low marketable surplus, ….

The DrumNet Intervention

The DrumNet intervention aimed at resolving the constraints small farmers face by:

Linking them to input markets (provision of credit)

Linking them to ready and better paying output markets (includes transportation)

Technical advice (information)

Players in the value chain are linked through a mobile phone-based platform

Provides a high-demand set of business support services to about 2000 resource-poor farmers in rural Kenya.

Targets sunflower producers in western Kenya (see location).

Three sets of business support services are provided — marketing, finance, and information as an integrated package.

Key actors in the sunflower value chain include:– farmer groups, transaction agents, produce buyers, input suppliers, financial organizations and agricultural extension workers - all are interconnected using ICTs.

This presentation looks at the effects/impact of the DrumNet intervention in smallholder sunflower production in Kenya

Overview of the DRUMNET intervention

Before DrumNetSource: baseline research

Value Chain Before DrumNet

Small Plot Farmers Farmgate Brokers Local Brokers Central Brokers

Processors

Exporters

Large Retailers

Market & Other FeesTransporter

Large Institutions

65%

9% 3%

23%

Finance

BUYER

Bank

Stockist

Farmer Groups

The model creates efficiencies and allows participants to enter markets

Banks shielded from complexity of managing large number of farm input loans

Repayment risks reduced with connection to produce payments

Buyers access predictable supplies of produce without significant field mobilization

Disintermediation of traditional brokers, resellers, and traders

Farmer Input Suppliers alerted to upcoming Farmer demand for products

Full transparency and market data for all participants

Farmers grow under structured contracts with Buyers

Transaction agents/group leaders (use cell phones within the value chain)

All financial transaction occur on cashless basis

DrumNet Flow

Partnerships Buyer Farmer Intermediary

Organizations (FIOs) Farmer Groups (FGs) Banks Agro Suppliers

MembershipFGs become DrumNet

members Fill Membership form Pay DrumNet

Membership fee

TrainingFGs get trained on DrumNet model Crop Agronomy

System Input• Partner & FG data get

input in the system• SMS generated by the

system acknowledging receipt of fee

E-Token: 382764Seed:10kgDAP:500kg

System E-Token • System sends E-token to FGs

to pick inputs from agro-dealers

FGs pick inputs from Stockist• Stockist uses DrumNet

procedures/tools• Stockist gets paid cash or by

Bank transfer against FGs loans

PlantingFGs plants & takes care of their plots

based of the Crop Agronomy training received

DrumNet Flow

Field Audit• Pre-scheduled messages to

FGs from DrumNet system

Harvest Projections• Buyer gets projections on

expected yields

Produce Collection• Produce aggregated from FGs

and collected at DrumNet Collection Points

Buyer Receives produce• Buyer receives produce,

weighs and grades• Buyer makes payment to

DrumNet Lockbox

Deductions & Payment• Deduct Principal & Interest• Deduct DrumNet Fees• Net payments transferred to

FG bank accounts

Before DrumNet

Small Plot Farmers

Processors

Exporters

Large Retailers

Market & Other Fees

Transporter

Large Institutions

86%

5%

9%

Comparison of the two value chains…..Before & …After

Finance

Small Plot Farmers Farmgate Brokers Local Brokers Central Brokers

Processors

Exporters

Large Retailers

Market & Other FeesTransporter

Large Institutions

65%

9% 3%

23%

Finance

After DrumNet

Other benefits of DrumNet intervention: household food security

0 10 20 30 40 50

Non participating

Participating

How much food did you borrow? (kg)How much food did you borrow? (kg)

0 5 10 15 20 25

Kg

Non participating

Participating

How much food did you donate? (kg)How much food did you donate? (kg)

Other benefits of DrumNet intervention: income and medicare

0

10000

20000

30000

40000

50000

net income non crop income crop income

Kshs

Non participating

Participating

0

10

20

30

40

50

60

Non participating Participating

maintained expenese as before

Reduced medical expenses

Income (Kshs)Income (Kshs) Access to medicare (% of farmers)Access to medicare (% of farmers)

Systems approach:

Linkages to agricultural value chain actors not previously accessible to farmers

Use of mobile phones for business as an emerging area (Lessons of Experience)

Influence on policy & institutional practices:

Lessons from DrumNet have informed a Ministry of Agriculture program - Kilimo Biashara - in partnership with Equity Bank – IFAD –AGRA.

Equity bank has expanded its financial products to include lending to rural farmers

More BenefitsMore Benefits

Rate of farmer participation still low and reaching scale Rate of farmer participation still low and reaching scale elusiveelusive

Tonnage and yield per acre below MOA recommended Tonnage and yield per acre below MOA recommended levelslevels

Sustainability- Need for further costs reduction across the Sustainability- Need for further costs reduction across the supply chain (DrumNet is migratory due to strategic default supply chain (DrumNet is migratory due to strategic default by farmers)by farmers)

Adoption of SMS technology still low with Farmer Group Adoption of SMS technology still low with Farmer Group Leaders (30% adoption)Leaders (30% adoption)

Some Challenges Some Challenges

Challenges contd..

Side selling and diversion of inputs by Side selling and diversion of inputs by FarmersFarmers

Strategic default – farmers borrow with intention of not paying back Fuelled by poor coordination and monitoring of

farmers Reliance on rain-fed agriculture – easy for farmers Reliance on rain-fed agriculture – easy for farmers

to blame weather for failure to payto blame weather for failure to pay

Despite the above challenges , some Despite the above challenges , some encouraging outcomes have been realizedencouraging outcomes have been realized

Products & Services facilitation

MarketMarket Finance Information

Re-defining the ICT functionalitiesOffer bundled services to DrumNet partners

Payment Processing

CashAdvance

FarmingTechniques

WebHosting

Savings Product

TransactionBrokering

TransportationCoordination

Pricing Farm InputBrokering

ProductAggregation

MarketingGroup Support

Farm Input Credit

Crop Insurance Credit Ratings

Financial Planning

FarmInputs

Newsletter MarketReports

Communication

Transportation

Advertising

The Future - Built On IDRC’s Initial Support

Conclusion

Linking smallholder farmers in the agricultural value chain requires an integrated intervention that fosters linkage with Input providers Buyers Other services providers

Reducing the length of the value chain and integrating ICTs facilitates this linkage.

It also has other benefits Household food security Household income

However there are challenges that require careful monitoring of input use and well coordinated produce pickup.

Project areaProject area