Download Experiences in Linking Smallholder Vegetable Farmers to the

Experiences in Linking Smallholder Vegetable Farmers to the Emerging
Institutional Market in the Philippines
P.J. Batt12, S.B. Concepcion2, R.B. Murray-Prior12 and F.T. Israel3
1
Curtin University of Technology
2
University of the Philippines (Mindanao)
3
University of the Philippines Strategic Research and Management Foundation
Abstract
In the Southern Philippines, under a collaborative research project funded by
the Australian Centre for International Agricultural Research (ACIAR),
Component 4 (C4) is working with small groups or clusters of smallholder vegetable
farmers to link them to high-value institutional markets. For smallholder producers,
the key benefits of cluster marketing arrangements include; greater access to
markets, technical information, inputs and micro-finance; improved bargaining
power; higher prices and lower costs. For the community, with an assured market,
cluster marketing provides greater opportunities for employment associated with
land preparation, planting, harvesting and sorting, and transport. However, cluster
marketing also brings the community closer together, making it easier for them to
access public investments in infrastructure. For the environment, the adoption of
low input biodynamic production systems has resulted in a significant reduction in
the use of chemical fertilisers, pesticides and herbicides. However, in the long term,
cluster marketing groups will only survive where there is an appropriate level of
trust, confidence and unity; a personal commitment; active leadership; open
communication; collective decision making; multiple buyers and abundant
institutional support.
INTRODUCTION
In the Philippines, some 5.7 million households are engaged in vegetable
production, where the majority of smallholder farmers (80%) earn less than PhP 3,000 per
month (Batt et al., 2007). The vast majority of the fresh vegetables produced in the
Philippines (75-85%) are sold through the traditional marketing system, where farmers
sell their produce on the spot market to traders, consolidators, vegetable processors and
wholesalers. However, as personal disposable income rises, a greater quantity of fresh
vegetables is being sold through modern retail markets and institutional food markets.
Irrespective of the market, smallholder producers acting independently are seldom able to
satisfy their downstream customer’s needs for consistent quality and continuity of supply.
As a result, institutional buyers in high-value markets, which include consolidators,
wholesalers and distributors, retailers, food processors and the food service sector, must
rely upon multiple suppliers. However, as the market becomes more sophisticated and
competition intensifies, more institutional buyers are seeking to by-pass the traditional
marketing system to contain costs, preserve product quality and through greatly improved
traceability, to protect the integrity of their brands.
One of the many strategies adopted in the Philippines to facilitate a more
consistent supply of good quality vegetables from smallholder farmers is the clustering
approach, whereby a small group or cluster of smallholder farmers is organized to deliver
a pre-determined amount of produce to a focal customer (CRS-Philippines, 2007).
Developed from the CIAT Territorial Approach, the CRS Eight Step Clustering Approach
for Agro-enterprise Development employs a participatory action learning process, where
the cluster members proactively plan their production to meet the specific quality and
delivery requirements of their focal customer. The first five steps are preparatory
activities that emphasize the need for the farmers to learn new skills, access new
information and adopt new innovative approaches to identify and to respond to market
opportunities. The two subsequent steps require the cluster to undertake test marketing,
and where it is successful, to scale-up their activities. The final step of cluster
strengthening requires the cluster members to develop new skills, new values and to
identify alternative methods for organising the cluster.
Such collaborative marketing arrangements typically provide farmers with more
market knowledge, more negotiating power, lower costs and in some instances, a higher
price. In a study of three clusters in Mindanao, Montiflor (2008) identified the challenges
faced by collaborative farmer groups. These included on-going financial support,
difficulties in sustaining active farmer members and the need for more skilled farmer
leaders. Montiflor, Batt and Murray-Prior (2009) identified two alternative approaches to
cluster farming: an area-based and a commodity-based approach. In the area-based
approach, farmers group together based on the proximity of farms, while in the
commodity-based approach, farmers plant the same or similar vegetables and combine
their output in order to achieve a higher volume.
Irrespective of the approach adopted, Murray-Prior (2007) notes that the success
of collaborative marketing arrangements is very much dependent on the characteristics of
smallholder farmers and the external environment in which they are embedded.
Smallholder farmers in the transitional economies often suffer from poverty, high levels
of illiteracy, ill health, and low social and political status. Furthermore, the ability of
smallholder farmers to penetrate high value markets is constrained by a number of
external factors including high transport and handling costs; expensive and limited access
to crop inputs, credit and information; inferior technology; high transaction costs;
problems with land tenure; a weak legal framework and the lack of government and
institutional support. Furthermore, most smallholder vegetable farmers are unaware of the
customers’ quality requirements, preferred varieties, the seasonality of production and the
supply and demand situation in both domestic and export markets (Batt et al., 2007).
Based on almost ten years experience with collaborative marketing groups in the
Philippines, this paper seeks to identify the key benefits of collaborative marketing for
smallholder farmers and the key success factors that are necessary for their long-term
survival.
MATERIALS AND METHODS
Although the southern island of Mindanao has great potential to cultivate
temperate and tropical vegetables, due to favourable soil and weather conditions,
abundant agricultural land, and an extensive research, development and extension
network (Infante, 2003), Mindanao is one of the most poorly developed regions in the
Philippines. As a result, a number of poverty alleviation programs are being conducted in
the region by both government and non government agencies (NGO’s). With funding
from the Australian government (under both AusAID and ACIAR), the USDA and the
corporate sector, organisations such as the Catholic Relief Service (CRS), the Landcare
Foundation of the Philippines (LFPI), Kaanib, Kasilak and the University of the
Philippines Strategic Research and Management Foundation (UPSTREAM) are linking
smallholder vegetable producers to high-value institutional markets.
In the preparation of this paper, information has been collated from: key informant
interviews with funding providers, NGO’s, the Department of Agriculture, Municipal and
City Agriculturist Offices, industry associations, cluster leaders, cluster members and
their respective downstream customers; project reports; and various conference papers
and proceedings. This paper has been written drawing on our accumulated experience
over time, rather than a single concerted effort to gather information.
KEY BENEFITS OF CLUSTERING
For the farmers
The key benefits of clustering for smallholder vegetable farmers can be grouped
into two main categories: economic and social. Most smallholder farmers expect to
achieve an economic advantage through clustering via a higher price when they
consolidate and grade and sort sufficient product to meet the demands of more discerning
downstream buyers.
However, the benefits of clustering can also enhance smallholder farmers’ net
returns through reducing costs. Not only does consolidation potentially reduce the costs of
transport, but where institutional buyers arrange to collect the produce at some designated
collection point, the cost of transport may be factored into the prices paid. Furthermore,
while the collective purchase of production inputs also has the potential to lower costs,
clustering often results in farmers receiving seeds, fertilisers and even protected cropping
structures at no cost through a range of local, regional and national government grants.
As few public extension agencies have the funds to offer advice to individual
farmers, clustering greatly improves smallholder farmers’ access to technical information.
Other support organisations continue to link the clusters to high-value institutional
markets by funding market research and visits to prospective buyers. Others offer
assistance with logistics and packaging. In all of these instances, clustering has the
potential to greatly expand the range of markets smallholder farmers can access. While
there is no evidence yet of cluster groups in the Philippines adopting quality management
systems, group certification will provide an effective way of containing costs and of
ensuring compliance through mutual self regulation.
One of the most significant benefits of clustering is access to working capital.
With no collateral, smallholder farmers acting independently are unable to secure
personal loans. Through clustering, more so when it can be shown that the group is linked
to a known institutional buyer, micro-financiers are able to spread their risk by advancing
a group loan, whereby each member of the cluster becomes in part responsible for the
other members loans.
To date, it is apparent that the social benefits of clustering greatly enhance the
economic benefits. As fresh vegetable prices in the Philippines are highly variable, there
is no guarantee that higher prices will be achieved. However, cluster members report that
they have a much better understanding of the market dynamics, the role and function of
market intermediaries, and what they need to do to satisfy their downstream buyers’
demands (Montiflor, Batt and Murray-Prior, 2008). This has resulted in a greater ability
to negotiate with downstream buyers and a vastly improved relationship with much
higher levels of trust, not only between the cluster and the focal customer, but also
between the cluster members themselves. Cluster members generally feel more
empowered, for they are able to apply the skills learnt in transacting with the focal
customer to other markets.
For cluster members in Maragusan (Lamban et al., 2010), the skills they had
learned for marketing vegetables were directed towards the production and marketing of a
range of biodynamic plant concoctions that were applied as both fertilisers and insect
repellents. In a similar manner, with the failure of their focal market to honour their
commitments, the Ned cluster utilised the skills they had learnt to identify new markets
and to negotiate with new buyers (Axalan et al., 2010).
For some smallholder farmers, being able to purchase a mobile phone has greatly
improved their access to market information and indeed, greatly expanded their social
network. Other farmers have been able to purchase white goods for the household, small
pieces of equipment such as knapsack sprayers, or to invest in other plant and equipment
that provides another opportunity for them to derive additional income. However, the
most overwhelming social benefit of clustering, as stated by the farmers, is the ability to
send their children to school.
For the community
In communities where a cluster has an assured market for their product that meets
the buyers specifications, smallholder farmers have increased the area planted in the focal
crop with a commensurate increase in the demand for labour associated with cultivation,
planting, harvesting and sorting. Other entrepreneurs within the community gain
employment in facilitating the transport of the produce. Depending upon the terrain and
the condition of the roads, transport from the farm to the point of collection can take a
variety of forms including manual hauling, horseback, buffalo sled, motorcycle or
jeepney and tramline.
At the community level, clustering can have a significant positive impact in
bringing the community closer together. As fresh vegetables sales increase, the
community begins to recognise that its greatest strength lies within the community itself.
Through acting collaboratively, individual households can achieve more than if they acted
independently. However, such will only occur where there is trust, financial transparency
and effective leadership. As many of the clusters implement a levy whereby 5-10% of the
sales revenue is collected to establish a revolving cluster fund, members are able to access
these funds to purchase production inputs or to meet unforeseen household expenses.
Furthermore, a strong rural community often attracts financial support from other sources.
In a number of instances, international development agencies have made significant
public investments in infrastructure including sanitation and water supply, packing sheds
and equipment. For the more developed clusters, funds have been provided to pay for the
salaries of both full-time and part-time staff and/or a vehicle.
For the environment
As a response to adverse climatic conditions, including heavy rain, high winds and
drought, more smallholder farmers are adopting low input biodynamic farming practices
as a risk mitigation strategy. This includes the use of open pollinated seeds, fermented
plant juices and extracts, vermi-compost, companion planting, integrated pest control,
crop rotations and contour planting. This has resulted in a significant reduction in the use
of chemical fertilisers, pesticides and herbicides. With appropriate crop rotations, as less
chemical is applied to control pests and diseases, there is less runoff to contaminate
streams and waterways, less likelihood of farmers becoming accidentally poisoned and
less likelihood that the produce itself will be contaminated by chemical residues.
As many of these marketing clusters have arisen from what were primarily
Landcare groups, many farmers already practice various techniques such as contour
planting to reduce erosion.
KEY SUCCESS FACTORS
O’Connor (2004) describes how cooperatives have played a major role in
agriculture in many developed and developing countries. They have been important both
in securing farm inputs and in the transport, storage, marketing and downstream
processing of many farm products. Yet despite their advantages, the majority of
collaborative marketing groups fail as a result of changing conditions in their business
environments, poor business models, bad management or the failure of members to
support them. In the developing world, Lele (1981) has suggested that the main reasons
for the apparent failure of so many cooperative groups can be attributed to: a lack of
understanding of the actual constraints and solutions facing smallholder farmers;
insufficient attention to the internal prerequisites of leadership, management, experience
and technical know-how; and the absence of external prerequisites for the effective
functioning of organisations such as appropriate government policy.
To be successful, Murray-Prior (2007) concludes that collaborative marketing
groups need to have some competitive advantage and an element of trust. Without being
able to offer smallholder farmers higher prices, to reduce costs, or to provide access to
resources that they would not be otherwise able to obtain, there is little incentive for
members to remain within the group. However, even where cluster marketing groups
have been able to secure a higher price, Montiflor et al. (2010) describes how farmers’
expectations can remain largely unfilled. For the Quirogpang cluster, even although the
focal buyer paid prices that were higher than the prevailing roadside price, farmers were
dissatisfied as the prices offered were well below those paid in the wholesale market.
Furthermore, as the focal buyer only purchased that product which met his quality
specifications, the cluster had to sell that product which did not meet specifications to the
traditional spot market, where the prices paid for the reject product were substantially
lower than what they would have ordinarily received. In the case of the Ned cluster
(Axalan et al., 2010), delays in payment made it difficult for the farmers to repay their
loans. Furthermore, the customer to whom the buyer supplied the product suddenly
defaulted and withdrew from the market because the demand for the focal product was
linked with the demand for two other products (joint demand), and when these were not
available, there was no demand for the focal product.
Despite the apparent success of cluster marketing in linking smallholder farmers
to high-value markets and to return above average prices, other externalities will also
impact upon price. In many tropical countries such as the Philippines, the frequency and
the intensity of the typhoons greatly influences the supply of fresh vegetables. With the
coming of the typhoon season, a marked reduction in supply will see prices escalate,
putting pressure upon the agreements that smallholder farmers have in place with their
institutional buyers. As these prices are often negotiated weekly and in some instances,
monthly, cluster members may be tempted to divert their product to other buyers who
offer a higher price. Not unexpectedly, when the cluster fails to deliver the anticipated
quantity, the buyer will look for more reliable suppliers. Appreciating that it is neither
possible nor desirable to lock the cluster members into an exclusive supply agreement that
may not be in their best long-term interest, smallholder farmers are being encouraged to
commit only 60% of their product to the focal buyer. Having met their commitments,
farmers are then free to choose how they dispose of the surplus. Given the experiences of
both the Ned and the Quirogpang cluster, it is desirable for the cluster to transact with
multiple buyers, for high-value institutional markets can sometimes be just as unreliable
as the traditional market.
Knowing full well the potential impact of the typhoons on price, smallholder
farmers often plant in the expectation of achieving high prices, but if both the frequency
and the intensity of the typhoons are less than anticipated, prices will fall. As prices ease,
it becomes increasingly difficult for the cluster to offer sufficient price incentives, more
so where high-value institutional buyers have high quality specifications. There is some
anecdotal evidence to demonstrate that the quality specifications employed by high-value
institutional buyers are flexible, contingent upon the quantity of fresh vegetables
available; when the supply is constrained, quality specifications are often relaxed, but
when the supply is abundant, quality specifications are rigidly enforced. For smallholder
farmers and the cluster, such variability in the application of standards is problematic. Not
unexpectedly, this is the root cause for much the conflict evident within the exchange
transaction.
Heavy rains during the wet season can also negatively affect the ability of
smallholder farmers to deliver the product to market. Heavy rain often washes out roads
and bridges making it impossible to transport the produce and with no capacity to store
the product farmers incur substantial financial losses. Furthermore, where the cluster has
adopted a staggered planting schedule in an effort to maintain the continuity of supply,
heavy rain, especially just after planting, will wash out the crops with a commensurate
reduction in the supply for 18 – 24 weeks. Real et al. (2010) reports how one cluster in
Bukidnon lost its market because of crop failure. This highlights the need for both the
cluster and the focal buyer to be open and to maintain a channel of communication that
facilitates the free flow of information.
The difficulties in attempting to cultivate vegetables within such an uncertain
environment can also have implications that go well beyond the capacity of the cluster to
satisfy the needs of its downstream buyers. As a result of crop failure, Real et al. (2010)
reports how one vegetable cluster in Bukidnon fell apart because farmers were concerned
about their long-term obligations to repay loans that had been advanced to the cluster. For
another cluster, after two successive crop failures, individual farmers are now so heavily
in debt that their on-going financial obligations are crippling their household.
If the loans through accredited microfinance institutions are to provide a viable
alternative for the loans advanced by market intermediaries, sound investment principles
must be practiced. As all loans involve an element of risk, budgets must be conservative,
taking into account both the production risk and the price risk. Furthermore, only a
proportion of the anticipated costs should be advanced to the farmer, preferably in inputs
rather than cash, and there must be some sharing of the risk between both the farmer and
the micro-finance institution to avoid a hand-out mentality. An individual farmer should
only be eligible for a larger loan after the initial loan has been repaid.
Within both the community and more so within the cluster itself, there must be an
element of trust. The level of trust in the community is related to the level of social capital
in the community (Murray-Prior, 2007), which is, in part, determined by the level of
homogeneity. The more alike the community is in terms of religion, ethnicity or language,
the more likely they are to collaborate. Montiflor et al. (2010) demonstrate how family
ties, belonging to the same church and speaking the same language, facilitated cohesion
within the Quirogpang cluster. Within this cluster, trust had developed to such an extent
that members handed over the responsibility of collating, selling and negotiating the sale
of the vegetables to one person. While trust is one of the most important factors that
strengthen collaboration (Batt and Purchase 2004), trust will emerge more rapidly where
there are prescribed rules that govern cluster membership and where all members of the
cluster are treated fairly, equally and with respect.
CONCLUSIONS AND IMPLICATIONS
Cluster farming is not a new concept in the Philippines. The Department of
Agriculture (DA) first facilitated the formation of clusters in the corn industry through its
Ginintuang Masaganang Ani (GMA) Program (Montiflor, 2008). While its introduction
into the vegetable industry has been generally well received, much has yet to be learned
and not unexpectedly, there is some apprehension regarding its long-term sustainability.
To date, each of the successful clusters share all of the following: (1) a strong
element of trust and unity among members. In the first instance, this can be facilitated by
enduring kinship ties within the community based on family, ethnicity or religious beliefs.
However, in the longer term, trust will develop from open communication and the full
and honest disclosure of prices and costs; (2) commitment. In some way, each of the
clusters have instituted rules which govern membership, in part, to facilitate homogeneity
within the group, but also to ensure that the focal buyers needs are fulfilled. Irrespective
of their personal circumstances or the prevailing market price, members must honour their
commitments. Where members repeatedly fail to meet their obligations, there is evidence
to suggest that these farmers have been expelled; (3) strong leadership. In every instance,
a strong group was led by a prominent and empowered farmer leader; (4) multiple buyers.
Despite directing activities towards satisfying the need of the focal customer, in many
instances, the focal customer was unable to take the product or the prices offered by the
focal customer were lower than the alternative buyers. Given too that most institutional
buyers have some quality specifications, where product fails to meet the buyer’s needs, an
alternative market must be found. This demonstrates the need for the cluster to continue
to trade in both the high-value institutional market and the traditional market; and (5)
strong institutional support. In order to overcome the constraints of the smallholder
environment, institutional support is required to facilitate capacity building, technology
transfer and provide an alternative source of finance. However, cluster sustainability
remains problematic. The key issue that has yet to be resolved is the development of an
appropriate exit strategy for the agencies involved in providing the institutional support.
Some level of institutional support will be necessary to assist smallholder farmers, but it
is neither possible nor desirable to provide extensive institutional support for any
extended period of time.
ACKNOWLEDGEMENT
Financial support from the Australian Centre for International Agricultural
Research (ACIAR) and the use of the Eight Step Agro-enterprise Development Approach
developed by the Catholic Relief Services (CRS) is duly acknowledged.
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