by Parakrama A. Samaratunga, Institute of Institute of Policy Studies of Sri Lanka

Summary

The traditional supply chain of spices in Sri Lanka consists mainly of small scale producers. Over 200,000 small scale growers are involved in spice cultivation where 70% of production comes from small holder farm units of less than 1 ha of land. Many of them are part time farmers with other sources of income. Only a small group of producers have commercial orientation and are willing to improve productivity. Because of this lack of investment, the supply chain has some fundamental problems that need to be dealt with: 1) purchasing is decentralized; 2) the quality of products is low; 3) there is a strong presence of middle-men in the chain. These limitations are affecting the competitiveness of smallholders who grow spices for the domestic and export markets.

As a response to this weak competitiveness of smallholders MA'S Tropical Food Company has introduced an innovative "business model". Through this model, the company assists smallholders in different ways: 1) assisting smallholders on organizing themselves (alone and in farmers' organizations); 2) shifting the company's procurement system from decentralized to centralized; 3) training extension officers to support farmers; 4) setting private standards and paying premium prices for farmers who achieve them; 5) improving logistics and inspection. This model has mutually benefited the parties involved in the supply chain. For the company, it has improved corporate income, volume of trade and turn over. For smallholders, it has improved farm income, created more jobs and enabled other non-monetary benefits (i.e. inclusion).

This model has been in existence for about a decade. The company has not yet reached its potential capacity. Some limitations of this "business model" can already be identified: 1) high transport cost; 2) high labour cost; 3) delayed payments. The company has also a low production capacity, being unable to absorb the production of all surrounding farmers. In the macro level, the government needs to play also a role. Regulations are still weak to sustain the new system.

What were the potentials and limitations of private business models in promoting smallholder participation?

Potentials:

• When MA'S Tropical Food Company centralized its procurement system smallholders also benefited. This action resulted in the reduction of transaction cost and improved information flow among the supply chain segments. Reduction of intermediaries has ensured sharing of profits between smallholders and the company.
• When MA'S set its own standards and sent extension officers to assist smallholders, the quality of products was enhanced. MA'S started selling better quality products and the smallholders who met the standards got a premium.
• Smallholders were able to acquire a stable price regardless of price fluctuations. Risks have been minimized by assuring the sales of the high quality products.
• With the support of MA'S, some smallholders have initiated a farmers' organization. It facilitates some activities related to the chain, such as: 1) sharing the labour; 2) reducing production costs; 3) enhancing farmers bargaining power; 4) helping farmers to keep records along with the cultivation.

Limitations:

• The low production capacity of MA'S is one major limitation factor. Many farmers want to supply their high quality produce to the company, but the production capacity is not able to absorb the entire production. Many surrounding farmers are excluded.
• Higher transport charges are another limitation factor. The company does not provide transport facilities for the produce of all farmers.
• Delayed payments by MA'S have also affected smallholders. They had to wait around one month to receive their payment. Now they feel it is convenient to sell their produce to the village trader or to the town trader since they can get the payment immediately.

What were the enabling and hindering policies?

• There is no government-managed system in Sri Lanka to provide compulsory quality certification for spices.
• Government has to play a regulatory role for the sustainability of the system. This includes improving private sector participation in the agri-business sector through various incentive schemes (eg: tax holidays), export promotion viz. trade agreements and legislative governance.

What factors explain the inclusion of the smallholder producers in the market chain (while others are excluded)?

• Taking part on farmers' organizations (i.e. group of farmers cultivating cinnamon).
• Meeting the quality standards of MA'S.
• Maintaining a regular record of farming activities.
• Transporting their own produce or benefited from the transportation of their harvest by MA'S (i.e. nutmeg producers).

What are the costs and benefits of inclusion?

• Smallholders who meet the standards of MA'S will benefit from the production whenever the company buys their produce. The cost of the inclusion is the uncertainty of the sales each year. If production is high and the company buys the supply from a certain number of farmers, some others may be excluded. Leaving the farmer in the hands of the village or town traders.
• Smallholders who do business with MA'S are not sure when they will receive their payment. It is reported that farmers had to wait for an entire month to be paid. This uncertainty also pushes producers to sell their produce to the village or town traders.
• The highest cost of this relationship between smallholders and MA'S is the lack of commitment, or better putting, lack of conditions for a commitment. MA'S cannot give any guarantee to farmers if the company itself cannot afford to buy all the production available and cannot pay farmers on the day they deliver the produce.

What does this all mean for efforts to promote smallholder participation in dynamic markets?

For smallholders to actively participate in dynamic markets it is necessary that companies like MA'S have the conditions to sustain their participation. If the changes in farming proposed by the company are not enduring, farmers will also not sustain their involvement. For smallholders to be faithful to a company and to the standards that this company requires, the feedback has to be on the same level of commitment. When a production changes to access the market and the company cannot buy the produce due to a lack of production capacity, farmers will not want to do business with this company on the coming year. Also if farmers develop a product with high quality standards, but this product cannot be transported to the company, the farmer will decrease its production quality on the subsequent year because of lack of good logistics.