By Emmanuel Sulle, researcher, Institute for Poverty, Land and Agrarian Studies, University of the Western Cape, Souch Africa
Since the emergence of the “land grab” phenomenon in the mid-2000s, alternative approaches to land-based investments have been developed and tested to mitigate the often significant and adverse impacts on rural people of such grabs while still supporting foreign direct investments, particularly in agriculture, for economic development in African countries.
The use of more inclusive business models is one approach. These models aim to ensure that the existing land users do not lose their rights to access, control and own land. They are meant to empower communities to have a voice in business decision making processes and share benefits and risks resulting from the business activities.
As suggested in a number of voluntary guidelines, including the African Union Framework and Guidelines, and the FAO Voluntary Guidelines for the Responsible Governance of Tenure of Land, Fisheries and Forests in the Context of National Food Security, the rights of women and indigenous communities to access, control and own land are critical to local development. Research clearly indicates that in areas where women have access and control over the land they farm, they earn a significantly more income and have greater power in family decision making processes. Inclusive business models are crucial in ensuring these rights are upheld.
An inclusive business model is one in which the elements of resource ownership, voice, risks and rewards are clearly defined, understood and respected by all parties engaged in such a business.
Currently, a range of existing business models used in the production, processing, marketing and distribution of both cash and food crops is considered inclusive. The most commonly referred to “inclusive business model” is a hybrid model - a combination of plantation and outgrowers.
‘Plantation farming’ refers to a system in which a single operator or company (sometimes with partners) is responsible for organizing the economic activities of production, processing and marketing. The term ‘outgrower farming’ includes small-scale, medium and large-scale farmers supplying their agricultural produce to a processer or a miller. This relationship is based on specific contractual obligations, for example, that the company will buy farmers’ produce and provide them with inputs and training, while farmers commit to supply produce in specified quantities and quality.
The Case of Kilombero Sugar Company Limited in Tanzania
To illustrate, most of the existing sugarcane millers in sub-Saharan Africa have leased or owned plantations, sugarcane crushing and processing facilities, while the sugarcane outgrowers own or rent their farmland, and supply their produce and some labor to the company. The miller markets, processes and distributes the final products such as sugar, molasses and spirits. At the end, both the miller and the outgrowers share the final proceeds in the pre-agreed manner. Overall, agricultural business models which utilize partnerships between plantations and outgrowers remain more successful than single large-scale investments in land or plantations.
However, it is important to note that almost all ‘inclusive’ models have shortcomings—some serious enough to disqualify them as inclusive business models.
The sugarcane production model used by the Kilombero Sugar Company Limited (KSCL) in Kilombero District, Tanzania, provides an example of some elements of inclusive business models and their challenges. KSCL has been partnering with sugarcane smallholder farmers to produce sugarcane that is processed, marketed and distributed by the miller (KSCL). The partnership is based on a Cane Supply Agreement (CSA) which is signed between the company and the farmers’ associations every three years, and may be amended every harvesting season if the need arises. Individual outgrowers cannot sign contracts with the company. Instead, they participate through local farmers’ associations, of which there are now 15 in the Kilombero District.
How it works
The CSA spells out the division of proceeds, and it requires the company to pay the outgrower for the sugarcane delivered to the company on the 15th day of the following month. For the year 2013/14, outgrowers earned US$35.6/tonne, before adjustments for sucrose levels and actual sales are made. Based on these adjustments, outgrowers are paid less if the sucrose level of their cane is too low; and all growers are paid based on final sales. Payment is done on the ratio of 57 percent to 43 percent of the profits for outgrowers and the company, respectively.
The outgrowers can participate in the sugarcane production business with as little as one acre of land. Since each farmer has full control of his or her land, he or she is still free to lease out such land or turn it to the production of other crops such as rice or maize – all suitable in the area, although their production is now affected by birds nesting in sugarcane fields.
At the moment, KSCL is the largest miller in Tanzania; it runs two irrigated estates with a total 8,022 hectares and two factories. It buys sugarcane from over 8,000 registered outgrowers who own individual sugarcane farms amounting to 11,900 hectares. Currently, outgrowers supply 43 percent of the total sugarcane processed by the company annually. In 2013/14 the company produced 116,495 tonnes of sugar, about 40 percent of the total sugar produced in the country. The company, through outgrowers’ associations, has managed to mobilize a large number of outgrowers to put their farmland into sugarcane growing fields, and attracted some donor support to finance the maintenance of both the estate and outgrowers’ infrastructure.
This partnership is not without challenges. The inadequately planned and executed expansion of sugarcane production in the area is now causing problems for the outgrowers and the company. This is because the production levels have overshot the company’s processing capacity, leaving farmers with sugarcane that is unharvested and unsold, and no options rather than being indebted. Recently, farmers have also registered complaints around the measurements of their sugarcane weights and sucrose levels by the company.
Yet, as the sugarcane business becomes more lucrative, elites are buying out land from small farmers, and outgrowers have turned most of their farmland into sugarcane fields, increasing land scarcity for food crops in the area.
This has resulted in the phenomenon of ‘commuter families’; that is, families commuting between the sugarcane producing villages to other villages in search of land to produce food crops. This can negatively affect families, as their children are either left alone or with only one parent.
Problems are aggravated by increased importation of cheap foreign sugar. Although, the importation of foreign sugar is necessary to fill the gap left by local producers, levy-free or subsidized sugar imports are far cheaper than locally produced sugar.
To address these challenges, required immediate actions include improved transparency and accountability within the sugar board of Tanzania to avoid excessive importation of sugar. A transparent measurement system for farmers’ sugarcane weights and sucrose levels is also needed, preferably one approved by both the farmers’ representatives and those of the company. Also, efforts should be made to ensure KSCL has the capacity to process all produced sugarcane each season. Otherwise, markets for other crops, such as rice, should be improved in the area to give farmers an opportunity to turn the extra sugarcane farms to rice producing fields.
Some lessons from the KSCL business model are critical for Tanzania’s new initiatives such as the development of the Southern Agriculture Growth Corridor of Tanzania (SAGCOT) and Big Results Now (BRN) – all of which include the expansion of sugarcane farming as a priority crop. These new initiatives need to ensure that the positive aspects of the hybrid model -- such as few barriers to enter the sugar business, and the clear and respected division of business proceeds between the agribusiness and outgrowers -- are emulated.
Important takeaways from this model include attention to the structure of resource ownership between the miller and outgrowers, institutional arrangements, and the contract flexibility which allows both partners to negotiate sugarcane prices whenever there is a need to do so. Assuming the outgrower associations have access to adequate market information, this helps every partner in the business to maximize benefits and minimize business related risks. However, it is also critical to note that compared to the company, local farmers remain weak partners and effort is needed to ensure they have the knowledge and capacity to be able to negotiate reasonable terms with the company.
Is bigger better?
The model suggests that for agricultural investments to work, an investor does not necessarily need large plots of land of up to 50,000 hectares as suggested in SAGCOT plans, but rather a moderate amount of land which could also encourage an investor to look for extra outputs from neighboring farmers as has happened with KSCL. In fact, all operating sugar mills in Tanzania have plantations of less than 10,000 hectares.
In addition, during the implementation of SAGCOT and BRN, proper land use planning must be done to ensure that the land allocated to nucleus and outgrower farms for cash crops includes food producing zones. In this way, the issues of food insecurity and farmers commuting from one location to the other in search of food producing land will be addressed.
Lastly, it is critical to understand that inclusive business models do not operate in a vacuum; rather they require enabling policy, legal and institutional frameworks that are efficiently and effectively executed.
Emmanuel Sulle writes in his personal capacity. The views expressed in this commentary are those of the individual author and do not necessarily reflect the views of FOLA’s sponsoring organizations.