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Presentation of value chain basics to Fair Trade producers representatives
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Value chain analysis and Fairtrade coffee
Chris Coles
Introduction
• Brief introduction to value chain analysis
• Key questions and themes• Examples from Ethiopia and Tanzania• Mapping and basic analysis exercise• Question and answer session
I would like you to understand...
What value chain analysis is (and isn’t)?
? ? ? ?
How it may be useful to you
What is a value chain?
Definition
‘The value chain describes the full range of activities which are required to bring a product or service from conception, through the different phases of production (involving a combination of physical transformation and the input of various producer services), delivery to final consumers, and final disposal after use.’
Source: Kaplinsky & Morris 2004
What is a value chain?
Just an approach to understanding a complex reality
Tea: sub-sectorValue chains
Small-scale
cultivation
Small-scale
processing
Domestic sales
FactoryPlantati
on
Cluster
Export
Value chain
1
Agriculture sector
Value chain
2
Value chain analysis (VCA) is...
NOT an answer to all
problems!
A way of looking at market systems...
Features of value chains
Key questionsWhat are the qualities and
volumes of the products and how do they compare
with market requirements?
What are the rules of the game?
Who participates? Primary participants
and service providers
What are the constraints and opportunities?
Key themes
The market
Demand pull, not producer
push
Market segmentationA defined product and its
market
Smallholders
Retailers
Routes to market
CooperativeunionsProcessing & export
Production
Input supply
Commercialgrowers
I II
Examples – market maps form Oromia, Ethiopia and
Kilimanjaro, Tanzania
Profitability and competitiveness
Gains from efforts
-+
PROFIT
=COSTSSALES
25% gross
margin
Smallholder producers
CooperativePrivatetrader
Largeintegrated company
150MT
80MT20MT
50%
30% 55%
Producer options...
Price and value capture, FOB, Kilimanjaro coffee
ProcessorFarmer Exporter
$1.27 $3.00$2.60
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
42 44 14
ProductionPrimary processing
Transport
Secondary processingPackagingTransportWholesale
TransportStorageExport
ProducersCosts/kg
Labour, $0.42Inputs, $0.26
Transport/processing, $0.32
RevenuesPrice/kg parchment, $1.57
Gross margin, 36%Sales, MT/season, 0.5
Gross profit/season, $285
Processors (curing)Costs/kg
Local tax, $0.11Transaction costs, $0.40
Packaging, $0.03Processing, $0.06
RevenuesPrice/kg green beans, $2.24
Gross margin, 3%Sales, MT/season, 36,000
Gross profit/season, $2.52m
ExportersCosts/kg
Transport, $0.09Clearing & forwarding, $0.18
Warehousing, $0.03Interest, $0.21
RevenuesPrice/kg green beans, $2.85
Gross margin, 4%Sales, MT/season, 7,200Gross profit/season, $1m
Coffee up to export, Tanzania
Governance
Setting and enforcing the rules
Commercial governance
Policies, institutions, initiatives
Support organisations
How to do VCA...
Phase Step What to do? Why?
Phase 1: Diagnosis
Step 1
Preparation To define the product, market, target group and the project team
Step 2
Map the big picture: enterprises and other participants in sector, links between them, demand and supply data, and the context
To organise a chaotic reality, understand the overall system
Step 3
Map where the target group participate To avoid erroneous assumptions about target participantsTo take account of the less visible suppliers
Step 4
Conduct fieldwork interviews in each node of the chain, with participants and consumers
To provide data and insights for Steps 5 to 8
Step 5
Track revenue flows and incomeEstimate how expenditure flows through the chain and how much accrues to the target group (e.g. producers)Consider their returns and factors that enable or inhibit earnings
To follow benefits through the chain down to the producer and how assess how returns can be increased
Phase 2:Opportunities
Step 6
Identify where in value chain to seek change: which activity/activities in the chain?
To use Steps 1 to 5 to select areas ripe for changeTo focus Steps 6 to 8 down to specific areas
Step 7
Analyse blockages, options, and partners in the functional areas selected, to generate a long list of possible interventions
To think laterally and rationally in generating the range of possible projects
Step 8
Prioritise projects on the basis of their impact and feasibility
To generate a project shortlist, comprising projects most likely to deliver impact
Phase 3: Planning
Step 9
Project planning How to package selected projects (to obtain financing)
A full process for value chain analysis
What to do about it?
The concept of ‘upgrading’
Vertical
Functional
Process
Functional
ProductionProcessing Wholesale End markets
ProductProcess
Horizontal
coordinati
on
Inter-chain
Enabling environment UPGRADING STRATEGIES
Governance in Ethiopia and Tanzania – case studies
• FLO-cert, CAFE practices, Q Coffee, organic standards
• Central government licensing and export control
• Auction systems – TCB and ECX: NY ‘C’ link
• Direct export – ECX DST and TCB• Producers’ institutions – two-tier
marketing structures
Research questions
• How do producers benefit (or not) from being connected to different market channels?– Fairtrade and organic certified– Open market
• How do policies and institutions affect the extent to which producers recieve benefits?
• Financial and non-financial
Producer income – costs and payments
Kilimanjaro – example of costs,
US$/MT
Value chain shares of value and profitability -
examples
What limits producer benefits?
• Inefficiencies and high costs – licensing, transaction costs
• Legislation and policy limit access of non-cooperative members to alternative markets
• Poor leadership; corrupt practices, low organisational capacity
What limits producer benefits 2
• Poor communication and a lack of transparency
• Quality issues – buying posts, incentive structures (pricing and collection processes)
• Traceability issues (related to low output)
• Low output–Limited proportion of sales to
premium markets–Low productivity
Exercise1. Map a value chain that you are
familiar with2. List the constraints and
opportunities using this format:I. What is the issue?II. Who is it an issue for?III. What are the actual or potential
implications?
3. Suggest ‘upgrading strategies’ (both internal and external to the value chain) to address constraints