NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Organizational models for market linkages

It’s easy to hate the middle men. These invisible actors in the supply chain are often portrayed as shady characters who create little “value”, instead contributing to higher prices at the grocery store register and lower wages to farmers. What do they do, anyway? Recently these actors have played a starring role in many movements, painted as dubious if not villainous characters who are squeezing farmers and ripping off consumers.

Pitchforks and torches aside, traders have been a part of food systems since we began putting food into carts and moving it from the farm to local or regional markets. As the food business has become global, it is often traders who manage the trucks, planes, boats and trains that help food move around the globe. In processing, distribution, transportation, storage, and sorting intermediaries perform many critical roles that would otherwise be pushed onto farmers. And farmers, especially small farmers, are quite occupied farming and making ends meet as it is without having to assume additional roles in the supply chain.

If we aim to bridge the gaps between a global food system and small growers, we are forced to recognize an important role for these intermediaries (see the Trading Up series via KIT , a great resource). Where are the opportunities for traders to assist small farmers in the integration of the supply chain? What kinds of organizational models can be constructed in order to take the burden off small farmers for marketing, branding, technical upgrading, distribution, and the like while delivering fair and transparent prices back to farmers?

A new generation of middle-men: supporting and integrating the small farmer

For the last 20 years, retailers have been streamlining processes, preferring to work with fewer, bigger partners and suppliers that can deliver the quantity and quality they demand. New linkages for small farmer inclusion, i.e., a new generation of middle-men, must be supported in order to allow small growers to overcome the quality, quantity, transportation, packaging, marketing, and knowledge sharing gaps that have prohibited them from market participation.

New business models must therefore design and implement organizational innovations in market linkages that put small scale-scale suppliers on par with, or above, the competitiveness of large scale suppliers.

At the production level, intermediary structures that support small-farmer inclusion in global retail chains include:

• Formal small-scale producer organizations. These organizations take many different forms including associations, cooperatives, shareholder corporations, or self-help groups among others. They may be owned in a collective (i.e. cooperatives and associations) or individual manner (i.e. corporations – see following bullet). These groups provide the ability for multiple farmers to pool product and provide the quality and quantity demanded by buyers.
• Lead farmer models: Lead farmer models are established when a famer acts as a central buying hub for local growers, conglomerating produce in order to obtain a given quantity for wholesale. This arrangement may be extremely basic or may operate as a more savvy business and be relatively sophisticated in terms of organization, volume amount, and handling. The lead farmer may well evolve into a trader as she becomes more skilled in commerce.
• Trader models: A huge range of traders exists in most developing countries. Regardless of scale, at the farm level these traders provide critical services to farmers that far exceed simply buying and selling products. Some typical trader services include access to inputs, market signals and information on what to plant when, credit, transportation as well as a host of social services such as emergency transportation when a family member falls ill, emergency loans, community transportation that are rarely fully understood.

At the marketing and processing level, and retail level, intermediary structures that can support small farmer inclusion may include:

• Marketing arms of producer organizations. These organizations can often support product branding, help raise value (and incomes) for the product of small growers, provide technical upgrading, and broaden supply base.
• Certifiers, knowledge sharing partners: These intermediaries may include certifiers (like organic or fair trade) or may be knowledge-sharing partners (like agronomists that work to ensure quality on behalf of other chain members).
• Specialized producer partners: Additional specialty partners might include value-added processors, like specialty roasters for coffee, who may also offer unique avenue into the retail world.

Identifying and encouraging new market linkages for small farmers by supporting traders

Popularizing the support these types of intermediaries offers incentives for innovation and efficient new partnership creation. For companies looking to strengthen their supply chain and source ethically, seeking out and identifying intermediaries that are willing to work in alignment with these goals will be critical. Similarly, for market-oriented NGO’s, a commitment to assisting farmers in developing these organizations and partnerships when and where none currently exist, is a vital effort towards establishing and sustaining livelihoods for rural producers.

At the end of the day, what is needed is the development of intermediation models that deliver development outcomes that support small farmers and business value to the other members of the supply chain. Finding a way to balance social and economic imperatives in a trading model remains a major challenge for the emerging field of social entrepreneurship.

In the following parts of the series we will outline additional considerations for new business models for small farmer inclusion, including:

• Equitable access to services;
• Inclusive Innovation in the chain; and
• Shared measurements of outcomes