New Business Models for Sustainable Trading – Part 3
Editor’s Note: This post is Part 3 of a 6-part series exploring new business models for linking small farmers to global markets being analyzed through an international collaborative effort that can be read about here. Read an introductory post, catch up on part 1 part 2, and find out more about our work with the Center for International Tropical Agriculture at CIAT’s blog.
In our last post we remarked how chain-wide collaboration was essential to creating shared goals amongst chain actors and to making real progress towards small farmer inclusion. Interdependency between chain actors appears key for weathering risk, meeting new standards of quality, complying with regulations, and promoting innovation and increased product value. This post explores the issue of transparency in chain governance, and the role it plays in meeting expectations, standards and commitments to buy and sell volumes of a certain grade, as well as equitable processes of risk management across a supply chain with multiple participants.
Transparent Chain Governance
Governance refers to the setting, monitoring, and enforcement of formal and informal rules along the value chain. Governance patterns in global value chains vary, and global-scale industrial organization affects not only the fortunes of firms and the structure of industries, but also how and why countries advance -or fail to do so- in the global economy (Gereffi, Humphrey, Strugeon, 2005).
Trading terms, including price setting, grading, quality standards, and delivery regularity, is often described as buying conditions. Uncertain terms and conditions lead to supply irregularities and erratic pricing, underscored by communication breakdowns and reduced efficiency and profits. Chain-wide governance and regulation exists when members of the chain share a consensus on quality, quantity, and frequency in a clear and transparent way. Transparency indicators for governance structures conducive to sourcing from small scale agriculture tend to fall into the following categories:
1. Clear, and accessible and understandable production standards. What is the buyer willing to buy? What are the quality and quantity demands and how do these relate to price? What production practices would facilitate/eliminate buyer interest and top price?
2. Standards developed collaboratively. Producers must be engaged in production standards. What’s possible for small farmers to bring to the market? How are current production methods contributing to or /limiting small farmer participation? What kinds of additional support might farmers need to be successful?
3. Transparency of prices. Transparency of prices through the chain empowers more effective and grounded negation even without disclosure of margins.
4. Transparency about the impact of changes in price, standards and policy for all actors. How are changes in price, standards or in policy affecting certain members of the supply chain? Are some actors falling out of compliance because of unequally shared risk? How can these actors be better supported?
Models for Transparency that Encourage Meeting or Exceeding Quantity and Quality Goals
New business models seek to make incentives transparent and assist in their accrual to chain actors responsible for positive change. In inclusive agriculture, we see innovative value chains utilizing a number of methods for creating greater transparency through chain-wide governance including:
Aligning Incentives with Outcomes: Contracts that Leverage Access and Investment
For small farmers, clear contracts that leverage access to credit and reasonably priced inputs can allow for risk mitigation through more accurate crop and investment planning. To this end, farmers have a better chance to meet quality and quantity goals of buyers, establishing chain-wide success through the alignment of expectations and deliverables.
Linking Upgrades to Improved Market Conditions: Profit-sharing Agreements
Here, farmers improve quality and value so that product can be sold to more exacting customers at a higher price. Part of that price premium is returned to farmers with the rest covering marketing expenses.
Towards about transparency:
Similar to Principle 1, Chain-Wide Collaboration, transparent governance requires actors to consider themselves as part of a business ecosystem. This principle is rooted in a business model that considers inclusion in decision making to be vital for equitable risk sharing through an honest assessment of expectations and outcomes. In the following parts of the series we will outline additional considerations for new business models for small farmer inclusion, like:
- Equitable access to services;
- Inclusive Innovation in the chain; and
- Shared measurements of outcomes