Using ICT to integrate smallholder farmers into agricultural value chains: The case of DrumNet in Kenya Julius J. Okello, Edith Ofwona-Adera and Oliver L.E Mbatia Paper presented at IAAE eARN Africa Symposium, Beijing, August 19, 2009 University of Nairobi

Smallholders and market linkage Smallholder farmers continue to experience difficulties being linked to markets in Africa Most of them face poorly functioning input markets/failed market for essential inputs, e.g.,  Credit (& certified seeds)  Information  Technical advice

Smallholder farmers and market linkage contd… Small farmers are also not able to integrate into better paying output markets Output markets fail for such farmers because they are:  Widely scattered hence high assembly costs  Many and poorly organized  Tend to trade in small volumes These factors make it costly to do business with small farmers.  Worsened by lack of market information

Small farmers’ market place Typical volumes traded by most smallholder farmers in Africa

What’s the point? Input markets fail for smallholder farmers Output markets also fail. And are:  Fragmented  Offer poor prices  Are thin (only handles small volumes)  Relational transactions – personal exchange Hence smallholders are poorly linked to both input and output market Poor market linkage contributing to the low- equilibrium poverty trap  low investment, low harvests, low marketable surplus, ….

The DrumNet Intervention The DrumNet intervention aimed at resolving the constraints small farmers face by:  Linking them to input markets (provision of credit)  Linking them to ready and better paying output markets (includes transportation)  Technical advice (information) Players in the value chain are linked through a mobile phone-based platform

Provides a high-demand set of business support services to about 2000 resource-poor farmers in rural Kenya. Targets sunflower producers in western Kenya (see location). Three sets of business support services are provided — marketing, finance, and information as an integrated package. Key actors in the sunflower value chain include:– farmer groups, transaction agents, produce buyers, input suppliers, financial organizations and agricultural extension workers - all are interconnected using ICTs. This presentation looks at the effects/impact of the DrumNet intervention in smallholder sunflower production in Kenya Overview of the DRUMNET intervention

Before DrumNet Source: baseline research Value Chain Before DrumNet Small Plot FarmersFarmgate BrokersLocal BrokersCentral Brokers Processors Exporters Large Retailers Market & Other FeesTransporter Large Institutions 65% 9% 3% 23% Finance

BUYER Bank Stockist Farmer Groups The model creates efficiencies and allows participants to enter markets  Banks shielded from complexity of managing large number of farm input loans  Repayment risks reduced with connection to produce payments  Buyers access predictable supplies of produce without significant field mobilization  Disintermediation of traditional brokers, resellers, and traders  Farmer Input Suppliers alerted to upcoming Farmer demand for products  Full transparency and market data for all participants  Farmers grow under structured contracts with Buyers  Transaction agents/group leaders (use cell phones within the value chain)  All financial transaction occur on cashless basis

DrumNet Flow Partnerships  Buyer  Farmer Intermediary Organizations (FIOs)  Farmer Groups (FGs)  Banks  Agro Suppliers Membership FGs become DrumNet members  Fill Membership form  Pay DrumNet Membership fee Training FGs get trained on  DrumNet model  Crop Agronomy System Input Partner & FG data get input in the system SMS generated by the system acknowledging receipt of fee E-Token: Seed:10kg DAP:500kg System E-Token System sends E-token to FGs to pick inputs from agro- dealers FGs pick inputs from Stockist Stockist uses DrumNet procedures/tools Stockist gets paid cash or by Bank transfer against FGs loans Planting FGs plants & takes care of their plots based of the Crop Agronomy training received

DrumNet Flow Field Audit Pre-scheduled messages to FGs from DrumNet system Harvest Projections Buyer gets projections on expected yields Produce Collection Produce aggregated from FGs and collected at DrumNet Collection Points Buyer Receives produce Buyer receives produce, weighs and grades Buyer makes payment to DrumNet Lockbox Deductions & Payment Deduct Principal & Interest Deduct DrumNet Fees Net payments transferred to FG bank accounts

Before DrumNet Small Plot Farmers Processors Exporters Large Retailers Market & Other Fees Transporter Large Institutions 86% 5% 9% Comparison of the two value chains…..Before & …After Finance Small Plot FarmersFarmgate BrokersLocal BrokersCentral Brokers Processors Exporters Large Retailers Market & Other FeesTransporter Large Institutions 65% 9% 3% 23% Finance After DrumNet

Other benefits of DrumNet intervention: household food security How much food did you borrow? (kg) How much food did you donate? (kg)

Other benefits of DrumNet intervention: income and medicare Income (Kshs) Access to medicare (% of farmers)

Systems approach:  Linkages to agricultural value chain actors not previously accessible to farmers  Use of mobile phones for business as an emerging area (Lessons of Experience) Influence on policy & institutional practices:  Lessons from DrumNet have informed a Ministry of Agriculture program - Kilimo Biashara - in partnership with Equity Bank – IFAD –AGRA.  Equity bank has expanded its financial products to include lending to rural farmers More Benefits

 Rate of farmer participation still low and reaching scale elusive  Tonnage and yield per acre below MOA recommended levels  Sustainability- Need for further costs reduction across the supply chain (DrumNet is migratory due to strategic default by farmers)  Adoption of SMS technology still low with Farmer Group Leaders (30% adoption) Some Challenges

Challenges contd.. Side selling and diversion of inputs by Farmers Side selling and diversion of inputs by Farmers Strategic default – farmers borrow with intention of not paying back  Fuelled by poor coordination and monitoring of farmers  Reliance on rain-fed agriculture – easy for farmers to blame weather for failure to pay Despite the above challenges, some encouraging outcomes have been realized Despite the above challenges, some encouraging outcomes have been realized

Products & Services facilitation Market Finance Information Re-defining the ICT functionalities Offer bundled services to DrumNet partners Payment Processing Cash Advance Farming Techniques Web Hosting Savings Product Transaction Brokering Transportation Coordination PricingFarm Input Brokering Product Aggregation Marketing Group Support Farm Input Credit Crop InsuranceCredit Ratings Financial Planning Farm Inputs Newsletter Market Reports Communication Transportation Advertising The Future - Built On IDRC’s Initial Support

Conclusion  Linking smallholder farmers in the agricultural value chain requires an integrated intervention that fosters linkage with  Input providers  Buyers  Other services providers  Reducing the length of the value chain and integrating ICTs facilitates this linkage.  It also has other benefits  Household food security  Household income  However there are challenges that require careful monitoring of input use and well coordinated produce pickup.

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