Hurudza Case Study:Paprika Growers' Scheme 2016-17

Agricultural Reference Bureau

Value Chain Linkages Management

Background

When Zimbabweans talk about being into farming, the crops that spring to mind are typically; maize, sorghum, pearl millet, soya beans, wheat and tobacco, plus different types of livestock. On the horticulture side, one finds; onions, tomatoes, brassicas and peas. Not much is said about paprika, or “red gold”, as it is sometimes referred to. However, Zimbabwe’s climate is very well suited to growing high-quality paprika, as it is relatively drought resistant, and so has the potential to be a high-profit margin crop for both commercial and smallholder farmers alike.

The Makoni Paprika Growers’ Scheme was conceived in 2015 by African Farming Solutions (“AFS”) and Goodrich Analytix (“G-analytiX”) in order to fulfil an opportunity presented by AFS to sell paprika grown in Zimbabwe to an international buyer, Extractos Vegetales S.A. (“EVESA”), while improving the livelihoods of smallholder farmers. Under the scheme, AFS would provide the agronomic expertise while the farmers and other stakeholders would benefit from using a system, called aGrnomiX when applied to depending on the level of finance that could be attracted to support the scheme, up to 1,000 hectares of paprika could potentially be grown in the first season using good agronomic practices that would be implemented under the guidance of AFS in order to deliver an expected 5,000 tonnes of paprika.

In 2016, some 12 months after conception, the scheme was finally given life through Virl Rural & Social Financial Services (“Virl”) securing US$ 1.26 million in finance from the Zimbabwe Microfinance Fund (“ZMF”), as part of the United Kingdom’s Department for International Development (“DFID”) US$ 72 million four-year Livelihood & Food Security Programme (“LFSP”), managed by the Food and Agriculture Organization of the United Nations (“FAO”), which aims to; increase agricultural productivity, increase incomes, improve food and nutrition security, and reduce poverty in rural Zimbabwe.

The US$ 1.26 million funding, would enable 400 hectares of paprika to be grown by between 400 and 600 smallholder farmers organised into appropriate groups with large enough combined plots of contiguous land, such that the requisite agronomic practices needed in order to achieve the desired yields could be implemented.

Scheme Objectives

The Makoni Paprika Growers’ Scheme represents a quantum leap for smallholder farmers in the district. Many of the farmers being targeted and applying to participate in the scheme would not otherwise have qualified for the level of credit being provided for, nor have appropriate collateral, and equally would not have enjoyed the reduced interest rates and insurance premiums being charged under the scheme.

The scheme is built around a comprehensive package of; inputs, services and asset acquisitions at a cost of US$ 3,152.- per hectare that is designed to ensure the farmers graduate out of a cycle of subsistence farming and into a prosperous existence that improves livelihoods and food security. The funds are being lent through Virl to the farmers, unsecured, at an annual percentage rate (APR) of under 22%, which is typically half the rate microfinance institutions would charge and exceptional in terms of requiring no security from the farmer.

Based on 600 farmers participating, the average cost to the farmer would be US$ 2,659.- (loan plus interest).

The financing of agriculture in Zimbabwe, like many developing countries, particularly smallholder farming, faces significant challenges. One of the key difficulties is the lack of confidence in the other parties in the value chain. Lenders don’t have confidence in farmers. Farmers don’t have confidence in lenders. Suppliers of inputs don’t have confidence in either lenders or farmers. Off-takers / buyers don’t have confidence in farmers and vice-versa.

This lack of confidence typically manifests itself in the form of unrealistic collateral requirements and unsustainable interest rates that severely limit the opportunity for smallholder farmers to; either access finance at all, or do so at an affordable interest rate, that would allow them to climb out of the poverty-cycle of a subsistence existence.

aGrnomiX, the Agricultural Reference Bureau & Value Chain Linkages Management system designed and developed by G-analytiX, is an innovative system, combining technology and business models, that establishes, or re-establishes, trust in ring-fenced farming value chains.

In Zimbabwe, the aGrnomiX solution was marketed using the name Hurudza, meaning “super farmer” in Shona. By linking each stakeholder in the value chain and incentivising loyalty, visibility over the activities of each counterparty is increased and accountability improved. As a result, many of the risks associated with working with farmers, particularly smallholders, are mitigated and confidence is rebuilt.

In terms of the Makoni Paprika Growers’ Scheme, aGrnomiX performs two fundamental roles:

• Firstly, aGrnomiX was used to assist with; the processing of farmer applications, the subsequent selection of those that represented the lowest risk and determining the amount of land, and therefore credit, that each farmer or farmer group would be offered as part of the scheme.
• Secondly, during the life of the scheme, aGrnomiX is being used to record and help manage every physical, financial, virtual or intellectual transaction or movement of goods or services related to the scheme with regard to the stakeholders and participants in the value chain.

Farmer Selection

Over 1,000 applications representing over 1,000 hectares of land were processed using the aGrnomiX system. Each application form, designed in collaboration with Virl, comprised of circa 60 data points regarding the individual smallholder farmer and the group that they belonged to.

In conjunction with expert input from agronomists, G-analytiX developed a judgemental scorecard, to assess the risk level of each applicant. The final iteration of the scorecard implemented was based on seven key elements of information:

• credit history
• production history (quantitative)
• Production history (qualitative)
• Land usage characteristics

Initially, given the objective of maximising the positive social impact of the scheme, it was decided that the G-analytiX aGrnomiX score would no interestingly, the necessity of excluding about 20% of the farmers presented an opportunity, even before production had begun, to back-test the predictive nature of the aGrnomiX score in identifying suitable farmers by comparing the results from the two samples.

As can be seen in the distribution analysis, the aGrnomiX score was shown to be theoretically quite effective at predicting which applicants would have been suitable and, therefore, also efficient at optimising the use of the funds available.

If farmers with a score greater than the average, or mean, value and less than the 2nd standard deviation, i.e. excluding upper outliers, were selected then they would have made up the majority of those actually selected in practice.

The other observation that can be made is that the fatter tail on the distribution curve of the excluded farmers suggests that those who scored well in those groups may have actually embellished their applications as these scores make up a disproportionate percentage of the upper outliers.

Value Chain Management

Being able to manage the value chain and providing visibility to the stakeholders was an important prerequisite to achieving the confidence level required to secure the US$ 1.26 million funding for the scheme.

The scheme is based on a multi-tier structure. Funds are disbursed directly to the suppliers of inputs and services as aggregated bulk payments at the level of the scheme as a whole in order to take advantages of economies of scale and the negotiating power of large orders. However, the borrowing is based on individual lending under a group structure whereby each member of the group is jointly and severely liable for the total of the individuals’ loans within the group and scheme as a whole. Likewise, when the paprika is sold to the off-taker the individual contributions will be recorded and then consolidated at the group and scheme level.

The aGrnomiX system is able to establish the multi-tier structure and record; both the bulk transactions for inputs and services at the scheme level that need to be apportioned to the groups and individuals within each group, as well as the individual loans and outputs from production within the groups so that at each level it is possible to manage and report on the physical, financial, virtual (e.g. expected yield data from satellite monitoring) and intellectual (e.g. hours of mentoring received) positions or balances and query the transactions or movements that contributed to them.

For the off-taker, aGrnomiX facilitates the buying process by using the linkages established between individual farmers, each group and the scheme as a whole, to record the production outputs of each farmer in terms of the grade and quantity of paprika delivered and then aggregate at the scheme level to calculate and make the appropriate bulk payment(s) to the lender.

In the event that there is an insurance claim, aGrnomiX is also able to manage the insurance payment to the scheme and the proportional impact on the credit balance of each individual farmer in the scheme as well as record the specific details of the loss and claim against the individual farmer(s) and group(s) for future assessments and scoring purposes.

Conclusions

The Makoni Paprika Growers’ Scheme uses an implementation approach that dramatically improves the livelihoods of smallholder farmers by promoting a graduation model and transforming the style of farming from poverty-prolonging small-scale ways into poverty-alleviating commercial practices.

The implementation approach, combined with the aGrnomiX system and technology, addresses the key challenges of establishing confidence between the various parties in the value chain. Lenders can have confidence in farmers and mitigate the repayment risks. Farmers can have confidence in lenders and can access levels of finance at improved interest rates that would previously have been out of reach. Suppliers of inputs and services can have confidence in both lenders and farmers as disbursement of funds is direct to the source. 

Further information