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