horizontal) integration in the model depends upon the degree to which the in- dividual levels are tightly linked – from control of production through to retail – often by means of contract farming or other contractual buyer models. Verti- cally integrated supermarket value chains are a prime example of this model.
A supermarket works closely with importers or domestic wholesalers in order to convey information about acceptable product specifi cations such as variety, quality, volume, and standards relating to hygiene, traceability and residues.
Information and services are passed down the chain to producers, frequently accompanied by quality control, technical training, appropriate inputs, record keeping and fi nance. Such vertical integration particularly applies to fresh fruits and vegetables. Horticultural value chains can be excellent for the integration of smallholder farmers since, for many of the products, intensive labour and man- ual cultivation and harvesting are necessary to deliver the required output.
Coffee is a specifi c agricultural output that often involves vertical inte- gration – not the lower quality Robusta varieties that are subjected to exten- sive processing to achieve its fi nal form, but fi ner Arabica coffee that relies Figure 3.2 Artichoke value chain
Source: Campion (2006)
Supermarket US and Europe
Local
supermarket Banks, NBFls
Retail
General Mills, Green Giant, etc.
Small farmers
Independent distributors Input
distribution
Extension services Inputs
Large farmers Viru, Agromantaro, TALSA, Procesadora
Local wholesalers
Misti - fertilizers;
Bayer - pesticides;
Seed and plant sellers Plants
Banks, NBFls Wholesale/
export
Banks, NBFls Processing
Mfls, Rural Banks Production
Banks, NBFls financial links Functions
Financial link showing who finances whom Participant in value chain
broken line indicates skipped function
on inputs, climatic conditions and cultivation techniques. Starbucks Coffee Company, described later in Box 4.7, offers a model of tight integration from production to retail.
A second integrated model applied to value chains is that of an integrated services model. One type of services model is led by a fi nancial conglomerate and another type is led by a facilitating entity which combines ownership structures with their facilitation. The latter type could be led by a strong NGO, such as BRAC in Bangladesh as described in Box 3.8, or an agribusiness ser- vices centre such as are being developed in India.
BRAC offers an important example as a fi nancial institution that makes direct strategic investments in the chain when it sees the fi nancing of its cli- ents requires this. For example, BRAC set up and owned chicken hatcheries needed for poultry production of its clients. It also offers the required techni-
Box 3.8 BRAC integrated services model for agriculture, Bangladesh
BRAC, a national, private organization, started as an almost entirely donor funded, small scale relief and rehabilitation project, and evolved into an independent, virtually self- fi nanced organization in sustainable human development. Currently the largest NGO in the world, BRAC employees number more than 100,000 who work with the twin objectives of poverty alleviation and empowerment of the poor. At the centre of the BRAC approach are over 170,000 village organisations (VOs), each with 30–40 mostly women members, which are set up to provide social support and microfi nance services. These village organi- sations meet weekly to receive training, distribute loans, collect repayments and savings contributions, and raise awareness on many social, legal and personal issues affecting the everyday lives of poor women.
Building on this model, BRAC supports a number of programmes including agri- business. The objective of this approach is to promote agribusiness activities to generate employment and help alleviate poverty. Specially, it (i) promotes small scale agribusiness activities by channelling credit through three NGOs including BRAC and by providing technical and marketing support to small scale agribusiness throughout the rural areas of the country to raise the level of value addition and increase rural incomes; (ii) strengthen participating NGOs and wholesale banks to ensure effi ciency of the credit implementa- tion and management; (iii) strengthen agribusiness associations for policy dialogue on the enabling environment, agribusiness promotion and information dissemination. BRAC also becomes directly engaged in businesses which needed to support of rural enterprises engaged in commercial agriculture production, input supply, marketing, processing and transportation. As an example, BRAC businesses include: 6 poultry farms for supplying day-old chicks, 3 feed mills, 2 seed production centres, 2 seed processing centres, 15 nurseries and 12 fi sh or prawn hatcheries also with the purpose of strengthening the re- spective value chains. Together, its business model works to ensure an integrated set of services for its clients.
Key issues in agricultural activities for BRAC are:
• creation of basic awareness and provision of training to farmers;
• development of village-based technical service providers;
• adequate supply of quality inputs through extension workers/agents;
• assurance of market access of farmers;
• provision of appropriate loan packages for farmers to meet their specifi c demands;
• development of linkages among different value chains.
Source: Salenque (2007)
cal assistance and can facilitate marketing channels as needed. It has also done this for the artisan craft sector, including wholesale and retail of the crafts.
Through fi nancial services and strategic investments directly into the value chain, it generates employment in rural and peri-urban areas and raises the value added of the produce of its clients.
While not widespread, integrated agricultural value chain service models are growing in importance. Case Study 3 on LAFISE in Latin America, pre- sented at the end of Chapter 4, describes a commercial integrated banking and agricultural service model. A Rabobank example from India is also being adapted and used to fi t into countries in many parts of the world.
As noted in Figure 3.3, Rabobank assumes a central role in the value chain providing fi nancial and value chain support services throughout the chain.
By having such a central role as part of its business model, it knows the busi- ness sector and those involved. In this way, it can ensure that the linkages are effi cient and that any weaknesses among the partners are addressed so as not to cause problems to others in the chain. Since the money also passes through the bank, it can reduce costs by directly crediting and debiting the accounts of those in the value chain.
Credit advances from marketing or processor businesses are often related specifi cally to a single value chain since most companies, especially private ones, work in only one or a few value chains. However, they can exist within a complex system of interrelated agribusiness services which offer fi nancial and non-fi nancial services of a comprehensive nature for multiple value chains.
In Korea, one agricultural entity, formed under a cooperative structure, has a huge presence in the whole agricultural sector which allows it to provide integrated value chain services in multiple value chains as in the case shown in Box 3.9.
Figure 3.3 Rabobank integrated agriculture fi nance structure Source: Wortelboer (2007)
Supplier
Processor
Insurer
Farmer Rabobank
Transfer of lease payments Buy-back agreement
Long-term raw materials supply contract
Insurance contract
Down payment
Lease contract Equipment purchase contract
The NACF model in Korea and the cooperative banking model of Rabobank are both successful models. Whereas Rabobank focuses on the integration of fi nancial services along the chain and linkages with the chain partners, NACF also can participate directly in the chain. In other words, the multiple value chain services are different from those of Rabobank in that NACF itself acts as supplier, insurer, processor, and marketer for its member farmers and not only as a fi nancial services provider. For example, farmers can purchase their farm machines from NACF with NACF loans guaranteed by the agricultural guarantee fund, and they can sell their products to NACF operating markets through their local cooperatives. In the same manner, the farmers’ money is transferred to their NACF savings account, and later the money can be used towards repaying their loans.
Private, non-cooperative models and in some cases integrated governmental models have been demonstrated to be successful. However, they are complex and much caution must be noted – their success often depends highly upon the superb management capacity and the social and economic environment within which they were formed. More often than not, these conditions are not present.
For example, in Eastern Europe and Central Asia large integrated agricultural Box 3.9 National Agricultural Cooperative Federation, Korea
The Republic of Korea has been experiencing signifi cant growth in major industries, in- cluding agriculture. The National Agricultural Cooperative Federation (NACF) has played a decisive role in the development of the country’s agricultural industry. NACF is a national federation of 1,187 agricultural cooperatives in Korea. The Federation and its member cooperatives offer multifunctional services to its 2.4 million individual members. These include: 1) banking and insurance; 2) input supply; 3) agricultural marketing and live- stock; and 4) guidance and welfare services. Within the banking and insurance services, the Federation and its member cooperatives are connected with each other for mobilizing and providing the agricultural fi nance services for farmers and agri-industries throughout the country.
The cooperative structure of NACF in Korea lends itself to perform an integrated, full- service model of agricultural and non-agricultural services which benefi t its members. Its size allows NACF to operate across multiple chains and benefi t from the synergies of ser- vices and inputs across these chains. The NACF has 22 subsidiary companies to help pro- vide these services, which include four other agricultural marketing companies besides the parent company NACF, a logistics service company and the Nonghyup Economic Research Institute. It provides commercial fi nance, mutual fi nance, loan guarantees and insurance and other services through other subsidiaries including: 1) Namhae Chemical Corporation;
2) Korea Agricultural Marketing, Inc.; 3) Korea Agricultural Cooperative Trading, Ltd.;
4) NACF Futures Corporation; 5) Korea Coop-Agro, Inc.; 6) Nonghyup Korea Ginseng Co.;
7) Nonghyup Feed, Inc.; 8) Nonghyup CA Asset management Co., Ltd.; 9) Agricultural Cooperative Asset Management Co., Ltd.; and 10) NH Investment & Securities. It also provides social support through subsidiaries including: 1) Nonghyup Tours; 2) Agricultural Cooperative College; and 3) The Farmers Newspaper. In combination, the NACF and its subsidiaries represent an integrated model which is capable of providing virtually all agri- cultural value chain services needed by its members.
Source: Park (2007) and author’s personal correspondence with C. Choi (2009)
value chains, with embedded fi nancing, were also formed and were not sustain- able over time (Winn, 2009). In Kenya, as noted earlier, the large integrated model of the Agricultural Finance Corporation together with the Kenya Farmers Association and the National Cereals Produce Board also failed.