Last Updated on January 2, 2021 by Nick Baskett
Farmer-Level Sustainable Management: The ECOM Way
Coffee is one of the three most-popular beverages in the world (alongside water and tea) and one of the most-profitable international commodities. 1 It has been grown worldwide since the era of colonization. Now at the time of global development, production relations change with new models like direct trade, and large corporations needing to show their ethical credentials. Problems at the farm-level arise but can be met by several solutions, and one of them is the formation of a formal management system.
Indonesian Coffee Production
Indonesia is a big player in the world coffee industry. It is the fourth largest producer in the world after Brazil, Vietnam, and Colombia. The country produces a total of 675,000 tons per year, 92.6% of which are derived from smallholder plantations. 2
However, several local difficulties threaten its sustainability. One of them is the trend for young farmers to move outside coffee production, who eschew the industry for more viable crops like fruits. Another reason cited by reports is the perceived low status of coffee farmers, at least some part attributable to the lower income received in coffee production. 2
One approach for tackling these issues are in forming a capable management system. 3 One such example is the formalized methodology by ECOM Agroindustrial Corp. Ltd, (ECOM), a global commodity merchant and sustainable supply chain management company that applies management systems in Indonesia and Vietnam.
Focusing primarily on coffee, cotton, and cocoa, ECOM ranks globally as one of the top two coffee merchants and largest coffee millers as of 2019. In line with the company’s commitment to sustainable and socially responsible leadership within the soft commodities’ industry, ECOM establishes Sustainable Management Services (SMS) within its local operating companies.
SMS provides training, certification, and other value-added services to farmers in their supply chain. ECOM provides access to inputs and finance intended to improve the performance of farmers, and ultimately their profitability and livelihoods.
In the field, Service Delivery Models (SDMs) are supply chain structures within which services are provided to farmers.
Key Players and How it Works
Between the farmers who raise and harvest the crops and the company (ECOM) who may buy them, is a separate entity that is the SMS. This entity establishes, through services and products, an enabling environment for the farmers to improve practices, raise yield and build sustainability, eventually transforming the old-type farmer-producer to the new global-participant farmer-supplier.
The training is organised through their facilities in local SDM areas. Resources from third-party’s such as soil test providers, research institutes (for planting material expertise), input providers (for seedlings, fertilizers, and crop protection products or CPPs), and tarpaulin suppliers (for tarpaulin print needs).
For the SDMs to function successfully, ECOM deploys the use of Crop Doctors, who play a crucial role in distribution of agrochemicals and farming tools at affordable prices, as well as lending their expertise and conducting skill-transfer. They share a responsibility to facilitate the development of their local SDM area.
Recruited from the ranks of the local farmers by the SMS to act as facilitator in the service delivery, they are Subject Matter Experts that act as the intermediaries between the farmers and the SMS.
The services by the SMS and the Crop Doctors come at a price, however, and although the necessary products and services are marketed as affordable, they have to be paid for by the farmer.
If the farmer can see a benefit however, the service pays for itself and ECOM tracks the progress and return on investment made through its programme. If farmers’ incomes are too low to afford these products and services, sources for outside funding are accessible.
The report demonstrates that financial sustainability and return of investment are possible within the SDM, both for farmers and the SMS. Graphed data of SDM annual net income per region within a ten-year scope indicate a rise in net income, and clearly show points of reaching break-even for all regions, and signal a rise beyond.
Although the SMS services are each available independently, they are designed to work together and can be considered complementary.
Within the SDMs, the most crucial services are soil testing, fertilizer provision, and provision of planting materials for structural renovation of trees.
All SDM farmers reached an income level above the poverty line which indicates there is a genuine business case for farmers to invest in the services offered under this programme.
The study showed the financial sustainability of thee of the coffee SDMs in Indonesia is vulnerable because of thin margins, using a high-turnover, low margin model. A way to increase margins is to build value-added services into the standard product offering.
All had the potential to produce an income above the adjusted poverty line, but the best performing SDM as regular Arabica, while high costs associated with organic farming was not rewarded by a sufficient increase in market price.
While the SDM may bring benefits, there is an associated cost — which, even if it results in a good return on investment, may be out of reach for some farmers, who start out on a very low baseline income.
How Crop Doctors Get Paid
A Crop Doctors’ objective is to improve profit for the farmer, but they are also a business themselves and as part of the value chain require an income for their services. The report also looked at how they can enhance the income of Crop Doctors to make the practice more attractive. This can be achieved in a number of ways: Improve the gross margin (i.e. increase their prices and/or reduce their costs), increase the quantity of the deliverable, or offer more services.
Hulling and provision of fertilizer are the most productive services for the Crop Doctor. However, the overall net income will be too low to attract farmers to become Crop Doctors. The SMS will have to find ways to improve the business case for the Crop Doctors for the SDM, as a whole, to work.
Must be Accessible for Farmers
Farmers are needed to adopt the services in order to financially sustain the SDM. Some areas need high volume of services to outweigh the cost of overhead for the SDM. In other areas, the SDM will not break even at an adoption rate of 50% lower than expected.
On the other hand, farmer cash flow is not sufficient to support the service adoption cost. If this gap is not sufficiently offset by other household incomes, the success of the SDM might be at risk. In this case, there will be a need to provide farmers with better access to finance.
SDM Must be Independently Viable
The challenges within each SDM are specific to each locality, but general patterns have been practised throughout. Specifically, ECOM determined that SDM’s must be financially viable separate entities.
One benefit of this decision is that it is in the SDM’s interests to sell their products and services to any farmer, not just those that sell their crops back to the SDM, meaning more farmers can benefit from their services. In addition, all areas were comparable in the following ways:
- The menu of services offered by the SMS to farmers at a cost (sometimes too heavy for both parties);
- The network of Crop Doctors;
- Service implementation available whether ECOM sources products from the farmer in the SDM or not.
The differences of each locality prevent 100% replicability of the model. This requires a flexibility of the SMS to respond to specific situations.
- Training. All farmers and Crop Doctors receive Good Agricultural Practice (GAP) training free of charge. There are Farmer Training Centres operated by SMS in most SDM areas
- Certification. The training service for farmers also includes education on certification standards. The SMS assures readiness for 3rd party audits by conducting audits itself at farm level.
- Planting Materials. The SMS create nurseries for coffee and shade trees to be sold with the aid of Crop Doctors as planting materials for farmers. Collaboration with research institutes resulted in Arabica and Robusta varieties within trials by the SMS. Shade trees are also produced and sold in some areas.
- Soil Testing and Fertilizers. The SMS can provide farmers with an on-site soil-test using soil-testing devices, after which they can discuss the results to the farmers right away, accompanied by fertilizer recommendations.
High-quality fertilizers are available to farmers, in accordance with the recommendations following the soil test to ensure that the right fertilizers are used in the right quantities.
- Post Harvest Treatment. Tarpaulins are available to farmers from Crop Doctors and in some areas it is available in subsidised rates. Cop Doctors in some areas offer hulling services, using hulling machines provided by the SMS.
- Access to Finance and Direct Sourcing. Inputs in some areas are given to farmers in credit. Under certain circumstances, ECOM may buy coffee directly from them. Inputs can be provided to farmers either directly by SMS, or via middlemen and/or a collector.
As reported in the ECOM SDM assessment, the success of the SDM isn’t 100% certain. Some key risks have been identified.
For the farmers, their low-income level is a big issue as this affects whether they will stay within (or even accept) the SDM system. In some areas, the income level of farmers falls below the poverty line.
The projected net income for Crop Doctors indicates the chances for having a better living than a farmer are very slight. There will be a struggle for the SMS to recruit Crop Doctors for full-service delivery.
In such conditions, there is a possibility that some Crop Doctors may overcharge for services and products and display a lack of loyalty to the SMS (though this has not been included in the scope of the study).
The SMS had a 10 year time-frame to breakeven, however that excluded startup costs. While the SMS is structured as a commercial venture, it is clear there is no direct commercial benefit to the funders that would make this an interesting project.
A section on the reasoning of ECOM and their financial partners and donors was not included in their report, but we can speculate that there are enough ancillary benefits to having a prospering farming industry, that some amount of costs may be sunk. Company accountants will no-doubt have worked to ensure the investments are classed in the most tax efficient manner.
There is still a risk that the pricing of the services will make them unaffordable to farmers and will significantly affect the adoption rates and the financial sustainability of the SDM. The farmers may switch to cultivating fruit instead of coffee, as already displayed in one SDM. As SMS services are currently focused on coffee cultivation, this would directly impact the business case for SMS as they won’t be able to reach the projected service volumes.
Though they may take a long time to be evident, all things point to payoffs and production gains. Management solutions like ECOM’s formula in the Indonesian SDMs deliver dividends in the end, while the coffee farmers transition from farmer-producer to farmer-supplier as they take part in the global scenario.