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6 Planning and managing your business 47 6 1 Developing a business strategy and plan 47 6 2 Setting up your operation 49 6 3 Developing the business step by step 52 6 4 Financial planning and management 55 6 5 Financing your organic business 61 6 6 Keeping the business going 64 6 7 Management structures and capacity 67 7 Organising producers for the market 70 7 1 Producer organisation versus
The Organic Business Guide,Developing sustainable value chains. with smallholders, by Bo van Elzakker Agro Eco Louis Bolk Institute The Netherlands www louisbolk org. and Frank Eyhorn Helvetas Organic Fair Trade Competence Centre Switzerland. www organicandfair org, IFOAM and collaborating organisations Helvetas Agro Eco Louis Bolk Institute ICCO UNEP 2010. Published in Germany by IFOAM,In cooperation with, Helvetas Swiss Association for International Cooperation. Agro Eco Louis Bolk Institute, ICCO Dutch Interchurch Organisation for Development Co operation. UNEP United Nations Environment Programme, IFOAM and collaborating organisations Helvetas Agro Eco Louis Bolk Institute ICCO UNEP 2010. English language editing Sheila Taylor Kulika Uganda. Layout Catherine Reynolds IFOAM, All of the statements and recommendations in this book have been compiled by the authors and contributors according to their best know. ledge However the possibility of mistakes cannot be ruled out entirely Therefore the editors and authors are not subject to any obligation. and make no guarantee whatsoever regarding any of the statements etc in this work neither do they accept responsibility or liability for any. possible mistakes contained therein, The opinions expressed in this publication do not necessarily represent an IFOAM approved position. This publication is available for free download via the IFOAM web shop at www ifoam org bookstore Practitioners have the possibility to contri. bute to the online version of this guide by editing the wikibook at www wikibooks org The tools in the Annex are available in electronic format. from www organicandfair org Publications, Any reproduction in full or part of this publication is encouraged but must identify the title of the publication and IFOAM as the publisher. Bo van Elzakker Frank Eyhorn 2010 The Organic Business Guide Developing sustainable value chains with smallholders 1st edition IFOAM. ISBN 978 3 940946 67 6, Cover Photos clockwise from top left cotton storage in Kyrgyzstan source Helvetas Feria Agroecologica in Costa Rica source Ecomercados. export source Gebana and pineapple processing in Benin source Helvetas. Table of Contents,List of Figures iii,List of Tables iii. Acknowledgements iv,Foreword v,Abbreviations vi,Definitions vii. 1 Introduction to the guide 1,1 1 What can you expect from this guide 1. 1 2 Who is this guide for 2, 1 3 Entrepreneurial or developmental perspective 3. 1 4 How to use the guide 4,2 Organic production and Fair Trade 6. 2 1 What is organic production 6,2 2 What is Fair Trade 7. 2 3 Why is organic production an interesting business 9. 2 4 The difference from normal agri business 12, 2 5 Different sorts of standards and certification 14. 3 Starting from the market 16,3 1 What is the organic market 16. 3 2 Clients first 19,3 3 Matching supply and demand 21. 3 4 Relevance of local and regional markets 22,3 5 Building on your competitive advantages 25. 4 Developing organic value chains 27,4 1 What is an organic value chain 27. 4 2 Who plays which role in a value chain 28,4 3 Building partnerships along the chain 30. 4 4 Gender issues in organic value chains 33,5 Designing the organic production system 38. 5 1 What type of organic farming 38,5 2 Managing the conversion to organic farming 41. 5 3 Challenges in organic production 43,6 Planning and managing your business 47. 6 1 Developing a business strategy and plan 47,6 2 Setting up your operation 49. 6 3 Developing the business step by step 52,6 4 Financial planning and management 55. 6 5 Financing your organic business 61,6 6 Keeping the business going 64. 6 7 Management structures and capacity 67,7 Organising producers for the market 70. 7 1 Producer organisation versus company set up 70. 7 2 Involving farmers 72,7 3 Building up an extension system 74. 7 4 Staff development 77, 7 5 Handling pricing premiums and payments for farmers 79. 8 Certification and Internal Control Systems 83,8 1 Certification options 83. 8 2 Developing an internal control system 86,8 3 Traceability and data management 91. 8 4 Maintaining certification 93,9 From field to market 96. 9 1 The importance and value of quality 96,9 2 Getting quality produce from the farmers 97. 9 3 Transport and storage of raw material 100,9 4 Processing and value addition 101. 9 5 Exporting 103,10 Marketing 108,10 1 Marketing strategy 108. 10 2 The 4 Ps 110, 10 3 Building and maintaining client relations 113. 10 4 What assistance and support can I get in marketing 116. 11 Moving up 118,11 1 Scaling up 118,11 2 Having an impact 119. 11 3 Constant learning and improving 121,11 4 National and international networks 122. 12 What role for facilitators Governments and donors 124. 12 1 Facilitating the development of organic value chains 124. 12 2 Creating a conducive environment for organic businesses 125. 12 3 What role for donors and development agencies 127. A1 Useful references and websites 131,A2 Value chain facilitation 135. A2 1 Consultancy for developing organic value chains 135. A2 2 Donors and development agencies supporting organic value chains 136. A3 Business planning 137, A3 1 Outline of a business plan for an organic business 137. A3 2 Production planning tool example 139,A3 3 Examples of cost price calculations 139. A3 4 Financing institutions providing loans for organic and Fair Trade businesses 141. A4 Organisational set up and processes 142, A4 1 Roles and responsibilities in extension and ICS 142. A4 2 Job description for Field Officer example 143. A4 3 Content of an Operating Manual 145,A4 4 Annual operational plan 146. A4 5 Checklist What you may need for an organic business 147. A5 Certification and ICS 148, A5 1 Overview of important organic standards and labels 148. A5 2 Sustainability and industry standards that can be combined with organics 149. A5 3 Farmer agreement example 150,A5 4 Internal regulations example 151. A5 5 List of non conformities and sanctions example 152. A6 Marketing tools 154, A6 1 Product description sheet example of cotton from Burkina Faso 154. A6 2 Contract between seller and buyer example 155. Purchase Contract 08 2009 155,A7 General tools 156. A7 1 Typical pitfalls and how to avoid them 156, A7 2 Checklist What makes a successful organic business 157. List of Figures, Figure 1 The organic business in the value chain 2. Figure 2 Flow chart of typical steps to set up an organic business 5. Figure 3 Economic and non economic benefits of organic production 11. Figure 4 Increasing sustainability in commodity production and trade 14. Figure 5 Steps to identify the right product portfolio for your business 20. Figure 6 Characteristics of local regional and global markets for organic products 22. Figure 7 Typical value chain of agricultural commodities 27. Figure 8 Example of a value chain map for organic cotton from inputs to consumption 29. Figure 9 Downstream integration of processing packing and exporting 31. Figure 10 SWOT Analysis of the organic business idea 48. Figure 11 Example of an organisational structure of an organic business 51. Figure 12 Specialisation versus diversification of an organic business 55. Figure 13 Break even of costs and revenues new investment 59. Figure 14 Monthly liquidity of an organic vegetable business example 60. Figure 15 Typical set up of an organic producer organisation 71. Figure 16 Set up and roles within the extension and internal control system 75. Figure 17 Pricing according to the FLO system 80, Figure 18 The structure of an internal control system and its relation to the external certifier 87. Figure 19 People involved in an ICS their roles and the key tools they use 88. Figure 20 Functions of a central database in an organic business 91. Figure 21 Example of the 4Ps for marketing of organic Fair Trade cotton from Africa 110. Figure 22 Pricing strategies matrix 111,List of Tables. Table 1 Core elements of an organic business and their respective functions 50. Table 2 Phases in developing an organic business 54. Table 3 Cost price calculation with different volumes 57. Table 4 Example of a profit and loss calculation 58. Table 5 Example of a sensitivity analysis 59,Table 6 Example of a cash flow calculation 61. Table 7 Possible risks involved in running an organic business and measures to mitigate these risks 66. Table 8 Advantages and disadvantages of a producer organisation versus a company 70. Table 9 Processes of an ICS responsible people and documents needed 89. Table 10 Approved farmers list with delivered produce vs harvest estimates 90. Table 11 Extract of a producer database 92,Acknowledgements. The following people substantially contributed to the guide by writing parts of the text contributing. case studies or reviewing draft versions, Alastair Taylor Agro Eco Louis Bolk Institute Eastern Africa Uganda review. Andr Vording Angelica Senders Lisette van Benthum Rob Witte ICCO The. Netherlands concept content review, Fabio Sagliocca Claro Fair Trade Switzerland photos. Ghidey Gebremedhin Debessu Tigray Agricultural Marketing Promotion Agency. Ethiopia content examples, Gideon Adeoye Nigerian Organic Agriculture Network NOAN Nigeria content. Gunnar Rundgren Grolink Sweden review, Joachim Weber Agri and Co operative Training and Consultancy Services Kenya. content examples, Kees van den Berg Oikocredit Netherlands micro finance aspects. Lazare Yombi Helvetas Burkina Faso ICS documents,Mar a Dur n Ecomercados Nicaragua photos. Martina Meckel Louise Luttikholt Fairtrade Labelling Organizations International Fair. Trade aspects photos, Mirjam G ntert Adrian Wiedmer Gebana AG Switzerland photos and tools. Mohammed Suleman Khan Chetna Organic Farmers Association India content. Paul van den Berge FiBL Switzerland review,Peter Lendi Erboristi Lendi SA Switzerland review. Peter Schmidt Jens Soth Helvetas Switzerland content review. Prachanda Man Shresta Helvetas Nepal extension and ICS documents. Rhiannon Pyburn KIT Royal Tropical Institute The Netherlands gender aspects. Robert Berlin Lionnel Giron Intercooperation Switzerland review. Simon Ferrigno Consultant UK review, Steven de Vries Reilingh Rabobank The Netherlands financial aspects. This guide was produced with support of, ICCO Dutch Interchurch Organisation for Development Co operation. SECO Swiss State Secretariat for Economic Affairs, SIDA Swedish International Development Cooperation Agency. UNEP United Nations Environment Program, What does organic mean for you This question makes most people think triggers emotions and. sparks the imagination Seeing products branded as organic the consumer expects a high level of. ethics and integrity It is clear for most consumers that organic may cost an extra price At the same. time it is also clear that the claims are expected to be true Products ought to be of high quality healthy. and tasty moreover provisions should be made for animal welfare the protection of biodiversity and. a decent living for smallholders, Organic developed into an internationally known and recognized philosophy of production and trade. that is based on the organic principles of ecology health fairness and care as articulated by IFOAM. Producers and consumers alike want sustainable systems in place that provide real solutions to global. challenges such as hunger loss of biodiversity soil depletion and climate change This only works if. all stakeholders along the value chain are fairly treated and able to be competitive. Smallholder farmers in low and middle income countries are at the core of IFOAM s attention While. they are the most important source for tropical organic products they are also the group most. vulnerable to poverty and malnutrition due to unsustainable practices Organic is an opportunity. for them However opportunities may fail if they are not properly managed and if they cannot be. aligned with demand Setting up an organic business is ambitious and requires skills On the other. hand organic production is a successful model for millions of smallholders who taken together are. responsible for billions of dollars of consumer turnover around the world. The recommendations and case studies in this guide are built upon a wealth of practical experience. and in depth research and came out of a broad participation process We are grateful to all those who. committed to passing on their knowledge and hope to encourage and assist all those who strive for. improvement or even dare to venture into organic businesses with smallholders in low and middle. income countries,We wish you good luck and prosperity. Organically Yours,Markus Arbenz,Executive Director IFOAM. Abbreviations,AELBI Agro Eco Louis Bolk Institute,BDS Business Development Services. CAD Cash Against Documents,CB Certification body,CIF Carrier insurance freight. CFR Cost and Freight,FLO Fair trade Labelling Organisations. FOB Free on board,GMO Genetically modified organism. GPS Geographic Positioning System,ha Hectare,HACCP Hazard Analysis and Critical Control Point. ICS Internal Control System, IFOAM International Federation of Organic Agricultural Movements. ISO International Organisation for Standardisation. JAS Japanese Agricultural Standards,NGO Non Governmental Organisation. NOP National Organic Programme US,OFT Organic Fair Trade. PO Producer organisation,PGS Participatory Guarantee System. SPS Sanitary and Phytosanitary, Method to analyze Strengths Weaknesses Opportunities and. USP Unique Selling Point,Definitions, Associated crop Crops grown along with a main crop in the same field. Break even point The moment when revenues start to exceed operational costs. Bulking Collection of raw material from several individual farms. Business plan Documented strategy to develop an idea into a viable business. Cash flow Movement of cash into or out of a business over a specified period of time determining the liquidity of a company. A third party confirmation that a certain product or process complies with a set of requirements defined in. Certification,regulations or standards, A marketing cooperative of producers engaged in bulking and selling of products possibly including processing and. Cooperative,exporting and provision of inputs, A business of an individual entrepreneur or a shareholding can include farmers or farmer organisations as. shareholders, Competitive advantage Attribute or combination of attributes that allows a business to outperform its competitors. Contingency An additional amount or percentage added to any cash flow item in order to cover unforeseen costs. Conversion The process of changing from conventional to organic production. Cost price Actual total costs per unit of output of a product excluding the profit margin. Depreciation Spread of cost of an asset equipment building vehicle etc over its useful life. Development agency NGO or government organisation that supports development in low and middle income countries. An individual who possesses an enterprise and assumes significant responsibility for the inherent risks and for the. Entrepreneur, Exporter A company or a cooperative engaged in exporting products. Any activity used to make tasks easier for others Facilitation of value chains refers to supporting coordination and. Facilitation,communication among value chain operators. Fair Trade is an organized market based approach that aims to help producers in developing countries by paying. Fair Trade, them a higher price as well as enforcing social and environmental standards. Gross margin Difference between revenues and production costs excluding overhead costs or own labour costs. Inputs Material used for agricultural production such as seeds fertilizers and pest management materials. Marketing plan Documented strategy to promote and market the produce. Operator A person or business directly involved in producing buying processing or selling of a product. An agricultural production system that relies on natural means like crop rotation compost biological pest control. Organic agriculture and mechanical cultivation to maintain soil fertility and control pests excluding the use of synthetic fertilizers and. synthetic pesticides plant growth regulators livestock feed additives and genetically modified organisms. Organic business Commercial operations of a specific entity involved in the production processing or trade of organic products. A farming system that does not use chemical inputs but does not actively work on maintaining soil fertility e g. Organic by default, through application of organic manures crop rotation. Organic project An initiative to set up an organic business with a defined start and end of the intervention. Cyclical fluctuations of supply and prices high prices leading to an increase in production leading to oversupply. Pig cycles, leading to drop in prices leading to a decrease in supply etc. Premium A charge paid in addition to normal market prices for higher quality organic production or Fair Trade. Rotation crop A crop grown in sequence with the main crop in the same field. Smallholder A farm of small size which mainly relies on family labour. Supply chain The system that moves a product from supplier to customers emphasizing the perspective of sourcing. Transaction certificate Certificate stating that a certain shipment and volume originates from certified organic production. A chain of activities through which the product gains in value on its down stream journey from production to final. Value chain,consumption,1 Introduction to the guide. Sales of organic products are steadily increasing and so is organic production in low and middle. income countries For good reason for farmers it is an opportunity to improve their livelihoods and. at the same time manage their land in a more sustainable way It enables them to access promising. local and international markets and to gain a better income. There are many successful examples of how this potential can be turned into a sound business in. which all stakeholders benefit However there are also less successful cases where it was found. difficult to seize and to maintain a market Some of them have struggled for a long time to become. independent from external support The main objective of this guide is to increase the success rate. among organic farming initiatives in low and middle income countries. 1 1 What can you expect from this guide, This guide should help those actively engaged in setting up or in managing organic businesses with. smallholders to do a better job and thus to be more successful They should know what they are. getting into be well prepared and able to keep an overview once they are involved in an organic. business We purposely use the term organic business as we strongly believe that organic production. initiatives even if they focus on improving the livelihoods of smallholders can only grow and survive. if they are economically viable, In the guide you can expect to find the practical know how and essential information you need to. be familiar with in order to set up manage and expand an organic business By spending some time. reading parts of the guide you will, get a succinct but full overview of the main aspects and issues involved including. management principles needed in all businesses, receive practical guidance on how to structure and manage an organic business. learn about successful examples and the key factors that made them a success. learn about pitfalls so that they can be avoided, become familiar with systems and tools that can help you to be effective and efficient. get to know the most relevant information and linkages that help you to orient yourself. further in this field, This guide was developed in a participatory process involving people who are active and experienced. in managing or supporting organic businesses in Asia Africa and Latin America For the first step. the content identified by the editorial team was tested and expanded in an international workshop. involving more than 30 practitioners On this basis and drawing from years of their own practical. experience the authors developed a first draft of the guide Documents and websites on related. topics served as sources of inspiration and are referenced where useful for the reader Drafts of the. guide were reviewed by entrepreneurs consultants and development experts active in this field. Practitioners have the possibility to contribute to the online version of this guide by editing the. wikibook at www wikibooks org,1 2 Who is this guide for. The guide is primarily written for people who are directly involved in the set up or management of. an organic business that involves smallholders in low and middle income countries These can be. individual entrepreneurs senior staff of companies but also the management of producer. cooperatives marketing organic products In this guide when we use you we address this type of. people Figure 1,Figure 1 The organic business in the value chain. Secondly the guide should be useful for those who facilitate the development of such businesses These. can be NGOs focusing on sustainable development and income generation of rural communities. or consultants and business development services Thirdly the guide should help donors financial. service providers and government agencies active or interested in this field to better understand the. particularities of organic businesses and to provide the right support to the right initiatives Chapter. 12 specifically addresses organisations that facilitate and support the development of organic. businesses, The focus of the guide is on organic businesses and where this is possible organic in combination with. Fair Trade However it is not about Fair Trade in conventional farming The following examples from. Africa Asia and Latin America provide an idea of some of the different types of organic businesses. Pineapple processing and export in Uganda An individual entrepreneur who. contracts 200 farmers producing organic pineapple exports fresh pineapples and runs a. solar based drying plant He sells the fresh pineapple to Europe and sometimes to Kenya. and the dried fruit to Europe and on local urban markets. Cocoa production in the Dominican Republic A Fair Trade certified cooperative. consisting of 180 producer associations which involve a total of approximately 10 000. farmers most of them certified organic The cooperative runs fermentation facilities and. exports directly to Europe and the US Fruits and vegetables intercropped in the cocoa are. sold in the local market, Cotton and pulses in India A farmer co owned company that involves 5 000 cotton. farmers who hold the majority of shares The marketing company was set up in order to. improve the livelihoods of smallholders by increasing efficiencies lowering input costs and. raising incomes through organic and Fair Trade certification It established commercial. partnerships with the local processing industry and with textile brands abroad Pulses and. other rotation crops are currently sold in the local market. 1 3 Entrepreneurial or developmental perspective, Organic businesses may be developed by entrepreneurs who use their own funds or take up loans. or by producer organisations that use the shares or fees of their members They may receive support. from locally available funds for private sector development or from development agencies The. approaches of these different actors however are often quite different First of all an entrepreneur. needs to ensure that s he will make a profit meaning that revenues are higher than costs after an as. short as possible initial phase As entrepreneurs are using their own money they are usually more. sensitive about avoiding risk They particularly need to be sure that their investments pay off and. that no one else reaps their benefits At the same time entrepreneurs can also be opportunistic in the. sense that they can easily change business focus from one product to another one and in that way. abandon groups of farmers, Producer organisations have a longer term perspective with the wellbeing of their members in mind. They are not focused on profits they are focused on getting their members a better deal. Examples of entrepreneur thinking,How do I become profitable in a short time. What is the minimum I have to do and what extra if I want to do a really good job. What is the cost can someone else pay for it,What are the risks and how can I reduce them. How can I avoid farmers turning against me, Development agencies are most concerned about the impact the organic initiative has on poverty. reduction and on sustainable development of disadvantaged communities They need to ensure that. small farmers benefit and that important cross cutting issues such as gender equity and HIV AIDS. are given due attention Unfortunately many support programmes follow a project logic and some. businesses collapse at the end of that period as they are not yet self financing In some cases they. have become addicted to donor support and programmes are then extended for a long period. Examples of development agency thinking,How can we achieve development goals. How do we ensure that small farmers benefit, How does this integrate cross cutting issues gender social inclusion HIV AIDS etc. How can we make sure that public money is spent in a responsible way. How can we ensure that the objectives of the project are achieved. A far sighted entrepreneur will understand that his or her organic and certainly Fair Trade business. will only succeed in the long run if the farmers benefit too A far sighted development agency as well. as a farmer cooperative on the other hand will understand that farmers will only benefit if the. production and marketing of their products is handled in a professional and competitive way so that. it makes money This guide is written for all of them. In general it is a lot easier for existing companies and cooperatives to convert part of their business. to organics rather than for companies and cooperatives to be started up for the purpose of going into. organic business However in an existing business it is necessary to separate the organic unit from. the conventional one Setting up a new business developing an organic product line or starting up. organic processing are all very challenging tasks certainly in a three year period a good business. person knows when and where to ask for assistance Many entrepreneurs are reluctant to ask for. help because of the paperwork involved or because they have to expose their figures This is an. unnecessary obstacle to the growth of their business see chapter 4 4. 1 4 How to use the guide, You could read this guide from beginning to the end thus covering all relevant aspects of an organic. business more probably however the guide will serve you as a reference manual which you can. consult when searching for information or guidance on a topic that is relevant for your work at that. time In the back there is an Index that will help you to easily locate the topic of your interest In. addition to a table of contents there is a flow chart of the typical steps involved in setting up an. organic business Figure 2 For each step reference is made to the chapters where you can find the.