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Financial Management Strategy: Retain Assets in Kind

HomeStorageA possible problem encountered by value chain development projects attempting to funnel assistance to smallholders via development cooperatives is the cooperative business model . This maybe incompatible with a well rationalized Financial Management Strategy of the intended beneficiaries. The basic financial strategy would be to retain non-perishable agricultural assets such as maize, rice, bean, groundnuts or soybeans in kind as long as possible, and only slowly monetize the commodities as needed to meet immediate cash requirements. This is in contrast to the typical cooperative business model of having the members consign their produce to the cooperative shortly after harvest so the cooperative can bulk the produce into the necessary volume for convenient transporting to command a volume bonus. It is a model that takes managerial control of the commodities away from the members and normally compensates them some three or more weeks after accepting the goods on consignment.

Retaining non-perishable agricultural assets in-kind allows farmers to benefit from the normal seasonal price increases with time after harvest which would be co-mingled with any inflationary pressure on the national currency that impacts on the purchase of goods, particularly those being imported. It could also be a deliberate financial strategy to minimize the amount of cash around the house and the temptation that ready cash can have on both immediate and extended family members. If non-perishable assets are held in kind instead of monetized and the cash placed in the proverbial “cookie jar” or “under the mattress”, it would reduce the temptation for a husband to pinch some and head to the neighborhood bar for some local refreshment and perhaps some illicit companionship, or prevent a teenage daughter from pinching a little to get her hair braided, etc. to appease the young man down the street, she has her eye on. Perhaps this should be referred to as the proverbial financial management strategy with the appropriate proverb being “Lead me not into temptation”.

The identifying case comes from Malawi in which an informal interview with the proprietress of a CNFA sponsored agro-dealer, that was involved in both selling agro-inputs and purchasing commodities, indicated that most of her commodity purchases were coming from women, but they were only selling small amounts at a time. This could be in the range of 10 to 15 kg of instead of a full 50 kg bag. Basically, they were marketing what they could conveniently carry in a basket on their head. Further discussion indicated the commodity procurement season seems highly prolonged for a country with a single rainy season that allowed the production of only one full season crop per year. The procurement begins in May, shortly after the earliest harvest and continues all the way to January. With only a single crop and the southern tropics rains going from October to March, the expectation would be that the main harvest for maize, beans, groundnuts and soybeans would begin in May and extend no further than early July. Even allowing for manual shelling of maize and groundnuts, and manual threshing of beans and soybean by beating with a stick, plus sun drying, winnowing, and bagging into the standard 50 kg bags; the entire harvest should be available for marketing no later than late August. Thus, why does the procurement period extent for an additional four months to January? The best explanation is that farmers and their spouse are deliberatly holding their crops off the market for any of the reasons mentioned above, or perhaps other reasons.

There appears to be a distinct gender difference in selling of commodities. Men would more likely bring in whole 50 kg bags for sale. Perhaps this was to cover large cash needs like production loan repayments or school fees, etc. Women were more inclined to market small quantities in the order of 10 to 15 kg. This would imply they are selling commodities to meet immediate cash needs on a daily or weekly basis. The impression is that women would leave home for the market with 10 to 15 kg of grain on their heads, stop by the one of perhaps 10 commodity dealers in town, sell their grain, proceed to purchase what they needed for their family, and return home with about as little cash as when they left in the morning. If necessary they could make multiple trips to the grain dealer.

While this was identified with one agro-dealer, it was confirmed with other agro-dealers in Malawi, both the small dealers working with CNFA’s agro-dealer program and large dealers representing the large grain processors. It was also observed in other countries such as Kenya when a farmer marketed 10 kg of soybeans some three months after harvest.

Given the limited banks in rural areas, some general lack of trust in banks, and the security risks of having cash around the house for months, either in the cookie jar or under the mattress, where there could be internal family pressure as mentioned above, outright theft from within the community, or leveraged gifting to relatives in need who know ready cash is available, the overall financial strategy could be a rather astute financial management decision, that needs to be fully appreciated and respected by those attempting to assist them. The beneficiaries desire to minimize cash on-hand and retaining control of their commodities could be a reason why most development projects only attract a small minority of the Potential Beneficiaries and even then experience considerable side selling.

The implications are that the farmers would rather assume responsibility and accept the post harvest losses from home storage, in which stored bags of grain can occupy up to half a home as shown in the figure from Tanzania, than consign the bags to a cooperative and lose control of their assets. Such post harvest losses could include losses from mold, moisture, insects, rats, etc. Assuming no moisture problems, typically grains like maize, rice and soybeans can be held for up to three months or three generations of grain weevils before the infestation become sufficiently noticeable to down grade the grain’s value. Even then for reasonably small quantities typical of what a smallholder would be retaining in their homes, it is possible to chase the weevils away by laying one or two bags of the grain out in winnowing baskets for a day or so, allow the sun to warm the grain. This will make the weevils sufficiently uncomfortable they will run under the basket into the cool shade so the grain can be rebagged largely weevil free. This may be why it is common in smallholder communities to see grain being dried in the sun long after the harvest and initial drying to safe storage moisture content. Rats are still going to consume their share and need to be controlled.

The implication for development efforts intent on benefiting smallholder producers is that the whole strategy largely contradicts many development project cooperative business models expecting smallholders to consign produce to the cooperative shortly after harvest for bulking into a large enough volume to get a volume bonus on the sale, but with three or more weeks delay before the growers receive their payments. This could leave the members with substantial sums of cash to protect for months to come and no prospects to benefit from the anticipated rise in price adjustment for inflation with time after harvest. This would be particularly true for commodity consigned, bulked, and marketed shortly after harvest and prior to when seasonal price adjustments begin to take effect. The expected increase returns from bulking through the cooperative may actually be realized or exceeded by the farmers retaining their grain just by the normal price increases with time after harvest. The immediate cash payments would also be considerably more convenient, leaving the farmers with the sense of control over their produce, and avoid the overhead costs of the cooperative, that may exceed the bulking benefits. This is something worth investigating.

The continuous trickling in of commodities for sale would also emphasize the need for immediate cash sales since, if farmers or their spouses are selling their produce en route to the market to purchase needed household goods, they need immediate cash and delayed payment from a consignment sale is unacceptable even it provides a higher gross return. Instead farm families prefer to accept the possible 20% Discount for the immediate cash. In addition, if they are marketing small amounts over a prolonged period, then the cooperative will need to remain open and fully staffed for the entire extended commodity purchasing season, even when goods are only trickling in. This could substantially increase the cooperative’s overhead operating expenses, and reduce any envisioned Competitive Advantage that most likely is already marginalized. If the cooperatives are concentrating on a single commodity as is common when part of a value chain promotion, and not have the operating costs prorated over most of the commodities produced in the area as the competing private traders most likely are doing, the overhead costs per ton of commodity would again be increased, perhaps drastically. That in turn could easily provide the private dealers ample opportunity to provide a financially higher return to the farmers than marketing through the cooperative, in addition to the convenience of immediate cash. That is if the cooperatives accurately factor in the sustainable operational overhead costs that would have to be charged members for the cooperative to continue operating once any donor funded NGO facilitation and subsidies are withdrawn. This also has to be accurately and transparently reported to avoid the more typical Deceptive Reporting that overlooks most, if not all, the overhead costs and often attributes the overhead costs as a direct financial benefit to the producers. Something they never will actually receive.

Also, any research effort looking at the economics of smallholders needs to include any commodities that can be easily monetized and likely will be shortly, be it either crop or animal assets, and not limit the analysis to the ready cash.

Last Revised: 17 Feb. 2010

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