Value chain finance for infant high-value horticultural industries : a case study of the baby vegetable industry in Swaziland

Abstract

Having appreciated the changes in global markets that offer lucrative opportunities for highvalue crops like baby vegetables; the dire need to diversify the Swaziland agricultural sector; and the versatility of value chain finance, this study takes the Swaziland baby vegetable industry as a case study to determine the applicability of value chain finance to infant highvalue horticultural industries lacking guaranteed markets. This study focused on the NAMBoard value chain, employing both qualitative and quantitative methods of inquiry through a desktop study; case study reviews; and in-depth interviews. This study adapted the UNIDO (2011) VCF analytical framework. This study found that NAMBoard provides direct VCF to its producers, financial institutions provide formal finance, farmer group members provide informal finance to each other, farmers that have some other sources of income self-finance the baby vegetable enterprise, and that there is inter-financing between the baby vegetable and conventional vegetable value chains. Indirect VCF is absent in this value chain. On the other hand, Sdemane enterprise provides direct VCF to its outgrowers and data collectedEmpirical evidence on a sample constituting about 30% of the target population shows that seeds/seedling costs contribute 56.1% to total average production costs. This shows a big financing challenge now that NAMBoard is reluctant to give seeds on credit, while the rest of v the 43.9% still require financing. In addition to that, there is no capital finance loans provided to smallholder producer, but only operational finance is accessible from formal financial institutions. This study discovered that all baby vegetable producers also produce conventional vegetables, and these businesses are inter-linked. There is financing between the baby vegetable and conventional vegetable businesses and thus value chains, sourced from product proceeds. Individual producers, farmer groups and farmer associations form the producer base. A financial analysis on the production stage revealed that that there are informal financial relationships within farmer groups. Also, farmer groups use formal finance suggests that these don’t use other financing mechanisms except self-finance VCF. Empirical evidence on a sample constituting about 30% of the target population shows that seeds/seedling costs contribute 56.1% to total average production costs. This shows a big financing challenge now that NAMBoard is reluctant to give seeds on credit, while the rest of the 43.9% still require financing. In addition to that, there is no capital finance loans provided to smallholder producer, but only operational finance is accessible from formal financial institutions. This study discovered that all baby vegetable producers also produce conventional vegetables, and these businesses are inter-linked. There is financing between the baby vegetable and conventional vegetable businesses and thus value chains, sourced from product proceeds. Individual producers, farmer groups and farmer associations form the producer base. A financial analysis on the production stage revealed that that there are informal financial relationships within farmer groups. Also, farmer groups use formal finance more than individual producers who mostly prefer self-finance VCF. A VCF analysis of NAMBoard discovered that there is direct VCF between the SAS input shop and also the NAMBoard input shop, and between producers and the NAMBoard input shop. NAMBoard, in addition to the input shop and provision of extension services, performs three distinct post-harvest services namely: transportation; processing; and marketing, for which a handling fee of 35 percent to the final produce value is charged and deducted from product proceeds. The Swaziland financial system has no financial products specifically for this industry, as there is a very small number of participants borrowing funds from financial institutions. The loan processing procedures are cumbersome and take too long thus formal finance is currently ill suited to producers. This study rated the risks to the financial transaction reflecting the qualitative interpretation of available information and that obtained in the field through interview schedules with all value chain actors. Risks identified as high are: insufficient production; poor quality produce; failure to meet food quality ands safety standards; lack of guaranteed market; and ignorance on price. Catastrophic weather; loss of quality; lack of technical know-how; and failure to manage business profitably were categorised as medium risk. Inefficiency; lack of market demand; and unreliable water sources & electricity are seen as low risk to the financial transaction. This study also explored the Sdemane value chain, where Sdemane enterprise is the lead firm. It was examined and interpreted as an institutional success story that holds the solution to the NAMBoard value chain ailments. It also has out grower producers to supplement its production. Findings of this research show that a financial bailout ensured the survival and growth of this emerging value chain, which now has secured markets with a market demand more than achieved output. The model used is able to minimise and diversify risk for both Sdemane and the out grower producers. The manner in which this value chain is organised makes it competitive and exhibits potential which attracted donor funding, and today is an infant value chain that is achieving tremendous growth. This study concludes that VCF is applicable to infant industries lacking guaranteed markets to a limited extent. Minimising risk increases the availability of finance due to the resultant increase in financial attractiveness and the chain becomes able to produce competitively and meet the strict market conditions. At the end, the value chain would operate as if the market were guaranteed, just by being competitive and successfully delivering products to end markets. With regard to policy, rethinking the underlying NAMBoard business model and learning from success stories including the local Sdemane enterprise is one way to avoid the imminent collapse in exports from this value chain.