Forms and costs/benefits of inclusion

4.4. Forms and costs/benefits of inclusion Inclusion of small-scale farmers, as illustrated below, can mean different levels of participation in the supply chain, from mere participation as individual suppliers of raw material, to collective action with other suppliers to meet basic demands for volume and consistency of supply, to becoming a specialized supplier on the basis of value-adding activities, to becoming co-owner of a supply chain or one of its segments.

Illustration of different possible forms of inclusion of small-scale farmers

If one visited the South of Chile today, 15 years after the restructuring of the dairy industry got started, one would observe that different groups of small and medium dairy farmers have managed to put in place different strategies to remain included in the dairy chain. Figure 5 represents these different forms of chain inclusion (Peppelenbos, 2005).

Some decided to buy their own cooling tanks and not worry about the costs and problems of working in association with other farmers; they are included as individual suppliers. A second group of farmers organized and managed to become very efficient at collecting milk and selling it to processors.

A third group of associations decided to diversify into new activities, such as small-scale cheese production for local markets, the provision of veterinary and other services to their members, or projects in totally new areas such as the production of raspberries for export that added a new source of income to all or part of their membership.

Finally, a fourth category of association was able to implement even deeper changes: by bringing together several hundred small and medium producers, they were able to set up a number of processing firms, often with multi-million dollar investments, to compete against the large dairy processors.

Each of these forms of inclusion implies different costs and benefits, as well as different ways in which these costs and benefits are allocated across the different participants in the supply chain. The case studies should specify and quantify what were the gains, as well as the losses, of the small-scale producers and rural SMEs that managed to remain included in the supply chain. This analysis should be based on a comparison with groups of non included small-scale producers and rural SMEs.

Costs and benefits to be looked at are:

1. At the level of the farm: (a) changes in production costs; (b) changes in yields; (c) changes in the value of the product; (d) changes in the profitability of the product
2. At the level of the farmer organisation, when applicable: (a) changes in logistical costs (increased need for quality control, homogeneity, regular volumes…), (b) changes in financial costs (increased need for revolving capital), (c) changes in labour costs (increased need for skilled workforce)
3. At the level of the chain: (a) changes in the distribution of profit margins across the chain; (b) changes in sales volume and value
4. At the level of the household: (a) changes in income; (b) changes in the share of the income from the chain within total household income; (c) changes in income diversity and security; (d) changes in employment; (e) use of the added income
5. At the level of the innovation: (a) estimated costs and investments; (b) implicit or explicit subsidies

If other costs and benefits specific to the case study are identified during the field work, they should be added to allow for a proper assessment of the effects of inclusion and of the innovation. It is critical to be able to assess how successful is the innovation in improving small-scale farmers’ livelihoods.