SAMPLE PRICE FORMULA FOR SMALLHOLDER GREEN BEAN PRODUCTION

The price at which the contracting Company agrees to buy the Smallholder's (Farmer's) beans is determined as follows:

(1) A minimum price per kg green beans of acceptable quality is announced by the Company at least one month before the start of the coming planting season.

(2) This price is calculated as follows:

(a) The average cost of production for cultivating 1 ha of green beans in the area in question is determined by the Company in consultation with representatives of the Farmers' Group. The production costs are based on the recorded experience of contracted smallholders who grew green beans in the previous season, and include:

(i) the cost of all materials used for cultivating 1 ha of beans (seed, fertilizer, agro-chemicals, fuel, depreciation on cultivation equipment, harvesting equipment and materials);
(ii) the total value of the labour required through the season for all operations, charged at the opportunity cost of household labour in the area (usually equivalent approximately to the cost of hired labour in the local informal agricultural sector).

(b) The total cost of production is divided by the average yield of green beans from 1 ha achieved by contracted farmers in the previous season. The resulting figure is the absolute minimum price which the farmer must receive to cover the costs of production, without allowing for any profit margin or return on fixed investments (especially land).

(3) The base price (minimum price) is adjusted as follows:

(a) A minimum profit margin equivalent to approximately 25% of the cost of production is added. This profit margin must be set at a level which attracts farmers to grow green beans and sell them to the company, rather than apply their land and labour to alternative enterprises or sell their products in alternative markets. (If there are attractive alternative income-earning opportunities which farmers can take up, the minimum profit margin for green beans may need to be set at a higher level. The open market prices for green beans and for competing commodities - if such prices exist in the area - are useful pointers to the minimum profit margin which is required to attract and retain green bean growers).

(b) A quality bonus of 10% of the adjusted base price is added for extra fine beans (linked to the 10% premium which such beans realize in the end market).

(c) A levy of 2% of the base price may be retained by the company in a stabilization fund to allow for losses in storage or for losses or gains further up the marketing chain, but it must be made clear that this fund is held in trust for the smallholders.

(4) The adjusted base price is paid to farmers as follows:

(a) the value of all green beans delivered by each farmer in a particular calendar month is calculated by multiplying the kg of beans delivered by the adjusted base price;

(b) the costs of any inputs or services supplied to the farmer by the company on credit are deducted; (c) the resulting net revenue due to the farmer is paid no later than the 15th of the month following the calendar month in which the beans were delivered to the company.

(5) At the end of the company's financial year, when the audited accounts have been received:

(a) the profit realized by the company through the export of green beans is calculated;

(b) a productivity bonus linked to company profits is calculated at an appropriate level for payment to contracted farmers;

(c) the productivity bonus is paid to contracted farmers per kg of green beans delivered in the previous financial year, as in incentive for future performance and as a trust-building exercise between farmers and company.

(6) Operation of a price formula based on the above model depends on:

(a) a willingness on the part of the company to accept a significant degree of transparency in relation to its financial accounts;

(b) open consultation between the company and farmer representatives, usually with the help of a facilitating intermediary, throughout the process.

Few companies may yet be willing to enter into such an open dialogue, but the dividends for those that do, in terms of enhanced farmer commitment and loyalty and raised future productivity, are great. The model should be viewed as an ideal target to be achieved over a period of time.