FULL DAIRY FARMING VALUE CHAIN CONCEPT NOTE
updated May 2014

PROBLEM STATEMENT
GRAFCO offices are located in the highlands of central Kenya among a largely farming community. Reflecting this community, 80% of GRAFCO’s clients are small holder farmers involved in poultry, dairy, or vegetable farming.
GRAFCO has been advancing loans to these members towards boosting their farming activities with limited growth and impact. This has necessitated GRAFCO to go deeper in developing an agricultural program that wholly meets the needs of these members. The goal of the program is to have the membership practice farming profitably. This will result to increased incomes to sustain their families, pay back their loans on time, build their community and create employment through the farm proceeds.
At the onset of the program in April 2013, data collected from farmers showed that over 80% are into dairy, poultry and horticulture farming. It also emerged that some of the factors causing farmers to fail include but are not limited to poor farming methods, poor market prices for the produce, costly farm inputs and extension services, poor business skills and limited access to affordable funds.
It was therefore clear that access to affordable funding alone, which is what GRAFCO has been providing, is not enough. Training, mentoring and access to market are equally key components. GRAFCO therefore aims to develop a complete and inclusive value chain of connecting farmers to markets. Initial surveys indicate more GRAFCO clients would benefit from dairy farming than other activities, making this sector a reasonable starting point to develop a value chain.
GRAFCO has taken a step and trained the farmers in dairy, poultry, and greenhouse farming. This was done in June-August 2013 where 50 farmers were trained in dairy, 55 in poultry and 50 in green house farming. About a hundred more are waiting for the next planned training. The trained members are now practicing proper farming from the knowledge acquired while they continue receiving financial and business development services from GRAFCO as we focus on full implementation of the Dairy farming Value chain.

DAIRY FARMING VALUE CHAIN SOLUTION
In Kenya, dairy farming has been growing fast by selling milk to the East African market and beyond. This sector supports 1.8 million small holder farmers, employs 750,000 people and another 500,000 jobs along the value chain sector. Graf co is looking to play a role in improving this sector and having their members benefit from the sector. There still exists huge potential for growth in the industry and the small processors are looking to capture the market in the rural areas.
GRAFCO has identified one of the upcoming milk processors – Wamu Wamu Dairies who is currently collecting 8,000 litres of milk daily. Charles, the proprietor of Wamu Wamu Dairies, recently bought a 20,000 capacity milk processor in the village GRAFCO is head quartered. The processor is looking to start buying milk in this community where GRAFCO is working with farmers. In the next six to twelvemonths, the processor is looking to buying 20,000 liters from this community. Initial discussions between GRAFCO and the milk processor have progressed and both parties are interested in partnering together where the milk processor will provide ready market and GRAFCO being a financial institution will avail the needed cash to pay off milk suppliers ( farmers) for the milk sold to the processor. GRAFCO and the milk processor will work together to facilitate quality training to the members, supply of quality animal feeds, field extension and mentoring services to the farmers.

Farmers receive training in their respective fields, funding from GRAFCO for animals and more, get quality affordable feeds & supplements, access value-addition services from the veterinary doctors, sell milk to the processor and receive payment through GRAFCO. The processor will make payments for milk to GRAFCO in 45 days, while GRAFCO pays farmers for daily milk supplies.

OUTCOMES EXPECTED FOR CLIENTS AND COMMUNITY
The implementation of this value chain is expected to see over 60% of GRAFCO members who focus on profitable dairy farming as their main source of livelihood. The success of this program will result increased membership for GRAFCO by over 1,000 new members (average milk production is 20 lts per farmer, so 1,000 farmers will be needed to make the 20,000 lts daily target). GRAFCO will be able to add not less than 1,000 members in the next six to twelve months through this program, creating and sustaining at least 2,000 jobs with an indirect benefit to over 8,000 people in the GRAFCO community. The initiative is projected to provide high loan repayment rates, profits for the Sacco members and better investment opportunities. This will also result in increased capacity to support the existing GRAFCO community projects and avail equipped entrepreneurs who will serve as mentors for the growing membership in the wider community.
In keeping with GRAFCO’s endeavor to provide sustainable solutions to members, these dairy farmers will be helped to establish bio-gas digesters to produce methane gas for cooking! This will save trees currently being cut down for wood and charcoal for cooking.

RESOURCES NEEDED for FOR DAIRY VALUE-CHAIN DEVELOPMENT
For this program to take off, GRAFCO will fully utilize their agricultural field staff capacity who will work with the key value chain players and the Ministry of Agriculture.
The milk processor will buy milk from GRAFCO farmers and mobilize more from the community. This is estimated to add up to about 2,000 litres per day in the first six months as the volume gradually increases to the targeted 20,000 litres per day. GRAFCO will be involved in paying these farmers for their milk on demand (daily/weekly/monthly) basis. With the processor buying milk at Kshs. 35 ($.40 cents) per litre for an initial 2,000liters, GRAFCO needs Kshs. 70,000 ($825) per day or Ksh. 2,100,000 ($ 25,000) per month to fund this at the beginning. This initial phase of milk purchasing will be funded with the current Global Fund resources.
In the second phase (2014/2015), GRAFCO will be expanding the program to include funding farmers in buying quality animals, insuring them and buying feeds and supplements for at least the first month. In this phase, GRAFCO looks to lend to about 100 farmers each getting Kshs. 127,500, these translates to Kshs. 12.75 million ($150,000).

BENEFITS AND RISK MITIGATION OF VALUE CHAIN INTEGRATED FINANCING
A Member joins the SACCO and obtains financing for a fully supported production activity within the framework of a value chain. They obtain context-specific training on an ongoing basis. They are held accountable in respect to production quality and timing by peers and they are at times assigned a specific responsibility within the production group where need be. In turn they are provided, through the SACCO, quality inputs and farm-level based technical support. In addition the market for their product is guaranteed through a pre-negotiated contract.
Thus, a full value chain focus overcomes many of the challenges that face small scale producers, making it feasible for both financiers and recipients to structure meaningful financing.
Value-chain linked loan products therefore become win-win for all. The financier is assured of repayment, and profit. The farmer, once enrolled as a borrower, is assured of a market for his milk at a fair, pre-negotiated price; insurance for his animals is built-in; and he receives regular technical support from an integrated service provider. The SACCO, on its part, obtains a report of the performance of each borrower, and is therefore able to anticipate or forestall loan repayment defaults. Plus, all payments by the contract-buyer are channeled through the SACCO, who in turn acts as the clearing house for reconciliation and direct channeling of all ‘advances’ due for settlement to the various service providers.
Mitigations for the risks associated with traditional financing mechanisms are also more easily addressed within the framework of an entire value chain integrated loan product. Consider, for example:

• The problem on large levels of delinquency in loan repayments is eliminated.
• The problem of security for loans is eliminated, as the value chain itself, and the total value stored thereof, becomes the loan security.
• The problem of establishing a client’s historical performance is eliminated, because records maintained at every level of the value chain (the service providers’ reports; the buying clerk’s records; the grading data; the payments) are centrally stored.
• The problem of achieving economies of scale in finding qualified borrowers is also substantially addressed, as the value chain program, by nature mobilizes a large number of producers.