North Eastern Tanzania Organic Ginger Chain Economics Essay

The general objective of this paper was to provide description of the northeastern Tanzania organic ginger chain in a transaction costs approach. That is the paper that is developed from New Institutional Economics point of view expanding the work done by TOAM in their rapid market scan noting that NIE concentrate on transaction as the basic unit of analysis. We specifically aimed at: 1. Provide the case characteristics of the ginger farmers 2. Describe the chain’s transaction nodes 3. Map the participants; who are they and what are they doing 4. Provide simple illustrations of the chains map (Graphically) and participants activities. 5. Provide noted developments in the chain thereby presenting the flows of power and indications of the direction of trade. 5. Lastly provide conclusions and recommendations to be taken in the further papers. We hypothesized that: 1. Buyers would exercise power over the producers and processors.2. Two nodes in a relation will tend to diverge provided that there is a more lucrative parallel co-existing business as players in each node exercises his behavior in a need to economize gains from transaction. And lastly power of the node involved in transaction is derived from diversification and specialization. The more specialized the firm is and the more easily it can diversify the more powerful it will become. The more diversified the firm is and the less it can specialize the less powerful it will be. We found divergence in trade. We also found that both exporters and farmers were diversified therefore divergence of the nodes could lead to abandoning of trade by each player dealing in that crop.

INTRODUCTION

In north eastern Tanzania supply chain for organic ginger sees its establishment in 2007. It started to undergo development through 2009 when a series of tasks and activities to develop it were held by TOAM. Organic ginger chain initially was established in Mnazi, when a farmer visited TAZOP office in Tanga and sees them struggling to develop a line for ginger export. The farmer with the other farmers joining established a supply relation with TAZOP and in 2008 they were registered organic and sold their first slot. The owner of that certificate until recently is TAZOP.

In 2008 fifty tones, 2009 twenty tones, 2010 they did not buy and 2011 two tones were bought by TAZOP.

The model of establishment and selling was that TAZOP with other facilitors (e.g. TOAM and FAIDA MaLi helped farmers to form a cooperative which owned processing facilities) TAZOP which was potential buyer helped provide some of the facilitates for production like farm tractor and processing like canvas for drying ginger. Farmers dried the ginger and sell individually or with other three or two farmers to TAZOP, by organizing for their transportation. Also some other farmers would decide to sell to other farmers who owned TAZOP recognition form for them to send the produces to Tanga.

TOAM and FAIDA MaLi were core facilitators, they held series of stakeholders meeting in between 2007 and 2009 that aimed to sensitize plan and implement strtergic value chain development activities. In 2008 TAZOP exported for the first time. In that year also farmers were sent to exhibitions and agriculture shows. The chain was mapped in 2009 changes still occurred structural and governance changes still occurred in that chain even throughout 20011 and 2012 so that export was dwindling and therefore the chain was not clear.

Due to lack of a clear supply chain many other proposals of traders to buy it organic like that of DM ULIKAYE the “NATIONAL SALES AND PROMOTIONS MANAGER” AFR TEA & COFFEE BLENDERS LTD (TTB) and that Chai Bora tea company (which initiated the efforts to trade) among others who had interest in exporting it remained reluctant up to now when the research was carried irrespective of the sector’s performance in price and quantities (see tables 1) and the proposed solution from the TOAM’s 2009 that aimed at bringing organic ginger business viable and sustainable. TOAM proposed that “converging information drawn from understanding the policy and regulatory environment, from mapping the structure of the market, from analyzing the key trends and dynamics in the market, and from identifying points of leverage where interventions might have greatest impact” would be the secret for the development of that chain. TOAM used in this respect sub sector analysis and appraised it as a holistic, systemic (multi-level) and intervention-orientated). Therefore a need for a new focus was needed because of the changes. We presumed transaction costs to be key in shaping thee chain. This paper modified some techniques in TOAM’s chain and developed a new study using a New institutional Economics approach to study the chain specifically applying second level of the Williamsons 2000 four level approach in developing the value chain.

Table 1: Performance of organic sells in quantities: mean production within Mamba and Mnazi

2007

2008

2009

2010

2011

Mamba

4085

4330

4460

4250

5025

Mnazi

1294a

2351

2288

2036

3004

a this was conventional ginger as trade had not stated. The quantities are expressed in kilograms of dry ginger.

Table 2: Average price (In Tanzania shillings) of ginger for the two areas sold as conventional and that as organic

2007

2008

2009

2010

2011

Mamba

70

2500

6000

4500

3600

Mnazi: b

c

382

70

976

2617

1205

2496

1170

3211

1200

2446

b the row presents price fetched in spot markets when ginger were sold, while

c. means that the ginger was sold to TAZOP.

You can note from the tables that production is increasing, and average production per respondent per year is larger in Mnazi than Mamba. In the TOAM’s 2009 Value chain development study comprising the areas where my research is based, TOAM developed supply chain for the whole ginger sector in Tanzania.

The development led TOAM into identifying three supply chains for both conventional and organic ginger. These chains are:

In a production node ginger is cultivated by smallholder farmers

CHAIN 1: FRESH UNPEELED AND PROCESSED GINGER FOR LOCAL MARKET SHF – URBAN TRADERS – LOCAL MARKET (Conventional)

CHAIN 2: PROCESSED ORGANIC GINGER FOR LOCAL TEA BLENDERS SHF – SME+LARGE PROCESSORS-SUPERMARKETS+TEA BLENDERS (organic)

CHAIN 3: PROCESSED ORGANIC GINGER FOR EXPORT MARKET SHF-SME+LARGE PROCESSORS+(EXPORTERS-SUPERMARKETS)+EXPORT (organic)

The focus of this study was to rearrange and expand chain number three with Transactions focus which also during the preliminary survey conducted in Same and Lushoto a similar chain was identifies for ginger exportation. However the difference observed during the preliminary survey was on the supermarkets, where no one was identified to be involved in export of ginger, and the number of transaction nodes which this study found it important to separate node supplying raw materials (inputs, and factors of production in particular) for undertaking different functions in other node from the production node.

The aim of this paper was to develop a chain that would make easy further analysis of transaction costs and institutions in influencing entry and participation of organic ginger farmers into export market. Also gaining a better understanding of transactional nature of the environment for which organic ginger business runs, the main development in the chain and the flow of powers in the chain and their determinants.

LITERATURE REVIEW

Theoretical framework

Theoretical framework upon which this paper was developed was on Institutional Economics. According to Williamson (2000) Economic variables are analyzed focusing on Transactions as a unit of analysis. There existed a possibility of integrating transactions with other focuses that does not pertain to NIE per se but they affect the way parts transact into mapping the supply chains. Supply chains mapping can focus on: particular use or user; a particular theme; or lastly processes, flows, facilities, organizations, geographic relationships and can be mapped, can be mapped using different approaches such as the Global commodity chain approach GCC and actors in it can in different approached be facilitated e.g. by giving the subsidies.

The paper attempted to integrate technique from the GCC approach, own initiatives and case study analytic techniques in developing the chian the mix herein refered to as Transaction cost approach. GCC sees power as a determinant of entry into the chain, organization change and forms in the chain and more specific the management of the whole established chain (Raikes, Friis and Ponte, 2000). Since the case which this chain was established was not known from the transaction cost point as to who owns the most power in the chain interest drew on the knowledge of power, the binding mechanisms and the arrangements with which gains are derive from trade considering Gerrefi and Korseniewisk (1994) observation on the two drivers of supply chains.

Depicting the chain required showing involvement of players into transactions particularly the end of the relation once the transaction is completed and selection of what focus is taken. For example obligations that parts hold and the way they are governed after transaction in other term relationship ex-ante.

Transaction costs theories assumes that a transaction will occur given that total cost from adding costs of developing the good traded to costs of making exchange such as bargaining are lower than expected gains from trade.

Literature on power and networking in supply chain

Power exist in supply chain exerted from two fundamental control points, the first is from supplier of row materials used in the chain and the other from the end user and other firms in touch with him/her Boehlje & Schrader (1995). This with other factors embedded in Transaction costs variables determines the structure of supply chain.

According to Williamson 2000 there are three types of governance structures which are simple market exchange, contracting, internal organization (vertical integration) because of power it is expected that farmers will tend to be forced to change their organizational structures easily as more powerful nodes exercise power on them. The more powerful are the adjacent nodes to the farmers’ nodes the more it will force farmers to shift between the governance structures. Similar changes will be forced by transaction costs.

The changes that occur in the chain are but not only transactional changes from institutional economics point of view as noted by (Martin, 2000). These changes in the chain are also not only constrained to exertion of power to the producer node as the only driver of change from a commercial perspective but also by changes in the products demand, that in part lead to other two drivers which are freer trade and technological changes. In Institutional Economics view shift in the governance structures are driven by the efforts of actors in trying to maximize their share in the benefits of trade and safeguarding themselves from losses of transactions benefits. They result into convergence of institutional arrangements rearranging, establishing or reestablishing a more stable governance structure as noted by (da Silva and Saes, 2007).

In simple market transaction parts are free to exercise their transactional alternatives from trade (for example decision on when to sell or how to sell, to bargain or not bargain) and that their relations with the other partner ends with very little or no obligations once transaction is consumed.

In contracting transactors define the range of acceptable behavior and how to effect them ex-ante to limit losses from transactions during and ex-post that may or may have not been anticipated ex-ante. Attenuation of hold-up problems shirking problems and others which may arise from trust are reduced by stipulating terms of trade ex-ante (Kledal, 2006) and their redefinition and reorientation even ex-post thereby reducing chances of costly repetitive bargaining. Klein, Crawford and Alchian (1978) and Williamson (1979) noted that the shorter the contract is the more it will hold the transactors in negotiation. Past experience in transaction between the actors will also determine the needs for negotiation and importance in shifting between the governance structures.

In vertical integration transactors may attempt design open relation especially in the way they own specific assets that are used in trade. Firms by runing as sole proprietors may attempts to involve their transacting partners in the ownership of some assets there by creating a more rigorous economic relation. Example is as noted by (Kledal, 2006) that hold-up opportunities can be limited by allocating residual rights of control over the use and disposition of assets, and thereby restrict the ability of non-owners to withhold assets from production.

Co existence of governance structures in the same chain, whose assets are not different in-terms of specificity cause problems in the chain and they force convergence of the supply chain towards a more efficient structure (da Silva and Saes, 2007).

Hypothesis

Under the theoretical framework developed the following theories were developed and were verified/tested in the analysis.

That organic ginger chain is demand oriented and therefore buyer driven. Buyers will exercise power over the producers and processors.

Two nodes in a relation will tend to diverge (running from their obligations) provided that there is a more lucrative parallel co-existing business line.

Power of the node involved in transaction is derived from diversification and specialization. The more specialized the firm is and the more easily it can diversify the more powerful it will become. The more diversified the firm is and the less it can specialize the less powerful it will be.

METHODOLOGY

Transaction costs approach was employed for reestablishment of the Northern Tanzania organic ginger chain. The development and structure of the supply chain adapted the second level of the Williamson’s 2000 four levels methodology. A lower level analytic technique where transacting parts are observed was then used. Also the study borrowed from case study techniques to come up with reasons and ways transacting parts behave.

Methodology for this is termed a transaction cost approach because the nodes of the chain map are identified basing on whether there is any transaction occurring in that place.

This paper is part of a broader study on governance of global value chain for organic ginger which is sub part of a research project conducted in Tanzania, Uganda and Kenya. Two areas which one deals partly and the other one fully in organic were chosen.

Secondary data were obtained from TOAM and FAIDA MaLi where data for production and recorded sales obtained. Amount of organic farmers Certified or in the PGA were obtained from the cooperatives and knowledge on whether the farmers deal in organic were obtained from TOAM. The farmers in the cooperatives and PGA formed the sampling frame.

Careful on-field observations and discussions were done for a period of one month; from tenth day of April to the fifteenth day of May 2012; with the cooperative and local government leaders in charge of Mamba and Mnazi agriculture, FAIDA MaLi, TOAM and TAZOP.

Combinations of telephone interviews, questionnaires administered physically and online, and observations helped to bring the chosen respondents in vicinity for primary survey. The reason that observation was important is that farmers may under or overestimate the land they cultivate. Also it would be important and simple to talk of something you ever had been in contact.

There were discrepancies in data obtained by respondents recalling and the ones in statistical records. Therefore where necessary the data were checked to cub this problem.

Two maps of the supply chain were drawn because of the difference in the nature of transaction between the two study areas and for the purpose of depicting the chain clearly.

The study would have chosen only Mnazi because it is the area with the live organic business; but studies shows that Mnazi supply only 3% of ginger into the biggest dar es Salaam local market and the remained is supplied by Mamba. Therefore it was of a paramount importance to also include Mamba. In separating between different transaction periods the study divided ex-ante to mean the period before 2008, during to mean the period between 2008 to 2009 and ex-post to mean the period between 2011 to date for Mnazi this is because these periods depicts different transactional characteristics. “Ex-ante” there were no organic chain that had established; “during” trade had started and there were promising trends, “Ex-post” factors that were not well tackled ex-ante (for example transaction costs variables) caused trade to slow down. In Mamba since there have not been a recorded selling of organic ginger reference transaction cost periods were made on ex-ante and ex-post demarcating feature being the period when the respondent joined the cooperative particularly when it was formed in 2007.

For the purpose of this study and because not many farmers cultivated ginger before 2007 also information were recorded from 2007 for both Mamba and Mnazi basing on farmers recalling, statistical records and documentations.

A deliberation technique to suggest on the best integration techniques that can reduce transaction costs along with other constraints in the chain was finally developed after a collection from the respondents of constraints that farmers are facing in the supply chain, review of literature and self creativity to come up with a supper mix of partners in that particular supply chain. Integration was important because during survey there were interest by the farmers and the local government in the district level to draw away brokers from the chain.

RESULTS AND DISCUSION

Case characteristics of organic farmers

Table: 1 below presents the respondents characteristics of case from the two study areas. 37 and 59 out of expected 40 and 60 respondents were obtained as a valid sample from Mnazi and Mamba respectively the reason for discrepancies being the topographical nature of the areas and difficult in getting connection. Household size variables show that there are 8 and 6 people in a household for Mnazi and Mamba respectively. Most populated household have 24 people in Mnazi and 11 people in Mamba while the list populated have 3 and 1 members respectively. Land cultivated as organic during trade were 1.95 and 2.4 acres for Mamba and Mnazi respectively. It can also be noted from the table that out of 37 respondents only 17 were doing ginger before starting to do it organically.

There were no established systems to guide traders on how they should buy from the farmers in the authorities dealing with ginger. No known trader buys organic from Mamba. Lastly there were 2 known buyers exist in Mnazi, the buyers are TAZOP and GFP.

Characteristic

Mnazi (N=37)

Mamba(N=59)

Age: Mean

Minimum-maximum

42

26-74

45

20-81

Household size: Mean

Minimum-maximum

8

3-24

6

1-11

Land owned in acres: Mean

Minimum-Maximum

6

1.25-15

4

0.25-20

Land cultivated: Conventional (n=17a)

Organic During(n=37)

Organic Ex-post (n=37)

1.24

1.95

2.4

–

–

–

a the n in this case differ from the selected sample size because some farmers were not cultivating ginger before the initiative to go organic.

Description of the Transaction nodes

Export organic ginger chain, in North Eastern Tanzania, exhibit five different transaction nodes. These nodes were named as follows: the node supplying (transacting for) factors of production, the production node, processing and farmers’ crops assembling node, buyers’ assembling and packaging node, and the retailing/or consumers’ node.

Factors of production and Inputs transacting node

It was important was observed as a separate node in transaction cost approach. Transactions that are carried here aim at providing readymade inputs that are used in the other nodes of the chain. Most frequently bought inputs are hand operated cultivating tools such as hoes, machete, and iron mattock. The tools are bought almost every season. The reason that these tools especially those that are used for land cultivation are bought almost every season is because of the nature of the soil and topography. The soil is stony and every time farmers want to cultivate the make terraces sometimes using stones. Cultivation inputs are obtained from retail shops around Mnazi town.

Farmers use capitals from their own savings, 95% cultivate land that was inherited from their ancestors, and use casual labor. About 6% of farmers join and cultivate together. 5% enter into agreement with other farmers where one of the farmers provide a factor production like land and inputs that the other farmers will use to cultivate under a certain agreement. Also farmers take loan from local money lenders, For example it was found in Mnazi that there are farmers without capital, or who are in need of money for other activities, the farmer go to a shop retailer to borrow the money. They agree that when harvesting season come the debtor pays the creditor the money by giving him/her produces that worth the money the debtor owes the retailer but at a price predetermined at the time of lending the money. Another witness form a retailer named Neema Makoko from Mamba was that farmers without land in Mamba go to a person with land and they agree that the landlord give land and seeds or manure to the tenant. Then all other activities to raise the crops are upon the tenant. At the end the two share the crops by halves without considering costs. Also farmers without capital go to retailers and do as Mnazi farmers but there is sometimes another form of payments where they may agree to share the crops by half.

Renting land is constrained by a number of assert specificity that will need the tenant to invest before starting cultivation. The more expensive and specific the investments are, the more is weak the social ways of enforcing contracts between the trading partners. Formal financial systems like banks exist but they are not accessible because of high level of insecurity the lenders feel against lending to the farmers and the perception and low comfort farmers feel to borrow. It was found that all interviewed farmers who borrowed obtained the service from the local money lenders. The players here are banks, MFIs, and SACCOS and local money lenders, shop retailers and facilitators.

Production node

At this node most of players are farmers. 68 registered farmers in Mnazi and 158 in Mamba. The week when this study started another 108 farmers join organic farming from Mnazi to supply to GFP. TAZOP supplying farmers organize for organic production and, in fact, produce in compliance with the organic standards. At this node, in Same and Lushoto, the buyer (TAZOP) of organic ginger is directly involved by putting an extension officer to monitor the activities. The certifiers and buyers visit the farmers during production season twicw for certifiers and thrice for TAZOP. Important players, apart from the buyer and farmers, here are the certifiers, inputs suppliers, financial institutions, NGOs and the local government.

Production and marketing trends

Mean production and investment has been increasing ex-ante, during and ex-post. Amount of ginger sold in spot market increased steadily (refer Table:2). Amount sold in long term contract (i.e. to TAZOP) decreased from average of 5144kg to 2784 kg since organic trade started. Also on average amount saved for home consumption and for seed was 3120 kgs in Mnazi meaning that about 1/3rd of what is produced is saved for seeds and little for food. The same was seen in Mamba where mean investment and production were also increasing. Amount traded in the spot market in Mamba is the same as there were no contracted organic buyers except for short term contracts.

Table 2 Production and marketing information

Mnazi (N=37)

Mamba(N=59)

Mean production: Ex-ante (n=)

During

Ex-post

5176 kg

8632 kg

9564 kg

3679 kg (n=49)

—

5025 kg (n=56)

Mean investment: Ex-ante

During

Ex-post

844 117 Tsh.

706 621 Tsh.

1 004 054 Tsh.

743 000 (n=49)

—

1 209 080 (n=56)

Sold at Spot market: Ex-ante

During

Ex-post

1576 kg.

3882 kg.

5400 kg

3679 kg (n=49)

—

5025 kg (n=56)

Long-term contract: During

Ex-post

5144 kg

2784 kg

N/A

N/A

Saved for seed and food

780 kg.

963 kg (n=57)

Note: The quantities are expressed in kilograms of row ginger for clarity, but all ginger sold during and ex-post via long term contract was dried (processed). “n” in the bracket shows amount of interviewed farmers who cultivated/responded positively. Sometimes the farmers do not cultivate or they postpone harvesting until the next season, causing data missing.

Transactions related to ginger at production node are of different forms. Some farmers sell their crops to local buyers directly who make arrangements to harvest pack and transport. Brokers may also persuade farmers to sell. In Mnazi this is the time when TAZOP negotiate price with the farmers, once they harvest farmers dry the ginger and transport it to TAZOP office in Tanga. Also some farmers sell their crops at this point but mainly to fellow farmers.

Crops assembling and processing node (s)

The farmers’ crops assembling and processing node(s) are different in the two study areas. There are two processing taking place in this node, one is drying only the other one is drying and grinding to obtain fine flour. In mamba once drying is completed the chips are grinded to get flour, in Mnazi the chips are sold to TAZOP and the remained to local traders. However Mnazi dry the amount around the required by TAZOP the remaining volume is sold unprocessed, example they sold only 2 tones of dry ginger in 2011 out of the 50 tones demanded by TAZOP and out of a total of raw 650tons produced by members which converts to 165 tons of dry chips. Areas for processing are cooperative society collection and processing centre in Mnazi and a processing factory in Mamba where there are also different privately owned crops collection centers. They are located at a place where a track can reach. Mnazi processing had hand equipments for chopping the ginger and canvas for drying. At this node it was found that processing is only drying and packaging. Business arrangements at this node are that farmers may sell the dried ginger to others farmers who take it to Tanga or may join with other farmers to sell to TAZOP. TAZOP make arrangement, negotiate and agree with the buyers on the amount they will buy and price at this node.

The privately owned crops collection centres in Mamba contains a godown/warehouse and weighing balance. In this place the crops are only assembled for shipment. Local buyers come and buy at this point. The processing factory contains sophisticated machines for chopping, drying, grinding and packaging. The factory started operation in May/June 2012 but they had no a specific buyer. When this study had started there were no buyers. The usual ways farmers’ use of sending the crops in the collection centre had started. Farmers are paid at the spot. Price had droped to 400 the lowest and 600 the highest price per kg of raw ginger, and brocker spread rumors that the cooperative factory shall not buy the ginger, so that every time price fluctuate from 800Tsh. To around 400Tsh. Key players here are the centre owners, certifiers and the buyers. Two kinds of transactions were observed to take place here. The first forms the relation between farmers and cooperative for purchase of ginger, and the other is between the cooperative and the buyers. There were arrangements by FAIDA MaLi, District authority and cooperatives in same to contact tea blenders, local buyers like food processors and even exporters.

Buyers’ assembling and packaging node

Two organic buyers were known to be active from the two study areas, but they have only shown their confidence to buy ginger organic from Mnazi. These buyers were GFP and TAZOP. GFP joined organic ginger business in 2012 in the week the survey started and had registered 108 farmers but only TAZOP had actually, exported organic ginger sourcing. TAZOP had a collection centre in Tanga city where crops were assembled and packaged before they are shipped outside. TAZOP make about 3 visits every season to the farmers and farms. In the visit they what is done is making monitoring evaluation o see farmers are still observing organic standards. The second is to provide training and lastly to negotiate price. At this node farmers carry title of the goods until they are checked and accepted for packaging. Purchase arrangement though have been changing were organized where by TAZOP make visit and sit in the harvesting season with farmers and negotiate price. Once is agreed the farmers harvest chop and dry the ginger for about 4 to 6 days then ship it to Tanga some 200kilometers.

Other buyers such as tea blenders appear not in Same and Lushoto. Other players here are the certifiers and the buyers.

Note that all the above nodes are situated in Tanzania.

Importers node

These nodes are situated outside Tanzania. The certifiers, governments and international standards (codex alimentarius) national standards (such as the US NOP, the Japanese JAS or the Indian NOS) and regional level (e.g. EU-Regulation), as well as for private labels (Soil Association, Naturland, BIO SUISSE etc.) conditions are prevailing institutions (facilitators and rules of the game) that should hold for these node and affect the other above nodes in particular. This node is barely touched, in this research, as the unit of transaction analysis. Only necessary issues pertaining in this node were brought in discussion with care and precaution that much might have would be skipped as it is situated beyond the study setup. Internet helped to provide necessary information to discuss the necessary containments of transactions in this node

ACTORS

SMALLHOLDER FARMERS (SHF)/SMEs

Smallholder farmers are the principle producers of ginger in the study areas. They also involve in seeds preparation and marketing. It is once again claimed that 90% of the ginger is organically cultivated (TOAM, 2009). There are 326farmers who cultivate ginger organically. 68 farmers are certified 108 are in PGA in Mnazi organized to sell to GFP and 158 are in PGA in Mamba but they have no known buyers; whereas 218 farmers were active members o