Direct Cost Recovery from Services vs Crop Type
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Strength of Relationship 4/5
- Strong relationship between driver and outcome variables
- Results are consistent across analytical models used
- Few limitations regarding sample or indicator
Key Messages
FarmFit data reveals the direct cost recovery, or the standalone profitability of service provision, is much higher in food crops and/or loose value chains than in cash crops and/or tight value chains. This does not mean that the former are more commercially viable than the latter, as direct cost recovery is only part of the story. Rather, there are many indirect sources of value and these also differ across different types of value chains.
Nonetheless, our findings on the link between crop type and direct cost recovery are significant as they demonstrate clearly distinct approaches to the economics of smallholder farmer service delivery.
Our data suggests that these results are due to three main reasons:
Ability to access indirect sources of value Higher investments Farmer willingness to pay
Keep reading to find out more.
Understanding how direct cost recovery differs by type of value chain
FarmFit Insights Hub analysis finds that business models active in food crops have a significantly higher direct cost recovery, at around six times higher than models in cash crops (
In this section, we combine our analysis of
The data suggests there are three main clusters of business models when viewed through this lens:
- Food crop business models: With just a few exceptions, direct cost recovery of 50%+ is the norm.
- Subsidized cash crop business models: The overwhelming majority of models that do not (or barely) directly charge farmers for goods and services provided are active in cash crops.
- Cash crop models with direct cost recovery: A minority of cash crop models are noticeably different from other cash crop models, and recover at least half the cost of service delivery to farmers, with a few even making a profit based on direct cost recovery alone .
The analysis on this page dives deeper into the design and contextual drivers behind each of these three clusters of business models, and identifies practical recommendations for how businesses, investors, support organizations, donors and governments can help make these models more successful.
Link to other outcomes
When looking at the relationship between type of company and the other two outcomes analyzed in this Insights Hub, we find that:
- For
Service Delivery Cost per Farmer , costs (or investments) are a lot higher in food crops and loose value chains. Click here for more details. - For
Farmer Value Created , there is no significant difference in results. Click here for more details.
Diving deeper: What might explain these results?
The results have very important implications and should be interpreted from multiple angles. FarmFit data and analysis suggests that the results can be explained by 3 key factors. Clicking on each of these factors provides a longer overview of our thinking, including more supporting qualitative and quantitative insights.
Ability to access indirect sources of value – Businesses active in tight value chains and/or in cash crops tend to have access to more numerous and secure sources of indirect value, specifically in terms of their sourcing, marketing and compliance activities. These sources of value provide indirect returns to the company, reducing the need for direct cost recovery (charging farmers) and justifying subsidization of service delivery.Higher investments – Businesses active in food crops and/or loose value chains invest on average around twice as much on a per-farmer-basis. As high-cost models are more difficult to cross-subsidize, these businesses have much more incentive to charge farmers for services provided.Farmer willingness to pay – Certain services (such as training) are likely to be free to farmers, whereas support such as inputs/mechanization are not. Direct cost recovery is higher in models providing the latter types of services.
Implications – what does this mean for you?
Based on our findings to date on this topic, we see the following implications for different audiences:
- Assess and quantify the sources of indirect value for your company from working with smallholder farmers.
- Are there benefits for certification purposes?
- Are there benefits for marketing purposes?
- Are there benefits to your sourcing business?
- For companies in cash crops and tight value chains that currently subsidize service delivery, consider whether you should change your goods and services fees. Assess your value proposition to farmers to determine an appropriate rate to charge – this needs to be a price that is less than the value that your goods and services bring to farmers.
- If you perceive the cost of investing in smallholder farmer service delivery as too high to scale up your investments, consider whether adding to or expanding your current services can be achieved by charging farmers. Consider how your value proposition to farmers can be strengthened to make this possible, particularly through services like finance for which there tends to be a higher willingness to pay and are correlated with both higher effectiveness and higher cost recovery.
- Evaluate whether your investment strategy could be assigning too high a risk to food crop and loose value chain models. Historically, investors have tended to view investments in food crops and loose value chains as riskier, as company size is often smaller and side-selling often higher. This demands greater risk-adjusted returns for the investment to be judged feasible. Our data suggests that direct cost recovery in these models is a lot higher than those in cash crops and tight value chains, potentially making them more attractive investees than sometimes assumed.
- If you are investing in companies with very low direct cost recovery, encourage and support your investees in assessing, quantifying and monetizing their direct (charging farmers) and indirect (to the sourcing business, as sustainability returns, etc.) sources of value.
- Consider whether your support helps increase the overall service delivery investment per farmer. FarmFit data suggests that more heavily subsidized models tend to invest less on a per farmer basis. Evaluate whether your support to the private sector is driving commercial viability and encouraging rather than inhibiting larger investment.
- Encourage the development of indirect sources of value in food crops: this could be regulatory requirements for more sustainable products (including requirements on farmer well-being and livelihoods as well as social and environmental protection) and consumer awareness on these topics. This can help create additional sources of value for businesses active in food crops.
- Support grantees and partners organization in assessing, quantifying and monetizing their direct and indirect sources of value in working with smallholder farmers.
- Organize learning exchanges between companies active in both food and cash crops to share experiences and gain inspiration. For example, these could focus on how and where to find and monetize indirect sources of value or how to design a model in which farmers have the capacity and willingness to pay for services.
- Consider how regulations and public consumer awareness campaigns can create indirect sources of value for businesses and encourage them to invest more in smallholder farmers. Examples could be raising awareness among consumers of sustainability issues or encouraging the development of certifications or other standards that promote (economically, socially and environmentally) sustainable produce. However, consider that such interventions need to be well-designed otherwise they can distort the market or do harm in other ways. Ways of mitigating such risks include:
- Hold consultations with different stakeholders, including the private sector, farmers, civil society and consumers
- Benchmark learnings from other countries
- Explore ways in which you can encourage access to finance for smallholder farmers, such as encouraging the emergence of innovative digital finance products and strengthening digital infrastructure, while introducing regulations that adequately protect the data and privacy of farmers. This can unlock more investments in smallholder farmers while improving direct cost recovery – by optimizing the (separate) timing of receipt of goods and services, and payment.
Reflections on data limitations and further research
The FarmFit Hub is an interactive resource that we are constantly updating with new data, new analysis, validation by our partners, etc. For the results on this page, we would like to emphasize the following:
Major caveats and limitations of our current approach
Limited (but growing) visibility into indirect sources of value
Updating these findings: Next steps
Deep dive into high direct cost recovery cash crop models
Suggestions for additional research by our peers and partners
Deep dive into specific contexts, sectors, geographies or value chains
