A leap of faith– by the smallholder and the investor. Malawi Mangoes' innovative business model

Malawi Mangoes will be the first large-scale fruit processor in Malawi, and become one of the largest in Sub Saharan Africa. Some of the challenges of this start-up are typical, but some aspects of the business model are quite extraordinary.

Imagine asking smallholder farmers if they would like their fruit trees cut back so hard that they will have no fruit next season - based only on the promise of bigger fruit and a new market in years to come. You’d think it might be nigh on impossible – but it is core to the business model.

Imagine seeking finance for a processing factory that will source from thousands of farmers, taps into abundant global demand for fruit puree and provides an option for diversification and export in an economy that is desperate for both. You might think it would be fairly easy. But the assumption would be wrong.

It is worth exploring the Malawi Mangoes approach with both farmers and investors, as they shed light on the intricacies of inclusive business in agriculture.

Models for smallholder production

Once the processing factory is fully operational (2 lines running 22 hours a day, every day) it will require almost 100,000 MT of mangoes and bananas per year. As with any investment in shiny new plant, keeping it operational is key to generating a return. So securing sufficient fruit supply is also essential. What’s distinctive here is the attention being paid to models that will deliver this tonnage, particularly from smallholder farmers living in Salima District.

Malawi Mangoes aims for around half of their fruit supply to be sourced from smallholder farmers, and to grow the other half on their own farms.

Rather than adopt a model common to peanut, potatoes or sorghum - relying on local traders or an NGO to aggregate smallholder produce for them - they are building relationships directly with farmers. They have to – because farmers don’t yet grow the mango varieties they need for puree, and can’t put in the necessary disease mitigation controls for banana themselves. To create a supply of plump mangoes they offer to ‘top-work’ mature mango trees - drastically pruning them back, then grafting in new varieties. In two seasons the trees will produce new fruit and in four seasons’ time they should deliver a full harvest of large mangoes, instead of the local varieties that are currently sold – or remain unsold – in buckets on the roadside or even get left on the ground.

It is too soon to say ‘what worked’ in building farmer supply. But some strategies that aim to make it work are already clear:

1. Planning for step-by-step phasing. So far, farmers are opting to top-work an average of 8 trees each. But now they see them shooting again, they are happy for another batch to be done. So the target of 12 per farmer might have been unachievable if pushed in one go, but can be achieved over time.
2. Combining a multitude of options, for farmers and the company: the initial focus is on top-working trees, so as to generate a harvest for farmers and a supply for the factory in less than 2 years. But planting new trees around the perimeter of a plot will also be encouraged. This will take longer to generate supplies, but will eventually reach higher quantities (perhaps 50 trees per farmer) so generate greater impact.
3. Clear communication. The company is investing in farmer liaison and extension. There is already a draft Charter, which specifies what both parties can expect. There is work planned to develop buy-in, create ID cards, and develop training for both employees and farmers.
4. Purchase guarantee. Unusually, the risk of side-selling is small – farmers do not currently have other markets for the new varieties of mangoes they will produce. But is there a different risk of farmer supply exceeding the company’s demand? The model is built on fairly conservative estimates of supply and wastage. But what if the good news is that farmers can supply more? It would destroy the patiently-built trust if the company did not buy them. So Malawi Mangoes is clear: they will buy all the quality fruit that is offered and to ensure this success the company are already building relationships in the regional ‘fresh fruit’ markets (the markets to which Malawi Mangoes will be selling any excess fruit) which in turn could result in higher prices being offered to the farmers.

The benefits to smallholders are likely to be considerable. It is early to speculate on numbers. But we have enjoyed doing so. Projections depend on many variables. Current estimates are for a modest supplement to family income initially: perhaps $100 per harvest- for one or two thousand families fairly soon. But there is the prospect of cash injections into local households reaching into millions in years to come. Including local employment as well as fruit sales, local earnings could and should be running at over $4.5 million per year within a decade.

But investing in farmer liaison, top-working and planting is time-intensive. It costs. Is it cheaper than relying purely on buying land for commercial farming? Both require substantial investment – one in virgin land and water supply, the other in patiently building extension services, farmer skills and linkages. Smallholder supply is a great way to generate a top-worked harvest for the first couple of years of operation, and to lay the basis for long-term growth and expansion over a decade or more. But it is no easy option. It still needs to be financed.

For the company founders, relying purely on large-scale commercial farming was never an option - they maintain that “any business working in agriculture in Malawi must accept it is involved in an area of pivotal (indeed, existential) relevance to people’s lives and that therefore, to make the business itself a success, the ‘opportunity’ to share into that success must be made available”. Their model is therefore a blend of smallholder and own-farm supply. But for investors, this smallholder supply chain is a less familiar option. They will want to know, what exactly is the cost relative to the return?

Securing investment

Securing investment was hard. Securing domestic investment proved impossible. Discovering that took time. A few of the reasons were:

• Country risk: Malawi was just seen as too risky for this kind of investment.
• Profile and criteria: it’s easy to waste time with banks or funds that have criteria that don’t fit the business: ‘Glossy brochures suggest you tick the box. When you get into the process you find you don’t.’
• Terms: when it comes to negotiating terms for a loan, it may simply be impossible to agree.
• Although the commercial driver of the business is to exploit under-supply, the fact that no one else is supplying puree in the region makes it seem too novel, too risky, to banks.
• Domestic funds lack access to large amounts of foreign exchange, sufficient to make major investments.
• International development funds that will support inclusive business by actually investing in a company are few and far between. The major grant-givers of the world don’t, in general only ‘challenge funds’ do. Too many development finance institutions prefer to finance existing business for expansion or simply take too long to make their investment decisions.

The company has ended up with pure commercial equity for the major investment, likely to be supplemented by concessional funding (about 4% of total investment) from a donor-financed challenge fund. The investors in Malawi Mangoes have put money and trust in the management approach to a blended supply chain and ‘opportunity sharing’, as a basis for business success. But Management also know that it is an area that investors (and others) will be most critically looking at, to see if it really will work.

Outcomes look exciting though not yet secured. The only thing we can be sure of is this: if these projections turn into reality, there will be a great deal more interest in the business model, the returns, and the smallholder engagement strategy than just this blog.