maize moisture metre chapter three farm investments and ......farm investments and their financing...
TRANSCRIPT
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Chapter Three
Farm Investments and their Financing
Maize moisture metre
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3.1 Boosting Farm Income by Investment in Small-scale Irrigation1
Section 1 Vegetable Demand and the Development of Agriculture in Uganda2
Uganda’s farming background is rich. Most Ugandans, at some point of their lives, have been in touch with an agriculture activity. However, the agriculture sector is characterized by subsistence farming methods with low yields, a situation that is mostly the result of very low usage of improved inputs and of modern technology. Moreover, production remains highly dependent on weather conditions3. Because of low productivity and the high
vulnerability to external shocks, small scale agriculture is not generally regarded as a worthwhile income-generating activity.
Nevertheless, the potential to boost farming income is great. Uganda’s weather is temperate, with fairly constant temperatures throughout the year and an average daily maximum of 25°C. Water is plentiful and 90 percent of the soil is categorized as fertile enough for farming activities.
1 Author: Maya Hirsch, FSD and University of Cologne. The author acknowledges the immense contribution of Agaru SACCO board, management, staff and members to the development of this pilot and the article.
2 Editors Note: Irrigated crop production can be difficult and intended growers are urged to seek expert advice. 3 In Uganda 96% of the farmers still rely solely on rainfall and are therefore extremely vulnerable to changing weather
patterns (UNHS 2005/2006).
Pilot irrigation site in Kalongo, Northern Uganda
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4 FSD investigations in local markets in Kampala and Kalongo, during the years 2009 and 2010.
On the demand side, there have been significant increases in recent years, including during the year to which this Yearbook relates – 2010. With stability and peace having returned to the Northern Uganda, people have left the IDP camps and returned to their villages after decades. The major towns in the north and mid-north, Gulu, Kitgum and Lira, have seen rapid growth and this has caused a significant increase in the demand for food, including for fresh vegetables and fruit. In the meantime, regional agriculture production remains focused on relatively weather-resistant crops such as rice, sunflower, maize, simsim (sesame) and, especially, cassava. Due to apparently changing weather patterns over recent years and incidence of drought, the increasing demand for vegetables has not been met by increased supply. Even though water sources are plentiful and water tables high, there is a shortage of knowledge on irrigation and water conservation. This stands in the way of successful vegetable production.
The strong demand for vegetables exists not only in northern towns, such as those mentioned above, but also in Southern Sudan. Currently these markets are being served by production from Mbale and the South-Eastern Uganda. On a daily basis vegetables (mainly tomatoes, onions, cabbages and eggplant) are transported hundreds of kilometers to reach the highly profitable markets in the north. Due to the high cost of transportation and the long distances, vegetables reach the north with extremely inflated prices, making them an almost luxury good. Tomatoes cost twice as much as they do in central regions, while eggplants go for up to four times and cabbages triple the prices for which they can be bought in Kampala, see Table 1: Vegetable price differences between Kampala and Kalongo below. This imbalance reveals the scope for northern farmers to generate significant income through vegetable production.
The main problem in moving towards commercially orientated agriculture production in these regions is the lack of farming knowledge and suitable technologies. But there have been other impediments. Farmers in this part of the country were highly affected by the insurgency and have returned to their
homes and villages after many years or even decades finding their land overgrown. They then face the high costs for bush clearing and land opening. These tasks, coupled with changing weather patterns, are the most common limitations noted by farmers as constraints towards commercial farm production.
Vegetable Kampala Market Price Kalongo Market Price Price DifferenceKampala v/s Kalongo
Irish potatoes
Onion
Cabbage
Eggplant
Tomatoes
800 UGX/kg
1,500 UGX/kg
500 UGX/kg
200 UGX/piece
500 UGX/2 pieces
1,200 UGX/kg
3,400 UGX/kg
1,800 UGX/kg
800 UGX/piece
500 UGX/4 pieces
+150%
+226%
+360%
+400%
+200%
Table 1: Vegetable Price Differences Between Kampala and Kalongo4
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Table 2: Irrigated Cabbage Production
Table 3: Irrigated Onion Production
Vegetable Quantity Unit Unit Price UGX
Selling Price UGX
Selling No. kg
GrossReturn UGX
GrossMargin UGX
Total Expenditure UGX
20,000
2.5
300
4
each
litres
kg
man months
15
70,000
1,800
30,000
Kampala price - kg
Northern price - kg
300,000
175,000
540,000
120,000
1,135,000
Kampala price - kg
Northern price - kg
3,750
3,750
1,500
2,200
5,625,000
8,250,000
4,490,000
7,115,000
Seedlings
Chemicals
Fertilizer
Labour
Input costs
Irrigated Production of Onions on ¼ acre for one growing season
However, by intensifying production on a small area, such as is required for irrigated vegetable production, the cost of land opening becomes less of a hurdle. Investment in accessing water, and irrigation equipment, coupled with the use of appropriate cropping practices, means that it is possible to produce substantial volumes from a small piece of land (only 1/4 acre). Moreover, the irrigation input means that the production can be achieved independent of weather and season of the year.
Section 2 What are the Advantages of Irrigation?
Those farmers who can purchase the necessary equipment and who can master the additional tasks and techniques that successful irrigated farming demands can enjoy a very worthwhile investment. Gross margin analyses for three irrigated vegetable crops are presented in the tabulations that follow.
Table 4: Irrigated Tomato Production
Vegetable Quantity
Table 4: Irrigated Tomato Production
Unit Unit Price UGX
Selling Price UGX
Selling No. kg
GrossReturn UGX
GrossMargin UGX
Total Expenditure UGX
300,000
300,000
300,000
120,000
1,200,000
Kampala price - kg
Northern price - kg
700
1,200
5,000
5,000
3,500,000
6,000,000
2,300,000
4,800,000
Seedlings
Chemicals
Fertilizer
Labour
Input costs
250
300,000
300,000
30,000
Kampala price - kg
Northern price - kg
1,200
1
1
4
each
litres
kg
man months
Vegetable Quantity
Irrigated Production of Cabbages on ¼ acre for one growing season
Unit Unit Price UGX
Selling Price UGX
Selling No. kg
GrossReturn UGX
GrossMargin UGX
Total Expenditure UGX
335,000
105,000
270,000
120,000
830,000
Kampala price - kg
Northern price - kg
6,030
6,030
500
1,000
3,015,000
6,030,000
2,185,000
5,200,000
Seedlings
Chemicals
Fertilizer
Labour
Input costs
50
70,000
1,800
30,000
Kampala price - kg
Northern price - kg
6,700
1.5
150
4
each
litres
kg
man months
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The data presented in Tables 2 – 4 indicate that irrigated production of vegetables generates attractive gross margin returns (gross income before deduction of fixed and financing costs). The returns are especially good in the North of Uganda, due to higher market prices there for these fresh produce items.
Section 3 A Pilot Irrigation Installation in 2010
With the aim of testing the real potential and viability of small scale irrigation for vegetable production in the northern regions a pilot site was installed in Kalongo (Agago District) in August 2010. In order to test not only production quantities, but also user friendliness and irrigation technology uptake among rural farmers, a ¼ acre piece of land was equipped with a drip irrigation system, and cabbages, onions and tomatoes planted. Since neither small scale irrigation nor commercial vegetable growing is common in these regions, the biggest challenge has been to introduce the new technologies, and to facilitate both changes to farming practices and uptake of new business opportunities based on the most common economic activity in this area - agriculture.
The positive demand for fresh vegetables, and the attractive prices for growers, have already been established above. The remaining prerequisites for a successful investment on small scale irrigation for commercial purposes are:
• a relatively small area (e.g. ¼ acre) offertile soil,
• basicfarmingknowledgeandenthusiasmon the part of the grower,
• wateraccess,• abilityofthegrowertoobtainfinancefor
the investment. In Kalongo, as in so many areas of Northern Uganda, access to water is relatively easy, as not only are there many bodies of water, but also very high water tables, which means water is easily pumped for irrigation purposes. Moreover, at the volumes used, no special water permits are required. The volume of water required for ¼ acre of crop is about 1,000 litres per day, given average weather conditions.
There are three main methods for applying irrigation water to crops5:
• Overheadspraying• Flood–surfaceapplication• Drip–preciseapplicationtorootzones
In view of the main characteristics of many Ugandan farmers (remote areas, water scarcity and no access to a reliable energy source) the drip irrigation technology offers the most convenient alternative. Due to its low energy requirement and high water efficiency it is perfectly suitable for remote areas. The drip system can be gravity driven, which allows usage in areas with no access to electricity or in places where the electricity grid is not reliable enough for economic activities.
The water efficiency of drip systems reaches 95 percent, minimizing the growth of weeds through irrigating individually the root of each crop plant, giving absolutely no water to the weeds in between. It is relatively cheap and in case of problems relatively simple to repair. A further advantage of drip irrigation is that fertigation becomes possible through mixing the fertilizers directly into the water, enabling an efficient use of fertilizers
4 FSD investigations in local markets in Kampala and Kalongo, during the years 2009 and 2010. 5 Editors’ Note: See also Agricultural Finance Yearbook 2009, pp. 52 – 61 for an article by Eng. John Ssemakula. This
covers irrigation options in Uganda in a comprehensive manner.
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Table 5 A Breakdown of Costs at the Pilot Irrigation Site, Kalongo
Item Quantity
1
2
3
4
5
1
977
2,432
1,602
Price
2,400,000
250
15
50
Total CostUGX
2,400,000
244,250
36,480
80,100
608,100
239,850
180,000
3,788,780
Drip Irrigation System
Seedlings
Tomato
Onion
Cabbage
Agrochemicals* (anticaterpillar, insecticide, fungicide)
Fertilizers* (DAP, CAN, Polyfeed)
Tomato strings
TOTAL
* Variable costs
in which, again, only the crop plants are reached.
For growers investing in drip irrigation systems it is recommended to focus on the use of improved inputs, such as quality seedlings, pesticides and fertilizers. It is advisable to consider this additional investment to maximize revenues through minimizing risks (pests, caterpillar, fungus, etc.) in the small scale vegetable farming business.
The pilot ¼ acre was planted with tomatoes on one half of the land, and cabbages and onions on the other half, in two equal parts. The total investment costs (equipment and crop) were less than UGX 4m, two thirds of this
being longer term investment in equipment, and one third the short term investment in the improved inputs for the crop – planting materials, fertilizer, pesticides and labour. Please see Table 5 below for details.
The investment in improved inputs can vary considerably depending on the input quality and crops to be planted. In the case of the Kalongo pilot site, high quality inputs were used. Besides the use of quality inputs, the experience in Kalongo has shown that good farm management is essential for achieving a productive and profitable outcome. Daily monitoring of the crops is a must. Risk mitigation is crucial. Early treatment of pest and disease problems helps to avoid big losses.
Section 4 Pumping Water
Even though drip irrigation itself is gravity led, water has to be conveyed to a water tank which is placed at a height of 1.5 m. above ground level. This gives the necessary head to facilitate gravity irrigation. There are different ways of bringing the water from its access point into the tank. The alternatives vary highly in cost and efficiency, with
advantages and disadvantages depending on the site characteristics, distances, given labor force and water access.
For the Kalongo site a solar driven water pump was used, since sunshine hours are good in this part of the country, and this alternative certainly saves labour. However, a solar-powered pump is the most expensive option, almost doubling investment costs. Nevertheless, solar driven water pumps are the worldwide market-leading technology for
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small scale water pumping in remote areas. In Uganda the market penetration of solar-powered pumps is low and the availabliity of trained technicians in Northern Uganda are in short supply. This focuses on the need for the farmer/investor to have a relationship with an experienced company that can provide reliable customer support, so as to avoid inconveniences which could affect production.
By contrast to the fully automated solar pump, the treadle pump option is very much cheaper. It is best suited to situations where the water access point is relatively close to the water tank and where labor is readily available to pump 1,000 litres/day.
The cheapest but most labor intensive option is human transport. In this case the water is carried manually with jerry cans from its access point to the tank. Since labor force is cheap in many rural regions, this solution is expected to become the most common one. Other alternatives like water harvest from the roof, generator driven pumps and others can be considered depending on the site characteristics and access to fuel.
Section 5 Financing the Investment in Irrigation
The financial viability of investment in irrigation has been demonstrated, but how can such an investment be financed when the farmer has limited capital?
In the following Excel tabulation, figures are presented in order to show how an “irrigation loan” might operate. The figures used in Table 6 were based on the Kalongo pilot experience. Analyzing its profitability reveals that this investment represents
a business opportunity for both sides: borrowers/farmers and lenders/financial institutions.
With irrigation, a major cause of agricultural production losses, i.e. rainfall failure, can be addressed. This may well prompt financial institutions to see some agricultural loans with new eyes, due to opportunities for better on-farm risk management leading to enhanced volumes of effective demand for loans.
Section 6 A Model Loan
In the following we assume a loan for 90 percent of the total investment costs, as listed above for the Kalongo example, in order to explore the real scope of such an investment and hence shed some light on the eventual effective demand for irrigation loans, especially in Northern Uganda.
As is common for agricultural term loans, the loan period is set at 24 months, with an interest rate of 18 percent per annum (on a declining basis). Further we assume that every 4 months the ¼ acre is harvested and that for each planting season costs for new seedlings and inputs are incurred. Since seedlings and inputs for the first season are considered in the initial investment, the gross margin income for the first harvest period is higher than that of subsequent cropping seasons. To ease presentation we have withdrawn the seasonal input costs, starting in season two, directly from the gross margin income, so that these expenses are considered throughout the analysis. Additionally we have assumed that in all seasons exactly the same crops and quantities are planted, which makes the seasonal input costs and harvest income identical. Since irrigation makes
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off-season production possible we base the calculation on three harvest seasons per year.
Considering the premises set above, the farmer requires a loan of UGX 3.4m for his small-scale vegetable growing business. Experience from financial institutions has clearly shown that for agricultural lending, monthly repayments are not convenient, due to the seasonal nature of the cash flows generated. Accordingly a season-dependent payment is assumed.
Despite the fact that seasonal repayments mean larger amounts than would be the case with monthly repayments, they are never greater than 20 percent of the gross margin, leaving the farmer/family with a worthwhile, positive cash flow to meet other expenditures, such as private consumption, further investments and reserves in the case of production losses. During the growing season only the interest payments have to be made; these do not exceed UGX 51,000 per month.
When observing the cumulative monthly cash flows, one can appreciate that the
capital growth is fast and attractive. The figures are promising and this analysis shows the high profitability of such an investment, which enables a small scale farmer to earn up to UGX 11m in only two years, when considering low vegetable prices whilst higher prices as in the northern part of the country allows an income of up to UGX 24m in the same time period.
However, these figures and the success of such a business are highly dependent on good farm management and an organized financial administration. Further, even though first mover advantages are to be expected, it is likely that through increasing vegetable supply, prices might fall substantially in the mid/long term. Diversification of production should be the first reaction to this, and in any case, it is likely to be some time before vegetable production exceeds regional demand,
For the years to come, investing in small scale irrigation for vegetable production is a promising and highly profitable business, not only for farmers, but also for financial institutions.
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Model Irrigation Loan6
Model Irrigation Loan
Drip Irrigation
System
Seedlings
Fertilizers/
Agrochemicals
Tomato strings
Total Investment
costs
Loan for 90% of
Total Investment
Costs
Crop sales /harvest
Crop sales /harvest
Crop sales /harvest
Crop sales /harvest
Crop sales /harvest
Crop sales /harvest
2,400,000
360,830
847,950
180,000
3,788,780
3,409,902
3,409,902
3,409,902
3,409,902
2,727,922
2,727,922
2,727,922
2,727,922
2,045,941
2,045,941
2,045,941
2,045,941
1,534,456
1,534,456
1,534,456
1,534,456
1,022,971
1,022,971
1,022,971
1,022,971
511,485
511,485
511,485
511,485
0
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
51,149
51,149
51,149
51,149
40,919
40,919
40,919
40,919
30,689
30,689
30,689
30,689
38,361
38,361
38,361
38,361
25,574
25,574
25,574
25,574
12,787
12,787
12,787
12,787
0
797,917
51,149
51,149
51,149
51,149
40,919
40,919
40,919
40,919
30,689
30,689
30,689
30,689
30,689
30,689
30,689
30,689
25,574
25,574
25,574
25,574
12,787
12,787
12,787
12,787
0
797,917
681,980
681,980
511,485
511,485
511,485
511,485
3,409,902
681,980
681,980
511,485
511,485
511,485
511,485
3,409,902
3,778,500
2,389,720
2,389,720
2,389,720
2,389,720
2,389,720
15,727,100
5,865,000
4,476,220
4,476,220
4,476,220
4,476,220
4,476,220
28,246,100
-51,149
-51,149
-51,149
-3,727,351
-722,899
-40,919
-40,919
2,348,801
-712,670
-30,689
-30,689
2,359,031
-549,847
-38,361
-38,361
2,351,359
-537,060
-25,574
-25,574
2,364,146
-524,272
-12,787
-12,787
2,376,933
11,519,281
-51,149
-102,297
-153,446
3,573,906
2,851,007
2,810,088
2,769,169
5,117,970
4,405,301
4,374,612
4,343,922
6,702,953
6,153,107
6,114,745
6,075,884
8,427,742
7,890,683
7,865,109
7.839,534
10,203,680
9,679,408
9,666,620
9,653,833
12,030,766
-51,149
51,149
51,149
51,149
40,919
40,919
40,919
40,919
30,689
30,689
30,689
30,689
38,361
38,361
38,361
38,361
25,574
25,574
25,574
25,574
12,787
12,787
12,787
12,787
0
797,917
-51,149
-51,149
-51,149
5,813,851
-722,899
-40,919
-40,919
4,435,301
-712,670
-30,689
-30,689
4,445,531
-549,847
-38,361
-38,361
4,437,859
-537,060
-25,574
-25,574
4,450,646
-524,272
-12,787
-12,787
4,463,433
-511,485
24,038,281
-51,149
-102,297
-153,446
5,660,406
4,937,507
4,896,588
4,855,669
9,290,970
8,578,301
8,547,612
8,516,922
12,962,453
12,412,607
12,374,245
12,335,884
16,773,742
16,236,683
16,211,109
16,185,534
20,636,180
20,111,908
20,099,120
20,086,333
24,549,766
24,038,281
Kampala Case Lira/Kalongo/Kitgum Case
Interest PrincipalGross
Margin Income
NetIncome
Monthly CashFlow
CumulativeInterest Principal
Gross Margin Income
NetIncome
Monthly CashFlow Cumulative
Lender Borrower Borrower
Month Item LoanLedger
Interestrate
Interest Recieved
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Totals
6 Editors’ Note: It is worth mentioning that the lending institution for the pilot operates an internal reserve fund in case of crop loss through hail. This is potentially very important when concentrated production is concerned, as is the case with irrigated vegetables. Here a significant investment occupies a small land area, and therefore would be vulnerable in the event of a hail strike, since hail often affects a limited geographical area. In the event that the irrigation loan product portfolio increases substantially in size, the lender will seek excess-of-loss cover (similar to reinsurance) from an insurance company. Local insurers have already expressed interest in offering such a product.
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3.2 Profit or Loss with Credit-Financed Investments in Farm Machinery?1
of various types of farm machinery, together with other stakeholders. Traditionally, in Uganda, use of farm machinery has largely been restricted to land opening (or field ploughing)2, which accounts for approximately 80 percent of farm machinery operations, with the remaining 20 percent shared between planting, weeding, off-field transport and on-farm post-harvest operations such as shelling, threshing, grading, etc. It is in this context that the discussion below is broadened to address the versatile operations for which farm machinery can
Section 1 Overview
Deployment and use of farm machinery and equipment, particularly motor-powered, is an important integral component of increasing production and productivity in agriculture. It can improve the competitiveness of Ugandan agricultural products and reduce drudgery for those working the land.
The presentation in this article is specifically restricted to on-farm motor-powered machinery for production and post-harvest handling operations, within agricultural value chains. The information used was generated from a diversified sample of owners and users, suppliers and financiers
1 Author: Asaph Besigye, Inspired Associates 2 Except for conservation tillage, the practice of which is nominal in Uganda.
A power tiller in use in Northern Uganda
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be deployed, to generate economic benefits beyond land opening.
The capacity of the tractor for use in land opening is dictated, among others, by the nature and timing of the land opening operation to be accomplished and the financial ability to acquire the machinery. Tractors available for land opening include;
• Single axle tractors (power tillers) withhorse power (hp) ranging between 8 and 12.
•Therearealso4x2tractorstypically38to60 hp and 4x4 tractors of up to 110 hp3.
• Beyondthese,largeestatesmayhavelargeequipment such as tracked bulldozers for bush clearing very thick vegetation.
The cost ranges from as low as UGX 4m for
Table 1: Prices of Selected Tractors and Tractor Implements
an 8 hp power tiller (fitted with a plough) to UGX 45m for a 38 hp tractor and UGX 130m for a 110 hp tractor (with no plough).
Of course, the cost depends on the brand and condition of the equipment, and there are both new and reconditioned items of machinery on the market. The famous brands such as Massey Ferguson and Honda are more costly compared to other brands like Sonalika, Mahindra, Renault, Kubota, Yanmar, etc whose presence on the Ugandan market is still relatively new.
Beyond the tractor there is need for a range of implements and accessories, if the tractor is to generate maximum economic benefit. These may include cultivator, harrow, planter, ridger, sub-soiler, tractor trailer, boom sprayer, grain sheller, thresher, etc. Again, the costs of these vary with size, quality and source of the implement.
Item New cost UShs, retail in Kampala
Single Axle Honda Tractor - 8 hp (with plough)
Massey Ferguson (MF) Tractor – 4x2 38 hp (with no plough)
MF Tractor – 4x4 110 hp
Plough
Harrow
Planter – 6 rows
Tractor Trailer – 12 ton
4,000,000
45,000,000
130,000,000
9,000,000
18,000,000
30,000,000
18,000,000
3 A 4x2 is a four wheel tractor, with just the rear wheels driving; a 4x4 machine has all four wheels driving.
Examples are given in Table 1 above. The plough, harrow, planter and tractor trailer are suitable for a 70 - 90 h.p. 4 wheel tractor.
There are, of course, other items of farm machinery such as: harvesters and combine harvesters, hullers, coffee pulpers, chaff cutters, tea pluckers, driers, cleaners, milkers and milk coolers which also require specific mention. The demand for these on the market depends on the intensity
of the farming activity of the relevant agricultural enterprise and their perceived economic benefit by the users. Some of this equipment can be operated by mounting it on the tractor, and thus increasing the versatility of the tractor and optimizing its economic return. Others use a standalone power source. Beyond the expense of acquisition, the other major concern in the use of farm machinery
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is the operating cost. Costs of operation vary, among others, with the capacity (hp) of the equipment, intensity of the work done – which is often dictated by the nature of the terrain, the maintenance and handling of the equipment and of course its age and condition. Such is the variance in operating costs that it would not serve any purpose to provide a uniform hourly cost of operating equipment, for the discussion in this article.
However, the major cost components are the fuel, labour and maintenance. For ex-ample a well maintained 8 hp power tiller consumes about 4 litres of diesel to plough one acre on a good level field while a 90 hp tractor requires 8 to 9 litres of diesel to plough one acre. Labour costs depend on the skills, competence and availability of the operators, while maintenance costs per hour depend on the frequency, extent and quality of maintenance.
Section 2 Farm Machinery Usage
In summary, power tillers are suited to smaller areas and to scattered holdings. They do not cope well with hilly or muddy terrain. Larger horsepower machines, 2x2 or 4x4, suit larger areas.
Deployment and use of farm machinery is primarily intended to enhance productivity and generate profit for both the owner and user. Productivity of the farm machinery, as discussed in various sections of this article, is a function of proper evaluation of its suitability for a given operation (both type and scale), the age of the machinery and the degree of care in handling and maintenance. These particularly hinge on the entrepreneurial traits of the machinery owner or user.
Farm machinery has a limited economic life and thus must be put to appropriate
use and also must be handled with uncompromised maximum care. Oversight by the owner during both own use and hire out operations, timely servicing, sheltering while the machinery is not performing any operation and proper fuel and lubricant levels are all very important to enhance the productivity of the farm machinery.
Profitability from the use of farm machinery is clearly related to the productivity and versatility of use of that machinery as discussed above. In case of hiring out, there is need for proper cost analysis, including all the necessary variables such as fuel, operator costs, maintenance and repair costs, lubricants, depreciation, financing costs and expected margin. These are all relevant in determining the hire cost in order to ensure full recovery and realize profit for the necessary future replacement of the machinery or even expanding the fleet. Unfortunately this is rarely, if at all, done.
The driving factors in machinery hire tend to be restricted to fuel and operator labour costs and what other competitors are charging as yardsticks. There are currently many farm machinery hire opportunities with individual farmers, NAADS, NGOs, tea and sugar estates for their outgrower operations, BAT, Northern Uganda Development and Recovery Plan, etc. With proper planning and costing, farm machinery hire services should realize profits. Without proper costing, one could not authoritatively tell whether the current hire charge of UGX 70,000 to UGX 80,000 for 4x4 tractors and UGX 60,000 for power tillers per acre is profitable for the owner of the machinery.
Operator training4 is a critical requirement in the use of farm machinery. Major suppliers of equipment provide, for clients who purchase equipment, a complementary package of training for operators. Similarly
4 Training must be for the operator and not only for the owner.
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MAAIF’s Agricultural Engineering and Appropriate Technology Institute (AEATRI) provides training for the equipment operators but this is on demand and on a cost recovery basis. The response from a number of equipment owners is reported to be good.
Besides the equipment operators, local artisans and blacksmiths who fabricate parts for farm equipment and local mechanics play an important role in enhancing the productivity and economic life of farm equipment. Seldom do the skills of these actors match the requirements of their tasks, clearly they need training. As in the case of equipment operators, AEATRI provides tailor-made training for artisans in order to enable them to fabricate quality parts of standard size and in reasonable quantities. Training is also offered for tractor mechanics. The duration of the training varies with the skills capacity of the trainees, level of education and the objective to be achieved from the training.
All the above factors, plus location and the ease of access by owners and users of farm machinery to good quality services and spares is a very important requirement for lowering machinery downtime and reducing maintenance and repair costs.
Section 3 Financing Investments in Farm Machinery
Depending on the intended operational usage and thus the type and capacity requirements, investment in farm machinery involves substantial expenditure as earlier illustrated. This therefore necessitates a well thought out financing
plan. Realistically such a plan is dictated by the availability of own funds, accessibility to external financing and the projected cash flows to be generated by the machinery to be acquired.
Two options are pursued by individuals and entities acquiring farm machinery. The first option is total financing using own resources. This of course is only feasible where the investor has accumulated sufficient financial resources and does not require debt. Included in this group of purchasers are estates, cooperatives and farmers’ groups, government departments such as prison farms and individuals. Though this practice has for a long time been the norm because of previously inaccessible bank financing, especially term credit, the ownership of machinery acquired through this means is still limited.
The second option is acquisition by debt, either for part or full financing. Many banks in Uganda are currently offering asset financing products that enable clients to acquire farm machinery. The facilities include loans and leases and are provided according to the needs and situation of the clients. The introduction and expansion of asset financing by financial institutions has been a tremendous achievement compared to the past when financing for agriculture in general by banks was a tough task and access to term finance was a nightmare.
Loan financing for machinery encompasses short and medium term financial facilities, depending on the cost of the machinery and the repayment capacity of the borrower. The average loan duration stretches from one to ten years. The loans require collateral, often with value well in excess of the loan amount and of readily marketable quality. Preference for collateral has therefore tended to favour urban-based properties,
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thus potentially excluding rural clients who dominate the demand for farm machinery. Under the loan financing arrangement the ownership of the asset vests in the borrower and the lender has limited or no control on its usage, maintenance and even disposition.
In order to address this weakness, several financial institutions offer lease products whereby the ownership of the asset remains with the lending institution (the lessor), though its usage is by the borrower (the lessee). The ownership of the asset is passed on to the lessee at the end of the lease period when all the rental instalments have been fully paid and when the borrower at that time pays a nominal amount to the lender for taking ownership of the asset. Thus almost all lease facilities in Uganda are finance leases and not operating leases5.
Lease access requirements are less stringent than those for loans since the lender maintains ownership of the asset and thus can easily repossess and re-lease it to another borrower if the initial lessee defaults on payments or misuses the asset. The portfolio of equipment that can be acquired under leasing includes small, medium and large items.
Thus, although in the past leasing targeted expensive assets, there is now a clear move by financial institutions to downscale and thus cast the leasing net more broadly to widen the clientele for this product. For example Centenary Bank leases assets with values as low as UGX 100,000. Evidence from a number of equipment suppliers who are partnering with financial institutions indicates that equipment sales have increased as a result of the introduction of leasing facilities, compared to the past, when only loan facilities were accessible.
Of course, leasing as opposed to straight borrowing comes with a number of conditions. These mean additional cost to the borrower. The leased asset must be maintained under a service agreement with a competent service provider whose presence, and thus accessibility, in a given locality may not be guaranteed.
As such, the service tends to be more costly than under open market service acquisition and there are potential delays for repairs, even minor ones, as the user of the equipment must wait for the contracted service provider as opposed to using anyone who might be available. In leasing contracts, as in straight borrowing, the lessee/borrower is required to provide a downpayment of 10 to 20 percent of the cost of the asset.
Pricing of asset finance facilities varies between financial institutions and also according to available credit lines. Under commercial lending terms by the banks interest rates currently range between 18 to 26 percent p.a. of the credit amount for both loans and leases, depending on the risk rating of the client. In addition, there is a commitment fee of 1 to 2 percent of the total credit amount, paid up front, on approval of the application. Clients are required to have the equipment comprehensively insured during the tenure of credit. In the case of the Government Agricultural Credit Fund (see Article 1.3 in this Yearbook) the interest rate for agricultural equipment, including farm machinery, was capped at 10 percent p.a for the first tranche during 2010, rising to 12 percent for the second tranche in 2011.
Under both loan and lease financing, the repayment structuring varies from one financial institution to another. Many financial institutions structure
5 See also Obara, Andrew (2008) ‘Will Leasing Boost Agricultural Finance?’ pp 22-24 in Agricultural Finance Yearbook 2008 Bank of Uganda/Plan for the Modernization of Agriculture, Kampala.
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the repayment so as to require uniform monthly instalments. This can often become burdensome to the borrowers during the low cash-flow periods, such as when the machinery is not economically deployed. This might be in the case of the off-ploughing window or prior to the harvest and sale of the crop when the machinery is deployed for the owner’s farm operations. Also there are instances where the machinery is contracted out to entities such as sugar factories and BAT for ploughing outgrower fields or to NAADS and NGOs, whose payments may not match the financing repayment structure. In such cases there have been instances of attempts to attach collateral and to recover the asset in the case of leasing by the financial institution.
However, there are financial institutions which structure the repayment more sensibly, in accordance with the cash flow generating prospects. In such instances the cases of repayment arrears are minimal. Thus the latter approach is clearly better. Only by gearing repayment obligations to expected cash flows can substantial progress be made in steering the agenda for farm mechanization in Uganda.
Section 4 Current Issues related to Suitability of Tractors on the Market
As in the cases of use of other motor powered equipment, farm machinery has many issues relating to quality. For purposes of easy analysis, these issues can best be grouped into 3 categories.
First are those relating to technical aspects in terms of suitability to local soil conditions. Some areas of Uganda, where tractor mechanization is growing e.g. in the North, have issues with large numbers of stumps and rocks, which need to be cleared or avoided if the hydraulic systems of the machines are not to be stressed beyond their design capacity. Some tractors on the market are from countries where well-cultivated soils, free of obstructions, are the norm. Users of tractors on newly-opened land should be well aware of the need for great care with all models of tractor, but especially with those that are designed and built for favourable land conditions. Any application of machinery for an operation without evaluating the appropriate requirements to perform that operation can lead to unsatisfactory performance and may be wrongly blamed on poor quality.
Table 2 Typical lease agreement for acquisition of a tractor.
Item Cash price Lease payments
90 h.p. tractor
Lease down payment
Monthly payment
Period
Totals
75,150,000
75,150,000
7,500,000
1,446,000
60 months
94,260,0006
6 In addition to the lease payments the lessor will insist on the machine being insured. In this example, over the five years of the lease, insurance premiums in total might amount to an additional UGX 6,122,000. At the end of the lease period the lessee might expect to be able to take full ownership for an additional payment of 5 percent of the initial price – in this example, UGX 3,757,000.
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Machinery which is tested for suitability before it is marketed has fewer, if any, quality-related problems. Testing helps to identify any major or minor defects for necessary adjustment and rectification before use. A number of machinery vendors are having their equipment tested and their products are generally performing well. However, operators of machinery that comes on the market without being tested are experiencing many problems in terms of operational efficiency, break down, high operational costs, etc. This point is taken up in Section 5 on the next page.
Power tillers are a special case. They are suitable for use in relatively flat areas with light or sandy soil. They are not suited to use on heavy soils, or on sloping or steep terrain. Once deployed for use in the latter cases, operators complain of poor performance and may erroneously attribute this to quality problems.
Second, there is the issue of the availability and affordability of spare parts. Cases have been encountered where machinery has been abandoned and left to waste for lack of spares. It is also a fact that in a number of instances major parts for farm machinery have had to be sourced from Nairobi. This of course delays the repair, increases downtime and may result in financial loss due to postponement of the farm activity to be accomplished, or loss of potential hire revenue. Moreover, many users, and even machinery dealers, contend that new spare parts are very expensive. This leads owners to resort to improvising with substandard used parts, even from different makes and/or those fabricated by local artisans.
Third, as for implements, it is obvious that any machine without the necessary implements cannot be optimally used. A tractor (and power tiller) is a versatile source
of power and can be utilised for many and varied operations, provided the implements and equipment are available. When this is the case then the owner is in a position to maximize its revenue generating potential. Interestingly, many people have perceived farm tractors as specifically limited to land opening or ploughing and harrowing, and have thus ignored their potential for performing other major functions both on-the-farm and off-the-farm such as ridging, planting, weeding, transportation, irrigation, pest control, shelling, etc. This essentially has rendered the tractors to be idle most of the time. In general, correct handling, maintenance and care are of vital importance. A number of owners of farm machinery report regular breakdowns, high fuel consumption, and many other faults with their equipment while their counterparts having similar equipment say they do not encounter such problems. Care in usage coupled with correct maintenance is the key to keeping engine-powered machinery productive, making the investment worthwhile.
The above quality problems are not insurmountable though. The most important avenue to addressing these problems is to have the machinery competently tested before its marketing and use.
In summary, owners who observe the rules for correct operation and maintenance have few quality complaints. Those who pay less attention, especially groups such as producer associations or cooperatives, where the issue of collective responsibility may be lacking, face daunting problems and end up wrongly attributing them to quality issues.
Similarly, operators of equipment under post-sale service contracts such as
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demanded under vendor warranty or by the financiers, have fewer or no quality-related issues. Often once the service contract terminates, the magnitude of quality-related complaints tend to escalate, a reflection of compromised care and maintenance. The implication here is that complaints of quality of machinery on the market need to be addressed with caution and maximum objectivity.
Section 5 The Way Forward
Role of MAAIF’s Agricultural Engineering and Appropriate Technology Research Institute (AEATRI)
As argued above, suitability of farm machinery for the tasks for which it is being purchased is vital, especially given the substantial investment involved in its acquisition and operation. Machinery
that cannot perform at all or which under-performs not only ruins the financial prospects of its owner but is also a deterrent to any efforts to modernize agriculture through mechanization. It is in this respect that testing of the machinery prior to its being marketed and used becomes of paramount concern.
In Uganda the mandate for testing new and imported equipment coming on the market is vested with AEATRI of the Ministry of Agriculture Animal Industry and Fisheries (MAAIF). The testing is expected to vet, under competent authority, the suitability of the equipment for the local conditions and thus for endorsement for marketing the equipment. In the course of testing defects, errors, omissions and other aspects of non-conformity are ascertained, if any, and corrective action is recommended accordingly for the manufacturer or suppliers’ attention. Once the defects are rectified or in case no defects are identified the machinery is endorsed for marketing and use.
Disc and harrow plough.
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After testing, the supplier/dealer is issued with certificate of conformity which is a vital instrument to attest that the machinery will, under normal circumstances, enable the owner or user to realize value for money for its acquisition and use. Indeed many large or public entities, such as agricultural estates, local governments and NGOs, require testing prior to buying agricultural machinery.
These days suppliers with test reports are finding it relatively easy to market their machinery compared to their counterparts whose machinery has not been subject to AEATRI testing. It should be noted that the testing is by no way intended to bar the machinery from coming into the market, but rather for enabling the suppliers to address any defects that may be a result of human error or engineering oversight. It is thus pursued in a positive dimension rather than a negative way and thus should at no time be avoided by any rational suppliers or dealers interested in promoting and increasing the market share of their products. One past example of the AEATRI testing result was the finding that of the knapsack sprayers that were offered for testing as a condition to bid on contract for CDO, some 75 percent were found to be defective.
Ironically, AEATRI confirms that there are dealers who do not provide their equipment for testing prior to putting it on the market. Of course many buyers are not aware of this vital independent and professional vouching opportunity and end up buying equipment only to complain when its efficiency falls below expectations. Though in such cases AEATRI may respond to the complaints and intervene, the intervention is more of a post-mortem rather than preventing the problem and the resulting financial loss.
Beyond testing the equipment, AEATRI provides training to equipment operators and artisans, important benefits for ensuring maximum efficiency and increased economic life. The training is either in partnership with the suppliers or just by AEATRI itself, as earlier discussed.
Limited dissemination of AEATRI’s testing reports
One of the key challenges for AEATRI is to ensure that those who need the information actually have access to it. These include, in particular, users and financiers of farm machinery. Too often the results stay effectively hidden from those who can make use of them. For example, AEATRI has often provided the test reports to MAAIF but it is evident that such reports just end up resting on the shelves. It is therefore important that an alternative approach to disseminating the test results be adopted. AEATRI’s role is intended for the benefit of public interest, so that those choosing machinery have maximum confidence in the suitability of the machines on offer in the market.
Ideally it would add more value if the test reports, and even the availability of the service itself, become widely known. Thus the reports should be widely disseminated to entities like financial institutions, insurers, the Institute of Bankers, Uganda Leasing Association, Uganda National Farmers Federation secretariat, equipment maintenance service providers, farmers’ groups, cooperatives, farm estates, NGOs, donor projects engaged in agriculture together with government agencies and departments such as local governments, URA and UNBS.
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AEATRI needs to redefine its role to be more of watchdog than a commentator. Its outreach could become more effective by way of a monthly or quarterly bulletin or other publication either by AEATRI itself or by MAAIF’s Farm Engineering Department. Electronic dissemination on the internet could also be used. With such information being accessible, interested owners, users and financiers would be better informed not only about the source of appropriate equipment, but also about the local capability for repair and service of a given machine. In this way AEATRI would also authoritatively, rather than passively, exercise its mandate.
Section 6 Conclusion
Investing in farm machinery, if feasible and well evaluated, provides enormous potential opportunities for generating profit by the owners. However, if not well handled, it is
bound to result in losses and subsequent scapegoat excuses, often focusing on quality.
Having made this point, there is also evidence that some agricultural machinery, designed for overseas conditions, is not suited to those areas of Uganda where rocks and stumps put much stress on hydraulic systems. The latter need to be especially rugged in order to be able to stand the stresses involved.
Given the increasing availability of financing opportunities within the Uganda financial sector, complemented by a good policy environment it is clear that MAAIF in general and AEATRI in particular should have a more pro-active role in supporting, with information, the very significant investment involved in the acquisition and use of engine-powered farm machinery.
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3.3 Money in Honey: Investing for Quality Gives Best Returns in a High Prospect Sub-sector1
for this market is promoted by street vendors, selling it in all sorts of reused packaging, ranging from soda bottles to used cooking oil containers. Some foreigners or tourists are actually enticed by these vendors in the villages, as they believe honey sold in rural areas is natural and unadulterated. To prove that the honey is pure, the vendors have a practice of dropping a dead bee inside the bottle!
The other local segment caters to the retail market such as supermarkets and sundry shops in and around all major districts. In this segment, there is a small group
1 Author: Lesster Leow, EastWest Innovations Uganda Ltd.
Section 1 The Markets for Ugandan Honey All honey, in the hive, is at its purest possible quality. The vegetation around where bees forage determine the flavour, colour and viscosity of the honey. Quality deteriorates because of poor harvesting and processing methods. Normally it is the human factor that plays the biggest role in compromising the quality of honey. This will be further elaborated in Section 2.
Honey producers can target local, regional and global markets. The local market can be sub-divided into two segments. The first such segment is almost purely price-driven. Quality here is not an issue. Honey catering
A modern honey processing operation in Kampala
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of consumers that go for higher quality honey that has fewer impurities. However, the bigger local demand is still for low priced honey, as most consumers are not particular or have little knowledge about honey standards.
For the higher-priced retail market, presentation and packaging are important. Usually the honey is packed in new plastic jars with a net weight of 500g. Of late, with an increase in choice of packaging materials, honey is also packed in smaller quantities of 100g and 250g. Retail prices, locally and regionally, hover around UGX 3,800 to UGX 5,000 per 500gm.
Regarding export market, honey from Uganda is said to be exported to the European Union and the Middle East. However there are no official statistics for this market. It is believed Ugandan honey is exported by a couple of companies in small quantities, directly to niche retailers, instead of being exported in bulk.
The quality of honey for the export market must be very high. For exporting to European Union countries, the honey has to meet the European Union Honey Legislation requirements (http://eur-lex.europa.eu). The important aspects buyers look into are the country of origin, pollen spectrum, flavour, enzyme activity, moisture and sediment content. Packaging for such niche markets varies according to the buyers’ requirements. It can be in airtight buckets of 25kg or in individual jars, as specified by the buyers.
Bulk export is usually packed in food-grade drums of 300kg. Currently the price for bulk honey is between US$1.20 – 1.30 per kg (CIF). The minimum required quantity for bulk export is a full container load of at least 20 tons. At present, Uganda’s honey industry is still at the infant stage. Nobody
yet has the capacity to tap into the bulk export market.
Section 2Quality Issues in the Honey Value ChainFor the basic local market, honey is mainly sourced from honey hunters and traditional bee farmers. Honey hunters get their honey from wild bee colonies in anthills and hollow tree trunks, while the traditional beekeepers own a few beehives made out of local materials such as rattan and logs.
There are also a good number of modern beehives given by donors and funded projects. Both the honey hunters and traditional bee farmers got their knowledge of beekeeping from their forefathers and practise destructive methods of honey harvesting. They do not tend to the bees regularly and will only approach the colonies during harvesting season. They force the bees out of the hives with lots of smoke and fire before collecting whatever remains in the hive.
The honeycombs with brood, bee bread, ripe and unripe honey are then squeezed with bare hands or unhygienic equipment. Some will even boil the honey to separate honey from the wax. Investment for players in this sector is minimal. Both the producers and sellers make use of whatever they can get hold of and no expensive equipment and training are required.
For the local and regional retail market there are also more commercially-minded producers. Some are traditional bee farmers and some are members of beekeeping associations, who have gone through a form of training. They usually sell their honey
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to traders or packers who add value by packaging before selling to retailers. There are a significant number of players involved in this segment.
Packers are normally not beekeepers themselves. Middlemen will travel to villages to buy from various sources and resell at some centralized market in town. Most packers purchase from these middlemen, filter some of the impurities from the honey, pack and label for retail sales. Little or no testing and minimal quality control of the honey is involved. The packers only need to invest in simple filtering equipment, plastic jars and labels. Investment in improving the presentation of the end product is important, as many different brands compete for attention on the same retail shelves.
Although the packaging has improved, the quality of the honey varies greatly amongst different brands. Though some of the producers have undergone training and have acquired modern beehives such as Kenyan Top Bar hives or Langstroth hives, most of the training is done in classrooms without any actual interaction with the bees. The lack of hands-on experience in handling the bees catches most beekeepers off-guard when they encounter the aggressive behaviour of the African bees face to face during their first harvest. This has led to the development of fear of the bees and subsequently these apiarists revert back to the destructive mode of harvesting. This will result in dead bees, burnt grass ashes and melted wax being mixed together with the honey. As such, the quality of the honey will still be compromised, despite the investments in training and the use of more expensive hives.
Often the emphasis is on short term profitability of the business, without any education on the importance of proper
handling of the bees for longer term productivity and profit. This is just like, “putting the cart in front of the horse”. Bee farmers should recognize the bees as an important asset in their honey business. They have to understand how to work harmoniously with the bees in their natural environment, rather than fighting against the bees. It is only when they can calmly work on the bees that they will abandon the hit-and-run approach of harvesting. They can then harvest correctly, maintaining the quality of the honey. When the process is right, the outcome will be right. Profitability will follow when the honey quality and yield improve.
For bee farmers and beekeeping associations that pack their own honey for retail sales, improved training will equip them to do quality control and produce higher quality honey. However, non-beekeeper packers who buy their honey from middlemen have absolutely no control over the quality of the honey. They buy whatever is available during that period. Even if some good quality honey is produced at the source (i.e. by the bee farmers in rural areas) there is no way to prevent adulteration, mixing with other lower quality honey or improper handling by the many hands through which the honey passes.
For the export market the investment is much higher both in training and equipment. In order to maintain best quality, all involved have to be acutely aware of the consequence of not doing the right thing. Any mistake along the way, starting from the very source inside the hive, through the harvesting, processing and packaging, will lead to the honey failing to meet the stringent requirements for the export market. As such, even after the initial training, beekeepers and refinery staff have to be constantly reminded, monitored and
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re-trained to ensure they follow the proper procedures.
Bee farmers must harvest only ripe honey, using the proper harvesting method to ensure the honey is not laden with excessive smoke and ashes. At the refinery, the honey extraction, filtering and packing has to be carefully controlled. Throughout the chain of activities, the honey has to be handled with clean equipment and stored under proper conditions. Although the investment in honey processing equipment is also higher for exporters, the bulk of the investment actually needs to be set aside for training and follow-ups as people are always the deciding factor in maintaining the quality of the honey.
Most of the beekeeping training courses which are currently available in Uganda are only acceptable for producing for the local and regional markets. In order to fulfill the more stringent requirements for the export market, exporters will have to work closely with their outgrowers, to the extent of developing a monitoring system or
database to keep track of the farmers and of their performance. Close supervision of all departments involved will ensure that the required level of competence is achieved.
Section 3
Typical Investment and Returns for a Small ApiaryThere is no magic figure in starting beekeeping. The numbers of hives one can maintain depends on the competency of the beekeeper, the land available to him or her and the vegetation surrounding the land. For discussion purpose, we look at a typical smallholder beekeeper with 20 hives that are colonized.
Before comparing the different kinds of hives from which a beekeeper can choose, the other standard accessories they should be equipped with are detailed in the table below:
Amount in UGXA smoker 25,000A protective bee suit 120,000A hive tool 10,000A bee brush 7,000A pair of protective gloves 18,00020 airtight buckets for harvesting honey at UGX 7,500 each 150,000 Basic beekeeping training 300,000Total standard cost 630,000
Standard cost of Equipment
Now we shall compare the costs and income achievable using different kinds of hives. It usually takes about 18 months for a new colony to fully build up its strength and produce to capacity. Small harvests are possible in the first year, but this will be excluded in the calculation below, as it is not certain that production in the first year will be achieved.
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To use the Langstroth beehive effectively, a much higher beekeeping skill level and precision hive construction are needed. This is to ensure productivity over a number of years, to realize the benefits of the considerable investment involved, upfront. With the current conditions in Uganda, traditional and Kenyan Top Bar hives are still the more recommended methods of beekeeping.
With improved knowledge, skills and close monitoring of the activities of the bees, harvesting can be done on a more regular basis and thus yield will increase. Also, in the rural areas where properly dried timber is not available, KTB and Langstroth hives will warp after a short while and create problems for the beekeepers when handling the bees. They will also be difficult to
Cost of 20 KTB beehive at UGX 60,000 1,200,000Standard cost 630,000Total investment 1,830,000Honey harvest in a year 20kg / hiveTotal honey harvest in the 2nd and 3rd year 800 kgSelling price of honey 3,000 per kiloGross income 2,400,000Net income 570,000
Amount in UGX
Cost of 20 Langstroth beehive at UGX 140,000 2,800,000Standard cost 630,000Total investment 3,430,000Honey harvest in a year 30kg / hiveTotal honey harvest in the 2nd and 3rd year 1200 kgSelling price of honey 3,000 per kiloGross income 3,600,000Net income 170,000
Amount in UGX
b) For Kenyan Top Bar (KTB) beehive investment
c) For Langstroth beehive investment
Cost of 20 traditional beehive at UGX 10,000 200,000Plus standard cost, as above 630,000Total investment 830,000Honey harvest in a year 15kg / hiveTotal honey harvest in the 2nd and 3rd year 600 kgSelling price of honey 3,000 per kiloGross income 1,800,000Net income 970,000
Amount in UGX
a) For traditional beehive investment
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maintain and repair. Using local materials available in hive construction is more appropriate.
Section 4
A Honey Export Operation To start an export honey operation, one can choose to be involved in the upstream activity of beekeeping, or to concentrate on trading. In the discussion below, we are looking at the operations of an exporter who does not engage in beekeeping itself. The company will buy directly from the outgrowers, process the honey and pack it for export. The main field of operation will be sourcing, processing and marketing.
There are two kinds of export in which one could be engaged, small scale and bulk export, respectively.
For small-scale export, the basic equipment required would be:
Honey extracting equipment, stainless steel settling tanks, filtering equipment, airtight buckets, clean refinery & storage building, pickup. The cost can range from UGX 50,000,000 to UGX 150,000,000, excluding the building.
For bulk export, the basic equipment required would be:
Forklift truck, food grade drums, palettes, honey extracting equipment, stainless steel settling tanks, filtering equipment, airtight buckets, clean refinery & storage building, truck. The cost can range from UGX 300,000,000 onwards, again excluding the building.
Expansion of a refinery can be progressive. One can invest in the minimum initially and add on more of the same equipment as
Close-up of a honey comb
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production increases. Usually, companies will start with small-scale export. Once they secure more honey and orders, they can easily switch over to bulk export operations by adding on some other equipment. Whatever they have already invested in will not be wasted, as the assets are still applicable in the new operation.
At the moment, the local and regional demand for honey far exceeds the supply. In fact, local and regional prices are more attractive than those achievable for bulk export, at world honey wholesale prices. At the same time, the investment for a bulk export operation is quite substantial. Thus bulk export is not the most profitable option at the time of writing. Small-scale export to niche markets that command higher product prices is a more attractive choice to start with.
As written in Section 2, the investment in training and education will be much higher than the investment in hardware. It is difficult to quantify this software investment as it varies with the level of professionalism of the staff and moreover is an on-going investment.
It is only during the last ten years that the beekeeping industry is slowly gaining attention as an additional income generating activity for the growing number of farmers who have small land plots. The local land inheritance culture of dividing land among one’s sons is causing plots to be split into smaller portions. Beekeeping becomes a viable enterprise for such small landowners, as it takes up less space compared to agriculture or animal husbandry. This newly-noticed industry is not well understood by banks in Uganda and they have not developed any special schemes to cater for beekeeping activities. They will assess any loan request using
standard policies and procedures. The following is a summary, from the point of view of a honey producer.
a) Financing equipment
For companies engaging in honey production and processing, asset-financing arrangements are possible with some general equipment such as generators and vehicles. However, banks would be more reluctant to provide loans for equipment that is specific to the beekeeping industry, such as refinery equipment and beehives. They will only consider loans for such specific equipment if there are other assets to secure it. Risk is much higher due to the limited resale market for such items. Also, for production equipment like beehives, it will be almost impossible to repossess once the bees colonize the hives.
b) Working capital
Unlike equipment loans where the equipment itself is an asset with some value as collateral, banks are more stringent in facilitating loans for working capital. The usual procedure would require the borrower to use assets such as land, buildings or fixed deposit as collateral to secure the loan. They will also look into the past years’ cash flows and performance of the company in deciding the payment terms. Interest rate is in the high 20% - 30% range.
An alternative for companies without suitable assets as collateral would be contract financing, whereby, with a firm order secured from a buyer, the exporter could negotiate for a temporary loan using that as security. Unlike businesses such as manufacturing where business activities are more evenly spread out through the year, honey production is seasonal. The huge amount of money needed to buy the honey during the one or two seasons a year poses a
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great strain on most companies’ cash flows.
With contract financing, once the exporter ascertains the amount of honey their out-growers can harvest for the season, they can liaise with their buyer and bank for such a financing arrangement2. The money released in advance by the bank makes it possible for them to pay the outgrowers for the honey, process and ship it to their customer. The exporter will incur less interest expense with contract financing, compared to the case with unsecured finance, which in any case is extremely difficult to obtain in Uganda.
c) Financing for smallholder producers
Local banks are receptive to opportunities to provide financial services to out-growers supported by a processor / exporter.
Many banks are coming up with low cost savings accounts and are opening branches upcountry to tap into this market. However, the monthly bank charges may still be too taxing on beekeepers who may receive income only once or twice a year. Also, any loan packages come with the unaffordable interest of more than 20% and a short repayment period.
Beekeeping is unlike most other agriculture or animal husbandry activities when it comes to the investment and return schedule. Almost all the investment is made in the initial period and the returns only start to be generated 18 months later. However, the beekeeper can reap returns for many years thereafter with minimal maintenance investment. If this situation is understood by the banking sector, and they develop special loan packages that take all
2 See also Article 4.2 in this Yearbook for a more complete discussion of bank financing linked to forward sales contracts.
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these unique characteristics of beekeeping activity into account, then it would be viable for the outgrowers to tap into financing by the banks.
Section 5 Support by Government The Ministry of Agriculture, Animal Industries and Fisheries has been making efforts to support the honey industry by assisting commercial beekeepers and stakeholders with permits for bee transfers and veterinary certification for honey exports. The Ministry of Trade and Tourism and The Uganda Export Promotion Board also issue different certificates essential to any export of honey, while the Ministry of Finance allows tax exemption on imports of honey processing equipment and packaging.
All these greatly help in advancing and developing this industry. It would be an
3 Apitrade Africa is a private Organization set up in Uganda to facilitate the honey industry, (www.apitradeafrica.org). Anybody who wants information about the honey industry must join as a member in order to get assistance.
added boost to the development if all the necessary permits and certificates could be processed in a one-stop location. Not only is it more efficient for the exporter, it will be easier for Uganda to compile statistics regarding this industry. With more information and feedback, the Government can then formulate policies that will enhance the growth of this industry. The National Agricultural Advisory Services (NAADS) Program provided some farmers with beehives and training. There is room for improvement in the quality of the provisions though.
With the setting up of ApiTrade Uganda, an organization dedicated to supporting the beekeeping industry, Uganda is trying to provide a regional link for producers, buyers and equipment suppliers3. They organized ‘Apitrade’, a honey conference / exhibition that acts as a platform for interested players in the industry to meet. It is held once every two years in different African countries; the first was in Uganda in 2008. This year, 2010, Apitrade is hosted by Zambia and in 2012 it will be in Ghana.