In Zambia, Cheetah Ltd. processes and exports paprika as the primary ingredient in food coloring. It is the largest processor of paprika in Zambia. Paprika is considered high valued, high quality sensitive, but a non perishable crop with much of the initial drying being done at the farm level. Cheetah has made a multi-year effort to utilize a smallholder out grower program in their overall production procurement effort working with local smallholder organizations. They offer a complete extension program, but only provide production credit for seed, having experienced considerable repayment problems with more extensive seasonal production loans. They purchase the paprika directly from the farmers at predetermined prices based on grade. In so doing they have incurred considerable expense and receive some managerial assistance from DED, a Germany development volunteer organization, in the form of donor subsidized volunteers appointed for a couple years to assist in managing the out grower program. Still they continue to experience considerable side selling to private traders commonly referred to a “Pirates”.
In attempting to recover their costs in managing the smallholder out grower program they actually discount the price they pay the smallholders relative to large farmers marketing a larger volume of paprika. Thus, while Cheetah quotes a top grade price of ZK 3,400/kg (US$ 0.75), private traders were reported to offer ZK 3,600/ kg (US$ 0.80) in cash, independent of grade. It is not certain but this paprika could eventually be delivered to Cheetah or one of their competitors. In addition when Cheetah purchase paprika from the out grower farmers they will charge the farmers ZK 2,000/bag (US$ 0.44) as a transport fee from the buying point in the village to the depot in the town. In addition, Cheetah deducts 1 kg per bag as a handling fee to cover their cost in operating the buying point. These charges are independent of how full the bags might be. Typically a full bag of dried paprika will weight 20 to 25 kg, but farmers would often market less than a full back, going as low as 5kgs. The ZK 2,000 (US$ 0.44) for transportation was very transparent. However, the 1 kg handling charge was buried by simply weighing the bag as shown in the photo and recording 1 kg less than what was weighted. A little bit of creative accounting.
The ZK 2,000/bag (US$ 0.44) transport charge plus the one kg per bag handling charge can provide private traders a ZK 5,000/bag (US$ 1.11) opportunity to directly compete with Cheetah at financial parity. This is based on the average price between grade A and grade B being ZK 3,000, (US$ 0.67) and most bags falling into these two grades. For ZK 5,000 (US$ 1.11), the private trader would have to assure the grade, repack into tighter bags and arrange transport to the depot. This might not be that difficult. During the buying shown above, transport was a problem as the Cheetah buyer actually arrived by motorcycle and would have had to arrange for storage in the village for later pick-up if the Winrock marketing project personnel observing the buying had not volunteered to transport the paprika in their two crew cab pickups and saving the farmers the ZK 2,000/bag (US$ 0.44) transportation charge. Meanwhile not 50 m away a Seven Ton Lorry pulled up in front of a Small Village Kiosk. The kiosk apparently had the transportation problem resolved. Such village traders could easily become buying processing points for the farmers, and offer at least as good, if not a better, deal as Cheetah, as well as handle other commodities such as cotton which was also grown in the area as part of another out grower program, in what would be a Symbiotic Relationship within the village. Also, while the Cheetah buyer was expected to make cash payment, on the occasion shown above the representative did not have the funds and had to promise payment the following week. While Cheetah appears to be making payments fairly quickly, more often goods consigned to farmer cooperatives would promise payments in three weeks, but on average take about six weeks and occasionally up to three months. Much of this delay could be the banking system, where the time required for transactions to clear one step at a time for each segment of the banking business chain since clearing still has to be done by post instead of high speed computers. Under such circumstance it is little wonder that smallholders will accept a 20% discount on cooperative quoted prices for an immediate cash payment.
Exchange rate: US$ = ZK 4500