Firm taps local farmers to produce beans for Mars, et al.

KENNEMER CEO Simon Bakker

IT WASN’T something that Simon Bakker had deliberately set out to do.

But when he decided to tap the smallholder farmers for the supply of cacao, the chief executive of Kennemer Foods International had incidentally created one of the most successful sustainable business models in the country today, and one which the government and multilateral agencies are now looking to replicate.

“We did not set out to make an inclusive business but working with smallholder farmers made business sense,” Bakker says.

The Board of Investments and the Asian Development Bank have cited Kennemer as a successful inclusive business model, or a sustainable business aimed at benefiting low-income communities. The      company has taken center stage in various Asia-Pacific Economic Cooperation events this year.

Instead of going for a plantation, the firm has chosen to tap smallholder farmers, he says.  “And before you know it, we have evolved and have been labeled as an inclusive business. But we are just a regular business whose operations happen to have social benefits,” he says.

Bakker recalls there was no significant Philippine cacao industry to speak of back in 2010 when Kennemer Foods was set up. The company was created for the purpose of growing, sourcing and trading fermented cacao beans to chocolate producers such as Mars.

The company, however, recognized the potential of the local cacao industry, given the  growing global demand for high quality beans amid a decline in production in Indonesia and Malaysia, thus prompting the need for more long-term suppliers from the region.

The company also took note of the wide agricultural lands the Philippines could offer. According to Bakker, there are some 9.7 million hectares of agricultural land, 3.5 million hectares of which are dedicated to planting coconut. He says cacao can be inter-cropped with coconut.

The fact that there are some five million smallholder farmers in the country also present a lucrative prospect for Kennemer.

The problem, however, is that most farmers are relatively unfamiliar with cacao, while those who know the crop see it more of a backyard plant than a commercial venture, Bakker says. He says there are also some unfounded concerns about having to shift to cacao from coconut.

And while there are government programs that provide planting implements such as seeds, he says there is barely technical support that will see the farmers through the whole cycle of planting and growing the trees.

“We figured that if we want to increase production of cacao, we would need an end to end solution,” Bakker says. This means the need to provide quality planting materials, quality inputs, knowledge and training, smallholder financing, and access to market.

What Kennemer did then was to team up with the state-run Land Bank of the Philippines, which at that time was already developing with the Japan International Cooperation Agency a finance program for crops like cacao.

That loan program, which is now known as Cacao 100, offers long-term financing option for smallholder farmers without the need for guarantees. Contract farmers, from whom Kennemer sources cacao beans, were able to secure at least P75,000 each in loans that can be paid over a seven-year period.

So far, Land Bank has already provided some P700 million in loans to the cacao farmers. It has also committed to make available as much as P5 billion worth of financing assistance.

Kennemer also provided extensive training programs to the smallholder farmers, which were grouped into small clusters, each headed by a cacao doctor. The head of each cluster also served as the “franchise holder” of Kennemer’s program.

“What would happen is that farmers would sign up and we provide the training. We teach the cacao doctor the technology for free and that takes about five weeks of training over a two-year period. He also serves as the consolidator for his group and coaches his own growers in the cluster. We finance the growers. So what the farmers get are the planting materials, including pesticides and fertilizers, cash and the knowledge. Their equity is the maintenance,” Bakker says.

By 2013, the program has started to take off as more farmers have taken interest in planting cacao.

Kennemer now operates the largest cluster of cacao nurseries throughout Mindanao, Palawan, Cebu, Bohol, and Leyte. By the end of the year, Kennemer will have some 10,000 farmers planting cacao, 1,500 of whom have started to earn. Close to P1 billion has so far been invested by both Kennemer and the farmers in this venture.

Bakker says it will take about two years for a cacao tree to be productive, but full maturity will take around five years.

Since Kennemer just started in 2010, many of the plants are still in their gestation period. The beans already available for purchase, meanwhile, are being shipped to Malaysia and Indonesia for processing.

Currently, Kennemer is one of the biggest cacao buyers in the country, accounting for about 40 percent of the purchases.

Bakker estimates only 5,000 tons of cacao beans are being produced in the Philippines.
What is promising, however, is the significant income that can be had from growing these cacao trees.

Bakker says a decent yielding farm can generate at least 1.5 tons of beans per hectare, which the company currently buys for P120 a kilo. At maturity, a healthy hectare can give farmers an annual gain of P150,000, net of the costs of raising the crops. This represents a seven-fold increase in their income from farming only coconuts.

Given the promising returns of cacao farming, Bakker says they are hoping to have at least 50,000 hectares planted with cacao in five years’ time. These are expected to yield an additional 75,000 tons of cacao beans for the local industry.

By 2020, the company expects to have at least 35,000 smallholder farmers supplying to Kennemer and about 25 buying centers from the three centers it currently has.

“The key really is how to organize the smallholder farmers and get them to create a product of reliable quality. There are markets that traditional business has not seen as viable such as the coconut farmers, but I believe that if a business really tries to make a difference, you can come up with ways to organize those groups and make them a valuable part of your business,” Bakker says.

Another crucial factor to the business’ success is the change in policies, which in this case is the availability of financing specifically for cacao farmers.

“So what we do is not a corporate social responsibility (CSR) project. It’s a regular business that have social benefits but one wherein you don’t have to worry every year where the funding will come from… What we do now shows that we’re here for the long haul. This kind of inclusive business model is the future and it’s not going away anytime soon,” Bakker says.