Formal Markets

Formal Markets Definition Formal markets refers to the category of buyers or potential buyers operating within structured trading systems characterized by predefined formal ways of procuring and/or selling their products or services. Organizational and/or Business buyers fall within this category of market segments.

Exercise 1:

Objective: The aim of this exercise is to help participants understand the requirements of formal buyers and what their group can do to be attractive to this market segment.

Aids required Pen/marker pens, flip charts & stands, manila papers hard cards, pins, soft boards

Time required:  About 15-20 minutes for group work;

5 -10 minutes for group presentations & wrap up

• Divide the participants into 3 groups (Group 1, 2 & 3) then ask each group to answer one of the following the following questions:

1. What is your understanding of formal markets? 
2. What characterizes formal markets?
3. What business opportunities do formal markets present to your group / cooperative?

• Ask each group to choose a leader (chair) and a rappatouer whose roles are to coordinate the group and take the points respectively. Each group should also come up with an appealing name for the group.
• Let the participants put their responses on manila papers and choose a representative to do a presentation for a maximum of 5 minutes.
• Pin up the Manila paper with the each group work within where they can easily be viewed by the trainees.
• Wrap up:  Conclude the exercise by summarizing the responses and adding additional points for each question as per the notes below. 

Formal market segments

Various segments of markets exist within the formal sector that deals in agricultural commodities including:

• Processing companies (Food, Feed & other Industrial products); these are organizations that transform the nature of commodities from one from to another(s). Some engage in semi processing for further value addition by other processors while some full process raw materials into end user products. There exists opportunities for commercial farmer organizations to establish commodities (e.g. chilli seeds , garlic and onion seedling, fresh packaging of red cabbage, cauliflower or French beans ) supply linkages at both levels where the farmers can establish village processing units to add-value and supply semi-processed commodities and /or supply raw commodities to the processing companies.  
• Commodity Trading Companies: Commodity trading companies mainly engage in buying of agro-commodities in large quantities for resale to other buyers as well as to regional and export markets. They normally have a large warehousing facilities and aggregate commodity from various sources and suppliers for purposes of trade
• Institutions (Schools, hotels, hospitals, relief agencies, Correctional centers,): Institutions mainly engage in purchase of agricultural commodities in order to meet their clients demand for food.  They have a predetermined level of demand per period informed by their capacity.
• Formal Retailing Stores ( Supermarkets, groceries)
• Government agencies / Institutions
• Exporters

Trade facilitation initiatives achieved for formal buyers through commercialization include active buying and selling where formal organizations companies are identified to conduct direct purchases from communities or conduct direct purchases to participating Commercial Zones, Commercial Cooperatives, Commercial Producer Groups (CPGs), Households (HH) and Farmers.

3.2 Business Partnership with Formal Buyers

Time required approximately 2 hours (inclusive of a 20 minutes break)

Formation of strategic partnerships is a critical avenue aimed at optimizing the returns to the target smallholders through their increased participation along commodity value chains. Formal buyer partnerships for domestic and regional markets enhance a systematic approach to; increasing commodity market shares; Enhancing product flow between Commercial Zones and key market players as well as reducing market risk through diversification and strategic partnerships with a range of key market players.

Partnerships with formal markets are applicable for a varied category of commodities including;

• Raw / unprocessed agricultural commodities
• Semi-processed commodities
• Fully processed commodities
• Business support services ( transportation, input suppliers, financial services, packaging

Smallholder commercialization efforts must ensure that quantity and minimum quality assurance / quality control (QA/QC) requirements are met for the target commodities in accordance to the buyer specifications since formal buyers usually have specific product parameters that they consider in purchasing various commodities. Hence there is need to equip communities with QA&QC skills and ensure village-based mechanism  are established, to optimize benefits from supply of high qualities commodities.

3.3 Benefits of Business Partnership

a)Business Competitive Strategy - Organizations are shifting from rivalry to forming synergic Strategic Alliances/ partnerships for synergy in achieving their goals

b) Partnership enhances Value Chain efficiency for both producers (suppliers) and buyers as it is a long-term business relationship as opposed to being one-off transactional arrangements

c) Organized sourcing from commercial farmer organizations / cooperatives leads to efficiencies in trade, consistency in supply as well as reduced transaction costs including transport, logistics, communication

d) Business partnership enhances Supply chain management and improves on overall business operations – business planning, financial management, sourcing & marketing

3.4 Formal Buyers Engagement

3.5 Step wise approach on the formal process

1. Prospecting, Targeting & Qualifying
   • Identify who to target & why; develop a list of potential formal buyers;
   • Do thorough background search & gather relevant Market Intelligence (MI) to understand the industry trends, target buyer’s  business;
   • Understand the  target buyer’s needs;
2. Pre-Approach
   • Uphold highest level of professionalism in communication and approach;
   • Understand the organization’s buying behavior & processes;
   • Identify who makes / influences purchase decisions;
   • Plan a meeting agenda to address the identified & likely concerns of the prospect;
   • Make an appointment, giving them choices of appointment times and meeting locations;
   • Thoroughly prepare for the meeting;
3. Approaching
   • Arrive for the appointment in time;
   • Carefully listen to the prospective buyer and ask relevant questions;
   • Presentation & Demonstration ( Farmer Group’s / organization’s mandate, samples;
   • Indicate the intention for partnership at the earliest opportunity;
   • Use Features, Advantages, Benefits and Value based  approach (FABV);
   • Emphasize on buyer benefits – benefits of sourcing from organized production  (Commercial Producer Groups & Commercial Cooperatives);
   • Establish & clarify the buyer’s requirements and commodity specifications – quality, quantities, periodic demand, terms of trade;
   • Discuss the business opportunities;
   • Formally Capture all the discussions on the a note book (minutes);
4. Follow up
   • Share the previous meeting’s discussion points (minutes) with the potential client promptly;
   • Follow up to book other appointments;
   • Ensure action points are addressed;
5. Sealing the deal
   • Negotiate on terms of trade – pricing, payments and delivery mechanisms;
   • Discuss the partnership agreement;
   • Specify each partners roles;
   • Share the draft partnership agreement;
   • Link the commercial producer group / cooperative to the buyer;
   • Facilitate buyer - seller forums for market feedback & information sharing;
6. Business Relationship  Management
   • Purpose of business partnership is to shift from transactional sell-buy relationships to the producers groups being business solution providers in agro-trading;
   • Make follow ups phone calls/visits;
   • Facilitate farmer visits to the buyer & buyer visit to the producer groups;
   • Facilitate formalizing / signing of the partnership agreements;
7. Partnership Review & monitoring
   • Ensure information / feedback adequately flows between the buyer & commercial producer groups / cooperatives;

Formal Market Engagement in a Process Map

3.6 Negotiation; a Key Component in Business Partnership

Time required: Approximately 1.5 hours with a 15 minutes break

Critical skills  for negotiation; The two / more parties need to reach an agreement on the terms of trade Effective negotiation must lead to a Win-Win situation.

• Preparation & planning;
• Knowledge of the subject matter / product; - global trends, sourcing areas, pricing, seasonality
• Ability to think clearly and rapidly under pressure and uncertainty;
• Ability to express thoughts verbally;
• Listening skills, good judgment, integrity, patience
• Ability to persuade / convince others

Aspects to negotiate – Price, Quality, Purchase Volume, Weights & Measures, Packaging, Sorting & Grading, Delivery Mechanisms and Terms of Payment;

3.7 Example of Private Sector Buyers Partnership Agreement

Farm Concern International (FCI), is an African-wide market development agency involved in developing markets and business linkages such as between producers and traders to facilitate business players in achieving their business goals and objectives such as;

• To reduce trading costs, enhance efficiency and supply consistency
• To maximize profit for market actors
• To enhance adoption of best practices in agricultural commodities such through facilitating forums to discuss quantity and quality requirements by traders and consumers
• To establish communication platforms for buyers and sellers through Business Forums

FCI has established a business relationship and partnership with _________________________________________a wholesale business person or export company or trader association  mobile no.____________________ in _________________ Market dealing with__________________

Farm Concern International will endeavour to;

• Introduce buyers to structure farmer organizations  to increase supply, improve production systems and reduce business transaction costs.
• Support smallholder Commercial Producer Groups to develop and implement scheduled production and improve supply systems to enhance supply efficiency
• Seek partnership with various Business Support Service providers (BSS) and modify services to suit smallholder farmers 
• Facilitate business forums between farmers and various categories of buyers  
• Enhance technical capacity of farmers to meet market needs and customer requirements
• Enhance business skills through capacity building to trader
• Develop joint action plans with the market players on selected commodities and markets.

Market players will offer the following;

• Offer market information updates highlighting market situation for sharing with farmer organizations
• Periodically meet with smallholder producers to  offer  advice on product requirements, quantities  and quality
• Guide producers on market requirements for selected range of commodities
• Offer feedback on market trends to FCI and commercial village producers to enhance market-led agricultural production
• Provide training in the area of processing and

I agree to establish a partnership relationship with Farm Concern International in Rwanda