Direct Cost Recovery from Services vs Crop Type

Strength of Relationship 4/5

  • Strong relationship between driver and outcome variables
  • Results are consistent across analytical models used
  • Few limitations regarding sample or indicator

Key Messages

Direct cost recovery from services is a key indicator of the commercial viability of a smallholder-inclusive business model; it represents the proportion of costs incurred in service provision that a company can recover by charging farmers.

FarmFit data reveals the direct cost recovery, or the standalone profitability of service provision, is much higher in food crops and/or loose value chains than in cash crops and/or tight value chains. This does not mean that the former are more commercially viable than the latter, as direct cost recovery is only part of the story. Rather, there are many indirect sources of value and these also differ across different types of value chains.

Nonetheless, our findings on the link between crop type and direct cost recovery are significant as they demonstrate clearly distinct approaches to the economics of smallholder farmer service delivery.

Our data suggests that these results are due to three main reasons:

  1. Ability to access indirect sources of value
  2. Higher investments 
  3. Farmer willingness to pay

Keep reading to find out more.

Understanding how direct cost recovery differs by type of value chain

FarmFit Insights Hub analysis finds that business models active in food crops have a significantly higher direct cost recovery, at around six times higher than models in cash crops (crop type definition). Interestingly, this is accompanied by higher spend; service delivery cost per farmer is, on average, more than double for food crops, compared with cash crops.

In this section, we combine our analysis of crop type with that of value chain organization. Read more about how the FarmFit Insights Hub categorizes by crop type and value chain organization and why these two indicators are combined for this analysis.

These results have been validated using machine learning methods.

The data suggests there are three main clusters of business models when viewed through this lens:

  1. Food crop business models: With just a few exceptions, direct cost recovery of 50%+ is the norm.
  2. Subsidized cash crop business models: The overwhelming majority of models that do not (or barely) directly charge farmers for goods and services provided are active in cash crops.
  3. Cash crop models with direct cost recovery: A minority of cash crop models are noticeably different from other cash crop models, and recover at least half the cost of service delivery to farmers, with a few even making a profit based on direct cost recovery alone .

The analysis on this page dives deeper into the design and contextual drivers behind each of these three clusters of business models, and identifies practical recommendations for how businesses, investors, support organizations, donors and governments can help make these models more successful.

Link to other outcomes

When looking at the relationship between type of company and the other two outcomes analyzed in this Insights Hub, we find that:

  • For Service Delivery Cost per Farmer, costs (or investments) are a lot higher in food crops and loose value chains. Click here for more details.
  • For Farmer Value Created, there is no significant difference in results. Click here for more details.

Diving deeper: What might explain these results?

The results have very important implications and should be interpreted from multiple angles. FarmFit data and analysis suggests that the results can be explained by 3 key factors. Clicking on each of these factors provides a longer overview of our thinking, including more supporting qualitative and quantitative insights.

  1. Ability to access indirect sources of value – Businesses active in tight value chains and/or in cash crops tend to have access to more numerous and secure sources of indirect value, specifically in terms of their sourcing, marketing and compliance activities. These sources of value provide indirect returns to the company, reducing the need for direct cost recovery (charging farmers) and justifying subsidization of service delivery.
  2. Higher investments – Businesses active in food crops and/or loose value chains invest on average around twice as much on a per-farmer-basis. As high-cost models are more difficult to cross-subsidize, these businesses have much more incentive to charge farmers for services provided.
  3. Farmer willingness to pay – Certain services (such as training) are likely to be free to farmers, whereas support such as inputs/mechanization are not. Direct cost recovery is higher in models providing the latter types of services.

Implications – what does this mean for you?

Based on our findings to date on this topic, we see the following implications for different audiences:

Reflections on data limitations and further research

The FarmFit Hub is an interactive resource that we are constantly updating with new data, new analysis, validation by our partners, etc. For the results on this page, we would like to emphasize the following:

Major caveats and limitations of our current approach 

  1. Limited (but growing) visibility into indirect sources of value

Updating these findings: Next steps

  1. Deep dive into high direct cost recovery cash crop models

Suggestions for additional research by our peers and partners

  1. Deep dive into specific contexts, sectors, geographies or value chains