The characteristics for the nucleus farmer business model are a nucleus potato farmer with an equipment set for 80ha of potato production with 2-3 rotation crops per year plus seed and potato storage. Furthermore, 25% - 50% of the land will be for the use on own land while the other 50% - 75% will be used to service surrounding small and emerging commercials farmers. One of the nucleus potato farmers offers the complete package: ploughing, seedbed preparation, planting, spraying, ridging and harvest, all inputs, and marketing.

There would be a margin of 25% on tractor services, 10% on inputs, and 10% on the marketing of the crop. Contracts with processor(s) for specific varieties could exist. The processors may do own seed multiplication. Small farmers can only take the complete package and need to pay as they go along to reduce the financial risk. For this model four pilot farmers were chosen (experienced potato farmers based in Narok (2x), Nakuru, and Nyandaru Counties) that are full-time professional farmers.

Those farmers have existing registered businesses with bank accounts. They own a variety of assets, including tractors, ploughs, buildings, transport vans, and land. Moreover, the farmers have invested their own money in the business and two have tractor bank loans. The four farmers own between 32 and 140 ha of farm land. Two of them are experienced certified seed producers while the other two have contracts with processors.

The four farmers currently service between 20 - 40 farmers and have access to many more. Mechanized potato farming is capital intense (table 34) but very profitable (table 35). For experienced farmers it is feasible to harvest 35tons/ha but it is assumed here that it takes 5-7 years to get to this level. 20KES is the normal price for processing potatoes in the high season, 30KES with modest scarcity, and 40KES in the low season. Farming costs are mainly driven by inputs. Mechanization is about 36% of the costs, dropping to 27% after 4-5 years when loans are repaid. Interest is only 9% of the cost (on average over the first 5 years), even at 18% interest. However, a high interest is not killing this business but the rise in inputs costs which is the biggest threat to profitability but only after bad yields and low prices.

As long as prices are at 20KES/kg and yield over 15tons/ha, or 15KES/kg and 20tons/ha the farmer still makes profit. The investment costs for a service provider in the first year would be about USD 166.340, including a diffused light store, tractor, trailer, cultivator, 3-furrow reversible, rotary hiller, planter, box spreader, boom sprayer, knapsack sprayer, ridger, and a harvester with the following projected annual profit and loss of such a pilot farmer.

This business seems to be very profitable. The monthly cash-flow for this farmer shows that interest payments and even repaying the loan is possible from year 1, even assuming low yields and a small area farmed. Nevertheless a one year grace period would be good, just in case things don’t work out in year 1. This farmer can provide 1,5 Mio. deposit and own working capital. The other 3 farmers may have less income from other crops planted and therefore may need a grace period or working capital finance.

Assumptions for the following calculations:
• 5 year loan at 18% for 90% of investments
• 60% of machinery capacity used year 1, 100% in year 5 (40ha in total)
• 7% inflation, modest yield of 15t/ha in year 1 increasing to 35tons/ha in year 4 (after 8 crop cycles)
• 10% margin on inputs sold, 25% on mechanization services,
• 10% on crops sold of other farmers
• 5% of service fees and inputs from farmers services are never paid for (bad debt)
• Farmer uses income from 6 ha at 10tons/ha at 19,5KES/kg in January to finance next potato crop (does not need cash finance for this)
• Sales price is 24 KES/kg in cycle one, increasing with inflation each cycle.
• Price received is only 19,5KES, because transport cost to Nairobi are by independent transporter are 4,5KES/kg

The business model for smallholder farmers serviced by a nucleus farmer then looks like the following using the assumptions from above. As seen in the table, mechanized potato farming is potentially very profitable for larger nucleus farmers, and the small farmers they service with profit margins of 62% and 52% respectively.

Many successful small farmers may end up buying their own machinery to increase profitability. So from an economic perspective it is worth supporting.

FINANCING STRATEGY FOR THE MECHANIZED NUCLEUS FARMER

Three types of financing are needed in this model:

Investment capital for the nucleus farm
• USD 16,5 Mio. for equipment and seed storage
• Cash contribution the nucleus farmers have is about USD 0-1,5 Mio
• Assets (buildings, land, vehicles) of the nucleus farmers as collateral
• Interest rates of 20% are still affordable

Working capital for the nucleus farm
• USD 800,000 – 1 Mio. per cycle (1 crop cycle is 4 months, 2-3 cycles/year)
• Only necessary for 1-2 cycles
• Backed by contract with processors

Working capital for small farmers
• USD 250,000 for 1 ha – USD 2,5 Mio. for 10 ha
• Used to pay nucleus farmer for inputs, mechanization service,
• Backed by contract with processor and labor

For such a business, commercial banks are needed for asset and working capital finance. In Kenya there are more than 20 commercial banks. Many are active and interested in agricultural processing and farming, and have developed methods to reduce and manage default risk. Crop-finance has become available through banks as well. Micro-credit banks are not very active in primary agriculture and have higher interest rates. However, there is a big difference in interest rates between banks and the products within the banks.