Often several steps removed from the farmers themselves, big food buyers still have a vital role to play in making the world’s agricultural supply chain more sustainable.
Often several steps removed from the farmers themselves, big food buyers still have a vital role to play in making the world’s agricultural supply chain more sustainable.Coca-Cola is working on a range of fruit juice products for the east African market. To do so, it needs a reliable supply of tropical fruits. A year ago, such a supply didn’t exist. So it set about creating one.
In January last year, the US dinks giant initiated an $11.5m four-year project in Kenya and Uganda to bring 50,000 small farmers into its supply chain.
As a first step, it paired up with the Bill & Melinda Gates Foundation (which put up $7.5m) and agricultural development charity TechnoServe.
Participating farmers should see their productivity increase and their profits double. About 27,000 peach farmers are already involved. Passion fruit growers will follow shortly.
With the help of Coca-Cola’s non-profit partners, the fruit producers receive training in improving quality, increasing production and getting organised into farmer groups. The latter will help their access to credit.
Coca-Cola is active further up the value chain, too. The company’s local subsidiaries are working with puree manufacturers to boost their production capacity. On the back of purchasing guarantees from the US multinational, these small processing companies are already investing in new equipment.
For Simon Winter, senior vice-president for development at Technoserve, the project stands out for two reasons.
First, the initiative is being driven by Coca-Cola’s business units, not the corporate philanthropy department. He says: “This provides a strong indication that this is a real investment activity and not a nice-to-have on the side of the business to help poor people.”
Secondly, the project touches on the three main areas where large procurers of agricultural raw materials can have the largest impact: strengthening the supply chain, sharing technical expertise and providing finance.
Impact points
Every buyer of agricultural products has a vital role in supply chains. How they play that role has substantial impacts for sustainability.
Historically, large buyers have tried to downplay their influence. Coca-Cola is typical when it says it “does not own any farms and therefore has less direct control over the supply chain”.
In some cases, the buyer-producer relationship is direct. Starbucks, for instance, buys four-fifths of its coffee beans from growers with whom it has ongoing contact. Its ability to request strict social and environmental standards is therefore higher (see case study).
Most buyers, however, are several – often multiple – steps removed from the farmers themselves. In such cases, their leverage is with intermediary suppliers.
For reasons of quality, the big retailers’ suppliers who buy from farmers will have some control systems in place, explains Jan Kees Vis, sustainable agriculture director at consumer goods company Unilever.
“It is at this level that we aim to intervene and suggest to suppliers that they should add or build on their own requirements,” he says.
In the case of Unilever, its standards are laid out in its sustainable agriculture code. In a similar vein, Coca-Cola boasts supplier guiding principles. Many other large food buyers have similar documents.
Ultimately, large buyers should be looking to audit the application of such standards. Integrating environmental and social criteria into existing quality assessment systems represents the most pragmatic approach, says Mike Barry, head of corporate social responsibility at UK retailer Marks & Spencer.
Auditing the supply chain of every raw material bought is a huge undertaking, however. “With literally thousands and thousands of farms, it’s a work in progress,” Barry admits.
Share the agronomy
A second area of potential impact is sharing expertise in sustainable agronomy. This is especially true in the developing world, where farming methods are frequently low-skilled.
Lack of awareness of efficient, environmentally friendly agricultural techniques is one of the “biggest inhibitors” to sustainable farming worldwide, according to TechnoServe’s Winter.
“[Small farmers] need exposure to global best practices and global technologies that come when you link up with large international corporations,” he says.
The example of General Mills is illustrative. The US food company operates a volunteering programme in which its specialist technical staff advise small food processing firms in Africa (see case study).
In January, the company launched Partners in Food Solutions, a non-profit entity designed to encourage other large food companies to join the programme.
Last but not least comes finance. Improving farm practices to make them more sustainable will, in many cases, require upfront capital. Small farmers typically lack access to credit, which prohibits investment.
The financial and investment communities are gradually coming around to the idea after historically shying away from lending to the agriculture sector because of the perceived risks.
Regional and national development banks are leading the way. The International Finance Corporation, for example, recently announced a $10m risk-sharing facility to support loans to Ethiopia’s coffee sector.
Private investment groups are increasingly active in this space too. Phatisa, for example, a Johannesburg-based private equity firm, recently closed a new agriculture fund at $135m.
Its African agricultural fund aims to make investments of up to $20m across Africa’s food value chain, from primary production to processing and tertiary services.
It also includes a technical assistance facility of $10m to support the establishment of contractual partnerships (known as “out-grower schemes”) between large companies and small farmers.
Food buyers are beginning to get in on the act. Finance provision in the form of seed capital, recoverable grants, purchase guarantees and price premiums are among the more common approaches.
The global food chain is a complex system. Large buyers are one of many actors. Only collaboration at every level from farm to fork will bring about the changes that are required. That said, as the ultimate customer for the farmers, large food companies have a unique role to play both up and down the value chain.
Strengthening the supply chain, sharing expertise and providing finance are by no means the only contribution they can make. But they are among the most impactful, and as good a place to start as any.
Case study: Starbucks and café culture
In 2004, Seattle-based coffee retailer Starbucks launched a small certification experiment in Central America. The Coffee and Farm Equity (C.A.F.E.) Practices initiative has since expanded to 140,000 farmers in about 20 countries.
By 2010, participating producers provided Starbucks with 81% of its coffee beans – just shy of 300m pounds (135m kilograms).
Unlike other certification schemes, C.A.F.E. Practices is based on the principle of continuous improvement. Producers large or small (99% of participating farms are 12 hectares or smaller) need to pass a basic quality check.
The applicants are then independently certified against a scorecard of environmental, social and economic transparency criteria, as defined in the C.A.F.E. Practices guidelines.
Again, in contrast to other certification processes, third-party certifiers operate entirely independently from Starbucks. The company works with California-based Scientific Certification Systems to assess and train certifier organisations. Coffee producers then contract one of these certifiers to undertake an external assessment of their operations.
While full compliance by producers does not form an initial requirement, Starbucks has a number of zero-tolerance criteria. The list includes practices such as underage or forced labour and payment below the minimum wage.
“Beyond that, it’s really a process of establishing where the farmer is at today and then working with them to make these changes,” says Julie Anderson, global responsibility manager at Starbucks.
That could translate into financial support. Starbucks funds a loan scheme for small farmers to the tune of $14.5m a year. It aims to increase this to $20m in the near future.
More important is the technical advice passed on to coffee farmers. Coordinated through farm support centres in Costa Rica and Rwanda (others are soon to follow in Colombia and China), Starbucks’ agronomists offer training and advice in a range of environmentally friendly and efficient farming methods.
One illustrative example is a freely distributed software programme that helps farmers better interpret soil and leaf analyses. This, in turn, helps reduce reliance on chemical fertilisers and improve both crop yields and quality.
By way of incentive, the top performers (those scoring more than 80% on the C.A.F.E. Practices scorecard) receive a five-cents-per-pound premium for all the coffee sold to Starbucks.
All participating producers stand to benefit, however, according to Carlos Rodriguez, director of agronomy at Starbucks’ Costa Rican farm support centre. Not only do their farming methods become more environmentally sustainable, but their operations become more competitive, he says.
“Once farmers start making changes, the amount of coffee they produce and the quality both increase … and they are able to sell their coffee for a very good price,” Rodriguez explains.
As an extension of the programme, Starbucks is initiating pilots in Sumatra, Indonesia, and Chiapas, Mexico, to help coffee farmers monetise their contribution to carbon sequestration by linking them up with carbon trading schemes.
Starbucks is also working with charity Conservation International to take the C.A.F.E. Practices model and apply it to the cocoa sector.
Case study: General Mills – teaching techniques
Recent years have seen the It’s Wild brand crop up on food retailers’ shelves across Zambia. The brand encompasses a range of processed goods, from rice and peanut butter to honey and soya.
Behind the brand is the Community Markets for Conservation company, known as Comaco. Based in the Luangwa river valley region, the company began as a solution to a wide-scale poaching problem. Too poor to buy food, local communities had little option but to hunt wildlife.
Comaco’s vision is simple: persuade poachers to take up smallholder farming, teach them environmentally friendly agricultural techniques, and then pay them a premium for their produce. The result? A viable economic alternative to poaching.
In practice, things turned out to be slightly more complicated. Comaco was confident it could source a sufficient volume of sustainable produce. But how to process it into value-added products that would appeal to the market?
“General Mills helped fill that gap,” says Dale Lewis, the company’s general director and a leading conservationist.
As the sixth largest food company in the world, Minnesota-based General Mills knows a thing or two about food processing. Through an innovative volunteer pilot programme, the company is linking its technical food specialists to small and medium-sized producers in southern and eastern Africa.
Comaco is one of 14 African small firms currently linked into what General Mills refers to as its “technical philanthropy” activities. About 300 of the company’s 1,200 food scientists volunteer their expertise to the programme’s small enterprise partners via the telephone or internet.
As part of the initiative, General Mills also works with local development charity Technoserve, which liaises directly with the participating SMEs.
John Mendesh, vice-president of research and development for General Mills’ Big G Cereals division and an active participant in the programme, describes the company’s intervention as “creating a virtuous circle”.
The food processors themselves are gaining invaluable lessons in areas such as food safety, process development, plant design, new product development and packaging. That translates into greater productivity, increased quality and ultimately more profitability.
Market access is the key, according to Mendesh. He says: “Without a market, all the agriculture in the world isn’t going to solve the problem [of sustainability].”
Consumers are also set to benefit as the products of these partner SMEs are more nutritious and also more affordable than imported products.
The ultimate beneficiaries are the farming communities, who are seeing their incomes increase as well as their region’s natural capital restored.
Mendesh explains: “Our ultimate aim is to help the smallholder farmers at the very start of the food chain, but we do that by intervening further up the food chain with these SMEs.”
To date, the households of 45,000 farmers have seen their incomes increase. Local wildlife numbers are following a similar trend. Luangwa’s population of zebra, waterbuck and wildebeest are just some of the species that are bouncing back after years of decline.
With the support of US federal aid agency USAID, General Mills is now looking to scale up the project by getting other large food processors on board. Under the umbrella of Partners in Food Solutions, it aims to engage 200 SMEs in 15 African countries in the programme.
IFC supports Ethiopian coffee cooperatives
In October 2010, the International Finance Corporation signed a $10m risk-sharing facility with Ethiopia’s Nib International Bank to support lending to 70 Ethiopian coffee-growing cooperatives.
Over the life of the facility, the volume of coffee processed by the cooperatives is projected to jump from around 460,000 kilos to 4m kilos and create work for 2,000 people, more than half of which are likely to be women. The loans are expected to help generate $17m of export revenues.
The cooperatives will be encouraged to use eco-pulper “wet mill” technology, which reduces water consumption and resulting waste water effluents by 90% compared with traditional methods.
The Ethiopian economy is highly dependent on agriculture, which employs 80% of the country’s 80 million people. Coffee is Ethiopia’s main agricultural crop and accounts for about 35% of total export earnings.