Katie Ricketts and Mark Lundy

New Business Models for Sustainable Trading – Part 2

Editor’s Note: This post is part of a recurring series exploring new business models for linking small farmers to global markets being analyzed through an international collaborative effort that can be read about here. Read the first part here and visit CIAT’s blog to learn more.

Supply chain discussions, counting sheep and drinking warm milk have been sleep aids for insomniacs everywhere for quite some time. But before your eyes glaze over and your head hits the keyboard, consider a bigger picture: Supply chains connect us with every person, through every product, in every corner of the globe. How can we encourage collaboration, information sharing, resource and technology transfer to create supply chains that allow small farmers to be successful and critical participants in global food chains?

Principle 1: Chain-wide collaboration

Businesses that are shifting procurement and buying practices to include small farmers tend to recognize their participation in a comprehensive business ecosystem. In this ecosystem, chain-wide collaboration is a key business strategy. In agriculture, adaptation to market fluctuations in terms of quality and quantity are two broad categories perpetuating inefficiencies and profit losses. Small farmers are least likely to cope with these shifts, often dropping out of markets completely. Chain-wide collaboration ensures that actors can reach a common goal of both supply and price stabilization, in conjunction with greater profitability by:

-Sharing critical information:

-Maintaining transparent standards and creating greater value

-Identifying and pro-actively collaborating to solve problems

Sharing Critical Information:

Gauging accurate market demand and distributing market information is key to supply and price stability along agricultural supply chains. Committed distributors and retailers with a pulse on supply trends can be critical to cooperatives and entities assisting small farmers to reduce risk and plan accordingly.

Cuatro Pinos is a 30 year old farming cooperative in Guatemala, established to bring jobs and economic development to seven principally indigenous communities near Saquetepequez. Today the operation employs over 5,000 small farmers, 562 of whom are as co-owners. Through supply chain coordination, success is directly linked to the clear communication and knowledge sharing between Cuatro Pinos and its value chain partners.

Using sales projections from its wholesaler, LA Salad , market data flows directly from US retailers to buyers in Los Angeles to the cooperative. This information helps the cooperative create more accurate planning schedules, estimate future gaps and anticipate changes in demand. The result is greater supply chain agility and a greater chance at supply chain and price stability.

Maintaining Transparent Standards and Creating Greater Value:

Chain-wide collaboration is essential for creating increased value and maintaining product standards. Today, food trade companies are responding to a growing demand for greater food safety, traceability, and sustainable sourcing standards. These standards require strict adherence all along the supply chain, which means that every actor in the chain has a vested interest in ensuring that other members follow procedure.

Certifying agencies as well, might step into a “champion” role, helping companies establish metrics and outlining best practices around which companies can rally around. Rainforest Alliance, Organic Certification, Fair Trade and sustainability reporting (like GRI and ISEAL), are a few examples of organizations assisting companies with a long term visioning for meeting chain-wide standards for value creation through certification. As companies use small farmer inclusion in supply chains to convey increased value to both customers and investors for social and environmental sustainability, compliance with standards and transparency will only strengthen investor and consumer perceived value.

Unilever, a global corporation with over 10,000 suppliers of raw materials and packaging, is one of the world’s largest buyers of palm oil. The extraction is notorious for perpetuating rainforest deforestation and Unilever has committed to sourcing 100% sustainably cultivated palm oil by 2015. As founder of the Roundtable on Sustainable Palm Oil (RSPO), Unilever is collaborating with a number of NGO’s, 50 private companies, international banks, and hundreds of its supplies towards the integration of these new, sustainable cultivation standards. Coordinated chain shifts like this, offers new opportunities to better serve existing markets, the chance to enter new markets, add value, and implement innovative, sustainable processes.

Identifying and Resolving Issues:

Unforeseen environmental, social, and political events can distort production yields, complicate transport and delivery, and result in dramatic price fluctuations and volume gaps.

Mechanisms of support with a long term objective of system-wide stability can assist with managing risk effectively. In agriculture, risk management is an inherent part of the process of food production. Unpredictable weather, shifts in consumer demands, less than transparent application of regulations, and logistical challenges challenge leave certain actors assuming unequal levels of risk. Often, vulnerability to these risks is most extreme at the farm level. Companies engaging in chain-wide collaboration are preserving business relationships and reducing single player exposure to risk in favor of system-wide stability.

Del Cabo, a US company specializing in organic vegetables and herbs works with multiple, independent grower groups in parts of rural Baja California. Among other things, Del Cabo is working to reduce price shocks and supply gaps due to unexpected economic and environmental crisis experienced by farmers. Towards this end, Del Cabo established a “rainy day fund”, based on a percentage of farmer and company profits to assist growers with unforeseen issues that affect crop production. This savings fund is extended to any member of the network experiencing an unexpected crisis. This collaborative effort ensures that all actors on the chain continue to function, recoup losses, and maintain their place in the chain.

Building momentum towards collaboration

By sharing risk, disclosing information, and finding collaborative solutions to potential problems, companies can come together and small farmers can be successfully integrated. Chain-wide collaboration can create product and corporate value, stabilize price and supply, and offer significant returns for social impact. Our upcoming five posts will discuss the remaining 5 principles for smallholder inclusion, including:

  • New market linkages;
  • Fair and transparent chain governance;
  • Equitable access to services;
  • Inclusive innovation in the chain; and
  • Shared measurements and outcomes