guidelines on greening agri business -chain upgrading

II/MB.-RESOURCE GUIDE ON GREENING AND INCLUSIVE AGRI AND AGRO ENTERPRISES, GIZ-DA-NCI

SECTION 7: CHAIN UPGRADING AND GREENING STRATEGY

The chain upgrading plan follows the development of a common vision by value chain actors. This section provides examples of strategies aimed at reducing environmental impacts while improving chain competitiveness and promoting inclusive growth.


Supply chains can boost their competitiveness in the following ways:

a) Efficiency: getting a product or service to the end client at a basic quality level cost-

effectively over time.

Example of environment friendly upgrades to achieve efficiency/cost differentiation

India Farmers and PepsiCo: promotion and development of direct seeding technology and machine help rice growers avoid three

water-intensive steps: puddling, transplanting and standing water. In 2010, PepsiCo in collaboration with farmer suppliers in India expanded direct seeding and applied it to approximately 10,000 acres, saving more than 7 billion liters of water. And, because in direct seeding there is no water at the base of the crop, there is


also a 70 percent reduction of greenhouse gas emissions. b) Differentiation: Competing based on quality, functional characteristics, branding, etc.

Example of environment friendly upgrades to achieve product differentiation (from Short Guide to Sustainable Agriculture)

In a bid to bring a new dimension to its agricultural sourcing strategy, Danone Dairy Product business in France adopted an approach developed by Bleu Blanc Coeur, which involves reintroducing omega 3-rich flaxseeds into cows’ diets, supplemented by grass, hemp and alfalfa. Cows’ natural diet is grass, which is rich in beneficial fatty acids. But in the second half of the 20th century, maize silage and soybean cakes became the mainstays of cattle feed. The result has been a change in cows’ milk composition and a shift in the ratio of omega 3 fatty acids to omega 6. Moreover, the modern diet makes cows more prone to flatulence. Danone Europe embarked on the program in 2005. On the twenty French farms taking part in the pilot, greenhouse gas emissions were reduced by 20 to 30%, and milk yield increased by 8 to 10%. Analysis showed the milk contained the same level of proteins as before, but less fat overall. In late 2007 Danone Europe began rolling out the program in its biggest milk collection region around Rouen. Progress was rapid: within six months more than 500 farmers were on board. The program ensures availability of more quality milk and new growth opportunities through delivering healthier products to consumers. But beyond the business angle, the program brings health, social and environmental benefits. The naturally high omega 3 content of the milk gives it functional benefits and contributes to a healthier diet for consumers. Cows are also healthier, and farmers see improvements in production and in their revenues. At the same time, methane emissions from the cows are reduced by around 20 percent.

c) Strategic market choices: assessing and shifting marketing, production or distribution tactics to take advantage of opportunities arising from a value chain’s structure or from market trends, such as:

Seasonality: scheduling production to obtain higher off-season or high-demand (e.g., during holidays) prices Financial flows: targeting cash-rich periods (i.e., harvest time) or internal remittance flows Channel requirements: targeting market channels that better fit a firm or industry's competitive capacities such as lower volume/higher margin or contracted production channels


Example Shift of Clorox from a a chemical intensive consumer product company to one that now has sustainability as a core focus: Aside from the company’s acquisition of Burt’s Bees, Brita and GreenWorks, the following trends pointed Clorox towards the sustainability path: the ever-increasing attention to health and wellness, consumer desire for sustainability, an increasing focus (likely fueled by Wal-Mart) on affordable convenience, and a fast-growing demographic of the Latino community. Clorox invested three years and $20 million into its “Green Works” product line, which is made with non-synthetic materials. By using more sustainable raw materials in its product, the company was able to market the Green Works line to various retailers such as Walmart. The results were very tangible, as Clorox was able to gain a 40% market share of natural cleaners (Nidumolu, September, 2009).

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Process upgrading is usually driven by the need to cut costs and/or increase output in response to competition within the value chain or between value chains. Competition in the form of low-cost alternatives both from inside the value chain and from competing value chains may place pressure on MSEs/agribusinesses by reducing the demand for their products. This competition forces MSEs/agribusinesses to respond by increasing their production efficiency or, in other words, by upgrading their production processes.1 Example 1 (from Short Guide to Sustainable Agriculture) Five Brazilian tomato growers in Goiás state have worked closely with Unilever Brazil since 2002 to adopt sustainable growing practices. The medium- to large sized farms produce 440,000 tons of tomatoes each year between them. But the humid climate, variable weather and high levels of pests make for difficult growing conditions. In February and March, the start of the growing season, Goiás state experiences as much as two to four inches of rainfall a day, making the soil particularly vulnerable to erosion. To minimize erosion and soil degradation, Unilever Brazil’s field staff, who visit the farms weekly, advise growers to keep tilling to a minimum or to avoid plowing the soil altogether. Turning the soil may control weeds, but it exposes the top soil, which is rich in organic matter and retains water well. When top soil is exposed, the organic matter it contains is rapidly broken down and nutrients vital to plant and soil health (nitrogen, phosphorous and potassium) are lost. Not tilling helps to keep the soil in better health and also reduces the need for irrigation and fertilizers, saving farmers money on expensive inputs. Unilever helps the growers implement other land use practices such as sustainable pest control, waste reduction, drip irrigation, and harvesting techniques as well. For the farmers, these sustainable practices result in a lower cost of inputs and a bigger tomato harvest. This means that the gross cost per ton of fruit is reduced. Throughout the year other crops are grown on the healthy land in rotation, such as soy and corn in the summer. By protecting the natural resources and improving the livelihoods of growers, Unilever Brazil is securing its own access to more sustainably produced tomatoes to meet local processing needs.

Example 2 (from USAID MicroReport)

In the horticulture sector, where markets are highly competitive, MSE producers are under constant pressure to increase productivity in order to keep costs down. In Guatemala, smallholder farmers adopt improved cultivation techniques such as better planting densities, hybrid seed varieties, planting seedlings instead of seeds and using integrated pest management to increase their productivity.

1 USAID MicroReport: Lessons Learned on MSE Upgrading in Value Chains.


Likewise, in Honduras, where MSE horticulture producers must compete with large-scale producers, small-holders increase their efficiency and yields by introducing techniques such as drip irrigation, environmentally sustainable disease and pest management and staggered production schedules.

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Product upgrading is motivated by changes in end markets, usually stemming from changes

in consumer preferences. To remain competitive in mercurial markets, MSE producers must

up-grade their products to meet consumer preferences.


Example 1. (USAID Micro Report)

The coffee industry provides a clear example of demand-driven upgrading. Over the past 15 years, consumers have become increasingly aware of the origins of coffee and the social and environmental issues associated with coffee production. With this increased awareness, there has been a corresponding growth in consumer demand for specialty coffee that meets certain health, safety, environmental and social standards. In response to this changing demand, many coffee growers have tapped market opportunities for specialty coffee by upgrading their product to meet specialty coffee specifications, such as international organic and fair trade certifications or lead firm-developed standards such as Starbucks’ Coffee and Farmer Equity (CAFÉ) practices.

Making the changes that are needed to achieve higher standards can be cost-prohibitive for MSE owners. In order to provide MSEs with adequate incentives to adopt practices that cost them time and money, buyers may follow a “carrot” and/or a “stick” approach. In the case of coffee farmers in Chiapas, Mexico, complying with CAFE practices allowed them to receive a higher unit price for their coffee, thus providing a “carrot” type of incentive. On the other hand, the lead firm can employ a “stick” approach by exerting its buying power to influence MSE producers to upgrade their product by simply refusing to buy from them unless they upgrade. Example 2 The price of feed has the largest effect of all inputs on the profitability of hog growers. One of the most consistent determinants of relative profit efficiency, and thus, of profitability over time, of backyard hog production is the use of good quality feeds. The use of good feeds in conjunction with the use of higher quality animal breeds shows up in the taste of the meat, the percentage of fat, and also in better feed conversion ratios. Likewise, a change in the price of feed has a large impact on the profitability of hog farmers. Feed and slurry production are important environmental hotspots in the product chain of pork. The feed digestibility is a key parameter for achieving reductions in both the feed consumption and slurry excretion per pig produced. Improved digestibility can also be obtained with improved farm management. To address above constraints, GanaVida and its network of suppliers focused on the production of naturally farmed pork cuts. More than just being antibiotic- and hormone-free, the products are naturally delicious and full of flavour. Hogs are raised in the same farm or within the proximity of farms where most of their feed is grown under an organic or natural farming system and where manure is recycled efficiently and ecologically. Livestock management is based primarily on reducing and avoiding stress as opposed to treating or compensating for the symptoms of stress. Hogs


thrive on an all natural fermented diet aimed for good nutrition, efficient feed conversion ratio, and enhanced meat flavour.

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Functional upgrading refers to the basic question of which activities the actor in the chain should concentrate on. Examples of functional upgrading would be a cassava farmer expanding his/her activities to chipping and consolidation. Dry chips have 3 advantages: a) adds value for cassava farmers; b) longer shelf life: and c) dry chip is lighter and takes up less space than fresh tuber, which reduces transport costs.


Source: USAID MicroReport – Lessons Learned on MSE Upgrading in Value Chains 1. Channel upgrading by MSE owners is motivated by the desire to improve risk-adjusted

returns.

Higher prices, higher sales volumes and more effective risk management through diversification all provide incentives for MSEs to enter into new market channels. MSEs may also enter into new market channels to seek an outlet for lower quality products that do not meet export or other high-value market standards.

2. Channel upgrading is a dynamic response to changing market conditions.

Firm owners respond to changing consumer preferences and prices in a dynamic way, so that channel upgrading is rarely a complete and one-time-only shift from one market channel to another. In some cases, MSEs shift to a new market channel to escape declining prices. In other cases, MSEs seek less volatile prices.


3. Selling exclusively to the highest-priced market channel may not maximize an MSE’s risk-adjusted returns.

Markets are dynamic and the end market paying the highest prices today may not pay the highest prices tomorrow. The risks associated with price and demand fluctuations are an important motivation for MSEs to sell in multiple market channels, including lower-value market channels.

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1. The vision provides the platform for prioritizing constraints and operations and, consequently, interventions. Industry stakeholders must come to an agreement on:

• How to create a competitive advantage


• What is to be the focus of the skills development and upgrading strategy • What is needed to sustain competitiveness

2. Prioritize constraints and opportunities on skills and critical occupations identified

during the subsector analysis vis-à-vis competitiveness vision together with industry stakeholders.

3. Define strategies together with industry stakeholders. The process of establishing and

defining the strategic directions must be driven by industry stakeholders, principally but not exclusively from the private sector.

A good strategy: a) exploits the positive current situation; b) preserves and manages existing resources; and c) Focuses on efficiency and effectiveness.

4. Take into consideration the capacities and incentives of players in the industry when designing strategies to ensure that the starting point is well within their reach. Incentives and motivations are important considerations so as to ensure that stakeholders do not lose interest in the change process and will take ownership of the strategies.

5. For strategies that require subsidy or external funding support, it is important right from the outset to think of the exit and sustainability strategy. To the extent possible, strategies should be based on market-based or commercially grounded transactions

6. In designing strategies, it is important to focus on the underlying cause of the constraints and not the problem itself.

7. Identify catalysts --- actors in the value chain with incentives, skills, and resources to

drive upgrading investments in the chain


Sources: - Sustainability Manufacturing Toolkit

It is advisable to focus on constraints that present opportunities for simultaneously creating value for the business and tacking environmental management. One way to prioritise a range of issues involves ranking them according to their relative environmental and business impact.

Assessing Degree of Impact for Prioritizing Constraints

Impact Level Environmental Impact Business Impact

High Results in significant damage to the general environment and is of great concern to stakeholders.

Significant ramifications for business and reputation with potential for substantial losses or gains.

Medium Causes some damage to some parts of the environment and

Moderate ramifications for business and reputation.


attracts some stakeholder concern.

Low Results in minimal environmental damage, with limited stakeholder interest.

Minimal ramifications for business and reputation

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Example of a high priority issue: Use of commercial feeds in pig production

Issue Business Impact Environmental Impact

Reliance on commercial feeds in hog raising

HIGH Low profitability

HIGH High ammonia emission


A growing number of customers fear eating meat from hogs raised conventionally (commercial feeds, inorganic inputs/ additives)

Acidification High energy use

Potential Solution: Shift to natural feeds Improvement of feed digestibility through fermentation Improvement in Feed Management Practices

SUGGESTED TEMPLATE IN DEFINING POTENTIAL STRATEGIES/SOLUTIONS

ISSUE POTENTIAL SOLUTION APPROACH TO IMPLEMENTING

SOLUTION

POTENTIAL PROPONENT/

CATALYST

Example: Rice Value Chain

Rice is more water consuming than many other crops. Water is a substantial economic cost to rice producers and processors, as well as an environmentally-sustainable concern. The large amount of irrigation water needed for rice production can eventually lead to groundwater table reduction or can place pressure on surface water supplies. The direct benefits of water conservation include reduced pumping costs, increased

Introduction of Alternate Wetting and Drying (AWD), a water-saving technology that lowland (paddy) rice farmers can apply to reduce their water use in irrigated fields Access to short-cycle and high-yielding rice could successfully lower the amount of irrigation water used in continuously flooded cultivation. A more consistent reduction of water consumption could be obtained by developing profitable varieties suitable to discontinuous irrigation in all climate

Additional service that can be provided by irrigators’ association Development of indigenous capacity to produce certified seeds of varieties adapted to changing agro-ecologies, with high tolerance to biotic and abiotic stress, and suited to low input systems. The certified seed production units can be community-based enterprises owned and operated by farmers and farm laborers. These

Irrigators Association Rice Farmers Association Community-based certified seeds producers Rice Farmers interested to go into seed production



SOLUTION


CATALYST

availability of surface water reserves, and reduced depletion of groundwater aquifers

conditions. Promotion of intercropping. Intercropping allows for further water savings and more efficient water usage, and effectively provides growers with two crops from the one application of water. Careful water management of rice farms is needed to ensure both environmental sustainability and rice productivity.

community-based enterprises can also be developed to provide coaching to their peers One-time technical assistance to develop core group of community-based trainers to support LGU extension officers

LGU Rice Farmers Association

Reliance on inorganic inputs and poor farm management practices: The increased use of chemical/ inorganic inputs during rice production represents not only increased cost of production for farmers, but also a potential source of pollution. Fertilizers account for 25% - 30% of total cost of production. Suboptimal use of

Upgrading of Nutrient Management Practices/ Promotion of Good Agricultural Practices (GAP) Promotion and adoption of natural rice farming protocols. This can facilitate the gradual transition into organic rice production. Production and use of natural inputs Methane mitigation using reduced tillage

Community-based processing and marketing of technological inputs which will reduce dependence on expensive external inputs and facilitate shift towards sustainable, regenerative production systems. This will also contribute to employment generation. Availability of cheap and quality fertilizer will augment the purchasing power of farmers which is

Farmers Association Input Dealers



SOLUTION


CATALYST

inputs result to poor yields.

technology and mulch (rice straw)

tantamount to an increase in income. Coaching on GAP and natural farming protocol can be provided as an embedded service.

Example: Copra

The traditional method of drying copra is labor intensive, increasingly expensive, and results in the presence of toxic substances such as aflatoxin, which is unsafe for human consumption. Poor quality copra translates to losses for all players in the coco oil chain. In addition, copra makers are exposed to intense heat and smoke especially so that they do not use any safety or protective gears.

Shift to white copra production/ Upgrading of facilities and technology

White copra processing and trading facility operated by farmers’ groups under a marketing contract with an oil mill

Farmers association Oil mill

guidelines on greening agri business -chain upgrading

Business

quality milk

cows milk composition

inclusive agri

resource guide

cows diets

milk yield

cows natural diet

greening strategy