Drought in a wheat exporting country like Russia can lead to social unrest in North Africa and the Middle East. Take the metaphor of the butterfly which can cause a hurricane in Texas merely by moving its wings. In a system where many factors are interlinked, a minor event can trigger a set of consequences which increase exponentially: the so-called butterfly effect. That’s what happens in food chains as well
The New England Complex Systems Institute illustrated this relationship by comparing food riots to the food price index of the United Nations Food and Agriculture Organization (FAO). The researchers discovered a clear correlation: when food prices rise above a specific threshold (for example, failed harvests in countries which export food) that immediately causes unrest in relatively poor countries which are food importers. Extreme fluctuations in food prices can have major social impacts.
Effect of food hypes
The butterfly effect in the food chain works in reverse as well. Not so long ago consumers simply ate what was in season and on sale in the market. Now it’s the other way around: farmers produce what consumers want. An influential food blogger who starts a health hype in Amsterdam or San Francisco can influence the way farmers run their business in another part of the world. Take quinoa and avocados. Many farmers in South America (quinoa) and South Africa (avocado) have allocated a significant proportion of their land to a new crop to meet demand from Western consumers. From plate to farmer, not farmer to plate.
But the farming sector is never completely demand-driven says Gilles Boumeester, Head of RaboResearch Food and Agribusiness. ‘Firstly, agricultural production is subject to much more uncertainty than the production of consumer goods: the weather, good or bad harvests, plant and animal diseases, quality controls. But what’s even more important is that there are always by-products. If a consumer wants a car, the manfacturer assembles one from all kinds of parts. But if the same consumer wants a pork steak, the farmer has to slaughter a pig, after which he is left with 149 products which he also has to sell. In other words, demand also steers supply. This doesn't just apply to meat but to numerous agricultural products. If the demand for cheese rises, you get more whey. And the production of soymeal also yields soy oil.’
"There is limited knowledge of food production chains"- Gilles Boumeester, Head of RaboResearch Food and Agribusiness
Farmer runs greatest risk
A stable food chain starts with a stronger position for the farmer. In this demand-driven chain it’s the farmer who runs by far the biggest risks. Time and again farmers have to wait and see whether they can recoup their investments. For instance, if a farmer decides to plant an almond orchard to meet the demand for almond milk, he will have to wait six years for the first fully fledged harvest. By that time the hype may be long gone. The farmer is stuck with his almonds and the land has been incorrectly used for a period of six years. Making bankruptcy almost inevitable.
More sustainable, environmental friendly production methods - which are increasingly expected or even demanded from farmers - also require significant investments. Here again, the farmer simply must wait and see whether he will get a return on his investment. Gilles Boumeester: ‘You could say that nearly every player in the food chain turns a healthy margin except the farmer. They can consider themselves lucky with a return on equity of between 1 and 2%. The combination of small margins and big risks is a destabilising factor. Farmers may go bankrupt or choose to make very low levels of investment. As a result, in the long term they produce less and weaken their competitive position. If farmer’s risks become unacceptable, it’s difficult for them to obtain funding.’
Rabobank helps farmers by adjusting repayment schemes to lows in the price cycle or periods when the farmer or the sector is going through hard times. We also have products which cover the risks of price volatility for buyers. This means they can offer more stable prices to the farmers.
How we work on a stable food chain
Cooperatives have proven their worth in reinforcing the position of farmers, particularly smaller ones. Rabobank advisers around the world advise farmers about setting up cooperatives, particularly in emerging markets. Recently Rabobank was involved in setting up a milk cooperative in Uganda. Gilles Boumeester: ‘Rabobank has its origins in a country which was strongly formed by cooperatives. But cooperatives are not suitable for all products. They tend to work well for dairy farmers, but grain cooperatives can be trickier. You can always sell grain to a buyer who offers you a better price (side selling). That’s more difficult with milk – you have continuous production and it’s not really a product that you can take out and tout around.’
True pricing is another way to reinforce the position of farmers. This form of pricing calculates not just the investments the farmer has made in the product, but also the potential secondary effects resulting from the production. Examples are the various ways in which farmers contribute to water management and to adjusting CO2 in the soil.
To arrive at a calculation of the true price, a simple methodology is needed to calculate and incorporate the costs and benefits to society in the price of different agricultural products. The Dutch social enterprise True Price is working with Wageningen University to develop such a methodology but there’s still a long way to go. In fact agreements on true pricing can only truly be made in an international context.
"Nearly all the players in the food chain turn a healthy profit, except the farmer"- Gilles Boumeester, Head of RaboResearch Food and Agribusiness
Raising consumer awareness
Chocolate manufacturer Tony Chocolonely decided on a different route. To deliver on their promise of slave free chocolate they carefully map out and check every link in their own production chain. From the cocoa plantations in West Africa right through to the supermarket shelves. It’s a strategy that’s paying off because many consumers have embraced this original brand and are prepared to pay the ‘true price’ of this chocolate. The more successful Tony Chocolonely becomes, the greater the pressure on other chocolate manufacturers to be more transparent. And that’s exactly what the idealistic brand wants to achieve: making the entire chocolate industry ‘slave free’. If you make production chains transparent, consumers are more willing to pay a supplement for sustainably produced products. ‘Everyone loves talking about food but there’s limited knowledge of production chains,’ says Gilles Boumeester. ‘Increasing public awareness is high on our agenda, which is why Rabobank also partners with organisations like the Food Education Platform in the Netherlands (Voedseleducatie Platform). They develop materials for primary schoolchildren, teaching them how food is produced for instance. If it were up to me, we should be talking not just about the fair-trade oriented initiatives which benefit smaller farmers but also about milk or bread. People need to pay a fair “true” price for those products as well.’
Rabobank is involved in several initiatives in emerging markets to give farmers access to the pricing process. If a farmer can check on his mobile for the current world market price of a tonne of coffee beans or a kilo of cocoa, he has a stronger information base relative to the buyer. He will still have to negotiate the best possible deal but he will at least know the true value of his crops.
Rabobank also advises large agricultural businesses on setting up outgrower schemes. Palm oil plantations, for instance, are large-scale businesses which generate good returns. They often work with numerous small farmers who could use a helping hand. Together with the major palm oil producers and wholesalers Rabo Development and Rabo Foundation work to improve the position of these kinds of supplier by providing education and access to finance.
Rabobank is a member of a consortium of public and private organisations which took the initiative to set up the Patient Procurement Platform (PPP). This is primarily an agreement with the UN World Food Programme to buy agricultural products from small farmers in Rwanda, Tanzania and Zambia. It is a huge step forward for the farmers because they find it very difficult to obtain fixed contracts. The added certainty means that they can invest in their business for the first time. The goal is to sign up 1.5 million farmers in 25 countries to the platform by 2030.
There is no quick fix to stabilise the food chain. Improved coordination and closer collaboration within the food production chains is needed but is also complicated due to multiple stakeholders. Long-term contracts between buyers and suppliers are still the exception since they are generally considered to limit their room for negotiation. Fortunately, the parties in the chain are starting to see the benefits of ‘vertical collaboration’ in the food chain. In the long term nobody gains from instability.