In AP Microeconomics today, a topic of conversation was how to best lift the economic fortunes of those in poor countries. I used supply and demand analysis to show how agricultural subsidies result in surplus food that is sent to foreign locales as food aid. In some countries this has been devastating to local agriculture (Ethiopia, for example). I also used Toms Shoes as an example of when you give a good to people that COULD be produced locally, you may unintentionally harm the local production of that good. (Yes, in most poor countries they do make shoes for local consumption). I believe these policies, in general, are not in the interest of the intended recipients. There HAS to be a better way---MAYBE the following is it....
In the past, American companies doing business in the developing world have not been known for their abilities to forge mutual business relationships---that is a fancy way of saying in many instances it has been outright pillaging. Perhaps Pepsi is breaking new ground in this relationship. If it is genuine and works the way described below, I believe this is THE way to help people improve their standard of living. Giving small farmers a real incentive to produce and be more productive AND do it with a mutual respect for what they do. Seems to be a win-win situation, which is what you want when you trade with someone...Let me know what you think...
For Pepsi, A Business Decision with Social Benefit
In the past, farmers would make the dangerous trek north from this tiny town hidden in the rugged folds of the Jalisco mountain range to the United States, hoping to earn enough money doing odd jobs to cover debts incurred while cultivating the small plots of land that have been in their families for generations.
But more recently, many have managed to avoid the trips, staying home as the result of a new venture with PepsiCo, which buys their crops.
“Some of us used to go north to work to make money to pay off debts, but no longer,” said Martín Ramos Torres, a farmer, adding that at least two members of the cooperative he leads had been caught by United States border patrol agents and deported. “In just three years, everything has changed.”
Mr. Ramos and some 300 small farmers here no longer sell their corn to middlemen but directly to PepsiCo, which guarantees the price it will pay for their crops upfront. The deal enables the small farmers to secure credit to buy seeds and fertilizers, crop insurance and equipment.
“Before, I had to sell my cow to buy what I needed,” said José Guzmán Santana, another farmer selling to Pepsi. “Now I keep the cow and my family has milk while I grow my crop.”
PepsiCo’s work with the corn farmers reflects a relatively new approach by corporations trying to maintain a business edge while helping out small communities and farmers. Begun as a pilot project by the foundation affiliated with the company’s Sabritas snack foods division, it is expanding to about 850 farmers to develop a local source of sunflower oil, which the company needs to improve the nutritional quality of its products.
The corn project saved PepsiCo transportation costs because the farms were close to two of its factories, and the use of local farms assured it access to types of corn best suited to its products and processes. “That gives us great leverage because corn prices don’t fluctuate so much, but transportation costs do,” said Pedro Padierna, president of PepsiCo’s operations in Mexico, Central America and the Caribbean.
The social benefits of the corn program are obvious in higher incomes that have improved nutritional and educational standards among the participating farmers, not to mention its impact on illegal immigration and possibly even the reduction of marijuana production.
The sunflower farmers are expected to see similar benefits — but PepsiCo insists those benefits are ancillary to the business rationale for the program.
A growing number of major companies have adopted similar business tacks aimed at profitability that also prove to be economically and socially beneficial for needy people. One of the earliest examples was Danone’s development of a vitamin-enhanced yogurt product that sells for 11 cents in Bangladesh. The product is profit-neutral, but has given the company valuable insights into the 2.5 billion potential consumers who live on less than $2.50 a day.
“These are markets,” Harry Verhaar, head of strategic sustainability initiatives at Philips Electronics, said of countries with sizable populations of impoverished consumers.
Philips has begun selling low-cost, solar-powered lighting products in Africa to people who lack access to the electrical grid. “We are developing products to address them that are economically good for us as a company and also good for ecology and good for consumers,” Mr. Verhaar said.
The products reduce the use of kerosene, the fuel of choice among the world’s poorest consumers. Because they light homes that previously went dark at sundown, they may enable a child to study longer or a community to enjoy an evening soccer game.
And they have spawned business. “A guy will set up a small shop with a large solar panel on the roof or behind and charge a small fee for recharging the solar light,” Mr. Verhaar said.
“We are seeing an increased focus by companies looking to see how they can use their core capabilities for public good rather than simply writing a big check,” said Gaurav Gupta, regional director for Asia at Dalberg Global Development Advisors, a consulting firm focused on international development. “They’re starting to realize that the marginal cost of doing a little extra good produces such a great impact — and not only in terms of good will, but also because it’s good for business.”
Mr. Gupta stressed that what was emerging was not “corporate social responsibility,” a loosely defined concept typically driven by corporate marketing departments, which he said was “largely nonsense.”
“This is about a company’s core activity, which is something it is constantly thinking about and working to improve,” he said. “Its impact on business can be defined and measured.”
Derek Yach, the former World Health Organization official who is now PepsiCo’s senior vice president for global health and agriculture policy, said firmly: “This is a business. All the good things we want to do have to be financed out of the profits of the company, so why not do them while we are doing our business?” Mr. Padierna described the program in the state of Jalisco as Act II of a three-act play, which started when the company needed a way to mitigate its impact on the potato market. Through a guaranteed purchase system similar to the one it uses with the small farmers, PepsiCo enticed big agribusinesses to invest in the development of potato varieties better suited to Mexico’s tropical climate and also mitigated its impact on potato prices, which swung wildly because its demand was so large.
Today, the company is the largest buyer of potatoes produced in Mexico, accounting for some 22 percent of total potato purchases there.
Working with small farmers was a bigger challenge. Mr. Guzmán and Mr. Ramos, for instance, had little experience with pesticides, having previously relied on the local priest to bless away worms.
Nor did they maintain bank accounts, a hurdle to payment by wire transfer. “We didn’t have money to put in the bank,” said Bonifacio Villalvazo, who together with Mr. Guzmán and Mr. Ramos is a member of one of the cooperatives created by the program.
The company teamed up with a Mexican nonprofit group, Fundación Sembrando Trabajo, which extended to farmers in Jalisco a program it had begun in Chiapas. “The levers we use in this program are tiny, but they have tremendous impact,” said Alberto Castelazo, chairman of Sembrando Trabajo.
A team of engineers from the nonprofit did soil and other tests to determine what seeds and fertilizers would work best. The engineers live nearby and so are frequently on hand to offer farmers advice and services, like delivering the seeds, instructing farmers on how to plant them and counseling on the safe disposal of pesticide containers, which in the past had been re-used to store water and other things.
“They taught us to first triple-wash them and then to poke holes in the bottom so they can’t be reused,” Mr. Guzmán said. “Now we use them to make fences” — which in turn reduces the need to cut down trees, thereby reducing soil erosion.
Other members of the group repeatedly stressed how helpful it was to know they would receive their seeds and supplies on time. In the past, they worked through intermediaries who would sell them what they needed to plant their crops, financing some or all of their purchases.
The intermediaries decided when to deliver seeds and fertilizer and when the farmers would harvest. And almost invariably, the price an intermediary would pay for that crop was less than the amount a farmer owed him — assuming he even agreed to take the crop. “I planted a lot less because I didn’t know if I could sell it and I didn’t want to end up with a big debt,” said Germán Rodríguez Estrada, the youngest member of the cooperative. “Now that I have a secure buyer, I plant twice as much.”
Indeed, the farmers said Pepsi’s purchase guarantee was the most valuable aspect of the program, benefiting even farmers who did not participate. “My neighbors come to me and ask what Sabritas is going to pay me for my crop,” Mr. Ramos said. “Now everyone is getting that price.”
The farmers said the price was higher than they ever got from any intermediary, which means they end up with money in the bank after a crop is harvested. Sembrando Trabajo estimates that while their output has increased by about 160 percent, their incomes have tripled over the three years the program has been in place.
“Well, it depends on the year and the crop, but, yes, we all have higher incomes in general,” said Matías Estrada Figueroa, the treasurer of the cooperative.
They now maintain bank accounts, which Ellis J. Juan, representative of the Inter-American Development Bank in Mexico, considers one of the primary “macro” benefits of the program. “The minute one of these farmers gains access to the financial system, he in a sense has to become legal,” Mr. Juan said. “He may have to pay taxes, which is good for Mexico, but he also develops a credit history that might later give him access to a loan he could use to send his child to college.”
Other broad benefits Mr. Juan cited were the program’s potential to reduce illegal immigration to the United States and the cultivation of marijuana. “The minute you can have a crop that provides higher profits, that becomes a possibility, though of course it’s hard to measure,” he said.
The bank has struck an agreement with PepsiCo to provide up to $5 million in credit guarantees to support a program similar to the corn project. The new project has enlisted farmers in the states of Jalisco and Durango grow sunflowers, the first time since 1970s that the crop has been grown for anything other than floral arrangements and bird seed, according to PepsiCo.
The company will spend roughly $52 million over the next seven years to buy crops that may eventually produce 40,000 tons of sunflower oil. That oil will begin replacing the 80,000 tons of palm oil it needs each year for products made in Mexico. The new oil will improve the nutritional quality of the foods it makes and will lower transportation costs, since palm oil must be imported from Asia and Africa. That, in turn, will have environmental benefits.
As for the San Gabriel cooperative, its members are applying for a government grant to buy a tractor, which they say will increase productivity and yields. “Yes, a tractor or some other machinery, maybe a cooperative where we could sell seeds and fertilizers to other farmers,” Mr. Ramos said. “It’s just the beginning of what we might do.”
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