Value Chain Analysis for Sustainable Rural Development by: Ivan Idrovo and Marian Boquiren. Contracted by: GIZ-Department of Agriculture-NCI-Philippines

1. 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.
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2. 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 costeffectively 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
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3. 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
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4. 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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5. 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.
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6. 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.
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7. 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 firmdeveloped 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 hormonefree, 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
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8. 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.
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9. 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.
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10. 3. Selling exclusively to the highest-priced market channel may not maximize an MSE’s riskadjusted 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
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11. •
•
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
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12. 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 Significant
ramifications
for
the general environment and is business and reputation with
of great concern to stakeholders. potential for substantial losses or
gains.
Medium
Causes some damage to some Moderate
ramifications
parts of the environment and business and reputation.
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13. attracts
concern.
Low
some
stakeholder
Results in minimal environmental Minimal ramifications for business
damage, with limited stakeholder and reputation
interest.
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Example of a high priority issue: Use of commercial feeds in pig production
Issue
Business Impact
Reliance on commercial HIGH
feeds in hog raising
Low profitability
Environmental Impact
HIGH
High ammonia emission
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14. Acidification
A growing number of High energy use
customers fear eating meat
from
hogs
raised
conventionally (commercial
feeds,
inorganic inputs/
additives)
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
environmentallysustainable 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 Additional service that
Alternate Wetting and can be provided by
Drying (AWD),
a irrigators’ association
water-saving
technology
that
lowland (paddy) rice
farmers can apply to
reduce their water use
in irrigated fields
Development
of
Access to short-cycle indigenous capacity to
and high-yielding rice produce certified seeds
could
successfully of varieties adapted to
lower the amount of changing
agroirrigation water used ecologies, with high
in
continuously tolerance to biotic and
flooded cultivation. A abiotic
stress,
and
more
consistent suited to low input
reduction of water systems. The certified
consumption could be seed production units
obtained
by can be communitydeveloping profitable based
enterprises
varieties suitable to owned and operated by
discontinuous
farmers
and
farm
irrigation in all climate laborers.
These
Irrigators
Association
Rice
Farmers
Association
Communitybased certified
seeds producers
Rice
Farmers
interested to go
into
seed
production
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15. ISSUE
POTENTIAL SOLUTION
availability of surface conditions.
water reserves, and
reduced depletion of
groundwater
aquifers
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.
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
APPROACH TO
IMPLEMENTING
SOLUTION
POTENTIAL
PROPONENT/
CATALYST
community-based
enterprises can also be
developed to provide
coaching to their peers
LGU
Rice
Farmers
One-time
technical Association
assistance to develop
core
group
of
community-based
trainers to support LGU
extension officers
Community-based
Farmers
processing
and Association
marketing
of Input Dealers
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
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16. ISSUE
POTENTIAL SOLUTION
APPROACH TO
IMPLEMENTING
SOLUTION
POTENTIAL
PROPONENT/
CATALYST
inputs result to poor technology and mulch tantamount
to
an
yields.
(rice straw)
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 Farmers
and trading facility association
operated by farmers’
groups
under
a Oil mill
marketing contract with
an oil mill
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