Sustainable Transformation Of Agriculture at Scale: Opportunities and Challenges
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Presented by Jonathan Gheyssens, UNEP, Luxembourg 29th November 2019 https://events.globallandscapesforum.org/agenda/luxembourg-2019/day-1-2/interactive-session-8/
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Sustainable Transformation Of Agriculture at Scale: Opportunities and Challenges
- 1. 04/12/2019 UN Environment - Financing Sustainable Land Use - Ivo Mulder 1 Sustainable transformation of agriculture at scale: opportunities and challenges Jonathan Gheyssens, UNEP Luxembourg 29th November 2019
- 2. 04/12/2019 Financing Sustainable Land Use - UN Environment - Geneva 2 • Why we need sustainability is clear and its urgency apparent (Emissions Gap report 2019) • What needs to be done in terms of targets and safeguards is also in the process of being clarified • What is still missing is the “how”: how to change long- standing, complex systems with maximum adhesion and minimum negative side effects • Long-term structural land use changes at scale need to be grounded in viable and credible economic opportunities • Thanks to support from the government of Luxembourg, we have initiated that reflection by looking at business models of sustainable land use for two commodities: beef in Costa Rica and coffee in Vietnam The Business case project
- 3. 04/12/2019 Financing Sustainable Land Use - UN Environment - Geneva 3 The sector’s productivity and profitability is low – in need of enhancing its sustainability performance • Low productivity and profitability of livestock sector in Costa Rica – the sector is heavily exposed to future impacts of climate change and the third largest emitter of GHG • Limited availability and coverage of financial products and services attuned to the needs of the sector Conducive enabling environment for transitioning to a climate-smart livestock sector • Government of Costa Rica has adopted a Low-Carbon Livestock Strategy and a NAMA Livestock. The objective – transition to a climate-smart sector with increased productivity, profitability, reduced GHG and increased resilience to climate change • Promoted technologies and practices – rotational grazing, hedgerows, improved pastures, organic fertilization, improved water management and natural regeneration of forests (sustainable intensification) – Space for sustainable intensification Beef sector in Costa Rica: context and scope Current challenges and opportunities faced by small and medium sized livestock sector producers in Costa Rica
- 4. 04/12/2019 Financing Sustainable Land Use - UN Environment - Geneva 4 Beef sector in Costa Rica: Adoption of climate-smart technologies and practices (60,000.00) (40,000.00) (20,000.00) - 20,000.00 40,000.00 60,000.00 80,000.00 100,000.00 120,000.00 140,000.00 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 KG Year Emissions CO2e balance – improved scenario Capturas de CO2 (Media) Total de Emisiones (Media) Emisiones Netas (Media) 0 50000 100000 150000 200000 250000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 KG Year Emissions CO2e - BAU Total de emisiones entéricas (Media) Total de emisiones entéricas (Max) Total de emisiones entéricas (Min)
- 5. 04/12/2019 Financing Sustainable Land Use - UN Environment - Geneva 5 Adoption of climate-smart technologies and practices in the beef sector -40,000 -20,000 0 20,000 40,000 60,000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Colones Year Net Cash Flow - BAU Flujo Neto (Media) Flujo Neto (Max) Flujo Neto (Min) 0 5 10 15 20 25 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 HA Year Land Use Change Evolution - BAU Pasturas (Media) Cultivos (Media) Bosque Primario (Media) Bosque Secundario (Media) Plantación Forestal (Media) Casas y edificios (Media) Otras actividades (Media) -40,000 -20,000 0 20,000 40,000 60,000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Colones Year Net Cash Flow – Improved scenario 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 HA Year Land use change – evolution improved scenario Business-as-Usual • limited coverage of improved pastures • No fodder bank for animal protein Improved scenario • Increased coverage of improved pastures (30%) • 1 hectare utilized for a fodder bank – animal protein • 10% of pastures liberated for natural regeneration (potential PES)
- 6. Coffee sector in Vietnam: context and scope • Focused on the situation of Robusta producers in the Central Highlands • 90% of producers exposed to soil depletion, decreasing yield and the overapplication of agrichemical at increasing cost • More of them are forced out of coffee farming, putting global supplies at risk 12/4/2019 Financing Sustainable Land Use - UN Environment - Geneva 6
- 7. 04/12/2019 Financing Sustainable Land Use - UN Environment - Geneva 7 Resilience to changing market conditions The likelihood that the market price will be above the minimum price to provide sustainable livelihood for smallholders Figure shows the minimum price for positive NPV over 25-years and the likelihood of that price within the last 10-years Model Minimum sustainablefarm gate pricefor coffee(USD) Liklihood that priceisgreater than min farm gatepriceCoffeemono-crop 1 yr rejuvination 1.646 43.4% Coffeemono-crop 10 yr rejuvination 1.528 55.9% Durian 0.167 99.9% Avocado 0.00 100.0% Cassia 1.377 68.1% Cassia & Pepper 1.161 73.5% • Intercropping and diversification hugely beneficial for resilience and livelihood improvement • Importance of choosing the right combination of crops
- 8. 04/12/2019 Financing Sustainable Land Use - UN Environment - Geneva 8 Volatility and market cycle • Volatility in commodity markets deters producers and supply chain actors from making investments to improve production or increase resilience because it reduces confidence in future market conditions. Solution?: Price stabilization mechanism Market fragmentation • Without a global standard for sustainable production which penalizes negative externalities, regulators enforcing more sustainable production models risk this may inhibit the competitiveness of their region Solution?: Industry standards and norms Demand-side constraints • Without sufficient levels of demand to bolster prices of the end products, producers will not be sufficiently compensated for their additional production costs Solution?: Premiums “with teeth” Barriers to mainstreaming
- 9. 04/12/2019 Financing Sustainable Land Use - UN Environment - Geneva 9 Supply-side constraints: the availability of suitable financing • Lack of finance due to high perceived risk, insufficient information and knowledge about the sector Solution?: Sustainable land use finance, de-risking facilities Opportunity cost • Investments with demonstrable environmental benefits are often in direct competition with other investment needs. Additionally, they may have a longer payback period and, initially, have less certain returns Solution?: Subsidies Linear marginal cost curve • In land use, cost structures are often dominated by variable costs over fixed costs, such as fertilizers and manual labor inputs that must be applied in equal quantity on each unit of land Solution?: Increased innovation and R&D in the space Remaining barriers to scale
Editor's Notes
- To achieve meaningful change in the commodity and land use sector in Vietnam need to work with smallholders Smallholder production is responsible for between 80-90% of all output of coffee from the Central highlands, however most economically disadvantaged participants in the coffee value chain. Characterized by low-volume, low quality production, limited access to finance and legal recourse as a result they are almost entirely dependent on business decisions of downstream participants Key challenges facing smallholders: 1) Output is low and environmentally unsustainable: Coffee expansion on marginal land Intensified agricultural chemical application driven by lack of technical capacity Over application of fertiliser and pesticides not only incurs a significant cost but may also have a detrimental impact on product quality and the environment requiring ever greater application of chemicals. 2) Price concerns and market instability Fluctuation in the market driven by clustering of growing regions (Brazil Vietnam and Indonesia) There are two critical issues driving price concerns Economic fluctuations due a relatively small domestic consumption increases exposure of domestic market to that is clustered around the production of a small group of countries, Vietnam, Brazil, and Indonesia Additionally increases in real commodity prices induced by increases in global demand for commodities set in motion two processes: Investment in new productive capacity and (2) productivity-enhancing technological innovation leading to a lagged increase in supply and eventually over supply. Oversupply then leads to a subsequent reduction of the price of coffee, which in turn leads to a reduction in the volume supplied. No central authority for the legal enforcement of fair-trade practices in the region Which in turn contributes to: 3) Unequitable distribution of value within the Vietnamese Robusta value chain - and the ability to access markets for higher value goods 4) Inadequate credit coverage: Credit need for farmers Additionally farmers have Inadequate financial coverage is a constraint facing farmers during the growing season. Many small farmers lack of financial resources to reinvest in the crop. They always borrow money to spend in January and repay the loan when they finish harvesting coffee from October to December. Significant capital is required during replanting or if a farmer wants to transition to another crop, this is highest risk as farmer is not generating any cash flow and future cashflow from the crop being planted are most uncertain In the absence of formal loans from banks, smallholders usually take loans from informal credit providers or non-cash loans from aggregators that take the form of seedlings and Agri inputs that are repaid at harvest at high interest rates. If need: Low prices commodity markets deters producers and supply chain actors from making investments to improve production or increase resilience, in turn, contributing to producer insecurity. This can lead to a vicious cycle for producers: lower levels of investment lead to the production of lower quality coffee and lower yields, as well as increasing the level of vulnerability to emerging risks such as climate change. This in turn suppresses earnings expectations for smallholders further reducing their incentive to invest, while also increasing the motivation to move to alternative crops, potentially destabilizing the supplier base.
- To achieve meaningful change in the commodity and land use sector in Vietnam need to work with smallholders Smallholder production is responsible for between 80-90% of all output of coffee from the Central highlands, however most economically disadvantaged participants in the coffee value chain. Characterized by low-volume, low quality production, limited access to finance and legal recourse as a result they are almost entirely dependent on business decisions of downstream participants Key challenges facing smallholders: 1) Output is low and environmentally unsustainable: Coffee expansion on marginal land Intensified agricultural chemical application driven by lack of technical capacity Over application of fertiliser and pesticides not only incurs a significant cost but may also have a detrimental impact on product quality and the environment requiring ever greater application of chemicals. 2) Price concerns and market instability Fluctuation in the market driven by clustering of growing regions (Brazil Vietnam and Indonesia) There are two critical issues driving price concerns Economic fluctuations due a relatively small domestic consumption increases exposure of domestic market to that is clustered around the production of a small group of countries, Vietnam, Brazil, and Indonesia Additionally increases in real commodity prices induced by increases in global demand for commodities set in motion two processes: Investment in new productive capacity and (2) productivity-enhancing technological innovation leading to a lagged increase in supply and eventually over supply. Oversupply then leads to a subsequent reduction of the price of coffee, which in turn leads to a reduction in the volume supplied. No central authority for the legal enforcement of fair-trade practices in the region Which in turn contributes to: 3) Unequitable distribution of value within the Vietnamese Robusta value chain - and the ability to access markets for higher value goods 4) Inadequate credit coverage: Credit need for farmers Additionally farmers have Inadequate financial coverage is a constraint facing farmers during the growing season. Many small farmers lack of financial resources to reinvest in the crop. They always borrow money to spend in January and repay the loan when they finish harvesting coffee from October to December. Significant capital is required during replanting or if a farmer wants to transition to another crop, this is highest risk as farmer is not generating any cash flow and future cashflow from the crop being planted are most uncertain In the absence of formal loans from banks, smallholders usually take loans from informal credit providers or non-cash loans from aggregators that take the form of seedlings and Agri inputs that are repaid at harvest at high interest rates. If need: Low prices commodity markets deters producers and supply chain actors from making investments to improve production or increase resilience, in turn, contributing to producer insecurity. This can lead to a vicious cycle for producers: lower levels of investment lead to the production of lower quality coffee and lower yields, as well as increasing the level of vulnerability to emerging risks such as climate change. This in turn suppresses earnings expectations for smallholders further reducing their incentive to invest, while also increasing the motivation to move to alternative crops, potentially destabilizing the supplier base.
- To achieve meaningful change in the commodity and land use sector in Vietnam need to work with smallholders Smallholder production is responsible for between 80-90% of all output of coffee from the Central highlands, however most economically disadvantaged participants in the coffee value chain. Characterized by low-volume, low quality production, limited access to finance and legal recourse as a result they are almost entirely dependent on business decisions of downstream participants Key challenges facing smallholders: 1) Output is low and environmentally unsustainable: Coffee expansion on marginal land Intensified agricultural chemical application driven by lack of technical capacity Over application of fertiliser and pesticides not only incurs a significant cost but may also have a detrimental impact on product quality and the environment requiring ever greater application of chemicals. 2) Price concerns and market instability Fluctuation in the market driven by clustering of growing regions (Brazil Vietnam and Indonesia) There are two critical issues driving price concerns Economic fluctuations due a relatively small domestic consumption increases exposure of domestic market to that is clustered around the production of a small group of countries, Vietnam, Brazil, and Indonesia Additionally increases in real commodity prices induced by increases in global demand for commodities set in motion two processes: Investment in new productive capacity and (2) productivity-enhancing technological innovation leading to a lagged increase in supply and eventually over supply. Oversupply then leads to a subsequent reduction of the price of coffee, which in turn leads to a reduction in the volume supplied. No central authority for the legal enforcement of fair-trade practices in the region Which in turn contributes to: 3) Unequitable distribution of value within the Vietnamese Robusta value chain - and the ability to access markets for higher value goods 4) Inadequate credit coverage: Credit need for farmers Additionally farmers have Inadequate financial coverage is a constraint facing farmers during the growing season. Many small farmers lack of financial resources to reinvest in the crop. They always borrow money to spend in January and repay the loan when they finish harvesting coffee from October to December. Significant capital is required during replanting or if a farmer wants to transition to another crop, this is highest risk as farmer is not generating any cash flow and future cashflow from the crop being planted are most uncertain In the absence of formal loans from banks, smallholders usually take loans from informal credit providers or non-cash loans from aggregators that take the form of seedlings and Agri inputs that are repaid at harvest at high interest rates. If need: Low prices commodity markets deters producers and supply chain actors from making investments to improve production or increase resilience, in turn, contributing to producer insecurity. This can lead to a vicious cycle for producers: lower levels of investment lead to the production of lower quality coffee and lower yields, as well as increasing the level of vulnerability to emerging risks such as climate change. This in turn suppresses earnings expectations for smallholders further reducing their incentive to invest, while also increasing the motivation to move to alternative crops, potentially destabilizing the supplier base.
- To achieve meaningful change in the commodity and land use sector in Vietnam need to work with smallholders Smallholder production is responsible for between 80-90% of all output of coffee from the Central highlands, however most economically disadvantaged participants in the coffee value chain. Characterized by low-volume, low quality production, limited access to finance and legal recourse as a result they are almost entirely dependent on business decisions of downstream participants Key challenges facing smallholders: 1) Output is low and environmentally unsustainable: Coffee expansion on marginal land Intensified agricultural chemical application driven by lack of technical capacity Over application of fertiliser and pesticides not only incurs a significant cost but may also have a detrimental impact on product quality and the environment requiring ever greater application of chemicals. 2) Price concerns and market instability Fluctuation in the market driven by clustering of growing regions (Brazil Vietnam and Indonesia) There are two critical issues driving price concerns Economic fluctuations due a relatively small domestic consumption increases exposure of domestic market to that is clustered around the production of a small group of countries, Vietnam, Brazil, and Indonesia Additionally increases in real commodity prices induced by increases in global demand for commodities set in motion two processes: Investment in new productive capacity and (2) productivity-enhancing technological innovation leading to a lagged increase in supply and eventually over supply. Oversupply then leads to a subsequent reduction of the price of coffee, which in turn leads to a reduction in the volume supplied. No central authority for the legal enforcement of fair-trade practices in the region Which in turn contributes to: 3) Unequitable distribution of value within the Vietnamese Robusta value chain - and the ability to access markets for higher value goods 4) Inadequate credit coverage: Credit need for farmers Additionally farmers have Inadequate financial coverage is a constraint facing farmers during the growing season. Many small farmers lack of financial resources to reinvest in the crop. They always borrow money to spend in January and repay the loan when they finish harvesting coffee from October to December. Significant capital is required during replanting or if a farmer wants to transition to another crop, this is highest risk as farmer is not generating any cash flow and future cashflow from the crop being planted are most uncertain In the absence of formal loans from banks, smallholders usually take loans from informal credit providers or non-cash loans from aggregators that take the form of seedlings and Agri inputs that are repaid at harvest at high interest rates. If need: Low prices commodity markets deters producers and supply chain actors from making investments to improve production or increase resilience, in turn, contributing to producer insecurity. This can lead to a vicious cycle for producers: lower levels of investment lead to the production of lower quality coffee and lower yields, as well as increasing the level of vulnerability to emerging risks such as climate change. This in turn suppresses earnings expectations for smallholders further reducing their incentive to invest, while also increasing the motivation to move to alternative crops, potentially destabilizing the supplier base.
- To achieve meaningful change in the commodity and land use sector in Vietnam need to work with smallholders Smallholder production is responsible for between 80-90% of all output of coffee from the Central highlands, however most economically disadvantaged participants in the coffee value chain. Characterized by low-volume, low quality production, limited access to finance and legal recourse as a result they are almost entirely dependent on business decisions of downstream participants Key challenges facing smallholders: 1) Output is low and environmentally unsustainable: Coffee expansion on marginal land Intensified agricultural chemical application driven by lack of technical capacity Over application of fertiliser and pesticides not only incurs a significant cost but may also have a detrimental impact on product quality and the environment requiring ever greater application of chemicals. 2) Price concerns and market instability Fluctuation in the market driven by clustering of growing regions (Brazil Vietnam and Indonesia) There are two critical issues driving price concerns Economic fluctuations due a relatively small domestic consumption increases exposure of domestic market to that is clustered around the production of a small group of countries, Vietnam, Brazil, and Indonesia Additionally increases in real commodity prices induced by increases in global demand for commodities set in motion two processes: Investment in new productive capacity and (2) productivity-enhancing technological innovation leading to a lagged increase in supply and eventually over supply. Oversupply then leads to a subsequent reduction of the price of coffee, which in turn leads to a reduction in the volume supplied. No central authority for the legal enforcement of fair-trade practices in the region Which in turn contributes to: 3) Unequitable distribution of value within the Vietnamese Robusta value chain - and the ability to access markets for higher value goods 4) Inadequate credit coverage: Credit need for farmers Additionally farmers have Inadequate financial coverage is a constraint facing farmers during the growing season. Many small farmers lack of financial resources to reinvest in the crop. They always borrow money to spend in January and repay the loan when they finish harvesting coffee from October to December. Significant capital is required during replanting or if a farmer wants to transition to another crop, this is highest risk as farmer is not generating any cash flow and future cashflow from the crop being planted are most uncertain In the absence of formal loans from banks, smallholders usually take loans from informal credit providers or non-cash loans from aggregators that take the form of seedlings and Agri inputs that are repaid at harvest at high interest rates. If need: Low prices commodity markets deters producers and supply chain actors from making investments to improve production or increase resilience, in turn, contributing to producer insecurity. This can lead to a vicious cycle for producers: lower levels of investment lead to the production of lower quality coffee and lower yields, as well as increasing the level of vulnerability to emerging risks such as climate change. This in turn suppresses earnings expectations for smallholders further reducing their incentive to invest, while also increasing the motivation to move to alternative crops, potentially destabilizing the supplier base.
- Threshold prices: Minimum price of coffee/intercropping for sustainable livelihood Assumption: farm gate price = 80% market price Assumption: Annual cost of living = 295,350 VND/capita/month Average rural household = 5.92 people
- To achieve meaningful change in the commodity and land use sector in Vietnam need to work with smallholders Smallholder production is responsible for between 80-90% of all output of coffee from the Central highlands, however most economically disadvantaged participants in the coffee value chain. Characterized by low-volume, low quality production, limited access to finance and legal recourse as a result they are almost entirely dependent on business decisions of downstream participants Key challenges facing smallholders: 1) Output is low and environmentally unsustainable: Coffee expansion on marginal land Intensified agricultural chemical application driven by lack of technical capacity Over application of fertiliser and pesticides not only incurs a significant cost but may also have a detrimental impact on product quality and the environment requiring ever greater application of chemicals. 2) Price concerns and market instability Fluctuation in the market driven by clustering of growing regions (Brazil Vietnam and Indonesia) There are two critical issues driving price concerns Economic fluctuations due a relatively small domestic consumption increases exposure of domestic market to that is clustered around the production of a small group of countries, Vietnam, Brazil, and Indonesia Additionally increases in real commodity prices induced by increases in global demand for commodities set in motion two processes: Investment in new productive capacity and (2) productivity-enhancing technological innovation leading to a lagged increase in supply and eventually over supply. Oversupply then leads to a subsequent reduction of the price of coffee, which in turn leads to a reduction in the volume supplied. No central authority for the legal enforcement of fair-trade practices in the region Which in turn contributes to: 3) Unequitable distribution of value within the Vietnamese Robusta value chain - and the ability to access markets for higher value goods 4) Inadequate credit coverage: Credit need for farmers Additionally farmers have Inadequate financial coverage is a constraint facing farmers during the growing season. Many small farmers lack of financial resources to reinvest in the crop. They always borrow money to spend in January and repay the loan when they finish harvesting coffee from October to December. Significant capital is required during replanting or if a farmer wants to transition to another crop, this is highest risk as farmer is not generating any cash flow and future cashflow from the crop being planted are most uncertain In the absence of formal loans from banks, smallholders usually take loans from informal credit providers or non-cash loans from aggregators that take the form of seedlings and Agri inputs that are repaid at harvest at high interest rates. If need: Low prices commodity markets deters producers and supply chain actors from making investments to improve production or increase resilience, in turn, contributing to producer insecurity. This can lead to a vicious cycle for producers: lower levels of investment lead to the production of lower quality coffee and lower yields, as well as increasing the level of vulnerability to emerging risks such as climate change. This in turn suppresses earnings expectations for smallholders further reducing their incentive to invest, while also increasing the motivation to move to alternative crops, potentially destabilizing the supplier base.
- To achieve meaningful change in the commodity and land use sector in Vietnam need to work with smallholders Smallholder production is responsible for between 80-90% of all output of coffee from the Central highlands, however most economically disadvantaged participants in the coffee value chain. Characterized by low-volume, low quality production, limited access to finance and legal recourse as a result they are almost entirely dependent on business decisions of downstream participants Key challenges facing smallholders: 1) Output is low and environmentally unsustainable: Coffee expansion on marginal land Intensified agricultural chemical application driven by lack of technical capacity Over application of fertiliser and pesticides not only incurs a significant cost but may also have a detrimental impact on product quality and the environment requiring ever greater application of chemicals. 2) Price concerns and market instability Fluctuation in the market driven by clustering of growing regions (Brazil Vietnam and Indonesia) There are two critical issues driving price concerns Economic fluctuations due a relatively small domestic consumption increases exposure of domestic market to that is clustered around the production of a small group of countries, Vietnam, Brazil, and Indonesia Additionally increases in real commodity prices induced by increases in global demand for commodities set in motion two processes: Investment in new productive capacity and (2) productivity-enhancing technological innovation leading to a lagged increase in supply and eventually over supply. Oversupply then leads to a subsequent reduction of the price of coffee, which in turn leads to a reduction in the volume supplied. No central authority for the legal enforcement of fair-trade practices in the region Which in turn contributes to: 3) Unequitable distribution of value within the Vietnamese Robusta value chain - and the ability to access markets for higher value goods 4) Inadequate credit coverage: Credit need for farmers Additionally farmers have Inadequate financial coverage is a constraint facing farmers during the growing season. Many small farmers lack of financial resources to reinvest in the crop. They always borrow money to spend in January and repay the loan when they finish harvesting coffee from October to December. Significant capital is required during replanting or if a farmer wants to transition to another crop, this is highest risk as farmer is not generating any cash flow and future cashflow from the crop being planted are most uncertain In the absence of formal loans from banks, smallholders usually take loans from informal credit providers or non-cash loans from aggregators that take the form of seedlings and Agri inputs that are repaid at harvest at high interest rates. If need: Low prices commodity markets deters producers and supply chain actors from making investments to improve production or increase resilience, in turn, contributing to producer insecurity. This can lead to a vicious cycle for producers: lower levels of investment lead to the production of lower quality coffee and lower yields, as well as increasing the level of vulnerability to emerging risks such as climate change. This in turn suppresses earnings expectations for smallholders further reducing their incentive to invest, while also increasing the motivation to move to alternative crops, potentially destabilizing the supplier base.