Reducing risks, increasing returns
There is no doubt that there is an inextricable link between the trade and flow of agricultural goods and the sustainable development of supply chains. This is core to our vision at Louis Dreyfus Company, as a global merchant, which is to work toward a safe and sustainable future while contributing to the global effort of providing sustenance for a growing population. It must also include the development of a robust and thriving farm sector.
While operating on a global scale, Louis Dreyfus Company’s influence and ability to transform supply chains is limited to the company’s own activity. However, the importance of working in concert with a wide range of stakeholders – be they our peers, customers, suppliers, non-governmental organizations, banks or governments – to facilitate change at scale, is something we are acutely aware of and have significantly focused on over the past few years.
While sustainable development and a healthy farming community are essential to the future supply of food, our investments and operations also need to provide a positive return in order to achieve the desired ‘win-win’ result. We face many challenges and often difficult choices to achieve our own goals around environmental, social and economic parameters.
Louis Dreyfus Company’s Zambian cotton operation provides good examples of the challenges that investors can encounter.
As the owner and operator of cotton ginning capacity in Zambia, Louis Dreyfus Company engages with tens of thousands of smallholder cotton growers in various regions across the country. Being able to effectively service their needs while managing a successful ginning and exporting operation requires us to operate a significant structure at considerable cost. The nature of the farming community in Zambia requires Louis Dreyfus Company to provide considerable pre-finance in the form of cottonseeds and agricultural inputs, recouping these loans in the form of harvested cotton at the end of the growing cycle.
Given the significant oversupply of ginning capacity in Zambia, competition for harvested cotton for processing is considerable. Farmers are often tempted to default on their loans and sell their cotton to other gin operators who offer to pay more, and who do not have the cost burden of a comprehensive structure, like Louis Dreyfus Company and some of our peers. In addition, our focus on cotton yield improvement, both as a means to increase farmer revenues and to secure cotton supply for processing at our gins, can often be undone if farmers are encouraged to sell their harvest elsewhere.
Ultimately, if the cost of owning and operating gins, and all the ancillary operations and services that Louis Dreyfus runs to support our farmer network, outweighs the resultant revenue from selling the cotton, we – like others before us – would need to consider the viability of our presence in countries such as Zambia. Given the benefits that our presence brings to the community in terms of education on good agricultural practices and marketing, and of the various community initiatives that we support around health, schooling and social welfare, the loss of this operation would be keenly felt by many.
Collaboration with the government and other stakeholders, especially in the NGO and finance sectors, to look at innovative ways to reduce the financial burden currently carried by the private sector, would be a significant step in the right direction.
Similarly, more equitable distribution of costs related to agricultural extension services would allow the private sector to flourish, while ensuring that farmer yield and livelihood improvements remain a key focus.
Looking beyond Louis Dreyfus Company’s Zambian cotton operations and experiences, valuable learnings around effective sustainable development in agricultural supply chains can be gleaned from elsewhere. Various projects, for example, in key origination regions such as the coffee-growing countries of East Africa, have sought to improve revenues for farmers through yield and quality improvement, while also addressing key issues around deforestation, gender empowerment, diet and income diversification.
These projects often involve the expertise and guidance of local implementing partners, working in concert with government ambitions around agricultural development in their respective countries, while providing appetite and enthusiasm on the part of private sector actors like Louis Dreyfus Company to invest and commit to supply chain participation and development. Louis Dreyfus Company’s coffee business is currently engaged in numerous projects of this type in various key origins, from Indonesia and Vietnam to Ethiopia, Columbia, Kenya and Uganda.
The Louis Dreyfus Foundation, working in partnership with Louis Dreyfus Company, also works across the developing world to support projects that focus on sustainable agriculture, food security, education and women farmers. Empowering smallholder farmers to move out of poverty through improvements in their own food security and the generation of commercial surplus have been key features of projects to date. The Foundation has so far worked in this capacity with more than 88,000 individual farmers, which in turn has benefited approximately 400,000 people.
Working with knowledgeable and capable local partners in each country has allowed the Foundation and Louis Dreyfus Company to demonstrate that a collaborative approach is the best way to leverage expertise, and maximize benefits for local communities.