Positive Externalities, Knowledge Exchange and Corporate Farm Extension Services; a Case
Bowe C. and van der Horst D. (2015). Positive externalities, knowledge exchange and corporate farm extension services; a case study on creating shared value in a water scarce area. Ecosystem Services 15, 1-10. (pre-print version)
Positive externalities, knowledge exchange and corporate farm extension services; a case study on creating shared value in a water scarce area.
ColmBowea and Dan van der Horstb
a Liverpool John Moores UniversityNatural Sciences and Psychology
bSchool of Geosciences, University of Edinburgh.
Abstract
Despite much rhetoric about the ‘greening business’ agenda and various initiatives to promote the valuation of ecosystem services and natural capital, the corporate sector hasbeen slow to integrate social and environmental factors into core business models and to extend this integration across their supply chain. Our effort to narrow this thematic and methodological gap focuses on the co-benefits and positive externalities that can be generated through progressive knowledge exchange between a corporation and its suppliers. Using a case study of contract farming of malting barley in water scarce Rajasthan (India), we examine the extent to which best practice agronomic advise given by corporate farm extension workers can help small scale farmers (suppliers) to increase income, improve resource efficiency (water, fertiliser, energy) and reduce greenhouse gas emissions.Findings from our desk study suggest positive results for all these variables, when compared to the regional benchmark of non-participating farmers. Under a scenario where advice is provided on all major crops (not just barley), we find a significant further increase of farm income. Our valuation of the reduced exploitation of ground water(alone) exceeds the advisors’ annual salaries, suggesting that under full social and environmental accounting, the extension services are not a cost factor, but a profit making unit of the company.We discuss our findings in relation to alternative approaches to PES and alternative investment strategies in green technologies.
1. Introduction
There is a growing effort to involve businesses in the protection of the natural environment and the world’s ecosystems, from grand declarations (e.g. the UN ‘Natural Capital Declaration’ - Mulder et al., 2013) to more practical reports focusing on the quantification and valuation of externalities produced by businesses and the ecosystem services which underpin business performance (World Business Council for Sustainable Development, 2011; Trucost and TEEB for Business 2013). A company creates externalities when it undertakes activities that bring costs or benefits to unsuspecting third parties. Environmental externalities often relate to impacts on public goods such as clean air or fresh water resources.
Businesses wishing to account for, manage and plan their environmental and social impacts can face a number of challenges, from the lack of established assessment methods to problems along the supply chain where they can exert only partial influence on the behaviour of their suppliers and customers. The nature of relationships along the supply chain has been a focus of media, advocacy and academic attention, showing how a company’s brand value can be damaged by revelations about the poor practices of their suppliers (e.g. child labour, environmental pollution, see Lund-Thomsen and Nadvi, 2010) but also how good environmental and social practices can be promoted amongst suppliers through a pro-active and supportive approach by thelarger company that buys their products (e.g. Walton et al., 1998). This paper examines a particular kind of supply chain relationship; between a large company and the many individual farmers supplying its feedstock. Amongst supply chain relations, this particular relationship stands out for the size differential, i.e. a one big buyer with thousands of small suppliers. It also stands out for the fact that farms are not simply businesses; they are families and communities, rooted in a particular agro-ecological landscape and rural culture. The size differential means that companies can have huge leverage on farmers, dictating contracting arrangements that shape farming strategies and thus impact on the rural landscape and the ecosystem services it provides. This leverage may increase even further in a developing country context, where farmers tend to have less access to capital, to agronomic adviceand (due to poor infrastructure) to different markets and alternative buyers(e.g. Galt, 1997; Porter & Phillip-Howard 1994). Some critical authors have argued that these contract farming arrangements are exposing farmers to new risks, or are causing an unequal distribution of risks and the subordination of farmers (e.g. Goldsmith, 1985; Watts, 1990; Clapp, 1994).
A more progressiveoutlook would suggest that it is in the long-term interest of the company to think more holistically about their relationship with the farmers. For example gaining farmer loyalty can help to ensure security of supply for their regional processing plants despite the arrival of new buyers on the local market; the provision of training and the supply of farming materials can help to ensure high quality feedstock despite disease outbreaks or adverse weather conditions. Porter & Kramer (2011) flag up several recent examples of corporations benefitting by working more closely and more synergistically with farmers and farmer communities; their call for ‘creating shared value’ could be read as a call for creating positive local externalities through company activities that go beyond short-term gain or a singular focus on the short-term bottom line defined exclusively through traditional financial accounting tools. Known as a leading thinker on business strategy, Michael Porter’s ideas are evidently having some influence within the business community (for examples in the agricultural sector, seeFSG, 2011; Nestle, 2013). The idea of creating shared value differs from corporate social responsibility in that it seeks to anchor pro-social and pro-environmental corporate behaviour within markets and value propositions, rather than within an ‘add-on’ narrative of corporate duties and responsibilities. Porter and Kramer list three broad areas where companies should seek to create shared values; (1) rethink products and markets to provide more appropriate services and reach those (poor people) with unmet needs; (2) mitigate risks and improve productivity in the value chain and(3) enable local cluster development, e.g. by supporting suppliers. It is clear that the last two areas can be of direct relevance for contract farming. Also the first area can be relevant for contract farming, in at least two respects. First of all, in developing countries many farmers have unmet information needs, i.e. they require more, better and faster information on technologies, crops, markets, pests or weather in order to make good agronomic and farm management decisions. Secondly, the company’s extension workers and logistical operations (e.g. they have empty trucks driving into the countryside to pick up the feedstock) could be seennot just as costs, but as (underutilised) assets that could be deployed for additional business activities, such as the delivery of new and socially beneficial goods and services to remote rural areas[1].
The existing literature on shared value and on the mutual benefits of contract farming is limited in size and is mainly qualitative(Galt, 1997; Porter & Phillip-Howard 1994; Birthal et al 2008; Porter & Kramer 2011;Fayet and Vermeulen 2012; Baumulleret al 2014; Christiansen 2014).There is a gap in the literature about the extent to which companies can work progressively with farmers, to reduce the negative environmental externalities of existing farming practices and share the economic benefits of a long term, stable and beneficial interdependence along the supply chain.
In a contribution to narrowing this gap, this paper aims to assess, quantify and value the farming related externalities caused by a company’s extension services, using a case study from Rajasthan where small scale farmers were incentivised to start growing malting barley for a company’s regional processing plant. It is a case of crop switching on existing agricultural land.
Our paper is structured as follows. In the next section, we provide the business and biophysical context for our case study. We explain the data sources we used and the externalities we have chosen to examine. We develop a set of scenarios which allow us to examine the relative environmental performance of the farmers who grow barley for the company. In the third section we quantify the externalities associated with each scenario. In section four we convert these to monetary values. In section five we discuss the limitations and consequences of our findings, exploring different intervention options to further improve resource efficiency or farmers’ incomes. Section six contains our conclusions.
2 Case study Background
2.1 Business context
Barley has traditionally been grown inRajasthan and more widely in northern India as a fodder and feed crop with low input requirements. However over the last 40 years, farmers have shifted from barley towards (higher value) wheat or mustard production (Verma et al 2010).In 2006 the multinational SABMiller set up theSaanjhiUnnati (Progress through Partnership) project in Rajasthan to develop a local supply chain for barley for their new regional brewery, which would reduce their need to import malting barley from abroad.The company employs 30 agricultural extension workersacross Rajasthan who liaise with farmers and sensitize them to the adoption of barley varieties that are more suitable to brewing (notably varietyK551, brought in from Uttar Pradesh). Participating farmers receive best practice advice (water management, fertilizer application) to reduce inputs and improve yield; data which was collected by an Indian consultant who was hired by the company to undertake focus group discussions with the extension workers. We obtained the above details and data from discussions with the company, facilitated by the Cambridge Institute for Sustainability Leadership[2].
2.2 Biophysical System
The major crops grown in the Rajasthan region include barley (HordeumvulgareL.), wheat (Triticumaestivum), mustard (Brassica juncea) and gram (Cicerarientinum) grown in the Rabi (winter, dry) season and soybean (Glycine max), guar gum (Cyamopsistetragonoloba), bajra millet (Pennisetumglaucum) and groundnut (Arachishypogaea)during the Kharif (summer, rainy) season.
This study focuses on the Rabi system and the inputs and outputs produced from this system (table 1); the correspondingecosystem services and natural capital externalities(table 2).We did not have sufficient data to assess impacts on cultural ecosystem services or on biodiversity. Since this is a case study of crop change on existing fields in an intensely farmed landscape, we anticipate these impacts to be relatively minor. As the study sought to achieve quantification within a business context we focused on externalities where data on inputs and methods to calculate impact/outputs were readily available (Table 1 and 2), as follows:Water is pumped from wells using diesel and electric pumps, resulting in decline in groundwater reserves and CO2 production.Inorganic fertilisers (DAP, urea) and organic fertiliser added to the soil result in denitrification of nitrates to N2O an important GHG’s. Rainfall and irrigation can lead to runoff and leaching of nitrate and phosphate from fertiliser additions leading to eutrophication of local water bodies and a reduction in water quality. This led to carbon balance (green house gases) and water balance (green, blue and grey water) being included (table 1 and table 2)[3]. The addition of crop residues and organic manure leads to an increase in the amount of carbon stored in the soil, while tillage leads to the violation of carbon and release of CO2. However under the methods applied we found no difference between crops for these externalities. Other outputs such as volatilisation of ammonia and nitric oxide from denitrification were not considered in this study for reasons stated above.
Groundwater extraction by farmers significantly exceeds natural recharge and the current agricultural system is clearly not sustainable in the long term. It is anticipated that the continued depletion of groundwater resources will eventually result in the abandonment of dry season farming (‘Rabi’ crops are completely dependent on irrigation) and the reduction of yields in the rainyseason (‘Kharif’ crops; currently partially dependent on irrigation).
2.3Scenario approach and baseline selection
The study was implemented on a model farm in the district of Jiapur, Rajasthan, based on an average farm size of 2.8ha. An assumption is made that 100% of the production area for each crop is irrigated during the Rabi season. While the choice of Rabi crops can influence the choice of Kharif crops, externalities from the Kharif crops are not considered within the study as the company has less influence over this.
We used a scenario approach to estimate change in externalities, taking account of changes in cropping area,crop yield, fertiliser application and ground water levels based on general changes in the agriculture sector and the impact of the company.Four scenarios were developed, a historical pre-company scenario (1) predating the company’s establishment in the area(2005-2006) and three present time scenarios (2012-2013). The present timebaseline scenario (2) represents farmersNOT working with the company and twopresent time company scenariorepresenting farmers whodraw on the company’s extension programme to adopt agronomic best practice with regards to malting barley only (3a), or with regards to malting barley as well as their other their other main crops (3b).
Proportion of cropping area and yield(table 3):Ministry of Agriculture, Govt. of India district level data was used derive proportion of cropping area (based on production area values) and yield for the historical and baseline scenarios.SABMiller works with 6000 farmers in Rajasthan, half of them in Jaipur district. Jaipur has a population of over 6.5million, so it is assumed that the company’s activities impact such a small proportion of farmers as to have a negligible effect on the Ministry of Agriculture Jaipur data. This data show year to year variation.To identify general trends in this data a regression model was run to model a line of best fit. The pre-company scenario and no company scenario (baseline) production and yield values were read off this line for the 2005-2006 and 2012-2013 growing seasons respectively.
For the company scenarios (Scenario 3a and 3b) values for the yield (see exceptions below) and proportion of cropping area for each were derived from the SABMiller extension worker focus groups.The conservative company scenario 3a assumes that the effects of the extension workers only influence barley yield and not that of the other crops. Therefore the baseline scenario yield values are used again for this scenario for all crops except Barley. While 3b assumesthat the SABMiller extension service has an impact on all Rabi crops in the systemdue to improved management techniques and access to information. The distinction is made between the scenarios (3a and 3b) as it is assumed that as the farm extension workers who work directly with the farmers on the production and sale of barley will have a greater knowledge of Barley over the other crops.
Based on comparisons between the yield data expressed by the focus group studies and the Ministry of Agriculture district level data,differences in yield were found between the baseline and the company scenarios. While these differencesare substantial,they are within the 45 – 70% yield gaps for major crops identified by Mueller et al (2012).
Fertiliser application(table 3): The drive for agricultural intensification and fertiliser subsidies has led to an increase in fertiliser applications across India (Sharma 2012). Rajasthan showed a 26.2% increase in fertiliser use in kg/ha between 2000 – 2010 (Sharma and Thaker 2011). Based on this we assume a 13% fertiliser increase between the historical and present time scenarios
Farm extension workers identified agronomic management changesadopted by participating farmers. UREA usage for barley was reduced from 110kg/ha to 90kg/ha. The extension officers noted that urea added height to the barley plant so higher plants were more lodge prone in case of excess irrigation or rain, leading to a yield reduction due to losses.
Ground Water Levels(table 3):Based on data on ground water levels in Jaipur and rate of decline (CGWB 2007), aground water depth of 30m is assumed for the historical and 40m for the baseline and company scenarios.
Barley price (table 3):For barley, the company provides farmers a 5% price premium above the market rate. This is incorporated into the scenarios
Net farm income:Net farm income was also estimated for all scenarios. Crop and fodder prices, crop/fodder ratios and cost of production were derived from farm gate prices reported by farm extension worker focus groups. Due to the high temporal variability in fodder prices seen in the regionlikely due to availability of fodder and the localised nature of markets, we also considered data from data from Directorate of Marketing & Inspection (DMI), Ministry of Agriculture, Government of India[4]. Due to the high variability very conservative values were selected. Values up to 10 times greater have been recorded. DAP and Urea costs were adjusted to account for changes in applications in the various scenarios. Seed rate for barley was reduced from 60 kg per acre to 165 - 125 kg/ha. The effect of this was a small reduction in the cost of production for barley.