IS SUSTAINABILITY UNGA’S RESPONSIBILITY?
Should companies in emerging markets view sustainable supply-chains as a competitive edge?
A report released by the United States Department of Agriculture (USDA) Foreign Agricultural Service reports that consumption of corn/ maize will surpass production creating a deficit that will have to be supplemented by importing grain. The country already imports maize to supplement its needs. The Minister of Agriculture attributes these low yields both to climate change and farmer’s reliance on rain instead irrigation. The Unga Group is one of Kenya’s largest flour mills. They source maize and wheat from farmers. With decrease in locally sourced maize yield, maize prices have continued to go up. Unga Group has responded by raising flour prices or limiting flour supply. As the largest flour mill in the country, what is their responsibility to ensure that they build a supply chain that does not have maize shortages?
80% of Kenyans live in rural areas and rely on agriculture either directly or indirectly as a source of livelihood. Agriculture accounts for 24% of the GDP and 19% of formal employment. Post-independence in 1963, Kenya’s maize yield steadily increased peaking in 1990 and has been on a steady decline since. The yield increase can be attributed to the adoption of hybrid maize seeds. However in recent years, yield has been decreasing even despite the fact that the amount of land farmed has increased. Kenyan farmers have been slow to adopt modern farming technologies specifically in relation to irrigation. Studies have shown that maize production has been negatively impacted by this climate change. Climate change has led to an increase in temperatures and decrease in rainfall. In a paper examining the economic impact of climate change on maize production, Lewis Wandaka has extrapolated that maize production could fall by 21% in 2100.
Unga group was formed in 1908. In 2000 U.S. based Seaboard Corporation bought 35% of the company. Unga had posted some years of losses. SOMC saw this as an opportunity to turn the company around by infusing capital and better technologies.
However, even with better technology, they still faced the issue of raw material shortage. Unga group is in a position where they can leverage their brand to encourage farmers to adopt advanced and sustainable farming practices. Through access to suppliers they can educate the rural farmers on the benefits of modern irrigation. To combat the issue of the farmers’ lack of capital, Unga can persuade the farmers to consolidate so that they can pull their resources together.
Companies like Unilever have begun to see the importance of a sustainable supply chain. They are investing 4.3 million pounds in this venture. They source a lot of their black tea from the Kericho farms located in Western Kenya. Apart from working with farmers on increase crop yields, they are also working on providing attractive compensation to the farmers. Younger rural farmers are increasingly abandoning farming to move to urban areas. Despite the initial high capital investment, Unilever is securing future tea supply.
In the same way, Unga can see this as an opportunity to improve their bottom line. Investing in maize farming will lead to higher maize yields and prevent the rise of maize prices. They also secure their future by ensuring that they have a constant raw material source.
The biggest hurdle I see here is that Kenyan companies do not have a huge focus on corporate sustainability efforts especially in the agribusiness and food and beverage sector. Sustainability is not viewed as a competitive advantage. If Unga group were to take this approach they would be leading the charge on changing corporate cultures across Kenya.
Student comments on IS SUSTAINABILITY UNGA’S RESPONSIBILITY?
I agree that selling corporate social responsibility in developing countries is a tough sell especially when the key priority for developing countries is to accelerate economic development and growth (typically by exploiting natural resources). In order for Unga to expand their sustainability efforts, Unga will need to be able to find enough companies that would want to source and pay a premium for sustainable flour. To create a community that would be dedicated to this, perhaps the first step is to have a common sustainable maize certification that Unga can be a part of or spearhead so that there’s a common global language across the industry for what sustainable maize is defined as (similar to RSPO in palm oil or FSC/PEFC in forestry). Unga would then be able to organize their lobbying efforts and justify premium pricing on the basis of these certification standards.
Unga isn’t the only one who should be selling at premium prices (see comment above). It’s interesting that Unga is willing to provide “attractive compensation” to farmers – what does this compensation look like? Unga itself should certify farming practices that are sustainable and be willing to pay premium prices for the corn and flour that they source from farmers. By setting standards for water, fertilizer, and energy use, Unga can drive the changes it wants to see in farming practices while investing in its own future yields of corn. In 2009, McKinsey identified practices that farms can engage in to reduce their carbon footprint. 90% of these opportunities lie in developing nations like Kenya. Unga should ensure farmers have sustainable practices in each of these categories:
Sub-categories Identified as Terrestrial Carbon
Crop nutrient management
Reduced slash and burn agriculture
Reduced pastureland conversion
Reduced intensive agriculture conversion
Organic soil restoration
Source: Adapted from McKinsey (2009)
This is an interesting view into some of the nuanced hurdles that arise whenever people try to combat larger global issues, like climate change and sustainable agriculture. I feel like this can’t begin with a top down imposition of rules by Unga – it’s hard to convince someone to give up short term gains for uncertain long term gaines. I think they have to work with the farmers to get them to move towards these more sustainable farming practices. I wonder if there are NGOs or charities that could come in really handy in this situation, that may have a mission for increasing sustainable agriculture, improving conditions in emerging African communities, and/or combating the real world challenges of climate change. I think any help they could receive just to get started towards sustainability will go a long way to maintaining it and building it within neighboring communities (once the farmers, the companies, and the NGOs/Charities can see the results).
Super interesting article Diana. I am left wondering what opportunities exist to find those willing to pay for more sustainable agricultural practices and use their additional willingness to pay to fund Kenyan efforts to increase sustainable agriculture. While I like some of the commenters ideas about a certification program are intriguing, I wonder whether Kenyan consumers are willing to pay that premium. Assuming we do not want UNGA to export their products to markets that do, and therefore exacerbate the corn/maize shortage, I wonder whether UNGA could work with NGOs or other organizations to develop sustainably farmed credits to sell to other agribusiness companies, non-profits or other entities similar to how clean finance mechanisms allow for emissions reduction credits to be sold across companies and countries. That way, those who require credit for, or value, sustainable farming practices provide the capital, while the production and consumption of the agricultural products remains in markets that need them, reducing both staple food shortages and avoiding larger transportation costs.