The keys to building successful smallholder farmers to help meet the world’s growing need for food.

By Greg Page, Cargill Chairman and Chief Executive Officer

Smallholders - Big Impact was presented at the World Food Prize's Norman E. Borlaug Dialogue, October 2010. 

Thank you Ambassador Quinn. Good afternoon. Thank you for inviting Cargill to join the Borlaug Dialogue, and particularly the discussion this year about smallholder farmers.

We first offer our congratulations to World Food Prize laureates David Beckmann and Jo Luck for their extraordinary efforts over the years to reduce hunger and alleviate poverty.

Today we are all asked to consider what role smallholders can play in meeting the challenge of feeding our world. Many of my remarks will relate to the centrality of price to enable their success. In my job I have a great opportunity to observe price signals and their power. I have watched the power of price mobilize and energize people. I had an opportunity in 2007 to travel more than 2,000 miles by car across Southern Russia and see firsthand the effects of re-energizing and remobilizing capital investment in food production in Russia. I also have seen the opposite, where the power of pricing discourages and depletes people’s optimism.

The theme of our meeting today is “taking it to the farmer,” and my observation is that if we take good prices to farmers, incredible progress can be made in very short periods of time. 

First, a little bit about Cargill. Today we operate in 66 countries and more than half of our 130,000 employees are outside of the United States. We describe our activity as the “commercialization of photosynthesis.” The building blocks of the products that we process, trade and convert into food are the outcome of sunlight and carbon dioxide through photosynthesis. There is malt for beer, cocoa for chocolate, soy beans for cooking oil, and sugar for pastries – and all of this is the outcome of photosynthesis. We also participate in energy markets. The confluence between energy and agriculture has never been more obvious than the last five or six years.

When you think about Cargill, you probably think about us working with a lot of large farmers, whether here in Iowa, in Brazil, Argentina, or on the plains of Canada. Despite the importance of these very large farmers, we also have a significant stake in the success and health of a lot of smallholders. In Zimbabwe last year, we purchased cotton from 46,985 farmers (I am impressed with the accuracy of our accounting system!) We provided pre-planting financing to 36,000 of those farmers to enable them to plant those crops with the fertilization and seed treatment necessary for a successful harvest. In Zambia, we purchased cotton from more than 41,000 farmers and provided pre-planting loans to more than 30,000 of them. In Ghana and the Ivory Coast, we purchased cocoa beans from more than 250,000 farmers through their cooperatives. And in Mexico, we are an investor in a sugar milling business that purchases and processes sugarcane; Cargill then acts as the marketing arm for more than 12,000 smallholders.

This morning, Sarah Munalula, a farmer in Zambia, made what I think is the most important statement – that if you give farmers like Sarah the right price, they can be successful. I think that is an important thought to carry through my comments.

Cargill’s business model cannot succeed without successful farmers at every level of production. Today, my remarks will focus on smallholders in countries where the Green Revolution has not yet occurred. These smallholders are growing crops to sell into markets, not subsistence farmers. These are smallholders who, by increasing their productivity, can help feed their continental neighbors. We believe increasing their productivity is essential to ensuring food security, and it is also essential to do that without increasing the amount of the world’s land mass committed to cultivated agriculture.

So first, we question: where are the world’s hungry? Of the 10 countries with the highest prevalence of the population living in undernourished circumstances, eight are in Africa. At the other end of the spectrum, of the largest populations of undernourished people, more than 360 million of the 950 million undernourished are in India and China. Adding to the complexity is the fact that one of these countries has structural wheat surpluses and the other has financial reserves of $2.5 trillion. This is a very diverse, challenging issue.

Does the world have the capacity to grow enough calories to nourish all of our current inhabitants? I get asked this question regularly and my answer is always the same: yes now and yes in the future. There are clearly enough calories produced in the world today, but they don’t get distributed in a way that alleviates hunger.

The FAO has wonderful statistics, country by country, that list the number of undernourished people. In one table they list the number of calories by which the average individual in that group is undernourished per day. If you extend those numbers and convert those calories into whole grain equivalents it comes to about 30 million tons, which is about 1/6 of the amount of grain we convert into fuel – so in the global sense, we do not have “caloric famine.”

Caloric famine is the absence of enough food regardless of the price; the calories simply don’t exist. The point in fact is we do have enough calories – what we are left with is “economic famine,” the inability of people to purchase sufficient calories to meet their needs. In these cases, we need to grow more calories where these people live; bring in food on a free market basis and trade; or, where food emergencies exists, bring it to them through philanthropy.

My comments today are directed toward those parts of the world food system where smallholders must bear simultaneously the duel burdens of caloric famine and economic famine. These smallholder farmers are at a price-sensitive level of production and they will respond to price signals. The prosperity of these smallholders often is the underpinning of more impactful economic development. But it also is necessary for economies that benefit from improvements in agricultural economic activity to simultaneously promote non-agricultural economic improvement to provide the purchasing power that will then feed back to agriculture and sustain that very virtuous loop. 

What does the smallholder food crop farmer in a developing country need to prosper? Cash. Kofi Annan this morning highlighted in his remarks the importance of reliable markets. We live in a very interesting time and, I would argue, a more treacherous time compared with the time of the first Green Revolution. Agriculture increasingly is in a constant state of disequilibrium. By that, I mean very small incremental changes in the stocks-to-use ratio, which is probably one of the best indicators of our food security now, lead to enormous changes in price. This summer we have observed it in a way that is very beneficial to Iowa and many other places. The drought in Russia reduced global production of grain by an amount equal to seven-tenths of 1 percent of global production. That relatively small drop in global production led to price increases of 60 to 80 percent for grain. We live in this period of disequilibrium where small increases in production lead to a kind of complacency that drives prices down very rapidly while small negative trends in production and reductions in our stocks-to-use ratio lead to rapid and very large increases in price. 

Besides inputs and cash, four basic things are required for smallholders to be successful: the opportunity to plant the right crop in the right soil; property rights; increased revenue certainty; and access to open markets.

I will start with comparative advantage – or ensuring that smallholders grow the crop that makes the most sense for their geography to capture their greatest comparative advantage. The world will always raise the most food economically and in the most environmentally responsible way if we raise the right crop on the right land and use the right technology to do so. An over-exaggerated example is that we could grow all the orange juice consumed in Iowa here in Iowa – we just shouldn’t.

The following example might be more realistic and certainly very real in the world today. China has a comparative advantage in terms of soil and climate in the production of the starch crops wheat, corn and rice, and they have a relative disadvantage in the production of soybeans. So the Chinese government has, in my opinion, very appropriately directed its greatest efforts toward the production of rice, wheat, and corn, and it has continued to buy soybeans from Brazil amongst others. The Brazilians, in turn, get much of their wheat and much of their malt for their beer from Argentina. Brazilians have no advantage in growing wheat and barley, so they commit those acres to produce soybeans. Therefore, the Chinese grow what they are best at, the Argentineans grow what they are best at, the Brazilians grow what they are best at – and by trading with each other, the wealth of all three countries is raised. But if China, as a result of a reduction in its trust and comfort with its counterparties, were to seek to be more self-sufficient, the aggregate supply of food in the world would be reduced, and its aggregate cost would rise.

In addition to choosing the right crop, innovations also will help smallholders increase their productivity and prosper in the future. Over the course of the last two days, we have heard about a number of opportunities that we have been taking to the farmer. The recent news that scientists have decoded the genome for wheat could result in a whole new breed of disease-resistant crops that can produce higher yields, lower costs and increase food security. Basic farmer training can also have a dramatic impact in productivity. In China, Cargill has conducted training schools for more than 2.4 million farmers in crop production, crop nutrition, animal breeding and feed technology. 

The second thing that smallholders need to be successful is property rights. For smallholders to prosper they must be able to own land, have access to it, and transfer it to their children. Again, Kofi Annan spoke very clearly this morning about the importance of clear and reliable rural property titles. This is a first order requirement to establish long-term investment in agriculture and build the important agricultural infrastructure needed in developing countries. Property is used as collateral for credit -- with property, farmers are better able to get the working capital needed to farm successfully.

I spent a fair amount of time in my career living in Thailand where Cargill built an export-oriented poultry production facility. It was in the part of Thailand that was the center of the communist insurgence during the Vietnam War era. In that area, homesteading was allowed and clear titles were given. Roads were built on a grid that looked a lot like a smaller scale version of North Dakota where I grew up. So the combination of clear titles, homesteading, and the creation of infrastructure allowed Thailand to have what today is an extraordinarily vibrant, export-oriented food production system.

Helping smallholders develop more sustainable farming practices is an important goal, and farmers are more likely to take sustainable actions when they clearly own their own property.

In Vietnam, Cargill has trained farmers on how to grow sustainable cocoa, and we will train more than 25,000 cocoa farmers this year in the Ivory Coast in similar practices to gain certification from worldwide organizations promoting sustainable agriculture. The combination of these learnings has led to a more than 30-percent increase in productivity in the Ivory Coast as well as an increase in sustainability. Combine the right behaviors, increased productivity, and today’s outstanding global prices for cocoa and you can see the power of property rights and good prices in the actions being taken by our cocoa suppliers in the Ivory Coast. They are a very energized group of people. Higher incomes also allow families to send their children to school.

In Indonesia, we have smallholders at our palm plantations in South Sumatra. And 8,800 of them have been certified by the Roundtable on Sustainable Palm Oil. This is the first group of smallholder farms to receive that designation, which is critical for markets in Europe.

The third thing smallholders need is a reliable market into which to sell their crops. Here I will take a little step out of the box. As a Cargill executive, I long preached the value and importance of free trade and free markets. The reality, however, is that today smallholders in developing countries lack sufficient revenue certainty. As a result, they don’t have the confidence to invest in their properties over the immediate and longer term.

Most of the countries with significant numbers of smallholders and better agriculture infrastructure – those that did participate in the Green Revolution such as India, Mexico and China – created to an important degree revenue certainty for their farmers as they deployed and encouraged this technology. Their actions moderated the downside risk of increases in productivity and certainly encouraged the elimination of huge caloric famine.

In developing countries today, one of the biggest obstacles many smallholders face in years of good crops is that they are forced to sell at harvest, when prices are depressed and supply is high, taking inadequate prices, which further discourage investments. These farmers are cash flow destitute with limited access to real credit. Selling at depressed prices creates a non-virtuous circle of discouraging further production in future years.

In the long run, the private sector can play a role in solving these problems but first the legal and political environment must evolve to support private investment. Private sector needs in this regard are much the same as smallholders: a reliable legal system based on the rule of law; a predictable banking and fiscal system; and a reasonably stable political environment. Until this legal and political framework exists, we need to acknowledge that there can be a role for a public financier providing sufficient capital to take crop inventories across the post-harvest dip. Beyond harvest loans on crops, governments also can help farmers band together and invest cooperatively in storage and other infrastructure.

So now for a trickier issue. As governments attempt to pick that very wise price that balances the needs of farmers for adequate revenue and encourages ongoing immediate and long-term investment, they have to balance it against the needs of urban consumers and others who will pay those prices. For the system to be sustainable, it is critical that the prices paid to farmers and the prices paid by consumers be the same. It puts an enormous burden – a Solomonic burden – on the political infrastructure to predict that price: one that is fair to farmers and consumers, and one that encourages the end of caloric famine. In the past, governments have pursued these patterns – sometimes successfully and other times with unintended consequences. We should learn from these experiences. One approach has been to split the price – to have a high price to farmers and then to buy down the price for consumers. Obviously this strategy quickly becomes politicized as everyone seeks to widen the spread to the greatest degree possible and drain national coffers.  Sustainable agriculture needs to have its revenue coming from the people who consume those farm products. Even more perversely, we have observed times when extraordinary interventions have been called for in the short-term to deal with excess supplies, through restraints on production. Or we have seen support limits imposed on the size of farm that can receive a given price or a given target price.

On the other side, we have seen where there are no limits and there is rapid consolidation in the size of farms, a rapid increase in the price of land, and inevitably a dramatic impact on the rural sociology of that country. So the burden of selecting this price is not small. But the benefit of some adequate and reliable price certainty has certainly been an important element in those countries that have benefited from the Green Revolution.

As we go into the second generation of the Green Revolution some attention must be given to this issue. The combination of modest early public policy support, followed by private sector investment, can help moderate revenue volatility. The key word here being modest, of course, but who is the judge? We must find a way to allow supplies of food to increase in the medium term until, in the long term, smallholders can travel down to a more natural free market path. History shows us that this can be a painful journey, but to evolve in sustainable agriculture attention must be given to the whole issue of revenue adequacy. 

The fourth and final item to create smallholder prosperity is physical connectivity to world markets. A positive outcome for smallholders in Africa, for example, would be to experience a more reliable price by connecting with regional markets. This morning we heard comments about the price-depressing effect of the inability, even within the Sub-Saharan African region, to ship food across national boundaries. Once smallholder farmers are more of a competitive force in food production in their own economies, they will be better positioned to tap into global food trade.

Governments must encourage open trade and a fair, transparent, rules-based and rigorously enforced system so food surpluses can reach areas of food deficit. Providing open markets is obviously an advanced solution that requires substantial infrastructure.

As we sit here in the state of Iowa, a state whose agriculture has benefited so enormously from the logistical advantages afforded by the Mississippi River, it is easy to visualize the importance of a powerful tool such as the Mississippi. Contrast that with other parts of the world where it is a huge burden for farmers as they simply try to market their crops across inadequate bridges and dirt roads. Without investments, these isolated markets cannot increase food security and the prices received by their farmers will remain inadequate.

The food crisis in 2008 was exacerbated by countries closing their borders and that is certainly happening again in 2010. Given the increases we have seen recently in food prices, especially in wheat, and the civil strife it has caused in places such as Mozambique and Egypt, it is worth stating again that short-term trade restrictions by governments are not only harmful in the immediate term but run the risk of reducing people’s confidence and trust in each other.

It is interesting to watch one of the debates going on today: Are all the food imports in China a good thing? And is it good for Africa? There is a group on one side of this debate who says the huge food demands of an ever-more-prosperous China is Africa’s great opportunity, and there are others who say the high food commodity prices that result from the enormous imports by the Chinese have caused more people to enter into a situation of economic famine. This argument again points out the left hand and right hand challenge of trying to address economic and caloric famine.

I mentioned earlier that Cargill has direct connections with many smallholders in a variety of commodities and countries, and working with smallholders has been an important part of the company’s legacy for more than 145 years. We are on the ground in developing countries providing technical knowhow, training and practical support for smallholder farmers to help them increase their productivity – and most importantly raise their standards of living. A year ago at this meeting Bill Gates said food companies need to provide markets for smallholder farmers by turning them into suppliers. Companies like Nestle are doing just that, helping develop the dairy sector in Kenya, Uganda and Rwanda. One of our neighbors in Minneapolis, General Mills, is working to help small- and medium-sized food processors and mills in four African nations.

Cargill also helps turn smallholders into suppliers in many of the countries where we do business. But we cannot do this alone. We work with our NGO partners like CARE, TechnoServe and the World Food Programme to help address social issues as well as education, nutrition and health care. Throughout our supply chains, we are working with a number of NGOs like the World Wildlife Fund and The Nature Conservancy to improve those agricultural practices that can convince the world that we, in fact, have sustainable agricultural production. At Cargill we take these actions of our own free will and we do it to build a sustainable business and to be responsible citizens.

I believe the world has the knowhow; it has the spirit of innovation; and the capacity to feed a growing population and to feed it better. The economics and the cash flow for the smallholder are the key part of that equation – arguably it is the condition precedent for all of the other things to take place.

The problems are daunting and bigger than any one actor. We all – civil society, governments, academia and the private sector – must work together toward these solutions. If we respect the law of comparative advantage, clarify property rights, create improved revenue certainty for smallholders, and finally, allow for the opening of markets and free trade that will benefit their productivity, we can feed the world’s population and do it on our current land mass. It will be a long and sometimes difficult journey, but we must continue our efforts if we are to honor Norman Borlaug’s legacy and strive to feed the world’s people.

So, in closing, I will quote from the remarks this morning of Dr. Nuhu Hatibu of the Kilimo Trust: “With sufficient price, we can do this ourselves.” I believe that is true. 

Thank you.

Note: This transcript is an edited version of the speaker’s delivered remarks. Minor edits were made to improve readability.