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Why Sharing Economic Growth with the Community Is Good Business

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Subsistence dairy ranchers in Central America struggle to stay afloat during the dry season when grass is scarce. Global life sciences company Bayer has launched a program to enable them to produce their own corn silage feed.  The results of this program are helping to pull the ranchers out of poverty because they are now able to sustain a consistent milk output through the year and can increase the number of cattle they keep. This in turn makes them more reliable (and cheaper) suppliers for large-scale milk processing companies. This innovation creates value for Bayer and its partners in the program as well as for the ranchers and their customers.

The world’s 550 million smallholder farmers are amongst its poorest inhabitants, eking out a subsistence on farms smaller than 10 hectares. With minimal financial resources, they face unending challenges from weather, disease, pests, weeds, uncertain prices, and highly seasonal growing conditions.

Helping these people would seem an unlikely business prospect for a large multinational like Bayer, a global leader in life sciences. Yet, as a previous article on HBR.org has described, Bayer has successfully teamed up with private and public sector organizations to give smallholder crop farmers in India, Indonesia, and Bangladesh access to markets, financing, high-quality agricultural inputs, and education on contemporary farming and business practices. The system is based on a network of independently managed Better Life Farming Centers, each connecting up to 500 smallholder farmers to the capabilities, products, and services of Bayer and partner corporations and NGOs. This new inclusive ecosystem is already lifting a million farmers out of poverty while expanding the company’s market reach.

Bayer has been following a similar path to address the plight of hundreds of thousands of marginalized dairy ranchers with more than 24 million livestock in Southeast Mexico and Central America, and is experiencing similar results.

The problem

The typical small dairy rancher has about 25-30 head of cattle, grazing on as many hectares. They sell their daily milk production to local milk processors and artisanal cheese producers, generating bi-weekly cash payments that they use to pay workers, cancel some debts, and cover farm operating expenses. In the rainy and humid months of April to mid-November, the ranchers maintain a reliable supply of grass to feed their animals. Operations, while difficult and requiring long hours, generally run smoothly.

Problems arise during the dry season when grass growth is insufficient to feed the herd. The ranchers keep their animals alive by feeding them stubble from other crops, supplemented with minimal amounts of expensive grass bales. The animals lose up to 90 kg (around 20 – 25% of their weight) during the dry months, and produce 50% less milk.  They are also more likely to fall sick and less likely to breed.

The solution

Bayer, already selling seed to crop farmers in the region, saw an opportunity to expand sales while mitigating the dairy farmers’ plight. The solution: have ranchers plant corn on a part of their grazing land during the rainy season, and train them to perform corn silage at the right harvest time, a proven preservation technique in harsh climates. The ranchers could then use the preserved corn silage to feed their animals during the dry season.

Bayer created a dedicated organization, DKsilos, consisting of agronomists and veterinarians, to help the dairy ranchers implement the new business model. The DKsilos team integrated existing local suppliers, such as veterinarians and sellers of machinery, into a new distribution network that supplied the ranchers with high-quality seeds and other agricultural inputs. The new network also financed the ranchers and distributed their output to local and regional customers.

Overcoming the challenges

DKsilos had to overcome several challenges. To begin with, it had to make sure that ranchers would be willing to consider the new model, which was not a given, because crop farming carried a lower social status. Through a series of focus groups DKsilos quickly established that higher income and greater peace of mind during the dry season could overcome any perceived status loss, especially when the farming enabled them to become more successful ranchers.

The next challenge was the ranchers’ lack of technical expertise in corn growing and silage, especially in a tropical region where corn silage was not a common practice. The ranchers initially believed that only large ranchers, with large infrastructure and technically qualified personnel, could successfully grow and silage corn. By establishing pilot plots in various conditions and locations DKsilos was able to demonstrate the technical feasibility of local corn production and silage and how it led to healthier livestock, and more profits for ranchers.

A third challenge was the under-capitalization of the ranchers, who would need machines to help plant the corn, and to harvest and silage it. DKsilos worked with local banks to develop a leasing model that gave ranchers access to machinery without front-end investment. Some ranchers also used the availability of financing to purchase the equipment and, when not being used, rent it to neighbors. These options expanded the market for local equipment distributors.

Finally, DKsilos had to create a robust knowledge transfer process to educate the region’s tens of thousands of widely dispersed smallholder ranchers. Bayer used its operating expense budget to subsidize the local distributors to hire a technical advisor, who became part of the package they offered to ranchers. The technical advisor helped ranchers select the right land for corn growing, advised them on time to harvest, and trained them to prepare the silage.

A win-win payoff

Ranchers quickly received benefits from their new business model. The production and storage of the corn silage cost 50-75% less than feeding the animals during the dry season with grass bales. The silage also had higher nutritional content since the concentration of starch on corn kernels provided more energy per kilogram than grass bales.

With silage-fed cows, ranchers could now sustain milk production during the drought season, avoiding the 50% decline previously experienced. They also benefited from a slightly higher price per liter because the milk produced by silage-fed cows had higher fat content. They could even grow their herds since the healthier animals experienced increased birth rates, and the same farmland could now support 2-3 grazing animals per hectares.

The economics were compelling. For the typical rancher with 25 cows, feeding costs during the five-month dry season fell from around 76,000 pesos (US $3,800) to about 54,000 (US $2,700) while revenues from the higher milk productivity rose from 120,000 pesos (US $6,000) to 200,000 (US $10,000), delivering an increase in operating margin of around 100,000 pesos (US $5,000) — or about 20,000 pesos (US $1,000) more a month.

With the smallholder ranchers now producing more milk through use of the DKsilos technical assistance, Bayer’s corn seeds and crop protection products, and machinery services from partner organizations, they could now become reliable suppliers to large scale regional processors such as Sula (Lacthosa) in Honduras, Dos Pinos in Costa Rica, and Nestlé in Mexico.

DKsilos connected its participating ranchers to these producers, who benefited from access to locally sourced milk instead of transporting milk or milk powder, at some environmental cost, from suppliers 1,000 kilometers away. At the same time, Bayer increased its sales of corn seeds and crop protection products. The win-win-win cycle also included the regional milk industry, which now had access to higher quantities of lower-cost and higher quality milk. And many new local jobs were created to support the expanded dairy operations.

. . .

The new practice quickly took off. Corn silage planting grew at a compound growth rate of 152% between 2016 and 2022, from 10,000 hectares to more than 120,000, and now includes 42,000 participating ranchers in eight states in southeast Mexico and in Guatemala, Honduras, Nicaragua, Costa Rica, Panama, and Dominican Republic. Since 2016, participating ranchers have collectively saved over $550 million USD from using their locally produced feed rather than purchasing bales of grass, and generated more than $200 million USD in incremental profits from their higher quantity and quality milk production. DKsilos is now preparing to roll out the same model for small dairy ranchers in Latin America on a larger scale, and possibly in Africa and Asia as well.

Source : Harvard Business

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