Why sharing economic growth with the community is good business

The world’s 550 million smallholder farmers are among its poorest, eking out a living on farms smaller than 10 hectares. With minimal financial resources, they face endless 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 company like Bayer, a world leader in life sciences. Yet, as described in a previous HBR.org article, Bayer has successfully partnered with private and public sector organizations to give smallholder farmers in India, Indonesia, and Bangladesh access to markets, financing, high-quality agricultural inputs, and education about modern farming and business practices. The system is based on a network of independently managed Better Life Agricultural Centers, each connecting up to 500 smallholder farmers with 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 is following a similar path to address the plight of hundreds of thousands of marginalized dairy farmers with more than 24 million head of cattle in southeastern Mexico and Central America, and is achieving similar results.

The problem

A typical small dairy farmer has about 25-30 head of cattle grazing on that many hectares. They sell their daily milk production to local milk processors and artisan cheese makers, generating cash payments every two weeks, which they use to pay workers, cancel some debts and cover the farm’s operating costs. In the rainy and humid months from April to mid-November, livestock farmers maintain a reliable supply of grass to feed their animals. The operations, although difficult and requiring long hours, usually run smoothly.

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

The solution

Bayer, which already sells seeds to farmers in the region, saw an opportunity to expand sales while easing the plight of dairy farmers. The solution: Get ranchers to plant corn on some of their pastures during the rainy season and train them to make corn silage at the right time of harvest, a proven technique for storage in harsh climates. Ranchers can then use the saved corn silage to feed their animals during the dry season.

Bayer created a special organization, DKsilos, consisting of agronomists and veterinarians, to help dairy farmers implement the new business model. The DKsilos team integrated existing local suppliers, such as veterinarians and machinery vendors, into a new distribution network that supplied farmers with high-quality seeds and other agricultural inputs. The new network also finances livestock farmers and distributes their produce to local and regional customers.

Overcoming challenges

DKsilos had to overcome several challenges. To begin with, he had to make sure that ranchers would be willing to consider the new model, which was not a given, since growing crops carried a lower social status. Through a series of focus groups, DKsilos quickly found that higher incomes and greater peace of mind during the dry season could overcome any perceived loss of status, especially when farming allowed them to become more successful livestock producers.

The next challenge was the lack of technical expertise of livestock farmers in growing maize and silage, especially in a tropical region where maize silage was not a common practice. Originally, ranchers believed that only large ranchers, with large infrastructure and technically skilled personnel, could successfully grow and ensile corn. By establishing pilot plots in different conditions and locations, DKsilos was able to demonstrate the technical feasibility of local maize and silage production and how this leads to healthier animals and more profits for farmers.

A third challenge was the undercapitalization of ranchers who would need machinery to help plant the corn as well as harvest and ensilage it. DKsilos is working with local banks to develop a leasing model that gives livestock farmers access to machinery without an upfront investment. Some ranchers also used the availability of financing to purchase the equipment and, when not in use, rent it to neighbors. These options have expanded the market for local equipment distributors.

Finally, DKsilos had to establish a robust knowledge transfer process to educate tens of thousands of widely dispersed smallholder farmers in the region. Bayer used its operating budget to subsidize local distributors to hire a technical advisor, which became part of the package they offered to breeders. The technical advisor helped the farmers to choose the right land for growing maize, advised them on time to harvest and trained them to prepare the silage.

Profitable profit

Livestock farmers quickly reaped the benefits of their new business model. Maize silage costs 50-75% less to produce and store than feeding animals during the dry season with hay bales. Silage also has a higher nutritional content because the concentration of starch on the corn kernels provides more energy per kilogram than grass bales.

With silage-fed cows, farmers can now maintain milk production during the dry season, avoiding the 50% drop previously seen. They also benefited from the slightly higher cost per liter as the milk produced by silage-fed cows had a higher fat content. They could even raise their herds as the healthier animals experienced an increased birth rate and the same farmland could now support 2-3 grazing animals per hectare.

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

With smallholder farmers now producing more milk by using DKsilos’ technical assistance, Bayer’s maize seeds and crop protection products and machinery services from partner organisations, they can now become reliable suppliers to large regional processors such as Sula (Lacthosa) in Honduras, Dos Pinos in Costa Rica and Nestlé in Mexico.

DKsilos connected its participating farmers with those producers who benefited from access to local 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 also includes the regional dairy industry, which now has access to larger quantities of milk at a lower price and higher quality. And many new local jobs were created to support the expanded dairy operations.

. . .

The new practice is quickly gaining ground. 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 southeastern Mexico and in Guatemala, Honduras , Nicaragua, Costa Rica, Panama, and the Dominican Republic. Since 2016, participating farmers have collectively saved over $550 million by using their locally produced forage instead of buying hay bales and generated more than $200 million in additional profits from producing higher quantity and quality of milk. DKsilos is now preparing to roll out the same model for small dairy farmers in Latin America on a larger scale, and possibly in Africa and Asia.

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