Challenges to Developing Value Chains with Smallholder Rice Farmers: Experience of Lotus Foods

Lotus Foods imports heirloom rice that is grown on family farms in Bhutan, Cambodia, China, India, Indonesia, and Madagascar. We started our business in 1995, starting with black rice from China, which we trademarked as Forbidden Rice®. We were the first company to introduce “exotic” rice to the US market, which has since become an important segment of the specialty grains category with multiple brands and competitors, and placement on mainstream grocery stores across the country.

What has distinguished Lotus Foods in the category has been our articulated mission of supporting sustainable agriculture, conserving rice biodiversity, and ensuring the family rice farmer a living wage. In Bhutan, providing a modest export market for the country’s traditional red rice, has helped maintain its prestige and protected it from being displaced by “modern” varieties introduced from outside.

Today our supply is sourced from an estimated 3,000-4,000 households. For the most part these families are dependent on rice production for their food and income. Almost all of our products are certified organic, Fair Trade and non-GMO verified. This means our farmers earn between 20% and 40% more for their rice than if they sold it on the open market. We believe strongly in these certifications. They tell consumers we care, and they give us confidence that principles we support are being adhered to.

In 2008 we intensified our company’s environmental and social goals by committing to providing market incentives to farmers using System of Rice Intensification (SRI) practices, which enable them to double and even triple their yields with half the water, no agrochemicals, one-tenth the seed and usually less labor due to the drastic reduction in seed rate. This was a huge challenge as it meant creating a supply chain from the ground up and working with farmers and partners with no experience in processing or export.

Whereas our previous business model relied on liaising with in-country partners who handled all issues related to production, processing and shipping, working with SRI farmers has involved a more complex satellite of partners. In Madagascar these include a small farmer cooperative, USAID- and CIRAD-funded development projects, and US Peace Corps Volunteers. In Cambodia we work with the national NGO CEDAC. And in Indonesia our partner is a woman entrepreneur representing a large well-established cooperative. The FAO has just produced a publication on organic agriculture in Africa that includes a detailed article on our collaborative activities in Madagascar, which reflects the complexity of relationships. See page 112.

At times this means we operated much like a NGO ourselves, investing heavily of our time and resources in technical assistance, capacity building, identifying grants for weeders and organic fertiliser, and extending financing before a grain of rice had been harvested. Balancing the “people, planet, profit” equation is tricky. But it has been worth it. Especially in Cambodia and Indonesia, our partnerships are scaling well. We recently, introduced three new products (microwaveable rice bowls) that feature SRI-grown native rices from both countries, and many more farmers are benefiting.

Without a doubt the largest obstacle to any small company in developing relationships with smallholder farmers is lack of capital. In many countries coops can’t borrow from banks, only individual farmers. Or they have no credit record. So they are challenged to find the funds to pay farmers for the harvest and still have enough for processing, packaging, etc. Often, too, the coop/NGO/private business is struggling with costs like organic and Fair Trade certifications. This means the importing company has to cover some or all of these costs, putting them at risk financially.

We’ve often argued that what is needed is a low-interest Revolving Loan Fund that could be available to mission-driven companies like Lotus Foods and in-country partners who are working directly with groups of smallholders. At the start-up stage, access to $10,000 to $25,000 can make a huge difference in mitigating risk, and minimise the need to borrow at high-interest commercial terms. To facilitate scaling up, loans of $50,000 to $250,000 and even higher would be desirable.

In-country partners could draw on the fund to pay farmers at harvest, backed up by purchase orders. Or to buy equipment, like vacuum packaging machines, that will improve efficiency and quality. And the importing companies could use such a fund to help finance marketing and outreach, which would pay off in expanding sales and revenues. We’d love some serious discussion of this idea.

Watch a video about the initiative and SRI rice,here.