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Class Project

Paul Szauter, World Hunger, 4/16/2012

This is the next round of work on the World Hunger project, continuing World Hunger 2/12/2012.

Contents

I. Introduction

A. Origin of Project. This project originated in class discussion on January 30, 2012, during an exercise that we called "The Four Horsemen." The class was asked to imagine the biggest problems in the world. Once we had a list of the problems, groups of students worked on possible solutions. The general problem from which this project was generated was simply "Food."

At the end of the discussion on 1/30/2012, the board looked like this:

Several ideas emerged from this discussion. First, there is an enormous gap between the United States and the developing nations of the world. In the United States, food is abundant and cheap, and indeed obesity is a problem. There was some criticism of the role of corporations in agriculture. Several students wanted "open-source" agriculture, in which the results of publicly-funded research would be made freely available to all. Students wanted incentives for researchers, perhaps at universities, to develop improved crops and agricultural practices that would be freely shared. There was a strong interest in developing alternative/indigenous crops in addition to the major food crops of the world (maize, wheat, rice, soy, etc.)

In exploring this problem, I found an expert source of the problem statement, as summarized in my project report on World Hunger on 2/5/2012. Here is the first Millennium Development Goal of the Food and Agriculture Organization (FAO) of the United Nations:

Goal one: Eradicate extreme poverty and hunger.

Here is the FAO's explanation of this goal and its role in addressing it:

The number of hungry people in the world remains unacceptably high despite expected recent gains that have pushed the figure below 1 billion. FAO estimates that the number of people who will suffer from chronic hunger in 2010 is 925 million.

FAO focuses on poverty and hunger reduction through: improving agricultural productivity and incomes and promoting better nutritional practices at all levels and programmes that enhance direct and immediate access to food by the neediest. FAO helps developing countries to improve agriculture, forestry and fisheries practices, to sustainably manage their forest, fisheries and natural resources and ensure good nutrition for all. FAO promotes greater investment in agriculture and rural development and has assisted governments to establish National Programmes for Food Security aimed at smallholder farmers. In emergency response and rehabilitation efforts, FAO's expertise in farming, livestock, fisheries and forestry is crucial. FAO works quickly to restore agricultural production, strengthen the survival strategies of those affected, and enable people to reduce their dependence on food aid. FAO also plays a crucial role in prevention, preparedness and early warning.

I posted an additional exploration of the problem in my project report on World Hunger on 2/12/2012.

In the time since then, I continued to read books and explore websites to gather additional information and to devise a plan. The resources that I used are all summarized in this report. The ultimate goal of this project is to devise a plan of action to be presented in a final report.

B. Define the problem. We can't do better than the FAO's goal statement to "Eradicate extreme poverty and hunger."

In prior explorations of this problem ( 2/5/2012 and 2/12/2012), I found that the problem was too large to consider all at once, and sought ways to reduce the scale of the project. I concluded that it was best to focus on Central and South America, where the need is great.

At first, this would seem to be one of those problems that could be easily solved by throwing money at it. If we throw enough money at the problem, people won't be poor and hungry, right? However, this simple approach raises two additional questions:

1. At whom do we throw the money?
2. Where will the money come from?

We will begin by addressing these questions first.

II. At Whom Do We Throw the Money?

For insight, I turned to Hans Rosling, a terrific thinker and great speaker, who has created the Gapminder site. Gapminder collects an enormous amount of data in one place, and provides a powerful set of data visualization tools. Below are two talks by Hans Rosling, which are really worth watching.

In the first video (The Magic Washing Machine), Hans Rosling makes a compelling case for economic development and industrialization around the world. A broad goal of innovation should be to eradicate poverty around the world, allowing people in developing nations to reach a standard of living that is taken for granted in the industrialized world. This must be done without destroying the planet, making innovation in sustainability and green energy essential to progress.

In the second video, Hans Rosling takes us through the lives of people living in poverty in Africa, showing some of the forces of economic development. At around 13:00 in the second video (New Insights on Poverty), we see an African woman going to market on her bicycle, while Hans Rosling points out the forces improving her quality of life.

She is carrying a child. The child is healthy because globalization has caused medical knowledge to spread, creating a better set of health outcomes for a given per capita income than existed decades before in developed countries. The woman was educated in a public school, so she knows enough arithmetic not to be cheated in the marketplace. She rides her bike on a paved road, the result of public spending on infrastructure. She also has access to information on when to go to the market, and on current prices for what she is selling. She rides a bicycle that may have been financed through microcredit lending.

This simple example shows that the elimination of poverty depends on public sector investment in health, education, and infrastructure. Relatively small amounts of money provided through microcredit lending can finance the purchase of goods that will increase income: a bicycle, a sewing machine, a flour mill. There must also be access to information using relatively inexpensive technology, such as cell phones.

If all of these elements are in place, we can count on people's aspirations for a better life to motivate them to improve their own situation.

At around 15:00 in the second video (New Insights on Poverty), Hans Rosling rates the importance of various means to development. Economic growth is the most powerful driving force. This cannot occur without good governance and public education. These are the major factors. There are many worthy efforts on the part of governments and international organizations to foster economic growth and public education, but these cannot succeed without good governance in the target country. Perhaps the most important role for governments outside a target country is to encourage good governance, without which all aid is worthless. Giving money to a corrupt and incompetent government will not foster economic development, because it will not be spent on public education, public health, or infrastructure.

In evaluating our plan, we will consider a minimal standard of good governance from publicly available information. Based on the information summarized in my earlier report (2/12/2012), among the nations of Central and South America, we would consider only Haiti to fall below this standard. Someone else's project will have to address economic development in Haiti.

The presentations by Hans Rosling suggest an appropriate target for money: hard-working small-scale farmers. While directing money to these people will not directly solve the problem of the urban poor, it is a good place to start.

III. Where Will the Money Come From?

The best source of money is from people who have money to spare. Their basic needs for food, housing, health care, and education are met. They are in secure employment, and they take for granted the safety of their families and property. These are all of the fundamentals in Maslow's hierarchy of needs. Most healthy people who have these basic needs satisfied have additional needs: the need for self-esteem and self-actualization. Self-esteem derives from engaging in activities that allow a person to feel that they are making a contribution. Someone who is financially independent might perform charity work, or start a foundation. People who have reasonable employment but not complete independence may contribute time or money to charity. What if it were really easy to make a contribution to a better world while doing something that you already do, just by making a slightly different, informed choice?

We decided above to direct money to small-scale farmers in Central and South America. The simplest way to direct money to farmers is to buy food that they produce in a way that ensures that they will benefit. Fortunately, we do not have to invent the mechanism to do this. It was invented some time ago, and we encounter it on a regular basis: the Fair Trade movement.

The premise of the Fair Trade movement is simple: people in industrialized countries enjoy a large number of goods imported from developing countries. If markets worked perfectly, trade with developing countries would benefit the people producing these products. Unfortunately, a farmer producing small quantities of coffee, chocolate, or other goods cannot sell to the American consumer directly. He or she must sell in local markets through a series of parties. Each transaction is an asymmetric one in which the small producer must take the offered price. Besides the cost of processing, transporting, and marketing goods, there is a substantial profit margin at each step. There is a large difference between the price offered to the small producer and the price paid by the American consumer. The Fair Trade movement began decades ago to give small producers fair prices for their goods. It began with handcrafted items, and today encompasses coffee, chocolate, tea, grains, fruits, vegetables, and other products.

Fair Trade USA is one part of the Fair Trade movement. The organization provides Fair Trade certification and a distinct label that indicates that there is a complete audit trail from the small producer to American manufacturers and distributers. Consumers pay a premium of around 30% for Fair Trade goods. Fair Trade USA uses the funds derived from licensing the Fair Trade label to oversee trade and to assist countries that produce goods. The assistance is given in the form of improved agricultural practices, general education, health care improvement, and assistance in starting small businesses. For a complete description, please see the pages on Impact at Fair Trade USA.

More than 10,000 Fair Trade Certified products are sold in more than 70 countries worldwide. In the U.S. market, consumers can choose from more than 7,000 products sourced from 58 countries. The success of this approach shows that consumers are willing to pay a premium for goods that have been traded fairly. Consumers have shown that they are willing to make a sight effort and incur a modest expense in order to make a better world. It is informative to see where the Fair Trade movement had its first successes: handcrafted gifts, coffee, chocolate, tea, snack items and other modest luxuries are not essential to daily life. People who indulge in the puchase of these nonessential things would like to feel that they are helping the less fortunate when they do so.

This observation suggests that it should be possible to build a business that transfers profits from the sale of imported food items to American consumers to people in the producing countires in Central and South America. In order to develop the plan, it is necessary to take a digression into the types of corporations that exist in the United States.

IV. Structure of Corporations

A corporation is a legally created entity that has privleges and liabilities distinct from its members, whose assets are typically shielded from liability. We would like to consider some kind of corporate entity to assist us in directing money from socially conscious people in the United States to small-scale famers in Central and South America. Here is a list of kinds of corporations, with a consideration of how each might be suited to address this problem.

A. For-profit Corporation, publicly held. A for-profit corporation that is publicly held is a legal entity with shareholders who hold publicly-traded stock. For example, Apple Computer and Google are such corporations. The principal duty of the board of a corporation is to maximize profit to provide a financial return to investors. This does not completely eliminate the possibility that the corporation might act in the public interest for some social purpose. Many corporations have created nonprofit foundations (see below) to which they donate some of their profits. Corporate donations to charity are part of a strategy of managing taxes. Corporate donations to charity are also part of establishing a positive brand image, which can be seen as an aspect of marketing.

Whole Foods Market is a publicly-held corporation that is relevant to the problem of eliminating poverty and hunger. They have created the Whole Planet Foundation, a nonprofit foundation that provides microcredit lending to entrepreneurs in communities that supply Whole Foods Market stores and facilities with products. In 2010, Whole Foods Markets donated over $1.6 million (on $3.1 billion in gross profit, see Whole Foods Annual Report; 5% of net after-tax profits, see Whole Foods Annual Report) to Whole Planet Foundation (see Key Metrics).

B. For-profit Corporation, privately held. A for-profit corporation that is privately held is a just like a publicly-held corporation, except that there is no publicly-traded stock, and ownshership is confined to a small group of stakeholders. Privately-held corporations have an advantage in that they are not required by the Securites and Exchange Commission to publicly disclose as much financial information, and are not subject to quarterly scrunity by stock analysts. This gives a privately-held corporation more latitude to pursue long-term strategies not solely focused on growth and profit maximization.

One example relevant to this project is Newman's Own, Inc. This company was started with an initial investment of $80,000 in 1982 by actor Paul Newman and writer A. E. Hotchner, who began by having a private manufacturer make bottles of salad dressing. The company became a success, expanding its product line to include other specialty foods. From the outset, Newman's Own pledged to donate 100% of profits after taxes to charity. In 1999, the company reached $100 million in charitable giving; that year, it reported sales of $100 million. There is a historical account of Newman's Own, Inc. from 1982-2000 at Funding Universe.

C. Non-profit Corporation. A nonprofit corporation is a legal entity that manages donated funds for some publicly-stated purpose. In the United States, a 501(c)(3) nonprofit corporation, as defined by the IRS code, "must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization, i.e., it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates."

Exempt purposes are defined by the IRS:

"The exempt purposes set forth in section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency."

The Whole Planet Foundation, described above, is a 501(c)(3) nonprofit corporation. Besides receiving funding derived from the profits of Whole Foods Market, the foundation receives charitable donations directly from individuals and other corporations.

D. Benefit Corporation (L3C).

A benefit corporation or B corporation (also known as a low-profit limited liability corporation or L3C) is a corporation that is required by law to generate a benefit to society as well as to its shareholders. Vermont was the first state to allow the chartering of benefit corporations in 2010, followed by a handful of other states. A benefit corporation is publicly accountable for its specific purpose (such as a fixed percentage of profits to charity) as well as for providing a return to investors. This hybrid strategy allows raising funds and providing a financial return to stockholders, while pursuing a public goal in the manner of a 501(c)(3) nonprofit corporation. The public goal is the primary purpose of an L3C corporation, while profit is secondary.

A major source of funding for L3Cs is foundation support. Foundations are required to disburse at least 5% of their assets each year in order to maintain their tax-exempt status. Foundations can make outright grants, receiving nothing in return, or can make program-related investments (PRIs), potentially earning a return on their investment. The PRI must relate to the foundation's purpose, and must have a risk/reward ratio that is lower than a standard market investment such as the purchase of shares in a publicly-traded stock.

PRIs make up less than 1% of the charitable distributions made by foundations in 2006 and 2007 (Foundation Center). The IRS can refuse to recognize a PRI if the project is not adequately charitable. L3Cs can make the process simpler for foundations, depending on the pattern of IRS rulings.

E. Comparison of Corporate Structures for this Project.

We should consider which corporate structure is best suited to accomplish the aims of this project. Considering first for-profit corporations, whether public or privately held, we are encouraged by the two examples, Whole Foods Market and Newman's Own, Inc.. In the first case, a profitable, publicly-held corporation has established a foundation that is free to raise funds through other means. In the second case, a profitable privately-held corporation that has never sought to raise capital from outside investors is free to donate all after-tax profits to charity. There are ample foundations and charitable organizations to address the problems posed here, and they do great work, but they are limited by the amount donated to them.

We are most interested in the L3C corporate structure, which has as its primary purpose the goal of social good, as does a charity, but which is free to raise funds from both the sale of products and from program-related investments (PRIs) from foundations.

V. Business Plan

This project is ultimately about a business plan, a mechanism for translating sales of Fair Trade certified food products from Central and South America into benefits for small-scale producers. We imagine that the plan would have the components outlined below.

L3C Registration. There are several states that allow the registration of a Low-Profit Limited Liability Company (L3C). We will use Vermont as an example. The Vermont Secretary of State has posted the requirements for L3C Registration:

"A low-profit LLC is a new type of company, called an 'L3C.' Vermont is the first state to enact this new type of company. The Low-profit Limited Liability Company is a cross between a nonprofit organization and a for-profit corporation. The entity is designated as low-profit with charitable or educational goals. Any entity seeking 501(c)(3) status would still want to organize as a non-profit corporation, under T.11B, to qualify for that tax status.

Organizing the L3C is the same as the regular LLC except that the l3c designation must be indicated when the articles of organization are filed and the name must include the words 'L3C' - Section 3005(2).The organization form has been amended to include the l3c designation. The filing fees, amendments, agent requirements, etc. including the annual report filing has not been changed and applies to both. The basic purpose of the L3C is to signal to foundations and donor directed funds that entities formed under this provision intend to conduct their activities in a way that would qualify as program related investments.

T.11, Ch 21 Section 3001(27) reads as follows:

'L3C' or 'Low-profit limited liability company' means a person organized under this chapter that is organized for a business purpose that satisfies and is at all times operated to satisfy each of the following requirements.
(A) The Company significantly furthers the accomplishment of one or more charitable or educational purposes within the meaning of Section 170(c)(2)(B) of the IRS Code of 1986, 26 U.S.C. Section 170 (c)(2)(B); and (ii) would not have been formed but for the company's relationship to the accomplishment of charitable or educational purposes.
(B) No significant purpose of the company is the production of income or the appreciation of property; provided, however, that the fact that a person produces significant income or capital appreciation shall not, in the absence of other factors, be conclusive evidence of a significant purpose involving the production of income or the appreciation of property.
(C) No purpose of the company is to accomplish one or more political or legislative purposes within the meaning of Section 170(c)(2)(D) of the IRS code of 1986, 26 U.S.C. Section 170(c)(2)(D).
(D) If a company that met the definition of this subdivision (27) at its formation at any time ceases to satisfy any one of the requirements, it shall immediately cease to be a low-profit LLC, but by continuing to meet all the other requirements of this chapter, will continue to exist as a limited liability company. The name of the company must be changed to be in conformance with subsection 3005(a).

This makes it clear that the charitable goals of the organization must be clearly defined and compatible with the IRS rules on activities suitable for 501(c)(3) nonprofit organizations.

Charitable Goals. Here we will enumerate specific charitable goals.

First Products. Here we will describe Fair Trade products for sale in the United States.

Medium-Term Goals. Here we will describe medium-term goals to be pursued after the first landmarks are met.

Elevator Pitch - 4/16/2012

In 1519, the Spanish began their conquest of the Aztec Empire. After years of fire, blood and steel, they looked over the conquest and discovered two staple crops: maize, which they adopted, and amaranth, which they outlawed. Domesticated amaranth represents one of humankind's greatest agricultural achievements. We are here to bring it back. I'm Paul Szauter, of Panamerica Foods L3C. Our mission is to bring back great nutrition to American consumers while helping small-scale producers in Central and South America.

For socially conscious consumers who are looking for an organic snack bar, Bleeding Heart Bars are a snack that lets them help small producers of indigenous grains. Unlike other Fair Trade Products, Bleeding Heart Bars - in quinoa, amaranth, ancient grain and rainforest - finance microcredit and agricultural research directly through Panamerica's L3C structure.

Panamerica Foods L3C is a low-profit limited liability corporation. Our first mission is assistance to small producers. Our mission has been recognized as a program-related initiative by several foundations, who supplied some of our early capital needs. We need you to stock our products so that sales in your stores can take us to the next level of achievement while satisfying your customer's needs to make a better world through their choices.

Elevator Pitch - 4/23/2012

Millions of people in Central and South America live in poverty and hunger on less than $2 a day. Millions of people in the United States would like to help, but don't know how.

I'm Paul Szauter, of Panamerica Foods L3C. Our mission is to bring great nutrition to American consumers while helping small-scale producers in Central and South America.

For socially conscious consumers looking for an organic snack bar, Bleeding Heart Bars are a snack that lets them help. Unlike other Fair Trade Products, sales of Bleeding Heart Bars directly finance microcredit and agricultural research through Panamerica's L3C structure.

Our first mission, ahead of profit, is assistance to small producers. Our mission has been recognized as a program-related initiative by several foundations, who supplied some of our early capital needs. We need you to stock our products. Sales in your stores will satisfy two of your customer's needs: great nutrition and making a better world.