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Coca-Cola ups contract farming practices

10/16/2012 @ 6:14am

Coca-Cola Co. (KO) is using more corn-based sweeteners in its products in a bid to cut costs and is planning a large expansion of its contract farming portfolio to include commodities such as coffee, tea and fruits as well as dairy products, a senior company executive said Tuesday.

"In most Coca-Cola products, there's a clear directional shift toward the use of high-fructose corn syrup, which is cheaper than sugar," Michael Ferrari, director of global agricultural commodity risk management at the beverage giant, told Dow Jones Newswires on the sidelines of an agriculture conference here.

The concept of contract farming is gaining ground among food and beverage companies worldwide as they try to maintain stringent quality control while expanding globally and at the same time cushion themselves against volatility in food prices.

December white sugar futures on the London International Financial Futures and Options Exchange are trading around $560 a metric ton. Near-month corn futures on the Chicago Board of Trade are around $7.42 a bushel, equivalent to $292/ton.

Even after obtaining high-fructose corn syrup from corn, there are a few downstream products that can be sold off for energy and animal feed use, partly offsetting raw material costs, Mr. Ferrari said.

He said the contract farming model has been successful for the company, as it ensures good agricultural practices, higher yields and the monitoring of quality specifications in line with the company's requirements.

Under contract farming, companies supply inputs to growers and buy back the crop at a pre-determined price, provided that certain quality norms are adhered to.

"We procure sugar cane from contracted farmers and get it crushed from designated millers to ensure quality," Mr. Ferrari said.

However, he didn't provide figures on the volume of corn and sugar cane purchased under contract farming and its share in the company's overall needs.

Contract farming for sugar cane is being done mostly in India, Australia, Thailand, Brazil, Egypt and South Africa, he said, adding that for corn, it's mainly in the U.S., Canada, Mexico and Brazil.

Mr. Ferrari also said the company plans to expand its contract farming activities in Africa to take advantage of the availability of large tracts of arable land.

"Africa has tremendous potential. It's a gold mine in high-quality agricultural land which at present is relatively cheaper," he noted.

Mr. Ferrari said the company's output of tea- and coffee-based products is expanding, and it plans to replicate its corn and sugar cane contract farming model in these commodities as well.

Another potential area for such farming is mangoes, apples and berries, he said.

Write to Sameer Mohindru at sameer.mohindru@dowjones.com

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(END) Dow Jones Newswires

October 16, 2012 03:13 ET (07:13 GMT)

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