Global Food Chains: Constraints and Opportunities for Smallholders

1
Global Food ChainsConstraints and Opportunities
for Smallholders

• Bill Vorley and Tom Fox (IIED)
• OECD DACT POVNETAgriculture and Pro-Poor Task
  TeamHelsinki Workshop
• 17-18 June 2004

2
Structure of the presentation

• Emphasis on
• Market structure and governance
• Output markets rather than input markets
• Rural World 2
• Bulk commoditiescoffee, cocoa, bananas..
• Buyer-driven (Demand) chainsFFV..

3
Sources

• Literature
• IIED research projects
• POVNET background papers
• DFID E-forum on 'New Directions for Agriculture
  in Reducing Poverty' 
• Growth and Poverty
• Economic Opportunity
• Commodity studies for DEFRA and IFC (with
  ProForest and Rabobank)
• Food, Inc.

4
Pro-poor trade markets in context
Promote growth
win-win eg Fairtrade exports
win-win eg FSC and CDM
Reduce poverty
Protect the environment
win-win eg local control of natural resources
5
Evolution of non-oil commodity terms of trade
Indices 1980 100 prices deflated by the unit
value of manufactures exports from the G-5
countries to developing countries
Source World Bank Global Development Finance
2002
6
World Bank commodity price indices for low and
middle income countries (1990 100)
Sources 1970-2000 World Bank Global Economic
Prospects 2004 (Appendix 2) 2002-2004 World
Bank Commodity Price Data Pinksheet - June 2004
7
Bulk commodities Immiserising growth
Price
Production
Had the prices for the top ten tropical
commodities risen in line with inflation from
1980 to 2002, suppliers of these goods would have
received US243 billion more than their actual
receiptsfive times the total world aid budget
1900
2000
Agricultural markets do not self-correct?
Robbins P (2003). Stolen Fruit The
tropical commodities disaster.
8
Bulk commodity treadmill

• Farm prices influenced by global interactions of
  supply and demand -- underlying drivers of
  climate, global economic activity, national debt,
  technology, political force in negotiation of
  trade agreements
• Trade based on anonymity and standardisation --
  can be substituted or mixed based on universal
  grades and standards, and can be bought quickly
  and at low cost
• High levels of corporate concentration in trade
  and processing, often intra-firm trade within
  privately held companies
• Low trade margins--profits arise from exploiting
  volatility via access to global supplies,
  information, credit and risk markets (scale)
• Low buyer involvement in production
• Low producer barriers to entry

Oversupply Buyers market
9
Bulk commodities Trends

• Backward integration to local procurement(eg
  Cargill, ADM, Barry Callebaut cocoaCôte
  dIvoire) as states withdraw from direct
  involvement in commodity markets
  (liberalisation/structural adjustment), OR
• Re-focus downstream, on distribution, brand
  management and marketing to escape the volatility
  and low margins of commodity business (eg Dole,
  Heinz, ContiGroup, ConAgra)
• Risk management, quality assurance and
  traceability achieved through contracts with
  preferred or dependent suppliers
• Transition to buyer-driven chains?

10
The coffee value chain
medium scale 15
plantation 15
small holders 70
Production
15
15
Local exporters
100
100
Neumann, Volcafe, Ecom, Man 43
other traders 57
43
57
International trade
Nestle, Kraft, Sara Lee, Procter Gamble 45
Other roasters 55
Roasters
55
45
Distribution
75
25
25
Food retail 75
Lines between chain sections show cross-chain
investment
11
The cocoa value chain
Source IIED, ProForest, Rabobank (2004). Better
Management Practices and Agribusiness
Commodities. Research for IFC Corporate
Citizenship Facility and WWF-US. PHASE 1 Scoping
Review.
12
Margins in the mainstream coffee value chain

• Margin/kg
• Wet processor incl. costs 0.04
• Trader 0.005
• Processor (hulling) incl. costs 0.04
• Dealer 0.02
• Roaster incl. costs 1.217
• Retailer incl. admin 1.10

Source Oxfam/ St Jean-Kufuor. Coffee left the
farm/plantation as fresh cherry (ie wet
processed) valued at 0.06/kg and retailed at
3.57/kg.
13
Value-Added

• Developing country contribution to value-added
• Cocoa 60 (1970-72) ? 28 (1998-2000)
• Coffee 30 ? 10 (past decade)

14
Mixed evidence from managed markets

• Managed Supply
• Supply management suppresses farmer share of
  export value?
• History of transferring resources to the powerful
  lobby of Rural World 1
• Contracting parties of ICAs were national
  governments acting as export monopolies these
  monopolies no longer exist. No longer valid to
  approach as trade between countries when have
  trade between and within firms
• Problems not insurmountable? Big topic at UNCTAD
  XI
• Managed Volatility
• Hedging and risk management tools too complex for
  Rural Worlds 2-3?

15
Future role of agriculture?

• The growth potential of agriculture as a sector
  lies largely in non-staple production, where
  resources should therefore be concentrated
• Individual agricultural enterprises will prosper
  to the extent that they are able to deliver
  predictable and traceable volumes of high quality
  produce to increasingly sophisticated and
  integrated market agents
• Farms that cannot meet these requirements will
  survive only to the extent that they are
  subsidised by non-agricultural incomes, as
  homestead plots or part-time, often recreational
  enterprises
• The new economies of scale mean that
  small-scale commercial farms will be increasingly
  disadvantaged
• There will be many benefits to poor people,
  partly indirectly through lower food prices, but
  also more directly, through new kinds of growth
  linkages associated with a prosperous commercial
  farming sector
• However, these benefits will manifest themselves
  in new ways, for example as jobs in food
  processing or manufacturing, or in other ways in
  the supply chain.

Simon Maxwell to DFID consultation New
Directions for Agriculture in Reducing Poverty
16
The end of the small farm win-win?

• Small-farm agriculture has been presented as a
  growth-equity win-win
• Resurgence of interest in agriculture
• But the case for the efficiency of smallholder
  farming may be breaking down
• Economies of scale occur off the farm
• Polarisation of agribusiness and small-scale
  farming cultures
• Threat to Rural World 2

17
Three Rural Worlds

• Rural 1 Globally competitive
• Rural 2 Local orientation, landowners,
  shrinking middle
• Rural 3 Struggling rural underclass

Rural World 1 is changing..
Part of consolidated buyer-driven supply chains
-- high level of collaboration (associative
relationships) with processors and retailers
Residual suppliers to retail/wholesale or bulk
commodity markets
Fractured livelihoods, including migration,
labour for Rural 1
18
Agrifood chains
Buyer-driven chains (Demand chain) Short
chains Differentiated products Contracts with
buyers High buyer involvement High barriers to
entry
      Raw materials
      End customers
Upgrading
Bulk commodity chains (Supply chain) Undifferent
iated Cash markets Low buyer involvement in
production Low barriers to entry
19
Linking Smallholders to Markets (Orden et al,
2004)
INTERNATIONAL MARKETS
 
MARKET ACCESS
FOOD REGULATION
FOOD AID
Rural
World 1
Rural World 2
DOMESTIC MARKETS
INSTITUTIONS
PHYSICAL INFRASTRUCTURE
Rural World 3
SELF CONSUMPTION
20
Issues

• Low farmgate prices
• High farm-retail price spreads
• Market exclusion

• Oversupply
• Subsidies and dumping, competition, import surges
• End of ICAs
• Technology treadmill
• Lack of alternatives
• Debt
• Market distortions
• Oligopsony
• Buyer power
• Barriers to access and entry
• Standards
• Reduction in supply base, dependent suppliers

21
Why is market structure and governance so
important?

• Trade liberalisation will not bring the expected
  benefits when agricultural markets do not
  function competitively
• Corporate growth and consolidation is premised on
  expectations that larger buyers can extract more
  favourable terms from suppliers
• there is a risk of declining share of value for
  rural actorsworkers in the agriculture and
  processing sector, and primary producers
• Can raise barriers to market access and market
  entry

22
Coffee, deregulation and upgrading (Ponte, 2001)

• Post- ICA regime
• Post-ICA regime ? buyer-driven chains (actually
  roaster-driven)
• Increased upgrading opportunities through
  marketing of fair trade coffee
• But most openings in speciality markets more
  suitable to estates than smallholders
• This is because market liberalisation in
  producing countries resulted in the break-down of
  quality control
• Chains of speciality coffee grown on large-scale
  estates can be strictly coordinated with traders.

• ICA regime (1962-1989)
• Upgrading possibilities limited, as trade
  undifferentiated
• Producing countries achieved product valorisation
  through higher international prices provided by
  the ICA.

23
Buyer-driven chains features

• Value chain thinking
• A reversal of the marketing chain from supply
  chain to demand chain
• Long-term vertical coordination between
  producers, intermediaries, processors and
  retailers.
• Producers contract with processors and retailers
  to deliver differentiated (de-commodified)
  products.
• Driven by the need for traceability, assurance
  of supply, consistency of product and risk
  management High levels of governance by
  downstream actors
• High barriers to entry
• Volume requirements, voluntary standards
• Capital requirementsRural World 1
• Market closure
• ? Role of pricing is weakened

 Control without ownership
24
The Supply Chain Bottleneck in EuropeSource
Grievink (2003)
Consumers 160,000,000 Customers
89,000,000 Outlets 170,000 Supermarket
formats 600 Buying desks 110 Manufacturers
8,600 Semi-manufacturers 80,000 Suppliers
160,000 Farmers/producers 3,200,000
Covers retail food (not foodservice) and
represents about 85 of the total sales of the
western European countries
25
Market power

• The ability to profitably set customer prices
  above competitive levels (seller power) or set
  supplier prices below competitive levels (buyer
  power)

Redistribution of wealth from producers to
consumers
26
Ingredients of market power

• Size
• Absolute cost advantage
• Ability to influence policy
• Market concentration
• Dependent suppliers
• Buyer-driven chains
• Brands
• Information
• E.g. consumer data from EPOS

Concentration isnt everything
27
Buyer power in action extracting more favourable
terms from suppliers
Data from UK Competition Commission (2000)
Appendix 7.2. Applies to suppliers top 5 lines
28
Supply chains and value chains
The supply chain The stages that transform a raw
material into a finished product or service and
deliver it to the ultimate customer
      Raw materials
      End customers
The value chain Allocation of price paid by
consumers to suppliers and primary producers
Adapted from Cox et al., 2002
29
Exports to the North
30
Developing countries have failed to penetrate
agricultural markets of rich countries
Developing countries share of total world
exports ()
Source World Bank Development Prospects 2004
31
Fresh vegetables Kenya to the UK
Producer/exporter 14

Producer/outgrower 3-5
Producer
Packaging 13
Air freight and handling 21
Importer charges 6
Supermarket 46
Source Dolan, pers comm.
32
Standards and market access the example of
Homegrown in Kenya

• Homegrown
• 15 of Kenyas horticultural exports
• high quality premium and prepared vegetables and
  cut flowers
• 6,000 employees
• 700 outgrowers, which it grades according to
  compliance with market standards
• Each of the markets to which Kenyan produce is
  shipped sends both commercial and technical
  representatives to observe and audit what we do
  here. Some of them make at least three visits in
  a year. In addition we have the British Retail
  Consortium that checks our pack stations to
  ensure that they meet European standards. There
  is also the Ethical Trading Initiative that looks
  into the issue of the awareness of horticulture
  farmers of the social impact of their activities.
  I would say that Homegrown spends about Ksh2-3
  million EUR 20-30,000 per month to meet these
  market standards.
• Standards dictate extent to which companies use
  outgrowers vs. own production

Source Market Intelligence
33
EUREP-GAP standards

• EUREP-GAP initiative of Euro-Retailer Produce
  Working Group
• Goal of harmonising supply chain standards
  worldwide for good agricultural practice (GAP)
• EUREP-GAP Protocol 2000 focus on food safety and
  traceabilitymeet consumer concerns on
  pesticides, hygiene
• Environment and worker welfare issues secondary
  concern
• Growers receive approval through independent
  verification from approved certification body
  audit costs EUR 450
• Developing country producers -- alarm at
  imposition of standards without due
  consideration of local conditions. Current
  standards
• favour large-scale producers and threatens
  livelihoods of hundreds of thousands of people
  in exporting countries such as Kenya
• Are a de facto barrier to market entry
• Supermarkets may require banana suppliers to
  comply with EUREP-GAP, ISO 14001,and the ETI Code
  of Labour Practice.

Sources Fresh Produce Journal, Banana Link
34
Private standards in context
New food safety regulations due to come into
force in the EU in January 2005 will make it
mandatory for all fruit and vegetable products
arriving in the EU to be traceable at all stages
of production, processing and distribution.

• Saturday, May 15, 2004
• EU safety rules to cost Kenya Sh26bBy Joseph
  Murimi
• The European Unions newly introduced food safety
  regulations could cost Kenya some Sh26 billion
  annually in missed export earnings.
• The stringent rules are expected to prevent a
  large proportion of Kenyas fresh horticultural
  produce from entering the EU should farmers fail
  to beat the December 2004 deadline.
• This exposes the horticultural sector to the
  problems suffered by fishing sector whose
  products have been severally blocked from
  entering the European market for failing to meet
  set sanitary standards.

Sources Fresh Produce Journal, Banana Link
35
Example of FFV Working for Homegrown in Nairobi

• A flexible workforce to fill the orders is
  essential. Many of those workers live at
  Pipeline, a spreading slum of new high rise
  blocks and unfinished flats occupied by labourers
  who have migrated to Nairobi from the rural areas
  for work. Gladys came to Nairobi to support her
  husband and three boys and to try to earn enough
  money to send them to school. She lives with them
  in one room in a block where about 100 people
  share a lavatory and outside tap. For that she
  pays 2,000 Kenyan shillings a month. Her target
  at the factory is to top and tail 180kg of beans
  a day, for which she is paid 200 shillings (about
  1.60). But they often have to do more and then
  they get performance bonuses. Typically she will
  earn just over 6,000 shillings a month after tax
  and insurance deductions, which is a lot by
  Kenyan standards.

Felicity Lawrence, The Guardian, 17 May 2003
36
The Banana Split
How much of 1.00 retail value of loose
Ecuadorian bananas stays with each actor to cover
costs plus margin, based on June 2003
pricesSource Bananalink
37
The UK banana price wars 2002-3
Source Banana Link
38
Transmission of retail banana price competition
back to plantation workers in Costa RicaBased on
May/June 2003 data
Legal minimum 3.42
Source Banana Link
39
Global food chains can reach in to developing
country markets, as well as reach out

• More than 50 of growth in global food retail
  will be through emerging markets

40
The advent of global retailing
41
Global Top 10 Grocery Retailers, 2003
Source MM Planet Retail
42
Global market attractiveness for modern food
retail
43
Global Retail Development Index (Kearney)
China
Hungary
Poland
Country risks
? High risk ? Low risk
South Africa
Russia
India
Vietnam
Indonesia
Ukraine
Market potential
? Low ? High
44
First movers
45
Careful expansion
46
Escalators
47
Regional retailers in Asia
48
Regional retailers in Asia
40/month
49
Uchimi in Kenya
50
Its not just the middle classes

• Carrefour has a stable consumer base in China
  among people of low to medium income levels.
• Carrefours vision, to be The worlds most
  global retailer, with a complete line of formats
  and the best adapted to the various forms of
  local consumption.

51
Fresh vegetables in Carrefour Shanghai
To guarantee fresh food quality and security,
Carrefour has implemented the Qualité Filière
programme developed in France in fruits,
vegetables and fish, establishing tight
relationships with producers and suppliers and
giving the retailer maximum control over the
whole production chain.
Photo MM PlanetRetail
52
Milk (Brazil)

• Supermarket chains 43 market share top five
  control 70
• Retailing of milk shifted rapidly into
  supermarkets, esp. UHT (75 of formal milk
  market)
• Deregulation? processing cooperatives sold to
  multinationals eg Nestlé now control 60 of
  the Brazilian market
• Higher price competition?dairy companies
  consolidated supply bases, and enforced adoption
  of new technology and quality standards
• Number of farmers delivering milk to top 12
  companies ?35 (97-00) average size of farm
  suppliers ?55. Nestlé alone shed 26,000 farmers
  from its supply list -- a drop of 75.

53
Traditional markets dont stand still

• Brazil/Sao Paulo (Farina) traditional retailing
  flourishing in face of multiple supermarket
  market power.
• 1994 2002 number of small traditional
  retailers and independent supermarkets increased
  while the number of chain retailer stores
  declined
• an oligopoly with a competitive fringe
• China
• Proportion of total retail sales accounted by
  modern grocery distribution sector is static
• Suggests that traditional retail channels such
  as the independents and wet markets are also
  booming.

54
Turbo-capitalism favours consumers over primary
producers

• Retail consolidation leaves a declining share of
  value for upstream chain actors
• expansion is predicated on economies of scale ie
  extraction of value from leveraged suppliers
• Wal-Mart strategyvalue captured from suppliers
  is passed to consumers

55
How relevant to poverty reduction?

• RW1 (employment), RW2 (?), RW3 (labour)
• How important in absolute terms?
• Barriers to new markets
• Restructuring of existing markets
• Labour and gender impacts
• How important relative to other policy
  objectives, especially reducing border
  protection, tariff escalation, and subsidies in
  the North?

56
Africa is hardly on the map for global retailTop
30 Grocery Retailers Worldwide Sales, 2002-2003
(US bn)
Source MM Planet Retail - www.planetretail.net
57
Milk producers of Aroma province Asociación de
Productores de Leche de la Província Aroma,
ASPROLPA
58
Securing Small Producer Participation in
Restructured Domestic and Regional Agri-Food
Systems
59
Objective

• Identify and empirically assess the strategies by
  which smaller-scale producers and rural
  entrepreneurs respond to agri-food restructuring
  in ways that strengthen the resilience of rural
  economies
• and thereby understand the keys to inclusion
  into agri-food systems under different
  levels/degrees of restructuring

60
Phase I Key trends

• Four overview papers
• examining global issues stocktaking of macro
  trends
• common design of national case studies
• Country research papers
• key trends and strategies in the domestic
  wholesale and especially retail markets of
  selected countries
• identification of specific knowledge gaps
• Proceeded by electronic forum
• Establishment of regional networks of researchers
  and others

61
Regoverning Markets project
62
Supermarkets, standards and small producersDFID
project

• Objectives
• Seek to minimise the exclusionary effects of
  private standards on small producers in South
• Inform European supermarket retailers and
  agri-food processors on the developmental impacts
  of their procurement practice
• Explore the scope for small producer associations
  to engage directly in defining standards setting
  processes and compliance procedures
• Focus first on EUREPGAP standards with DFID,
  WB and DGIS

63
Recommendations
64
Institutions to service buyer-driven chains
Eleni Gabre-Madhin, The World Bank Getting
Markets Right A New Agenda Beyond Reform
65
Regoverning markets

• Options for producers
• Cooperating to compete
• Options for national governments and multilateral
  policy
• Dont give up on commodity markets
• Re-regulation inc. progressive supply management
• Global monitoring of corporate concentration
• Addressing buyer power
• Regional and local competition policy as
  legitimate arm of agriculture and rural
  development policy
• Options for business
• Mainstreaming fair trade
• Fairness in trading as a corporate standard
  rather than consumer choice
• Rethinking supply chain management in favour of
  smallholders
• Inclusion of the standards takers in
  standards-setting

66
Research gaps

• The degree of market transition from bulk
  commodity/staple production to buyer-driven
  chains (and visa-versa!)
• The real impacts of supermarkets in mid- and
  low-income countries relative to other drivers of
  agrifood restructuring
• Spill-over effects
• from restructured middle-income countries into
  fragile markets, and their impacts on domestic
  production, food security and dietary patterns