regoverning agrofood market and transforming agricultural...

Regoverning Agrofood Market and Transforming Agricultural Production in China: From Smallholders to Pluralistic Large Farms

Xiangping JiaNorthwest Agriculture & Forest University

Outline• Background of China’s transformed farm system and

agro‐food chain

• Case studies

– Dairy scandal and transforming dairy production

– Emerging farmer cooperatives

– Direct Farm programs of supermarket

• Concluding remarks

Agricultural Transformation in China: Challenges and Policies

4.5% of annual growth rate of agri GDP in past 30 years

0

1

2

3

4

5

6

7

8

1979-84 1985-95 1996-00 2001-05 2006-10

More than 4 times of population growth rate

Annual growth rate of agri GDP in 1978‐2010

0%

20%

40%

60%

80%

100%

1980 1985 1990 1995 2000 2005 2010

Forestry

Fishery

Livestock

Crop

As growth differs among commodities, agricultural structure has also changed significantly

18%

34%

Rural poverty incidence in 1978‐2007

0

5

10

15

20

25

30

35

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Based on national poverty line

US$ 1/day (in PPP)

Self‐sufficiency of Food in China and the World

• Grain self‐sufficiency– 92% in 2010– 88% in 2012– 100% for wheat and rice– Net importer of maize since 2010

(5.2 million tons in 2010)• Imports of other products

– Sugar (3.7 million tons in 2012)– Edible oil (9.6 million tons)– Dairy products (6.2 million tons

equivalent fresh milk)– Pork, beef and mutton (0.7 million

tons)

Major Drivers of Agri growth in the Past

- Institutional change-Technology -Market reform (including international trade)

- Investment-…

Major Drivers of Agri growth in the Past

- Institutional change (of decollectivized decision making to small‐scale family farms)

-Technology -Market reform (including international trade)

- Investment-…

Challenges: falling farm size

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Source: NBSC

Ha/hh

With increasing agri. productivity, rural has been undertaking significant transformation: >2/3 of rural labor has off‐farm job now

0

0.1

0.2

0.3

0.4

0.5

0.6

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

Full timeFull time + seasonalFull time + seasonal + part time

2011

Age Range 1990 2000 16-20 76 24 21-25 66 33 26-30 71 48 31-35 73 52 36-40 80 57 41-50 79 62

Challenges:Percent of workforce in‐farm, by age range

Source: CCAP’s surveys

20088

Agriculture: elders + middle age women

3

2011

Land policies: enhancing land use‐rights and rental market development

05

1015202530354045

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(%)

Rent‐out Rent‐inSource: Author’s own survey on 1,175 rural households (in 8 provinces) and land transfer for each plot during 2002‐2012.

Less than 20% farmers being engaged in land consolidation through farmer cooperatives or agribusiness enterprises, based on a large scale survey in 90 villages of 8 provinces (1,175 rural households) in 2012.

0

20

40

60

80

100

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(%)

Farmer cooperatives or agribusiness companies

Through village committee

Between farmers

Institutional (land) reform:China’s Farmers in Communes … Land

belongs to collectives

40,000 communes [before]

200,000,000+ million farms [after][Every rural resident (900,000,000 of them) has land]

– Farm size: about 0.7 hectare

Decollectivization (1978 to 1984)

The Chinese government promotes to transform smallholder farming to a larger one… But how are these farms organized?

1950‐1970

1980‐2010

2011‐?

Family Farm: Mixed Opportunities and Challenges

• Transaction costs related to individual smallholder farmers are prohibitive.

• New‐wave of transformed agrofood market.• Farmers have to confront a rapidly changing technological

environment in which substantial inefficiencies may arise.• Ecology‐poverty trap (full externalities).

Agriculture by nature is an ecological production process, and technological progress can not capitalize very part of farming.

In the presence of positive transaction costs, hired labor has been found less efficient than family labor (Sah 1986; Binswanger, Deininger, & Feder, 1995; Binswanger & Rosenzweig, 1986).

Farmer organizations are primarily subject to family governance (Schmitt, 1993, pp. 155‐157).

Political arguments: justice and equity. Small farmers are “small” but “beautiful” (Schultzian)

17

Agrofood Chain in China: An Overview and Challenges

• Key Challenges: Production– Lack of scale and coordination in production– Continued out-migration and rising rural wages– Minimal human capital & experience

• Key Challenges: Distribution & Marketing– Minimal storage and cold-chain infrastructure– Large number of intermediaries (brokers) between farm wholesale– Weak definition and enforcement of quality standards

• Implications– Production relatively inefficient and costly– Additional costs added by many layers of intermediation– Minimal ability & incentives to meet higher quality & safety standards

18

Agrofood Chain in China: Recent Policy Response

• Develop economies of scale– Permit/promote land consolidation– Promote formation of farmer organizations and cooperatives

• Support “modernization” of supply chains via private enterprise– Dragon-Head & “Vegetable Basket” programs for domestic agribusiness– Permit foreign supermarkets to enter

• Establish new safety standards– Tougher obligatory standard: “No Harm”– Two-tiered voluntary standards: “Green” & “Organic”

• Promote vertical coordination – Direct Farm Pilot program

Policy Interventions of Promoting Large Farms (2006 ‐ 2013)

•

Year Policies Highlights

2006 No. 1 Policy of State Council“Advice to Promote New Rural Campaign”

• New rural campaign and Modernize agriculture

• Agro‐industrialization by supporting agri‐business enterprises and vertical coordination

2007 Law of Farmers Professional Cooperatives • Provision of service (such as purchasing agricultural inputs, marketing, and technologies etc.) through cooperatives

2008/2011

Ministry of Agriculture (MOA) and Ministry of Commerce (MOFCOM) issued “Advice of Developing Direct Farm (DF) with Supermarket”.

• Reduce market intermediaries by connecting to retailing

• Support consolidated production through agri‐food chain

2013 No. 1 Policy of State Council “Advice of Modernizing Agriculture and Energizing Rural Development”

• Institutional innovations of farm production• Promote and support large farm (specialized

farm, cooperatives, agribusiness enterprises etc.)

2013 The 3rd plenum of the 18th central committee, Nov. 9th.

• Draw up a “profound revolution” to give farmers full rights to their land and housing. Promote ‘family farm’.

Why It Is An Issue?

• Of course, organizations matter! (Ménard, 1996)• Contradictory theories and facts….

– Family farming of owner‐operator has been found the efficient system of agricultural production because of incentive problems of hiring labors (Schultz, 1964; Cheung, 1968; Eswaran & Kotwal, 1985; Binswanger & Rosenzweig, 1986; Allen & Lueck, 2002)

– Why the farm system transforms to a pluralistic one? How family farming posits itself in the hybrid forms of pluralism?

Why It Is An Issue? • Policy implications

– Production and technologies– Inclusiveness– Credit market– Environmental sustainability– Political structure of interested groups– Organizational knowledge is a source of competitive advantage (Loasby, 1999; Teece et al., 1997)

• Economic structure is affected!

Case One:

Dairy Crisis and Transformed Production in China

Dairy Production in Greater Beijing, China

Before 2008, small‐scale backyard dairy farms were dominating.

Year ≤10 10-50 50-500 500

2004 49 25 19 8

2005 44 28 20 8

2006 43 28 21 9

2007 40 27 22 11

2008 35 28 23 13 Source: China Dairy Statistical Yearbook, 2005‐2009

Table. Percentage of Cows by Herd Size in China (2004-2008)

• To procure, transport, and process the milk from millions of small dairy farms, mobile brokers and small milk stations procured most of the milk before the crisis.

Traditional Marketing at Upstream Dairy Chain

Milk Scandal in China

• The largest food safety incident broke out in Aug. 2008 in China. • The chemical melamine was added (by brokers?) to increase the

measured “protein content” of milk.• Impacts:

• Estimated 300,000 victims• Panic of consumers• Inspections revealed the problem existed in milk products of

more than 20 companies• On dairy farmers…

From: ChinaToday.com

From: XINHUA

• Government Response– Subsidize dairy farmers’ losses – not many got…

– Marketing policies– Forbid mobile brokers

– Inspection program to overhaul milk stations

– Upgrading

– Production policies – Moved farmers from backyard to consolidated cow

complexes (“yangzhi xiaoqu” in Chinese)

Impacts on Farmers

• China’s dairy industry was seriously hit by Milk Scandal in 2008

• In the aftermath of the onset of the Scandal, dairy participation fell substantially and herd size declined

• Marketing chain is transformed towards inspection and supervision

• (Jia, et al., 2012; Mo, et al., 2012)

From Backyard to Cow Complexes/hotel: Traditional to Formality

Where to live? Where to farm? Where to market?

1

2

3

Sampled Dairy Farms in Greater Beijing (2000-2010)

Year

Number of sample

households (Total)

Number of dairy farmers

% in cow complexes

Average herd Size

2000 231 85 0 2.9

2004 231 150 0 5.6

2008 231 121 2 9.3

2009 231 104 30 8.6

2010 225 58 43 10.9Source: Authors’ own survey. Jia et al (2012)

Dairy production is consolidated in cow complexes.

Dairy Farmers’ Perception on Cow Complexes

Complexfarmers (N=25)

Backyard farmers(N=33)

Advantages (% of respondents)

With at least one advantage 64 33

- Easy to sell milk 44 27

- Easy to enlarge herd size 36 9

- Benefit from technical support 8 6

- Benefit from purchasing inputs 12 6

No advantage 36 67

Complexfarmers (N=25)

Backyard farmers(N=33)

Disadvantages (% of respondents)

With at least one disadvantage 72 67

- Uncomfortable distance 36 39

- Poor sanitation and epidemic prevention 20 36

- Delay of milk payment 36 3

- Overcharged renting fee 16 3

No disadvantage 28 33

While there are benefits for participating in such complexes, the costs are evident, both economically and psychologically…

pros cons

Questions to the Audience

• Is it equitable to restructure the production system by removing smallholder farmers who might be dependent on agriculture?

• How do you view the ‘innovations’/’anomalies’?– Contract?– Co‐op?– Joint venture?– . . .

• Neo Institutional Economics (NIE) approach?

Related Publications

• Jia, X., Luan, H., J. Huang, S. Li, and S. Rozelle. (2014). "Marketing Transformation at Dairy Farm‐gate after Milk Scandal in China: Evidence From Greater Beijing." Agribusiness: An International Journal.

• Jia, X., J. Huang, H. Luan, S. Rozelle, and J. Swinnen. (2012). "China’s Milk Scandal, Government Policy and Production Decisions of Dairy Farmers: The Case of Greater Beijing." Food Policy 37(4):390‐400.

Case Two: Emerging Farmer Cooperatives in China

• Atomistic: Smallholder farms Agent/brokers

Aggregator Wholesale

– Efficient and inclusive

– There is little coordination between the chain

partners

– But low traceability and quality assurance

Fragmented Agrofood Chain in China

History of Farmer Coops in China

• Before 1980, planned economy• 1980‐1994, market liberalization• After 1994, farmer associations were established to

– disseminate technology – access to market

• In 2004, a systematic promotion on farmer associations• In Oct. 2006, the “Law of Farmers Professional Cooperatives”

(FPCs) was passed in the Standing Committee of the 24th People's congress, and the law was promulgated in July 1st of 2007.

• Is farmer organization (Farmer Professional Cooperatives, FPC) a solution to mis‐coordination of the agrofood chain?

• How does FPC coordinate marketing?• How does FPC organize production?

Research Question

Data and Sampling

FPCs by starting year (%)Totals (obs.)<=1998 [1999,

2003][2004, 2007) >=2007

Registered toIndustrial and Commercial Bureau 1 3 14 82 94

Non‐registration 7 10 43 40 30

Number of observations4 10 37 106 157

Data were based on a national representative survey in 5 provinces in 2009 (two years after the law in 2007).

FPC and Marketing Channel

Total Traditional Wholesale Modern Mixed

Samples 157 21 35 36 65

Distribution of samples (%) 100 13 22 23 41

Food safety Specify food safety requirement 28 (18) 7 11 54 29Supervise production 18 (11) 0 6 67 28Refuse when poor quality identified

27 (17) 4 7 48 41

Value adding content

Has processing 33 (21) 0 24 21 55

Has own brand 27 (17) 4 19 19 59

Quality certification 28 (18) 11 14 11 64

Agribusiness mode

Is production base (jidi) 37 (24) 3 14 49 35

Dragon‐head‐driven company 42 (27) 0 0 50 50


Samples 157 21 35 36 65



27 (17) 4 7 48 41


Has processing 33 (21) 0 24 21 55

Has own brand 27 (17) 4 19 19 59


Agribusiness mode




Total1 Traditional Wholesale Modern Mixed

Samples 157 21 35 36 65



27 (17) 4 7 48 41


Has processing 33 (21) 0 24 21 55

Has own brand 27 (17) 4 19 19 59


Agribusiness mode





Samples 157 21 35 36 65



27 (17) 4 7 48 41


Has processing 33 (21) 0 24 21 55

Has own brand 27 (17) 4 19 19 59


Agribusiness mode




Econometric Analysis

• DV – Marketing channel (Small brokers; wholesale, agribusiness or

supermarkets)

• RHV– Initiation (Time, and person)– Scale– Membership characteristics (% of “core” member)– Agro‐industrialization (Brand, certification, production base)– Product attributes (livestock, fruits, vegetable, grains)

FPC Marketing and Initiation: Regression ResultsTraditional Wholesale Modern

(I) (II) (III)Initiating year ‐1.153 1.185 ‐0.086

[1.271] [1.478] [1.256]

Initiating source of government (D) 6.044 5.654 ‐12.097[10.453] [12.158] [10.332]

Initiating source of government and farmers (D)

2.006 13.136 ‐15.455[9.700] [11.282] [9.588]

Initiating source of farmers (D) 6.519 ‐4.232 ‐2.583[10.244] [11.915] [10.125]

Initiating source of firms(D) – – –

• Initiation source has no impact on FPC’s marketing.

• Economies of scale matter. FPCs with more members access to markets of model channels.

Traditional Wholesale Modern(I) (II) (III)

Spatial coverage: Within village (D) 17.149** 0.492 ‐17.375**[7.834] [9.112] [7.744]

Spatial coverage: Other villages within township (D)

5.111 10.036 ‐15.458*[8.371] [9.737] [8.274]

Spatial coverage: Outside township (D) – – –

Ratio of formal members to total ‐0.062 ‐0.058 0.124[0.081] [0.094] [0.080]

FPC Marketing and Scale: Regression Results

Traditional Wholesale Modern(I) (II) (III)

FPC has own brand ‐13.356 5.478 8.007[9.837] [11.442] [9.724]

FPC certify product to certain quality standards

10.918 ‐3.759 ‐7.020[9.334] [10.856] [9.226]

FPC identified as “production base” (jidi)

‐10.268 1.057 9.331[7.267] [8.453] [7.183]

• The parameters of institutional attributes are not significant, suggesting minor effects of public & private standards and the related government policies.

FPC Marketing and Agro‐industrialization: Regression results

Summary

• Agrofood chain is getting better coordination through FPCs in China.

• However, the coordination of agrofood market through FPCs in China is maintained by impersonal rules and relational agreements.

• It is challenging to assuring traceability and food safety.• Brand becomes an important asset specificity of reputation

for FPCs to achieve vertical coordination with contracts. • Certification to food safety and quality standards, however, is

not facilitating the vertical contracts.

Summary• China’s Farmer organizations are being backward integrated by

agribusiness companies (of processing, trading, agro‐chemical, etc.).

• Decision‐making within FPCs in China is still decentralized to individual farmers.

• However, there is a trend that the decision rights of marketing rights tend to be collectivized in high‐value sector.

• The governance structure of FPCs in transition China presents hybrid forms of both hierarchy and family farming, and there exist dynamic and multiple trajectories.

• Government policies (direct subsidies on initiation) are limited in promoting.

Related Publications

• Jia, X., J. Huang, and Z. Xu. 2012. "Marketing of Farmer Professional Cooperatives in the Wave of transformed agro‐food market in China." China Economic Review 23(3): 665–674.

• Jia, X., and J. Huang. 2011. "Contractual arrangements between farmer cooperatives and buyers in China." Food Policy 36(5):655‐665.

• Jia, X., Y. Hu, and G. Hendrikse. 2015. “Centralized versus Individual: Governance of Farmer Professional Cooperatives in China”. (Eds) J. Bijman, R. Muradian, J. Schuurman. Cooperatives, Economic Democratization, and Rural Development. Edgar Elgar.

Concluding Remark

• Family farm is still the dominant system of ag. production in China

• However, a variety of new forms of production are emerging, leading to a pluralistic system

• Family farm travels on multiple trajectories with local viability

• China faces mixed opportunities and challenges to transform the smallholder farming to a large one

[email protected]

Food value chain development

APEC Food Security Training and Workshop – Beijing, 5-9 September 2015

adelaide.edu.au

Risti Permani, PhD Global Food Studies, University of Adelaide

University of Adelaide 2

More info: http://www.adelaide.edu.au/global-food/research/food-security/

4 University of Adelaide

0 10 20 30 40

Traditional retailers

Supermarkets

Hypermarkets

Convenience stores

Retail sales value growth rates in Indonesia, 2007-12 (%)

Retail sales value growthrates in Indonesia, 2007-12 (%)


Source: Euromonitor International

Background

• In developing Asia the growth of agricultural sector has been increasingly driven by increased demand for livestock products and other high-value crops, which has also influenced the composition of export trade (World Bank 2009).

• This shift, which can be explained by trends in income, urbanisation, trade liberalisation, and foreign direct investment, has influenced not only opportunities for small farmers and the role of public policy and investment but also stimulated the so-called agribusiness transition (Gulati et al. 2005; Briones and Felipe 2013). – Agribusiness transition occurs when the sectoral transformation is

followed by a corresponding development of industry (agro-processing) and services such as finance, logistics, marketing, etc. (Briones and Felipe 2013). The share of agribusiness in GDP is typically higher than that of agriculture.


• Combined with increased globalisation, agribusiness transition has also involved change in ways how the agrifood supply chains operate.

• Increased foreign direct investments, consolidated retail sector and technological improvements have allowed agrifood products to move across borders (Lee et al. 2012).

• These increased global agricultural trade and investments have been characterised by the increasing importance of standards.


The increasing importance of standards

• Puts pressure on agrifood firms to upgrade their capacity to source fast and reliable supply of high quality, large volume, low-price and diversified products on a year-round basis (Humprey and Memedovic 2006; Lee et al. 2012).

• Quality assurance and traceability - a crucial part of a monitoring system with the potential to improve safety within food chains, as well as to improve consumer confidence and better link producers to consumers (Regattieri et al. 2007; Swaroop et al. 2010; Aung and Chang 2014).

• Leads to ‘consolidation among fewer, larger and more capable suppliers’, which allows them to not only compete for market shares through product differentiation (seen as a source of competitive advantage) but also comply with public food regulations, reduce costs and risks in increasingly complicated food supply chains (Humprey and Memedovic 2006; Lee et al. 2012).


• Global agribusiness has been increasingly dominated by value chain relationships in which the lead firms exercise vertical coordination. (driving product differentiation and innovation, quality control) (Humprey and Memedovic 2006).

• However, increased quality-focussed competition may expose risks to small farmers who are unable to adjust to the above changes.


Key questions

• Are smallholders being excluded from agrifood transformation?

• What are the characteristics of business models that allow and enhance smallholder participation?

• What are the effects of participating at modern supply chains on smallholders’ welfare?

• How can food value chain analysis inform policy makers about strategies developing smallholder-inclusive business models?


Global Food Studies at the University of Adelaide

• GFS was established in January 2013 as a new team within the Faculty of Professions, with applied research and postgraduate education programs focused on economic, agribusiness and policy issues facing global and local food systems.

• GFS research addresses issues related to food and nutrition policy, food security, the economics of food value chains, resource and environmental economics and the role of agriculture in growth and development.

• In addition to conducting research on issues facing food systems in Australia, GFS has projects in the EU, Indonesia, North America, the Pacific Islands, South Africa and Vietnam.

• The team has strong research partnerships with agricultural, food, health and environmental scientists and research centres, as well as industry, government, NGOs and policy makers.

• More info: http://www.adelaide.edu.au/global-food/


http://www.adelaide.edu.au/global-food/




Outline

1. Value chain framework

2. Smallholder-inclusive business models

3. Case studies

4. Discussions


1. Value chain framework

Participant survey

• Have you heard about value chain analysis?

• Have you attended a course on value chain analysis?

• Have you done value chain analysis?

• If you have two Nos to the above questions:

– Do you want to learn about value chain analysis?


• Reardon and Timmer (2014) - A framework to describe the transformation of food systems:

1. Urbanisation;

2. Diet change;

3. Transformation of the midstream and downstream components of the agrifood system;

4. Technological and commercial transformation of the farm segment;

5. Transformation of the upstream components of the agrifood system with accompanying rural factor market (labour, credit, land) transformation.

Interactions between chain participants


Indonesian dairy value chains

23

Imports

New development

University of Adelaide

Smallholder; 192,160 dairy farmers managing about 3 cows each on average

Increased demand for ‘liquid milk’; only 13 litres

per annum in 2013.

Source: Morey (2011)


Market chains

• Value chains include all actors and activities from food production to consumption—“from farm to fork”.

• The chains explain the way in which different components of the market are linked.

• Generally drawn for one commodity and is usually vertical.


FEWNET (2008)

Value added

• Typically value is added at each point or level along the market chain (ie when transformed/ processed and (less obvious) when moved from one location to another; or being stored.

• VCs, as engines of growth, create added value that has 5 components: 1. Salaries for workers; 2. A return on assets (profits) to

entrepreneurs and asset owners;

3. Tax revenues to the government;

4. A better food supply to consumers;

5. A net impact on the environment, positive or negative.


FEWNET (2008)


Supply Chain Orientation

Traditional supply push

27


Value Chain Thinking

Value chain demand pull

28

Agrifood Value Chain

Input

Suppliers

Primary

ProducersProcessor

Wholesaler/A

gent

Retailer Consumer

Service Providers (e.g. agronomy, veterinary, logistics, finance, waste management)

Wholesaler/A

gent

Information – Behavioural & Attitudinal

Relationships - Collaborative

Financial – Value Added


Value Chain Thinking

How can we add value?

New or improved products & services:

For consumers - understanding targeted consumer segments

For our customers – understanding who are our ‘partners’ in the chain and what they need to be successful

Why?

Individual companies that act in isolation cannot expect to be competitive with rival chains that co-operate to work seamlessly.


The complexities of value chains

Depends on:

• the number of ways in which the commodity is being utilised (and thus transformed);

• whether it can be stored;

• how widely it is distributed (eg locally consumed vs export) and

• the number of different participants.


FEWSNET (2008)

Global food chain


Globalisation, privatisation and vertical coordination in food value chains in developing and transition countries (Swinnen and Maertens 2007)

• The most important changes are the shift from domestically oriented to globally integrated food supply chains and from state-controlled systems to private governance in the agri-food system.

– Companies and property rights have been privatised, markets liberalised, and food supply chains integrated into the global economy.

– Liberalization and privatisation initially caused the collapse of state-controlled VC.

– Privately governed VC systems have emerged and are growing rapidly to respond to consumer demand for food quality and safety on the one hand and the farms’ production constraints caused by factor market imperfections on the other hand.


Recent development of literature on value chain

Efficiency

Equity

Efficiency with equity or

competitiveness with inclusiveness

(Gulati and Reardon 2007)


Efficiency issues

• The levels and sources of efficiency and inefficiency of the value chain to deliver minimum cost commodities to consumers, and thus the “systemic competitiveness” of the value chain.


Wholesalers versus farmers: Are wholesalers ‘exploiters’?

• Wholesalers may be either inefficient or uncompetitive (eg high rents due to barrier to entry or oligopsonistic behaviours)

• Favoured by simple observation of wide differences between farm-gate prices and consumer prices (based on gross margins).

• But need to check transaction costs; risks from farmers’ behaviours eg side selling or shorting supplies; costs incurred providing credit to farmers to keep suppliers; etc.

• Gov may need to consider how to design investments needed to improve the competitiveness of the wholesale system


Changes in literature over the years

• Increasing study of international VCs; emphasis on coordination mechanisms to ensure quality and food safety and to speed delivery

• A shift to outsourcing from developing countries, a shift toward massive FDI, a climb in “follow sourcing” international value chain coordination

• A shift from emphasis on commodities and cost advantages to quality differentiation and quality assurance

• Shifts: – manufacturers then services;

– in developed then developing countries;

– in non-food then in food


The hidden middle (Reardon 2015)

• The food security debate has focused largely on the farm sector and on trade.

• Relatively neglected or “hidden” from mainstream debate are the middle segments (processing, logistics, wholesale) of agrifood value chains in developing countries – and yet this “midstream” forms 30-40% of the value added and costs in food value chains.

• The productivity of the midstream is as important as farm yields for food security in poor countries.

• Policy and public investment – putting in place: – ‘Enabling conditions’ eg road and electricity to make private investments

profitable.

– Improving upstream supply to midstream – eg varieties that are more storable and shippable; commercial regulations that improved the domestic “food business climate: and occasionally by subsidising equipment and plant investments to upgrade processing and logistics.


Governance vs government

• Governance sounds like “government”? – Interpreted narrowly to include

only the legal and regulatory requirements that influence business operation and market access in a value chain

• Governance - a system that links actors in the value chain together in a variety of sourcing and contracting agreements (adopted from Campbell and Parisotto 1995).

• This organised system allows competitive firms to meet specific requirements in terms of products, processes and logistics in serving their markets.

Governance

Official

Rules

“Unwritten norms”


The instruments of governance

• Government regulatory frameworks

• Contracts between value chain participants – Eg wholesalers’

requirements to correctly harvest agricultural products to prevent damage

• Unwritten “norms” that determine who can participate in a market.

May originate within or outside of the value chain


Standards and contract farming

• Given the increased importance of quality standards and need to consolidate amongst value chain agents, contract farming is seen as a viable instrument to overcome market imperfections especially when it involves farm support package.

• Four main factors are identified as encouraging contacting: – market uncertainty, – indirect benefits (for example

knowledge acquisition), – income benefits and – intangible benefits (Masakure and

Henson 2005).


The objectives of the governance analysis

How the VC is coordinated

Map governance instruments

Assess the impact of the rules on different ‘actors’ esp disadvantaged

Assess how different groups lack access to support for meeting standards


Why does governance matter? Source: Humprey and Schmitz (2001)

• To assess market access

– The chains that producers feed into are often governed by a limited number of buyers

• To identify upgrading prospects

– Producers that gain access to the chains’ lead firms tend to find themselves on a steep learning curve

• To improve distribution of gains

– Considering barriers to entry, actors’ competencies to govern, etc.

• To identify rationale for public or private intervention

– Considering access to information, access to credits, market competition, etc.


Step#1: Map actors

1. Tool#1 - Identify all actors (within and outside the VC) that are potentially able to influence governance structure;

2. Identify other external organisations and institutions through interviews with key actors in the chain – primarily be held with major players

3. Classify into different categories:

• Wealth (poor, average, better off);

• Business type and scale (micro, small, medium, large);

• Ethnicity

• Gender

The categories can be useful to assess the level of information asymmetries along the chain.

Pro-poor analysis


Mapping value chain

Inputs Production Collection Pre-processing

Factory processing

Inputs

Activities

Outputs

Actors

Participation of the smallholders

Challenges

Possible solutions

Location


Step#2: Determine the demand and supply conditions of the value chain – Map out the demand and

supply conditions throughout the year

– Practical aspects to be considered: • Change in number of buyers

and sellers; • Who sets the price? Does this

change overtime? • Are there any formal and

informal ‘governance instruments’ and external factors that affect the pricing setting behaviours?

Useful resource: ‘Structure-conduct-performance’: http://pdf.usaid.gov/pdf_docs/PNADL965.pdf


Determinants of agricultural commodity prices

• Factors affecting supply eg technology, weather, diseases, fuel costs, input costs, etc

• Factors affecting demand eg population growth, income growth, dietary changes and tastes, etc

• Also: – Place of sale (location / market) – Type of product (commodity, differentiation) – Product quality – Packaging – Time of sale – Processing – Storability – Marketing/contracts – Market Structure – Policy, rules, regulations


Step 3: Determine the dominant coordination arrangement(s) in the VC

• Every value chain has a system of coordination

– ie formal and informal arrangements between participants.

– Evolving coordination structures:

• To allow firms to fulfil the competitive requirements of intermediate and final markets

• To ensure compliance with official or unofficial rules and standards

• To make better use of capital investments

• Types of coordination structures vary from market-based trading structures to vertically integrated


Various VC models

• Different number of suppliers

• The presence of lead firms:

– most directly accountable for the configuration of production systems and for enforcement of rules

• There may be more than one system of coordination operating in a single value chain in any given area eg where independent and contracted producers exist side by side


Fresh fruits and vegetables: Traditional vs modern VC

Farmer Vendor I Wholesaler Wet

market Retailer Consumer

Farmer Vendor I Vendor II Supermarket Consumer

Supermarkets set the guidelines for grades and standards for vendors


Step 4: Analyse how target populations participate in the value chain

Two useful dimensions:

1. Functions in the VC

2. Formal coordination eg contracted input provision, marketing, certification, contract farming, also producer-driven formalisation of collective activities (associations, groups, etc) to reduce costs, increase revenues or reduce individual risks.


Step 5: Identify rules and regulations

Generating a clear understanding of:

• WHAT- The rules that influence actors in the VC; – Detailed sets of instructions related to cost, quality, processes,

delivery times, etc.

• WHO - The actors that set the rules; – Also how the rules are communicated

• WHY – The reasons behind the rules;

• VARY – How the rules affect different categories of actors within the VC – Per

• KNOW – How much different actors know about the rules

• CHANGE – The rate of change of the rules

• FAIL- What the consequences of failing to comply


Rules and regulations

Rules What Who Why Vary Know Change Fail

Quality standards:

Labelling

Certification (including voluntary)

Market participation


Step 6: Analyse the impact of rules on value chain participants (including enforcement, rewards and sanctions)

• ENFORCEMENT:

– The monitoring at different stages of the VC

– The sanctioning system which can include both sanctions and incentives/rewards.

• Though government regulatory capacity may be important to enforcement, it is not exclusively, or even principally, a government function.

• Lead firms may have significant enforcement power eg to exclude non-performing farmers from chains by revoking contracts or reducing prices.


Step 7: Analyse target sector knowledge and awareness of rules, norms and standards, and identify key gaps

• Issues: lack of understanding; rules are not written and may vary within and across market areas; often change in response to market offerings.

• To assess the level of transparency in monitoring and enforcing the rules.


Step 8: Analyse how information and services are provided internally through the VC and externally

• Services= assistance to other VC participants, to help them meet the requirements of rules and regulations.

• Provided by actors within or outside the chain.

• The main focus of service analysis:

1. To understand by whom VC participants are supported in achieving competency and compliance with rules.

2. To assess whether the level of support is adequate to the requirements of VC upgrading.


Recap:

Demand and

supply

Mapping actors

Coordination

Participa

tion

Enforce

ment

Rules and regulations

Knowledge Services



Private brands and their impacts on the markets: Case study – dairy product competition in Australian supermarkets

2. Smallholder-inclusive business models

Business models

• Globally, there are increased interests in exploring a ‘business model’ which allows participation of smallholder farmers and, equally important, is sustainable. – The FAO (2012) defines that the term “business model” as the

rationale for how a company creates and structures its relationship to capture value.

• According to Cotula and Leonard (2010) there are at least four categories of inclusive business models: – management contracts (eg tenant farming, sharecropping, etc);

– joint venture;

– farmer-owned business; and

– contract farming (eg the nucleus estate model, etc).


How can we include ‘inclusiveness’?

• Inclusive business models: – Address the particular challenge of integrating the poor in VCs; – Are not always initiated by smallholders but they do provide

opportunities for smallholders to form partnerships with other smallholders and commercial enterprises.

• Within the context of value-chain development literature, the more recent adoption of the term “inclusive” does not imply “no farmer left behind” or “a focus on the poorest of the poor” but instead refers to scale and outreach to a large number of smallholder farmers (Neven, 2012

• The FAO (2012a, page 17) suggests some criteria to assess inclusiveness: – Ownership – Voice in decision making (especially on price setting) – Risk – Reward (ie sharing of economic costs and benefits).



• If smallholders are expected to participate in, and benefit from a well-coordinated chain, public support must consider smallholders’ organisational models.

Welfare-enhancing?

• Increased quality-focussed competition may expose risks to small farmers who are unable to adjust to the above changes.

• In regard to contract farming, for example, the impacts of contract farming on farm performance and livelihood are an empirical matter.


Contract farming: %total farming


Contract farming


Welfare-enhancing? (cont)

• While most of them are able to show that participating farms experience higher welfare, most empirical studies on the welfare effect of contract farming have struggled to demonstrate causality (Barrett et al. 2012).


Success factors for strengthening smallholder-buyer business models within value chains.

• Non-politically aligned organisations (in order to be viewed as practical and market-oriented service providers for their members)

• High quality service provision (so that members value their membership)

• Social and enterprise strategies (to address the priority of the community)

• Network membership (to access information on new technical ideas) • Focus on core business (firs to improve productivity, second to

acquire marketing and management capacities) • Low cost value additional through organisational innovations

(value adding activities which do not require high cost capital investments ie sorting, grading, production planning and logistics)

• There is no “one-size-fits-all” (the models are formed based on the local cultural contexts and the marketing needs of members)

• Understanding the needs and risks of agribusiness companies (to remain in constant dialogue with buyers to meet market requirements)


Future challenge: nutrition-sensitive value chains? • Pinstrup-Andersen and Watson

(2011) characterise malnutrition in developing countries as a triple burden: – Under-nourishment (insufficient

calorie and protein intake) – micronutrient malnutrition

(hidden hunger); and – over nutrition (excess calories

leading to overweight and obesity).

• Despite the expansion of modern supermarkets, there is strong evidence that food categories that are important sources of micronutrients continue to be accessed primarily through traditional FVCs in developing countries.


Fresh fruit and vegetable market share of modern and traditional FVC retail sales


Source: Gomez and Ricketts (2013)

Supermarkets and over-nutrition

Umberger et al. (2015)– AJAE:

Using data from a survey of 1,180 urban households in Indonesia, their study finds that:

• There is not enough evidence of a significant relationship between use of supermarkets and adult nutrition measures.

• On the other hand, there is mixed evidence for a negative effect of supermarkets on child nutrition, particularly for those in high-income households.


Future challenges: A sustainable food value chain (SFVC)?

• According to FAO (2014), a SFVC is defined as:

“the full range of farms and firms and their successive coordinated value-adding activities that produce particular raw agricultural materials and transform them into particular food products that are sold to final consumers and disposed of after use, in a manner that is profitable throughout, has broad-based benefits for society, and does not permanently deplete natural resources.”


Sustainability in food value chain development (FAO 2014)


One-minute group discussion

• What do you think is the biggest challenge facing food value chains?

• What is your proposed solution to overcome that challenge?

• Why did we give similar/different solution(s)?


3. Case studies

Selected case studies

• Cocoa in Vanuatu

• Dairy business model in Sukabumi, Indonesia


Case study – Cocoa in Vanuatu

• The value chain approach is focused on understanding and meeting consumer needs.

• The value chain approach was applied in a project on cocoa production in Vanuatu.

• The project was well-timed to coincide with growing interest in producing single source chocolate from a number of high-quality chocolate makers, • eg from South Pacific

cocoa

http://aciarblog.blogspot.com/2014/03/champions-for-chocolate-smallholder.html University of Adelaide 76

Case study (cont.)

• Some companies have since become invaluable project participants.

– Chocolate companies are providing support.

• They assess cocoa bean quality and recommend how farmers can change practices to reach higher standards and receive premium prices.


• For example, Bahen & Co produced chocolate from different Vanuatu cooperative cocoa samples and then went back to Vanuatu with the research team to carry out taste-testing sessions with the farmers.

• They identified quality defects resulting from smoke taint and under fermentation – This was a very powerful

exercise considering some farmers had never tasted chocolate before.

• Guided by the companies' feedback, researchers are working with the farmers to, for example, improve bean-drying practices and avoid smoke tainting—a common quality issue across the South Pacific.

Bahen & Co Papua New Guinea 70% Cacao 75g


Connecting the value chain “With Cadbury’s paying the farmers $1.25 per kilo, Vanuatu farmers can triple their profit by producing a higher quality single-variety bean earning $6 to $8 per kilo from Haigh’s.” (Prof Randy Stringer, GFS)

“We don’t want to come across as altruistic, Mother Teresa — it’s a business partnership,… We want an insight into their souls; we want to see them grow…. we want to tell the story of the grower.” (Mark Bahen, Bahen & Co).


Partnerships with the public sector

• Joint research with a consortium of chocolate makers. – Public sector helps finance meetings/workshop and visits to small

farmers so the chocolate makers identify gaps in the chain and help refocus public sector research on productivity, disease management, post harvest, track and trace.

• Linkages – Public funding for a ‘platform’ with two or three retailers to assess

their purchase practices, explore bottlenecks, and do field work to set up new types of procurement programs involving small farmers, training traders, etc.

• Business models – Funding to review and classify different business models for

smallholder engagement and translate into action through capacity building activities.

Read more: http://blogs.adelaide.edu.au/global-food/2014/11/24/vanuate-cocoa-growers-tasting-the-fruit-of-their-hard-work/


Case study – Dairy in Indonesia

• MAS farmer group in Sukabumi, West Java was established in 2009; turned into a cooperative in 2013.

• Smallholder-initiated • Successfully upgrade from a

traditional dairy farm to a vertically-integrated cooperative that includes a milk processing plant

• Production – 600 litres/day. • Over 100 farmers supply to MAS. • A unique aspect of their business

model is instead of supplying to processors they make ‘guaranteed purchase arrangements’ with more than 300 primary schools in the region.


Products and consumers


Case study: MAS dairy farmer group in Sukabumi

• Group leader- initially a traditional dairy farmer; reliance on coops;

• Add processing activities (ie producing yoghurt, etc) – from (1) to (2)

• Involve other smallholder dairy farmers – from (1) to (4)


MAS success factors

• Ability to grab upgrading opportunities by taking more functions in the value chain (i.e. as a processor) and drive collective actions using limited budget.

• Ability to innovatively identify a business case by ‘creating a guaranteed market’.

• Offering differentiated products to consumers. • Shortened and ‘traceable’ value chains encourage this

small processor to impose high quality standards from its suppliers and pay price premium to its suppliers. – Further investigation suggests that this price premium seems to

incentivise its farmer suppliers to adopt on-farm innovation (eg high protein concentrate) in order to increase the quality of milk.

• The sustainability of this alternative business model, however, requires better management of input supplies and a closer look at governance issues in the region.


More stories from around the globe

• The potato value chain in India – A contract growing scheme pioneered by PepsiCo since 2001 which

include extension services, free crop monitoring, guaranteed markets and prices; access to quality input and weather-based insurance.

– Growth: from 1,800 farmers producing 12,000 tonnes of potatoes in 2008 to 13,000 farmers producing 70,000 tonners of potatoes in 2013.

• The pineapple value chain in Ghana – Initiated by a fruit processor Blue Skies Inc. with strong ties to

supermarkets in Europe and supplier base of around 200 commercially-oriented small-scale farmers. It provides free training and technical support, interest-free loans for inputs and equipments; prompt payments ie 2 weeks after delivery; guaranteed prices. Financial costs for certification are paid by Blue Skies.

Read more: FAO (2012a, 2012b and 2014)


Concluding remarks

• A whole of chain concept – upstream, midstream and downstream are all equally important.

• Broader focus of value chain development: not only focussing on smallholders’ welfare but also impacts on the society.

• There is no “one-size-fits-all” – highly important to consider the local cultural contexts when developing smallholder-inclusive business models.

• Given the dynamics of agrifood markets and increased competition, all chain players must remain in constant dialogue with all stakeholders to meet industry requirements.

• Research and policy communities can play role in the design and delivery of interventions that most likely to be effective at alleviating constraints in value chain development.


Discussion

• Thank you! • Email: [email protected] • More value chain-related materials:

http://www.adelaide.edu.au/global-food/research/dairy-production/

================================================ • Do you know any inclusive-business models that you think can be

replicated in other regions/countries? • Who did initiate that model? The government, the private sector, a

farmer, a FEMALE farmer, a trader, etc.? • What are they producing and what is their production capacity? • Are they successful? What are their success factors? • Are they adopting new technologies or innovative business models? • What do you think about the sustainability of their model?


mailto:[email protected]







References

• FAO (2012a). Review of smallholder linkages for inclusive agribusiness development, FAO, 2015(Available from URL: http://www.fao.org/docrep/019/i3404e/i3404e.pdf

• FAO (2012b). Smallholder business models for agribusiness-led development: Good practice and policy guidance, FAO, 20145(Available from URL: http://www.fao.org/docrep/015/md923e/md923e00.pdf

• FAO (2014). Developing sustainable food value chains - Guiding principles, FAO, 2015(Available from URL: http://www.fao.org/3/a-i3953e.pdf

• Gómez, M.I. and Ricketts, K.D. (2013). Food value chain transformations in developing countries: Selected hypotheses on nutritional mplications, FAO, 2015(Available from URL: http://www.fao.org.proxy.library.adelaide.edu.au/fileadmin/templates/esa/Papers_and_documents/WP_13_05_Gomez_Ricketts.pdf

• Humphrey, J. and Schmitz*, H. (2001). Governance in Global Value Chains, IDS Bulletin 32, 19-29.

• MP4 (2008). Making Markets Work Better for the Poor Making Value Chains Work Better for the Poor: A Toolbook for Practitioners of Value Chain Analysis, UK Department For International Development, 2014(Available from URL: http://aciar.gov.au/files/node/14580/making_value_chains_work_better_for_the_poor_a_to_14413.pdf

• Reardon, T. (2015). The hidden middle: the quiet revolution in the midstream of agrifood value chains in developing countries, Oxford Review of Economic Policy 31, 45-63.


http://www.fao.org/docrep/019/i3404e/i3404e.pdf

http://www.fao.org/docrep/015/md923e/md923e00.pdf

http://www.fao.org/docrep/015/md923e/md923e00.pdf

http://www.fao.org/3/a-i3953e.pdf



http://www.fao.org.proxy.library.adelaide.edu.au/fileadmin/templates/esa/Papers_and_documents/WP_13_05_Gomez_Ricketts.pdf

http://www.fao.org.proxy.library.adelaide.edu.au/fileadmin/templates/esa/Papers_and_documents/WP_13_05_Gomez_Ricketts.pdf

http://aciar.gov.au/files/node/14580/making_value_chains_work_better_for_the_poor_a_to_14413.pdf

http://aciar.gov.au/files/node/14580/making_value_chains_work_better_for_the_poor_a_to_14413.pdf

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