Johan F.M. Swinnen, University of Leuven (KUL) 14th May 2008, Royal museum for Central Africa in Tervuren, Belgium

1. Small Farmers
S ll F
and the
Supermarket Revolution
Johan F.M. Swinnen
University of Leuven (KUL)
IFPRI Tervuren May 2009

2. The Supermarket Revolution
p
The dramatic growth of importance of
modern retailing (
d ili (more generally ll
modern food industry and agribusiness)
agribusiness)
for emerging & developing countries
Domestic growth (with FDI)
Foreign growth (th
F i th (through t d )
h trade)
With it comes : rapid …
spread of “high standards”
p g
changes in supply chains

3. The Supermarket Revolution
p
First observed in South America in the
1990s (Reardon & co)
Second half of 1990s in Central and
Eastern Europe
More recently: f th east and south
M tl further t d th

4. 2004 Top FDI Destinations of
Global Retail Chains
1. Russia
2. India
3. China
4. Slovenia
5. Latvia
6. Croatia
Central Europe and South America are
already “mature” markets
l d “ t ” k t

5. China:
The Supermarket Olympics …
p y p
60 60000
Around 40 % Around 20%
annual growth
l th annual growth
l th
50 50000
between 1998 between 1998
and 2002 and 2002
40 40000
30 30000
20 20000
10 10000
0 0
1990 1992 1994 1996 1998 2000 2002 1990 1992 1994 1996 1998 2000 2002
Sale (US Billions） Number of supermarkets

6. Global Supermarkets & Changes
in th Structure of Trade
i the St t fT d
Increased exports from developing
countries
Increased high-value exports from
high-
g p
developing countries
Increasingly destination is global
supermarkets in rich countries
p

7. Changing Structure of World Trade
Developing
World Exports
Country Export
1980/81 2000/01 1980/81 2000/01
TROPICAL products 22.0 12.7 39.2 18.9
(Cocoa, tea, coffee, sugar, )
(Cocoa tea coffee sugar …)
TEMPARATE products 46.3 38.3 28.8 28.1
(Meat, ilk
(M t milk, grains, …)
i )
SEAFOOD, FRUIT & VEGs 19.8 31.0 21.6 41.0
Other PROCESSED 11.9 17.9 10.4 12.1
(tobacco, beverages, …)
Total 100.0 100.0 100.0 100.0

8. Global & Domestic Growth
in High-Value Food
Due to (Gulati t l)
D t (G l ti et al):
1. Rapid income growth
2.
2 Urbanization
3. Trade liberalization
4. Foreign di t i
F i direct investments (FDI)
t t

9. SuperMarkets & Standards
High standards in developing
countries
t i
• To
T serve markets overseas
k
• To serve high-standards domestic markets
high-
• To reduce transaction costs in regional
distribution
• To harmonize production and processing
standards across subsidiaries

10. SuperMarkets & Standards
• PUBLIC & PRIVATE standards
t d d
• Standards :
• size, color, …
• SPS, pesticide residue, …
• Child labor, environmental effects, …
• Traceability, …
y,

11. Increasing standards & trade conflicts
Figure: Notification of new SPS-measures to the WTO, 1995-2005
Source: Henson, 2006

12. … and Small Farmers ?
Concern 1 (exclusion: in or out ?): will
they be able to cope with demands by
y p y
supermarkets ?
Concern 2: if they are “in” will they
benefit,
benefit or will the companies extract all
the rents ?

13. The Exclusion Concern
Small farmers may be (further)
marginalized because :
i li d b
small farms fail to meet the standard
requirements to sell to these chains
small farms are constrained financially
(internally and/or externally) for making
necessary investments
fixed component in transaction costs
makes it more costly to deal with many
small farmers than with a few large farms

14. Evidence ?
Initial studies pointed mostly at problems:
growth of estate production and small
farmer exclusion
(eg Reardon and Berdegué, 2001; Gibson, 2003; Minot
and Ngigi, 2004; Reardon and Weatherspon, 2003)
Ngigi Weatherspon

15. Evidence ?
Initial studies pointed mostly at problems: growth
of estate production and small farmer exclusion
Growing number of recent studies present a much
more diverse picture, often contradicting intuition
and identifying benefits and opportunities
Importance of attention to :
organization of the supply chain, including
vertical coordination and contracting
labor market effects

16. China : Supermarket Olympics
p y p
Booming Supermarkets (with rapid F&V
consumption expansion) :
Sourcing from 50 million farmers
Through 5 million traders
Most very small (both traders and farmers)
Increasingly poor and marginal farmers are
pulled into the horticultural chain as
production area expands into poorer areas
further away from consumption centra
Process (so far) is very much pro-poor and
pro-
pro-
pro-small

17. Worst Case Scenario
Poverty level at national level (poverty line at
y (p y
0.42$/capita): 70%; rural areas: 77%
50% of population unable to read and write
45% of children under three growth retarded
Ranked last in index of competitiveness in
p
2000 - Disadvantage in location
Processor / trader of FFV is a monopoly

18. Worst Case Scenario:
Madagascar F & V
10,000 smallholders
,
produce high-standard vegetables
high-
for EU Supermarkets
under contract with monopoly exporter
sophisticated EU standards with
assistance of large number of private-
private-
sector trained extension agents
=> pro-poor and pro-small farmers
pro- pro-

19. Impact on welfare of smallholders
in Madagascar
i M d
Length of lean periods (months):
- For farmers with contract: 1.7
- For farmers before they had contract: 3.7
- For similar farmers without contract: 4.3
Contract income: about 50% of their total
income:
monetary income
Contract price is higher than the market price
Staple crop (rice) productivity increase (+66%)

20. Household participation in High Value
Vegetable Exports from Senegal
45%
40%
eholds
35%
30%
Shar of house
25%
20%
15%
re
10%
5%
0%
1990 1992 1994 1996 1998 2000 2002 2004
Year
contract-farming wage employment total

21. Supply Chains & Poverty
F&V in Senegal (2004)
1000 FCFA)
) 7,000
6,000
5,000
4,000
income (,1
3,000
2,000
1,000
0
hh without hh with agro- hh with contract hh with contract
contrant & industrial and agro-
without agro-
agro employment industrial
industrial employment
employment
Total income Agriculture Wage employment
Self-employment Other sources

22. Important Factors
Labor Markets
Vertical Coordination

23. Supermarket/Processor Motivation
for Vertical Coordination
Problem: processors/traders/retailers face lack of
supplies, because farms are not able to supply
the type/quality of products required
Reason: factor(*) market constraints (inputs,
credit, technology, …)
Solution requires some form of contracting :
Price/quality
Supplier assistance : inputs, technology,
extension services, management, …
– (*) output market with agribusiness

24. Farmers’ motivations for VC
Sub Sahara Africa
Reasons f contracting
R for t ti Madagasc.
Madagasc Senegal
(%) 2004 2005
Stable prices 19 45
Higher income 17 15
Higher prices
g p 11
Guaranteed sales 66
Access to inputs & credit 60 63
Access new technologies 55 17
Stable income 66 30
Income during lean period 72 37
Source: Maertens et al., 2006; Minten et al., 2006

25. “69% of 35 billion $ credit in the Brazilian
agri-
agri-food system is supply-chain credit”
supply-
Banco do Brasil (2004)
“Private agricultural marketing companies
Private
have become dominant providers of
smallholder input credit in Sub-Saharan
Sub-
Africa. In various countries of the region,
they are today in practice the sole
providers of seasonal input advances to
the small-scale farming community.
small- community.”
IFAD (2003, p.5)

26. Vertical coordination in modern
supply chains …
l h i
COMMERCIAL BROILER production
Thailand : 100%
Philippines : 80%
DAIRY production
d ti
Transition countries : growing rapidly
India (modern commercial): growing rapidly
COTTON production
Central Asia : very extensive
(71% of all small farms in Kazakhstan)
Africa : very extensive
HIGH VALUE VEGETABLES exports in Africa
p
Madagascar : 100% on contract
Senegal : 100% on contract

27. Profits & Contracts in Asia
Broiler farmers ($/kg 2002)
Smallholder <10,000
Independent Contract
Philipines
Phili i 0.03
0 03 0.08
0 08
Thailand 0.02 0.03
Source: Gulati et al., 2005

28. Farm assistance with VC
Examples :
Input supply programs
Trade credit
Investment assistance program
Bank loan guarantee programs
Extension services (technology and
management)
.....
Variations reflect market
imperfections, investment security, …

29. Rent Distribution & Welfare
The shortage of quality supplies & problems of
contract enforcement strengthen bargaining
position of (small) farms
=> EFFICIENCY PREMIA
>
(Swinnen & Vandeplas, 2007)
Should take into account LABOR market effects
of shift to large farms !
=> Important potential equity effects …
Importance of COMPETITION !

30. Supermarkets,
Supermarkets modern supply
chains & competition
They are likely to increase competition
for farm supplies in developing
countries ….
Pay a higher price than competition (=
efficiency premium)

31. “Uttar Pradesh closed 10 new Reliance
supermarkets last week after protests from
small traders ….
Hundreds of Indian farmers gathered today by
an agricultural collection depot run by a top
national retailer to call for Uttar Pradesh to
f
reopen Western-style supermarkets closed last
Western-
week. …
In a demonstration in favour of the new
supermarkets, the farmers shouted “Reopen
Reliance”‘ and “Long l farmers unity”. …
R l ”‘ d “L live f ”
Reuters, 28 August 2007

32. “[T]his abrupt decision … is certainly not in
the interest of farmers,” said farm leader
farmers
Ram Chandra Verma. The Reliance centre
buys up farm produce from local farmers
farmers.
For many farmers it saves them money
because they no longer have to go through
traditional middlemen to sell their goods.”
Reuters, 28 August 2007

33. Implications for Public Policy
1. Realizing the importance of modern
supply chains
2. Enabling
E bli & stimulating investments
ti l ti i t t
3. Improving efficiency, transparency, and
equity in supply chain
q y pp y
4.
4 Rethinking the role of the government
and policy-making ?
policy-

34. Implications I:
Enabling and stimulating investments
Create the right conditions for
stimulating investment.
Ensure macro-economic stability.
macro-

35. Implications II: Improving efficiency,
transparency,
transparency and equity in supply chains
Reduce t
R d transaction costs
ti t
Enforce competition
Invest in higher quality
Empower farmers

36. Implications III : Rethinking the role of the
government and policy-making
Policy analysis and information gathering.
gathering
Rethinking traditional public investments.
Public–
Public–private partnerships: consider private VC
as part of the solution, not the problem
solution problem.
Innovative finance instruments.
Supply-
Supply-chain development as part of a wider
rural development strategy.
ld l t t t

37. The end
h d

38. Why work with small suppliers ?
y pp
In some cases processors have no choice
Processors prefer mix of suppliers to spread risk
P f i f li t d i k
Enforcement costs may be lower
“processing companies stressed that willingness
to learn, take on board advise, and a professional
learn,
attitude were more important than size in
establishing fruitful farm-processor relationship”
farm-
(CIS study)
Cost advantages (eg labor intensive products)
Access to land (differs between countries)
Exogenous diff
E differences i company strategies
in i

39. Competition is Important
Induces horizontal spillovers and the
spread of farm assistance packages
Constrains (potential) rent extraction i
C t i ( t ti l) t t ti in
chain
Competition effect of supermarkets may
p p y
be quite counter-intuitive
counter-

40. Implications III : Rethinking the role of the
government and policy-making
Innovative finance instruments.
instruments
Supply-
Supply-chain development as part of
a wider rural development strategy.
id ld l

41. Cotton Central Asia
Annual Growth Rate (%)
Kazakh K
K kh Kyrgyz U b k
Uzbek Tajik
T jik
Harvested Area (Ha)
1993 – 1998 12.3 6.0 -1.7 3.7
1993 - 2003 5.8
58 7.6
76 -1.7
17 -0.1
01
Baled Cotton Production (1000 MTs)
1993 – 1998 12.6
12 6 20.4
20 4 -2.7
27 0.4
04
1993 - 2003 5.4 25.9 -2.6 -3.5
Cotton
$550 $450 $200 $165
Price

42. VC farm assistance : Dairy companies
in CEE (Bulgaria, Slovakia, Poland)
(Bulgaria Slovakia
Credit Inputs Extension
p Vet. Bank Total
PL 50 67 50 0 50 43
1994 SK 0 0 83 17 17 23
BG 9 18 9 0 0 7
PL 83 100 83 17 83 73
1998 SK 17 17 83 17 33 33
BG 45 64 18 18 18 33
PL 83 100 83 17 83 73
2002 SK 100 33 83 17 50 57
BG 82 91 73 18 36 60

43. Reforms and Vertical Coordination
(% farm assistance programs in dairy)
90
viewed
80
70
assistance (% interv
60
mpanies)
R2 = 0.9309
50
40
com
e
30
20
10
a
0
2 2.5 3 3.5 4
reform progress (EBRD)
reformprogress(EBRD)

44. Farm assistance by food
companies in CIS
(Armenia, Georgia, Moldova, Russia, & Ukraine)
% of firms % of farms
Credit 43 51
Prompt payments 42 87
Physical inputs 36 53
Quality control 34 78
Agronomic Support 21 81
Farm loan guarantees 21 15
Investment loans 6 0

45. Farm assistance by cotton gins in
Kazakhstan
K kh t (2003)
% of FARMERS
Credit 89
Water 73
Seeds 65
Fertilizer 40
Agronomic Support 4
Farm loan guarantees 0
Investment loans 0

46. Efficiency Effects
Important Direct Effects :
Enhanced QUALITY (& higher PRICES)
Increased PRODUCTIVITY
Increased INVESTMENTS
Important Indirect Effects: Spillovers
Contract replication by other companies
Farm assistance replication
Household level spillovers
H h ld l l ill

47. Change in Quality
g Q y
Dairy in Poland 1996-2001
100
otal (%)
90
80 Mlekpol
p
Share of Extra Class Milk in To
70 Mleczarnia
60
Kurpie
50
Mazowsze
M
s
40
30 ICC Paslek
20 Warmia Dairy
E
10
0
1996 1998 2001
S

48. Effect on Investment :
Farm cooling equipment in
Poland 1995 2003
1995-2003
100
90
Share of suppliers with own c.t. (%)
80
70
60 Mlekpol
h
Lowicze
50
Mazowsze
40 Kurpie
s
30
20
10
0
1995 1998 2001 2003

49. Contracting and Costs in INDIA (Rs/ton)
CONTRACT farming NON CONTRACT
farming
f i
Commodity
Produc- Transac- TOTAL Produc- Transac- TOTAL
tion cost tion cost COST tion cost tion cost COST
Milk 5,586 100 5,686 5,728 1,442 7,170
Broiler 808 38 846 27,322 90 27,412
Vegetable 1,485 35 1,520 1,630 437 2,067
Source: Birthal et al., 2005

50. Profits & Contracts in Asia
Broiler farmers ($/kg 2002)
Smallholder <10,000
Independent Contract
Philipines
Phili i 0.03
0 03 0.08
0 08
Thailand 0.02 0.03
Source: Gulati et al., 2005

51. Household Spillover Effects
Reduced RISK (guaranteed price for
contracted crop) in absence of insurance
p)
markets
Improved ACCESS TO CREDIT (cash for
p (
contracted crop) with imperfect capital
markets
Increased productivity of non-contracted
non-
activities, through improved
MANAGEMENT & INPUT USE
=> Positive effects found in several studies

52. Impact on small farms –
p
Poland dairy
50
45
40
%)
Share of farms (%
35
30
1995
25
2000
o
20
15
10
5
0
1-4 5-10 10-15 15-20 20-25
Herd size

53. Quality Control and Rents in Kazak Cotton
Q45: Do you trust the quality assessment as fair and
honest?
Yes, always
8,0%
Never
33,3%
Yes, always
Not always
Never
Not always
58,7%