Small famers and the supermarket revolution

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

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Small famers and the supermarket revolution

  1. 1. Small Farmers S ll F and the Supermarket Revolution Johan F.M. Swinnen University of Leuven (KUL) IFPRI Tervuren May 2009
  2. 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. 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. 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. 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. 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. 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. 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. 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. 10. SuperMarkets & Standards • PUBLIC & PRIVATE standards t d d • Standards : • size, color, … • SPS, pesticide residue, … • Child labor, environmental effects, … • Traceability, … y,
  11. 11. Increasing standards & trade conflicts Figure: Notification of new SPS-measures to the WTO, 1995-2005 Source: Henson, 2006
  12. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 22. Important Factors Labor Markets Vertical Coordination
  23. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 34. Implications I: Enabling and stimulating investments Create the right conditions for stimulating investment. Ensure macro-economic stability. macro-
  35. 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. 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. 37. The end h d
  38. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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%

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