New Developments Affect Agricultural Producers' Market Access

Due to improved logistics, faster communication, and fewer trade barriers, markets are increasingly open as well as increasingly homogenized toward international standards. Large farming systems are incorporating greater skills and more investment in technology and infrastructure to enable more controlled and large-scale production that is difficult for smaller farmers to achieve. The new market access challenges faced by smaller farmers do not apply just to exports since national or internal markets are beginning to imitate international standards, as part of a shift in the structure of distribution channels away from small local markets toward, for example, supermarkets.

Supermarkets typically procure steady supply and large volumes of products from suppliers. For small farms, to enter into a supermarket’s procurement system may require heavy capital and technological investment as well as a more skilled labor force. Agricultural standards play an important role in these procurement systems. Often, farmers simply cannot meet these standards on their own (Reardon and Berdegué 2002ab). Arrangements such as contract farming are one way to resolve the uneven relationships between many small suppliers and a few large buyers.

Agricultural standards evolved over the course of many years and were in essence codified publicly by regular accepted use, but the last decade or so has seen dramatic changes. New and often private standards are demanded by buyers in order to meet their value chain management needs or to reduce their exposure to risk.

How standards drive developments in the global agrifood system is intimately linked with functions of governance within the value chain; that is, conditions for participation in the chain are set, implemented, monitored, and enforced. In the past, these rules mainly dealt with meeting basic cost parameters and guaranteeing supply. However, as outlined by Giovannucci and Reardon (2000), standards have now become tools for product differentiation, playing new roles as strategic tools that are used for market penetration, safety assurance, traceability, quality control, incorporation of social and environmental guidelines, and even the definition of product niches.

Smallholders in the supply chain often lack the internal capacity and the economies of scale to establish effective quality assurance and traceability systems. Small enterprises and producers, especially sectors that are export-dependent, may be marginalized unless they can make standard compliance cost effective and guarantee traceability for the buyers.

Global Developments Driving New Trade Processes

Today, because there is great exposure and public risks when standards fail to maintain food safety or when they permit social and environmental harm, they are driving a number of new processes such as Hazard Analysis at Critical Control Points (HACCP) and sustainability standards such as organics. The globalization of these value chains and the enormous volumes and concentrations of buying power can mean dramatic consequences for thousands or even millions of people. Recent scares, like mad cow disease, avian flu, or E. coli, have demonstrated how the failure of standards can cripple an entire subsector, even across developed nations such as the US and UK. As a result, not only firms but also governments and consumers are increasingly concerned.

This concern is being progressively translated as higher requirements for market entry, including food safety, traceability, higher quality, and even certifications of process, i.e., HACCP, ethical, Fair Trade, organic, etc. These requirements are being driven by changes in three major areas:

1. A new consumer environment

Characterized by a predominant interest in personal health and increasing doubt in the ability of government to ensure food safety, this includes broader concerns such as unchecked chemical use in livestock that has led to antibiotic resistance in humans.¹ Increased transparency and communications has led to more information and greater concern about the social and environmental conditions in the place of origin.

2. A new business environment

In the agrifood business, an increasing concentration of suppliers, intermediaries, and retailers stimulates new methods of differentiation and spur a more intense drive for new supply sources and greater efficiencies in costs and logistics. As global corporations face new risks, they adopt various risk management techniques, especially the demand for more standards. Fulponi (2005) notes that setting standards above minimum levels and requiring third-party certification and traceability are a corporate response to the risk of civil or criminal responsibility. These risks are not only based on food safety but also concerns for labor violations such as those reported in some cacao production regions, worker safety in flower industries and fish packing plants, and below-subsistence wages in the coffee industry. In recent years, a record number of leading global companies voluntarily reported on social and environmental issues within their firms (Global Corporate Responsibility Reporting Trends 2006). Many used independent audits to help ensure their transparency and credibility.

3. A new regulatory environment

As more and more food is traded globally, all governments struggle to monitor and manage the safety of their food supplies, typically by imposing new barriers to entry in the form of public standards, including import bans to manage a variety of livestock diseases or stiffer border inspections for contamination and phytosanitary violations. In some cases, governments resort to regulations such as the US bioterrorism laws and the EU's Maximum Residue Levels or GMO restrictions.

These three environments have combined to stimulate the evolution of numerous standards. As public standards have multiplied, so have those mandated by private industry. Since 1995, more private international food-related standards have emerged than in the previous five decades combined. Clearly, standards have become an important competitive factor and are becoming an important determinant of access to markets.

Standards Increasingly Set the Rules of the Game

Standards offer quality and safety assurance as well as differentiate and define product categories. In addition to food safety, taste, cosmetic quality, and nutritional value, they increasingly involve process requirements such as environmental impact, worker health and safety, animal welfare, and fairness to primary producers. In some cases, suppliers are required to provide reasonable assurance of social and environmental benefits that range from an International Organization for Standardization (ISO) series to HACCP to Organics. Such requirements can either facilitate market penetration or act as barriers to entry. Accordingly, standards are the new rules and they are evolving dynamically. Indeed, a common argument for private standards is that firms believe they can more quickly respond to market needs by controlling their own standards. Understanding and meeting them is becoming increasingly challenging.

As incomes grow, so does the tendency to consume perishable foods such as meat, dairy, and aquatic products that are more susceptible to conveying life-threatening diseases. This tendency may be fueled by greater communication and trade influencing consumption patterns to resemble those of US and European consumers, whose tastes have been toward greater consumption of meat and dairy products where food safety standards are critical. Concomitantly, governments have become more sensitive to agriculture safety as scares ranging from BSE to avian flu impact human health and wreak economic havoc in some regions.²

These shifts mean more pressure on producers and processors to comply, and many enterprises are simply not prepared. In the People’s Republic of China (PRC)—where the majority of processors are small and medium enterprises (SME)—the total number of processors has shrunk by two-thirds in the past decade as food processing has shifted from traditional, lower-risk products to meat, dairy, and aquatic products and horticultural produce that require higher standards and greater investments (see Figure 1 [ PDF 39.1KB | 1 page ]).

A report released by Rabobank predicts that the PRC will become the world's third-largest fresh produce exporter within three years.³ Despite ongoing difficulties with meeting some standards in advanced markets, the PRC is forging ahead with high-value exports and has invested in standards and control systems to manage this output. It already produces half of the world's fruit and vegetables, mostly for domestic consumption, and exports of these products reached US$7.2 billion in 2006. According to FAOSTAT, this represents a substantial 7% of global trade in fruit and vegetables and trails only the Netherlands, the US, and Spain.⁴

Experience from other regions already points to some difficulties. Jaffee and Henson (2004) note that the rejection of agricultural imports due to not meeting standards cost low- and middle-income countries about US$1.6 billion in 2000–2001. In 2002, the PRC, Thailand, Turkey, Brazil, and Viet Nam accounted for nearly 60% of the EU's rejections from non-EU sources (Jaffee and Henson, 2004). USDA and FDA statistics note a rising trend in such food safety problems, with reports almost doubling from 1994 to 2004 (Center for Science in the Public Interest, 2007), and these US agencies plan to advocate preventive controls, including higher import safety standards.

Governance

Standards take different forms. They may be set in commercial legal codes and subject to fines if transgressed, they may be internationally recognized and widely used even though they have no specific legal basis, or they may be private, firm-specific requirements (see Table 1 [ PDF 22.8KB | 1 page ]).

Standards can be enforced by participants within the chain as well as by external agencies. From within the chain, the key sanction is excluding a supplier from participating. The converse of this is that well-performing suppliers can be favored with longer-term contracts and higher prices (Kaplinsky and Morris, 2001). Sanctions may also be exercised outside the chain, and many governments have extensive bureaucracies checking compliance with legislation and even prosecuting offenders. In recent years, NGOs have grown into an important sanctioning force. Boycotts and publicity campaigns, or the threat of them, have also forced many leading firms to change the way they produce or to delist particular suppliers (Kaplinsky and Morris, 2001).

What is common to value chains is the increasing concentration of power among a few actors, leading to increased horizontal and vertical coordination. The considerable purchasing power of large-scale retailers in particular, enables them to set private standards that are typically diverse, can be confusing, and are always more demanding than the public safety standards of most countries. Since standards can be influenced considerably by both public and private sectors, producers and processors of agricultural products have to serve many masters.

The world’s largest grocery retail markets by value are now the USA, Japan, the PRC, India, and the UK, and by 2020 the PRC is expected to more than double its value and move into second place. All these markets share development characteristics defined by the nature of their distribution channels. Today's retail food industry increasingly resembles the definition of a classic oligopolistic industry. At the top are large multi-unit retailers that tend to dominate consumer food distribution in many countries. For example, in the US the top five supermarket chains accounted for over 40% of retail food sales in 2000, while in 1993 they accounted for 20%. In France during this same period, the top five chains increased market share from 48 to 61% while in Italy it more than doubled from 11 to 25% (Busch and Bain, 2004).

The largest are powerful multinationals and include US-based Wal-Mart with more than 5,000 mostly hypermarket-type stores, France-based Carrefour with more than 11,000 stores of varying formats, and Netherlands-based Royal Ahold with more than 5,000 supermarkets. As reference, their annual revenue is greater than the total value of any country's agriculture sector. Wal-Mart revenues, for example, topped $300 billion, and its international sales exceeded $70 billion in 2006. Such dominant players are the major drivers behind a staggering global flow of commodities, products, information, and finance that coordinate the activities of hundreds of millions of farmers and affect billions of consumers.⁵

Producers and SMEs Face Difficult Hurdles

Developing country producers and SMEs face a number of hurdles to participate effectively in higher-value trade. An IFPRI article (Hazell, 2004) refers to the often-stated need for better infrastructure, linking to markets, and credit (among others) and notes that nonetheless, these still do not sufficiently address the problems of compliance with an increasingly complex standards environment.

Project effectiveness reviews for the countries of the Africa, Caribbean, and Pacific signatories of the Lomé Convention, looking at Quality & Conformity in the Fruit & Vegetables Subsectors, note that private standards present formidable technical barriers that have a negative effect on smallholders. Exporters select only the best-performing smallholders to be organized into groups, and these are expected to manage food safety and traceability systems. In addition to the high cost of certification, there is evidence that weaker farmers are often excluded. For example, one of Zambia’s largest horticulture exporters limits itself to source only one product from smallholder producers.⁶ The exporter fears that if the smallholder cooperative cannot meet the required standards, it may risk losing its Global-GAP certification.

Institutional structures are necessary to achieve a form of vertical coordination that can overcome transactions costs and standards barriers that smallholders face. In the Philippines, as in other countries, the growing popularity of contract hog farming allows feed millers to use smallholders’ labor and land, and to fatten hogs at low cost. Such small-scale livestock operations have thrived in many regional markets. As that changes, and largescale industrial operations become ever more dominant, small enterprises without the support of institutional structures and organizations are less likely to survive.

The Growth of New Distribution Channels

Recent studies point to the shift in marketing channels available to producers and the rapid rise of supermarkets in developing countries (Reardon, 2005; Bingen and Busch, 2005; Fulponi, 2005; Reardon et al., 2003; Moustier et al., 2005). The 1990s saw the emergence of supermarkets as a major form of retailing in many developing countries (see Box 1 [ PDF 17.7KB | 1 page ]), becoming dominant players in many Latin American countries with the trend moving rapidly in East and Southeast Asia and more slowly in South Asia (see Figure 2 [ PDF 22.7KB | 1 page ]). This development is substantially transforming the nature and the composition of domestic agrifood commerce as well as regional and overseas trade.

It is important to understand the effects of this market transformation, not only on producers and value chains but also on the entire agrifood system, since it affects costs and distributional issues from the farm to the table. Within these larger trends, several important developments can be observed:

• Increasing demands for higher levels of farmer performance in quality, process, and financial capacity to invest in technology and operating capital;
• Greater centralization of retail procurement with the advent of the specialized, sophisticated multi-country logistics management wholesaler replacing traditional wholesalers;
• Greater use of contracts and private systems to identify and reward preferred suppliers.

The Asia region now represents barely a third of all of the global food retail sales. It is forecast to grow to 41% of the global food retail market by 2020 while Europe will comprise 30% and the NAFTA area will shrink to 21% (IGD calculations). Multiple store retailers will be an important part of that as they are growing fast throughout the world, particularly with the liberalization of emerging markets and Foreign Direct Investment (FDI). These include small-scale convenience stores, such as those associated with gasoline stations, supermarkets, and full-service retailers such as hypermarkets.

Developing countries are not exempt from the trend toward supermarkets. South America, parts of Europe, and advancing East Asian economies saw their supermarket share of food retail grow from about 10–20% in the early 1990s to more than 50% just a decade later (Reardon and Berdegue, 2002). The supermarket sector in Asia is now growing even faster than in Latin America (Reardon et al., 2003). The authors, citing A.C. Nielsen statistics, note that supermarkets in East Asian countries, such as those in the Republic of Korea; Taipei,China; and the Philippines, have achieved an average 63% share of the food retail in those countries (excluding the fresh segment, i.e., meat, fish, fruits, and vegetables). In Southeast Asian countries such as Thailand, Indonesia, and Malaysia, supermarkets have already captured an average 33% share of the non-fresh food retail. Applying the calculations of Reardon and others in Latin America, one can estimate that supermarkets’ share of the fresh segment in Asia is approximately half of their total share in packaged foods.

In some countries the growth has been even more rapid. Indonesia’s supermarkets’ share of food retail was negligible before 1998 and by 2005 reached about 30% of the total (Natawidjaja et al., 2006). In the PRC, where supermarkets did not exist prior to 1990, they controlled 13% of total food sales by 2003, approximating the situation in Brazil and Argentina in the early 1990s but with one difference: the PRC is registering growth that is three times greater than Latin American growth rates in the 1990s. According to Hu et al. (2004), supermarkets in the PRC are growing faster than in any other nation at 30–40% per year. By 2002, supermarket sales in the PRC had already reached $55 billion, up from $10 billion in 1996. Strong growth is likely to continue. IGD predicts that the entire Chinese grocery market will grow by 65% to US$456 billion between 2005 and 2010.

The dominance of these new retail formats has resulted in the emergence of demanding new procurement channels and the decline of smaller informal markets that could more readily accept both small quantities and inconsistent qualities of foods from farmers and middlemen. In Viet Nam and the PRC, as supermarkets develop fast in cities, government policies favor centralization of food distribution and the reduction of street vending and informal markets (Moustier et al., 2005; Reardon, 2005).⁷

The demands in the domestic markets of less developed nations are growing and are increasingly resembling those of export channels. Latin America, for example, is a primary exporter of fruits and vegetables, yet over the last 15 years supermarkets have grown to sell about 3 times more fruits and vegetables than are exported from the region. Reardon et al. (2005) and Vander Stichele et al. (2006) also claim that the increasing market domination by big corporations and multinational supermarket chains influences the prices producers receive and the conditions under which they must produce. The consolidation of procurement implies great challenges for smaller producers.⁸

Supermarket channels have demanding private standards similar to export requirements for size, color, safety, consistency, volume, packaging, labels, etc., which implies the need for production level investments in drip irrigation, greenhouses, advanced storage, hygienic services, and logistics. These effects served to consolidate the many small suppliers to Thailand's largest supermarket chain, so that only the more professional operators—usually organized groups or larger farmers—could continue to trade with it directly (van Roekel et al., 2001).

More investment and operating capital are also needed since the greater volume of export and supermarket channels often means lower margins and delayed payments from buyers. Meanwhile, the traditional middlemen and general wholesalers that provided the framework for moving products from farms to processors and retailers are morphing toward specialized procurers for larger retailers and chains. Consequently, spot and wholesale markets tend to decline in importance and forward contracts expand (Reardon et al., 2003). These contracts often involve requirements for much larger and more sophisticated harvest and storage operations, centralized distribution systems, and longer shipping distances that create an increasing need for clear standards.

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Comment(s)

There are [2] comment(s) for this entry. Post a comment.

1. Prof. J. George
   (posted 06 July 2008 / 07:56:18 PM)
   
   The authors, Giovannucci and Pursell needs to be complimented on this publication for putting together a business perspective to the application of standards in the food trade.
   
   The perspective of the book however could have been broadened if the production landscape in the region was brought to play a dominant role. The price discovery advantages are certainly not available to the producers. The cost burden, however, is surely an additionality for the producer in more than one ways. For instance, the AGORA experience in Bangladesh is being experienced in all the member countries in the region. This burden is magnified when the state governments either in collusion or in default setting withdraws due to the fiscal conditionalities.
   
   The publication could have immensely benefitted from a professional copyediting and/or critical peer review. But it is a useful addition to the discipline of food safety regulation.
2. Dr T. Tappani
   (posted 03 June 2008 / 05:47:56 AM)
   
   This ADBI paper: "Standards and Agricultural Trade in Asia" is quite a practical and useful look at the topic of trade and development. The authors, Giovannucci and Pursell, clearly have a sharp eye for the needs of business and the realities of farmers (mostly small in the region) and combine these to offer some practical solutions that the Asian Development Bank and governments would be wise to consider in their work.