The Current Capacity to Meet Emerging Market Requirements

The Challenge

Standards are difficult for many developing-country farmers to achieve, yet they provide unique market opportunities. By meeting certain standards, farmers can reduce the risk of rejection in the marketplace as well as access new, more profitable market segments. Since standards set some producers apart, the differentiation they represent serves as a competitive tool. Clearly, SMEs and smaller farms in developing countries face challenges in meeting them. Many struggle to learn and apply these new expectations, and evidence is building that if they cannot achieve at least basic standards they risk being excluded from competitive markets both regionally and internationally with potentially serious consequences for economic growth, poverty alleviation, and even food security (Vander Stichele et al., 2006; Moustier et al., 2005; Reardon et al., 2003). Most producers face common barriers when considering standards:

1. Selecting which among the standards requires a good measure of market intelligence and contact with buyers as well as experience in assessing the relative demands, costs, and benefits of each—something for which there is almost no data whatsoever;
2. Few institutions exist to facilitate the adoption of standards as an ongoing learning process that takes both time and consistent training;
3. Capital to invest in new processes, equipment, and infrastructure is difficult to access;
4. Transaction costs for certifying products can be high and a barrier to entry;
5. Risky learning is often done at an international level since local market demand is modest.

Many processors, exporters, and retailers—especially for higher-value products—favor producers that can meet their demands for standards, large volumes, and year-round consistency. They sometimes create their own collection or purchasing systems that bypass local market networks thus reducing access. Typically this forces small- and medium-sized suppliers to either consolidate into organizations or larger firms or to compete for the lowervalue channels that remain. Three quick-sketch case studies point to the positive and negative experiences of different approaches; see Box 2 [ PDF 20.5KB | 1 page ], Box 3 [ PDF 27.9KB | 2 page ], Box 4 [ PDF 17.4KB | 1 page ].

Inadequate Standards and Forsaken Value

Lu (2005) estimates that in 2004 alone the PRC experienced approximately $8 billion in reduced exports due to its failure to meet standards in numerous agricultural subsectors. This has happened in almost every sector, including grains, apiculture products, livestock, fungi, and fruits and vegetables. For example, the prohibition of Chinese animal products to the EU in 2002 caused a $623 million loss for 94 Chinese food-processing enterprises. In 2002 and 2003, the PRC's export value of frozen spinach to Japan decreased by $372 million compared to that of two years prior due to rejections for agrochemical residues. Even the US faced problems with standards when an E.coli outbreak leading to three deaths in mid-2006 resulted in expected losses for the US spinach industry¹⁷ reaching $100 million for the year.

The recent discovery in Europe of illegal, genetically modified rice from the PRC prompted the European Commission to discuss far-reaching import restrictions that would affect numerous rice farmers. This would apply also to non-GMO farmers from affected areas, in effect burdening them for the standards compliance failure of their compatriots. It is not just the inability to meet food safety standards that diminishes potential income. Coffee producers in Cambodia and Laos, lacking technology and processing infrastructure, often cannot meet the basic quality requirements of international markets, and their production is now limited to domestic markets and some proximate cross-border trade.

Similarly, Viet Nam’s prodigious coffee trade is second to rice as the largest agricultural export earner and directly employs 600,000 workers. Much of the production quality, however, is such that its exports have consistently earned less per pound FOB than any of the top ten producers between 1993 and 2003 (ICO statistics).

The EU is Bangladesh’s most important client for its fourth-leading export: frozen shrimp and fish. In 1997 the EU banned Bangladeshi fishery products due to inspections that found serious infrastructure and hygiene deficiencies in processing establishments and insufficient quality control guarantees by government inspectors. Cato and Subasinge (2003) note that, in just five months that year, the revenues lost (US$15 million) nearly equaled the investment required to upgrade those plants and train personnel (US$18 million). The impact, both reputational and monetary, on the industry and economy of Bangladesh was substantial.

Implications for Producers

Currently, increased standards primarily impact those dealing with larger buyers or with the market for higher-value products. The developments in several countries noted previously indicate this will eventually be part of the equation for more buyers and for a broader range of products, even in secondary markets. Opportunities exist to better understand and adapt to new standards requirements in the secondary and regional markets in order to be better prepared for the eventual growing demands of those markets as well as to export competitively to the most lucrative markets.

For producers to be competitive and have market access, they have to address eight development areas:

1. Institutional structures – to deliver localized production training and farm and organizational management;
2. Market intelligence – understanding what to produce, at what time, and according to what standards in order to meet buyer specifications;
3. Quality – better inputs, particularly high-quality seed and appropriate varietals, for market-oriented production and capital investment for harvest and post-harvest requirements;
4. Quantity – group organization for smaller producers to aggregate the necessary volumes;
5. Consistent supply – appropriate late- and early-season varietals as well as investment in greenhouse production;
6. Trade transactions – sound contract law that is accessible with simple dispute resolution mechanisms;
7. Certification – low-cost certification and efficient product testing services;
8. Trade financing – contract farming and other internal value chain financing are important but will likely be insufficient.

Enforcing standards without adequate incentives is difficult. IFAD research evaluating organics in Asia (Giovannucci, 2005) found that some aspects of standards may be bypassed where producers gain little benefit from compliance, especially where compliance is not easily checked at the farm gate. In the case of arabica coffee, Varangis et al. (2003) found that where farmer production was blended together by traders, thereby losing individual product identification, there was little or no reward for compliance or higher-quality and minimal penalty for non-compliance. Accordingly, the overall quality suffered as few farmers complied with the established standards.

Download this Discussion Paper [ PDF 206.8KB| 34 pages ].

Post a Comment

We welcome your feedback on this publication. Post a comment. ADBI is not obliged to acknowledge or publish comments and may abridge or edit them before web posting.

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.