Supply Chains, Trade
and Food Security
(Linking Rich Consumers to Poor Producers
through Value Chains)
Johan Swinnen
LICOS Center for Institutions and Economic Performance
KU Leuven
&
Centre for Food Security and the Environment
Stanford University
FAO Rome March 2015
Liberalization Effects in SSA
by Ag-Food Commodity Type:
NRAs & Agric Production (per Capita)
GAO per capita Index
15
10
cereals, roots
and tubers
5
fruits and
vegetables
industrial crops
0
all commodities
-5
-10
0
2
4
6
8
10 12
Years after start of reform
Misconception 1:
“Agricultural markets”
• Microeconomics textbooks continue to point
at “agricultural markets” as standard
examples of “competitive (spot)
markets” (Sexton 2012).
• Example: “Thousands of farmers produce
wheat, which thousands of buyers purchase
to produce flour and other products. As a
result no single buyer can significantly
affect the price of wheat.”
Misconceptions of
modern agricultural markets
“I don’t know of any modern
agricultural market that meets all
these conditions.
Most don’t meet any of them”
(Sexton AJAE 2012)
Misconception 2: Modern value
chains and poor farmers
Typical argument:
“Quality standards, and company strategies to
secure timely and consistent supplies and to
save on transaction costs lead to the
marginalization of small, poor farmers
– with negative welfare and poverty
implications.”
Misconception 2: Modern value
chains and poor farmers
• There are many more small and poor farmers
included in supply chains
• Even if they are not included, there can be
strong pro-poor impacts (food security
enhancement)
• Supply chains play a crucial role in
technology transfer, productivity growth and
food security through direct and indirect
effects
Trade and Food Security:
Importance of Supply Chains
It is crucially important to explicitly
account for key institutional elements of
trade and supply chains
1. Role of standards
2. Market imperfections
3. Endogenous vertical coordination (various
forms)
Food Standards & Trade
120000
14000
GlobalGAP producers
Total amount of SPS notifications to WTO
12000
100000
Private
10000
80000
Public
8000
60000
6000
40000
4000
20000
2000
/2011
2009
2010
2008
2007
2005
2006
2004
2003
2002
2000
2001
1999
1998
1996
1997
1995
0
0
2004 2005 2006 2007 2008 2009 2010 2011
Private & Public Standards
-- Trade Aspects
• EU public regulations require “equivalence
of risk-outcome” : based on evaluation of
final product (consistent with SPS
agreement of WTO)
• Private: GlobalGAP requires “equivalence
of systems” : based on evaluation of the
process as well
– (Lee 2007- for food of non-animal origin)
=> Private more demanding
Global agri-food trade (US $)
1,400,000,000
World exports of agricultural products in US$
1,200,000,000
1,000,000,000
800,000,000
600,000,000
400,000,000
200,000,000
0
Source: FAOSTAT 2013
Changing structure of world trade
Share in Agri-Food
Exports (%)
World Exports
Developing
Country Exp
1980
2010
1980
2010
22.0
11.1
39.2
17.5
46.3
36.4
28.8
27.3
SEAFOOD, FFVs
19.8
33.5
21.6
42.2
Other PROCESSED
11.9
16.2
10.4
13.2
TROPICAL products
(Cocoa, tea, coffee, sugar, …)
TEMPARATE products
(Meat, milk, grains, …)
(tobacco, beverages, …)
“New architecture of modern agric.
markets/value chains” :
• important implications for equity and
efficiency
• market power/concentration and its
effects are not obvious
• types of “architecture” may differ
between ‘rich’ and ‘poor’ countries
Towards a General Model of
Value Chains
(Swinnen & Vandeplas, 2010, 2011, 2014)
• Try to develop a model which integrates
different aspects of this “new architecture”
Including:
– Quality requirements
– Specific investments and contracting costs
– Market imperfections
– Vertical coordination (contracting)
Types of “contracting costs”
Value outside of the
contract
Value > 0 Value = 0
Cost
Adv = 0 External MONITOR
advantage
INPUTS
. costs
of repeat
suppliers Adv > 0 TRAINING SEARCH
costs
costs
Institutional Organization of
Value Chains
• IO structure of supply chains is
ENDOGENOUS
– IO is affected by nature of transaction costs
– Standards requirements and factor market
imperfections induce vertical coordination
“Vertical coordination” Stimulated by
economic reforms
in value chains
(VC growth during
transition in ECA)
90
assistance (% interviewed
companies)
Examples:
• Input supply programs
• Trade credit
• Investment assistance
• Bank loan guarantees
• Technology and
management advise
• .....
80
70
60
50
40
30
20
10
0
2
2.5
3
EBRD Reform Index
3.5
4
“Private agricultural marketing companies
have become dominant providers of
smallholder input credit in Africa.
In various countries … they are … the sole
providers of seasonal inputs to small-scale
farming.”
IFAD (2003, p.5)
Institutional Organization
of Value Chain
• Vertical coordination implies:
– Transfer of inputs, know-how, technology … to
poor
• (arguably more important than many government
technology programs)
– Efficiency premia for poor suppliers
• Major implications:
– Increased productivity
– Spillovers on other crops and activities
– Increased incomes
– Improved food security
ph
Potential
Surplus
p*
Producer price
with imperfect
markets & VC
𝑝𝑙 + 𝛼𝑘 − 𝜑𝑓
Efficiency
ε Premium
Farm
Price
Producer price
with perfect markets
(Share
of
Surplus)
A
B
C
D
ph
Consumer Price (Value)
𝑝𝑙 + 1 − 𝛾 𝑘 + (𝛼𝑘 − 𝜑𝑓 )/𝛽
𝑝𝑙 + 1 − 𝛾 𝑘
𝑝𝑙 + 1 − 𝛾 𝑘 + (𝛼𝑘 − 𝜑𝑓 )
“Market power”
in value chains is endogenous (*)
(*) In addition to other “benefits” from concentration,
such as scale economies and countervailing power
Impact of Competition *
• On farmer’s income:
Y Y  Y 
Y 


 f 


      
f
– with ∂Y/∂α ≥ 0, ∂Y/∂φf ≤ 0, ∂Y/∂γ ≥ 0
• On vertical coordination:
[  min ]   min   min  f min 







f


   

 
 
– with ∂θ/∂α < 0, ∂θmin/∂α ≤ 0, ∂θmin /∂φf ≤ 0, ∂θmin /∂γ ≥ 0
* ignoring scale economy effects
General Equilibrium Effects
The effects on poor rural households depend [also]
on
- the nature of the demand shocks leading to
the expansion of high standard sector,
- production technologies,
- trade effects,
- spillover effects on low standard markets,
- factor market constraints,
- labor market effects.
(Xiang et al 2012, “Food Standards and Welfare:
General Equilibrium Effects”, JAE)
Empirical Observations:
Value Chain Surveys
Comparative Analysis:
2 Cases on Food Security
Smallholders
Trade
Value
Madagascar
Horticulture
(green beans)
100%
contract
Export
HIGH
Ethiopia
Biofuel
(castor)
100%
contract
Export
LOW to
MEDIUM
Comparative Analysis:
3 HV Cases on Poverty
Madagascar
green beans
Smallholders
Industry
structure
100%
contract
Monopoly
Senegal
Mixed &
green beans changing
Senegal
cherry
tomatoes
0%
High value
exports to
EU
yes
Competition
yes
Monopoly
yes
Comparative Analysis: 3 Cases
Madagascar
green beans
Smallholders
Industry
structure
100%
contract
Monopoly
Senegal
Mixed &
green beans changing
Senegal
cherry
tomatoes
0%
High value
exports to
EU
yes
Competition
yes
Monopoly
yes
1. High standard F&V exports from
Madagascar
•
Rapid growth over past decade
–
100 farmers in 1990
–
10,000 small farmers on contract in 2005
Impact on farms & food security
• Rice productivity increased by 70%
– (technology spillovers)
• Length of lean periods falls by 2.5 months
- (with contract: 1.7; without contract: 4.3)
• Contract income: about 50% of their total
monetary income
• Contract price is higher than the market price
Importance
Not
A bit Quite Very
Reasons why households signed a contract
(%)
Stable income during the year
0%
2%
32% 66%
A higher income
10% 42%
31% 17%
Price stability
10% 22%
49% 19%
Access to inputs on credit
0%
7%
33% 60%
Learning of new technologies
0%
8%
37% 55%
No other alternatives for income
8% 61%
19% 12%
Access to a source of income during the lean
period
1%
25% 72%
2%
ETHIOPIA – BIODIESEL (Castor) supply chains
nursery  seed collection  pealing oil pressing refining  oil export/use
3
0
Study area – generally food insecure
Source: FEWS, 2010
Findings
- significant adoption rate in few years of
promotion contrasts with low rates of other
technology adoptions
- penetration of the castor crop into
inaccessible and remote places
- diversification of crops
Results

Household income is higher

Significant improvement of food security:


“Food gap” is lower by 50% (30 vs 47 days).

Food consumption is significantly higher
Fertilizer use is higher by 70%, affecting both
castor and food crop productivity
Comparative Analysis: 3 Cases
Madagascar
green beans
Smallholders
Industry
structure
100%
contract
Monopoly
Senegal
Mixed &
green beans changing
Senegal
cherry
tomatoes
0%
High value
exports to
EU
yes
Competition
yes
Monopoly
yes
Income and Poverty Effects
Horticultural supply chains in Senegal
(Maertens & Swinnen “Trade, Standards & Poverty”, WD 2009)
Income (1,000 F CFA)
7000
6000
5000
4000
3000
2000
1000
0
total sample
Source: survey data
nonparticipants
estate farm
workers
contracted
farmers
Total household income
Income from farming
Income from agr. wages
Income from non-agr. sources
Worst Case Scenario ?
Tomato export chain in Senegal
1.
2.
3.
4.
5.
Poor country
FFV sector: very tight standards
Extreme consolidation
Foreign owned multinational
Complete exclusion of
smallholders
6. FDI of land (“Land grabbing”)
(Maertens, Colen and Swinnen 2011 ERAE)
Share of households
50%
40%
30%
20%
10%
0%
2003
2004
2005
2006
Average total household income
(million FCFA)
Value Chain Employment & Incomes of Poor
2500
2000
1500
1000
500
0
Total sample
Year
Gandon
•
•
Ross Béthio
More than 3000 workers
employed
Almost 40% of households in
the region
Total
Households with
Households without
members employed in members employed in
the tomato export
the tomato export
industry
industry
Total income
Income from farming
Income from tomato export industry wages
Income from self-employment
Income from other wages
Non-labour income
Gender Effects
Labor market effects
• Especially important for the poorest and for women
“although modern supply chains are gendered, their
growth appears to be associated with reduced gender
inequalities in rural areas. … women benefit more
and more directly from [employment in] large-scale
estate production and agro-industrial processing,
than from smallholder contract-farming.”
(Maertens & Swinnen
“Gender and Modern Supply Chains”, 2012 JDS)
• Note that in this perspective indicators that look
only at “participation of small farmers” can be
(double) misleading in terms of welfare and poverty
effects
Liberalization Effects in SSA
by Ag-Food Commodity Type:
NRAs & Agric Production (per Capita)
GAO per capita Index
15
10
cereals, roots
and tubers
5
fruits and
vegetables
industrial crops
0
all commodities
-5
-10
0
2
4
6
8
10 12
Years after start of reform
Hypotheses on
commodity variations in SSA
– Cereals and tubers :
•
•
•
•
Low value staple food crops
State remains important in exchange & VC
Private sector limited to spot market transactions
Less disruptions because limited external inputs
– Industrial crops :
•
•
•
•
Medium value traditional export commodities
External inputs
Shift from public to private VC
Major contract enforcement problems with
competition
Heterogenous commodity
responses to liberalization in SSA
– Fruits & vegetables: Mixture of
A. Low value for local market, Low input
B. High value, high input non-traditional exports
• Spectacular growth; entirely private sector;
intensive VC organized
Questions ?
Papers & Books - Empirical
•
Swinnen (ed.), 2007, Global Supply Chains, Standards & the Poor,
CABI Publishers
•
Maertens and Swinnen, 2009, “Standards, Trade, and Poverty:
Evidence from Senegal”, World Development
•
Minten, Randriarison and Swinnen, 2009, “Global Retailers and Poor
Farmers: Evidence from Madagascar”, World Development
•
Maertens, Minten and Swinnen, 2012, “Modern Food Supply Chains in
Africa”, Development Policy Review
•
Maertens and Swinnen, 2012, “Gender and Modern Food Supply
Chains”, Journal of Development Studies
•
Negash and Swinnen, 2013, “Food versus Fuel ? Biofuels and Food
Security in Ethiopia”, Energy Policy
Papers & Books - Theory
• Swinnen, Vandemoortele and Vandeplas, Quality Standards, Value
Chains, and International Development: Economic and Political
Theory, Cambridge University Press, forthcoming
• Swinnen, J., and A. Vandeplas. 2010. “Market Power and Rents in
Global Supply Chains.” Agricultural Economics 41: 109–120.
• Swinnen, J., and Anneleen Vandeplas. 2011. “Rich Consumers and
Poor Producers: Quality and Rent Distribution in Global Value
Chains.” Journal of Globalization and Development 2 (2): 1-28.
• Vandemoortele et al, 2012, Quality and Inclusion of Producers in
Value Chains: A Theoretical Note, Review of Development Economics
2012
• Xiang et al, 2012, General Equilibrium Effects of Quality and Supply
Chains, Journal of Agricultural Economics