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)

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 Role of standards Market imperfections Endogenous vertical coordination (various forms)

Food Standards & Trade Public

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 $) World exports of agricultural products in US$ Source: FAOSTAT 2013

Changing structure of world trade Share in Agri-Food Exports (%) World Exports Developing Country Exp   1980 2010 TROPICAL products 22.0 11.1 39.2 17.5 (Cocoa, tea, coffee, sugar, …) TEMPARATE products 46.3 36.4 28.8 27.3 (Meat, milk, grains, …) SEAFOOD, FFVs 19.8 33.5 21.6 42.2 Other PROCESSED 11.9 16.2 10.4 13.2 (tobacco, beverages, …) Total 100.0

“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 advantage of repeat suppliers Adv = 0 External INPUTS MONITOR. costs Adv > 0 TRAINING costs SEARCH

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” in value chains Stimulated by economic reforms (VC growth during transition in ECA) Examples: Input supply programs Trade credit Investment assistance Bank loan guarantees Technology and management advise .....

“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

Figure 1: Relationship between producer and consumer prices ph p0 a. Perfect enforcement   A B C D Figure 1: Relationship between producer and consumer prices Potential Surplus Producer price with imperfect markets & VC Efficiency Premium Farm Price (Share of Surplus) Producer price with perfect markets Consumer Price (Value)

“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: with ∂Y/∂α ≥ 0, ∂Y/∂φf ≤ 0, ∂Y/∂γ ≥ 0 On vertical coordination: 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 Small-holders Trade Value Madagascar Horticulture (green beans) 100% contract Export HIGH Ethiopia Biofuel (castor) LOW to MEDIUM

Comparative Analysis: 3 HV Cases on Poverty Small-holders Industry structure High value exports to EU Madagascar green beans 100% contract Monopoly yes Senegal green beans Mixed & changing Compe-tition Senegal cherry tomatoes 0%

Comparative Analysis: 3 Cases Small-holders Industry structure High value exports to EU Madagascar green beans 100% contract Monopoly yes Senegal green beans Mixed & changing Compe-tition Senegal cherry tomatoes 0%

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

Reasons why households signed a contract (%) 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 22% 49% 19% Access to inputs on credit 7% 33% 60% Learning of new technologies 8% 37% 55% No other alternatives for income 61% 12% Access to a source of income during the lean period 1% 25% 72%

ETHIOPIA – BIODIESEL (Castor) supply chains nursery  seed collection  pealing oil pressing refining  oil export/use

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 Small-holders Industry structure High value exports to EU Madagascar green beans 100% contract Monopoly yes Senegal green beans Mixed & changing Compe-tition Senegal cherry tomatoes 0%

Income and Poverty Effects Horticultural supply chains in Senegal (Maertens & Swinnen “Trade, Standards & Poverty”, WD 2009) Source: survey data

Worst Case Scenario ? Tomato export chain in Senegal Poor country FFV sector: very tight standards Extreme consolidation Foreign owned multinational Complete exclusion of smallholders FDI of land (“Land grabbing”) (Maertens, Colen and Swinnen 2011 ERAE) EU: marketing, labeling standards, health control private food quality, food safety, ethical, environmental standards (ISO, EurepGAP, Tesco Nature Choice, …) 36

Value Chain Employment & Incomes of Poor More than 3000 workers employed Almost 40% of households in the region 37

Gender Effects

(Maertens & Swinnen “Gender and Modern Supply Chains”, 2012 JDS) 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)

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 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

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