1. 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

2. Liberalization Effects in SSA
by Ag-Food Commodity Type: NRAs & Agric Production (per Capita)

3. 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.”

4. 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)

5. 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.”

6. 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

7. 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)

8. Food Standards & Trade
Public

9. 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 for food of non-animal origin)
=> Private more demanding

10. Global agri-food trade (US $)
World exports of agricultural products in US$
Source: FAOSTAT 2013

11. 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

12. “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

13. 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)

14. 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

15. 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

16. “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
.....

17. “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)

18. 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

19. Figure 1: Relationship between producer and consumer pricesph 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)

20. “Market power” in value chains is endogenous (*)
(*) In addition to other “benefits” from concentration, such as scale economies and countervailing power

21. 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

22. 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)

23. Empirical Observations:
Value Chain Surveys

24. 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

25. 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%

26. 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%

27. 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

28. 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

29. 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%

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

31. Study area – generally food insecure
Source: FEWS, 2010

32. 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

33. 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

34. 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%

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

36. 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

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

38. Gender Effects

39. (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

40. Liberalization Effects in SSA
by Ag-Food Commodity Type: NRAs & Agric Production (per Capita)

41. 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

42. 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

43. Questions ?

44. 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 “Market Power and Rents in Global Supply Chains.” Agricultural Economics 41: 109–120.
Swinnen, J., and Anneleen Vandeplas “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

45. 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 “Market Power and Rents in Global Supply Chains.” Agricultural Economics 41: 109–120.
Swinnen, J., and Anneleen Vandeplas “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