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Dynamics of Agri-food Supply Chains in Transition Countries Johan F.M. Swinnen The World Bank. Sarajevo Conference May 24-26 , 2004. Background . Breakdown of the relationships of farms with input suppliers and output markets.

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dynamics of agri food supply chains in transition countries johan f m swinnen the world bank

Dynamics of Agri-food Supply Chains in Transition CountriesJohan F.M. SwinnenThe World Bank

Sarajevo ConferenceMay 24-26, 2004

background
Background
  • Breakdown of the relationships of farms with input suppliers and output markets.
  • Contracting and vertical coordination in supply chain emerging to overcome these obstacles
  • Processes have been an engine of growth in most advanced ECA countries.
key issues questions
Key Issues / Questions
  • How important / general is this process ?
  • Which models ?
  • Which conditions are required ?
  • Effects ?
  • Who gets the benefits ? (What about small farmers ?)
  • Which role does FDI play ?
  • Implications for government policy and international organizations ?
methodology
Series of case studies, interviews and surveys

Different sectors (dairy, cotton, fruits & vegetables, …)

Different countries across ECA

Methodology
farms selling on contract in central europe of all

Farm Comp.

Family Farms

Hungary

1997

94

17

Czech

1999

98

46

Slovak

1999

96

35

Farms selling on contract in Central Europe (% of all)
dairy in north poland
Dairy in North Poland
  • ALL dairy companies assist suppliers (farms) through :
    • Input supply programs
    • Credit programs
    • Extension services
  • PART : Bank loan guarantee programs
  • Programs for SMALL and LARGE suppliers
slide9
CIS
  • 5 country study : 40% of agri-food processors offers credit to suppliers
  • Kazakhstan cotton : 71% of cotton farmers contracts with ginner, with assistance packages
how important
How Important ?
  • Sugar sector : 80 – 90 % of CEEC sugar sector is FDI, using contracts & farm assistance programs
  • Dairy& oilseeds sector : significant FDI, and most companies implement programs, with strong spillover effects on domestic companies
  • Supermarkets : Some, but not generally
  • After 1998 : VC in Russian food chain by domestic investments from outside agriculture
  • Kazakhstan : grain trading companies investing upstream; cotton ginning : contracting mostly with small farms, ...
2 multiple models motivations
2. Multiple Models & Motivations
  • Commodity specific
  • Transition-stage specific
    • Securing basic supplies
    • Quality !
  • Many constructions (simple & complex)
  • Key is “Non-traditional” design (also e.g. Warehouse Receipt Systems)
reasons for contracting cee

Czech

Slovak

Hung

Contract price higher

12

10

10

Avoid price uncertainty

6

21

33

Guaranteed sales

60

50

43

Immediate payment

7

11

3

Easier to get credit

0

0

9

Contract - inputs or TA

10

6

2

Other

4

2

0

Reasons for Contracting – CEE
agri business motivations for vertical integration
Agri-business Motivations for Vertical Integration
  • Early stage : Securing basic supplies (ex: pre-finance, inputs, …)
  • Advanced : Upgrading quality of supplies (ex: technical and management assistance, investment loans, loan guarantees, …)
supermarket assistance to farms
Supermarket Assistance to farms
  • Available evidence indicates that modern retailers introduce similar packages “if they have to” to secure quality supplies. E.g.
    • Central America (Berdegue et al)
    • Croatia (Reardon et al)
transition region is special
Transition Region is Special
  • Collapse of farm output and livestock numbers creates discrepancy between processing capacity and supply
  • History of poor quality
  • This makes it a “SUPPLIER’s MARKET” (compared to other regions)
integrating multiple stages interbrew brewing multinational
Integrating Multiple Stages : INTERBREW (Brewing Multinational)
  • Core business = brewing
  • Forced to vertically integrate to ensure quality malt/barley/seed
  • General strategy applied differently in different countries b/c of local conditions
  • Bring in co-foreign investors to assist with non-core activities and set up farm assistance programs
  • Programs interlink markets

Brewing Co.

Malting Co.

Barley farm

Seed supply

proces retail guaranteed supplier loans juhosukor in slovakia konzum in croatia
Proces./Retail – guaranteed supplier loans: JUHOSUKOR in Slovakia & KONZUM in Croatia
  • Retailer/processor provides loan guarantees for bank loans to suppliers

Retail/Processing Co.

Farm

Bank

dairy processor becomes financial institution danone in romania
Dairy Processor Becomes Financial Institution: DANONE in Romania
  • Processor takes on banking function:
    • provides loans to farms
    • based on business plans
    • takes collateral
  • Provides payment guarantee for input suppliers

Processing

Farm

Input Supplier

Bank

lending with distributed risk rabobank spvs
Lending with distributed risk: RABOBANK - SPVs
  • Financial institution is foreign investor
  • Special purpose vehicle (SPV) to distribute risk equally among partners
  • Ex. where group of small farmers formed cooperative to participate in SPV

Processing co.

SPV

Farm

Bank

Input Supplier

3 contract enforcement is essential for any model
3. Contract Enforcementis essential for ANY model
  • Crucial to make VC sustainable
  • Not obvious: Many cases and stories where contract enforcement problems undermines VC
  • Private enforcement mechanisms can be more important than public institutions
4 effects
4. Effects
  • Important Direct Effects :
    • Enhanced QUALITY (& higher prices)
    • Increased PRODUCTIVITY
      • (eg CIS study)
  • Important Indirect Effects: Spillovers
    • Contract replication by other companies
    • Farm assistance replication
    • Household level spillovers
household spillover effects
Household Spillover Effects
  • Reduced risk (guaranteed price for contracted crop) in absence of insurance markets
  • Improved access to credit (cash for contracted crop) with imperfect capital markets
  • Increased productivity of non-contracted activities, through improved management and better input use
5 foreign investment fdi
5. Foreign investment (FDI)
  • Conceptually, no need for FDI
  • Empirically:
    • FDI is driving force for contract innovations
    • Domesticspillovers are important
  • Several exceptions: FIG investments (Russia, Kaz), Cotton Kazakhstan
  • Crucial factor appears access to outside finance (and management strategy)
6 will small farms survive
6. Will small farms survive ?
  • Key concern
  • Lots of stories and intuition
  • Usually based on little evidence
the key concern
The Key Concern
  • Modern supply chains (or “The supermarket revolution”) will push a large share of farmers, in particular small farmers, out of the market as they fail to meet the requirements to sell to these chains (“The supermarkets”)
the key concern31
The Key Concern

Small farmers may ‘fail to make the grade’ because :

  • Fixed component in transaction costs makes it more costly to deal with many small farmers than with a few large farms
  • Small farms are constrained financially (internally and/or externally) for making necessary investments
evidence
Evidence ?
  • Many stories but little ‘hard evidence’
  • What exists suggest that
    • We should take this concern seriously
    • But the reality is much more complex and nuanced than assumptions
evidence part 1
Evidence – part 1
  • Interviews with agri-food companies confirms preference for larger suppliers
  • Specialized wholesalers and supermarkets prefer to work with (relatively) large FFV producers in Croatia (Reardon et al 2003)
  • Danone and Megle in Bulgaria and Romania have strategy focused on >20 cow farms
  • CIS study finds 60% of processors have minimum size for some of its farm assistance programs
evidence part 2
Evidence – part 2
  • Examples of company programs to small farmers being quite successful. Eg.
    • Croatian F&V suppliers to supermarkets
    • Kazak cotton
    • Polish and Romanian dairy
      • e.g. Friesland Romania works with 40,000 small farms through 1,000 collection centers; contracts include farm assistance packages
evidence part 237
Evidence – part 2
  • CIS study finds that processors do not discriminate on size for providing basic programs (agronomic support, physical inputs, prompt payments, …)
  • Both Polish dairy study and CIS study find that FDI companies are not more likely to cut small farms as suppliers (the opposite)
more importantly
More importantly
  • Modern dairy companies focusing on high-quality market (incl retail sector) tend to assist small farms; compared to market channels targeted to informal and low quality sales which do not
  • In Lithuania, all credit which small dairy farms get is through the dairy companies (cannot get access to bank loans or public assistance, incl SAPARD)
why work with small suppliers
Why work with small suppliers ?
  • In some cases processors have no choice : small farms represent most supply (eg Poland, many Balkan countries, Transcaucausus, Kyrgyz, …)
    • Eg. Romania: 95% of dairy farms have 1-2 cows.

=> Small Farm Paradox ?

  • “processing companies stressed that willingness to learn, take on board advise, and a professional attitude were more important than size in establishing fruitful farm-processor relationship” (CIS study)
supply chain revolution or evolution
Supply Chain Revolution or Evolution ?
  • Several factors suggest that the impact of the supermarket revolution on farmers, including small farmers, may be less dramatic in some contexts, and may have positive effects in transition countries
a supermarket is part of chain
A. Supermarket is part of chain
  • For vast majority of farm output there is no direct link with supermarkets: FFV is 15-20% of ag output. Most farm produce (milk, grains, sugar, cotton, etc.) is processed before it reaches retail sector. The impact on these farms will be indirect through the food processing sector.
  • The effects may be more similar to that of FDI in food processing. These effects have been positive in several cases for small farms
b farm structure is mixed
B. Farm structure is mixed

Share of large farm companies (% land use)

c next step in major changes
C. Next step in major changes
  • Agricultural restructuring in transition countries (Output, trade, employment, FDI, food industry restructuring, ….) has been dramatic over past 15 years
revolution or evolution
Revolution or evolution ?

Change in ag employment 1998-2001

revolution or evolution45
Revolution or evolution ?

EU – CEEC trade in ag and food products

1988-2001

d retailers and vertical coordination may play positive role for key weaknesses
D. Retailers and vertical coordination may play positive role for key weaknesses
  • Key weaknesses of ECA farms :
    • Shortage of finance for investments
    • Quality
    • Access to high value markets
  • Retail investments and coordination with supply chains may assist farms in these areas
7 implications for policy
7. Implications for policy
  • Create right conditions for business investment
  • Competition policy !
competition is very important
Competition is VERY Important
  • Induces horizontal spillovers and the spread of farm assistance packages
  • Constrains (potential) rent extraction in chain
  • E.g. Kazak cotton story: competition among processors for suppliers induces assistance programs, collection center investments, etc.
bad policies are worse than bad weather
Bad Policies are Worse than Bad Weather
  • VC may survive defaults due to unforeseen and one-time events (eg bad weather in Kazakhstan)
  • However, inappropriate government intervention may destroy VC
    • Eg Ukraine in 1990s
implications for investments and projects
Implications for investments and projects
  • Traditional Public goods : eg
    • rural electricity (Azerbaijan),
    • rural roads (Romania), …
  • New instruments: Focus on
    • Chain Finance,
    • Quality & Bringing small farmers ‘on board’  Example
finance the chain
Finance The Chain
  • Warehouse receipt programs
  • Leasing
  • Reverse Factoring
  • ….
how to benefit small farmers
How to benefit small farmers ?
  • Bring / Keep them in

=> LOWER TRANSACTION COSTS

  • Ensure fair distribution of rents

=> EMPOWER THEM

reduce transaction costs
Reduce Transaction Costs
  • Lower transport costs (eg improvement of rural infrastructure)
  • Reduce number of transactions by intermediary institution between farm and processor/input supplier
    • collection points
      • Milk (ex Poland, Romania, …)
      • F&V (supermarkets in Latin America, …
    • farm associations, but need instrument/incentive system to ensure homogenous (and high) quality
    • ….
empower the small farmers
Empower the (Small) Farmers
  • Stimulate ASSOCIATIONS of farms
    • Bargaining with companies
    • Lobbying the government
  • Stimulate COMPETITION in the chain (input suppliers, processors, traders, …)
  • Organize INDEPENDENT institutions for product quality assessment
quality control and rents in kazak cotton chain
Quality Control and Rents in Kazak Cotton Chain
  • Extra payments for clean cotton ? NO (99%)
  • Fines for ‘dirty’ cotton ? YES (100%)
  • Is your cotton mixed with that of other farmers ? YES (100%)
  • Can you inspect quality of processed cotton from your seed cotton ? NO (97%)
  • Who assesses the quality of your cotton ? GINNER’s LAB (100%)