FAO Rome March 2015

1. Supply Chains, Trade and Food Security (Linking Rich Consumers to Poor Producers through Value Chains)Johan Swinnen LICOS Center for Institutions and Economic PerformanceKU Leuven & Centre for Food Security and the EnvironmentStanford 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” • Microeconomicstextbooks continue to point at “agriculturalmarkets” as standard examples of “competitive(spot) markets” (Sexton 2012). • Example: “Thousands of farmers producewheat, whichthousands of buyerspurchasetoproduceflourandotherproducts. As a result no single buyercansignificantly affect the price of wheat.”

4. Misconceptions of modern agriculturalmarkets “I don’tknow of any modern agricultural market thatmeetsall these conditions. Most don’t meet any of them” (Sexton AJAE 2012)

5. Misconception2: Modern valuechainsandpoor farmers Typical argument: “Qualitystandards, and company strategiesto secure timelyand consistent suppliesandto save on transaction costs lead to the marginalization of small, poor farmers – withnegative welfare andpovertyimplications.”

6. Misconception2: Modern valuechainsandpoor 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 2007- 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

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) • Trytodevelop a model whichintegrates different aspects of this “new architecture” Including: • Qualityrequirements • Specificinvestmentsandcontractingcosts • Market imperfections • Verticalcoordination (contracting)

14. Types of “contracting costs”

15. InstitutionalOrganization 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 loanguarantees • 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. InstitutionalOrganizationof Value Chain • Verticalcoordinationimplies: • Transfer of inputs, know-how, technology … topoor • (arguably more important thanmanygovernmenttechnology programs) • Efficiency premiaforpoorsuppliers • Major implications: • Increasedproductivity • Spillovers on othercropsandactivities • Increasedincomes • Improved food security

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

20. “Market power” in valuechains is endogenous (*) (*) In additiontoother “benefits” fromconcentration, such as scaleeconomiesandcountervailing 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. (Xianget al 2012, “Food Standards and Welfare: General Equilibrium Effects”, JAE)

23. Empirical Observations: Value Chain Surveys

24. Comparative Analysis: 2 Cases on Food Security

25. Comparative Analysis: 3 HV Cases on Poverty

26. Comparative Analysis: 3 Cases

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

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 lowerby 50% (30 vs 47 days). • Food consumption is significantlyhigher • Fertilizer use is higher by 70%, affecting both castor and food crop productivity

34. Comparative Analysis: 3 Cases

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: verytightstandards Extreme consolidation Foreignowned multinational Complete exclusion of smallholders FDI of land (“Land grabbing”) (Maertens, Colen and Swinnen 2011 ERAE)

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

38. Gender Effects

39. Labor market effects • Especially important for the poorestandforwomen “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) • Notethat in thisperspectiveindicators that look only at “participation of small farmers” canbe (double) misleading in terms of welfare andpovertyeffects

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 valueforlocal market, Low input B. High value, high input non-traditional exports • Spectaculargrowth; 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, andPoverty: Evidencefrom Senegal”, World Development Minten, Randriarisonand Swinnen, 2009, “Global Retailers andPoor Farmers: EvidencefromMadagascar”, 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? Biofuelsand 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 Qualityand 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. 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 Qualityand Supply Chains, Journal of Agricultural Economics