Food Retail Growth and Farmers in Transition Countries Johan Swinnen University of Leuven

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Food Retail Growth and Farmers in Transition
Countries Johan SwinnenUniversity of
Leuven

• CEI Bratislava
• November 2005

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Food Retail Growth in Transition

• Part of a broader process of
• Globalization of investment and standards
• Transformation of the agri-food supply chains

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Globalization and transition dramatically change
supply chains

• TRANSITION disruption of supply chains
• GLOBAL FORCES rapidly change the environment of
  farmers and agri-food companies
• foreign investment in agri-food sector
• spread of global standards on food safety and
  quality

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FDI in East European Agri-food sector

• Sugar and brewery sectors are mostly foreign
  owned
• Major investments in confectionary, oilseeds,
  dairy, etc
• .
• Most recently, major investments in food retail
  sector

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Number of hypermarkets in Czech Rep.
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2004 Top FDI Destinations of Global Retail Chains

• Russia
• India
• China
• Slovenia
• Latvia
• Croatia
• Central Europe is already mature
• Food retail is top investment area

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Income and Growth of Supermarkets
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Reforms and Retail Investments
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Policies Matter Czech vs Slovak Share of
foreign retailers in top 50 retail in Czech and
Slovak
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Rise of Global and Private Safety and Quality
Standards

• Rich country quality and safety standards have
  rapidly increasing impact on transition and
  developing countries through trade and investment
• Trade agreements (WTO, etc) public standards
• Increasingly, private standards of investors play
  an important role, both for international
  (exports) and domestic markets (regional
  sourcing, import competition)

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Vertical Coordination in Supply Chains

• Rapidly growing in transition (and
  emerging/developing) countries
• Contracting and vertical coordination to overcome
  obstacles that suppliers and processors face in
  producing high quality products
• Processes have been an engine of growth in most
  countries.

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The Basic Problem

• Processors face lack of supplies, because
  suppliers
• Do not want to supply (no trust in payment)
• Are not able to supply (inputs, working capital,
  )
• Are not able to supply quality (quality inputs,
  technology, management, )
• Solution requires some form of contracting
• Contract with on-time payments
• Input assistance
• Technology and management assistance

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Supplier assistance by agribusiness companies
Examples

• Input supply programs
• Trade credit
• Investment assistance program
• Bank loan guarantee programs
• Extension services (technology and management)
• .....

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Impact on farmers ?

• Recent development. Hence
• Much speculation
• Approach in this presentation
• Drawing on experience in other regions
• Understanding of transition specifics
• Focus on empirical evidence (what exists)

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The Key Concern

• The supermarket revolution will push a large
  share of farmers, in particular small farmers,
  out of the market as they fail to make the
  grade to sell to supermarkets
• Two reasons
• 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

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Hard Evidence ?

• Little, but what exists suggest we should take
  this concern seriously.
• Eg. supermarkets preferred supplier programs
  tend to work with the (relatively) large
  producers and not smaller producers if they have
  alternatives.

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However

• 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 and even more so for rural development

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1. 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

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Supermarket may not be the main driver of the
changes

• FDI and increased standards in East European food
  sector is driven mostly by EU integration, not by
  supermarkets
• Also elsewhere eg. in Russia dairy, only outside
  major cities are supermarkets drivers of change
  elsewhere processing sector

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2. Farms structure is mixed

• Share of large farm companies ( land use)

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3. Revolution or Evolution ?

• Agricultural restructuring in transition
  countries (Output, trade, employment, FDI, food
  industry restructuring, .) has been dramatic
  over past 15 years
• Hence, additional pressure from supermarkets may
  be more evolution than revolution

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Revolution or evolution ?

• Change in ag employment 1998-2001

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Revolution or evolution ?

• EU CEEC trade in ag and food products
• 1988-2001

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3. Revolution or Evolution ?

• Agricultural restructuring in transition
  countries has been dramatic over past 15 years
• Hence, additional pressure from supermarkets may
  be more evolution than revolution, or
• Revolution is The Norm

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4. 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

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Supply chain assistance to farms

• Increasing evidence that investments by
  agribusiness, food processors and retailers
  induces extensive farm assistance packages when
  supply of quality produce is insufficient (which
  is virtually everywhere)
• Packages (can) include
• Pre-finance
• Extension services
• Investment assistance and loans

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Supply chain assistance to farms

• Impact can be very significant on growth and
  investments of farms, also small farms (see Dries
  and Swinnen 2003 for Poland)
• Significant impact on international
  competitiveness and integration of small farms in
  quality supply chains
• Sometimes supply chain assistance is only source
  of inputs for (small) farms eg Lithuania
• Competition is important it induces horizontal
  and vertical spillover effects

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Retailers may drive supply chain assistance by
food processing companies (Indirect effect)

• Eg. Romania 95 of dairy farms have 1-2 cows.
  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

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5. Other

• Demand (Quality) is The Engine. This is
  essential element in any approach to sustainable
  development.
• Creation of off-farm employment (packaging,
  quality control, ) is mixed

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Concluding comments

• No doubt, the supermarket revolution will pose
  some important challenges for farms, and in
  particular for small farms
• Possibly more likely to be evolution than
  revolution in transition countries
• Impact may be complex and important (potential)
  beneficial effects should not be ignored

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Concluding comments

• That said, the implications for policy-makers and
  international organizations are important, and
  the issues are complex
• How to create a win-win situation ?
• What role can governments play in this process ?
• Which actions can international organizations
  take ?

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