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W
1
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198~
1
World
Bank
Discussion
Papers
Exp orting
High-Value
Food
Commodities
Success
Stories
from
Developing
Countnres
Steven Jaffee
with
the assistance
of
Peter
Gordon
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Recent World Bank Discussion
Papers
No. 138 Coal Pricing
n China: Issues and Reform Strategy. Yves Albouy
No. 139
Portfolio Performanceof
Selected Social Security Institutes in Latin America.
Carmelo Mesa-Lago
No.
140 Social Security and Prospectsfor
Equity in Latin America.
Carmelo Mesa-Lago
No. 141
China's Foreign
Trade and Comparative
Advantage: Prospects,Problems,
and Policy Implications. AlexanderJ.
Yeats
No. 142 Restructuring
Socialist Industry:
Poland's Experience
n 1990.
Homi J. Kharas
No. 143
China: Industrial Policiesfor
an Economy in Transition. Inderjit Singh
No.
144 Reforming Prices:The Experience
of China, Hungary, and Poland. Anand Rajaram
No. 145
Developing Mongolia. Shahid Yusuf and Shahid
javed Burki
No. 146 Sino-Japanese
EconomicRelationships:
Trade, Direct Investment,
and Future Strategy. Shuichi Ono
No. 147 The Effects of Economic
Policies on African Agriculture:
From Past Harm to Future Hope. William K. Jaeger
No. 148
The Sectoral Foundations of
China's Development.
Shahidjaved
Burki and Shahid Yusuf,
editors
No. 149
The Consulting
Profession n Developing Countries: A Strategyfor Development.
Syed S. Kirmani
and Warren C. Baum
No. 150 SuccessfulRural
Finance Institutions.
Jacob Yaron
No. 151
TransportDevelopment in Southem China.
Clell G. Harral, editor, and Peter Cook and Edward Holland,
principal contributors
No. 152
The Urban Environment and Population Relocation. Michael
M. Cernea
No. 153
Funding Mechanismsfor Higher Education:
Financingfor Stability, Efficiency, and Responsiveness. Douglas
Albrecht
and Adrian Ziderman
No. 154
Eamings, Occupational Choice,
and Mobility in Segmented Labor
Markets of India.
Shahidur R. Khandker
No. 155 Managing External
Debt in Developing Countries:
Proceedings f aJoint Seminar, jeddah, May 1990. Thomas M.
Klein, editor
No. 156 Developing
Agriculiural Extensionfor Women Farmers.
Katrine
A. Saito and Daphne Spurling
No. 157
Awakening the Market: Viet Nam's EconomicTransition.
D. M. Leipziger
No. 158
Wage Policyduring the Transition o a Market Economy: Poland 1990-91. Fabrizio Coricelli and Ana Revenga, editors
No. 159 Intemational
Trade and the Environment.
Patrick Low,
editor
No. 160 Intemational Migration and Intemational
Trade. Sharon Stanton Russell and Michael S. Teitelbaum
No. 161
Civil Service Reform and the World Bank.
Barbara Nunberg and John Nellis
No.
162
Rural Enterprise Development in China, 1986-90. Anthony J. Ody
No. 163
The Balancebetween Public and Private Sector Activities in the Delivery of Livestock Services.Dina L. Umali,
Gershon
Feder, and Comelis de Haan
No. 164
How Do National PoliciesAffect Long-run Crowth?: A Research Agenda. William Easterly, Robert King, Ross
Levine, and Sergio Rebelo
No. 165
Fisheries Development, FisheriesManagement, and Externalities. Richard S. Johnston
No. 166
The Building Blocks of Participation: Testing Bottom-up Planning.
Michael M. Cemea
No. 167 Seed System Development: The Appropriate Roles of the Private and Public Sectors.Steven
Jaffee and Jitendra Srivastava
(Continued on the inside back cover.)
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1
98
11
World BarikDiscussion
Papers
Erxporting
High-Value
Food
Commodities
Success Stonresfrom
Developing
Countnres
Steven
Jaffee
with
the assistance
of
Peter
Gordon
'he
World
Bank
Washington,
D.C.
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Copyright 1992
The Intemational
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for Reconstruction
and Development/THE WORLD BANK
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H Street, N.W.
Washington, D.C. 20433, U.S.A.
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First printingJanuary 1992
Fourth printinig November
1995
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Papers
present results of country analysis
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is circulated
to encourage discussion
and commenit within the development community. To present these results with the least possible delay, the
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Jacob Yaron is senior rural finance advisor in the
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Library of Congress
Cataloging-in-Publication
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Yaron,
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Successful rural finance institutions J Jacob Yaron.
p. cm. - (World Bank
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ISBN 0-8213-2018-1
1. Development banks -Asia. 2. Rural credit -Asia.
3. Agricultural credit -Asia. 4. Development
banks -Asia -Case
studies. 5. Rural
credit -Asia -Case studies.
6. Agricultural
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-Asia -Case studies.
I. Title. II. Series.
HG1976.A78Y37
1992
332.7'1 '095 -dc20 91-46248
CIP
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Foreword
Changing patterns of food consumption
and expenditures,
ogether with advances
n intrnatonal
logisticsand the reductionof official barriers, have contributed o a rapid expansion
n world trade in high-
value food products (HVF), such as fresh and processed fruits and vegetables,
meats, and fish, dairy
products, and vegetableoils. This growing trade, set against the stagnation or decline in world trade
and
prices for many beverage
and industrialcrops, is leadingpolicy-makersand donor agencies o more closdy
examine the scope for developingand formerly centrally-planned
ountries to expand
or diversify their
exports in these products, as well as the needed investmentsand policies to bring about the expanded
productionand trade.
This study was initiated in order to gain a better understanding of the particular technical,
organizational, and commercial
challenges faced in HVF export developmentand to drzw lessons from
successfulcountry experiences n this area. The studyprovides
a synthesisof fifteennotable success stris'
of HVF exports
among developingcountries,analyzingcommonand idiosyncraticpatternsof development,
bases for competitiveness,market conditions,and institutional eatures.
The study
is part of broader analyticalefforts conductedby AGR, aiming o define the proper
roles
for the public and private sectors in agricultural development, o understand the functioning of private
agricultural markets,
and to identify best practices' regarding agriculturalpolicies and technologies. t is
also part of a broader effort by EMTAG to develop a strategy to support food market developmentand
export diversificationamong the countriesof Eastern Europe and the Near East.
Michel Petit Anil Sood
Director Director
Agricultureand Natural
ResourcesDepartment
ECA/MNA RegionsTechnical Department
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Acknowledgments
This paper benefitted from helpful comments made by S. Barghouti, W. Zijp, L. Tuck, M.
McMahon, D. Steeds, J. Wallis, M. Debatisse, and E. Chobanianof the World Bank and J. Holtzmnanf
Abt Associates. R. Henry and G. Feder provided helpful guidance and comments rom the genesis of the
study proposal through to its final conclusion.
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Appendix:The Developmentand Performanceof Case Study CommoditySystems 71
Mexico Fresh Tomatoes 72
Kenya 'Off-season' and SpecialtyFresh Vegetables 75
Israel Fresh Citrus Fruit 77
Brazil Frozen ConcentratedOrangeJuice 80
Chile Temperate Fruits and ProcessedTomatoProducts 83
ArgentinaBeef 87
Thailand Poultry 88
Thailand Tuna 90
Chile Fisheries 91
Cultured Shrimp Productionand Trade in China and Thailand 93
SoybeanDevelopment n Brazil and Argentina 97
Demand-drivenAgricultural Diversification n Taiwan (China) 103
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Executive Summary
0.1 Rising incomes, growing health consciousness,and urbanizationare among the major factors
contributing o changingdietary patterns,both in industrialized nd developing ountries.While there are
differences
in the pace and specific
features
of these dietary
changes, there has been
a common shift
toward increased consumptionof fresh and processed fruits and vegetables, of protein-rich meats, fish,
dairy products, and vegetableoils, and of prepared convenience' oods. Comparedwith cerealsand other
staple food products, these foods have relatively
high unit values and face relatively high income
elasticities of demand.
0.2 Changing dietary patterns,
together with technical advances
in food-related logistics and
multilateral eductions n trade barriers, have
contributed o a rapid expansion n world trade in the above
noted high-valuefoods (HVF) over the past quarter century. During the 1980s, a period in which the
aggregate
value of world trade
in cereals, sugar, and tropical
beveragecrops actually
declined, the
above
categories of HVF experienced verage annual growth rates in world trade ranging from 4% (e.g. fresh
vegetables;fresh meat) to more than l1 % (e.g. dairy products; shell fish). World trade in HVF is now
considerable. In 1988/89, it totalled $144 billion, representing5%
of total world commodity rade
and
a value equivalent o world trade in crudepetroleum.
0.3 Developing ountrieshave activelyparticipated n this internationalHVF trade, both as importers
and exporters. In 1990, exportsof HVF by middle- and low-income ountries otalled $52.5 billion. For
comparison, the aggregate exports of such countries for coffee, cocoa, tea, sugar, cotton, and tobacco
was only $26.3 billion-- roughlyone-half.Over the past decade,developingcountrieshave outperformed
industrialized countries in export growth
for several categories of HVF (e.g. fresh/processed
fish,
fresh/processed fruit, oilseeds, and feedstuffs). Despite these patterns, most analyses of developing
country
agro-industrial xperienceand agricultural rade problems and prospectscontinue o focus on the
traditionalbeverage and industrialcrops.
0.4 In 1990, there were twenty-fourmiddle-andlow-income ountrieswhoseHFV exportsexceeded
$500 million. The majority of such countriesare either Latin American(10) or Asian (8), with most of
these countriesalso being among the leadingdeveloping ountry exporters of manufacturedgoods. Only
a few African and Middle Eastern countries have developedsignificant levels of HFV exports. Two
Eastern Europeancountries- Hungaryand Poland--are among he leaders as a result of their significant
exports of meat products and fresh and processed
fruits and vegetables.
0.5 Althoughmany
developingcountrieshave developedsome exports of HVF, there is a relatively
high level of concentrationof this trade amonga few countries.For example,only four countries--Brazil,
Argentina,
China, and Thailand--account
for 40% of the total HVF
exports for all middle- and low-
income countries. Only
ten countries account for two-thirdsof the total trade
and twenty countries for
90%. Major cases of success in developingcountry HVF exportingare thus less widespread han might
be indicated
by aggregateddata for export
levels and growth.
0.6 This paper provides a synthesis of
notable "success stories"
of demand-driven production,
processing, and marketing of HVF among developing
countries.It examines n comparative
perspective
the development,
organization,and performanceof entire commodity
ystemsrather than the experience
of
individualprojects or companies.
It focuses on cross-cutting ssues and commonpatterns
rather than
elaborating on the microeconomic
and historical details
of individual cases. By identifying
common
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0.11 The paper
then examinesa range of technical, nstitutional, nd other measureswhich can counter
the incentive,risk, transactioncost, and logisticalproblems aised by the intrinsic echnicaland economic
properties of food commodities,production,etc.. Manyof these countermeasuresare essentiallymarket
or quasi-market responses on the part of private firms and individuals; others entail government
interventionswhich stimulate,
re-direct, constrain,or supplement
private activity.
0.12 Drawing from the industrial development
literature, the paper also
examines the issue of
commodity system competitiveness nd its contributing actors. From Porter (1990), it is noted that a
commoditysystemcan achievea competitive dvantageeither by 1) having ower costs of productionand
delivery, or 2) differentiating its product(s) through its quality or through accompanied echnical or
marketing services. A lower cost structure allows a commoditysystem to underprice its
competitors or
obtain higher returns when international
prices are at or near the
competitors' costs. Product/service
differentiation acilitates
the attainment of
premium prices and/or the ability to fill profitable
niches in
the market.
0.13 Five sets of factors are discussedas being determinantsof commoditysystem competitiveness.
These are: 1) the size and patterns of food demand, 2) macroeconomicand sector policies, 3) natural
resourcesand human capital, 4) physical, echnical,and social infrastructure,and 5) micro-marketing nd
logistical activities and the coordinationof production with downstream requirements. The first and
secondof these factor sets determineor strongly influence he incentives or specialized ood production
and marketing activities. Factor sets (3) and (4) determine he capacity to respond o these incentives,
while factor set (5) determines he efficiencyof this responseand the quality of the resultantproduct(s).
Synthesisof HVF CommoditySuccessStories
0.14 Among the nine focal countries, only three--China, Thailand, and Brazil-- have achieved levels
of agriculturalperformanceabove the norm for middle- and low-income ountriesover the 1965- 1989
period. Over much of this period, each of the other focal countries has experienced ates of growth in
agriculturalGDP and total foodproductionwhich rail aggregategrowthrates for middle-and low-income
countries. However, in certain commoditysystems, including those examined in this paper, the focal
countries have experiencedhigh rates of productionand trade growth, either
spanningseveral decades
or covering the past decade. Double-digit rates of growth in production and/or trade have been
experienced n one, two, or more decadesfor each of our focal
cases. The commnoditiesn questionhave
come to account for rising shares
of national food exports.
0.15 Most of the focal commoditysystems
experienced heir initialexport booms during the 1970sor
1980s n response o favorable nternationalmarketopportunities.Somecases featuredphenomenal xport
growth, as in the growth of Brazil's soybean/soybean
roduct exports from only $71 million in 1970 o
$2.2 billion in 1980, and the growth in Thailand's canned una exports from zero
in 1980 o over $500
million by the end of the decade. Large increases n world market shares were recorded n severalof the
focal cases. In such cases as Mexican tomatoes, Chilean temperate fruit, Thai
tuna, Chinese shrimp,
Brazil FCOJ, and Brazilianand Argentinesoybeans/soybean roducts, the focal commodity ystemsare
(among) he leaders of world trade.
0.16 In the majority of cases, the focal commodity ystemshave (or had) a productioncost advantage
over major
rivals due to a combinationof relatively low labor costs, low land costs, government-built
or -subsidized nfrastructure,and/or relatively
high yields. These productioncost advantageshave been
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at least partly off-set by higher processing,packaging,
and/or transpo: costs, especially n comparison
with industrializedcountry competitors.
0.17 In many of the focal commodity ystems, either initiallyor more recently, firms have sought to
compete
in internationalmarkets by differentiating heir products and/or marketing services.
This has
included efforts to provide especially high-quality products, to supply products matching special
manufacturerrequirements or consumer astes, and/or to supply a broad range of products. In several
cases (includingThai poultry and shrimp, Chileanfish products, and several areas of food processing n
Taiwan (China)), firms (or an entire industry) have made a successful ransition from being low-cost,
low-price suppliers to suppliersof high-quality,value-added roducts obtainingpremium prices. In the
case of Taiwan (China),
rising labor and other costs rendered such product up-grading essential for
industry survival.
0.18 Each of
the focal commodity systems faced highly favorable internationalmarket conditions
during their initial export boom years and for many years thereafter. Not only did incomegrowth and
changing life-styles contribute to generally increasing demand, but several of our focal commodities
experiencedsuddenmarket undersupplyperiods ("marketvacuums") lastingfor several years as a result
of trade embargoes or climatic, political, or other problems experienced by traditional suppliers.
Furthermore,most of the commodities overed n this studyare foods about which industrialized ountry
consumersare well aware and for which market distributionchannelspre-dated the arrival of the focal
country firms. Hence, market development osts were far lower than they would be if an exotic product
were being introduced.
0.19 Most of the focal commodity systems have also featured favorable rends in domestic market
demand. In more than half of the cases, export development ollowed upon many years of domestic
marketing experience,during which infrastructureand institutionswere built up. In these and in several
other cases, export booms were accompaniedby a rapid growth in the domesticmarket which provided
an outlet for blemishedor local grade produce, an outlet for animal/fishparts or productswhich can not
be profitably exported, and an overall fall-back
position in case of unforeseen barriers to export. In
several cases,
levels of domestic
per capita consumption
re (among) the highest n the world.
0.20 The paper provides a brief review of the macroeconomic ontext in
which commoditysystems
emergedand later developed.For only two of the focal countries--TaiwanChina)and Thailand--has the
macroeconomic
nvironmentbeen generally avorablefor investment
nd export developmentover most
of the past quarter century. While China featured strong governmentcontrols on investment
and trade
until the 1980s, each of the other focal countries
has experienced extended periods of currency
overvaluation,high inflation, and low growth
and investment.Still, for many of the focal cases, export
booms took place just after or parallel with the adoption
of macroeconomicand trade reforms which
improved ncentives.
The only exception o this was with Argentine
soybeans/soybean roducts,
whose
initial export boom (in the early-to-mid-1970s)
ccompanied he implementation f more stringent trade
controls and higher export taxes by a new administration.
0.21 In thirteen of the fifteen focal cases, the private sector has played a dominantor exclusive role
in commercial
production,processing,and marketing.This
privatesector has generallyconsistedof both
localand foreign/jointventure
companieswith the former
continuing o account
for the majority of trade
in all but one
of the cases. A dominant
or major commercial ole for governmentagencies
has occurred
only in the cases of Chineseshrimp and Israeli
citrus. In the former, state
enterpriseswere instrumental
in the initial development
of aquacultureand in the continueddevelopment
of trade. In the
latter, an
export monopoly marketing
board replaced a formerly
competitiveprivate
and cooperative trade and
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retained its monopoly until
1991. In
several other
cases, government agencies
have
undertaken
some
trade,
either
in conjunction
with
domestic price
support
and
stockholdingprograms
or as
part of
government
to government
international
deals. The
magnitude
of such
trade has generally
been quite
small.
0.22 While state
enterprises
have
played prominent
commercial
roles in few of the
focal cases,
in
virtually
all cases
governmentshave
played
important
acilitating oles.
This has
included he provision
of socialoverheadand marketing nfrastructuree.g. ports, railways,roads,cold stores, auction/terminal
markets),
programs in agricultural
and
food technology
esearch
and training,
factory
and/or
product
inspection
and certification,
and, in about half
of the cases,
some form
of market informationscheme.
In many cases, governments
have
negotiated
favorable erms for international
market
access and offered
some
form of trade
promotion
ssistance.
Eachof these
common
areas
of govermment
nvolvement
ertain
to facilities
or
services which
either have
public
good properties
or give
rise
to externalities.
0.23
In
a majorityof cases,
government
nterventions ave
extended
beyond
he above roles
to include
moreactive
microeconomic
nterventions.
This has
frequently nvolved
one
or more
types of subsidy
or
investment
redit,
although
n the majority
of cases
such bonuses
were
available o
producers,
processors,
and
traders of other commoditiesas
well. Price supports and/or price
or quantity controls have been
periodically
applied
in mnany f
the focal
cases. Data available
for
several
of the focal Latin
American
case studiesindicate hat theaggregateeffectof direct and indirect governmentnterventions as been one
of net taxation, suggesting
hat levels of
productionand
trade would have been higher
in the absence
of
interventions.
0.24 The paper examines
organizational
attems in the
focalcommodity ystems, ncluding
ompetitive
structuresand institutional inksbetween
producers,processors/exporters,
nd foreignmarketdistributors.
In the
vast majorityof cases, while
domestic marketing
systems have remained
decentralized,
export-
orientedprocessing and
trade has tended
toward high rates of concentration
with
between hree
and ten
firms accounting
for the bulk of
capacity and trade. In some cases, such
concentration
patterns have
derived primarily from economic
factors
(e.g. economies
of scale, differential
capabilities
and
performance,etc.); in other
cases, government
nterventions ave determined
or directly
contributed to
such
patterns. Concentrated(although
not monopolistic)
rade structures have apparently facilitated
imnproved
uality control,
marketing logistics,
and,
in some cases, an ability
to influence
world
commnodity
rices.
0.25
Another common
organizationalpattem
has been
the prominence
of contract farming
and/or
vertical
integration
n the
linkagesbetweenfarm-level
production
and downstream
processing
and
trade.
Open
market buying and selling
of raw
materials has
become only a supplementary,
market-clearing
mechanism
n many of
the focal commoditysystems.
In many
cases, the leading
firms havedeveloped
their own programs
of applied
research,
extension, input delivery,
and credit as
a supplement or
replacement
or markets
and
govemmentprograms
for such
services.
0.26 Contract-based
or intra-firm
trade have
also been
significant eatures
of the export
operations n
the majority of the focal commoditysystems. Such long-termmarketingties have helped to maintain
market
access, lower
logisticaland transaction
costs, and
facilitate lows of
information
nd technologies
which have
enabledsuppliers
to better
meet changing
consumer
and buyer
tastes and requirements.
0.27
Foreign capital,
technology,
raining,
and/or management
kills
have
played an important
role
in the
development
of most of
the focal
commodity
systems.
In virtually
all of
the focal Latin
American
cases,
credit from
foreign
distributors
or direct
foreign
investments
in
production
and/or
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processing/marketingfacilities played a major role in initial subsector growth. Similar agroclimatic
conditions between the focal countries and parts of the United States facilitated he transfer of crop
varieties and of cultivation echniques.
Lessons and Policy lmplications
0.28 One of the lessons of the "successstories" experiences s that agriculturalexportdiversification
by developing countries need not focus on exotic tropical
commoditiesand need not depend upon low
labor costs for international ompetitiveness.
The collectiveexperiencesuggests hat developing
countries
can compete against industrialized
country suppliers in the markets for a wide range of high-valueand
high-volume
commodities on the bases of both cost and quality. Although such quality-based
competitivenessdid not occur overnight, with the liberal adoption/adaption f
foreign technologiesand
advice and with the build-up of local skills, infrastructure, researchcapabilities, and experience,many
of the focal commodity systems succeeded to match or exceed competitivequality standards within a
decade after initial internationalmarket entry. A niche market strategy may well be necessary or very
small countries which lack the capacity he potential o serve mass-marketdistributionsystems. Larger
middle- and low-incomecountriesshould aspire to compete n larger, faster growing markets.
0.29 A second important esson is that successfulexport diversificationoften depends upon prior or
parallel development of domestic markets. None of the focal commoditysystems has developed as an
export-orientedenclave and relatively few have relied upon export markets
for the bulk or even the
majority of their sales. This complementarity etweenexport and domesticmarket development s much
more important or high-valuefood commodities han it is for many traditionaldeveloping ountry export
crops (e.g. tropical beverages, tobacco)given the limiteddomestic market for the latter. This suggests
that government and donor programs and other interventions geared towards agricultural export
diversification houldnot only seek to build upon existingdomesticmarketingexperience,but shouldalso
incorporate investmentand other components o support further domesticmarket development.
0.30 A third lesson is that governments and donors should facilitate foreign and joint
venture
investments and international transfers of production and
processing technologies. This implies a
streamliningof procedures for foreign investment, nd a reduction n tariff and non-tariffbarriers for the
importationof planting materials,
irrigation and processingequipment, and other technology-embodied
inputs into agribusinessoperations.
0.31 A
fourth lesson is that while favorable macroeconomic onditions and policies have provided
stimuli for new investments
nd expanded rade for most of the focal commodity
ystemsat certain points
in time, much of the initial supply response o favorable nternationalmarket
conditionsand most of the
sustainedproductionand trade expansion xperienced n the focal cases can be
attributed o a combination
of a) microeconomic developments
(e.g. joint ventures, vertical integration, investment
incentive
programs, etc.), and b) investments n humancapitaland support
structures e.g. infrastructure, esearch).
This implies hat efforts geared toward promoting
agriculturalexport diversificationwill need to extend
beyond policy reform programs to include human capital and brick and mortar investmentsas well as
microeconomic nitiatives.
0.32
A final lesson is that both the public and private sectors have important roles to play in the
developmentof high-value ood exports.
Among he prerequisitesfor profitable and sustainable rade
are
the availabilityof transport and telecommunicationsacilities
and the maintenance f law and order. These
goods and services are normallyprovided by the public
sector. In the focal commodity ystems, the role
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of the public sector has extended beyond these basic public goods and services. Probably the most
important means of government support has come through the developmentof public 'knowledge
systems', comprising research,
training, extension, quality control, and market information services.
While such public services were commonlysupplemented or replaced) by private initiativesonce the
commodity systems reached relatively advanced levels of development, these public services were
generally crucial in the initialdevelopmentor adoptionof productionand processing echnologies nd in
the subsequent improvements in productivity and quality which enabled the participating firms to
successfullycompete in internationalmarkets. In many of the focal cases, governmentagencieshave also
conducted export promotion activities, although these were generally less important than efforts to
negotiatefavorable or at least equitableaccess to important nternationalmarkets.
0.33 The collective experience of the focal commodity systems leads to the conclusion that the
commercialproduction,processing,and marketingof high-value oods shouldbe left to the private sector.
While in several of the focal cases public enterprises have directly participated in trade, most such
enterprises have adopted a productionpush- rather than market-orientation,have been averse to risk-
taking, and have been operationally inflexible. Though proving adept at selling commodities to
undersuppliedmarkets, such state enterpriseswere not effective in marketingdifferentiatedproducts in
competitivemarkets.In contrast, the private sector (including rading cooperatives) as demonstrated ar
greater ability to anticipate, respond o, or cultivatechanges in market demand and service requirements
and has been far more innovative in developingproducts and inter-organizational inkages o facilitate
expanded trade. These differential properties of public and private trading enterprises are particularly
important n the developmentof high-valuefood exports given the importanceof service, quality, and
product form differentiation n major internationalmarkets for these goods.
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I. Introduction
1.1 Increased disposable incomes, urbanization,
and growing health
consciousnessare among the
major factors contributing
o changingdietarypatterns,
both in industrializedand developingcountries.
While the pace and specific
componentsof such dietarychangeshave variedbetween
countriesand among
different
incomeand residentialgroups within ndividual ountries,
here has been a general shift
toward
increasedconsumptionof fresh fruit
and vegetables, of protein-rich
foods such as meats, fish,
dairy
products, and vegetable
oils, and of prepared
'convenience'foods with high value-added.
1.2 Compared
with traditionalstaple foods
(such as foodgrains, egumes,
roots, and tubers), these
horticultural, livestock, fisheries,
oilseed, and preparedfoods have considerablyhigher
unit values and
face muchhigher income
elasticitiesof
demand. While representative
world prices for sorghum,
maize,
and wheat in recent years have been
in the range of $75 to $175
per metric ton, many fruits
and
vegetables, juices, meat
and fish products, and animal
feed products quote internationalprices of $500
or
more per metric ton. Among industrializedmarket economies,
the estimated income
elasticity of
demand
for cereals is -0.22, comparedwith between +0.25
and +0.38 for meat, eggs,
and fruit and
vegetables. For
developingcountries, the income
elasticity of demand for
cereals has been estimatedat
+0.16, comparedwith
between +0.61 and + 1.00 for the noted high-value
commodities.
1.3 Compared with many traditional
developingcountry agricultural
crops, the noted high-value
foods (HVF) have exhibited far more
favorable trends in international
rade over the past decade. For
example, while developingcountry trade
in coffee, cocoa, cotton, and sugar actually declined in value
during the 1980s, de loping countries
as a group experienced
annual export growth rates
of 4 - 11%
over this period for such product
categories as fresh and processed
fruits and vegetables,
fresh and
processed fish
products, feedstuffs, and oilseeds.
For several categories of HVF, developingcountry
trade performancematched
or exceeded hat of industrialized ountries.
1.4 World
and developingcountry
trade in high-value ood products--defined
ere to include meats,
dairy products,
fish products, edible
horticulturalproducts, spices,
oilseeds, animal/vegetable ils, and
animal feedstuffs--
is now considerable. In 1988/89, world exports in
such products totalled
approximately$144billion. For comparison, his was the same value for world rade in crude petroleum
that year and representedabout 5% of total world commodity
rade. World trade in edible horticultural
products alone ($40.3 billion)
exceeded hat for cereals ($38.6 billion).
1.5
According to FAO trade statistics, the 1990 exports of
high-valuefoods by middle- and low-
income countries were valuedat $52.5 billion, representingmore than one-third of total
world exports
' SeeSarna and Young 1985) or data
for cereals,meatandeggs,
and Islam 1990) or datafor
fruit and
vegetables.
2
UNCTAD1991)Handbook f Internationalradeand Developmenttatistics, able4.3.
3 Dataobtained romUNCTAD1991)Handbook f International radeand Development
tatistics, able
4.3.
4Ibid. and FAOTradeYearbook.
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of these products.
5
For comparison, the combined
value of developing country
exports of tropical
beverage crops, sugar, cotton, and tobacco in that year was only $26.3 billion--
roughly one-half. Despite
the quantitative significance of developing country high-value food exports, analyses of developing
country agricultural trade and agro-industrial
experience and prospects
continue to focus primarily
on the
traditional export
and industrial crops.
6
1.6 Many middle- and low-income countries have developed
export trades in one or more categories
of high-value foods, either on a specialized basis or as an extension of domestic marketing activities. In
fact, in 1990, twenty-four such countries had exports of HVF which exceeded $500 million.
7
These
countries, the majority of which are either Latin American or Asian, are listed in Table 1.
Table 1: LeadingMiddle-and Low-IncomeExportersof High Value Foods
(1990)0
Country Value Country Value Country Value
($ Millions)
$ Millions $ Millions
1. Brazil 5,852 9. Indonesia 1,864 17. Ecuador 945
2. Argentina 5,017 10. India 1,723 18. S. Africa 855
3. China 4,825 11. Korea 1,718 19. Peru 571
4. Thailand
4,301 12. Mexico 1,667 20. Costa Rica 531
5. Malaysia 2,463 13. Hungary 1,600 21. Senegal 525
6. Taiwan (China)
2
,
451
b 14. Poland 1,338 22. Colombia 505
7. Turkey 1,997 15. Philippines 1,294 23. Honduras 504
8. Chile 1,919 16. Morocco 1,075 24. Uruguay 500
a Aggregate of exports of 1) meats/products, ) dairy products, 3) fish/lproducts, ) fresh and processed
fruits/vegetables/nuts, ) feedstuffs,6) oilseeds, 7) vegetable/animal ils, and 8) spices.
b Data for 1989
Sources: FAO Trade Yearbook (1990), FAO FisheriesCommoditiesStatistics 1990), UNCTADHandbook
of International
Trade and DevelopmentStatistics 1990);
Mao (1991)
I The 33 largest exporters each had HVF
exports exceeding$200 million. Their total
HVF exports came to
$51.12 billion. As only a few other middle-and low-income ountries ecorded HFV exports exceeding
$100
million, we estimate he sum total of such exports to be less than
$1.5 billion.
6 See, for example,World Bank (1991)
Price Prospectsfor Maior Primary Commodities.1990-2005.
7 This does
not includeHong Kong and Singapore.
While HVF exports exceed $1 billionfor both countries,
these countries are net importers
of such products. Their exports are largely
re-exportsof products from China,
Thailand,
Malaysia, and other countries.
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1.7 While
many middle- and low-income countries have indeed developed HVF export trades, Table
1 indicates that a relatively small number of countries account for the bulk of this trade. In fact, only four
countries--Brazil,
Argentina, China, and Thailand--account for 40% of developing
country exports for
HVF. The
leading ten courntriesaccount for two-thirds and the top twenty c-^-ntries account for nearly
90% of the total. This implies that the remaining
100 plus middle- and low-income countries have played
a very minor role in world HVF
trade, except perhaps as importers
or as suppliers of special
products
to relatively
small niche markets.
1.8 This study provides a synthesis of notable "success" stories of demand-driven production,
processing, and marketing
of high-value foods and feeds among developing countries.
It focuses on major
cases of successful export development,
which have either spanned
many decades or have emerged only
over the past decade
in response to new market opportunities. In the majority
of these cases, there have
also been significant prior, parallel, or subsequent development
of domestic demand
and commodity
distribution.
1.9 The review examines the development,
organization, and performance
of entire 'commodity
systems',
rather
than the experience
of individual companies.
Primary attention
is given to common
patterns
and cross-cutting issues,
rather than to the historical
and microeconomic intracacies of particular
cases.
The study seeks to identify
the common technical, institutional,
policy, and other factors which
have contributed to commodity system development and international competitiveness.
1.10 The desk research
upon which this study is based
was undertaken as part of a
joint EMTAG/AGR
review of
"Non-Farm Private Activities
in the Food Marketing System", designed to draw lessons
from
successful food processing and marketing experiences
in OECD and relatively
advanced developing
countries for possible application within the countries
of Eastern Europe and
the Mediterranean Basin.
9
This
orientation strongly influenced
the selection of case studies. First, it led to a focus on
temperate or
Mediterranean-type commodities which are
currently or which prospectively
could be produced on
a
competitive basis within the focal regions. Hence,
the sample of case studies
was drawn from commodity
systems involving tomato
products, temperate and citrus
fruits, tree nuts, value-added meat and fish
products,
and temperate vegetable oil/feed crops. No tropical food
or feed products (e.g. pineapples,
processed cassava) were
included. Second, it was
determined that the vast majority
of case studies should
be drawn from middle-income countries whose levels of human capital and infrastructure approximate
those found
in Eastern Europe and the Mediterranean Basin.
1.11 'Successful'
commodity systems from twelve countries were
selected for analysis. However,
due
to the availability of
insufficient information for three
cases, only nine countries
were represented in the
final analysis.' These
countries represent different
geographical regions as well
as low-income (Kenya,
China),
middle-income (Argentina,
Brazil, Chile, Mexico, and Thailand), and high-incoia.e
(Israel,
Taiwan(China))
countries. This sample of countries accounts for about 50 % of the total HVF exports
of
8 Readers are referred to two recentlypublished studies (Pomereda
nd Zorrilla (1990); and Barghouti
et al.
(1992))which deal with issues related to agriculturalmodernization nd diversification rom a regional
perspective.
9 The final reports from this EMTAG/AGRtudy are expected n early 1993.
' Inadequate nformation or an analysis of commodity ystem development,organization
nd performance
was available for the tree nut industry in Turkey, for potatoes n
Cyprus, and for canned fruit in South Africa.
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developingand centrallyplannedcountries, with seven of the nine countrieshaving HVF exports which
exceed $1.5
billion.
1.12 For several countries only one commodity system was examined; for others, two or three
different commoditysystemswere analyzed.A total of fifteen cases were examined,coveringa range of
horticultural, meat, fisheries, and oilseed products. Some of the focal commodity systems date back
several decades or even to the 19th Century; others have emerged to a position of international
competitivenessonly during the past decade. The specificcases covered in the analysis are:
1) Mexico Fresh Tomatoes--theongest standing and most successfulcase of developingcountry off-
season' fresh vegetable
supply o the
United States.
2) Kenya Fresh Vegetables-Sub-Saharanfrica's most successful rade in 'off-season' and specialty
fresh vegetables o niche markets in Western Europe.
3) Israel Fresh Citrus Fruit--a ong-termmajor player in the Mediterranean-Western urope citrus
trade. While the sub-sector'scompetitiveposition n this trade has recently declined, a domestic
processing ndustryhas developedwhich has absorbed he bulk of productionand has undertaken
competitive xports of various value-addedproducts.
4) Brazil Frozen ConcentratedOrange Juice--an ndustry which was transformed from a cottage
industry o the dominantworld exporter n a large internationalmarket n
the space of only fifteen
years.
5)
Chile TemperateFruits--thearge-scaleexport of counter seasonal supplies of grapes, apples, and
other fruits to previously developedNorthernHemisphericmarkets.
6) Chile Tomato Paste--a recent rapid expansion
in production and trade in response to a market
'vacuum' generated by an trade dispute between he U.S. and the EEC.
7) Argentina Beef-- a long-standingcommodity system which has supported the highest per capita
consumption n the world and has remained internationallycompetitive for quality products
despite macroeconomic instability and direct taxation at home and protected markets and
subsidizedproductionabroad.
8) Thailand Poultry--a ottage industry ransformed
by technological nd institutional hanges to bring
about a rapid expansion n local consumption nd a rising share of the Japanese market.
9) Thailand Tina- a canning
industry whose exports rose from zero in 1980 to nearly 50% of the
rapidly expandingworld market by the end of the decade.
10)
Chile Fish and Fish Products-
rapid growth and new product development or one of the major
world
exporters of fish products.
11)
China Shrimp--the
ecent rapid developmentof the world's lowest cost and largest shrimp export
industry.
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12)Thailand Shrimp--the xpansionand product diversificationof a leadingshrimp exporter which has
recently shifted to aquacultureand whichhas taken advantageof an established nfrastructure or
food processing.
13)Brazil Soybean--a1960s and 1970s boom in production,processing,and trade driven by favorable
internationalmarkets and technological mprovements.
14)ArgentinaSoybean--theapid development f an internationally ompetitive ndustrywithina climate
of macroeconomic nstability.
15) Taiwan (China) Agricultural Diversification and Food Processing-- the demand-driven
restructuring of agriculturalproduction, food processing,and agricultural rade away from rice
and agricultural raw materials o
value-added ork, fish, and fruit and vegetable roducts.
Structure of the Paper
1.13 The balanceof this paper is organizedas follows.SectionTwo providesa conceptual ramework
for examining the development,organization, and performance of food commodity systems. In this
section, we define commodity ystemcompetitiveness nd identify its major contributing actors.We also
examine a variety of generic barriers to entry, efficiency, and coordination n food commoditysystems
and a countervailing ange of technologies, nstitutions,and other mechanisms o overcome uchbarriers.
1.14 SectionThree provides a synthesisof the focal 'success stories' of HVF export development. t
examines selected indicators of commoditysystem performance, reviews the internationalmarket and
domesticmacroeconomic/human capital/infrastructure nvironment n which these commoditysystems
developed, and reviews common and divergentorganizationalpatterns. Among he cross-cutting ssues
addressedare the respective oles of the private and public sectors, the prevailingcompetitive tructures,
the roles of foreign capital and technology, and the prevailing institutional arrangements linking
producers, processors/exporters,and foreign market distributors.
1.15 SectionFour provides a summary of this analysisand suggests essons for developingcountries.
The Appendix offers the individual case studies, reviewing historical patterns, major factors in
development,etc.. Each case study is condensed nto a few pages, with ample references provided for
further study.
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II. Economic and Institutional
ssues in the Marketingof High-ValueFoods
Marketing High-ValueFood Products
2.1
A high-valuefood product represents he outcomeof a multipleand sequentialseries of
investments,
decisions,
activities and decisions; he outcomeof a process which begins with
the articulation of consumer
demand, leads to decisions by farmers and fishermen o produce, raise, or catch particularcrops, animals, and
fish, and continues hrough a series of activitieswhich
produce and subsequently ransform the crop or animal
product in form, time, and place to match consumer demand(Breimyer(1976)). Hence, in the case of high-
value foods, all profitable and sustainableproduction,post-harvest,and distributionactivities must be demand-
driven: they must cater to and adjust to changes in consumer preferences for quality, variety, convenience,
location, price, etc.
2.2 Food marketing is the physicaland economicbridge which links aw materialproductionand consumer
food purchases. It involves a set of interdependent ecisions, investments, nstitutions, esource flows, and
physical and business activities (Kohls and Uhl (1985). As the bridge betweenproducers and consumers, he
main roles for food marketingare to:
a)
Stimulate and Support Raw Material Production--
food marketing plays a critical role in
stimulating, orienting, and facilitating raw material production at the farm level. This entails the
communicationof information to farmers regarding what (and when) to produce, the provision of
financial(and other) incentives o farmers to produce food items for sale, the reduction of transaction
costs between producers and consumers, and the facilitation of farmer access to those productior
resources (e.g. credit, material inputs) needed o respond o such incentives.
b) Balance Commodity Supply and Demand-- food marketing institutions must provide the
organizational ramework to coordinate productionand consumption. t must balance the supply and
demandfor food raw materialsand commodities,not only in quantity erms, but also in terms of quality,
time, and place. This entails ogistical nd informationalasks, transacting or currentor future supplies,
quality control measures,
and makingphysicalchanges to the raw materials/commoditieshemselves.
c) StimulateDemandand Enhance ConsumerWelfare--food marketing shouldpromote increased
effectivedemand, consumption, nd consumerwelfare by introducing ew products, improvingproduct
quality, reducing consumer costs, making foods available
on a more consistentbasis, and educating
consumerson the merits and alternativeuses of products. These tasks will require the development nd
application of processing and logistics technologies, the dissemination of information, and the
developmentof efficient mechanisms or the exchangeof goods.
2.3 The processof marketing
high-valuefood products transcendsseveraldifferent industriesand markets
and may cross internationalborders (Marion et al. (1986)). In this process, the physicalcommodity can be
conceived of as 'flowing' from one value adding stage to another, with each of these stages being associated
with a particular industryas conventionally efined
(e.g. transport, fooa processing,packaging,retailing). The
product gains
value as its form is changed and/or as it is graded, stored, packaged, and transportedto more
closely match consumerdemand. Preceding,accompanying,or following
hese physicalcommodity lows are
additional lows, namely for a) product, market, and technical information,b) financial resources, and
c) ownership rights to the commodity.
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2.4 In the marketing of high-value food products, many of the pertinent production, post-harvest, and
distribution activities require specialized echnical or market knowledge, skills, or assets and/or require the
presenceof participants n particular locations. This suggestspossiblegains from a division of labor, whereby
potentiallymany different individualsand organizations pecialize n the performanceof one or relativelyfew
physicaland business activities.However,given the natureof foodmarketing, here will remain a strong degree
of interdependence mong these various individuals/organizations;n interdependencewhich must be reflected
in effectivecoordinationof participantdecisionsand activities,whether hroughmarket, administrative, r other
means (Davis and Goldberg (1957)).
Food Commodity Systems: Organization. Coordination, and Perfornance
2.5 Recognizing hat productionand food marketing ctivitiesare interdependent,hat those individuals nd
organizationsperformingsuch activities are themselves nterdependent, nd that such activitiesand economic
entities are linked through a network of exchange relations and additional coordinatingmechanisms, it is
appropriate o view themas elementsof a 'system' (Arthur et al. (1968). Faced with enormousproblems n both
conceptualizing nd empirically tudyingnational ood systems,agribusiness nd agriculturalmarketinganalysts
have focused their attention on individualcommodity systems", defined by Marion et al. (1986) as: "small
economic systems, . . . incorporating an interdependent array of organizations, resources, laws, and institutions
involved in producing, processing, and distributing an agricultural commodity." Commoditysystems may
involve the production, processing, and marketing of only a single commodityor else that of a set of very
closely related commodities as in dairy product, poultry, oilseed, or citrus fruit systems).'
2.6 Individualcommodity ystemsexhibitwidelydifferentorganizational haracteristics, oth withinand
among countries. Most commodity system studies by agricultural economistsand agribusiness specialists
describeboth 'horizontal' and 'vertical' structuralelements, the former being entry and competitive onditions
prevailingat each industrystage (e.g. processing,retailing); he latter relating o the location/ iming/ clustering
of marketing functions, inter-stage differences in size, seasonality, etc., the number of parallel marketing
channels,and the incidence and forms of contractualor ownership ntegration.Government rograms affecting
the commodity's productionand marketing are also described n most studies.'
'4
" Agriculturalconomists ave ended o use he termcommoditysub-sectors'.This s an inappropriate
term since there is nothing sub' about them, except hat they includeparticularsub-components f agriculture.
A more appropriate erm would be 'trans-sector' since the focal system
cuts across several sectors, markets, or
industries.
2
As with industriesor markets, commodity ystemsare conceptual rtifacts. The borders
betweenone
commoditysystem and others may be quite hazy. This is especially rue where highly processed oods are
concerned. Many individual oods are the productof several commodity ystems. For example, the
manufacturerof prepared soups and ready-to-eatmeals frequentlydraws upon raw materials rom the vegetable,
grain, and meat sectors. Changes n technologies re renderingmore agricultural aw materialssubstitutes or
another, this again blurring the distinctionsbetweencertain traditionalcommodity ystems.
13 Studies by Goldberg (1974), Morissey (1974),
and Marionet al. (1986) typify this type of analysis.
14 Few commodity ystem studies
really apply a 'systems' perspective.To do so, the organizational nalysis
would need to focus on or at least be cast in terms of the set
of ordered trading, bargaining, and other
relationshipswhich exist among and betweenproducersand marketing
entities and which link such participants
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selling, and transferring ownership of goods and services--may n some contexts be as significant as direct
production costs and/or the costs of physical marketing functions such as storage and transport. Transaction
costs include: a) the informationcosts incurred in identifyingand screening different trading opportunities,
outlets, and partners, b) the costs of negotiatingexchangeagreements, c) the costs of actually transferring
goods, services, money, and ownership ights, d) the costsof monitoring rade conditions o determinewhether
the agreed terms are compliedwith, and e) the costs of enforcingstipulated erms through egal, socialor other
means (Dahlman (1979); Williamson (1979); Leblebici (1985)).2IDespite their considerable importance,
transaction costs have rarely
been examined (or measured) in studies of food marketing in developing
countries.22
Commodity System Competitiveness
2.10 In contrast o the burgeoning iteraturedealingwith the performanceof manufacturing ectors, the food
marketing and commodity system literature devotes little attention to the issue of the competitivenessof
commodity systems, except in the narrow sense of comparativecosts of production, transport, etc.. A food
commodity system must be competitive in two different ways in order to be sustainable and provide
remunerativereturns to producers, processors, and traders. First, it must be competitivewith other industries
or agriculturalcommoditysystemswithin he same country in attractingor mobilizing esources neededfor its
functioning (e.g land, labor, capital, or other resources).' Second, except in a totally autarkic or protected
situation, a commodity system must also be competitive absolutely against similar commodity systems or
industries rom other countries.The commodity ystemmay have to competeagainst hese rivals in international
markets or may be threatenedby them through imports into the domestic market. This is what the literature
refers to as 'competitiveadvantage' or 'internationalcompetitiveness'.' This second form of competitiveness
is of primary interest here.
2.11 Writing in the context of manufacturing ndustries, Porter (1990) argues that they are two basic types
of competitiveadvantagewhich firms or industriesmay have vis-a-vis heir rivals. These are:
1) lower cost of productionand deliverywhichallows the firm/industry o underprice ts competitors
or to obtain superior returns when prices are at or near the level of competitors,and
2) differentiationof product through its quality and through accompanied echnical or marketing
services which allows the firm/industry o commandpremium prices and fill profitable niches in the
market.
21
Transactionosts akenumerousangible orms, ncluding:ravelcosts,personnelime, communications
costs, nsurance osts,advertising ndpromotion osts, ransport ndstorage osts,market esearch nd
consulting osts,arbitration,egal,and auditing osts,financial ndothercostsfromdelayed ayments r
delayed rocurement,
he costsof creditrating hecks nd product nspectionervices, osts ncurred
n
safeguardingroperty,andactual osses rom tolengoods, tc.
22 Ahmed
nd Rustagi 1985) ecognizehe importancef transactionostsandattribute largepartof the
differentialn marketingmargins ound n foodmarkets n Asiaand Africa o higher ransactionosts ncurred
in the latter region.
23
A commodityystem
willbe competitiven this regard f it enables irmsand ndividualso obtainhigher
returns or somepreferred ombinationf income nd risk) han
or alternative sesof the resources. his will
normally e derived roman inherent r developedomparativedvantage,
lthoughhe commodityystemmay
also be sustained y either emporary r longer-term rotection r subsidiesromgovernment.
24
See, for
example,Porter 1990) nd Alavi 1990).
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2.12 Porter argues that
it is difficult, although not impossible to be both a lower cost and
product
differentiatedsupplier compared with one's competitors. This is becauseachieving he higher quality or level
of serviceneeded for differentiationcan be very costly. While some technological r institutionalmethodsmay
simnultaneouslyeduce productionand/or
marketingcosts and add scope for differentiation,
Porter contends hat
competitorswill imitate these innovationsover the long run, forcing the firm or industry to choose which of
the primary
sources of competitive
advantage to emphasis in its strategy.
5
In
the course of an industry's
development, echnical, economic, or other changes may lead to shifts from a strategy of low cost supply o
one of differentiation or vice versa). In a competitiveenvironment, whether such a shift can be efficiently
achieved may be the differencebetween industry (or firm) prosperityor bankruptcy.This perspective can be
applied to patterns of development n food commoditysystems.
2.13 In the context of export-orientedagriculture, it is important o recognize a third potential source of
competitiveadvantage. This we may call complementary upply.This arises either when the seasonalityof
one's productioncomplements ather than overlaps hat of other producersor when one's own productionfaces
far less seasonalityor inter-annualvariability than that
of competitors. The commoditysystem may be in a
position to service the 'off-season' market in major
consumer countries, and/or capture
short-term rents by
expandingconsignments n the face of productionshortfalls in major producing/consumingountries(deriving
from adverse weather, outbreaks of disease or pests, or other factors). Complementarysupply is not a
competitivestrategyper se when consideringmedium-to-long-termrade development.Even when serving an
'off-season' market niche, a firm or industry must still position itself either as a low-cost or product-
differentiatedsupplier.
Determinants
of Competitiveness
2.14 What factors
determine the comparative and competitiveadvantages
of particular food commodity
systems? n neoclassical rade theory a country's
comparativeadvantage s associatedwith its human, physical,
and financialresource endowments nd the opportunitycosts of using such resources to produce (and market)
differentgoods and services. The focus is on comparative osts with countrieshaving a comparativeadvantage
in those industries which intensivelyuse those resources in which the country is relativelywell endowed. As
noted above, competitiveadvantagemay be based on product (and service) differentiation,
ather than lower
costs. The determinantsof effectiveproduct differentiation re many, but may primarily include he quality of
human capital and
physical nfrastructure, he effectiveness f technological evelopment
nd application,and
the receptivenessand competitiveness f consumerand intermediatemarkets.
2.15 In the trade and manufacturing
ndustry literatures, it is now widely recognized hat both comparative
and competitive
advantage are a product of various policy, technological,
human capital, infrastructure, and
managementfactors, in addition to given resource endowments. Table 2 draws on this literature as well as
selected studies on agricultural competitiveness o outline
a range of factors thought to be important in
influencingcommodity
system competitiveness nd growth.
6
Such factors condition he incentives to invest
in specializedcommodityproductionand marketingactivities, influence he likelihoodof a supply response o
such incentives, and determine he competitiveness
f that supply response.
25
At the same ime,whilestressing ne strategy, supplier annot otally gnore he other. Unless he low
cost supplier ffersacceptable uality nd
service, ts cost advantagemaybe nullifiedf substantial
rice
discounts re demanded. he differentiatedroduct uppliermustcontrol ostsso
that hesedo not exceed he
premium riceswhichbuyersor consumers
re willing o pay.
26
See, for example,Alavi 1990),
ABTAssociates1990), ndul Haque 1991).
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Table 2:
Factors Influencing
Commodity
Sector Competitiveness
and Growth
(International) Market Demand Factors
Macroeconomic and Sector Policies
Income and Population Levels
and Growth
Fiscal and Monetary Policies
Income
and Price Elasticities
Exchange Rate Policies
Consumer Tastes
Trade and Licensing Policies
Settlement and
Work Patterns Price Policies
Tariff/Non-tariff
Barriers into Import Markets
Labor Policies
Resources/ Political Strength of Competing Suppliers
Natural Resources
and Human Capital
Physical, Technical .and Social Infrastructure
Land, Water, and Other Natural Resources
Transport Infrastructure
Climate and Sunlight
Communications/Utilities
Infrastructure
Skilled and
Unskilled Labor
Marketing Facilities
Entrepreneurial
and Trade Experience
Agricultural Research
and Extension
Post-Harvest Technology
Research
Credit Facilities
Market Information
Micro-Marketing
and Coordination Elements
Costs/Efficiency
of Physical Marketing (Processing, Storage, Transport)
Costs/Efficiency of Buying + Selling
Coordination of Production +
Marketing
(New) Product Development
Quality Control
Quantity
Control for Sales and Market Power
Risk Sharing/Reduction
Measures
Marketing Research and Promotion
2.16 The scope
for commodity system development and growth
is intimately tied
to the
size and patterns
of food demand and,
in an international context, to the scope for entry
into foreign markets. Major
changes
taking place 'outside' of food marketing
systems, including increases in income, changes in taste, changes in
work and living patterns, and new technological
developments (e.g. refrigeration), strongly influence
food
demand and create both
food marketing opportunities and challenges.
Access to particular international markets
may be blocked by tariff and non-tariff barriers, or, conversely, be facilitated by preferential
treatment on the
basis of
historical ties or importer
foreign policy objectives.
Sustained import penetration may thus
depend on
political bargaining
as much as economic competitiveness.' Of course,
international competitiveness
will be
strongly influenced by the resource
endowments, experience,
and political strength
of firms and industries in
other countries.
2.17
Macroeconomic and sector policies also have a very
significant role in shaping
the incentives for
investment in production
and marketing activities. Such policies strongly
influence the costs and returns
on farm
inputs and food products,
the relative prices among
these products, and
the conditions for entry into trade. A
stable macroeconomic
environment
and improvements in that environment strongly
influence investment
decisions and hence long-term productivity.
The incentive to invest and
the cost competitiveness
of a commodity
27 This is the central thesis
of Mares (1987).
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sector will be underminedby high rates of inflation,high costs for capital, rising labor costs, and an overvalued
exchange rate-- all variables subject o influence rom goverrnent policies.
2.18 While macroeconomic nd pricing policies nfluenceproduct costsand prices, there are importantnon-
price characteristics of food products (e.g. nutritional properties, physical appearance, freshness, timely
availability, packaging) which may be just as significant in international competitiveness.' In addition,
macroeconomic nd sector policiesdo not determine he capacityand speed by which
producersand marketing
enterprises respond
o changes in market and technological pportunitiesand hence, maintaincompetitiveness.
These are determinedmore by organizational, nstitutional,and human capital factors.
2.19 As recognized in neoclassical rade theory, an important basis for comparative (and competitive)
advantage is a country's naturalresourceand humancapital endowment.These are certainly important n
influencing country's capacity o be competitive n the productionand marketingof particular food products.
To the traditionalcomponentsof this categoryof resourceswe add entrepreneurial nd trade experiencewhich
is vital to any effective marketingeffort. In a particular commoditysystem, such experience can be acquired
over time (e.g. 'learning by doing'), transferred in from another local industry, or imported via a foreign or
joint venture.
2.20 Well-developed hysicaland social nfrastructure re the secondcategoryof goods whichare required
for an efficientsupplyresponse o the incentivesprovidedby marketopportunities nd favorablemacroeconomic
conditions. Physical infrastructuresuch as roads, ports, telephone lines, power systems, railways, terminal
markets, and storage and processing acilitiesare fundamental o a well-functioningmarketing ystem. The same
is also the case for the social infrastructurewhich develops and adapts technologies, provides training and
information, and provides financing.
2.21 The final set of factors influencing nternational ompetitiveness elate to micro-marketing ctivities,
the coordination of production with downstream requirements, and physical logistics. This is the
managementelementof commodity ystem development-- he managementof physicalresources and of inter-
personal and -organizational relationships. While typically ignored in economic analyses emphasizing
quantity/price relationships, these managementand coordinationelements are central to commodity system
operationsand competitiveness. t is primarily at the farm
and firm levels and in the interfaces between hem
where levels of productivity,product quality, and transactioncosts are determined.
Generic Barriers to Entrv and Coordination in Food Commodity Systems
2.22 Food products, raw materials, production, marketing infrastructure, and marketing
services have
intrinsic echnicaland
economicpropertieswhich,particularly n developing ountries,frequently ead producers
and marketing entities to experience severe problems related to production and market risk, inadequate or
asymmetric nformation, transactioncosts, logistics, and overall marketingcosts. Each can therefore serve as
major barriers to production, exchange, and coordination
n commoditysystems. In this section, we briefly
discuss some of these intrinsic problems in food marketing--problems which will commonlyarise even in
favorablepolicy environments.
28 See WorldBank 1986) nd SchiffandValdes 1992) or globalperspectivesn the link between
macroeconomicolicies, ectorpolicies, nd agriculturalerformance.
29
See Alavi 1990) ndPeters 1992) or moregeneral
discussionsf non-priceactors n industrial
competitiveness.
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Food Product TechnicalCharacteristics
2.23 Compared with most other products, food products and
raw materialsare more bulky and perishable.
Bulky commoditiesgeneratephysicalhandling
and transportproblems related to the development nd utilization
of infrastructure capacities and to potentially high unit logistical costs. For very bulky goods, it may be
necessary o establishprocessingfacilitiesand the attendantpower and water supply in close proximity o farm
productionareas. Perishability imits he marketable ife as a freshcommodity nd the period of time over which
it can be used
as raw materialsfor processing. Commodity
perishabilitygreatly limits the marketing lexibility
of producers, enhances heir marketrisks, and potentially laces them in an unfavorablebargainingpositionvis-
a-vis buyers who
have alternative supply sources. Commodityperishabilityenhancesrisk of product loss or
value decline during transport and storage, may necessitate investment n highly specialized and 'lumpy'
transport and storage facilitiesand equipment, limits the role of storage in balancingsupply and demandover
time, and raises the risk of contamination n food processing.In addition to these losses or special costs, rapid
perishability raises transaction costs since it requires that the raw materials or commoditiesbe repeatedly
screened or graded for quality at each level in the commoditysystem.
0
2.24 While agricultural commodities are frequently regarded as being relatively homogeneous, food
commoditiesand raw materials do exhibit considerablevariability in their quality from unit to unit and from
one supplyperiod to another. Food commodities nd raw materials end to have multiplequalityattributes,some
of which are difficult to measure (or observe), and most of which are valued and weighted differently by
specificgroups of users and consumers.These featuressometimes imit he scopefor informative rading,create
potential nformation asymmetries elated to quality, and reduce the likelihood hat market prices will signal
complete information bout the quality of these goods.
3
'
Food CommodityProductionCharacteristics
2.25 The farm-levelproduction
of many food commodities nd raw materialshas featureswhich render such
production inherently isky, heighten ransactioncosts in a market setting, and inhibiteffectivecoordinationof
production with downstreamoperations
and consumption.First, compared with manufacturedproducts, food
products tend to be produced over a geographicallymore dispersedarea and by individualproducerswho are
smaller in scale and less specialized.This productionpattem may result in high costs for crop intelligenceand
transmitting nformation o producers regardingconsumerpreferences.This productionpattem also contributes
to potentiallyhigh transportation osts in the
collectionof raw materialsor animals, thus interruptingphysical
commodity lows. The output of a small producer may also be insufficient o warrant investment n proper
storage facilities or standardized containers, perhaps leading to additional handling activities or requiring
additionalquality inspection.All of these imply added transactioncosts.
2
I Sellinghighlyperishableommoditiesn description oses isks or bothsellersandbuyerssince heir
qualitymay deteriorate
n the interim eriodbeforeactualdelivery.
31 As the quality
f food directly ffects umanhealth, nfornational symmetriesre potentially uite
serious. n the absence f labelswhich ndicatehe true contents f foodproducts,
heirnutritional alue,and
otherhealth mplications,onsumerhoicemaybe poorly nformed.On
foodquality nd information
asymmetry, ee Caswell nd Padberg 1992).
32
From he pointof viewof marketing gents, uchadded ransactionostsare at leastpartly
counterbalancedy the reduced isk of totalsupply ailure due o weather,
isease,or pests)whenproduction
is geographicallyispersed.
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2.26 At the same time, small, dispersed
producersmay possiblyface
a situationof monopsonistic ompetition
with only one or very few active buyers in their area. There is frequentlya considerablemismatchbetween he
efficientoperatingscales at the farm level and in subsequentprocessingoperations.A market structurefeaturing
a relatively large processor and multiple small suppliers may emerge with asymmetric information and
considerable
nequalityof bargainingpower. The mismatch
n efficientoperating
scales serves as a barrier
to
forward integrationby un-organizedproducersand requires the processor o develop multiplesupply sources
to enable it to utilize its full capacity.A coordination roblemarises
since the productionschedules or different
suppliers must be scattered
over time rather than overlap one another.
2.27 A second commonset of food productioncharacteristicsconcerns he yield lag, yield uncertainty,and
seasonality
of production. The production
of most food crops
and animal products is dependentupon the life
cycle of plants and animals. In some cases (e.g. tree crops; beef cattle), this life cycle involves an
extended
gestation period before commercial yields are attained. This creates a need for medium-term inancing and
presentsa potentiallyconsiderable ommercial isk for the producer. Agriculturalproduction s
inherentlyhighly
risky due to the important nfluenceof weather and the possible incidenceof plant diseasesor pests. Adverse
natural or man-madeevents can undermine otal supplyor the supply from one geographical rea, resulting in
farmer losses, un(der)-utilized marketing and processing facilities, and unmet consumer demand.
3
The
seasonality of crop and animal production creates problems for cost-efficientutilization of transport and
processing facilities. For perishable commodities,processingrequirementsmay make it necessary to extend
planting and harvest activities into more risky productionperiods.
Production Supportby MarketingEnterprises
2.28 Food marketing enterprisesoften have an important role in stimulatingand directly supporting raw
material production. They can do this by various means, including the supply of market and technical
information, the supply of productionfinancing,and the supply of certain material inputs (e.g. seeds, chicks,
fertilizers). The incentives or marketingenterprises o provide such services will depend upon their ability to
appropriate the benefitsderiving from them; benefitssuch as increasedoutput, enhancedproduct quality, and
output better timed for marketing or processingrequirements.34 he scope for appropriabilityof benefits will
depend upon the nature of the goods/services hemselvesas well as the prevailingmarket structure.
2.29 For example, the disseminationof technicaland market informationhas public good properties: such
information s non-rival in its consumptionand it is very difficult or costly to exclude individualsbenefitting
from the informationwithout contributing o its cost. The marketingenterprise is unlikely to capture the full
benefitsfrom its supplyof information ince in a competitive nvironment,producerscan utilize he information
and then sell to a competingbuyer. Where such 'free-riding' is widespread, there will be little incentivefor
private firms to provide more than minimalmarket or technical information.The provision of technical and
market informationmay also be associatedwith so-called moral hazard' problems. The directed messagemay
be biased toward the particular needs of the buyer rather than properly informing he producer about the wider
range of technical and market options. The provision of technical information and the direct supply of
production inputs can also give rise to negative externalitiesas when the reconunendedpractices (e.g. heavy
chemical use) adverselyaffect neighboring armers or residents.
3 Theseunplanned ariationsn annualproductionevelsmay esult n similarlywideswings n producer
and consumer rices. If eitherproducer ncomes r consumer urchases re narrowly ased,suchprice
variations an have majorwelfare mplications.
3' See Umali t al. (1992) ndJaffeeandSrivastava1992) or moredetailed nalysis f the incentivesor
private ectorsupplyof selected griculturalnputsand services.
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2.30 With respect o productionfinancing,barriers arise due to limitedcollateraland asymmetric nformation.
The producer is generally better informed han the marketingenterprise about his creditworthiness.The firm's
ability o recover the loan may be better in a non-competitivehan in a competitivemarket, since in the former
case producers will have little or no alternative market outlet, enabling the lender to deduct the loan amnount
from the paymentsdue for the commodity.
Processingand DistributionFunctions
2.31 Several types of
infrastructure, information,and other resources
needed for efficient food processing
and distribution functions have characteristicswhich may inhibit private investment n specialized activities,
contribute to non-competitivemarket structures, and/or weaken the competitivenessof a commodity system.
For example, certain types of infrastructurenecessary or marketinghave either public good propertiesor are
subject o such large economiesof scale as to result in naturalmonopolies n all but very large countries. Roads
are an example of the former
and rail and port facilitiesof the latter.
Private firms engaged n food marketing
will generally lack the capacity to invest in such
facilities, the absence or poor quality of which
will reduce
producer incentives, raise marketing costs and restrain
trade in certain directions.
2.32 While not featuring economies
of scale as significant as for rail and port facilities, others types of
marketing infrastructuredo neverthelessentail lumpy' investmentswhich can serve as a major barrier to entry.
Investments n certain modernprocessing, storage, transport, and trading facilitiesprovide
he investor, at least
initially, with an operational capacityfar in excess