Exporting High-Value Food Commodities

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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

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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

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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

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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

Bank

for Reconstruction

and Development/THE WORLD BANK

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Jacob Yaron is senior rural finance advisor in the

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Library of Congress

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Yaron,

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Successful rural finance institutions J Jacob Yaron.

p. cm. - (World Bank

discussion papers; 150)

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

credit

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I. Title. II. Series.

HG1976.A78Y37

1992

332.7'1 '095 -dc20 91-46248

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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

ii


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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

xii


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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.

xiii


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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.

2


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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.

3


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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.

4


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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.

5


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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.

6


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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

7


24/124


25/124

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).

9


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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).

10


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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

Exporting High-Value Food Commodities

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