Over the past quarter century, the production and consumption of high-value food products (HVFPs) in developing countries have soared. At the same time, wholesale and retail marketing of these items has changed rapidly. In both industrialized and developing countries, the HVFP sector is becoming global in scope and growing increasingly concentrated at the levels of production and marketing.
This dynamic situation poses special obstacles for small-scale farmers, who constitute the majority of the population in many poor developing countries. They will have difficulty improving their livelihoods if they are not involved in this rapidly evolving sector. The key challenge is to find non-distorting, equitable policy and technology options that support the participation of small-scale producers in HVFP markets. At the same time, the creation or preservation of artificial advantages for large enterprises that drive small-scale producers out of those markets must be avoided. Trade barriers such as agricultural tariffs, implemented in the name of protecting smallholder agriculture, often, in fact, serve the interests of large domestic operations that compete with small farmers.
The growth in HVFP production has been particularly rapid in the area of animal products such as poultry, pork, and fish (where production has grown between 5 percent and 8 percent per year). Consumption of HVFPs has also grown rapidly in developing countries. From the early 1980s to the mid-1990s, the average yearly increase in consumption was 5.4 percent for meat and 3.1 percent for milk; both are projected to grow at 2.9 percent per year between the late 1990s and 2020. Consumption of vegetables and fruits is also expanding quickly in developing countries for the same reasons: population growth, urbanization, and an increase in income (with the latter two factors contributing to changes in diet away from starchy staples toward HVFPs).
In addition to the domestic demand in developing countries, net exports of HVFPs to developed countries have also increased. In the case of fish and poultry, expansion for trade has rapidly outpaced the high growth rate of production for domestic markets. Also, reversing a previous pattern, fish has become a major net export to industrialized countries in recent years. The aggregate value of net fisheries exports from developing to developed countries now often exceeds the combined value of net exports of coffee, tea, cocoa, bananas, and sugar.
Global markets for high-value agricultural produce have become increasingly concentrated in recent years, with greater vertical integration between producers and consumers. This consolidation has occurred in response to forces associated with globalization, such as shifts in demographics and consumer demand, improved communication, and increased international capital flow.
With mergers of multinational companies reducing the number of actors in global markets, the coordination of procurement, processing, and distribution of products within the same multinational firms has increased. This has changed the environment within which exporters from developing countries operate. Both traditional multinational processing firms and the increasingly active multinational supermarket chains procure produce directly from developing countries. Unlike an earlier era when national corporations traded raw commodities across national borders, multinational companies increasingly procure, process, package, and distribute food commodities across many borders, with more direct activity in the developing countries themselves.
Similar trends of concentration and vertical integration can be observed among larger companies in developing countries. Charoen Pokphand is a Thai company founded in 1921 that specialized in domestic seed supply through the 1960s. It is now the major force in feed milling, chicken and shrimp production and export, and restaurants in Southeast Asia. In 1995, Charoen Pokphand had $4 billion in sales, controlled 80 percent of shrimp feed in India, owned 75 feed mills in China, owned over 800 food outlets in Thailand, and was a major global producer of shrimp and chicken.
Export transactions involving HVFPs from developing countries increasingly take place under forward contracts and are subject to stringent specifications regarding food safety, quality, quantity, and timeliness of delivery. In the late 1960s, [RTF annotation: Not all readers will connect “Northern” to industrialized countries. If we want to avoid using “countries” twice, better “food processors from the North began…”]food processors from industrialized countries began to invest directly in collection and processing plants in developing countries (for example, Birdseye’s export of frozen vegetables from Mexico). More recently, supermarket chains from industrialized countries have begun to contract directly with suppliers in developing countries, sometimes in competition with independent processors, but often in collaboration with them.
Effective participation by developing-country producers in these growing global markets requires access to specialized information, technology, professional knowledge, assets, institutions, infrastructure, and liquidity. Furthermore, the same pressures that operate in international markets also affect the growing high-value end of domestic markets. Predictability of safety, quality, and ontime deliveries of known quantities is critical. Small-scale and traditional producers have trouble participating under these conditions. For such producers to remain engaged in growing HVFP markets, they must be able to contract forward with the main outlets for their produce, and must be organized in ways that reduce the risks that either party will be unable to complete the terms of their contract.
Two key strategies for keeping smallholder farmers involved in demanding markets for HVFPs are producer marketing cooperatives and contract farming schemes. The histories of both are mixed and have been extensively documented. The central issues are (1) whether wholesale and retail outlets have options for securing products other than by dealing with smallholder farmers (such options would include investments in plantations), (2) whether governments are playing a role in providing a facilitating environment for smallholder production, and (3) to what degree smallholder farmers are participating in the management of smallholder schemes.
Horticulture in the central highlands of Kenya provides a good example of a capital- and skill-intensive activity that has steadily shifted to smaller-scale contract farms. Strong political backing by the government has been central to its success, including a favorable regulatory environment and good infrastructure, such as extension to growers along with market information, quality inspection services, and cold storage at the airport. In Guatemala and Honduras, where population densities in the vegetable-growing areas are higher and the political pressure of small farmers is keenly felt, foreign distributors have tended to contract with large numbers of small farmers. In Mexico, on the other hand, contracting by US-owned processors and distributors has tended to involve large Mexican farms and industrial operations.
Small-scale participation in the livestock and fisheries sectors tends to be more difficult for structural reasons. Smallholder technologies for controlling pollution and animal disease become overburdened (and often are not used) when population densities are high. Compliance is hard to monitor, and even harder to enforce. Large-scale poultry, hog, and shrimp operations can often manage to adopt available technologies to control pollution: where high-value export markets are at stake, large operations make the necessary investments. Furthermore, disease-free certification (or expedited border clearance in terminal markets) is required for export. The investments necessary for pollution abatement and disease control are often beyond the means of small-scale farmers operating independently. Without proactive development and policies to keep smallholders involved, the industry in developing countries splits: industrial livestock and fish sectors occupy expanding export markets, and a static smallholder sector competes for the low end of the domestic market. Worse, since export certification cannot be easily obtained in areas where small-scale sectors do not follow controls, the interests of large- and small-scale producers begin to diverge.
An interesting example of a successful contract farming initiative is the Soro-Soro Ibaba cooperative in Southern Luzon, Philippines. The Soro-Soro scheme associates a large number of nonagricultural investors with regionally defined groups of small-scale farmers. The cooperative mills its feed and provides fattener hogs, vaccines, regular veterinary support, and marketing services. Farmers provide space, buildings, a waste lagoon, water, labor, and management of the fattening phase. The fatteners are sold by the cooperative and the farmer is paid a fixed fee per animal. Provided that the farmer follows the rules, the risk of animal loss is borne by the investor. The cooperative provides overall services for management and supervision, and functions as an investment company, paying dividends to shareholders.
There are successful models for keeping small-scale operators involved in HVFP. Crucial to this strategy are (1) market reform policies that encourage smallholder investment and avoid differential subsidies to large-scale operations, (2) institutional development to help small-scale operators meet global standards regarding quality, food safety, and timeliness, and (3) provision of public goods such as research, extension, and infrastructure. Such an approach requires both political commitment from government and ways to share the risks and rewards of vertical coordination fairly, so that small-scale producers can participate in growing high-return sectors.
For further reading see C.L. Delgado, “Sources of Growth in Smallholder Agriculture in sub-Saharan Africa: The Role of Vertical Integration of Smallholders with Processors and Marketers of High-value Added Items,” Agrekon 38 (1999): 165-189; C. Eaton and A.W. Shepherd, Contract Farming: Partnerships for Growth, FAO Agricultural Services Bulletin 145 (Rome: Food and Agriculture Organization of the United Nations, 2001); S. Jaffee and J. Morton, eds., Marketing Africa’s High-value Foods: Comparative Experiences of an Emergent Private Sector (Dubuque, Iowa, USA: Kendall/Hunt Publishing, 1995); and N.W. Minot, Contract Farming and its Effect on Small Farmers in Less Developed Countries, Working Paper 31 (East Lansing, Michigan, USA: Michigan State University, 1986).
Christopher Delgado (c.delgado@cgiar.org) is a senior research fellow, Nicholas Minot (n.minot@cgiar.org) is a research fellow, and Nikolas Wada (n.wada@cgiar.org) is a senior research assistant in the Markets and Structural Studies Division at IFPRI.