Income growth, urbanization, and globalization are driving a transformation of food supply chains in most developing countries in which consumers are shifting from staple grain production toward high-value commodities including animal products, fish, fruits, and vegetables. At the same time, domestic and foreign investments are driving the modernization of the food industry, including the rise of supermarkets, large second-stage processors, and exporters. The changes are transforming the market conditions faced by farmers. In food supply chains, these changes are particularly dramatic in the rapidly growing countries of Southeast Asia.
The opportunities for diversification into HVAPs are expanding as a result of these trends. Small farmers often have some cost advantages in producing these commodities relative to largescale producers due to the lower opportunity cost and better motivation of family labor compared with hired labor. However, small farmers are constrained from participating in high-value sectors because of:
- lack of information on production methods and marketing;
- difficulty in bearing the risks associated with growing and selling HVAPs;
- liquidity constraints that prevent even profitable investments; and
- the high transaction costs of assembling goods from many small farmers.
Increasing consumer preferences for quality and specific attributes, tightening food safety regulations, and the restructuring of the retail food sector (including the growth of supermarket chains) are imposing new requirements on suppliers which often give an advantage to large farmers, including those in developed countries. The challenge is to craft policies and regulations that establish a level playing field for different types of growers and to promote marketing institutions that facilitate vertical coordination—meaning the transfer of information, credit, inputs, and commitments—between small farmers and buyers.