«COMMITTEE ON AGRICULTURE Twentieth Session Rome, 25-28 April 2007 Challenges of Agribusiness and Agro-industries Development Item 5 of the ...»
COMMITTEE ON AGRICULTURE
Rome, 25-28 April 2007
Challenges of Agribusiness and Agro-industries Development
Item 5 of the Provisional Agenda
Table of Contents
I. Introduction 1
II. Sectoral Trends and Impacts 1 III. Enabling Policies and Institutions 3 IV. Agro-industry and Value Chain Programmes 6 V. Industry Standards and Quality Requirements 8 VI. Responding to the Challenges 10 VII. Views and Recommendations of COAG 11 For reasons of economy, this document is produced in a limited number of copies. Delegates and observers are kindly requested to bring it to the meetings and to refrain from asking for additional copies, unless strictly indispensable.
Most FAO meeting documents are available on Internet at www.fao.org W/J9176/e COAG/2007/5 1 I. Introduction
1. Dramatic changes are taking place in food and agricultural systems worldwide. Although the nature and pace of change is different between and within countries and regions, a common characteristic in developing regions is the transition to market driven systems associated with greater reliance on input markets and growth of post-production enterprises. In essentially all developing and transition countries, the role of the private sector is increasing, smallholder farming is becoming commercialized, and agribusiness and agro-industry are increasingly impacting on economic and social development.1
2. In the light of the perceived importance of recent trends, a large and growing number of governments have reformed their policies, adjusted programmatic priorities, and increased investments designed to accelerate the pace of agribusiness and agro-industry development.
During the past five years, agribusiness development and promotion programmes have been launched, for example, in Bangladesh, Barbados, Colombia, Cook Islands, Honduras, India, Indonesia, Moldova, Ukraine, Lao, Mozambique, Nicaragua, Panama, Papua New Guinea, Senegal, Sri Lanka, Uzbekistan, and Zambia. A number of member countries, including Afghanistan, Bangladesh, China, Egypt, Ghana, India, Iraq, Jamaica, Kenya, Myanmar, Pakistan, Uganda, Vietnam and Zambia, have recently requested FAO assistance for agribusiness or agroindustries development.
3. The importance of responding to structural changes in the supply of products is addressed by FAO’s Strategic Objective C.1 but relevant strategies and actions are also addressed in Strategic Objectives A.1 and B.2 as well as several other strategic objectives. Under the FAO reform, agro-industry programmes have been re-established in the Agriculture, Forestry and Fisheries departments but the scope of work required for agribusiness and agro-industries development cuts across many programmes in all departments.
4. This paper brings to the attention of COAG a number of pertinent issues relating to agribusiness and agro-industry trends for consideration and comment, and seeks guidance on the priority that FAO should give to agribusiness and agro-industry development.
II. Sectoral Trends and Impacts
5. The broad changes taking place in agrifood systems worldwide are driven by increases in per capita incomes, changing technology, trade liberalization and urbanization. Higher incomes, changing diets and increasing numbers of women in wage employment mean greater demand for high-value commodities, processed products, and pre-prepared foods.
6. There is a clear trend towards diets that include more animal products such as fish, meat and dairy products, as well as fruits and vegetables. Although growth rates are high for fruits, vegetables, meat and dairy products, production of staple crops is still the main source of agricultural value addition in many countries. But even staple foods are becoming differentiated products because of industry requirements to meet quality and delivery standards.
7. Reflecting changing consumer and agro-industry demand, the 1990s witnessed a diversification in developing countries into non-traditional fruits and vegetables. Developing Agribusiness is a broad concept that covers input suppliers, agro-processors, traders, exporters and retailers. “Agroindustry” also is a broad concept that refers to the establishment of enterprises and supply chains for developing, transforming and distributing specific inputs and products in the agricultural sector. For purposes of consideration at the level of COAG, both terms refer to commercialization and value addition in the agricultural sector with a focus on preand post-production enterprises and building linkages among enterprises.
2 COAG/2007/5 countries’ share in world trade of non-traditional fruits and vegetables increased to 56 percent.
Despite the growing relative importance of non-traditional exports, their significance for most developing countries in agricultural and economic development is limited. Overall, developing countries export less than 10 percent of fruit produced and less than five percent of vegetable production.
8. Prices for many traditional agricultural commodities have recovered or at least stabilized since 2000. It is important, however, not to be complacent. There are no significant demand factors, other than perhaps a rapid growth of biofuel industries, which suggest that the long-term decline in agricultural commodity prices has ended or that an agricultural growth strategy based on expanding primary commodity production is more viable now than it has been over the past two decades.
9. The prospects in developing countries for further expansion of food manufacturing appear to be greater than for the supply of primary commodities. Over the past 25 years, the percentages of global manufacturing value addition for food, beverages, tobacco, textiles and leather products – the main agro-industry manufacturing product categories tracked by UNIDO – generated by developing countries have nearly doubled. For textiles, developing countries accounted for 22 percent of value addition in 1980 but more than 40 percent in 2005. The increase was the greatest for tobacco, reaching 44 percent of global value addition in 2005. The EU countries together accounted for the largest share of manufacturing value addition for foods and beverages in 2005 as was the case in 1980, but by 2005 the developing countries together reached 23 percent compared to 21 percent from Japan and 19 percent from North America.
10. There is tremendous regional disparity among developing regions in the distribution of formal sector agro-industry value addition. For food and beverages, Latin American countries accounted for nearly 43 percent of value addition in 2003 and countries of South and Southeast Asia for 39 percent. In contrast, African countries contributed less than 10 percent of value addition. There are similar disparities and patterns in value addition for tobacco products, textiles and leather products, although South and Southeast Asia provide a higher share of value addition for these product categories than does Latin America.
11. Corresponding to the above trends, substantial organizational and institutional changes have been taking place in the agricultural sector of most developing countries. Growing concentration is taking place at all levels, particularly in the retail and processing sectors.
Agribusiness enterprises are getting larger as firms seek economies of scale in food manufacturing, marketing and distribution. Private sector standards for food quality and safety are proliferating. Increasingly, exchange is arranged through the use of contracts. More large-scale retailers and manufacturers are relying on specialized procurement channels and dedicated wholesalers. Food is increasingly being “pulled” into formal sector retail outlets such as supermarkets rather than grown for sale in local markets.
12. Changes in the retail sectors of developing regions have been particularly notable, becoming significant at different times in different developing regions. Structural transformation of the retail sector took off in Central Europe, South America and East Asia outside China in the early 1990s. The share of food retail sales by supermarkets grew from around 10 percent to 50 to 60 percent in these regions. By the mid to late 1990s, in Central America and Southeast Asia, the shares of food retail sales accounted for by supermarkets reached 30 to 50 percent. Starting in the late 1990s and early 2000s, substantial structural changes were taking place in East Europe, South Asia, and parts of Africa. Here supermarkets’ share approached five to 10 percent in less than a decade, and is growing 20 to 40 percent a year.
13. The changes in agrifood systems have significant implications for growth, poverty and food security. On the positive side, trends show that there is a rapid increase of value addition opportunities through agribusiness relative to primary production. Agro-processing enterprises are increasing demand and the effective size of market for farmers’ products. Exporters and agroCOAG/2007/5 3 processing enterprises are furnishing crucial inputs and services to the farm sector for those with no access to such inputs. This is inducing productivity and product quality improvements. Agroindustries also are stimulating market induced innovation through chains and networks. Domestic and export systems are becoming more mutually supportive.
14. While agribusiness and agro-industry development can increase competitiveness in international and domestic markets, the benefits are not automatic and will not be shared by all.2 The changes in agrifood systems pose particular risks for smallscale farmers, traders, processors, wholesale markets and retailers. For the small farmer there will be short-term difficulties to meet agro-industry standards and contractual requirements. Small processors increasingly will have to compete with larger scale food manufacturers that can benefit from economies of scale in processing technologies. Traders and marketers in local markets will be squeezed by the growing importance of specialized procurement practices and certified products. It has long been understood that traditional farming and marketing systems would have to change as farming became more commercialized and integrated into national markets. What is new is the extent and rapidity of the changes in traditional agrifood systems being driven by global and national trends in agribusiness and agro-industries and foreign direct investment (FDI) flows.
15. There is no broad agreement on how the changes in agrifood systems will influence traditional players (i.e. wholesale markets, small traders and small businesses) in the long run.
Indications to date suggest that there will be significant sectoral differentiation in impacts. For example, many traditional processing activities, especially in grains, oil and sugar have reached levels of scale and automation that offer limited space for small and medium enterprises (SMEs).
The dairy sector seems to be advancing in this same direction. On the other hand, prepared fruits and vegetables are based on labour-intensive on- and off-farm activities and the possibilities for participation by SMEs appear to be much higher.
16. There is agreement that the development of agribusiness and agro-industries will be context-specific: depending on the product sector, market needs, the stage of development of a particular country and area, agricultural sector policies, institutions and services, and the actions taken or not taken by governments to promote agro-industries and agricultural value chains. If agribusiness development is to play a key role in reducing rural poverty, then governments will need to understand and have the capacity to create enabling conditions for agribusiness while also monitoring and taking necessary steps to protect and enhance the livelihoods of small scale farmers and others members of rural and urban communities likely to be affected by agribusiness and agro-industry development.
III. Enabling Policies and Institutions
17. The policies, institutions and support services that establish the setting in which enterprises are started and grow constitute what is often referred to as the enabling environment for doing business. The business environment represents one of the most important drivers of competitiveness for domestic and export oriented agro-enterprises and agro-industries. The business environment is critically important for reducing the cost of doing business and attracting investment. It also affects risks and opportunities resulting from competitiveness emulation and the progressive refinement of successful business models.
18. Developing policies and institutions to encourage agribusiness investment needs to be done in a large policy context. Many of the most critical aspects of a supportive agribusiness environment are identical to those which apply to manufacturing and services industries. These include good public governance, stable macroeconomic climate, enforceable commercial laws,
appropriate financial services, protection of property rights, and adequate infrastructure.
Supporting trade policies are particularly important especially in the light of WTO discussions on special products and special safeguard mechanisms.
19. The above elements notwithstanding, there are aspects of enabling environments that are distinct or particularly important for agribusiness and agro-industries. Examples include policies, institutions and services relating to: food safety regulation, establishment and enforcement of grades and standards, contract negotiation and compliance, market information, rural transport systems, product, technology and process innovation, risk management, farm and agro-enterprise managerial and technical capacity, business linkages, cross-border and regional trade, and publicprivate sector cooperation.
20. Although many countries have implemented major policy reforms over the past two decades, the business environment often is still far from being conducive for agribusiness and agro-industries. Many countries continue to have complicated systems of business regulations, ineffective systems for enforcing property rights and rules, inadequate commercial services, lack of infrastructure, ineffective local government, and weak information and communication systems.