FAO ISSN 1816-5303 COMMODITIES AND TRADE PROCEEDINGS 2 Governance, coordination and distribution along commodity value chains Rome, 4–5 April 2006 FAO COMMODITIES AND TRADE PROCEEDINGS 2 Governance, coordination and distribution along commodity value chains Rome, 4–5 April 2006 Trade and Markets Division FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS Rome, 2007 The designations employed and the presentation of material in this information product do not imply the expression of any opinion whatsoever on the part of the Food and Agriculture Organization of the United Nations (FAO) concerning the legal or development status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. 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Applications for such permission should be addressed to: Chief Electronic Publishing Policy and Support Branch Communication Division FAO Viale delle Terme di Caracalla, 00153 Rome, Italy or by e-mail to: [email protected] © FAO 2007 iii Table of contents Preface..................................................................................................................................................... v Introductory Note .................................................................................................................................... 1 Brian Moir PART 1.................................................................................................................................................... 7 CONCEPTUAL ISSUES OF MARKET STRUCTURE IN AGRICULTURAL COMMODITY VALUE CHAINS Market Control and Competition Ιssues along the Commodity Value Chain......................................... 9 Nikolaos Vettas Trade Liberalisation under Imperfect Competition in Commodity Markets......................................... 27 Steve McCorriston The Fall and Rise of Vertical Coordination in Commodity Chains in Developing and Transition Countries ............................................................................................................................................... 47 Miet Maertens and Johan F.M. Swinnen Contracting Issues at Various Levels of the Value Chain..................................................................... 69 Doyle Baker and Carlos Da Silva PART 2.................................................................................................................................................. 83 INSTITUTIONAL AND STRUCTURAL ISSUES IN COMMODITY MARKETS Standards and Supply-Chain Coordination - Impact on Small-Scale Producers................................... 85 Kees van der Meer Laura Ignacio Supermarkets, Horticultural Supply Chains, and Small Farmers in Central America .......................... 95 Thomas Reardon, Julio Berdegué,Luis Flores, Fernando Balsevich and Ricardo Hernández Transmission of Price Signals and the Distribution of Revenues along the Commodity Supply Chains: Review and Applications ....................................................................................................... 105 David Hallam and George Rapsomanikis Estimating the Pass-Through of Agricultural Policy Reforms: an Application to Brazilian Commodity Markets............................................................................................................................ 119 Jonathan Brook, Olga Melyukhina, Alastair Bailey and Kelvin Balcombe PART 3................................................................................................................................................ 139 FARMERS AND COMMODITY DEVELOPMENT The determinants of investments in coffee trees in Uganda................................................................ 141 Ruth Vargas Hill Market and other Constraints to Smallholder Coffee Development in Tanzania................................ 167 Alexander Sarris and Sara Savastano Assessing Small-holder Participation in Value Chains: the case of vegetables in Honduras and El Salvador .......................................................................................................................................... 209 Mark Lundy, Roberto Banegas, Lourdes Centeño, Iván Rodríguez, Manuel Alfaro, Santos Hernández and José Ángel Cruz iv PART 4................................................................................................................................................ 227 CHANGING MARKET STRUCTURES AND DISTRIBUTIONAL ISSUES Contracting, Competition and Rent Distribution in Commodity Value Chains.................................. 229 Johan F.M. Swinnen and Anneleen Vandeplas Domestic traders versus global retail chains: Evidence from Madagascar ......................................... 243 Bart Minten Value Chain Analysis and Market Power in Commodity Processing with Application to the Cocoa and Coffee Sectors ................................................................................................................... 267 Christopher L. Gilbert v Preface The Commodities and Trade Division1 of FAO organized a two day workshop on 4 and 5 April 2006 in Rome, immediately after the meeting of the Common Fund for Commodities (CFC) with the various Intergovernmental Commodity Bodies (ICBs), thus benefiting from the presence in Rome of experts on various commodities from around the world. Additional analysts presented their work to the workshop. The workshop was held in the light of significant changes which are continuing to take place in the value chains for many agricultural commodities, particularly those fresh products destined for supermarket shelves. The changing pattern of these value chains has important, but not well understood, implications both for domestic policy in producing countries and for international trade. The objective of the workshop was to explore the issues arising from the changing structure of the various commodity chains, and to guide the future work of the Division in this area, in order to produce information and analysis of use to the FAO members. The workshop brought together the latest thinking on these issues to provide a stock-taking of the various problems, and more importantly, to identify the policy and technical issues on which there is consensus, and those where further analytical and empirical work is needed. Alexander Sarris Director Trade and Markets Division 1 Now the Trade and Markets Division Proceedings of the FAO Workshop on Governance, Coordination and Distribution along Commodity Value Chains 1 Introductory Note Brian Moir2 A two-day workshop was held by the Commodities and Trade Division3 at FAO in Rome, 4-5 April 2006. The objective was to explore the issues arising from the changing structure of the various commodity chains, and to guide the future work of the Division in this area. This set of proceedings of the workshop is published to assist in understanding the implications of the developments in agricultural value chains and in the analysis of value chains by economists, from a competitive market structure to one where market players are characterised by varying degrees of market power. This changing pattern and the development of market power affect resource allocation in agriculture and equity between producers, and have implications for domestic as well as international policies. THE CHANGING PATTERN OF AGRICULTURAL MARKETS The traditional pattern of agricultural production and markets as described by economists was (and to a large extent, still is) one of more-or-less perfect competition, typified by, inter alia, product homogeneity, a large number of buyers and sellers, and freedom of entry to the market. Under this model, each small farmer determines the volume and type of output to be produced and placed on the market. The relationships between seller and buyer (producer:wholesaler; wholesaler:retailer) are generally limited to simple spot transactions. The widely noted exception to the free market was the operation of various state trading enterprises. In countries such as the communist states of Eastern Europe, as well as China and Viet Nam, the supply chain was integrated and controlled by the state. Production, processing, marketing, and the provision of inputs and credit were all centrally planned. But in other countries also the state played a significant role in vertical coordination in food supply chains. In many African countries, parastatal organizations provided inputs and extension services to farmers and purchased their output and, despite the liberalization that has occurred in the past 20 years, this state controlled vertical coordination is still common in some African countries. Elsewhere, the state controlled the export of commodities from Canada and Australia, and controlled imports into Japan,