Market links and Value Chain Analysis

Nongluck Suphanchaimat Department of Agricultural Economics

Faculty of Agriculture Khon Kaen University

nongluck@kku.ac.th

Mekong Institute, Khon Kaen Thailand 23 March 2010

1992 ASEAN Trade liberalizationEliminate tariff within 10 years

2003 ACMECS framework Cambodia, Lao, Myanmar and Thailand

To utilize each countries’ strengths

2010Free trade within ASEAN

Expectations of the ACMECS

• Increase competitiveness, generate growth along the borders

• Create employment opportunities

• Facilitate relocation of agricultural and industrial industries

• Reduce income disparity between the four countries

• Although open markets and economic integration can enhance rural growth but at the same time encounter risk of economic losses to superior competitors, instability, and worsening inequality

•(Rosegrant and Hazell 2001).

Market LinkageMarket Linkage Market LinkageMarket Linkage

Why a company wants to embark market linkage ?

1. ensure sustainable partnerships between producers and buyers

2. to build trust and a recognition of interdependence between buyers and sellers.

Operational purposes:

1. Traders want to ensure both quantity and quality of the supply.

2. Producers want to have a reliable market, a fair price and support services for their production.

Market LinkageMarket Linkage Market LinkageMarket Linkage

For this purpose, procedures must be in place .

Assess the long term viability of the proposed enterprise and to ensure that the necessary conditions exist for successful production;

trust and recognition of inter-dependence between the buyers and the sellers.

Market LinkageMarket Linkage Market LinkageMarket Linkage

Assessing demand of the products

to ensure that both buyers and sellers understand and fulfill their obligations to the other party, thereby reducing the risk of the partnership collapsing

1. IDENTIFYING MARKET OPPORTUNITIES

1. IDENTIFYING MARKET OPPORTUNITIES

Any action taken must start from an understanding of the market to assure that demand for the product does exist

and will not disappear at least in the short term

"Demand for the product" means both

Demand for the raw material Farmers

Demand for the end product consumers

2. SELECTING SUITABLE ENTERPRISES2. SELECTING SUITABLE ENTERPRISES

• Smallholders

– Labor intensive– Low susceptibility to

crop hazard– diversify

• Large-scale farmers, plantation company

– Capital intensive– Specialize– More susceptibility

to crop hazard

Once a sure demand for any products have been identified, a choice can often be made between promoting production of

smallholders, or by large scale farmers or plantation companies. In the case of smallholders, independent intermediary is usually needed.

3. SELECTING SUITABLE 3. SELECTING SUITABLE LOCATIONSLOCATIONS

There is usually a choice of possible locations for sourcing products, whether through smallholder or large-scale producers. The following locational characteristics are needed

- sufficient suitable land and water in the area

- enough individual producers who are interested in growing the crop, and have sufficient resources to produce the amount required on top of their other economic activities;

- easy access for servicing and collecting the farmers' production, even in the rainy season.

4.SELECTING LINKAGE PARTNERS4.SELECTING LINKAGE PARTNERS

cultivation collection Processing Export Import Retail

--small holderssmall holders-Large scaleLarge scale

-producersproducers-Corporate farmsCorporate farms

The intermediaryTrading firmcollector

Trading companyTrading company consumersconsumers

5. FORMING AND MANAGING PRODUCER 5. FORMING AND MANAGING PRODUCER GROUPSGROUPS

Production through small holders forming into group is necessary due to:

economies of scale in provision of services, supply of inputs and collection of crop;

easier two-way communication of information;

more effective provision of training;

easier negotiations on price;

joint collateral for loan security;

peer group pressure for loan repayments;

easier monitoring of performance and quality control.

6. FORMING AND MANAGING PRODUCER GROUPS6. FORMING AND MANAGING PRODUCER GROUPS

the group should not be too large

the choice of which group a smallholder belongs to should be voluntary,

election of group leaders and design of management systems should be transparent and democratic;

the finances of the group should be professionally and transparently managed: suspicion of financial malpractice is the most common cause of break-up of producer groups;

facilitation and mediation by an impartial intermediary can be helpful in resolving disputes and linking groups to other advisory services.

77. DESIGNING BUYER-SELLER CONTRACTS. DESIGNING BUYER-SELLER CONTRACTS

The contract helps:

avoid misunderstandings,

clarifies expectations and obligations

builds confidence and trust between the partners

If mny farmers in one location are contracted by the same company, the company can enter into a contract with the farmer group or with one farmer representative who is trusted and respected by the other growers.

8. DESIGNING PRODUCT PRICING SYSTEMS8. DESIGNING PRODUCT PRICING SYSTEMS

The company pay the minimum needed to ensure that they secure theamount of crop that they require. Pricing Pricing can be set as can be set as fixedfixed or varied according to or varied according to market pricemarket price

Disadvantages of open market price is

it gives smallholders no incentive to sell to the contracting company

rather than to any other company.

it does not support loyalty between the smallholders

and the company

9. PERFORMANCE MONITORING AND RECORDING9. PERFORMANCE MONITORING AND RECORDING

The performance of all the partners involved in a market linkage needs to be carefully recorded and monitored especially for perishable products or foods susceptible to contamination.

Monitoring is also to avoid:

misuse of agrochemicals

failure to maintain required quality standards to be traced directly to their source.

It is important that farmers, as well as the other partners, are fully involved in monitoring their own performance. Record keeping procedures should be

introduced from the outset It is obviously vital that the farmers understand the language and terminology used.

Outcome

• Increase market stability

• Improve quality of product

• Partnership building

Some problemsSome problems

- - -some people do side sellsome people do side sell- -Calculation of prices and payments-

customer

price

suppliers suppliers suppliers

Integrated

FirmMajor buyer

MARKET BALANCED DIRECTED INTEGRADTED

Example of market structures

MaizeMaize Organic coffeeOrganic coffee Export craftExport craft Cut flowerCut flower

• How can we improve the market linkage to benefit small-scale producers?

• Increase the total amount and value of the product that the small holders sell in the chain .

• To sustain the share of the small holders in the sector or income from the margins per product.

Value chain analysis

Mapping Value chain

Product selection

Analyze Value chain

The value chain system

Supplier’s value chain

Firm’s value chain

Buyers’ value chain

-Input --credit-- labor

- machine- water-logistic

CollectorMachineries

ChemicalPackaging

Storage-logistic

DistributionPackaging

TradingStorage

Quality control-logistic

cultivation collection Processing Export Retail

How to choose product to study?

• Identify small holders participation in production system. what are existing situation? “What they produce? How they produce? How they sell? How is employment?

• Potential to improve the situations• Potential to use labor intensive technology• What are the constrains to improve

participation of the small holders ( lack of capital, knowledge and markets)

Example of product selection by Matrix Ranking

Weight the important of the value chain by giving score 1 - 4

criteria Weight Rice Silk Chicken

no.people 50 % 4 3 3

source of income 30% 3 2 4Employment 20% 3 4 1

3.5 2.9 2.7

Mapping the value chain

1. Provide holistic view of the chain, provide structure of the chain

2. Identify constrains of the chain3. position of small holders in

value chain4. Identify actors’ relations

5. Create awareness among the actors in value chain

Example of mapping by actors from farm to producers

InputProvision

Cultivation

Collection Processing

Export/RetailConsumption

PrivateSuppliersCooperatives

Farmers

Collector

-Store- transport- credit Provider- transport

- Storage-Quality control-Sell product to consumers

Producers ExporterRetailers

Ac

tor

sA

ctiv

itie

s

Growing

GrowingCaringHarvest

Collectquality

-Improvement- storing

-transport

Rice value chain - categorization of actors

Farmer(Technology)

Trader (Size)Miller or Processor

Final sale

Small

Medium

Small

Medium

Large

Rain fed

Irrigated

Contract

Contract

Medium

Large

Local

Local Retail

High Value Local

Export

Seed

produce

Example : mapping actors

Production

Collection

Consumption

Maize On farm feed consumption

Domestic

trader

Border trader

- shelling

Trader with silo - refined

- mixing Export

Animal feedManufacturers

Processing / trading

Mapping volumesMediumPrimary

Producers

SmallPrimary

Producers IndustrialSMEs

Large processing companies

Importers

CustomersMarket 1

CustomersMarket 1

20%

50%

30%

20%

Retailers A

Retailers B

20%

60%60%

20%

Example : mapping knowledge

Farmers - yield color of the product Collector - grade

- origin of the products

- quality

Consumers - quality/ purity/ aflatoxin free

- color

Example : Mapping Relationship

Farmers collector Processor consumers Exporter

Cooperative- Farmer group- Cooperativemembers

inputCorn

productionprocurementprocessing

activitiesSale on credit

-Farm plan-Herbicide application

-Uncobbed- dried-transport

-Drying- milling

Difficulties-Lack of cash- too expensive input

-Dry spell-Lack of production techniques-Poor road

-High transportation-Aflatoxin-rainfall

-Lack of drying technology

feasible solution

-Credit lending service-Contract farming-cooperative

-road improvement-Farmers field days-Provision of farm pond

-covered storage

-silo

- Credit providing for silo

Example of mapping constrains and possible solutions

input production trading processing Consumers

exporter

- Mature

- Purity

- Non-toxic

- Color

- Size

- Moisture

- Color

- Size

- Uniformity

- Smell

- Grade

- Color

- Taste

- Package

- Product

- Quality

Information : example of information flows

What types of relationship and linkages exist?

1. Spot market relation independent negotiation for price at quantity and

grade

2. Persistent network relation : Developed relationship at certain level; no formal

agreement, rely on regular trading and price can set before or later

3. Horizontal integration integrated relationship system that all actors understand needs of each others and develop patterns of trades and agreements accordingly.

Governance is a management of Value

chain in order to improve efficiency, quality of the value chain. These improvement may

involve cost and loss reduction income distribution and actor relations through

Rules and regulation

Control

Governance

customer

price

suppliers

Relationalsupplier

component and material suppliers

Turn-keysupplier

component and material suppliers

Integrated

Firm

Lead Firm

Lead Firm

Lead Firm

Captive suppliers

Low HighDegree of Explicit Coordination

Degree of power Asymmetry

End use

Material

va

lue

ch

ain

Market Modular Relational Captive Hierarchy

Market Modular Relational Captive Hierarchy

Low

Identify opportunity for upgrading knowledge/skill

Upgrading :1.Can cost of upgrading be

reduced ? Can speed of delivery be increased ?

2.Product upgrading. Introduce new products ? Upgrade old products ?

Analyze services that should be provided to assist the

upgrade

credit service provide credit to farmers for village storage

technical knowledgein seed production

on-farm experimeant

for seed production

Community based seed production

Example of feed corn value chain

The border trade

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

1,800.0

Mil

lio

n U

S$

Export

Import

Figure 1 Composition of Thai exports to Lao

0% 50% 100%

2003

2005

2007

Yea

r

Consumer goods

Vehicles

Machineries &equipmentMaterials

ConstructionmaterialsPetroleum

Figure 2 Composition of thai import from Lao

0% 50% 100%

2003

2005

2007

Year

Wood & w oodproductVehicle & sparepartsAgricultural product

Mineral

Machineries & Tools

Others

Border trade expansion has been achieved after 2003, agricultural products imported from Lao is still marginal compared to other items

Example of market network for Maize at Kenthao district,Lao

Thai traders at Thali (16)

Kenthao traders (21)

Village agents (115)

Farmers (1,150)

( ) number of person involved

Free trade help develop trading sector

Impact of free trade on Lao farmers

• Problems of soil erosion and depletion• reduction of natural food supply• heavy use of herbicide

compare cost in US$ per ha

102.7125.9

61.655.64

0

50

100

150

200

Lao (n=45) Thai (n=43)

cash cost per ton Family labor )

caompare yield and cost

5.6

4.9

113.7

137.3

4.4

4.6

4.8

5

5.2

5.4

5.6

5.8

Lao (n=45) Thai (n=43)

0

20

40

60

80

100

120

140

160

Average yield(ton per ha)

Total cost (US$per ton)

VC -MaizeFarmer

(5,000)

Trader

(20)

processor

(5)

Consumer (10)

activitiesplantSell input/credit

Buy output

Mixed

grade

Mix

export

regulationPlant on slope <38 degree

Sun dried before harvest

Mixed price from Lao

Price by grade for Thai product

Must pay back debt before new crop

Must deliver as grain

Identify origin

Free of aflatoxin

Impurity less than 5%

Price bht/kg

4.55.36.38

Margin %18%19%27%

Profit %(4.5-3)/3=50%0.3/5.3 = 6%0.25/6.3 =4%

FarmerTrader processorconsumer

FarmerExchange info

Borrow money and buy input sell output

no no

TraderProvide tractor transportation service

Provide technical advice

Exchange information

Thru trade union

Price info exchange

no

processorAssess production thru field visit

Price info

exchange Exchange information

Thru trade union

no

consumer no no exchange info on quality

exporter & domestic users’ info exchange

Relations between actors

Lao PDR

Myanmar

Cambodia

Vietnam

Malaysia

Indonesia

Taiwan

SingaporeFlow outFlow in

Commodity flows after free trade

0.40.16

0.1

1

Planted Area in mllion ha

Lao feed corn have to be mixed with Thai product

Thai Lao

Group work for discussion

• Identify crops or enterprise to analyze market linkage, give the reason why you choose this product

• Identify market structure and map out actors, activities

• Identify problems and possible improvement