Embed Size (px)
Citation preview
Private Investment in Agro-industry
Trends, Effects, Constraints
Jo Swinnen
University of Leuven & Stanford University
FAO Rome Dec 2011
Agro-industrialisation and agro-processing
The ratio of food processing to agricultural value added rises with incomes
Agro-industrialisation and agro-processing
The share of agribusiness in GDP increases with income
Source: World Development Report 2008 (p 135)
Agribusiness includes the value added for agro-related industries and for agricultural trade and distribution services
Supermarket investments
Supermarket food retail increases with per capita income
Source: World Development Report 2008 (p 125)
Private investment and FDI in agri-food sectors
Liberalization, privatization and investment Before 1990: state-control in agricultural markets
• Government marketing • State processing companies • International and domestic trade restrictions
1990-2000: privatization and liberalization processes • Privatization of state food companies and marketing • Introduction of competition • Removal of trade restrictions
Reduced state control in agri-food markets Increased private investments in agri-food sector
Per capita FDI growth with liberalization (flow)
7
FDI stocks in Developing Countries • 1980: 140.4 billion US$ (25.5%) • 2006: 3155.9 billion US$ (26.3%)
-
2 000 000
4 000 000
6 000 000
8 000 000
10 000 000
12 000 000
14 000 000
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Africa
Latin America and Carribean
Asia and Oceania
Transition countries
Developed countries
FDI stocks as percentage of GDP, 1980 – 2006
Source: Calculated from UNCTAD
0
5
10
15
20
25
30
35
40
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
Developed Countries
Africa
Latin America and theCaribbean
Asia and Oceania
Transition Countries
• Foreign direct investment, net inflows (% of GDP)
• SSA keeps up FDI as % of GDP during crisis, while going down in other regions
FDI flows compared to ODA flows to developing countries, 1970 - 2006
Source: Calculated from UNCTAD
Resource flows to developing countries (US $ billion)
1970 1975 1980 1985 1990 1995 2000 2003 2006 FDI 3.9 9.7 7.7 14.2 35.9 116.0 256.1 178.7 379.1 ODA 5.4 9.2 17.0 21.2 38.5 40.5 36.1 49.7 77.0
11
ODA vs FDI for DC
0
50000
100000
150000
200000
250000
300000
350000
400000
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
ODA
FDI
Greenfield vs. M&A
• Especially greenfield investment important for developing countries
• FDI flows: greenfield investment and M&As as % of GDP (weighted average), 1987-2001
0
100
200
300
400
500
600
700
800
900
1000
2003 2004 2005 2006 2007 2008 2009
FDI in agriculture (EURO MN)
Abania
Bulgaria
Czech Republic
Estonia
Croatia
Hungary
Lithuania
Latvia
Macedonia
Poland
Romania
Russia
Slovenia
Slovakia
Ukraine
Per Capita FDI in agro-food industry (euro/capita in 2007)
0
50
100
150
200
250
Czech Republic
Estonia Hungary Lithuania Latvia Poland Romania Russia Ukraine
FDI i
n th
e Agr
o-fo
od in
dust
ry (€
per
capi
ta)
Private investment and FDI in agri-food sectors
Industries offering the best opportunities for FDI in SSA
Source: UNCTAD
The emergence of supermarket chains and their importance in food retail Food distribution increasingly organized around large super-
and hypermarket chains
Supermarkets and consolidation in food retail first emerged in high-income countries:
• In the EU and the US: 60% of food retail through 20 food retail companies
• 5-firm concentration ratio very high in some industrial countries
Supermarkets and their market shares in food retail are spreading rapidly in the emerging and transition markets
The supermarket revolution
The 5-firm concentration ratio for food retail in industrial countries
Source: Henson, 2006
“The Supermarket Revolution” Share of foreign retailers
in top 50 retail in Czech and Slovak
0
10
20
30
40
50
60
70
80
90
1993 1994 1995 1996 1997 1998 1999 2000 2001
Fore
ign
shar
e (%
)
Czech Slovak
Mid 2000s Top FDI Destinations of Global Retail Chains
1. Russia 2. India 3. China 4. Slovenia 5. Latvia 6. Croatia • Central Europe is “already mature” • Food retail is top investment area
China: The Retail Olympics
0
10
20
30
40
50
60
1990 1992 1994 1996 1998 2000 2002
40% annual growth between 1998 and 2002
Number Sales (billion US$)
20% annual growth between 1998 and 2002
0
10000
20000
30000
40000
50000
60000
1990 1992 1994 1996 1998 2000 2002
Supermarkets in developing countries (% of food retail)
The supermarket revolution
0% 20% 40% 60% 80%
Brazil
Argentina
Cost Rica
Mexico
Honduras
Guatemala
Phillipines
Thailand
Indonesia
South Africa
Kenya
Increased role of private standards
Standards affect trade and specifically the export opportunities of developing countries
Standards affect the structure and governance of food value chain in developing countries Incl participation of smallholders
Impact on development (economic growth and
poverty reduction)?
Agro-Ind. Investment Effects
• Investment in the agro-food industry can have major spillover effects on farms’ productivity & investments through supply chain development
• Crucial role of “Value Chain Finance”
Value Chain Development & Poverty
• Smallholder participation varies strongly
• Smallholder participation is assumed to
be good ex ante
• Most studies ignore labor market effects
“69% of 35 billion $ credit in the Brazilian agri-food system is supply-chain credit”
D. Alcantara Banco do Brasil (March 2004)
“Private agricultural marketing companies have
become dominant providers of smallholder input credit in Sub-Saharan Africa.”
IFAD (2003, p.5)
Types of VCF
• Trade credit – (Input supply programs)
• Investment loans • Bank loan guarantee programs • Leasing • Warehouse receipt systems • …
Processor/Retailer – guaranteed supplier loans:
• Retailer/processor
provides loan guarantees for bank loans to suppliers
• Example: – JUHOSUKOR in Slovakia – KONZUM in Croatia
Retail/Processing Co.
Bank
Farm
Leasing dairy equipment by joint project Ex: Wimm Bill Dann -- De Laval in Russia
Processor
Project
Farm
Equipment Seller
Dairy Processor Becomes Financial Institution: DANONE in Romania
• Processor takes on banking function: – provides loans to
farms – based on business
plans – takes collateral
• Provides payment
guarantee for input suppliers
Processing
Bank Input Supplier
Farm
VCF in Romanian Dairy - 2004
Type of support DANONE FRIES- LAND
PRO-MILCH
RA-RAUL
Extension services
X X X X
Quality inputs X X X X Input Pre-finance
X X
Investment loans
X X X
Bank loan guarantees
X X X
VCF by food companies in CIS-5 (Armenia, Georgia, Moldova, Russia, & Ukraine)
% of firms % of farms Credit 43 51 Prompt payments 42 87
Physical inputs 36 53
Quality control 34 78
Agronomic Support 21 81
Farm loan guarantees
21 15
Investment loans 6 0
VCF in Cotton Sector in Kazakhstan (2003)
% of FARMERS Credit 89 Water 73
Seeds 65
Fertilizer 40
Agronomic Support 4
Farm loan guarantees 0
Investment loans 0
VCF & Economic Conditions (% VCF programs in dairy in ECA)
R2 = 0.9309
0102030405060708090
2 2.5 3 3.5 4
reform progress (EBRD)
assi
stan
ce (
% i
nte
rvie
wed
co
mp
anie
s)
VCF: Trade Credit & Inputs
Sub Sahara Africa
Source: Maertens et al., 2006; M inten et al., 2006
Reasons for contracting (%) Madagascar Senegal
2004 2005 Stable income 66 30 Stable prices 19 45 Higher income 17 15 Higher prices 11 Guaranteed sales 66 Access to inputs & credit 60 63 Access to new technologies 55 17 Income during the lean period 72 37
VCF: Trade Credit & Inputs
Central Asia (Cotton)
Reason for contracting (%)
Kazakhstan 2003
Guaranteed prices 4 Guaranteed sales 6 Access to credit 81 Access to quality inputs 11 Access to technical assistance 0 Other 4
Impact
• Important Direct Effects : – Enhanced QUALITY (& higher prices) – Increased PRODUCTIVITY – Increased INVESTMENTS
• Important Indirect Effects: Spillovers – Contract replication by other companies – Farm assistance replication – Household level spillovers – Gender effects
• Combined: – increased INCOME and reduced POVERTY
VCF & INVESTMENT : (farm cooling equipment in Poland)
0
10
20
30
40
50
60
70
80
90
100
1995 1998 2001 2003
Sha
re o
f sup
plie
rs w
ith o
wn
c.t.
(%)
MlekpolLowiczeMazowszeKurpie
VCF Impact on Investment Small farms in Polish Dairy sector
Comparative Analysis 3 cases of SSA horticulture
Small-holders
Industry structure
High value exports to
EU Madagascar green beans
100% contract
Monopoly Local
yes
Senegal green beans
Mixed & changing
Competition Local
yes
Senegal cherry tomatoes
0% Monopoly Foreign
yes
1. Mada : Green Beans
• Rapid growth over past decade – 1990: 100 farmers – 2005: more than 9,000 small farmers on
contract
• In 2004/5: 3,000 tons of exports – 90% put in jars and shipped by boat – 10% fresh and shipped by plane
Mada: Contracts in supply chain
Standard contracts for all farmers (individuals):
- 1 are - Fixed price over the whole year - Seeds, fertilizer, pesticides on credit (in
kind), to be repaid - Multiple contracts possible over one year
• Strict supervision of the farmers: – 300 extension agents on the payroll, each
has six assistants; one assistant for 5 farmers
– Number of visits of farmers: 30% of farmers say less than once a week; 30% says once a week; 41% says more than once a week.
– 92% of farmers say that firm knows approximately or exactly the number of plants on the plot!
• High supervision costs to ensure quality but also to avoid ‘side-selling’
Effects on technology adoption, income & land use (biodiversity)
• Land use in the off-season on rice fields
• Vegetable export contributes for 47% to household income
• Rice productivity up by 64% through technology spillovers
• Sharp improvement in food security
• Reduced pressure on forests
Impact of vegetable contract-farming on the length of the “hungry” season in Madagascar
0
1
2
3
4
5
currently contractedhousehold
contractedhouseholds before
the contract
similar householdswihtout contract
mon
ths
Source: Minten et al., 2009
0
5,000
10,000
15,000
20,000
25,000
30,000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Year
Exp
ort v
olum
e (t
on)
French bean Tomatoes Mango Other fruit & vegetables
2. Senegal exports
0
1000
2000
3000
4000
5000
6000
7000
Total sample Non-participants
Agro-industrialemployees
Contractfarmers
Ave
rag
e h
ou
seh
old
in
com
e (1
,000
F C
FA
)
Total household income Income from farming
Income from agr. wages Income from non-agr. sources
Income effects
Poverty effects (Green beans in Senegal)
Source: Maertens and Swinnen, 2009
0
10
20
30
40
50
60
Scenario "Noexports"
Scenario"Contract"
Actual situation
% o
f h
ou
seh
old
s
incidence of poverty
incidence of extreme(food) poverty
3. Worst Case Scenario ? tomato export in Senegal
1. Poor country 2. FFV sector: Increasing standards (private and
public) 3. Extreme consolidation 4. Foreign owned multinational company 5. Full vertical integration 6. Complete exclusion of smallholders 7. FDI of land (“Land grabbing”)
Employment • More than 3000 workers in 2006
• 40% of HH in the region have at least one member employed by GDS
0%
10%
20%
30%
40%
50%
2003 2004 2005 2006Year
Sh
are
of
ho
useh
old
s
Gandon Ross Béthio Total
Income effects
0
500
1000
1500
2000
2500
Total sample Households withmembers employed in
the tomato exportindustry
Households withoutmembers employed in
the tomato exportindustry
Av
era
ge
to
tal h
ou
se
ho
ld in
co
me
(1
,00
0 F
CF
A)
Total income Income from tomato export industry wagesIncome from farming Income from self-employmentIncome from other wages Non-labour income
Poverty Effects
• Poverty: 35% vs. 46%
• Extreme poverty: 6% vs. 18%
0%
10%
20%
30%
40%
50%
Households without membersemployed in the tomato export
industry
Households with membersemployed in the tomato export
industry
Sh
are
of
ho
useh
old
s
Poverty Extreme Poverty
Gender effects Female employment in Senegal horticulture export sector
Source: Maertens and Swinnen, 2009
Importance of female income in total household income
Source: Maertens and Swinnen, 2009
Case-study "Les Niayes" - all households
0 500 1000 1500 2000
Farming
Wages - FFV exportindustry
Wages - other
Self employment
Transfers
Household income (1,000 FCFA)
Total incomeMale incomeFemale income
Case-study "Les Niayes" - households employed in FFV export industry
0 200 400 600 800 1000 1200 1400 1600
Farming
Wages - FFV exportindustry
Wages - other
Self employment
Transfers
Household income (1,000 FCFA)
Total incomeMale incomeFemale income
Case-study "Senegal River Delta" - all households
0 100 200 300 400 500
Farming
Wages - FFV exportindustry
Wages - other
Self employment
Transfers
Household income (1,000 FCFA)
Total incomeMale incomeFemale income
Case-study "Senagl River Delta" - households employed in the FFV export industry
0 200 400 600 800 1000 1200 1400
Farming
Wages - FFV exportindustry
Wages - other
Self employment
Transfers
Household income (1,000 FCFA)
Total incomeMale incomeFemale income
BIOFUELS IN ETHIOPIA
2 MODELS: Castor & Jatropha
60
61
Biodiesel chains
nursery seed collection pealing oil pressing refining oil export/use
Study area – generally food insecure
Source: FEWS, 2010
• foreign company contracting farmers to grow castor
• farmers are eligible to participate –if own land size > 0.75 ha
• farmers are advised to allocate only a maximum of ¼ of their total land to castor and keep traditional crops on the side
• Castor seed has no other use in the area and has no other buyer
• Farmers often use inputs to other crops – thus contract farmers may record potentially gain from higher input use
63
Castor contract farming in the study area
- significant adoption rate in few years of
promotion contrasts with low rates of other technology adoptions
- penetration of the Castor crop into inaccessible and remote places
- diversification of crops
Preliminary findings
Preliminary results
Income is higher by 5-10%
Significant improvement of food security: “Food gap” is lower by 50% (30 vs 47 days).
fertilizer use is higher by 70%
• Effects: – adopting biodiesel crop narrows the food gap days by
28% for adopters
• this could potentially be attributed to – direct effect of the piecemeal cash flow farmers
received from piecemeal supplies nearby village level seed collection centers
– indirect effect of increased use of inputs and better agricultural practices and higher income from other side crops
…preliminary results
Policy Implications
1. Realizing the importance of this process
2. Investment climate (economic & political)
Constraints on Private Investment
Ukraine Moldov
a Kyrgyzsta
n Georgia Total
Average Volatility of the political environment 3.4 3.3 4.5 2.8 3.5 Uncertainty about the economic environment 3.3 3.4 4.4 2.9 3.5 Ambiguity of the legal system 3.9 3.5 3.5 2.7 3.4 Corruption 4.0 3.9 3.1 2.1 3.3 Bureaucracy 3.9 3.9 3.1 2.0 3.2 Lack of physical infrastructure 2.5 2.8 3.9 2.9 3.0 Backward technology 2.4 2.9 3.1 2.4 2.7 Lack of business skills 2.4 2.6 3.1 2.7 2.7 Finding a suitable partner 2.5 2.9 2.3 2.8 2.6 Problems in establishing clear ownership conditions 3.2 2.9 1.7 2.4 2.6
• Assessment of problems faced by foreign investors
Policy Implications
1. Realizing the importance of this process
2. Investment climate (economic & political)
3. Programs to improve: Transparancy Dispute resolution mechanisms ….
4. Competition – complex …
