Key message: the highest returns in global commodity markets are skewed towards the latter stages of the value chain, but a more equitable distribution can be achieved.
Geneva, 27 April 2007 - If producers such as farmers have not benefited adequately from the rising global demand for commodities, it is because most of the returns in this sector are skewed towards the latter stages of the value chain. There are several ways to shift more of the profits to the people who actually grow the crops. They include improving market entry, improving the functioning of domestic and regional markets, and enabling producers to carry out more of the "value-added" steps themselves.
A "value chain" has been defined as "the full range of interrelated productive activities performed by firms in different geographical locations to bring out a product or a service from conception to complete production and delivery to final consumers"(1).
With globalisation and the tendency towards product differentiation, value chains have become increasingly internationalised, and the share of overall returns has been shifting more and more towards the latter part of the chain -- towards those business activities which underscore differentiation, such as design and marketing. Transnational corporations meanwhile are growing in size and influence in the sector, leading to significant concentrations of power. The result is value chain dominance by certain types of commodity buyers, including large plantation owners, mining conglomerates, international trading houses and multinational supermarket groups.
Conversely, activities early in the value chain -- including the production or extraction of commoditised raw materials -- have declined in relative importance. Their share of value in the final product has diminished (see table 1 for an exemple) and the bargaining power of those who carry them out has been reduced.
African nations and Least Developed Countries in other parts of the world have suffered disproportionately from these trends. Such countries often depend on the production or extraction of commodities for a sizable share of their GDPs -- and for their export earnings. Wide-scale economic liberalisation and the substantial withdrawal of governments from marketing and support functions have further weakened the position of farmers and other commodity producers in these countries.
However, if the current state of affairs appears discouraging, the advantage of a value chain perspective is that it identifies ways to improve the situation. Three separate but related strategies are considered promising:
- Market Entry
Along with the formal barriers to trade that often affect agricultural products, commodity producers and processors face problems selling their goods overseas if they do not integrate into the established chains of leading firms. Such integration is not easy. The market requirements of large commodity purchasers have proliferated in recent years, and span a wide range of quality standards, traceability requirements and delivery conditions. This trend has been reinforced by the growing popularity of sustainability labels that seek to certify fair-trade conditions and organic production methods.
Yet recent studies carried out from a value chain perspective assert that "small enterprises can grow and become competitive economic ventures when they have clear and well-developed strategies to target and access quality market opportunities for selling their outputs"(2) .
Access to markets can be eased by making standard-setting procedures more responsive to developing country concerns and by improving the capacity of producers to comply with standards. This can be done through targeted investments and technical capacity building programmes that may be initiated by governments, the private sector, or the international community, often through public-private partnerships. For example, in direct response to the private "EurepGAP" standards developed by European retailers, the Kenyan Government together with civil society and the private sector have developed KenyaGAP, which is designed to adapt the EurepGAP quality assurance system to Kenyan capacities.
- Enhancing domestic and regional markets
Improving the functioning of domestic and regional markets is another way to build competitiveness and broaden the benefits of commodity-based growth.
First, these markets can act as an effective intermediate step for developing country producers and processors in scaling up their business operations. Reaching these markets allows them to expand the volume and breadth of their production without also imposing the daunting standards and conditions that large, developed-market purchasers typically require.
Second, building local networks and clusters among farmers and other commodity producers and processors in developing countries can be a means of building their capacity to link into global value chains and enhancing their resilience to shocks that could otherwise disrupt their capacity to supply their products. Clustering enterprises increases the scale of overall production and enables combined learning and sharing of resources within the cluster.
The role of government should be to help with this building of networks and clusters, and to focus on creating an environment within which domestic and regional markets can develop. Governments may also wish to provide incentives for market formation, whether through the provision of grants and low-interest loans or through favorable treatment on taxes and export duties for certain transactions.
- Moving up the value chain
With returns increasingly concentrated in the latter stages of the commodity chain, it becomes imperative for those in developing countries to take on more of the value-added activities that yield higher rewards.
How much opportunity there is to do so depends on a number of contributing factors. These include the degree of vertical integration in the sector, the way the value chain is governed, the support of government, the extent of access to overseas markets, and the availability of finance. In particular, where the lead firm in a value chain requires a complex array of product standards and conditions, it is often in that firm´s interests to transfer technology and know-how to suppliers. However, once suppliers participate in such an arrangement, they must be wary of the extent to which they become dependent on it -- the high costs of exiting the system can weaken their bargaining power, especially if the lead firm retains control of technology and expertise through strict licensing agreements.
Alternatively, farmers and other commodity producers may seek to access value chain financing structured around their established position within a robust value chain. This can allow greater flows of more affordable finance to fund upgrading of their activities. (3)
Governments also have a role to play. Providing market information, training, new technology, better infrastructure and funding for research and development are public activities that can help those in the commodity sector lift themselves up the value chain. These public goods can be focused on improving the ability of domestic firms to carry out design, marketing, and core technical production and processing.
Table 1. Value shares for Robusta coffee producers, 1980-1988 and 1999-2003
Source: Gilbert, C (2006) "Value chain analysis and market power in commodity processing with application to the cocoa and coffee sectors