Marcos Fava Neves

Small is beautiful in the modern food chain

By Marcos Fava Neves (China Daily)
Updated: 2009-10-13 08:03

An important discussion raging across the world is about the conflict between small holders and agribusiness corporations. Some critics say small holders will be "exterminated" because of the unequal competition they face from large corporations for land and other resources.

Agribusiness is defined as the sum of production and distribution of agricultural inputs, production operation within farms, warehousing, stocking and processing of agriculture products and byproducts. Davis and Goldberg, of Harvard, first put forward this definition in 1957. And they do not differentiate between large and small firms, and family and independently owned firms. The critics therefore are fuzzy.

Buying and selling efficiently on a global scale in the long term is a game for well-prepared businesses in any industry. We must offer these opportunities to small farmers.

Many researchers claim that small holders' biggest challenge is how to add value to premium products in niche markets in which scale gains are not critical for success. As a small producer, a Swiss dairy farmer or an Ethiopian coffee grower can achieve success through premium or special products targeted at a particular group of consumers willing to pay more for those products. Organic and more recently fair-trade products fit well into this philosophy.

Irrespective of the products, the challenge for the small producers is to target niches markets and to have a strong marketing capability. Interestingly, when large firms or professionally organized non-profit organizations (like Rain Forest and Agro Fair) opened their eyes to the niche areas they started growing faster.

Governments in developing countries have spent lots of resources on structuring small growers' production areas, transferring land ownership rights to them and providing farms with investments and training. There have been successes, but unfortunately the percentage of failures is much larger, especially when most of the support turned out to be a blind help.

It shows that growers have been encouraged to produce traditional products such as bananas and mangos for markets that lack the needed upstream and downstream coordination, and in which supply is far higher than demand.

The idea of improving the living standard of people in rural areas is very appealing. It assumes special importance when large-scale monoculture is pushing rural people toward large cities and raw material for biofuels threaten to occupy large parts of arable land across the world.

Economic efficiency and specialization are tough challenges. It is not possible, however, to stop discussing new business models that try to accommodate this social expectation.

There have been suggestions to introduce small holders to strictly coordinated agribusiness systems. It means the small holders will not produce just for subsistence or local markets, but also for industrialization or to sell their products in any of the attractive markets in the world. This view is gaining acceptance because of the growing concern over social sustainability.

If a firm involved in fruit juice production were to buy from small holders it could create opportunities for marketing appeal, using its scarce resources in downstream marketing activities and focusing on juice production instead of basic agricultural production. All these benefits may be counterbalanced by additional transaction costs borne by the leading small holders (several production units).

The gist of the points discussed above is that agribusiness firms or strictly coordinated systems must find ways to maintain sustainability. Many public agents put this factor on the top of their project analyses in order to get political acceptance and obtain finance from government sources.

A business project that has different viability dimensions and includes social considerations will interest for public agents. They may attract firms from a specific region that aim to develop their area of operation. The benefits may not be limited to generating taxes and jobs, but extend to positive externalities through coordinated and sustainable transactions among chain participants, both upstream and downstream.

It may also suit private agents who have a systemic and long-term view. This understanding would help them during their talks with politicians once positive externalities are clearer. It will also help organizations that are introduced to a specific area to negotiate their incentives.

This shows that including small holders in the modern food chain is an important step on the road to sustainable development.

The author is a professor of strategic planning and food chains at the School of Economics and Business, University of Sao Paulo, Brazil.

(China Daily 10/13/2009 page9)