Description
Using transaction cost analysis, gap analysis and the key dimensions of long-term buyer–seller relationships (satisfaction, trust and power-dependence), it is possible to demonstrate that the supply chain for potatoes cultivated in the Red River Delta (Vietnam) is surprisingly efficient.
Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
Agriproduct Supply-Chain
Management in
Developing Countries
Proceedings of a workshop held in Bali, Indonesia,
19–22 August 2003
Editors:
G.I. Johnson and P.J. Hofman
Australian Centre for International Agricultural Research
Canberra 2004
ACRC084.book Page 1 Monday, October 18, 2004 2:35 PM
Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
The Australian Centre for International Agricultural Research (ACIAR) was established
in J une 1982 by an Act of the Australian Parliament. Its mandate is to help identify agri-
cultural problems in developing countries and to commission collaborative research
between Australia and developing country researchers in fields where Australia has a
special research competence.
Where trade names are used this constitutes neither endorsement of nor discrimination
against any product by the Centre.
ACIAR PROCEEDINGS
This series of publications includes the full proceedings of research
workshops or symposia organised or supported by ACIAR. Numbers in this
series are distributed internationally to selected individuals and scientific
institutions.
© Australian Centre for International Agricultural Research, GPO Box 1571,
Canberra, ACT 2601.
J ohnson, G.I. and Hofman, P.J ., ed. 2004. Agriproduct supply-chain management in
developing countries. Proceedings of a workshop held in Bali, Indonesia, 19–22
August 2003. ACIAR Proceedings No. 119, 194p.
ISBN 1 86320 479 2 (print)
1 86320 480 6 (electronic)
Cover design: Design One Solutions.
Technical editing and typesetting: Clarus Design Pty Ltd
Printing: Pirion Printing
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
3
Foreword
A major theme of many ACIAR projects is ‘linking farmers with markets’. In a complex,
global market, price and supply fluctuations for rural produce affect resource and infra-
structure planning and access to credit, at both farm and national levels. Production sur-
pluses may not translate into higher incomes. The efficiency of enterprises is affected by
the choice of commodity, product end-use or market, as well as sourcing of inputs such as
fertilisers, seed, pesticides and technology.
Rural communities and governments must become more ‘market smart’. They need to
forecast, interpret and respond to supply signals from domestic and global markets, and to
capitalise on consumer preferences for perceived nutritional benefits, novelty and conven-
ience. They must balance sustainable resource use and demands for quality with the chal-
lenges of higher food safety standards and long and complex supply chains.
Progressing beyond self-sufficiency, whether at the farm or national level, requires the
capacity for reliable production and profitable marketing of products sought by con-
sumers. The challenge is to provide rural communities with the capability and resource-
fulness for social adjustment and improvement of enterprise profitability during their
integration into the global community. The need is especially acute for small, remote and
resource-poor communities because of their small production bases and greater vulnera-
bility to natural disasters, new pests, political instability and other ‘shocks’. Developed
countries must be proactive in enabling remote communities in developing countries to
obtain a fair share of global prosperity.
ACIAR considers that, in the face of globalisation, rural community progress and resil-
ience will depend increasingly on their understanding of and access to markets, the flex-
ibility and strength of their financial base, and the quality, efficiency and versatility of
their production, processing, distribution and marketing systems.
ACIAR will support research that enables improvements in product integrity, processing
and storage, and quality assurance and supply-chain management.
The papers in this proceedings were presented at a workshop in Bali in August 2003. Many
of them report on work carried out in ACIAR projects. More information is available
through ACIAR’s Linking Farmers With Markets, electronic newsletter (www.lfwm.net).
Peter Core
Director
Australian Centre for International Agricultural Research
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
5
Contents
Foreword 3
Opening Address 7
Ahmad Dimyati
Preamble 11
Supply-chain Management: Understanding the Concept and Its Implications in
Developing Countries 18
Elizabeth J. Woods
Incorporating Measures of Satisfaction, Trust and Power-dependence into an Analysis
of Agribusiness Supply Chains 27
Peter J. Batt
Banana Supply Chains in Indonesia and Australia: Effects of Culture on Supply Chains 44
Shinta Singgih and Elizabeth J. Woods
Supply-chain Management and the ‘One Dragon’ Approach: Institutional Bases for
Agro-industrialisation in China 53
Sherrie Wei and Zhang Yanrong
Analysis of the Constraints to Banana Industry Development in Indonesia Using the
Supply Chain Concept 59
Setyadjit, Ahmad Dimyati, Erna Maria Lokollo, Sri Kuntarsih, Rofik Sinung Basuki,
Ahmad Hidayat, P.J. Hofman, S.N. Ledger and E.J. Woods
Improving the Marketing System for Fresh Produce from the Highlands of Papua New Guinea 69
John Spriggs, Barbara Chambers, Carole Kayrooz, Ernest Natera, Norah Omot
and Margaret Vatnabar
Developing Systems to Maintain Quality through the Supply Chain: Getting the Product
Right for the Customer [Abstract only] 76
George Beers
Consumer Sovereignty: Exploring Consumer Needs 77
Peter J. Batt
Aflatoxin in Indonesian Peanuts: How Can the Contamination within the Food Chain
Be Managed? 88
Okky Setyawati Dharmaputra, Agustina A. Rahmianna, Nageswara Rao Rachaputi,
Graeme C. Wright and Greg Mills
Improved Marketing of Mandarins for East Nusa Tenggara in Indonesia 98
Sherrie Wei, Damianus Adar, Elizabeth J. Woods and Herman Suheri
Getting Farmers to Work Together: the Experiences of Mango Growers in the Mekong Delta
Region of Vietnam 107
Nguyen Minh Chau, Sherrie Wei, Vo The Truyen, Marlo Rankin and Iean Russell
Fruit and Vegetable Production in Vietnam and the Role of Traders in Marketing
[Abstract only] 112
Tran Cong Thang
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ACIAR Proceedings No. 119e
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Who Benefits from Enhanced Management of Agri-Food Supply Chains? 113
Chris Wheatley and Dai Peters
Farmers’ Misconceptions about Quality and Customers’ Preferences: Contributing
Inefficiencies to the Vegetable Supply Chain in Southern Mindanao 124
Sylvia Concepcion, Marilou Montiflor, L.T. Hualda, L.R. Migalbin, L.N. Digal,
E.T. Rasco, N.M. Manalili, M.J. McGregor, P.J. Batt, R. Murray-Prior
and F.M. Rola-Rubzen
The Melon Value Chain in Gansu Province, Western China: Benefits to Growers from
Improved Disease-Control Practices 133
Zhang Yanrong and Sherrie Wei
Improving Indonesian Vegetable Supply Chains 139
Wendy Morgan, Syukur Iwantoro and Ibu Alifah Sri Lestari
Indonesia’s Strategic Agricultural Commodities in Meeting the WTO Agreement 142
Rina Oktaviani
Market Access and J ob Creation: a Supply Chain Action Agenda (the Case of the Philippine
Fruit Export Winners) [Abstract only] 152
Nerlita M. Manalili
Public Policy Issues in Supply-Chain Management 153
Donna Brennan
Supply-chain Management and Agro-Enterprise Development: CIAT’s Approach in
Southeast Asia 164
Christopher Wheatley, Rupert Best, Dai Peters and John Connell
The Supply Chains of Melons in Western China 173
Sherrie Wei, Zhang Yanrong and Niu Gang
Development in Agribusiness Chains and Challenges for Postharvest Technology:
Experiences from The Netherlands [Abstract only] 178
George Beers
Linking Farmers with Markets: the Case of Cocoa 179
G.I. Johnson, Arief Iswanto, J. Ragisvaru, P.J. Keane, N. Hollywood, S.V. Lambert
and D.I. Guest
The Benefits of Supply-Chain Practice in Developing Countries – Conclusions from
an International Workshop 188
Chris Wheatley, Elizabeth J. Woods and Setyadjit
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ACIAR Proceedings No. 119e
(printed version published in 2004)
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Opening Address
Supply-Chain Management in Indonesia:
Prospects for Methodological Adjustment
and Practical Applications
Ahmad Dimyati
Secretary,
Indonesian Agency for Agricultural Research and Development
(IAARD)
Background
The Ministry of Agriculture of the Republic of Indonesia has defined two core
programs of national agricultural development, namely improving food security and
enhancing the development of competitive, sustainable, people-centred and
decentralised agribusinesses. The two core programs require better understanding and
implementation of a systems approach in identifying, analysing and improving
problematic situations in agricultural development. Therefore, the application of the
supply-chain management (SCM) concept in agribusiness is quite in line with the
current needs of the agriculture sector’s decision-makers and practitioners.
Supply-chain management has been widely used in the manufacturing industry. Its use
in agribusiness has been initiated in a study entitled ‘Market-based analysis of
constraints for the development of banana industry in Indonesia and Australia’. The
study was carried out by the Indonesian Center for Horticulture Research and
Development (ICHORD) in collaboration with Queensland Department of Primary
Industries (QDPI), with joint funding of the Government of Indonesia and the
Australian Centre for International Agricultural Research (ACIAR).
The introduction of the SCM concept within ICHORD programs coincided with the
introduction of another systems approach method, named ‘soft systems methodology’
(SSM) developed by Peter Checkland of the University of Edinburgh, Scotland. Our
research team tried to combine and integrate the two methods in analysing and
improving the problematic situations pertaining to the development of horticulture in
Indonesia.
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edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
8
Lessons Learned
The six principles of successful SCM were used to measure the performance of banana
production and marketing systems in several locations in the provinces of Banten, West
J ava, and J akarta. The six principles are: (1) understanding and meeting customers’ and
consumers’ needs; (2) getting the products right; (3) creating and sharing values; (4)
logistics and distribution; (5) information and communication; and (6) effective
relationships among supply-chain members.
The results of the study will be reported in detail in later sessions of this workshop.
However, it is necessary to underline several lessons learned from this study. After
discussing various problems and constraints in the banana industry, new ideas to improve
research and development programs in horticulture were revealed. On-farm oriented
research, which has dominated research programs for years, was supplanted by market-
oriented research programs, such as consumer preferences, components and determining
factors of fruit quality, and packaging, storage and processing. New ideas for on-farm
research also emerged, such as selection of better varieties and planting material, and
cultural practices related to fruit qualities.
Our short experience in applying the supply-chain concept also revealed that, between
different chains, variation is possible in the emphasis on different principles in achieving
success. One supply chain may emphasise the creation and sharing of new values to
improve income and welfare of the members, while another SC may emphasise the
importance of open and fair information flow and efficient communication.
The success of applying the supply chain concept and improvement of SCM depends
largely on effective contributions by various members of an interdisciplinary, or even a
cross-functional, team. No single scientific discipline or professional field can claim all
the credit for success. Researchers in various disciplines, extension workers, practitioners
and policy makers should collaborate in analysing the problems, formulating the
improved schemes and designing the actions needed to implement them.
Since SCM is a holistic approach with human-activity systems, similar to soft systems
methodology (SSM), we found it possible to integrate SCM with SSM. Such integration
permits:
1. mapping the situation of SCM in a richer picture according to SSM, to make it richer
and more dynamic than the linear flow charts usually used in SCM
2. use of interactive and iterative multilateral dialogues among supply chain members
3. characterisation of the chain, using SWOT (strengths, weaknesses, opportunities,
threats) analysis and root definition of the systems
4. mapping of narrative areas for improvement of SCM in the conceptual models used in
SSM
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ACIAR Proceedings No. 119e
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5. formulation of follow-up actions based on SWOT analysis can be further
elaborated using the SSM approach to define actions and changes that are logically
desirable as well as culturally and politically feasible.
Both SSM and SCM require an interactive and iterative egalitarian dialogue that suits
Western culture. Their application in the Indonesian cultural setting will need
adjustment of the style of dialogue. One of the drawbacks of the two methods lies in the
nature of decision-making process in the supply-chain systems. Supply-chain
improvement requires the decision of various ‘equally authorised’ partners. Hence, the
process is owned by these various partners. Multiple ownership of the processes and
the diversity of stakeholders, make the processes of improvement slow and
complicated.
Both SCM and SSM have good prospects for wider application in agribusiness
development. Among the areas that will benefit from the use of the two methodologies
are:
• analysis of constraints to agribusiness development made by various central
Directorates within and outside the Ministry of Agriculture
• assessment of location-specific and commodity-specific agribusiness models as
components of action research conducted by 26 provincial Assessment Institutes
for Agricultural Technology
• commodity-based ‘Action Programs’ conducted jointly by the Indonesian Agency
for Agricultural Research and Development (AARD) and Directorate General of
Horticulture Production Development
• integration of the two methodologies in the education and training curricula related
to the agribusiness development.
Since we are still in the early learning stage, we are expecting the workshop to make
a large contribution to the enhancement of SCM application in Indonesia, particularly
within AARD. Among possible contributions are:
• exchange of lessons learned in diverse social and economic conditions
• improvement and enrichment of the concept
• refinement of the procedures
• suggested adjustments for varied cultural situations and commodities
• strategy and tactics for wider application.
Finally, I wish you all productive deliberations and an enjoyable stay in this country.
Thank you.
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edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
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Preamble
An adequate and stable supply of agricultural com-
modities is the keystone of food security and eco-
nomic development. Globalisation and trade
liberalisation can help communities to improve rural
incomes, but these benefits may be compromised by
inadequacies in infrastructure or governance, by dif-
ficulties in controlling postharvest deterioration or by
an inability to produce competitive products.
ACIAR considers that, in the face of globalisation,
the progress and resilience of rural communities will
depend increasingly on their understanding of and
access to markets, the flexibility and strength of their
financial base, and the quality, efficiency and versa-
tility of their production, processing, distribution and
marketing systems. Rural communities and govern-
ments must become more ‘market smart’. They must
balance sustainable resource use with the challenges
of quality requirements, higher food-safety standards
and long and complex supply chains.
At the international workshop at which the papers
in these proceedings were presented, experts outlined
the theory, methods and approaches of supply-chain
management (SCM), and practitioners discussed
their practical experience in SCM. The workshop
then considered how SCM can best be used in devel-
oping countries to optimise benefit flows.
The main focus of ACIAR support for supply-
chain projects has been to consider whether evalu-
ating an industry using the supply chain as a founda-
tion (that is, looking at all aspects from farm to plate)
would better indicate the areas that need to be tar-
geted to improve industry efficiency and profita-
bility, for the individual members of the supply chain
and the chain as a whole. An important priority of the
ACIAR projects (listed later in this preamble) has
been to identify whether and how changes in SCM
can ensure that the benefits extend to farmers.
This workshop provided a forum for discussing
how SCM can assist in developing appropriate
systems from farm to plate, to the mutual benefit of
all involved, and what implications there are for
governments and communities. In addition, it
sought to assess whether this approach can assist in
identifying the most important constraints to these
improvements. These constraints would then be the
areas that R&D providers and policy makers could
focus on in order to assist industry development.
Workshop Objectives
The workshop sought to achieve:
• a greater understanding of the potential benefits
and application of the SCM approach to increasing
returns to smallholders
• an enhanced capability for supplying produce to
the higher-returns supermarket and hospitality
trades, by increasing product quality and supply
efficiency
• a better identification of the real constraints to
improvements in the targeted industries, so that
R&D activities can be implemented more
effectively
• an understanding of the implications of increasing
market sophistication for governments, industries
and communities
• publication, in the ACIAR Proceedings series, of
the papers presented. The papers in this volume
cover the theory of supply chain R&D and practical
experiences in application of the supply-chain
approach in developed and developing countries.
Participating Projects
The projects described on the following pages pro-
vided the support for many of the papers presented at
the workshop. The information was collated by
ACIAR, using the best information available at the
time of preparation, for use as a resource in the work-
shop. Further information on the projects can be
obtained from the contact person listed in the project
summary.
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edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
12
ACIAR Project PHT/1997/161 — Market based
analysis of constraints to banana industry
development in Indonesia and Australia. Active to
31/12/2003.
This small project developed a participatory
process to identify the major constraints to the com-
petitive performance of a horticultural industry in
Indonesia and Australia to:
• assist in industry development
• more effectively direct R&D to priority areas with
the greatest potential for improving producer
profitability.
The project tested the feasibility of using the con-
cepts of product market performance and supply-
chain management both as drivers of industry devel-
opment and to guide the contribution of R&D to
industry development.
Commissioned organisation:
Queensland Depart-
ment of Primary Industries, Brisbane (P.J . Hofman,
Email: <[email protected]>).
Collabo-
rators:
Central Research Institute for Horticulture,
Indonesia; University of Queensland, Australia;
Indonesian Agricultural Postharvest Technology
Research Institute (Indonesia); Directorate of Fruit
Plantation (Indonesia); Central Research Institute for
Socio Economic Development (Indonesia); Directo-
rate of Marketing of Horticulture (Indonesia);
Central Research Institute for Vegetables (Indo-
nesia).
The market for seed potatoes, fresh potatoes and
processed potato products in Vietnam (AusAID
CARD and other funds)
Funded initially under the CARD project, this
project sought to identify the principal source of seed,
the costs of seed, the various criteria farmers used in
their decision to purchase seed and the extent to which
the seed available met the farmers’ expectations.
Based on the performance of seed imported from
Western Australia, it was readily apparent that
improved seed had a significant positive impact on
yield, lifting the average yield of 12 tonnes per
hectare to more than 30 tonnes per hectare. Since
most of the potato crops in the Red River Delta are
harvested within an eight-week period, concern were
expressed as to what impact the improved produc-
tivity would have on prices in the fresh market.
Various exploratory studies were then undertaken to
examine the downstream implications on the whole-
sale market. Discussions focused on current whole-
sale prices, the seasonality of demand, competitors
(in China and Da Lat, Vietnam), tuber quality and
size, postharvest storage and the extent to which the
potatoes available in the Red River Delta met the
market intermediaries’ needs. Various discussions
were also undertaken with small-scale potato proces-
sors and the food service sector.
In presenting the results to a potato industry work-
shop in November 2001, the German technical assist-
ance agency Deutsche Gesellschaft für Technische
Zusammenarbeit (GTZ) advised that it was about to
embark upon a more extensive investigation of the
entire supply chain, including consumers. As a result,
the two research programs were combined. It was
proposed to interview consumers in both northern
Vietnam (the Red River Delta) and southern Vietnam
(the Mekong River Delta) and to undertake an anal-
ysis of both the domestic market and export market
for potatoes cultivated in the Red River Delta. Infor-
mation was sought on consumers’ attitudes towards
fresh potatoes, substitute crops (taro, sweet potato
and radish), the frequency of consumption, how the
product was used, how much consumers paid to pur-
chase potatoes, consumer preferences, and the
demand for both processed potato products and pota-
toes that were consumed away from home (restau-
rants). Various demographic variables were also
collected to evaluate such measures as the income
elasticity of demand.
A comprehensive analysis of the supply chain for
potatoes in both the Red River Delta and Mekong
River Delta was undertaken. Both quantitative and
qualitative interviews were conducted with farmers,
traders, wholesalers and retailers, and various food
service outlets. Information was collected on the
prices paid to purchase potatoes, the various activities
undertaken, the costs of performing those activities,
and the prices at which the potatoes were sold. Infor-
mation was sought on how prices varied over the year,
between the different grades, the different suppliers
(China and Da Lat), and the extent to which the quality
of the potatoes sold met the buyers’ needs. The final
aspect of the research included a number of relational
dimensions (trust, satisfaction, commitment, power-
dependence and relationship-specific investments) to
explore to what extent market intermediaries were sat-
isfied with the exchange relationship.
Commissioned Organisation:
Agriculture Western
Australia (Peter Batt, Email: <[email protected]>).
Collaborating Organisations:
Food Crops Research
Institute Vietnam; Curtin University of Technology;
GTZ.
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ACIAR Project PHT/1998/140 — Postharvest
handling and disease control in melons in China
and Australia. Active 1/1/2002 to 31/12/2004.
ACIAR funded an earlier small project, ‘Posthar-
vest handling and disease control in melons’, which
affirmed the priorities for melon industry develop-
ment in western China and the scope for improve-
ments in disease control and supply-chain
technologies. This project follows on from that
research. It is aiming to improve postharvest disease
control and market quality of melons and other
cucurbits, and improve returns to growers in China
and Australia. Project activities include the strategic
application of preharvest treatments to boost natural
defence mechanisms in melons, and postharvest
treatments to control disease and maintain quality.
Researchers are also developing and testing interven-
tions that improve supply-chain management,
analyse the economic benefits associated with using
modern postharvest technologies and transport sys-
tems, and identify the most practical options to
improve profitability for farmers.
Commissioned Organisation:
University of
Sydney, Australia (Dr Robyn McConchie, Email:
<[email protected]>).
Collabo-
rating Institutions:
Gansu Agricultural University,
China; China Agricultural University, China; Sydney
Postharvest Laboratory, Australia; Xinjiang Depart-
ment of Agriculture, China; University of Queens-
land, Australia; Xinjiang Agricultural University,
China.
ACIAR project ASEM/2001/037 — Improving
the marketing system for fresh produce of the
highlands of PNG. Active 01/01/2003–31/12/2005.
The Papua New Guinea (PNG) Highlands region
represents a unique environment in which high
quality temperate-zone horticultural produce is
grown year-round. The region has the potential to
meet produce needs of populous coastal cities of
PNG as well as to supply offshore markets. The main
drawback to fulfilling this potential is an inadequate
marketing system, and marketing improvements
have been given a high priority in the PNG Govern-
ment’s National Food Security Policy, 2000–2010.
Project researchers will map the marketing system
and its institutional environment (governmental and
infrastructural), identify the constraints and capaci-
ties for change, and evaluate the potential for
improvement. They will facilitate a process of
change, focusing on two particular supply chains —
a land/sea chain (bulky, less-perishable produce) and
a land/air chain (highly perishable, high-value pro-
duce).
Commissioned Organisation:
University of Can-
berra, Australia (Dr J ohn Spriggs, Email:
<[email protected]>).
Collabo-
rating Institutions:
National Agricultural Research
Institute, Papua New Guinea; Fresh Produce Devel-
opment Corporation, Papua New Guinea.
ACIAR Project ASEM/2000/101 — Improving
the efficiency of the agribusiness supply chain and
quality management for small agricultural
producers in Mindanao. Active 01/01/2001–31/12/
2003.
This project examined the factors affecting the per-
formance of the agribusiness supply chain for
selected fresh vegetables produced by smallholders
in Mindanao, Philippines, with particular emphasis
on the potential for farmer cooperatives to perform
the agribusiness functions and deliver greater bene-
fits to the farmer. The project involved rapid
appraisal and case study methods to assess the per-
formance of the current marketing arrangements and
sought to identify impediments to the functioning of
the supply chain. The researchers aimed to determine
whether there is adequate information flow between
market intermediaries and farmers, to reflect the
market requirements for quality management.
Training programs, workshops and seminars with
farmer groups and institutional participants aimed to
facilitate the adoption of quality management
systems and improve the success rates among agri-
cultural cooperative groups.
Commissioned Organisation:
Curtin University of
Technology, Australia (Dr Murray McGregor,
Email: <[email protected]>). Project
website: <http://www.curtin.edu.au/curtin/muresk/
aciarmindanao/>.
Collaborating Institutions:
Uni-
versity of the Philippines, Mindanao, Philippines.
ACIAR Project PHT/1997/017 — Reducing
aflatoxin in peanuts using agronomic
management and bio-control strategies in
Indonesia and Australia. Collaborating
Countries: Indonesia and Australia.
Several ACIAR bilateral projects have investi-
gated aspects of aflatoxin assessment and significant
progress is finally being made in developing inte-
grated control strategies. This project builds on this
and other work on drought tolerance (a trait that was
found to reduce contamination risk). Advances in
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(printed version published in 2004)
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agronomic management of aflatoxin since the earlier
projects means that reduction of aflatoxin contamina-
tion risk in peanuts, including the use of drought-
resistant peanut cultivars, is now feasible. This
project will determine the extent and relative impor-
tance of pre- and postharvest aflatoxin contamination
in peanuts, and develop biocontrol, management and
crop/fungus modelling strategies to minimise the
impact of aflatoxins in both Indonesian and Aus-
tralian cropping systems. Scientists will evaluate a
number of crop management and varietal methods to
control ‘on-farm’ aflatoxin contamination. As well, a
simulation modelling approach — integrating the
interaction between crop, soil, environment and
Aspergillus flavus
(the fungus producing the afla-
toxin) — will enable assessment of the probability of
aflatoxin formation at various stages during growth,
harvest and storage of peanuts.
Commissioned Organisation:
Queensland Depart-
ment of Primary Industries, Australia (Dr Graeme
Wright, Email: <[email protected]>).
Collaborating Institutions:
Research Institute for
Legumes and Tuber Crops, Indonesia; Assessment
Institute for Agricultural Technology, Indonesia;
Gadjah Mada University, Indonesia; University of
Sydney, Australia; SEAMEO Regional Centre for
Tropical Biology, Indonesia.
ACIAR Project ASEM/1999/013 — Improved
marketing of mandarins in East Nusa Tenggara in
Indonesia and northern Queensland. Completed
project.
Regional horticultural farmers in East Nusa Teng-
gara (NTT) and northern Queensland operate on a
small scale and lack a systematic marketing strategy
for their products, which are often of poor and incon-
sistent quality. The Indonesian farmers have addi-
tional problems associated with poor infrastructure
and lack of investment. The project focused on small-
holder mandarin farmers in NTT and northern
Queensland. The aim was to assist farmers to
improve quantity and quality of fruit production,
define specific market requirements and improve
marketing strategies. The findings of the project were
also applicable to East Timor.
Commissioned Organisation:
The University of
Queensland (Dr Sherrie Wei, Email:
<[email protected]>).
Collaborating Insti-
tutions:
Universitas Nusa Tendara; Queensland
Department of Primary industries; Metaram Univer-
sity, Lombok.
Improving the performance of the fruit industry
in Tien Giang and Tra Vinh Provinces. AusAID
CARD (Capacity-Building for Agriculture and
Rural Development) Project for Vietnam. July
2001–July 2003.
This project focused on the mango industry in the
Mekong Delta area of Vietnam and aimed to:
• enhance the capacity of agribusiness marketing of
the Southern Fruit Research Institute (SOFRI),
provincial agricultural services, selected farmer
associations and farmers
• strengthen the capacity of farmer associations in
service delivery, quality assurance management
and group marketing
• upgrade the capacity of SOFRI and provincial
agricultural services in fruit tree propagation,
production and protection, including expanded
capacity for certifying planting material to meet
market demand.
Four farmer groups were established and they
worked with Australian partners (including mango
farmers from Queensland) to develop a trial of QA
standards for the 2003 season and other group func-
tions.
Commissioned Organisation:
University of Queens-
land (Sherrie Wei, Email: <[email protected]>).
Collaborators:
Southern Fruit Research Institute,
Vietnam; Curtin University of Technology; Queensland
Fruit and Vegetable Growers; Cantho University.
Victorian Government and Australian
Department of Agriculture, Forestry and
Fisheries (AFFA) Project VG MIS: Indonesian
vegetable supply chains: case studies. Active to 30/
09/2003.
This one-year project used a case study approach
to introduce farmers, packing house staff and con-
sumers (via retailers) to the concepts of food safety
and meeting customers’ expectations. The project
was proposed as a five-year project and was
extremely ambitious. Activities undertaken to
achieve this included:
• selection of supply chains and personnel in five
locations to participate in case studies after lengthy
discussions with senior MOA staff in J akarta and
provinces
• a training-of-trainers (TOT) workshop for 10
MOA staff at CSA, J akarta on food safety for
packing houses, including packing-house HACCP
analysis, development of a packing-house HACCP
manual, and accreditation preparation
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• TOT for selected MOA staff and experienced
farmers at five locations, on integrated pest
management (IPM) and farmer field school (FFS)
methodology
• FFS for farmers in each supply chain (425 farmers
currently in FFS)
• packing-house food safety awareness for the
community at each supply chain’s location
• packing-house food safety training and HACCP
analysis for manager, staff and farmers supplying
packing houses at five locations
• training in product handling and storage for retail
fresh-produce buyers, managers and senior store
staff of one of the supply chains.
It is too early to evaluate the impact of the project,
but change has occurred at farmer, packing-house
and retail sectors of the case study supply chains
Commissioned Organisation:
Victorian Depart-
ment of Primary Industries (Dr Wendy Morgan,
Email: <[email protected]. gov.au>).
Col-
laborators:
Indonesian MOA’s Centre for Standard-
isation and Accreditation (Mr Syukur Iwantoro),
FIELD Indonesia (Ibu Alifah Sri Lestari), MOA &
Dinas staff in five provinces: East J ava, South
Sulawesi, Bali, South Sumatra and West J ava.
Rural Agroenterprise Development Project:
International Center for Tropical Agriculture
(CIAT). Active.
http://www.ciat.cgiar.org/
agroempresas/ingles/projectdescript.htm
This global project is promoting rural business
development and encouraging improved business
and market orientation in small rural producers’
organisations and support service organisations.
Small-scale farmers and entrepreneurs face
numerous barriers that prevent them from taking full
advantage of marketing opportunities. Usually, eco-
nomic models and policies do not favour them; they
have little business experience, and lack information
on technologies, markets, and prices; and receive
little support in terms of training, advisory services,
and credit. The mission of the project is to promote
the linkage of small farmers with growth markets,
and motivate the adoption of conservation practices
through the development of methodologies, tools,
information, and models of institutional organisation
for establishing and strengthening rural agro-enter-
prises and their complementary support services.
Currently, the project works with five modules that
integrate the essential elements for developing rural
agro-enterprises: marketing, postharvest technology,
business organisation, integrated agro-enterprise
projects (organised around commodity chains) and
local support systems, and training and strategic
planning. The project’s direct clients are civil society
NGOs and CBOs (community based organisations),
public sector development agencies and institutions
involved in building human capital. The project has
developed a methodological framework based on a
‘territorial approach to rural business development’,
which consists of four phases:
1. formation of a work team interest group) and
development of a common vision
2. identification of market opportunities
3. design of integrated agroenterprise projects (i.e.
oriented towards improving the commodity
chain)
4. proposal for strengthening the local support
system.
This methodology is implemented in reference
sites in collaboration with public and private-sector
development agencies. The project is decentralised,
having regional coordinators in Africa, Asia, Central
America, and the Andean region of northern South
America.
In Asia, the project has previously undertaken
research in Vietnam on clusters of root crop starch-
processing enterprises (understanding and enhancing
local innovation systems) and has conducted two
regional agroenterprise development training courses
with SEARCA and UPWARD (Los Baños 2001 and
Ho Chi Minh City 2003).
A new SDC-funded agro-enterprise development
project for Laos and Vietnam started in 2003. The
SDC project goal is ‘to develop sustainable agroen-
terprise initiatives with upland rural communities
that generate income and employment opportunities
through diversifying and adding value to local
natural resources’. The objectives embody the
process that will be followed in facilitating agro-
enterprise development, ensuring its sustainability,
and setting the context for extension of the
approaches developed, viz:
i. identify and evaluate market opportunities for
agroenterprise development through local stake-
holder interest groups
ii. design and facilitate the implementation of
agroenterprise initiatives with supply-chain
actors
iii. establish a strategy and local capacity for
promoting agroenterprises and strengthening
local business support services
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iv. institutionalise the agroenterprise development
process at district, provincial and national levels.
Project Agency:
International Center for Tropical
Agriculture (CIAT) (Project Manager Dr Rupert Best,
Email: <[email protected]>; Asian Regional Coordi-
nator: Dr Dai Peters, Email: <[email protected]>;
Consultant: Dr Chris Wheatley; Email:
<[email protected]>.
Collaborating Agencies:
Various national and regional partners.
IFPRI — The development of postharvest
activities and agroindustry as a strategy to
improve rural livelihoods. Project completed.
<www.beaf.de/dnload/IFPRI_Katalog.pdf>
This project aimed to develop recommendations
for the continued expansion and development of the
fruit and vegetable sector in Vietnam. Outputs sought
were:
• preliminary assessment of postharvest constraints
and selection of product groups for in-depth study
• identification and characterisation of household and
community management of postharvest operations
and agrofood-based rural industrialisation
• identification and characterisation of market
structure, marketing, and processing enterprises
involved in postharvest operations and agrofood-
based rural industrialisation
• identification and characterisation of institutional
mechanisms involved in lowering the transaction
costs and increase the access of rural households to
information, markets, and assets
• empirical analysis of economic behaviour,
adoption of technology and institutional
mechanisms
• analysis of impact of alternative policies and
strategies at the rural household level, at the
market level, and at the institutional level
• intensive dissemination of results in the country
and internationally.
Project Partners:
Vietnam Ministry of Agriculture
and Rural Development (MARD); International
Food Policy Research Institute (IFPRI), Nicolas
Minot; Email: <[email protected]>; International
Agrifood Consulting Company.
ACIAR Project ADP/2000/100 – Contract
farming, smallholders, and rural development in
East Java, Bali and Lombok. Active 01/01/2001–
30/06/2003.
This research aimed to examine contract farming
arrangements between smallholders and agribusiness
firms in Indonesia. Contract farming helps to over-
come problems of imperfect markets in developing
countries, and has been successfully adopted in Latin
America. The agribusiness firms ensure a guaranteed
source of supply and reduce transactions costs, while
the farmers are given access to input supplies (such as
credit, information on new technologies) and guaran-
teed prices. However, there are concerns that small
farmers may not appropriate much of the benefit
from these arrangements, and this project collected
baseline information on the use of contract farming in
Indonesia, with particular emphasis on opportunities
for smallholders in East J ava, Bali and Lombok. The
results from the study should also have relevance to
agribusiness firms and government decision-makers
at both local and national levels.
Commissioned Organisation:
University of New
England, Australia (Dr Phillip Simmons; Email:
<[email protected]>).
Collaborating Insti-
tutions:
Balai Pengkajian Teknologi Pertanian,
Indonesia; Bogor Agricultural University, Indonesia;
Brawijaya University, Indonesia; Udayana Univer-
sity, Indonesia.
Technical assistance on market promotion and
development of the Philippine fruit export
winners
This proposed project would aim to foster the
development of a thriving Philippine fruit export
industry that will help create jobs and improve the
lives of the people through a two-pronged approach
of formulating the needed strategies and corre-
sponding actions that will enable the country to gain
market access in developed countries and to improve
further product quality and competitiveness of its
export winners. The specific objectives are:
• To promote agricultural winners, specifically
tropical fruits, in key international markets
through:
– the conduct of marketing activities that promote
Philippine fruits and negotiate tariffs on imports
and
– the identification and evaluation of legal and
technological barriers to agricultural trade in
target markets.
• To ensure adoption of continuing product and
product quality improvement in the fruit export
industry through:
– the conduct of industry assessment focusing on
product and product flow (supply chain), to
identify areas for quality and efficiency
improvement and
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– the establishment of an institutional mechanism
that will convene the stakeholders as well as
facilitate the interface between export industry
leaders and government agencies.
• To formulate policy recommendations in line with
the strategies identified.
Proponent:
SEAMEO Regional Center for Graduate
Study and Research in Agriculture (SEARCA)
ACIAR Project ADP/2001/066 – Strengthening
agricultural market information activities in
Vietnam. Active 01/01/2003–30/06/2005
Vietnam faces many challenges in the area of agri-
cultural marketing but lacks experience and capacity
in market-based research. This project will develop a
framework to analyse agricultural marketing issues.
Researchers will describe (and quantify) the current
marketing channels for pigs, vegetables and canned
fruit in Vietnam, and identify the role of the public
and private sectors in marketing these products. They
will also compare the experiences of public and
private agricultural marketing services in China,
Thailand and Australia with the situation in Vietnam.
The researchers will work with the Information
Centre for Agriculture and Rural Development
(ICARD) – the market research and market informa-
tion unit of Vietnam’s Ministry of Agriculture and
Rural Development — to determine how the Centre
can provide ongoing market information services to
these and other industries.
Commissioned Organisation:
University of Western
Australia, Australia: (Associate Professor Michael
Burton; Email: <[email protected]>).
Col-
laborating Institutions:
Ministry of Agriculture and
Rural Development, Vietnam; Department of Agricul-
ture, Western Australia, Australia
Other initiatives
PHT/1996/004 – Monitoring mycotoxins and
pesticides in grain and food production systems for
risk management in Vietnam and Australia
PHT/2000/102 – Selection for improved quality and
resistance to Phytophthora pod rot, cocoa pod borer
and vascular-streak dieback in cocoa in Indonesia
Australia–Indonesia Working Group on Agriculture
and Food Cooperation (WGAFC)
<www.affa.gov.au/exportgrowth>.
The Working Group on Agriculture and Food Co-
operation (WGAFC) was established by the Aus-
tralia–Indonesia Ministerial Forum in November
1992 to identify opportunities for greater cooperation
in agriculture and food between both countries and to
facilitate trade and investment. This mechanism has
provided a valuable opportunity for developing link-
ages between high-level government officials and
private sector interests of both countries. Most of the
cooperative activities of the WGAFC are undertaken
by its four task forces: Meat, Dairy and Livestock;
Horticulture; Food Processing, Storage, Transport
and Distribution; and Agribusiness Support Systems,
although activity is not necessarily limited to these
sectors. The task forces comprise mainly industry
representatives but are co-chaired and facilitated by
Australian and Indonesian government representa-
tives. Several commercial joint venture opportunities
and areas for collaborative training and research were
identified at its J uly 2003 meeting.
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18
Supply-Chain Management: Understanding the
Concept and Its Implications in Developing
Countries
Elizabeth J. Woods*
Abstract
During the 1990s, academic and commercial interest in supply-chain management (SCM) in agribusiness rose
in Europe and the USA. The driving forces included the trend towards consolidation of organisations (at farm
input, farms, processor and supermarket levels), along with government deregulation of agribusiness markets.
Interest was also rising in quality-management systems and food safety, and competition in markets was
increasing, associated with global trade in agribusiness products. SCM as a field of study draws contributions
from several disciplines including transaction-cost economics, relationship marketing, agency theory and
systems studies. This paper analyses the role of SCM in the context of concepts of operational effectiveness
and strategy put forward by M. Porter in 1996.
SCM implies managing the relationships between the businesses responsible for the efficient production and
supply of agribusiness products from farm level to consumers, to reliably meet consumers’ requirements in terms
of quantity, quality and price. In practice, this often includes the management of both horizontal and vertical
alliances. Meeting customers’ requirements involves integrated management of the transactions and relationships
between firms as well as processes within firms. Managing these relationships provides an opportunity for overtly
negotiating the shares between chain members of the value produced within the chain. More importantly, joint
planning of collaborative strategies is possible, to grow the shared value. The latter contrasts with the usual
conflict between agribusiness suppliers and buyers about their relative shares of the value generated.
Traditional supply chains in developing countries typically involve many players, and are tightly linked with
long-standing social structures. As developing countries enter into World Trade Organization arrangements their
agricultural industries will be subject to increasing competition in their domestic markets, and have greater
incentives to meet global standards in export markets. SCM provides one approach to planning the improvements
needed in the management of their agricultural production and marketing systems to meet future challenges.
During the 1990s, academic and commercial interest
in supply-chain management (SCM) in agribusiness
rose in Europe and the USA. The concept and its
application have become one of the key areas of
research and commercial focus in agribusiness for
the past decade. Interest has spread in the past five
years to include not only SCM in agribusiness prac-
tice in Western countries, but also the potential and
implications of the concept in developing countries.
This paper outlines the background to rising
interest in the concept of SCM. It presents working
definitions of the concept, and describes the theoret-
ical contributions that have guided the development
* School of Natural and Rural Systems Management,
University of Queensland Gatton, Gatton Queensland
4343, Australia.
Current address: Executive Director, Research and
Development Policy, Department of Primary Industries,
Meiers Road, Indooroopilly, Queensland 4067,
Australia. Email: <[email protected]>.
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of the concept and the field of study. The paper
presents arguments which show that SCM in its prac-
tical application straddles the concepts of operational
effectiveness and of strategy, both of which are crit-
ical to business success.
SCM provides a useful framework for analysing
the relationships between businesses engaged in both
vertical and horizontal alliances as a means to pur-
suing consumer responsiveness, and is concerned
with the development and nature of relationships
between businesses in the supply chain. This includes
the contribution to the development of value by the
chain and the way in which value is shared between
the chain partners. The role of new technologies in
enabling SCM is also noted.
Finally, the potential application and value of the
concept in planning, developing and managing agri-
business in developing countries are explored.
Background
Several changes in the operating environment of the
food and agribusiness sectors contributed to rising
interest in SCM, but it can be argued that the heart of
the development was growing intensity in the com-
petition for consumer expenditure. In line with other
retail developments, greater differentiation of food
products, improvements in product quality, and the
ability to transport products in cost-effective ways
provided consumers with a greatly increased array of
products from which to choose. At the consumer
level, the driving forces changing agribusiness
included increasing consumer sensitivity to quality,
safety, health and nutritional aspects of food prod-
ucts, and consumer interest in place of origin and
means of production, including non-food values such
as environmental sustainability and animal welfare.
Consumers responded by exercising their ability to
choose, and by this means, began to exert greater
power than previously over the food production and
marketing systems. In turn, it became clear to food
suppliers that market success depended on respon-
siveness to consumer demands.
A term coined to describe this reorientation—
chain reversal or consumer-driven chains—empha-
sises that the rise of consumer power spelt the end to
the prevailing assumption at farm and agribusiness
level that the job was simply to supply a product
without concern about the consumers’ requirements
or the existence of a market for the product. Tradi-
tional agricultural and food businesses that had
focused strongly on price were not equipped to
respond to a widening range of consumer demands.
Individually, they lacked the means to deliver effec-
tive consumer response. Each represented only part
of the processes involved in production of an agribus-
iness product and its subsequent transport,
processing and retailing to the consumer. SCM pro-
vided a means to conceptualise management of the
changes required in the system to efficiently respond
to consumer needs, based on integration and co-ordi-
nation of the efforts of all the business units involved
in the production and delivery processes.
Changes in the macro environment were occurring
parallel to the changes at consumer level. These
included a trend towards consolidation of organisa-
tions (at farm input, farm, processor and supermarket
levels), principally to drive down the costs of produc-
tion through economies of scale, but also to gain
market share and competitive strength in an increas-
ingly global market place. Preparing for global trade
also led to deregulation of agribusiness markets by
government withdrawal from marketing in several
countries. This created the opportunity to rethink the
business strategy, and create new supply-chain rela-
tionships.
Australia’s recent deregulation of the dairy industry
is an excellent example of change in a domestic market
responding to the requirements for international trade,
as mediated through the World Trade Organization
(WTO). The deregulation process resulted in the com-
mercial renegotiation of supply-chain relationships
that had previously been subject to heavy government
intervention and regulation. Consolidation following
deregulation has provided one approach to the new
competition between supply chains for market share
and scale, and to generating efficiencies which could
support greater investment in differentiation, brands
and marketing of products, than had been possible
within regulated markets.
Underpinning Theories
Supply-chain management simply refers to the man-
agement of the entire set of production, distribution,
and marketing processes by which a consumer is sup-
plied with a desired product. Folkerts and Koehorst
(1998, p.385) define a supply chain as:
…a set of interdependent companies that work closely
together to manage the flow of goods and services along
the value-added chain of agricultural and food products,
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in order to realize superior customer value at the lowest
possible costs.
Some authors prefer the term
demand chain
as
more clearly focusing on the consumer’s require-
ments. The related term,
value chain
, highlights the
contribution of functional parts of the chain (either
within an enterprise or across a supply chain) to the
development of customer value across the chain.
While consumers do determine the market size and
preference, they do not play an active role in the man-
agement of the chain. Implementing practical
improvements to allow the chain to be more compet-
itive and more responsive, requires active manage-
ment initiated by one or more members of the supply
chain, and supports the focus on supply-chain
man-
agement
as a basis for moving actively towards
delivery of improved chain performance. In other
words, all products reach consumers through a
supply chain but not all chains have sufficient com-
mitment and interaction to consistently improve effi-
ciency, customer value and competitiveness through
integrated management.
It is important to note that, in developed countries,
SCM implies a focus on agribusiness units and busi-
ness-to-business relationships. This differs from the
industry or commodity focus traditionally adopted in
agronomic research or in agricultural economics
analyses of business improvement. It also differs
from the community and participatory models that
commonly form the basis of regional economic
development and natural resource management
studies. This focus on business units tends to lead to
most SCM work being with larger industry players,
and in markets where products are valuable and dif-
ferentiated, rather than in commodity markets.
SCM as a field of study draws on several disci-
plines. These are summarised briefly below, with ref-
erence to literature through which the topics can be
more fully explored.
•
Transaction-cost economics
analyses the costs
associated with the exchange of goods and services
(Hobbs 1996). This includes the costs of acquiring
information, costs associated with negotiating and
enforcing contracts, definitions of property rights,
and the monitoring and changing of institutional
arrangements which define the processes by which
business transactions occur between companies.
Transaction-cost economics emphasises asset
specificity. The underlying assumption is that the
more specific an asset is, the greater the incentive
to develop long-term cooperation and
relationships which will enable the asset to make a
long-term contribution to profitability.
•
Agency theory
involves defining the most
appropriate forms of contract to protect the
relationships between chain members (Eisenhardt
1989). The aim is to produce a contract or
agreement which achieves a balance in relation to
information asymmetry between chain members,
uncertainty of outcomes, and the different levels of
risk aversion held by chain members,
The agency theory approach is complementary
to transaction-cost economics; together they focus
on improving the economic efficiency of doing
business between firms.
•
Power and power relationships
between
businesses within a supply chain, and between the
chain members and the government, have been
studied by political scientists (French and Raven
1959). Boehlje et al. (1998) argue that the power of
one business over another is dependent on the
economic structure of the relationships. Power is
related to dependency, and dependency is related
to the availability of alternatives. The more
alternatives a firm has, the less dependent it will be
and the smaller the chance that it will be unduly
affected by the power (real or perceived) of
another firm.
The consolidation of agribusiness firms over
the last two decades has much to do with
attempting to gain real or perceived market power.
At the upstream end, the small and fragmented
businesses of smallholders have very little indi-
vidual power, which may provide them with a
strong incentive to work together.
•
Relationship marketing
refers to the move away
from adversarial buyer–seller relationships to
cooperative and collaborative marketing
strategies, to deal with increasingly fierce
competition (Gronroos 1994; Morgan and Hunt
1994). Relationship marketing recognises the
importance of commitment and trust in business-
to-business relationships, and that such
relationships are dynamic and can develop only
over time.
•
Network theory
recognises the reality that if
A
does
business with
B
who then does business with
C
,
A
can affect
C
’s business performance despite the
fact that they never do business together. The
strategic networks concept emphasises that firms
can gain stronger competitive positions by
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working cooperatively than they can by operating
individually (Easton 1992), and that networks with
long-term supply-chain relations featuring trust
and knowledge sharing are well positioned to
deliver lower business costs than firms relying
solely on spot transactions. As well as emphasising
the importance of skills in managing relationships,
the concept of networks emphasises the
development by each firm of capabilities that are
unique and hard to copy, thus ensuring that the
firm will continue to be in demand as a chain
partner able to fulfil specific functions.
• Production/operations management and logistics
emphasise operational efficiency through
minimising inventory and just-in-time supply.
They have contributed to SCM as a management
approach for planning gains through operational
efficiencies. Some authors (Westgren (1998), for
example) view the disciplines of operations
management and logistics as the initial source of
SCM studies.
SCM is a holistic approach that moves past the
level of the individual manager or business to
address all the processes from the initial assembly
of raw materials to the final retail processes that
provide the customer with access to the product.
In that sense, it is a systems approach (Beers et al.
1999). It represents a significant step forward
from analysis at the level of an individual farm or
agribusiness in isolation from its wider context. It
could be viewed as a parallel to the step between
crop or animal husbandry research and the study
of farming systems, where the latter has greater
potential to optimise both production outcomes
and protection of natural resources (at the system
level).
SCM: for Operational Effectiveness
or Strategy?
Porter is recognised as a leading figure in the study of
strategic management in the late part of the twentieth
century. In his seminal paper ‘What is strategy’
(Porter 1996), he draws the distinction between the
pursuit of operational effectiveness and the develop-
ment of strategy. He argues that, by their nature,
many popular management tools of the last 20
years—including benchmarking, best practice, and
quality systems—are designed to match competitors
in operational effectiveness. Along with the trend to
greater outsourcing (which can lead to competing
firms sourcing key inputs from the same supplier)
these approaches contribute to greater uniformity
between industry competitors and reduced consumer
choice.
Given the diversity of consumer interests and the
desire of consumers to choose products that match
their needs, perceptions and values, strategies which
result in a move towards greater industry uniformity
are unlikely to lead a business to a successful market
position. Hence, operational effectiveness is a neces-
sary but not sufficient condition for improving busi-
ness performance. Many aspects of SCM (improved
logistics, shared information systems and better
information flows, reduced transaction costs, preser-
vation of product quality, standards and integrity
throughout the chain) are, at their heart, efforts to
improve the operational effectiveness of a chain.
Adopting these approaches is important in matching
competitors and increasingly they are a necessary
condition for access to certain markets (export mar-
kets, supplying to supermarkets). However these
approaches will not guarantee a sustainable compet-
itive advantage.
By comparison, Porter argues that the crux of
strategy is doing something different that is hard for
competitors to match. Critical to developing sustain-
able competitive advantage is recognising that
choices need to be made, since doing more of one
thing will necessitate doing less or none of another
(termed trade-offs). The more that activities or func-
tions within a firm or a supply chain can be made self-
reinforcing (to deepen the strategic position), or the
more they depend on human capabilities and rela-
tionships, the more likely it is that the strategy will
lead to sustainable competitive advantage, because
these approaches are intrinsically hard to copy.
SCM provides opportunities to develop strategies
that meet these criteria. Potential strategies include:
• reducing market risks by working towards
interdependency (where business activities are
interdependent to the point that the costs of
switching to a new supplier or customer are
sufficiently high to inhibit the development of new
relationships)
• cooperating to learn how to create value together
and then collaborating to consistently utilise the
new value as a source of competitive advantage
(Collins et al. 2002)
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• using the established relationship as a platform to
build additional product lines or new markets; that
is, to innovate together.
Porter’s concept of strategy has relevance in the dis-
cussion of SCM as a useful management concept. The
key to development of chain relationships is commit-
ment to longer-lasting relationships instead of spot
transactions (which may offer short-term advantages
in certain parts of the price cycle). Chain relationships
are built on the relationships developed at a range of
levels between two firms (typically between senior
managers, distribution/receivals, sales/accounts, sales/
production). Developing relationships requires signif-
icant effort, and the maintenance of the relationships is
an ongoing commitment. As the investment in a rela-
tionship grows, so the cost grows to duplicate a similar
relationship. Hence, the cost of leaving a relationship
increases over time, leading to interdependency. It is in
the interests of a chain member to proactively work
with its chain partners to ensure their mutual ongoing
viability, because the alternative (creating new rela-
tionships) is too costly.
Application and Implications of
Supply-Chain Management
Recent studies of supply chains in Australia identi-
fied six key principles of successful SCM (AFFA et
al. 2002). These are:
• a focus on customers and consumers
• the chain creates and shares value with all its
members
• making sure the product fits the customers’
specifications
• effective logistics and distribution
• an information and communication strategy that
includes all chain members
• effective relationships that give leverage and
shared ownership.
The discussion in this section on the application
and implications of SCM will be structured around
these six features.
Since the driving force behind the developing
interest in SCM was the need for new strategies to
achieve sustainable advantage in increasingly com-
petitive agribusiness markets, a critical factor to
success is how effectively the chain addresses cus-
tomers’ wants and needs. The value built by a chain
(which can then sustain the future operations of the
chain members) depends on coordinated responsive-
ness to customers’ requirements.
In principle, SCM can shift the traditional conflict
between supply-chain partners about their relative
shares of benefits to a focus on increasing the total
value available to be shared. This should be attrac-
tive, because potentially there are better gains for all
in this approach. In practice, all levels of the chain
must derive value from the chain and from potential
improvements, to ensure all chain members agree to
proposed change.
Implementation of SCM in Western countries has
emphasised participatory and/or facilitated processes
that build relationships and increase understanding
and trust between chain members in the process of
developing shared plans and identifying opportuni-
ties for long-term collaboration. A skilled outsider
may facilitate such processes. In practice, there is
also a need for ‘chain champions’. These are
members (or a member) of the chain with a vision of
the opportunities that could arise from closer collab-
oration and with the energy to organise and drive
processes of relationship building and collaboration.
In new agro-industry development, building a supply
chain has been demonstrated to be just as critical to
the success of the industry as establishing adequate
agronomic and pest-management practices.
As noted earlier, SCM provides a framework for
the analysis and recognition of power in supply chain
relationships and for the discussion of how to share
the value generated by the chain. Achieving more
efficient SCM often requires horizontal collaboration
at levels in the chain where there are multiple small
players. This reduces the transaction costs between
the vertical levels in the chain and may reduce power
imbalances that occur in interactions between large
powerful players (such as supermarkets) and small
individual growers.
Closer relationships and better understanding of
the chain and customer value may provide opportu-
nities for farmers to extend their operations along the
chain. For example, additional grading that improves
product shelf life and reduces wastage (and the asso-
ciated labour costs for retailers to ‘pick over’ shelves)
represents extra value added by the farmer and may
be recognised with higher payment by retailers,
offset by their savings in labour costs. Similarly, a
farmer who develops the capacity to pack into con-
sumer-friendly trays is helping the retailer to manage
product safety and reduce the risk of in-store contam-
ination of the product. If the farmer’s packs also carry
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23
a bar code, the costs of weighing product at the check
out and of training retail staff to identify fresh
produce can also be saved.
SCM enables the development of quality systems
and product-integrity systems throughout the chain.
When they focus on the features that customers
value, such systems are the tools by which transac-
tions costs may be decreased and operational effec-
tiveness increased. Similarly, SCM allows for
sophisticated management of logistics including
optimisation problems and through chain inventory
control. There are opportunities to minimise waste
(shrinkage) along the chain, which is often a major
cost in marketing fresh food items.
Working in the supply chain context may offer par-
ticipants new insights into the relative importance of
alternative products and markets. In the absence of an
attempt to achieve integrated management, most
supply chain members will have regular contact and
communication with only their immediate supplier
and immediate buyer.
SCM may lead to detailed descriptions, and
mapping of flows of product, information, and
revenue throughout the chain. It also provides an
opportunity to examine activities undertaken and serv-
ices performed at each level in the supply chain, ena-
bling all the participants in SCM to gain a broader
understanding of the way in which customer value is
developed in the chain, and the possibilities to develop
new value or develop value more effectively. SCM can
provide similar insights to scientists whose usual focus
is on technical issues at a particular level in the chain,
and to economists who routinely analyse the industry
at one level in the chain (e.g. production economics at
farm level), but not the business or business-to-busi-
ness interactions. Government policy makers have
also utilised SCM to identify factors that may inhibit
chain development and performance, and to conceptu-
alise policy measures that might assist businesses to
overcome barriers and achieve more competitive
export performance (see, for example, Gifford et al.
(1998)). The Australian Government has initiated a
research, training and industry program in SCM in
response to its realisation that despite growing export
opportunities in Asia, Australia’s market share for
both commodity and processed food products was
declining in these markets.
1
The nature of chain relationships is informed by
substantial business and management literature on
strategic alliances, and by an increasing literature on
SCM in relation to agribusiness. Relationship issues
to be considered may include:
• agreeing to share long-term development goals
and seasonal business planning
• developing relationships between operational staff
within the businesses on issues such as, for
example, timing, amount, ripeness and
temperature of deliveries
• developing shared quality and safety standards and
agreeing how and when they will be measured and
monitored
• linking information systems to track product flows
and standards.
In SCM the focus is usually on long-standing rela-
tionships based on informal or trust arrangements
rather than ownership or contract relationships. The
former are valued because they allow flexibility and
they constantly reinforce how each partner will
benefit from collaborating to ensure a successful and
competitive chain.
Rising interest in SCM has been strongly sup-
ported by the capabilities of new technologies. In par-
ticular the application of information systems can
improve information flows and, with the addition of
e-commerce facilities, can facilitate revenue flows.
Satellite positioning system technologies are an
example of technology can be used to monitor
product flows. Conversely, well-developed SCM is
contributing to the management of other frontier
technologies. SCM enables management of supply
chains where the products have embedded intellec-
tual property (e.g. unique germplasm), through its
potential to tightly control product flows and main-
tain clearly differentiated lines of product with
unique and valuable characteristics.
SCM: What Value in Developing
Country Agribusiness?
Finally, in this section the potential application and
value of the SCM concept in planning, developing
and managing agribusiness in developing countries is
explored.
Farmers in the developing world face a similar
cost–price squeeze to that affecting farmers in the
1
Publications arising from this program are listed on the
AFFA website, <http://www.affa.gov.au/content/
output.cfm?ObjectID=D2C48F86-BA1A-11A1-
A2200060B0A01607>.
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24
developed world. The need to feed rapidly growing
populations tends to result in policies to keep food
prices low, making innovation and investment unat-
tractive even if the capital and management capacity
needed are available.
However, there are opportunities for developing
country farmers in the expanding total population
and increasing urban populations, and hence a
growing consuming class. At least in the short term,
this group can be expected to spend more on higher
quality and more varied produce than do people at
lower income levels. Projections on future trends
(Coates et al. 1997) suggest that, in terms of volume,
most of the growth in demand for food will be
middle-class consumption in the large countries of
the developing world including China, India, Indo-
nesia and large countries in South America (termed
World 2 in their scenario). Much of this demand will
be met domestically (by World 2 countries) but
against competition from exporting countries. The
primary basis of competition will be price but the
presence of exporting competitors will also mean the
gradual adoption of ‘world’ quality standards. This
represents an incentive for better SCM in developing
countries.
This effect is enhanced by the increasing implica-
tions of the WTO for developing countries. The pri-
ority to increase the competitiveness of domestic
agriculture and agribusiness is demonstrated by the
following extract from a publication of the Indone-
sian Ministry of Agriculture (MOA 2001):
…liberalisation of international trade that has been hap-
pening or is still in the process of being established is a
challenge facing agribusiness development. WTO/
GATT commitments to reduce or eliminate various
forms of protection, tariff or non-tariff, mean opportu-
nities as well as challenges. For nations with the ability
to improve their competitive strength, the opportunity is
open to increase domestic and international market
share. Conversely, for nations with no capacity to
improve their competitive strength, it means adverse
effects, the challenge to recede and step down. For this
reason, there is no option for Indonesia but to accelerate
strengthening competitive capacity.
In helping developing country farmers take advan-
tage of the growth opportunity to supply the con-
suming classes, the aim should be to build the
capacity of domestic producers to match the products
that exporting countries will be aiming to put into
Asian markets. SCM provides one conceptual
approach to meet this need. To not assist developing
country farmers to participate would see them cut out
of the major growth sector in food markets in the
world. Their displaced product would depress
domestic prices for lower class consumption and
further exaggerate the cost–price squeeze.
Many authors, including Heilbron and Larkin
(1995), have commented on the developing dualism
in food markets in Asia. Traditional markets continue
to provide for the bulk of the population through
delivery to wet markets and subsequent distribution
by a variety of small retailers. These chains are char-
acterised by multiple levels, fragmentation, highly
variable standards, and poor infrastructure and logis-
tical support. In parallel, large Western style retailers
are providing global standard goods and services to
the elite and middle classes in major cities. These
retail developments were begun by J apanese retailers
in the 1980s and followed in the 1990s by Western
food retailers. The Asian economic crisis provided
many of these Western companies with opportunities
to rapidly expand their foothold at low prices (DFAT
2002).
Supermarkets are most profitable when they are
located in areas of high rate of population growth of
people with consumer incomes, high-income growth
rates, and low supermarket penetration. This is the
precise description of the long-term trends in much of
Asia. SCM practices for this sector might be expected
Table 1. Projected population growth to 2025 (in billions).
1994 2025
Total world
World 1: the affluent, advanced nations, e.g. Europe, the USA and J apan
World 2: middle countries with needs and resources in balance, e.g. China,
India, Indonesia, large countries in South America
World 3: the destitute countries, e.g. sub-Saharan Africa
5.6
1.0
3.5
1.1
8.4
1.3
5.1
2.0
Data sourced from Coates et al. (1997).
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25
to be similar to Western supply chains at the down-
stream end. At the upstream end, consolidation could
be expected, relative to traditional supply chains, to
achieve reliable supply and consistent quality. Inter-
national retailers will also seek to provide food safety
and health standards similar to their operations in the
West. The risk of a major accident is serious for a
global retailer, both in terms of their international
reputation and because their pockets are perceived to
be very deep in relation to compensation and penalty
payments.
Studies of the traditional supply channels in devel-
oping countries often focus on issues of lack of power
of farmers, linked to the lack of timely information
flows. The traders or merchants are usually identified
as powerful and able to extract value at the expense of
farmers who are cash and information poor. How-
ever, there are alternative views. Kono and Goto
(2002) in a study of marketing channel development
in the banana industry in Indonesia, conclude that all
parties—growers, collectors and traders—must con-
tribute to developing pluralistic and reliable mar-
keting channels. Woods et al. (2000) noted a
workshop situation in which a trader motivated
farmers to strive for good products, being competi-
tive and becoming a champion. Hence, traders have
been observed to play a mixed role—of channel man-
ager, information supplier, co-investor and extension
officer—suggesting a mutual benefit rather than a
win–lose relationship may exist with smallholders, at
least in some circumstances.
In situations where trust already exists, the most
profitable application of SCM may be to improve
operational effectiveness. Options for improvements
might include training to increase the skills and
capacities of chain members so that they are more
able to adapt to change, improved infrastructure and
logistics, and better information flows, especially in
relation to markets and consumer preferences.
Improvements that took traditional supply chains in
these directions might provide a step towards the pos-
sibility of these chains developing export capabili-
ties.
Trienekens and Beulens (2003) present a research
agenda on innovation through food supply chains and
networks in developing countries. Based on case
studies that investigate supply chains involving
upstream production in developing countries for
export, or for Western style retailing in developing
countries, they identify the following three key ques-
tions:
• Do innovations at the consumer end induce
innovations at the upstream (farmer) end of supply
chains in developing countries?
• Are there any system effects, for example, on
economic development, sustainable development
and standards, of innovations at the consumer end
of the chain?
• Which institutional arrangements within chains
and networks are best able to survive in developing
countries and why?
Similar questions need to be asked about the poten-
tial impacts of improving traditional supply chains in
developing countries. Questions for a research
agenda might include:
• Can improved management of traditional supply
chains improve the quality of life of smallholders?
• Can improved management in traditional supply
chains improve the supply and quality of food for
increasing numbers of urban residents in
developing countries?
• Which institutional arrangements are best able to
deliver benefits, and how can these benefits be
shared to encourage further improvements?
References
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Australia), University of Queensland, and National Food
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Beers, G., Beulens, A. and van Dalen, J . 1999. Chain science
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Agricultural University, The Netherlands.
Boehlje, M., Schrader, L. H. and Akridge, J . 1998.
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scenarios of U.S. and global society reshaped by science
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Collins, R., Dunne, T. and O’Keeffe, M. 2002. The ‘locus’
of value: a hallmark of chains that learn. Supply Chain
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Easton, G. 1992. Industrial networks: a review. In: Axelson,
B. and Easton, G., ed., Industrial networks: a new view of
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Folkerts, H. and Koehorst, H. 1998. Challenges in
international food supply chains: vertical co-ordination in
the European agribusiness and food industries. British
Food J ournal, 100, 385–388.
French, J.R.P. and Raven, B. 1959. The bases of social power.
In: Cartwright, D., ed., Studies in social power. Michigan,
Michigan Institute for Social Research, 150–167.
Gifford, D., Hall, L. and Ryan, W. 1998. Chains of success:
case studies on international and Australian food
businesses cooperating to compete in the global market.
Canberra, Australian Government Publishing Service.
Gronroos, C. 1994. From marketing mix to relationship
marketing: towards a paradigm shift in marketing.
Management Decision, 32, 4–20
Heilbron, S. and Larkin, J .T. 1995. Corporate strategies and
structure: penetrating Asian markets. Canberra, Rural
Industries Research and Development Corporation,
Research Paper 95–7.
Hobbs, J.E. 1996. A transaction cost approach to supply chain
management. Supply Chain Management 1(2),15–27.
Kono, Y. and Goto, J . 2002. Marketing channel
development. In: Goto, J . and Mayrowani, H., ed.,
Potentials and constraints of banana based farming
systems: a case of an upland village in West J ava.
Tsukuba, J apan, J IRCAS Working Report No. 29, 41–46.
MOA (Ministry of Agriculture) 2001. Agribusiness system
development as prime mover of the national economy
(1st ed.). J akarta, Government of Indonesia, 80 p.
Morgan, R.M. and Hunt, S.D. 1994. The commitment–trust
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Porter, M. 1996. What is strategy? Harvard Business
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Trienekens, J. and Beulens, A. 2003. Innovation through
(international) food supply chain development. A research
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Woods, E.J ., Wei, S., Singgih, S. and Adar, D. 2000. Supply
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27
Incorporating Measures of Satisfaction, Trust
and Power-dependence into an Analysis
of Agribusiness Supply Chains
Peter J. Batt*
Abstract
Using transaction cost analysis, gap analysis and the key dimensions of long-term buyer–seller relationships
(satisfaction, trust and power-dependence), it is possible to demonstrate that the supply chain for potatoes
cultivated in the Red River Delta (Vietnam) is surprisingly efficient. While the price paid to the farmers is
ultimately determined by supply and demand, the price that farmers receive from traders and collector agents
is influenced by tuber quality and the costs of transportation. Contrary to expectations, farmers are generally
satisfied with the exchange and display considerable trust in their preferred trading partner. Farmers are
seldom dependent upon their preferred trading partner and indicate that numerous alternative traders are
available to purchase the potatoes they have harvested. While the traders similarly enjoy a strong positive
relationship both with farmers and collector agents and their downstream customers, wholesalers report that
they are much less satisfied in their exchange relationship with both traders and retailers. Wholesalers are more
dependent upon their upstream and downstream trading partners and more dissatisfied and less trusting of
exchange partners.
In most developing countries, the agricultural mar-
keting system is characterised by a highly atomistic
production side (where there are many small widely
dispersed farmers growing perishable crops) and an
oligopolistic marketing system (where there are
only a few traders) (Mendoza and Rosegrant 1995).
Marketing costs are high because of an inefficient
transport system, inadequate cool-storage capacity,
and significant variations in product form, variety
and quality (Harris-White 1995). The supply chain
itself is often long and protracted, involving a large
number of market intermediaries (Lele 1981). Fur-
thermore, information and locational factors poten-
tially limit the number of intermediaries available to
transact with primary producers (Pomeroy and
Trinidad 1995). In other instances, various credit
arrangements may lock farmers into long-term busi-
ness-to-business relationships where the farmer is,
to varying degrees, more or less dependent upon the
market intermediary (Mendoza and Rosegrant
1995).
There is also a growing recognition that economic
exchange is embedded within various overarching
social institutions including locality, class, ethnicity,
religion, gender and age (Zucker 1986; Fukuyama
1995; Harris-White 1997). The importance of trust
and social capital as a means of reducing risk and
facilitating exchange is being increasingly recog-
nised when producers and market intermediaries
have limited access to the legal system as a means for
redress (Mendoza and Rosegrant 1995; Fafchamps
1996; Humphrey and Schmitz 1998).
* Agribusiness Marketing, Curtin University of
Technology, GPO Box U1987, Perth, Western Australia
6845, Australia. Email: <[email protected]>.
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Using three alternative methods of evaluation, this
paper seeks to examine the efficiency of the mar-
keting system for fresh potatoes in the Red River
Delta (Vietnam). It is proposed that before any inter-
vention is contemplated, the supply chain must be
examined to identify the marketing margins
extracted by the various market intermediaries, the
extent to which suppliers are able to fulfil the needs
of their downstream customers, the constraints that
adversely impact upon the suppliers’ ability to meet
customers’ needs, and the nature of the long-term
relationships that exist between suppliers and their
customers.
Analysing Performance in
Marketing Channels
Developed primarily by Williamson (1979, 1985),
transaction cost theory assumes that various costs are
associated with an exchange. These costs are com-
prised of the costs of obtaining and processing infor-
mation, negotiating contracts, monitoring agents and
enforcing contracts. These costs may become signif-
icant in the presence of information asymmetry,
uncertainty and transaction-specific investments.
Although there are several different approaches for
measuring transaction costs, the market is said to be
efficient if the price consumers ultimately pay ade-
quately reflects storage costs, transportation costs
and differences in price due to product form (Harris-
White 1995). Since price data are usually the most
readily available and most reliable source of market
information in developing countries (Goletti and
Christina-Tsigas 1995), the performance of the
supply chain is most often evaluated using price mar-
gins. However, a large marketing margin may result
in little or no profit for an actor and may even result
in a trading loss, depending on the buying and selling
prices and the costs of marketing (Mendoza 1995).
Marketing margins will also fluctuate according to
the perishability of the product, the number of actors
involved in the exchange, the marketing services pro-
vided, and the risk and uncertainty borne by each
actor (Pomeroy and Trinidad 1995).
Industrial purchasing theory suggests that cus-
tomers will seek to purchase goods from those sup-
pliers who are best able to deliver the desired
quantity, within predetermined quality specifica-
tions, on time, at an agreed price (Monzcka et al.
1998). In describing quality, Gronroos (1990) finds it
necessary to differentiate between technical quality
and functional quality. Technical quality describes
the customer’s specifications. This is a physical
description of the product in terms of its size; shape;
colour; freedom from pests and diseases; purity (in
terms of its freedom from chemical contaminants,
pathogenic organisms and genetically modified
plants); maturity or freshness; and the manner in
which the product is packed. Functional quality
describes the way a supplier goes about delivering
the product to the customer. While this fundamen-
tally means being able to deliver the product when
the customer wants it — by implication, it involves
many inter-related activities such as production
scheduling, storage and warehousing, logistics,
ordering and invoicing. Since most market interme-
diaries purchase products in the expectation that they
will be able to sell them on, the timely and efficient
receipt of goods is critical to the success of most
downstream manufacturing and retail operations.
More recently, Parasuraman (1998) has introduced
a third dimension called service quality. Service
quality describes the extra things a supplier is willing
to do to retain the customer’s business. While the
exact meaning of the term ‘service’ varies with the
nature of the product and the requirements of the
buying organisation, service may include such varia-
bles as providing technical assistance, innovative
suggestions, credit arrangements, support for special
needs, or providing advance notice of impending
price changes or shortages in supply (Hutt and Speh
1995).
In measuring the extent to which suppliers are able
to meet the needs of their customers, Parasuraman et
al. (1985) proposed the concept of a service gap. The
service gap is a measure of how well the service level
delivered by a supplier matches a customer’s expec-
tations. An integral part of this analysis is concerned
with the identification of the constraints that prevent
the supplier from fulfilling the customer’s needs. It is
only after these constraints have been identified that
the supplier can improve their performance.
The Emergence of Relationship
Marketing
Traditionally, in order to cut costs, customers have
gone out of their way to identify the cheapest supplier
(Monczka et al. 1998). The traditional approach to
purchasing required the buyer to take three or more
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bids, then to play one supplier off against another
until they got the lowest price. Since this approach
relied primarily upon the use of short-term contracts,
it led to what can best be described as an adversarial
relationship. Both customers and suppliers sought to
extract as much as they could from the transaction,
knowing that at any time, if either party found a better
deal, the contract would be cancelled. However, such
short-term opportunism stifles innovation and pro-
vides few incentives to invest in productivity
improvements or new technology.
Technology is the reason for interaction between
firms (Thomas and Ford 1995). Since technology
may substantially alter the value chain and the way
the value chains are linked, strong mutual interde-
pendencies arise, so that the level of technology in
one firm will influence the product and process tech-
nologies of its partner. As a result, a firm’s unique
market position, power and competitive advantage is
created through its interactions with suppliers, cus-
tomers and other third parties.
Firms are establishing relationships with their sup-
pliers because these enable them to be more efficient
and to be more effective (Kalwani and Narayandas
1995). By developing relationships with their sup-
pliers, buyers and sellers can achieve cost savings
through: reduced search and evaluation costs;
reduced transaction costs (Hakansson 1982); and the
learning effects and relationship-specific scale econ-
omies (Gundlach et al. 1995). However, the primary
reason for establishing relationships with suppliers is
that customers realise that suppliers create value
(Kalwani and Narayandas 1995). Developing long-
term relationships can improve access to markets and
reliable market information (Low 1996) and cus-
tomers can anticipate improved access to a more reli-
able supply of production inputs (Hakansson 1982),
improved product quality and performance (Han et
al. 1993), and a higher level of technical interaction
in the form of information exchange, potential
product adaptations and technical assistance (Cun-
ningham and Homse 1982).
Through becoming closer to customers and better
understanding and satisfying customers’ needs, sup-
pliers can achieve greater customer loyalty and
higher repeat sales (Kalwani and Narayandas 1995).
Relationship marketing provides a stronger, longer-
term customer benefit that is more difficult for com-
petitors to match and it becomes more difficult for
competitors to enter the market (Hakansson 1982).
Buyers become less sensitive to price competition
and suppliers may even benefit from higher prices
(Kalwani and Narayandas 1995). Suppliers benefit
from being able to better plan and forecast production
schedules (Lohtia and Krapfel 1994), coordinate
deliveries, and undertake joint promotions (Easton
and Araujo 1994). However, the greatest benefit
arising from long-term relationships is the reduction
in uncertainty (Arndt 1979; Hakansson 1982;
Noordewier et al. 1990).
While much has been written about the develop-
ment and maintenance of long-term buyer–seller
relationships, the greatest support has emerged for
the key constructs of satisfaction and trust (Anderson
and Narus 1990; Anderson and Weitz 1992; Morgan
and Hunt 1994). However, in context of the devel-
oping countries, where farmers are often subject to
exploitation by opportunistic traders, the power-
dependence construct is expected to become quite
influential in governing the farmers’ relationships
with preferred trading partners.
Satisfaction
Satisfaction lies at the very foundation of modern
marketing thought. Satisfaction is derived from the
result of a comparison between the preferred sup-
plier’s performance and the customer’s expectations
(Fornell 1992). Whenever performance exceeds
expectations, satisfaction will increase, but whenever
performance falls below expectations, customers will
become dissatisfied.
Since satisfaction is defined as a positive affective
state resulting from an appraisal of all aspects of a
firm’s working relationship with another (Frazier
1983), Geyskens et al. (1999) propose that satisfac-
tion should capture both the economic and social
aspects of the exchange. Economic satisfaction is
defined as the channel member’s positive affective
response to the economic rewards that flow from the
relationship with its partner. An economically satis-
fied channel member considers the relationship a
success when it is satisfied with the effectiveness and
productivity of the relationship with its partner and
the resulting financial outcomes. Social satisfaction
is derived from the channel member’s positive affec-
tive response to the non-economic aspects of the rela-
tionship in that interactions with the exchange
partner are fulfilling, gratifying and easy. A channel
member satisfied with the social aspects of the
exchange appreciates the contact with their exchange
partner and, on a personal level, likes working with
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
30
the preferred partner because they believe the partner
is concerned, respectful and willing to exchange
ideas.
Trust
For any particular potential exchange, trust will be
critical if two situational factors are present — risk
and incomplete buyer information (Hawes et al.
1989). Since most sales transactions present some
degree of risk and uncertainty to the potential buyer,
without some degree of trust, the perceived risk may
be too great for the transaction to occur. More specif-
ically, trust becomes important whenever there is a
high level of performance ambiguity, and poor
product performance will have a significant, adverse
impact on the value derived by the buyer (Singh and
Sirdeshmukh 2000). In such circumstances, trust acts
as an information resource that directly reduces the
perceived threat of information asymmetry and per-
formance ambiguity.
However, trust also relates to the focal firm’s
intention to rely upon its exchange partner. Ganesan
(1994) describes this component as benevolence,
because it is based on the extent to which the focal
firm believes that its partner has intentions and
motives beneficial to it. A benevolent partner will
subordinate immediate self-interest for the long-term
benefit of both parties and will not take actions that
may have a negative impact on the firm. Singh and
Sirdeshmukh (2000) describe trust as a belief that an
exchange partner will act in a manner that is respon-
sible, with integrity and without injury to the focal
firm.
In building trust, Sako (1992) finds it necessary to
differentiate between trust at three levels. Contrac-
tual trust is an expectation that the exchange partner
will abide by their written or oral contractual obliga-
tions and act according to generally accepted busi-
ness practice. Competence trust is derived from the
assumption that the entrusted firm will carry out the
activities competently and reliably. Goodwill trust
arises where both parties have developed mutual
expectations that the other will do more than what it
is formally committed to perform. Here, the firm not
only expects the other not to act opportunistically, but
that it will, altruistically, go out of its way to help
(McCutcheon and Stuart 2000).
Power-dependence
When the outcomes obtained from the relationship
are important or highly valued; when the outcomes
from the relationship are better than the outcomes
available from alternative suppliers; and when fewer
alternative sources of exchange are available to the
firm, dependence is said to increase (Heide and J ohn
1988).
Whenever a channel member controls resources
that another channel member needs, various power
relations emerge that potentially enable the party
controlling those resources to exert some influence or
power (Andaleeb 1996). With greater dependence
comes greater vulnerability, for the more powerful
exchange partner may be in a position to create more
favourable terms of trade for itself (Heide and J ohn
1988). Since this may include access to markets or
access to capital, farmers are often more dependent
upon their preferred trading partner(s).
Dependence is also increased when the outcomes
available from the relationship are comparatively
better than the outcomes available from alternative
relationships. Firms dealing with the best trader are
more dependent because the outcomes associated
from dealing with that trader are better than those
available from alternative traders. In this context,
dependence is a measure of the overall quality of the
outcomes available to the focal firm from the best
alternative exchange relationship (Anderson and
Narus 1990).
In general, firms will seek to reduce their depend-
ence on other firms and to increase the dependence of
other firms upon themselves (Lohtia and Krapfel
1994). Firms may either seek to reduce and manage
dependence by purposely structuring their exchange
relationships with other firms (Heide 1994), or to
transact with multiple entities (Ganesan 1994).
Where there are many alternatives, the need to
interact is reduced, but as the number of alternative
exchange partners declines, the need to interact will
increase (Andaleeb 1996). Hence, when fewer alter-
native sources of exchange are available to the focal
firm, or when replacing or substituting a current
exchange partner is difficult because there are fewer
potential alternatives, dependence will increase
(Heide and J ohn 1988; Frazier et al. 1989).
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(printed version published in 2004)
31
Background to the Analysis
Potatoes have been cultivated in Vietnam since 1890,
when they were first introduced by the French colo-
nialists. In 1980, Vietnam was the largest producer of
potatoes in Southeast Asia, with more than 100,000
hectares under cultivation (Schmiediche 1995).
However, in the absence of a reliable supply of good-
quality seed, productivity per hectare declined and
the area of potatoes cultivated subsequently
decreased. Today, only some 35,000 hectares of
potatoes are cultivated in Vietnam, primarily in the
Red River Delta (Tung and Ho 1995).
Potatoes are the second most important crop in the
Red River Delta and, understandably, are a priority
crop for development by the Vietnamese Government.
Potato is an alternative food crop to rice — capable of
feeding an expanding population and providing both a
valuable source of nutrition and a valuable source of
income for many impoverished rural families.
The majority of potato farmers in the Red River
Delta are very small family enterprises, cultivating
fewer than 0.15 ha of potatoes. Most farmers plant
potatoes in either October or November and harvest
their crops in J anuary. With such a short cropping
season, inclement overcast weather during most of
the growing season, poor quality seed, soil compac-
tion, and the inappropriate use of chemicals and fer-
tilisers, the average yield in the Red River Delta is
just 16.7 t/ha (Batt 2002).
For most potato farmers in the Red River Delta,
collector agents and traders provide the major mech-
anism for the disposal of the potato crop. However,
traders purchase only the large and extra-large
tubers — farmers generally retain some proportion
of the medium-size tubers for seed, and the small
tubers are primarily used for stock feed. Not unex-
pectedly, the price that farmers receive for the pota-
toes they have harvested is dependent upon supply
and demand and tuber size. As potatoes provide the
majority of on-farm income for most farm house-
holds in the Red River Delta, any reduction in the
prices received will have a significant adverse
impact on the household. With 88% of potato
farmers earning less than USD67/month (Batt
2002), most farm households in the Red River Delta
are severely cash constrained.
The function of the various traders is to collect the
potatoes from the farmer’s property and to transport
and deliver the tubers to wholesalers in the major
metropolitan centres throughout Vietnam. The
majority of traders are also small enterprises, with
most purchasing fewer than 1500 kg of vegetables
per week. However, during the potato season, there is
a marked increase in the quantity of product pur-
chased, with most traders handling more than 10 t of
potatoes per week (Batt 2002).
In some potato-growing districts, collector agents
provide an intermediary function. It is the function of
the collector agent to aggregate potatoes from a
number of small growers, to pay the growers, and to
store the potatoes until the traders come to collect
them. Quite clearly, by aggregating the tubers in one
place, the traders do not have to travel to as many
farms to fill their truck. In most cases, the collector
agents are potato growers themselves.
In comparison to the traders, the wholesale enter-
prises are significantly larger, with most handling in
excess of 5000 kg of fresh vegetables per week.
Wholesalers deal with traders and collector agents
rather than farmers, as traders and collector agents
are more able to provide tubers of the desired variety
in the required quantity and desired size. Traders and
collector agents offer a more competitive price and
are able to deliver the potatoes when the wholesalers
require them (Batt 2002).
Wholesalers operate in the supply chain as market
intermediaries, but unlike traders and collector
agents, whose function it is to source potatoes from
many small farmers and to aggregate these into larger
quantities, wholesalers break the consignment down
into quantities sufficient to meet the needs of retail
customers and the food service sector.
Excluding sales to the food service sector and
processing industries, retailers provide the final link
with household buyers in the supply chain for fresh
potatoes. However, the scale of retail operations has
been found to vary enormously between the rural and
metropolitan areas and between and within the major
metropolitan cities. Businesses range in size from
those selling fewer than 500 kg of fresh vegetables
per week, to those selling in excess of 5000 kg/week.
The price at which retailers both buy and sell potatoes
also differs markedly between and within the regions,
depending upon the source of supply, supply and
demand (Batt 2002).
Data Collection and Analysis
In analysing the supply chain for fresh potatoes in the
Red River Delta, detailed interviews were conducted
with 60 potato farmers using a structured question-
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
32
naire. Information was sought on the cultivation and
postharvest practices adopted by the farmer and the
average price farmers received for the potatoes they
sold by month, tuber size and variety. Farmers were
then asked what criteria they believed a market inter-
mediary would use in choosing to purchase potatoes
from them. The questionnaire was based on the
industrial purchasing literature, and farmers
responded to 15 statements about the quality of their
offer on an importance scale of 1 (not at all impor-
tant) to 6 (very important). Farmers then rated their
ability to meet these same criteria on a scale of 1 (not
at all well) to 6 (very well). Farmers were then asked
to indicate why they perceived they were unable to
meet the market intermediary’s needs and the various
constraints that prevented them from improving their
offer quality.
In the final section of the questionnaire, farmers
were asked to describe the nature of their relationship
with their preferred trading partner and to respond to
24 prepared statements. The various statements,
developed from the literature on buyer–seller rela-
tionships, were divided into three groups (satisfac-
tion, trust and power-dependence). Farmers were
asked to respond on a six-point scale where 1 was ‘I
disagree a lot’ and 6 was ‘I agree a lot’. Twenty
potato farmers were interviewed from each of the
three major potato-producing provinces in the Red
River Delta (Hai Duong, Thai Binh and Bac Giang).
Enumerators were instructed to interview four
farmers from a minimum of five districts and to inter-
view no more than two farmers from any one village.
Interviews were conducted by research staff from the
Food Crops Research Institute, Gia Loc.
At the conclusion of the interview, farmers were
asked to identify the trader with whom they most fre-
quently interacted. Based on the number of names
received, ten traders in each province were randomly
selected for interview. Traders were asked to indicate
the average quantity of potatoes purchased and from
whom they purchased those potatoes. Information
was sought on the prices paid to purchase potatoes by
month, tuber size and variety. Traders were then
asked to indicate whether they graded the potatoes or
stored the potatoes before resale and the prices at
which those potatoes were sold to market intermedi-
aries. Traders then described the various criteria they
used in choosing to purchase potatoes from a farmer
or collector agent. Traders then responded to the
same 15 questions about the quality they expected
from suppliers and the extent to which their current
suppliers were able to meet their needs. Traders were
then asked to describe the nature of their relationship
with the farmers and collector agents from whom
they most often purchased potatoes and the nature of
their relationship with the market intermediaries to
whom they most frequently sold potatoes.
At the conclusion of the interview, traders identi-
fied the potato wholesaler with whom they most fre-
quently interacted. From the names received, ten
wholesalers were randomly selected for interview in
Hanoi. Information was sought on the average quan-
tity of potatoes purchased and from whom they pur-
chased those potatoes. Information was sought on the
prices paid to purchase potatoes by month, tuber size
and variety. Wholesalers were then asked to indicate
whether they graded the potatoes or stored the pota-
toes before resale and the prices at which those pota-
toes were sold. Wholesalers then described the
various criteria they used in choosing to purchase
potatoes from a potential supplier and the extent to
which current suppliers were able to meet the same
criteria. Wholesalers then described the nature of
their relationship with the various traders and col-
lector agents from whom they most often purchased
potatoes and the nature of their relationship with the
retailers to whom they most often sold potatoes.
Finally, 25 random interviews with retailers were
undertaken: ten in Hanoi and five in each of three
provincial centres. Information was sought on the
average quantity of potatoes purchased and from
whom they purchased those potatoes. Information
was sought on the prices paid to purchase potatoes by
month, tuber size and variety. Retailers were then
asked to indicate whether they graded the potatoes or
stored the potatoes before resale and the prices at
which those potatoes were sold. Retailers were also
asked to describe the various criteria they used in
choosing to purchase potatoes from a supplier and to
indicate the extent to which current suppliers were
able to meet these same criteria. Retailers were then
asked to describe the nature of their relationship with
the supplier from whom they most often purchased
potatoes.
Data were entered into the SPSS program (Version
10.0) for analysis. Although the mean ratings across
the supply chain were analysed using one-way anal-
ysis of variance (ANOVA), the sample sizes were
generally too small to enable any meaningful statis-
tics to be calculated. Hence, the majority of the anal-
ysis undertaken is descriptive.
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edited by G.I. Johnson and P.J. Hofman
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(printed version published in 2004)
33
Examining the Price Margins in the
Supply Chain
Since few farmers and market intermediaries main-
tain any written records of the prices at which they
buy and sell potatoes, some errors in reporting are
inevitable. Furthermore, since there is a degree of
confidentiality associated with the reporting of
market prices, respondents may deliberately choose
to overvalue the prices at which they have purchased
potatoes and to undervalue the prices at which they
have been sold to reduce their perceived profit
margin.
Farmers in Hai Duong indicated that they sold
potatoes to traders for an average price of
VND1385/kg (USD0.092/kg). Traders indicated
that they purchased potatoes from farmers for an
average price of VND1470/kg and sold those pota-
toes to both wholesalers in Hanoi and retailers in
Hai Duong for an average price of VND1770/kg. In
Hai Duong, retailers indicated that they purchased
potatoes from traders for VND1795/kg and then
sold those potatoes for an average price of
VND2150/kg. However, in Hanoi, wholesalers sold
these potatoes for an average price of VND2180/kg
to retailers who sold the potatoes for an average
retail price of VND2920/kg (Table 1).
In Bac Giang, there was a difference of VND200
between the reported price at which farmers sold
potatoes and traders purchased potatoes. No doubt
this was the result of intervention in the market by
collector agents. Collector agents are responsible for
sourcing the potatoes from many small farmers and
arranging for the transportation of those potatoes to
some central collection point. Farmers are paid in
cash for their potatoes when the collector agent takes
possession of the product. The potatoes are then
graded and stored for between 5–7 days until the
trader comes to pick them up. Depending upon the
level of service provided by the collector agent,
traders appear willing to pay an additional VND50–
200/kg (Batt 2002).
While there was a difference of VND145/kg between
the price at which traders indicated they sold the
potatoes and retailers purchased the potatoes, this
was attributed to sampling error, for the retail margin
was reported to be VND385/kg; a figure that was
consistent with other estimates.
In Thai Binh, it is apparent that farmers grossly
over-reported the prices at which they sold potatoes,
for both the traders’ margin and the retail margin
were consistent with the other two potato-growing
districts. This was supported by anecdotal evidence
and various unstructured interviews with growers
undertaken during the preliminary phase of this
research project. Furthermore, and similar to Bac
Giang, the majority of potato farmers transacted with
collector agents rather than traders.
An examination of the marketing margins along the
supply chain reveals that the marketing margin
increased as the product moved closer to the con-
sumer. Traders were able to extract an average mar-
keting margin of VND260/kg, or 19%. In the rural
areas, retailers extracted an average marketing margin
of VND410/kg (or 25%). However, in Hanoi, whole-
salers were able to extract a marketing margin in the
region of VND395/kg (or 22%), and retailers were
able to extract a marketing margin of VND615/kg (or
27%). However, the marketing margin that market
intermediaries were able to extract was not consistent
over the season. At both the beginning (December)
and the end (February) of the harvest season, the mar-
keting margins declined. Conversely, in January,
during the peak harvest period, the marketing margins
for all market intermediaries increased. Such pricing
behaviour has been reported by Batt and Parining
(2000) who accredited the reduced marketing margin
during times of reduced supply to the increased com-
petition between traders to secure the farmers’ pro-
duce. At the consumer level, research undertaken by
Table 1. Prices (VND/kg) along the supply chain for potatoes produced in the Red River Delta of Vietnam.
Location Farmer Trader Wholesaler Retailer
Sell Buy Sell Buy Sell Buy Sell
Hai Duong
Thai Binh
Bac Giang
Hanoi
1385
1420
1170
1470
1280
1370
1770
1450
1680
1785 2180
1795
1465
1535
2305
2150
1950
1920
2920
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
34
Batt (2002) reveals that the consumers in the rural
areas seldom purchase potatoes for more than
VND2200/kg and in Hanoi, consumers are unlikely to
purchase potatoes at prices exceeding VND3500/kg.
While traders may be able to extract an average
marketing margin of VND260/kg, the traders must
not only grade and store the tubers they have pur-
chased, but also pay for the costs of transporting the
tubers from the farm to the various wholesale and
retail markets. Although most of the potatoes pur-
chased by the traders had been graded by farmers and
collector agents (59%), a significant proportion were
purchased ungraded. Furthermore, over 54% of
traders indicated that they regraded the potatoes they
had purchased before resale. Although the costs of
grading ranged from VND10–50/kg, the market was
willing to pay a significant price premium for larger
tubers.
At the farm level, farmers received an average
price of VND1385/kg for the large tubers (5–8 tubers
per kg). For the extra-large tubers (3–4/kg), farmers
received a price premium of VND185/kg and for the
medium-size tubers (9–15/kg), the price was reduced
by some VND180/kg. For the small tubers (more
than 16 tubers per kg), farmers received only
VND500/kg — hence, most farmers retained the
small tubers for feeding livestock. As the product
moved through the supply chain, not only did the
price premium increase for the larger tubers but the
disincentive for smaller tubers became more pro-
nounced (Table 2).
Despite the differences in price, 74% of whole-
salers and 70% or retailers reported that they did not
regrade the potatoes they had purchased before
resale. Presumably, having purchased the tubers
from traders and collector agents, wholesalers and
retailers had no recourse; what they could not sell,
they would either have to eat themselves or incur the
loss. No doubt, in the absence of any enforceable
quality standards, wholesalers and retailers sought to
reduce the perceived risk by transacting with repu-
table traders and collector agents.
While the majority of traders (70%) stored pota-
toes for 5–7 days, no doubt as an integral part of the
process of consolidation, the majority of wholesalers
(63%) indicated that they did not store potatoes. Con-
versely, some 57% of retailers indicated that they
stored potatoes for up to one month. Presumably such
storage practices were undertaken to accommodate
the abrupt reduction in the supply of potatoes in Feb-
ruary–March. Storage losses generally ranged from
1–5% and, quite surprisingly, were not related to the
storage duration. This would suggest that the storage
losses incurred were the result of either damaged or
diseased tubers being placed in storage, rather than
any contamination occurring during the storage
period.
Transportation costs consumed a significant pro-
portion of the traders’ marketing margin. Of the three
areas studied, Hai Duong was the closest to Hanoi.
Hence, traders were able to pay a significantly higher
price and to transact directly with the farmers. Since
both Bac Giang and Thai Binh were located at a
greater distance, farmers were paid lower prices to
accommodate the higher transportation costs. While
it is unclear whether prices in Hanoi are set at the
wholesale level or the retail level, traders apparently
work backwards, subtracting the costs of transport
and the profit margin they seek to arrive at a price
they are prepared to pay the farmers and collector
agents.
On the other hand, since most wholesalers neither
regrade nor store the potatoes they have purchased, a
much greater proportion of the marketing margin will
be profit. However, given the significant price disin-
centive for small tubers, should wholesalers inadvert-
ently purchase a large quantity of small to medium-
size tubers, they may be exposed to a potential
trading loss. Being the last market intermediary in the
chain, the retailer has no recourse. Having purchased
the potatoes, they must sell them, lose them to infec-
tion by disease, or consume them themselves.
Table 2. Prices differentials at which tubers are purchased by tuber size (VND/kg).
Tuber size Farmers
sell
Traders
buy
Wholesalers
buy
Retailers
buy
Extra large
Large
Medium
+185
1385
–180
+170
1595
–170
+240
2180
–480
+450
2550
–885
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Gap Analysis
Traders want to buy potatoes that are free of chemical
residues, free of pests, diseases and physical injury, of
the desired size (large), and which provide an accept-
able shelf life. In order to meet the needs of their down-
stream customers, traders need to buy sufficient
quantities of potatoes at a competitive price and to be
able to pick them up when required (Table 3).
Regrettably, while a very simple methodological
error resulted in the enumerators failing to collect
data from the wholesalers, retailers’ expectations
were not greatly dissimilar to those of the traders.
However, retailers did place greater emphasis on the
ability of suppliers to meet their immediate needs.
Since retailers purchased in much smaller quantities,
being able to secure sufficient quantities of potatoes
was much less important. Similarly, since most pur-
chased from market intermediaries rather than
directly from farmers, geographical proximity to
their source was much less important. However,
retailers placed more importance on purchasing a
consistent, well-graded line of potatoes. Variety was
of little importance to retailers, presumably because
most of their customers did not differentiate between
varieties. While the market preferred large, evenly
shaped tubers, the principal criteria consumers used
in their decision to purchase were skin colour and
flesh colour. Over many years, consumers had
learned to associate yellow skin and yellow flesh
with potatoes that tasted good and cooked well.
Traders indicated that the collector agents were
generally better able to meet their perceived needs
than farmers. As the principal function of the col-
lector agents is to aggregate the potatoes from many
small farmers and to grade those potatoes before col-
lection, such is not unexpected. However, since even
this most fundamental task requires some effort, col-
lector agents will only undertake these activities if
they are adequately rewarded. As a result, traders
report that it is more expensive to purchase potatoes
from collector agents (Table 4).
Farmers were generally perceived as being unable
to deliver sufficient quantities of potatoes that were
free of pests and diseases, physical injury, of the
desired size and to deliver tubers of the desired shelf
life. Although the traders placed little importance on
packing, most reported that the manner in which
farmers packed potatoes was significantly below
their expectations.
Even although collector agents regraded the pota-
toes before resale, shelf life and freedom from phys-
ical injury remained a problem for the traders. Since
the majority of potatoes in the Red River Delta are
harvested before they are mature (Batt 2002), the skin
is unlikely to have hardened sufficiently. As a result,
the tubers are more susceptible to damage, dehydra-
tion and decay. The high incidence of physical
damage is no doubt related to harvesting practices.
Although no data were collected that quantified the
wholesalers’ expectations, it was apparent that most
wholesalers were dissatisfied with both the technical
quality and the functional quality of the product they
received from traders and collector agents. Whole-
salers reported that the tubers they received were
often too small and excessively damaged by both
pests and disease and physical injury. As a result, the
shelf life of the product was generally too short. Sup-
pliers were often unable to meet the wholesalers’
immediate needs and variations in product quality at
the farm level made it difficult for traders and col-
lector agents to provide potatoes of consistent
quality. While the inability to meet wholesalers’
immediate needs was no doubt the result of geo-
graphical distance — since both the traders and col-
lector agents operated in the rural areas — most
wholesalers reported that the prices that traders and
collector agents expected for the potatoes they sold
were too expensive (Table 5).
Table 3. Mean rating for what market intermediaries
desire from upstream suppliers (where 1 =
‘not at all important’ and 6 = very
important).
Factor Traders Retailers
Free from chemical residues
Free from pests and disease
Desired size
Long shelf life
Sufficient quantity
Meet immediate needs
Good reputation
Competitively priced
Deliver when required
Free from physical injury
Desired variety
Proximity (close)
Well graded
Appropriately packed
Supply a wide range of
fresh vegetables
5.74
5.70
5.52
5.52
5.45
5.39
5.39
5.35
5.30
5.27
4.87
4.48
4.26
3.48
3.39
5.21
5.37
5.42
5.37
4.68
5.47
5.42
5.26
4.74
5.42
3.79
3.32
5.05
3.00
3.06
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
36
Conversely, for the majority of retailers, suppliers
either met or exceeded their expectations. Although
problems were reported in the same key areas —
tuber size, freedom from physical injury, shelf life
and price — it was only the inability of suppliers to
provide tubers that were substantially free from pests
and diseases that proved to be significantly different.
The high price of potatoes was recognised as a
major constraint by two of the three market intermedi-
aries (Table 6). Traders indicated that it was too expen-
sive to purchase potatoes from both farmers and
collector agents; retailers indicated that it was too
expensive to purchase potatoes from wholesalers.
Since wholesalers did not indicate that it was too
expensive to buy potatoes from traders, this would
imply that wholesalers, being in perhaps the most
powerful position in the market, were able to extract
the margin they desired irrespective of the purchase
price and to pass these higher costs onto the metropol-
itan retailers who had no alternative source of supply.
Table 4. The extent to which farmers (F) and collector agents (CA) meet traders’ needs.
Factor Trader
wants
Trader gets Probability (p =0.05)
F CA F CA
Free from chemical residues
Free from pests and disease
Desired size
Long shelf life
Sufficient quantity
Meet immediate needs
Good reputation
Competitively priced
Deliver when required
Free from physical injury
Desired variety
Proximity (close)
Well graded
Appropriately packed
Supply a wide range of fresh vegetables
5.74
5.70
5.52
5.52
5.45
5.39
5.39
5.35
5.30
5.27
4.87
4.48
4.26
3.48
3.39
5.30
4.87
4.74
4.70
4.43
4.91
4.91
5.04
4.91
4.13
4.91
5.04
4.14
2.17
3.43
5.55
5.05
5.32
4.91
5.27
4.86
5.14
4.91
5.64
4.86
5.05
4.77
4.91
3.45
2.85
0.066
0.034
0.005
0.013
0.021
0.077
0.164
0.259
0.025
0.005
0.803
0.163
0.751
0.001
0.877
0.056
0.061
0.545
0.015
0.480
0.030
0.284
0.107
0.096
0.016
0.436
0.521
0.313
0.910
0.438
Table 5. The extent to which upstream suppliers meet wholesalers’ (W) and retailers’ (R) needs.
Factor Want Get Probability
(p =0.05)
W R W R
Meet immediate needs
Good reputation
Desired size
Free from physical injury
Free from pests and disease
Long shelf life
Competitively priced
Free from chemical residues
Well graded
Deliver when required
Sufficient quantity
Desired variety
Proximity (close)
Supply a wide range of fresh vegetables
Appropriately packed
5.47
5.42
5.42
5.42
5.37
5.37
5.26
5.21
5.05
4.74
4.68
3.79
3.32
3.06
3.00
4.70
4.40
4.80
4.40
4.50
3.80
4.80
3.70
5.00
5.00
5.30
3.80
3.40
2.60
3.80
5.63
5.26
5.26
5.00
4.68
5.16
5.11
5.32
5.05
5.58
5.53
4.16
4.05
3.22
3.37
0.420
0.578
0.625
0.119
0.015
0.429
0.506
0.695
1.000
0.038
0.061
0.309
0.105
0.721
0.185
ACRC084.book Page 36 Monday, October 18, 2004 2:35 PM
Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
37
From the wholesalers’ perspective, the major
problem they experienced with traders was the
narrow range of vegetables delivered. This would
imply that wholesalers sought to buy more than just
potatoes from the traders, but since most traders
bought and sold potatoes only when potatoes were
available from the farmers, this would not seem pos-
sible. Various other problems were experienced with
the quality of the tangible product, including inappro-
priate varieties (to meet the customers’ intended use),
tubers infected with disease and contaminated with
chemical residues, small tuber size, and a high inci-
dence of physical damage to tubers. Problems with
the functional quality included poor packing and an
inability to deliver sufficient potatoes so that the
wholesaler could satisfy their customers’ needs. No
doubt, since the traders operated in the rural areas and
presumably, since wholesalers were not able to
readily communicate with their suppliers, excessive
distance was perceived to be a major impediment.
For the retailers, while wholesalers could generally
supply sufficient potatoes to meet their needs, whole-
salers were unable to respond to their immediate
needs. Retailers also experienced more problems
with inconsistent tuber quality.
Comparing the various impediments that traders
experienced with purchasing potatoes from farmers
and collector agents provided some interesting
results. Traders deemed that it was more expensive to
purchase potatoes directly from farmers. Presumably
this resulted from farmers demanding a high price,
yet they presented the trader with only small quanti-
ties of largely ungraded tubers. Thus, the traders
experienced more quality problems when transacting
directly with farmers. However, when dealing with
collector agents, traders experienced more problems
with inappropriate varieties, small tuber size, phys-
ical injury and tubers being infected with disease.
The only plausible explanation for this would seem to
be derived from the ability of the trader, when pur-
chasing directly from farmers, to select for himself
those tubers he wants to buy and to reject others.
Conversely, when purchasing from a collector agent,
the trader must purchase the entire quantity. It would
also seem highly likely that, since collector agents
store potatoes for 7–10 days, any problems regarding
tuber decay would be more likely to show up after a
short period of storage rather than immediately after
harvest.
While traders indicated that they experienced more
problems with poor packing when purchasing
directly from farmers, farmers acknowledged that
poor packing was one the major impediments that
prevented them from meeting the needs of their
downstream customers (Table 7).
Poor grading, contamination by disease, a high
incidence of physical injury, poor appearance and
small tuber size were also perceived to be problem-
atic. However, that variable which farmers
believed most prevented them from meeting the
needs of downstream customers was the high pur-
chase price.
Table 6. Why suppliers fail to meet downstream customers’ needs (%) (F =farmer, CA =
collector agent, T =trader, W =wholesaler, R =retailer).
Factor T >F T >CA W >T R >W
High price
Poor grading
Inappropriate varieties
Narrow range of vegetables
Poor quality
Small tuber size
Not free of physical injury
Cannot meet immediate needs
Poor packing
Not free of disease
Poor storage capability
Poor reputation
Not free of chemical residues
Cannot deliver required quantity
Excessive distance
75
21
41
8
17
13
8
48
33
24
24
29
5
10
10
10
10
50
78
10
10
22
30
33
30
56
50
18
16
16
13
11
11
11
10
8
8
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
38
Farmers believed that the major factor contributing
to their inability to meet customers’ perceived needs
was insufficient capital (62%), which impacted
adversely upon their ability to purchase good-quality
seed and to purchase sufficient quantities of inputs to
maximise productivity (Table 8).
Nevertheless, various other agronomic constraints
affected the farmers’ ability to produce good-quality
potatoes, including heavy rain and the cropping pres-
sures under which farmers found themselves oper-
ating, for many farmers reported that the compost
applied had not broken down completely. At some
point in time, it must be recognised that the agro-eco-
logical environment of the Red River Delta is far
from optimal for the production of potatoes. How-
ever, it is also readily apparent that not all farmers
possess the skills necessary to know how to improve
productivity. If such is true and farmers are operating
below their full potential, costs per unit output will be
proportionately higher.
Lack of knowledge was also perceived to be a
major problem for the traders. While it is readily
apparent that farmers would benefit most by
improving their agronomic knowledge, traders may
not have the knowledge to differentiate between vari-
eties, to identify infected tubers, to know how to store
tubers or to understand the dynamics of the market.
Downstream Relationships in the
Potato Supply Chain
Contrary to expectations, it is apparent that most
farmers had a very positive relationship with their
preferred trading partner. The majority of farmers
were very satisfied with their trading partner and
most farmers trusted their preferred trading partner.
Farmers reported that their preferred trading partner
was always honest and kept their promises. Since
their preferred trading partner seldom acted oppor-
tunistically, farmers had confidence in their preferred
trading partner and generally believed the informa-
tion provided. Most farmers maintained that they had
a close personal friendship with their preferred
trading partner (Table 9).
It is also apparent that most farmers were able to
act independently of their preferred trading partner.
Most farmers indicated that they could readily
choose an alternative trading partner, although most
Table 7. Variables that prevent suppliers from meeting customers’ needs (%) (F =farmer, T =
trader, W =wholesaler, R =retailer).
Factor F >T T >W W >R
Insufficient quantity
Inappropriate varieties
Not free of diseases
Insufficient range
Too far from customer
Not free of physical injury
Small tuber size
Price too high
Poor grading
Tubers not packed
Poor appearance
Cannot source better quality
5
17
18
2
48
33
20
8
29
38
25
32
26
21
21
21
16
16
Table 8. What prevents suppliers from better meeting customers’ needs (%).
Factor Farmer Trader Wholesaler
Lack of capital
Inability to buy good-quality seed
Agronomic issues
Lack of knowledge
Do not have the desired variety
62
35
32
12
29
42
8
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
39
wished to maintain their relationship with their pre-
ferred trading partner because they made the best
offer relative to the alternatives. Furthermore, most
farmers indicated that their preferred trading partner
seldom had all the power in the relationship, nor did
they control all the information. Consequently, the
preferred trading partner was seldom able to coerce
the farmer into making decisions that were not in
their best interests.
The traders’ relationship with their most preferred
wholesale trading partner was also quite positive,
with most traders indicating high levels of trust and
satisfaction in the exchange. However, it was
apparent that the traders were more dependent upon
their preferred wholesale trading partner, even
though they did not necessarily provide the best offer.
Traders perceived that their wholesale trading part-
ners had more power and controlled more of the
information, although they were less willing to
provide financial assistance or to share the risks.
Conversely, the majority of wholesalers indicated
very low levels of both satisfaction and trust in their
relationships with retail customers. Transactions
entailed a high degree of risk and there was a greater
possibility of being exposed to opportunistic behav-
iour and conflict in the relationship. There was
minimal cooperation between wholesalers and
retailers and minimal trust. As a result, most whole-
salers indicated that their retail trading partners had a
poor reputation. Wholesalers were not only more
dependent, but retailers also wielded more market
power and controlled more of the information.
Upstream Relationships in the Potato
Supply Chain
In reviewing their relationship with farmers and col-
lector agents, the majority of traders also indicated
that they experienced high levels of satisfaction and
Table 9. Mean ratings of relationship variables for downstream relationships between market
intermediaries (1 =‘I disagree a lot’, 6 =‘I agree a lot’; F =farmer, T =trader, W =
wholesaler, R =retailer).
Factor F >T T >W W >R
Satisfaction
Trading with preferred partner is less risky
Good cooperation with preferred trading partner
Expect to continue to trade with partner
Preferred trading partner meets expectations
Treats me fairly and equitably
Adequately rewarded
Quick to handle complaints
Much conflict with preferred trading partner
5.82
5.64
5.61
5.55
5.49
5.44
5.22
2.09
5.83
5.70
4.40
5.43
5.77
5.57
4.10
2.47
4.20
3.70
4.64
3.10
4.10
4.30
3.10
2.90
Trust
Confidence in preferred trading partner
Always keeps promises
Always honest
Good reputation
Trust preferred trading partner
Believe information provided
Close personal friendship
Trading partner always considers best interests
5.58
5.54
5.53
5.46
5.36
5.05
5.03
3.81
5.03
5.20
5.37
5.33
4.93
4.53
4.77
3.10
3.90
4.00
4.00
2.70
4.30
3.70
3.80
3.30
Power-dependence
Free to choose another trading partner at any time
Has best offer relative to alternatives
Must adhere to partner’s demands
Trading partner has all the power
Trading partner controls all the information
Trading partner often acts opportunistically
More dependent on trading partner
5.71
5.31
2.78
2.28
2.21
2.15
2.07
4.90
4.57
2.37
2.83
2.40
2.03
2.37
2.90
4.30
3.78
4.30
3.00
3.22
4.50
ACRC084.book Page 39 Monday, October 18, 2004 2:35 PM
Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
40
trust with the exchange. Understandably, because the
collector agents accumulated potatoes from many
small farmers, traders generally felt they could rely
more upon the collector agents than they could upon
individual farmers. However, somewhat surpris-
ingly, traders indicated that they were more
dependent on farmers than they were upon their col-
lector agents. Since the farmers could choose the
trader to whom they sold their potatoes, farmers gen-
erally exercised more power and controlled more
information (Table 10).
J ust as the wholesalers reported that their relation-
ship with their downstream trading partners was not
entirely satisfactory, the wholesalers indicated that
they were equally dissatisfied in their relationship
with the traders and collector agents. Wholesalers
reported that traders seldom treated them fairly and
equitably and on many occasions, failed to meet their
expectations. Traders were slow to respond to the
wholesalers’ complaints and there was evidence of
only moderate levels of cooperation in the exchange.
Wholesalers also reported that despite the opportu-
nity to choose from several alternative suppliers,
traders and collector agents had more power and con-
trolled more of the information. Nevertheless, whole-
salers indicated that they were neither dependent nor
did they have to adhere to the trader’s demands. This
was achieved because most wholesalers (68%) pur-
chased potatoes from more than two traders and col-
lector agents (Batt 2002).
No doubt because of the potential variation in the
quantity and quality of the tubers delivered by traders
and collector agents, wholesalers demonstrated the
least amount of trust in their relationship with their
upstream suppliers. Wholesalers believed that traders
and collector agents were more dishonest and less
likely to keep their promises. Wholesalers also
seemed less willing to believe in the information pro-
Table 10. Mean scores on relationship variables for upstream relationships between market
intermediaries (1 =‘I disagree a lot’, 6 =‘I agree a lot’; F =farmer, T =trader, CA =
collector agent, W =wholesaler, R =retailer).
Factor T >F T >CA W >T R >W
Satisfaction
Trading with preferred partner is less risky
Good cooperation with preferred trading partner
Preferred trading partner meets expectations
Treats me fairly and equitably
Adequately rewarded
Expect to continue to trade with partner
Quick to handle complaints
Much conflict with preferred trading partner
5.83
5.70
5.48
5.48
5.41
4.82
4.26
2.17
5.55
5.68
5.32
5.68
5.41
5.18
4.77
2.27
3.90
4.10
4.60
3.50
4.70
4.60
2.70
2.60
5.40
5.45
5.60
5.50
5.10
5.13
4.90
2.05
Trust
Trust preferred trading partner
Always honest
Good reputation
Always keeps promises
Confidence in preferred trading partner
Close personal friendship
Believe information provided
Trading partner always considers best interests
5.35
5.17
4.95
4.91
4.87
4.68
4.10
3.04
5.00
5.29
4.68
5.23
5.27
4.73
4.23
3.18
4.40
4.00
4.00
4.10
4.20
4.20
4.10
3.50
5.16
4.90
4.60
4.85
5.10
4.42
4.95
2.70
Power-dependence
Free to choose another trading partner at any time
Has best offer relative to alternatives
Trading partner has all the power
Trading partner controls all the information
Must adhere to partner’s demands
More dependent on trading partner
Trading partner often acts opportunistically
4.77
4.05
2.91
2.82
2.77
2.36
2.36
5.10
4.14
2.59
2.27
2.32
2.23
2.00
4.40
4.60
3.30
2.80
2.60
2.70
2.33
5.80
5.25
3.70
1.90
2.30
2.45
2.20
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
41
vided by traders and collector agents and perceived
them to engage more frequently in opportunistic
trading. Such would suggest that price was of consid-
erable importance in the transaction. Wholesalers
believed that if traders and collector agents could
obtain a higher price from an alternative customer,
they would be more likely to abandon their relation-
ship. In turn, traders and collector agents could
readily blame their inability to deliver on the incon-
sistent supply from farmers.
While the wholesalers were generally dissatisfied
in their relationship with their retail customers,
retailers expressed quite high levels of satisfaction
and trust in their relationship with the wholesalers.
Indeed, most retailers intended to continue to trade
with their wholesale trading partner, even although
there were plenty of alternatives, noting that their
current wholesale supplier provided the best offer
relative to the alternatives. However, retailers
expressed some doubt as to whether wholesalers
always acted in their best interests.
Conclusions and Implications
With the majority of the potatoes harvested in the
Red River Delta being derived from some 235,000
small farmers, there is considerable uncertainty with
regard to both the quantity and quality of tubers avail-
able. In the absence of any definitive quality stand-
ards and in order to secure a more reliable supply of
potatoes, each of the market intermediaries agreed
that transacting with their preferred trading partner
was significantly less risky.
However, in a market where more than 85% of the
crop is harvested in just one month, the market will
demonstrate considerable price volatility. While a
long-term relationship may reduce some of the
uncertainty associated with procuring a more reliable
supply of good-quality potatoes, the relationship is
unable to provide any price certainty. As a result,
each of the actors may abandon their relationship
from time to time to secure a better price. Within such
an environment, one would expect the various actors
to engage in opportunistic trading practices, yet —
with the exception of the wholesalers, who reported
dissatisfaction with both their suppliers and their cus-
tomers — there was little evidence of market exploi-
tation.
While market intermediaries may find that they
have occasionally paid too much to purchase pota-
toes, they are in a position to respond to the market
and to modify their buying and selling practices in
order to reduce the extent of the loss. However, since
the potatoes are often dug immaturely and have only
a limited shelf life, farmers must accept the pre-
vailing market price at the time of harvest. While
farmers will ordinarily transact with those traders
who offer the best price, since the average farmer has
less than 1.5 t of potatoes at their disposal (Batt
2002), there is some doubt as to what benefit the
farmer will derive from selling to an alternative
trader. Since most Vietnamese potato farmers are not
constrained by any pre-existing credit arrangements
that might limit their ability to choose an alternative
trading partner, farmers choose to stay with their pre-
ferred trading partner because they want to, not
because they have to.
Within the supply chain itself, it is apparent that
the market intermediaries have adopted a cost plus
pricing approach. To the purchase price, the market
intermediaries add the various costs of grading,
storage and transportation, plus their desired profit
margin. In a market where there are many small
traders, wholesalers and retailers, few switching bar-
riers and few barriers to entry and exit (with the pos-
sible exception of the wholesalers), competitive
market forces will prevent the market intermediaries
at any one level in the supply chain from being able to
extract an extraordinary price margin. Both Faf-
champs (1996) and Lyon (2000) make similar con-
clusions from their respective analyses of the fresh
vegetable industries in Ghana.
Nevertheless, it is at the wholesale level where
most of the dissatisfaction arises in the supply chain
and, no doubt, it is at this level that there are the
greatest barriers to entry. Perhaps much of the whole-
saler’s relational dissatisfaction is derived from their
inability to exercise greater market power and to
extract a greater economic rent. However, despite
being the most concentrated sector, wholesalers exer-
cise minimal control over the traders that supply
them. Unless the wholesalers have made some pre-
existing arrangement to purchase all the potatoes
from a particular trader, the trader will park their
truck in a designated area in the wholesale market
and sell potatoes to whoever wants to buy them, pro-
viding they buy no less than one sack (Batt 2002).
While larger retailers can also buy directly from the
truck, many of these might be better described as sec-
ondary wholesalers, for they will distribute the pota-
toes to various retail markets throughout the
metropolitan area. That then leaves the wholesalers
ACRC084.book Page 41 Monday, October 18, 2004 2:35 PM
Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
42
very much dependent upon their local customer base,
who it seems may use that knowledge to their advan-
tage.
In conclusion, it is apparent that the prices that
farmers in the Red River Delta receive for the pota-
toes they have grown is determined more by supply
and demand than by the exercise of any coercive
power by market intermediaries.
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
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(printed version published in 2004)
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44
Banana Supply Chains in Indonesia and Australia:
Effects of Culture on Supply Chains
Shinta Singgih and Elizabeth J. Woods*
,1
Abstract
Research on banana supply chains (BSCs) was conducted in 2001 and 2002 through two case studies, BSC1
(Indonesia) and BSC2 (Australia). BSC1 supplied local banana varieties from small farmers in the Bayah
District in Banten Province to traditional markets in J akarta through the J akarta central market. In BSC2,
Cavendish bananas from growers in North Queensland were marketed through a wholesale agency in Sydney
to supermarkets and other high-quality retailers. This paper discusses the effects of culture on the operation of
both chains. Data were derived from interviews with chain members and observation of their daily activities,
and transcripts were categorised using qualitative software.
In both chains, strong and long-term relationships formed the basis of all chain activities, however the nature
of relationships between the chain members differed significantly between those in BSC1 and BSC2,
particularly at the upstream (farmer and village) levels. Culture affected the way in which members related and
communicated their ideas to each other. Relationships in BSC1 villages were dominated by traditional value
systems, social stratification and indebtedness that encouraged paternalistic approaches by the buyers toward
the sellers. Chain members’ relationships in BSC2 were more egalitarian and in some cases developed into
strong friendships. The culture, as expressed through the nature of these relationships, affected the pricing
mechanisms and farmers’ bargaining inclination. Despite the differences, each chain performed relatively
effectively, adapting to its needs within its cultural environment.
Supply-chain management (SCM) concepts origi-
nated from the fields of production/operations man-
agement and logistics (Westgren 1998), particularly
in the United States of America (USA) (Wilson
1996). SCM drew from the lean management
approach practised by the J apanese automotive
industry in the 1970s and 1980s, including non-con-
frontational ways of undertaking exchanges and just-
in-time distribution. The concepts can generally be
divided into two groups — traditional and the new
concepts of SCM. The traditional SCM concept
views the supply chain as a means of obtaining the
lowest possible initial purchase price while assuring
supply (Spekman et al. 1998). Hence, SCM is char-
acterised by the presence of multiple partners who
are evaluated based on purchase price, arms-length
bargaining, formal short-term contracts, and central-
ised purchasing. In such situations, fierce horizontal
competition among suppliers is encouraged because
the prevalent assumption is that suppliers would
behave opportunistically once the buyers become
dependent on their products.
The new paradigm of SCM, on the other hand,
emphasises the importance of good coordination of
all phases within the chain to transform raw materials
* School of Natural and Rural Systems Management, The
University of Queensland, Gatton, Queensland 4343,
Australia. Email: <[email protected]>;
<[email protected]>.
1
Current address: Executive Director, Research and
Development Policy, Department of Primary Industries,
Meiers Road, Indooroopilly, Queensland 4067,
Australia. Email: <[email protected]>.
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
45
into finished products or services and distribute them
to the end consumers (Spekman et al. 1998; Dunne
1999). This includes “designing, developing, opti-
mizing and managing the internal and external com-
ponents of the supply system …” (Spekman et al.
1998, p. 54). Baatz (1995) goes even further to
include recycling or re-use of the product, though this
inclusion is still relatively uncommon in SCM litera-
ture. Viewed as a system, the chain should also be
managed as a whole (Beers et al. 1999). Hence, in
SCM, the competition is no longer between business
units at the same level, but between chains operating
in the same or alternative industries.
The majority of SCM literature, including in the
agri-food industry, focuses on the application and
implementation of SCM in developed countries. The
differences in the nature of agri-food industries in
developed and developing countries mean that SCM
concepts derived from experiences in developed
countries cannot be easily applied in developing
countries without understanding the differences in
the nature of the industries in both types of countries,
caused by factors such as culture, and the systems
and regulations in place. Many SCM authors, for
example, Wilson (1995) and Fearne (1998), believe
that SCM is all about managing good relationships
among the chain members, with the financial gains
distributed according to the distribution of value
added. This paper focuses on the relationship nature
of the supply chain and the effects of culture, rather
than the issue of value-sharing within the chain.
Understanding how culture might affect supply
chains in particular countries is critical because of the
effects it might create in the logistic-relationships
management of supply chains. Culture here refers to
“the context of symbols, norms, interpretation
models and values shared by a social group. Values
form the core of culture and concern what is good/
bad, clean/dirty, normal/abnormal, logical/illogical,
rational/ irrational, fair/unfair etc.” (Aquilon 1997, p.
77). Two dimensions of culture described by Hof-
stede (1993, 1997), power distance and individu-
alism, will be used to describe the differences in the
Indonesian and Australian culture that might affect
the management of the chains and relationships
between their members.
In the following sections, the similarities in the
banana industries in Indonesia and Australia will be
briefly explained, followed by a description of the
research methods used in the study. The two case
studies are then described, focusing particularly on
the logistic management occurring within each chain.
The following sections describe the effects of culture
on banana supply chain logistic-relationships and the
chain members’ bargaining inclination. Finally, a
brief conclusion and implications of the study are
provided.
Banana Industries in Indonesia and
Australia
Although each chain studied is unique and has its
own characteristics, both operate in the banana indus-
tries within their respective countries, and share some
similar features. At the production end, the industries
are made up of mainly small family farms, although
large plantations also exist in each industry, particu-
larly in Australia, where less than 5% of growers
produce 70% of Australian bananas. For many small
banana farmers, growing bananas formed an impor-
tant part of their income. Since bananas are grown as
a monoculture in Australia, they were the main
source of income for the farmers, while in Indonesia
bananas are grown together with annual crops and
contributed to farmers’ regular income, although not
necessarily as their main source of income. Bananas
are produced mainly to serve domestic consumption
in each country.
At the marketing end, the banana industries in both
countries are part of the global fruit-marketing
industry. Imported fruit has been making its way to
Indonesia, and applications have been made to
import bananas into Australia. In Indonesia,
imported fruits can be found easily, not only in super-
markets in the cities, but also in traditional markets in
urban towns. These high-quality fruits are competi-
tors to the local bananas. As markets become more
competitive, small farmers can easily become
uncompetitive. To be successful in this environment,
good collaboration between all members of the chain
is critical to ensure competitive quality, quantity, and
price of their product to meet the changing consumer
preferences.
The banana industries in both countries are charac-
terised by informal, non-contractual relationships,
with farmers being price-takers and exercising the
least power compared to other members of the chain.
Those at the front-line interface with end consumers
normally benefit from the information to hand, and
hence often exercise power over others and create
dependency. The long and complex chains may also
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
46
discourage good communication and information-
sharing among members of the chains. Most
members communicated only with those at the pre-
vious and following level.
Research Methods
Two banana supply chains (BSCs) were studied, one
in Indonesia and the other in Australia. The Indonesian
BSC (BSC1) involved farmers from three villages in
the Bayah District of Lebak Regency in the Banten
Province in West Java. The main fruit commodity in
Lebak Regency is banana, and it is one of the largest
banana production centres in West Java, together with
Sukabumi and Cianjur Regencies. The three villages
were selected on the recommendation of the Bayah
Agricultural office, banana production statistics, and
access to study their systems. The Australian chain
(BSC2) was selected based on its comparability with
the Indonesian banana industry through consisting of
small banana family-farms, its attempts to operate
competitively and innovatively to survive in the
industry, its supply to supermarkets (the most common
retail outlet for Australians to buy bananas), and its
willingness to provide access to the researcher.
Data were collected in a series of interviews with
channel members and by observing them while
working. Interviews and observation findings were
transcribed and analysed with the assistance of NUD-
IST (Non-numerical Unstructured Data Indexing,
Searching, and Theorizing) software, which was
useful in allowing theory to emerge from the data
(Richards and Richards 1991). A summary of find-
ings was verified by the chain members for accuracy.
Description of BSC1 and BSC2
As typically occurs in developing countries, BSC1
was characterised by the existence of multi-layers at
both the upstream and downstream levels of the
chain. BSC1 supplies local banana varieties from
three villages, Cibareno, Cikatomas, and Cikamun-
ding, to end consumers in J akarta and neighbouring
cities such as Depok and Bogor through the central
Farmers
Collectors
Village wholesalers
Agents at the central markets
Traditional markets
Snack vendors Fruit and vegetable
vendors
Small restaurants Small markets
End consumers
Transporters
Transporters
Transporters
Flow of
information and
money
V
I
L
L
A
G
E
S
C
I
T
I
E
S
Figure 1. Logistic flows of banana supply chain 1 (BSC1), Indonesia.
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
47
market in J akarta (PIKJ – Pasar Induk Kramat J ati or
Kramat J ati Central Market). The logistic flow within
BSC1 is shown in Figure 1. Bananas were commonly
grown in the villages with minimal input and atten-
tion from farmers, on their rice banks or mixed with
hardwood trees/annual crops.
In BSC1, farmers sold their bananas to their
regular buyers — either collectors or directly to
village wholesalers — and only occasionally to
others. Two selling methods existed, weight-based
and tree-based. In the weight-based method, banana
bunches were carried on foot to the buyers’ ware-
houses to be weighed and priced according to one of
the buyers’ standard four price groups. In the tree-
based method, collectors actively searched around
the villages for young or mature bunches to be bought
on the tree. While a fixed-price system ruled almost
all transactions in the weight-based method, bar-
gaining governed the transactions in the tree-based
method. Competition among wholesalers ensured
relatively fair prices to suppliers. Banana ripening
was conducted using traditional methods, such as
smoking (burning dried coconut leaves) or carbide, at
the village wholesaler level. Bananas’ movement
within BSC1 was always accompanied by a change
of banana ownership at each chain level, apart from at
the central market, where the banana agents operated
on a 10% commission basis. No formal grading
standards existed within BSC1; bananas were graded
somewhat differently at each level using subjective
assessment of parameters such as bunch weight,
maturity, finger length, and cosmetic appearance.
A banana wholesale agent in Sydney was the focal
point that linked growers in North Queensland with
buyers in Sydney (BSC2). The predominantly Caven-
dish bananas were sold to major supermarket chains,
both high-quality and price-sensitive independent
retailers, and other wholesalers. The bananas were
sourced from specialised growers who produced high-
, good- and average-quality bananas. Supply from
small-scale, average-quality growers was discour-
aged. Growers typically consistently supplied to two
or three agents to spread their risks and obtain market
information from different cities. Growers were paid
on each consignment, several weeks after delivery to
the agent, who worked on a commission basis.
Growers graded unripened bananas by removing
defective fingers that fell outside the product specifi-
cation, and categorised the hands or clusters based on
the finger length. They trusted the agent to decide
which customers their bananas should supply, based
on assessment of the quality and consistency of the
ripe fruit. The characteristics of each chain are summa-
rised in Table 1.
Effects of Culture on Logistic
Relationships
In both chains, most chain members had known their
buyers/sellers for a relatively long time. In fact, strong
and long-term relationships formed the basis of all
activities in the chains. However, the nature of rela-
tionships between the chain members differed signifi-
cantly between those in BSC1 and BSC2, particularly
at the upstream (farmer/village) levels. Culture
affected the way members related and communicated
their ideas to each other. In turn, this affected the
pricing mechanisms and farmers’ bargaining inclina-
tion. This paper focuses only at the effects of culture
on chain members’ relationships and pricing mecha-
nisms at the upstream end of both BSCs. The effects of
culture on the logistic relationships of chain members
in this paper are viewed using Hofstede’s power dis-
tance and individualism dimensions (1993, 1997).
Power distance dimension
Power distance index (PDI) is a measure of the ine-
quality among people that is considered normal in a
country, from the perspective of the least powerful
partners in the relationship. Using a scale of 11 (small
power distance) to 104 (large power distance), less
powerful members of a group in a country with a low
PDI accept that power is distributed relatively equally,
which encourages interdependence. On the other
hand, high PDI refers to cases where the less powerful
members of a group depend emotionally on the more
powerful members. The PDI of Indonesia is 78, while
Australia’s is 36. If these scores are indicative of how
people from both countries perceive equality among
themselves, it might explain some of the attributes of
chain members’ relationships within each chain.
In high-PDI societies, inequality is considered as
the basis of societal order (Hofstede 2001). People
with social status, prestige, wealth, or simply greater
age, may be treated with a mixture of respect and fear
in these societies. In BSC1, social stratification
existed in the villages. Wholesaling is quite a
respected occupation, which positioned the whole-
salers relatively high in the village societies. Whole-
salers earned villagers’ respect because of their
business success, wealth, or simply their personality.
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edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
48
For example, the inequalities among BSC1’s
farmers, collectors, and village wholesalers were
apparent through the differences in materialistic pos-
sessions among them — wholesalers commonly
lived in relatively large houses equipped with a tele-
vision and antenna to receive TV channels from
J akarta, something that many small farmers in BSC1
could only dream of owning.
Koentjaraningrat (1967) argued that Sundanese vil-
lages, such as those in this study, tended to have social
stratification based on occupations and positions
within the village. Thomas (1975), who studied vil-
lagers’ perceptions of social stratification in three vil-
lages in West Java in 1965, also found occupation to be
one of the most significant determinants of social pres-
tige and power in village society. As a result, supplier–
buyer relationships are often characterised by pater-
nalistic attitudes by the buyers, which make small
farmers reluctant to bargain in a straightforward
manner. Similar, status-based relationships were also
found among the Madaymen farmers and middlemen
(Russel 1987). That these relationships have continued
to exist from the 1960s to 2002 in Sundanese villages
suggests they are rooted in stable social values.
Suppliers’ indebtedness toward their buyers,
which stemmed from the buyers’ role in guaranteeing
a market for their bananas and the credit provision
given to suppliers whenever they needed extra cash,
contributed to the inequality between suppliers and
buyers in BSC1 villages. Buyers offered loans
because they predicted that the future benefit of
having the farmers’ voluntary commitment to sell
only to them exceeded their current costs. However,
unlike in Thomas’ 1975 study of Sundanese villages,
where credit often caused conflicts because of the
high interest rates charged, credit in the villages
studied here was given without interest and without
an enforced repayment schedule. For many, the
feeling of indebtedness reduced their propensity to
bargain with the wholesalers. But for some (particu-
larly farmers who owed only a little money to their
buyers), it had less impact on their propensity to bar-
gain. They did not consider their financial ties a
barrier to bargaining or even to selling their bananas
to others if the buyers failed to meet the prices they
demanded. Some farmers who used to be collectors
and were still paid slightly higher than other farmers
also felt indebted toward their wholesalers, which
decreased their inclination to bargain.
As depicted by its relatively low PDI, relationships
between people in Australia tended to be based on
egalitarian principles. Such perception of equality
among people (such as the farmers and the agent in
BSC2) in a country with low PDI was also associated
with more modern agricultural practices, more social
mobility, and better education (Hofstede 1997). In
BSC2, communication between two parties could be
conducted in a relaxed atmosphere where neither of
them dominated the interactions. Conversation topics
between BSC2 farmers and the agent covered not
only bananas but also other interests such as sport or
sharing of jokes. BSC2 farmers saw themselves as
equal to the agent in social status, which allowed
friendships to develop from the trading relationships.
The four farmers interviewed have supplied the agent
for a long period of time and have turned their trading
relationships into friendship, although the distance
between their places of work meant face-to-face
meetings could only be conducted occasionally,
when the agent conducted his annual visit to produc-
tion centres in North Queensland. One of the farmers
was already the agent’s friend before also becoming
his supplier.
J ap et al. 1999 assert that friendliness in buyer–
seller relationships encourages them to share openly
and collaboratively and this provides a basis for
increased trust, which has to be continually worked
out between them. Batt (2003) concluded that
growers must have a certain minimum level of trust
in an agent before considering him/her as a potential
exchange partner. Compared to other horticultural
industries, trust is an even more critical issue in the
relationships between farmers and their agents in the
banana industry in Australia (and also in the mango
and avocado industries), because of the agent’s
important role in ripening the fruits before selling.
Quality-conscious independent retailers interviewed
claimed that banana condition (ripeness) was the
single most important criterion in banana selling
them. It was the agent’s responsibility to ensure that
the bananas were handled and ripened properly to
achieve the ripening stage desired by customers. This
meant that the agent must be capable of selling the
right fruit to the right customers at the right price, and
also of transforming the unripe bananas into ripe
ones. On the other hand, the agents depended on the
farmers to supply them with good-quality bananas
that were sought by their customers. This encouraged
interdependency between both the farmers and the
agent, and increased the importance of trust in their
relationships, since each party had little or no control
over the way the other did their job.
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
49
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ACRC084.book Page 49 Monday, October 18, 2004 2:35 PM
Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
50
Individualism dimension
Hofstede’s individualism dimension refers to the
degree to which people in a country prefer to act as
individuals rather than as members of a group (Hof-
stede 1997). Indonesia scored 14 here, while Aus-
tralia scored 90, within a 0 to 100 range. What these
numbers tell is that Indonesians tend to be loyal to
their groups, while Australians tend to be more indi-
vidualistic. Loyalty to the group also means sharing
resources. This is well expressed through the peasant
solidarity existing in BSC1 villages, which focuses
on the wellbeing of everybody in the group, rather
than the individual.
As most chain members in the villages had been
living in the same village all their lives, they knew
each other relatively well. Like many other peasant
societies in Indonesia, they valued high solidarity
among themselves and emphasised the sharing of
resources, mutual help, and the right to subsistence
for everybody (Alexander 1987). Peasant solidarity
stems from the gotong royong community spirit long
existing in many villages in Indonesia (Koentjaranin-
grat 1967). Self-sacrifice for the common benefit is
highly appreciated, while individualism is highly dis-
approved of. Cooperation was the basis of social
interactions among villagers, with implications for
the way bananas were traded in the villages. The two
most common features of peasant solidarity shown
among BSC1 members in the villages were the right
to subsistence and trust.
Many in the villages believed that everybody
should be given a chance to earn money for their fam-
ilies. The common manifestation of this belief was
farmers’ acceptance of the practice by village whole-
salers of paying collectors a slightly higher price for
bananas compared to the prices given to farmers who
supplied directly to the same wholesalers. Whole-
salers who tried to take over other wholesalers’ col-
lectors by offering them higher prices were regarded
as greedy by villagers and were considered disre-
spectful of the other wholesalers’ right to earn
money. In the spirit of respecting his former col-
lector’s right to earn money, a wealthy farmer refused
to supply directly to a wholesaler (hence disregarding
a chance to earn more money for himself); rather, the
farmer preferred to share the increased prices offered
to him by suggesting the wholesaler buy his bananas
through the collector.
Such values in village life encouraged people to
trust each other. When selecting buyers for their
bananas, many farmers considered mainly the dis-
tance between their field and the buyers’ warehouses,
rather than whether or not the buyer was a trust-
worthy person. By default, farmers believed that as
fellow villagers, the buyers would respect their right
to earn money and act in the best interest, price-wise,
of both parties most of the time. In a system where
most transactions were not recorded formally (apart
from those by village wholesalers who dealt with
large quantities of bananas), trust acted as an assur-
ance that the trading relationships were intended to
bring profit for both parties.
Consequently, many farmers believed the act of
bargaining risked being interpreted as lacking trust in
the wholesaler’s judgement. Bargaining could also
be interpreted as a direct confrontation with the
buyers, which was usually avoided in a society that
respected harmonious relationships. Suppliers
(farmers and collectors) tended to believe that most
of the time they would receive fair prices according
to market prices in the city and they could accept
occasional delays in receiving price increases. So
strong was the trust that many suppliers did not feel it
necessary to search for updated market information.
They also believed that forcing wholesalers to buy
bananas beyond their prices might cause losses for
the wholesalers, which in the long term would disad-
vantage the suppliers themselves. Hence, suppliers
might prefer to trust the wholesalers’ judgement on
appropriate prices and risk the amount of profit they
could get in the short term in favour of long-term sus-
tainable relationships. After all, bananas were seen as
a means of providing security and stable income for
most people in the villages.
In line with Australians’ tendency to be individu-
alistic, a farmer in BSC2 would rate his business
wellbeing as a higher priority than the whole chain’s
success. Farmers’ attempts to bargain with their
agents over prices were not considered as a confron-
tation but as an honest expression of disappointment
in the agent’s failure to satisfy their expectation, and
as such, did not necessarily affect the relationships
negatively. Each stated openly what they expected of
the other to progress their business. However,
because of the nature of the industry, wherein trust
developed slowly over time, costs of switching
between agents were high; it was in the best interest
of both parties to maintain a good relationship
between them. As transactions were repeated, trust
also increased, resulting in decreased need to bargain
and increased need to maintain the relationship (cal-
ACRC084.book Page 50 Monday, October 18, 2004 2:35 PM
Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
51
culated trust). BSC2 farmers managed their risks by
consistently supplying a certain amount or per-
centage of their bananas to several agents regardless
of their daily price differences. Any extra bananas
they produced would, however, always be sold to the
agent who gave them better prices in the previous
week. This practice is also common among other hor-
ticultural producers in Australia (Batt 2003). Good
relationships with each agent were particularly crit-
ical to ensure a market for farmers’ bananas in times
of over-supply, which usually coincide with the
summer fruit season. Farmers who pursued a spot-
transaction approach might find difficulties mar-
keting their bananas during those times.
In contrast to the high switching cost in BSC2, the
switching cost in BSC1 was low. In BSC1 villages,
trust was considered to be pre-existing in any farmer–
buyer relationship due to the collectivist nature of the
relationships within the village community. This
trust, combined with the low production costs and the
guaranteed market for bananas, resulted in farmers’
confidence in their capacity for one-off selling or if
necessary, shifting permanently to another buyer.
However in practice, farmers did not switch easily or
supply more than one buyer consistently. The latter
was due mostly to farmers’ small production scale.
Even large-scale village wholesalers only supplied
regularly to a single agent in the city. The loyalty
ethos embedded in a collectivist society as in Indo-
nesia meant that anybody who consistently supplied
more than one buyer would be labelled as disloyal
and their relationships would tend not to last. Fortu-
nately, because of the competition for banana supply,
reliance on a single buyer would not necessarily
decrease a supplier’s bargaining power, but would
increase the risk should the buyer’s business col-
lapse.
Supply-chain literature suggests that high ease of
switching between buyers is not consistent with
attaining chain integration and interdependency.
However, in practice, chain members in the villages
have established supply-chain values through their
socio-cultural value systems. Pre-existing trust and
respect for each other’s right to earn money has inte-
grated the chain, particularly at the village levels, as
has the provision through the chain relationships of
an informal system of micro-credit. In this sense,
traders are established in the role of chain champions.
Implications
The creation of Western-style supply chains in Indo-
nesia to secure supply to large supermarkets may
challenge the established socio-cultural norms. A
focus exclusively on superior, standardised quality
would represent a shift away from the current situa-
tion where all bananas find a market. Such a shift
would potentially divert income flows which cur-
rently seek to ensure that all farmers and collectors
are able to earn income (effectively an informal
welfare system). Losing their access to informal
credit and to cash payments (through moving to
delayed payments which are the norm from super-
markets) would also be difficult for many small-
holders to sustain.
In the Australian case study, established cultural
values and risk-management strategies were shown
to favour multiple simultaneous supply-chain rela-
tionships by banana farmers. By contrast, Indonesian
banana farmers already operate within supply chains
with a high degree of trust and stability. Under-
standing how these current Indonesian supply chains
operate and the culture and the deep-rooted values
which underpin them, should assist both academics
and practitioners to adapt Western supply-chain
practices associated with the growing supermarket
sector in Indonesia. The opportunity is to design
supply-chain practices which better fit with the soci-
etal needs as well as meeting the needs of super-
market owners and their customers.
References
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ACIAR Proceedings No. 119e
(printed version published in 2004)
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Koentjaraningrat, ed., Villages in Indonesia. Ithaca,
Cornell University Press, 386–405.
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
53
Supply-chain Management and the ‘One Dragon’
Approach: Institutional Bases for
Agro-industrialisation in China
Sherrie Wei*
and Zhang Yanrong
†
Abstract
A supply-chain approach for food and fibre industries has been widely discussed and practised with well-
known success stories, particularly in developed countries. Interest in supply-chain management (SCM)
among developing countries has risen in recent years as they aim for international standards with a view to
exporting their food and fibre products overseas.
Since the economic reform of the 1980s, the Chinese government and academics alike have promoted a
method of SCM for agro-industrialisation: vertical integration at the grower and wholesaler level. They have
popularised the phrase ‘one dragon of production and marketing’ — the head and body of the dragon are
integrated. This type of integration has been encouraged in two ways: one way is for large distribution
corporations to integrate back with contracted growers, or for the corporation to extend its supply-chain
function to production. The second common method comes from government-assisted grower cooperatives
that extend their chain function from growing to marketing their products.
The first stage in developing a supply-chain methodology is to understand the network and the environment
of the supply chains involved. This study looked at the drivers of SCM in China and used the concepts of ‘new
institutional economics’ to look at the social infrastructure for SCM in China. In 2000, O. Williamson
described four levels for the economics of institutions: embeddedness, institutional environment, governance,
and resource allocation. We conclude that the conditions of social infrastructure necessary for SCM are yet to
be developed in China. It will only be possible to extend the ‘one dragon’ approach to SCM when the
institutional environment is ready to support SCM requirements.
A supply-chain approach for food and fibre indus-
tries has been widely discussed and practised, with
well-known success stories. Supply-chain manage-
ment (SCM) simply refers to the management of the
entire set of production, distribution and marketing
processes by which a consumer is supplied with a
desired product (Woods et al. 2002). Rather than a
transactional or dyadic-based (one-to-one) orienta-
tion, as traditionally used in conducting businesses,
the focus of SCM is on more coordinated supply
among agribusiness units for desirable products. The
approach offers an opportunity for supply-chain part-
ners to see where they fit into this bigger picture and
how they need to position themselves to take advan-
tage of emerging trends and developments.
At this stage, the supply-chain approach has been
successfully applied in many industries in developed
countries, such the Netherlands, United Kingdom,
the United States of America and Australia. Interest
* Department of International Business Management,
Chien Kuo Institute of Technology, Taiwan/School of
Natural and Rural Systems Management, University of
Queensland, St Lucia, Queensland 4072, Australia.
Email: <[email protected]>.
†
Department of Agricultural Economics, Gansu
Agricultural University, People’s Republic of China.
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
54
in SCM among developing countries has increased in
recent years as they aim to meet international stand-
ards with a view to exporting their food and fibre
products.
Harland et al. (1993) pointed out a decade ago that
the first stage in developing a supply-chain method-
ology is to understand the network and the environ-
ment of the chain involved. It is relevant to examine
the drivers or antecedents of SCM and its institu-
tional basis. Williamson’s (2000) concepts of ‘new
institutional economics’ are particularly useful in
looking at the social infrastructure for SCM in China.
Williamson described four levels for the economics
of institutions: embeddedness, institutional environ-
ment, governance, and resource allocation.
From the current study, we believe that the social
infrastructure for effective SCM is yet to be devel-
oped in China. The Chinese government’s recent
‘one dragon’ policy for agro-industrialisation is an
alternative to SCM that does not make as much
demand on social infrastructure as the SCM
approach. However, the outcomes of the ‘one
dragon’ policy have been mixed. Its experiences,
both positive and negative, are relevant for policy-
makers in other developing countries interested in
agro-industrialisation. This study makes particular
reference to the melon industry in western China as it
is a well-known crop in western China and has the
potential to regain the fine reputation it had in the
past.
Institutional Basis for SCM in China
China and drivers of SCM
Research has identified several drivers in the
external environment of developed countries that
contribute to a more consolidated approach between
agribusiness units vertically involved in the same
supply chain. They include:
• cost-price squeeze in the larger environment of
globalisation
• increased demand for ‘traceability’ for food safety
and quality
• increasingly specific demands by consumers for
certain attributes, such as ‘green’, or ethically
sound products.
Since its accession to the World Trade Organiza-
tion (WTO), China has been under pressure to open
up its agricultural markets, however this process is
happening very modestly. The drivers of SCM in
developed countries stated above are not imminent in
China as yet, despite warning and recurring com-
ments in the media and from academics.
Cost-price squeeze
China possesses lower costs of production, such as
land and labour costs. Although more farm house-
holds are now using chemicals and commercial
seeds, many still use minimal farm inputs to save on
production costs. The cost of food in China is gener-
ally inexpensive. Local agricultural products of low
to mid-range value still have a substantial share in the
Chinese market.
Traceability
In China, any initiatives pertaining to food safety
issues are currently imposed by the government
rather than demanded by communities. There is a
lack of effective consumer groups pressing for safe
foods and this situation is not likely to change in the
near future.
‘Green’ and ethically sound products
There is little awareness of ‘green’ (inflicting no or
minimal environmental damage) products among
Chinese consumers even though some provincial and
city governments have the procedures for certifica-
tion of such products. It is still difficult to gauge to
what extent consumers are willing to pay more for
products that are produced using environmentally
friendly practices. In China, there is currently no con-
sideration given to the ethical issues implicit in pro-
duction, such as worker exploitation, animal testing
etc.
In developed countries, drivers for SCM have
forced small players out of business and consolidated
supply-chain partners at each level. In China, there is
little consolidation at any level as yet. There is a
myriad of small players at each level of the supply
chain. For example, in the melon industry in Gansu
Province, there are many small-farmer households
with an average of 2/3 ha of honeydew melon per
household. At the wholesale level, hundreds of
traders travel to Gansu from other provinces during
the peak season seeking melon supplies (Zhang and
Wei 2003).
A lack of institutional basis for SCM in
China
Williamson (2000) described four levels in the
economics of institutions. The higher level imposes
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constraints on the level immediately below. They are
summarised as follows:
• level 1, embeddedness — this consists of informal
institutions, customers, traditions, norms and
religion. It takes centuries to change in any
significant way. It is spontaneous and often non-
calculative and as such has no manifestation in
teleology.
• level 2, institutional environment — this consists
of formal rules of the game; for example, contract
laws. It takes decades to change. The purpose of
the rules is to get the institutional environment
right.
• level 3, governance —this is the play of the game.
It takes several years to change with a view to
getting the governance structure right.
• level 4, resource allocation — this relates to
continuous, everyday transactions which result in
prices and quantities. The teleology is to get the
marginal conditions right.
SCM and the embeddedness in the Chinese
society
In China, as in many other societies, informal rules
and values have a pervasive influence upon the long-
run character of the economy. There are various ele-
ments in Chinese society that impact on how busi-
nesses are conducted. A few of these are highlighted
below.
Low social status for traders — traditionally, the
Chinese had a hierarchy for different professions: the
gentry, the peasants, the labourers and lastly the
traders. There was a general low regard for traders or
businesspeople as they were perceived to be making
profits through tricky tactics. While today China is
actively involved in world trade, this low regard for
businesspeople is still entrenched in the culture. It is
somewhat accepted even today that businesspeople
need to have tricky strategies to outsmart their com-
petitors. There is little room for righteousness in busi-
ness, which the traditional Chinese culture
emphasised.
This perspective may not necessarily be the same
in other developing countries. One study found that
traders in Indonesia were normally well respected by
villagers for several reasons, such as their ability to
perform beyond the village level, their broader
knowledge of the industry, and their wealth (Wei et
al. 2001). The Chinese situation is quite different. In
the melon industry, for example, traders move
around the country for product supply in different
seasons of the year. Farmers are unlikely to respect
these wholesalers, as they do not know them well,
and the traders seek to purchase their produce at the
lowest possible price.
This prevailing attitude among the Chinese as con-
tributed has contributed, to a certain extent, to the dif-
ficulty of adopting a SCM approach to doing
business. In order to be prudent, business people gen-
erally adopt a transactional-based and short-term
dyadic relationship with their suppliers and cus-
tomers.
Homogeneity of ideas as the foundation for social
order — traditional Chinese concepts of social order
were based on homogeneity of ideas through a deep
socialisation process, rather than on a forced obedi-
ence to laws (North 1978). Such ideas of Confu-
cianism were deeply entrenched among the Chinese
people, forming a society with homogeneous ideas to
a considerable extent. Good government derived
from the people’s acquiescence to their roles in
society. Confucian scholar-officials known as man-
darins ruled China in the name of the Emperor until
the beginning of the twentieth century (Rajendra et
al. 1995). Confucian teachings have had great influ-
ence and control on the Chinese people, just as reli-
gion has done.
The implication for China in business relationships
is that the respect for law has not been nourished.
Agribusiness issues affected include the implementa-
tion of forward contracts, branding of products and
quality standards, to just name a few.
Collectivism, harmony and the disuse of conflict
— as part of the influence of Confucianism, the
Chinese culture emphasised collectivism and har-
mony. Empirical research in management areas
showed that the Chinese favoured harmony and com-
promise approaches to conflict rather than a direct
give-and-take collaboration (Kirkbride et al. 1991).
Research also showed that task conflict or conflict
management over issues reinforces interdependence
where people value each other’s abilities and
resources. Interdependence facilitates communica-
tion, exchanges and mutuality that in turn results in
collaboration between negotiators (Lawler and Yoon
1993). Parties who avoid conflict come to deny that
they need to rely on others or to resolve conflict to
move forward in a mutually beneficial way. Conflict
resolution may take the form of competition at
another level (Deutsch 1973).
The implication for SCM in China is that mutuality
and give-and-take between business partners is diffi-
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cult to develop. Supply-chain learning based on
information exchange at all levels is difficult to
achieve.
Close ties between family and friends, but weak
social ties — the Chinese show clearly differential
treatment between people they do and do not know
well. Largely due to this influence, family businesses
are common among the Chinese, including those who
have been overseas for generations. The sociological
theory of weak ties suggests that people who are less
well known to each other are more likely to divulge
needed information. Many Chinese business owners
and farmers may acquire superfluous or useless
knowledge as they are securely linked to a few
sources of information.
In the melon industry in western China, farmers
regularly send their produce every season to their rel-
atives who work at government institutions or uni-
versities to sell to colleagues. This also occurs in the
bok choy industry where the expression ‘patriotic
bok choy’ refers to the purchase of bok choy by the
employees of these organisations.
In the supply-chain context, close working rela-
tionships with suppliers and customers who are not
friends or relatives can be difficult if partners cannot
perceive the mutual benefits of divulging needed
information. Insufficient attention to weak ties may
also contribute to a general reluctance to coordinate
across organisational boundaries. Potential innova-
tions involving more than one level in the supply
chain can also be difficult to achieve.
SCM and the institutional environment
The institutional environment refers to the formal
rules of the game that set the parameters for the play.
The definition and enforcement of contract laws are
important features. China has less than 100 years’
experience of being a republic. It was a traumatic
experience to break away from its past and establish
a new legal system. Moving from a centrally planned
economy to a market economy in the mid-1980s,
China has even a shorter history of utilising market
mechanisms. Its legal system to define and arbitrate
disputes is yet to be perfected. Practical details such
as what constitutes a contract, relationship parame-
ters, cooperative laws, and sanctions for default are
largely left to the individual parties involved. Busi-
ness relationships rely on goodwill, but this is not
backed-up by state laws.
In China, there have been incidences of strategic
behaviour of default by farmers when dealing with
agribusiness corporations in forward contracts. Indi-
viduals and firms have been often able to get away
with default without adequate sanction. Widespread
negative experiences have discouraged the use of a
more collaborative approach such as SCM in doing
business in China. As a consequence, business is con-
ducted on-the-spot on a cash basis with little after-
sale service or information feedback in the supply
chain. This has increased both the risks and costs of
doing business and reinforced a transactional-based
approach to doing business in China.
SCM and governance structure
The governance structure is the play of the game.
Approaches to business relationships, such as SCM,
may be described under this level. “Governance is an
effort to craft order, thereby to mitigate conflict and
realise mutual gains” (Williamson 2000).
As discussed above, cultural and institutional ele-
ments essential for a supply-chain approach are not
present in China. It is difficult for supply-chain part-
ners to realise the benefits of mutuality, exchange and
to learn to collaborate toward long-term goals. The
current Chinese governance structure in business
also lacks some drivers of SCM found in developed
countries. A successful chain often has an effective
‘channel manager’ — a role often taken by supermar-
kets in developed countries. While the supermarket
sector is growing slowly China, it is yet to become a
driver for SCM.
There is little horizontal integration at each supply-
chain level to facilitate exchange and collaboration.
The population of farmers numbers nearly one billion
in China. In the melon industry, there is also a large
number of small-scale wholesale businesses and
numerous retailers (Zhang and Wei, these proceed-
ings).
SCM and resource allocation
This level refers to day-to-day transactions and
continuous adjustments to prices and output. In the
Chinese melon industry, there are no defined supply
chains. Businesses are based on short-term profits.
Competition is predominantly based on price and
undifferentiated lower or mid-value products. The ad
hoc nature of business operations may protect
supply-chain partners from some unfavourable
market forces in terms of entry and exit flexibility.
Transactions may be efficient in terms of offering
lower prices, but not effective in terms of delivering
desirable products to consumers.
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The Chinese Approach of Vertical
Coordination: the ‘One Dragon’
Policy
In the mid-1990s, as China experienced oversupply
of agricultural products, agribusiness marketing con-
cepts received more attention. Both the government
and academics promoted agro-industrialisation
through vertical integration. The slogan ‘one dragon
of production and distribution’ was soon popularised
— the head and body of the dragon are integrated. In
practice, this refers to the vertical integration of pro-
duction and wholesale operations under a corporate
structure, thus saving the need for coordination
between farmers and wholesalers. Leading corpora-
tions, or ‘dragon-head corporations’, are charged
with the privilege and responsibility of ‘dragging’
along the body and tail.
The ‘one dragon’ policy of integrating production
and wholesale distribution is a step forward from pre-
vious agricultural policies that emphasised produc-
tion alone. Earlier policies resulted in an oversupply
of low-value agricultural products. The ‘one dragon’
policy is different from the previous ones in that the
emphasis is on distribution as well as production of
mid- or higher value products. This policy of supply-
chain integration has been pushed by administrative
intervention rather than pulled by agribusiness
actors.
The ‘one dragon’ approach to agro-industrialisa-
tion has been implemented in two major ways. One
common method has been for large distribution cor-
porations to integrate back through supply contracts
with farmers, or for corporations to extend their
supply-chain function to production under a corpo-
rate structure. An example of this is for leading cor-
porations to provide improved varieties of seeds to
farmers or farmer groups and then buy their produce
from those farmers. Under this method, the focus is
on integration at the upper end of the supply chain,
rather than coordination of the chain as a whole. The
expectation was that these leading corporations
would set an example that other corporations would
follow in other villages and hence lead to wide adop-
tion on the path to agro-industrialisation. But the
implementation of ‘dragon-head’ corporations has
had mixed outcomes in efficiency and effectiveness.
Many of the leading corporations were state-owned
enterprises or jointly owned, receiving subsidy and
preferential treatment. As a consequence, many of
them were not managed according to market princi-
ples and modern management concepts. In other
instances, farmers defaulted on their contracts for
short-term gains.
The second means of implementing the ‘one
dragon’ approach is a more broad-based one of
setting up state-directed farmer groups. These groups
were to extend their chain function from growing to
marketing their products by administrative interven-
tion. For the marketing, the groups sent their products
to a consolidator, which could be a relevant local
government office or a state corporation. The
produce was sold under the village name or brand.
The emphasis was on developing products over
which villages had a comparative advantage. It was
hoped that each village would best utilise its advan-
tage under the slogan ‘one village one product’.
Directing farmers into groups was well justified. It
is believed that China, with a huge rural population
and proportionately inadequate farmland, is not fit
for large-scale farming. While some of the rural pop-
ulation is moving to urban areas, this process is
occurring very slowly, as unemployment in urban
areas has been a serious issue. The problem of pro-
viding work to a huge number of surplus rural
labourers will be the greatest obstacle for large-scale
agricultural production. The agricultural policy of
directing farmers into groups serves multiple pur-
poses of production and marketing as well as rural
development. In practice, there are only a few
success stories of state-directed farmer groups — for
example, one group in Shouguang County of Shan-
dong Province has been able to supply vegetables to
supermarkets in Beijing. In some instances, failure
has been due to inadequate planning and monitoring,
such as farmers packing inferior products which con-
solidators are still obliged to accept as they have the
responsibility to take all supply from farmers.
Conclusion and Discussion
In the Chinese ‘one dragon’ of production and distri-
bution approach to agro-industrialisation, the gov-
ernment assumed a large role in the process. There
are two related assumptions in the ‘one dragon’
policy: the inability of supply-chain partners to coor-
dinate the supply functions of production and distri-
bution under market conditions; and the capacity of
the government to plan and implement these func-
tions effectively.
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The heavy state role in agro-industrialisation is
consistent with the lack of ‘soft infrastructure’ for
SCM, as discussed above. There is little expectation,
under the current institutional bases in China, that
agribusiness actors in an increasingly decentralised
market system can coordinate their supply-chain
activities to deliver products that meet market
requirements.
While product distribution was emphasised in the
‘one dragon’ policy, it was implemented through
administrative intervention. This required compre-
hensive planning, based on predictions of market
forces, including supply, demand, consumer trends,
and other market intelligence. Dragon-head corpora-
tions and farmer groups were able to set up quickly
through state directives. However, success stories
were isolated rather than widespread (Waldron et al.
2003).
In light of Williamson’s (2000) four levels of insti-
tutional bases discussed earlier, one recommendation
came through this study — that the government could
improve the institutional infrastructure for agro-
industrialisation if it works on the second level of
improving the institutional environment, and facili-
tates changes in governance structure (at the third
level). At the institutional (second) level, this
includes devising mechanisms for more effective
implementation of accreditation programs, quality
assurance standards (there are already hundreds of
them) and contract laws. At the third level, horizontal
integration at the farmer level may be encouraged
through establishing government-facilitated farmer
groups. However, the emphasis needs to be on self-
managed farmer groups with the government playing
only a facilitative role — it may be appropriate to use
participatory techniques as have been used by non-
governmental organisations (NGOs) and other aid
projects in China. Horizontal integration at the farm
level is likely to bring about consolidation at the
wholesale level over time by squeezing out uncom-
mitted wholesalers. This will improve the likelihood
of exchanges and collaboration between farmer
groups and wholesalers in China. This may be the
first driver towards SCM in China.
References
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Connecticut, Yale University Press.
Harland, C., Williams, D. and Fitzgerald, L. 1993. Supply
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Kirkbride, P.S., Tang, S.F.Y. and Westwood, R.I. 1991.
Chinese conflict preferences and negotiating behaviour:
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Lawler, E.J . and Yoon, J . 1993. Power and the emergence of
commitment behaviour in negotiated exchange.
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North, R.C. 1978. The foreign relations of China. Belmont,
California, Dickenson Publishing Company.
Rajendra, N., Rajendra, V. and Barwick, R. 1995.
Introducing Asia, 2
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edition. Sydney, Longman.
Waldron, S.A., Brown, C.G. and Longworth, J .W. 2003.
Transforming lives with livestock-based agribusiness. A
paper presented at the Australian Academy of
Technological Sciences and Engineering (ATSE)
Crawford Fund 2003 Annual Conference held in
Canberra, Australia, 13 August.
Wei, S., Woods, E.J ., Adar, D. and Singgih, S. 2001. West
Timor mandarin marketing case study — implications for
supply chain management in developing countries. In:
O’Hare, T., Bagshaw, J ., Li, W. and J ohnson, G., ed.,
Postharvest handling of fresh vegetables. ACIAR
Proceedings No. 105. Canberra, Australian Centre for
International Agricultural Research, 49–53.
Williamson, O. 2000. The new institutional economics:
taking stock, looking ahead. J ournal of Economic
Literature, 38 (September), 595–613.
Woods, E.J ., Wei, S., Adar, D. and Singgih, S. 2002. Supply
chain management as beyond operational efficiency.
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Symposium on Tropical and Subtropical Fruits), 2, 425–
432.
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59
Analysis of the Constraints to Banana Industry
Development in Indonesia Using the
Supply Chain Concept
Setyadjit,* Ahmad Dimyati,
†
Erna Maria Lokollo,
§
Sri Kuntarsih,
¶
Rofik Sinung Basuki,** Ahmad Hidayat,
††
P.J. Hofman,
§§
S.N. Ledger
¶¶
and E.J. Woods***
Abstract
Banana is the highest production fruit in Indonesia. The fruit is sold mostly on the domestic market. A supply-
chain approach was used to analyse constraints to banana industry development in Indonesia, with a view to
determining research and development (R&D) priorities. Two supply chains were characterised through
participatory interviews and discussions involving the research team and the respective participants in the
chains. The first supply chain was a traditional banana supply chain from the Cikalong subdistrict, Cianjur
district, West J ava, supplying mainly the traditional markets in Bandung and J akarta. The second supply chain
was that of ‘company X’ supplying bananas to supermarkets in the J akarta, Bogor, Tangerang and Bekasi
metro areas. The chain characteristics were mapped to describe the flow of product, funds and information.
SWOT analysis was performed to identify areas for improvement in the chains. The suggested improvements
were compiled and classified under the six principles of supply-chain management (SCM): knowing
customers and consumers; creating and sharing value; getting the product right; logistics and distribution;
information and communication; and effective relationships. The research team and representatives of the
supply chain selected the five most-important issues for both supply chains. The results indicated that the most-
important constraint in both supply chains was getting the product right. This indicates that the current
emphasis of research and development on improving on-farm production and postharvest practices should
continue. However, there are other factors that need to be addressed, such as getting adequate supply of the
right product, and making sure that improvements do not impair sociological and other aspects of the chain.
* Indonesian Ministry of Agriculture, Balitpasca, J l.
Ragunan 29a, Pasarminggu, J akarta Selatan, DKI
J akarta, Indonesia.
†
Indonesian Ministry of Agriculture, Puslibang
Hortikultura, J l. Ragunan 19, Pasarminggu, J akarta
Selatan, DKI J akarta, Indonesia.
§
Indonesian Ministry of Agriculture, Puslit Sosial
Ekonomi, Pasarminggu, J akarta Selatan, DKI J akarta,
Indonesia.
¶
DitTanaman Buah, Indonesian Ministry of
Agriculture, Pasarminggu, J akarta Selatan, DKI
J akarta, Indonesia.
** Indonesian Ministry of Agriculture, Puslibang
Hortikultura, J l. Ragunan 19, Pasarminggu, J akarta
Selatan, DKI J akarta, Indonesia.
††
Dit Pengolahan dan Pemasaran, J l. Harsono, Gd D, No.
3, Pasarminggu, J akarta Selatan, DKI J akarta,
Indonesia.
§§
Agency for Food and Fibre Sciences, Department of
Primary Industries and Fisheries, Centre for
Subtropical Fruits, Nambour, Queensland 4560,
Australia.
¶¶
Agency for Food and Fibre Sciences, Department of
Primary Industries and Fisheries, Indooroopilly,
Queensland 4068, Australia.
*** School of Natural and Rural Systems Management,
University of Queensland Gatton, Gatton, 4343,
Australia. Current address: Executive Director,
Research and Development Strategy, Department of
Primary Industries and Fisheries, Meiers Road,
Indooroopilly, Queensland 4067, Australia.
Email: <[email protected]>.
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Production of banana in Indonesia is the highest of all
fruit crops. For example, banana production was
4,384,384 t in 2002, compared with 1,402,906 t for
mango and 968,132 t for citrus (Badan Pusat Statistik
2002). The main banana production areas are in J ava,
Sumatra, Celebes, Bali and, increasingly, Kali-
mantan. In J ava, production occurs in West, Central
and East J ava. West J ava includes the districts of
Sumedang, Tasikmalaya, Lebak and Cianjur. Central
J ava includes Cilacap, Grobogan, Brebes and
Kendal, and East J ava includes Bojonegoro,
Sumenep, J ember and Pasuruan.
The markets for banana are located in cities on the
producing islands, such as metropolitan J akarta,
Bandung, Semarang, Yogyakarta, Surabaya and
Malang for J ava. There are also holiday resort areas
like Bali and, potentially, neighbours like Singapore
which is close to Sumatra. Distance from the pro-
ducing areas to these markets can be short, such as
from West J ava to J akarta or Bandung, or long, such
as from Sumatra to J ava. There are two main types of
market: the traditional, long-established markets, and
the rapidly expanding supermarket businesses such
as Matahari, Carrefour, Goro, Hero and Kemchicks.
In Indonesia, there are two broad groups of
farmers. The smallholder farmer has 0.5–5 ha of
banana. These farmers often use low technology.
They are the main clients for the technology pro-
duced by the Indonesian Agency for Agriculture
Research and Development (IAARD), in close col-
laboration with extension workers. The large-scale
farmers have more than 5 ha (in one case up to 2000
ha). They often use more production and postharvest
technology than the small farmers. In some instances,
the technology is sourced through collaboration with
larger producers such as Chiquita and Del Monte.
Justification
The Indonesian government is eager to improve the
banana industry and incomes to growers. In the past,
emphasis has been mainly on improving production
practices. However, with the growing supermarket
sector, it is important to reassess the R&D effort to
ensure it is addressing the main areas that are
affecting the performance of the industry.
The focus of the Indonesian R&D effort is on
smaller growers and their supply chains. These
chains involve a large number of members, with both
economic and sociological characteristics. In devel-
oped countries, the supply chain or value chain is
increasingly being analysed and treated as the whole
unit rather than as individual components, on the
basis that the chain is an interdependence of members
seeking to develop a competitive advantage for the
whole chain (Woods 1999; Anon. 2003). However,
in developing countries the chains have rarely been
studied as a whole unit, but rather as individual links.
Methods
The method was developed by considering both the
concept of supply-chain management (SCM) and the
nature of the banana industry in Indonesia (empirical
evidence). The supply chain concept itself is more
established in the manufacturing industry sector than
in agriculture. Therefore, to apply the SCM concept
to the banana industry, the concept needed some
adjustment, so that it could be adopted in the circum-
stances applying in Indonesia. Previous experience
and the results of the desk study confirmed that eval-
uation of banana industry development required a
more-comprehensive and systematic approach. Pre-
vious banana-industry studies focused heavily on the
production sector (agronomy, cultivation etc.), while
only some touched briefly on socioeconomic aspects
(marketing, socioeconomics characteristics of the
producers and consumers etc.).
Relatively little has been written about the process
engendering chain management in Indonesian agri-
culture, especially in banana growing, where overall
production is scattered and involves very small-scale
farms.
At a first workshop, held at IAARD, Indonesia, the
concept of SCM and the empirical evidence came
together, which ensured that the final methods used
would be relevant to smallholders and would be par-
ticipatory in nature. The workshop was attended by
representatives of key members of the Indonesian
supply chains (small growers, traders, traditional
markets, and supermarkets), as well as members of
both the Indonesian and Australian project team. At
the workshop, the research team strategically identi-
fied case-study locations (Cikalong representing
SC1, and company X representing SC2). During the
workshop, the team identified the relevant partners
from each of the supply chains and collected baseline
information on the nature of banana supply chains in
Indonesia. It also gathered data on the banana
industry, including previous R&D activities.
As a result of workshop 1, the Indonesian team
developed the framework for their study. The frame-
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work was then refined during discussions with the
Australian project team to provide the final methods
used.
In the case studies, the Cikalong supply chain
(SC1) was chosen because it is the major producer of
banana to J akarta, the chain has the potential to
improve, with benefits to the members, and because
it is a good example of how the local government
(‘Pemda through Otonomi Daerah’) has enthusiasm
to take the initiative to create new value and greater
competitiveness for the banana industry in its region.
Company X (SC2) was chosen because it is inno-
vative and is a key driver in the chain to increase the
flow of benefits to the members from any improve-
ments made to the chain.
Information was gathered through individual dis-
cussions with members of the supply chains, and
through discussion groups with representatives of
several sectors of each chain.
At a second workshop, held at the Department of
Primary Industries (DPI), Brisbane, Australia, the
results of the two case studies were presented and dis-
DESK STUDY
– Field study
– J oint team meetings
WORKSHOP 1
(IAARD)
Indonesia
Discussion with the
Australian team; methods
finalised
CASE STUDIES
WORKSHOP 2
DPI, Queensland, Australia
Follow-up
Output
Output
– case study location
– develop partnership
– information system and database
(1) Supply chain, Cikalong
(2) Supply chain, Company X
(3) Other supply chains
Output
Figure 1. Outline of the methods used in the supply chain analyses.
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cussed. The workshop was attended by the Indone-
sian and Australian teams, as well as a trader
representative from Cibedug, Ciawi, Indonesia, and
one representative of local government from the
Agriculture Service of Cianjur District, Indonesia.
The objectives of the second workshop were to
develop and test the SCM method for the banana
industry. The six areas of SCM were used to develop
a list of potential improvements for both case studies
(SC1 and SC2), and prioritise these improvements in
relation to their potential to improve the industry.
Results and Discussion
Background data
Desk study
Information regarding the general overview, statis-
tical data, and previous research results on breeding,
crop management, crop protection, postharvest, and
agri-economics were collected during the desk study.
The results are briefly presented as follows:
Indonesian banana production is mainly by small-
holders, with the average area of farmers’ plantations
less than 0.5 ha. Banana production was about
4,384,384 t in 2002, about 68% of it from J ava.
Banana-production systems in Indonesia can be cat-
egorised into backyard, mixed crop, commercial
smallholder and agribusiness enterprises.
Indonesia is part of the centre of origin of banana.
There are more than 325 banana cultivars, with about
14 cultivars being commercially grown. Among
these are Ambon Putih, Ambon Lumut, Emas, Raja
Bulu, Raja Sere, Badak and Lampung (table bananas)
and Tanduk, Uli, Nangka, Kepok, Siem and Kapas
(plantain).
Although banana production has increased from
1997 to 2002, the production area has declined from
1997 to 1999. This has been caused by the outbreak of
several pests and diseases, especially in the main areas
of banana production such as Central Java, East Java,
Sumatra, and Sulawesi. The major banana diseases in
Indonesia are Panama disease (Fusarium wilt disease),
blood disease and moko disease (bacterial wilt disease).
Banana research has been receiving more attention
lately because of the increased domestic demand for
good-quality fruit.
Research in breeding
Very little research in banana breeding has been
done in Indonesia. This is understandable, considering
the wide diversity of banana germplasm existing.
Breeding has been done through hybridisation, soma-
clonal mutation and selection. The Indonesian Fruit
Research Institute (IFRURI) had established two cul-
tivars, Ketan-01 and Raja Siem, which are tolerant to
bacterial wilt. Two promising cultivars, i.e. Barifta 01
(mutant from cv. Barangan which is productive and
dwarf) and Sepatu Amora (tolerant to the vector of
bacterial wilt). The assessment of Fusarium resistance
via in vitro selection has also been done to find
resistant cultivars to this disease.
Crop management
The characteristics of banana production in Indo-
nesia are small-scale, minimum technological inputs,
high variability of the cultivars, little capital, no irri-
gation and planting material coming from suckers.
Crop protection
Reported pests are leaf curler (Erionatha thax L.),
pseudo stem borer (Cosmopolities sordidud,
Germar), stem borer (Odoiporus longicollis Oliv),
thrips (Chaetanapothrips signipennis), scab moth
(Nacoleia adasema), and nematodes such as Rhado-
pholus similes Cobb, Pratylenchus spp., Helicotyle-
chus multicinctus Cobb and Meloidogyne spp.
The main diseases are Fusarium wilt, bacterial
wilt, leaf spot/black sigatoka and bunchy top. The
other diseases are anthracnose, Panama, Cordona and
rotten young fruit.
Postharvest
In developing postharvest technologies for Indo-
nesia, there are still some gaps for research such as
the characteristics of plantains, more applied
research on improvement of ripening, and disease
resistance of the peel. Socioeconomic aspects have
received little attention.
Agro-economy
A study of agro-economics by Sudaryanto et al.
(1992) described the circumstances of the interna-
tional and domestic markets in mainly J akarta, and
reported two different marketing channels for
bananas coming from Lampung and from South
Sumatra. This study also investigated the marketing
margin in West J ava and gave examples of the flow
of bananas from the major producing centres in West
J ava to a major consuming centre in Bandung.
Field study
Both teams visited the Lampung banana-pro-
ducing centre to collect additional information. They
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visited the regional agriculture authority, Nusantara
Tropical Fruits (NTF), a small farmer at Padang
Cermin, West Lampung, a banana crisp company,
and a truck driver at Bakahueni port (connecting J ava
and Sumatra). One aspect of improvement was more
rapid movement of trucks through the port.
Workshop 1
Recommendations from the workshop were as fol-
lows:
In developing the banana industry in Indonesia, a
breadth of information is required, such as knowl-
edge of banana production, including the agro-eco-
logical zones (AEZ), farmer behaviour and
organisations in relation to improving knowledge
and practices, and research on production, posthar-
vest and processing practices.
There were two types of farmer in Indonesia:
large-scale farmers such as NTF, and small-scale
farmers. Large-scale farmers need little assistance,
whereas the small farmer still requires assistance.
Small-scale farmers had characteristics such as sub-
sistence with little technological inputs, scattered
location, low productivity and low-quality product.
The main pests and diseases are Fusarium and bacte-
rial wilt, there are many varieties of bananas grown,
and low adoption of research results.
Improvement of postharvest handling practices
cannot be made without considering on-farm prac-
tices. There are still research gaps. Banana-crisp
processors can produce high-quality product and
establish good markets even though the quality of
fresh produce remains low.
The percentage of the retail price received by the
farmer was considered to be low. Thus, increasing
the market or retail price in the market may not
increase the price to the farmer.
Cikalong, Cianjur was recommended as a location
for a case study since Cianjur is a model for banana
agribusiness development and there are loosely
organised and structured grower groups ‘Gapoktan
Serba Pisang’.
Supply-chain case studies
Cikalong (Cianjur) supply chain (SC1)
Product flow. Bananas are distributed from
farmers to consumers in wet markets and supermar-
kets in the big cities through village collectors, large
traders or supermarket suppliers. Some farmers sold
their best-quality product directly to street vendors.
The percentages of product sold to the wet markets,
supermarkets and street vendors are ca. 95, 4 and 1%,
respectively.
Cash flow. Village collectors were the primary
buyers of farmers’ product. They bought the product
from farmers at harvest in cash, or made an advance
payment before harvest and the balance at harvest.
Many village collectors received funds from large
traders in the consumer markets, but some used their
own capital.
Information flow. The main information shared by
every member of the chain was the quality required
by customers and consumers, both wet market and
supermarket. The quality requirements were deter-
mined by the variety and maturity. The highest prices
were for varieties Tanduk and Raja Sereh, followed
by Raja Bulu, Ambon Lumut, Muli and Nangka in
that order. For all varieties, the more mature the har-
vest, the higher the price.
Information about price was limited to the large
trader level. Collector–traders and farmers were price
takers.
Although farmers knew that the price received for
bananas was influenced by variety and maturity,
most of them did not direct their production strategy
to fulfil consumer demand because of the cash
needed and lack of security. Farmers preferred to
grow the Muli and Nangka varieties because of their
early maturity and high yield, so that they can get a
cash return quickly. Farmers were reluctant to delay
harvesting to increase maturity because of the risk of
theft of the crop.
Activities to add value. Farmers often harvested
and sold their banana before they were mature. Col-
lecting agencies and chain stores and wholesalers do
most of the ripening, grading etc., but generally the
collectors do very little of this (only about 5%). Two
reasons why growers do not ripen their crop are
because they get little increase in price for adding
value, and ripening too early in the chain will result in
transporting ripe fruit with greater risk of damage.
Collectors were paid for the transportation costs from
the farmers field to their base.
Services. Credit arrangements are the major
service collectors provide to growers. Information is
not a major part of the services offered.
What determines price? Size, variety, maturity
(usually based on how angular the shape is) and ripe-
ness (if the fruit are starting to colour) are the main
determinants of price, with variety and size being the
most important.
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Relationships. Very strong relationships exist
between the collecting agent at the subdistrict and
district level, and between the district collector and
the wholesaler. Several of the relationships are weak,
but this does not always mean that they need
improving.
How value is created. Most of the value is added
from the collecting agency at district level and
onwards. Most of the bananas stay on the bunch until
they reach the wholesaler.
Key decision-makers. Wholesalers are the main
determiners of price, with decreasing influence from
retailers, traders and, last of all, the growers. Growers
have very little control over price.
SWOT analysis: Cikalong
Strengths. There is a strong capacity to expand the
supply chain, because there are many potential
players in the supply chain and there is the potential
to increase the number of players. There is also the
capacity to increase production. Farmers are familiar
with growing bananas, so they could increase pro-
duction if they are rewarded for it. Local government
is ready to support the expansion of banana produc-
tion because banana is one of the top government pri-
orities for further development. It is also the vision of
the district government to expand banana production
in the district. There is an ‘association of banana
farmers’ in Cikalong, but this is not active at the
moment. There are no such associations in other pro-
duction regions.
Weaknesses. Poor cultivation techniques is a major
issue. Because of the lack of capital, the farmers
would need to combine resources to buy fertilisers
and other inputs.
In 2001, a training program organised by the Agri-
culture Service’s office instructed growers on the
benefits of fertilising, but the farmers said it would be
of little benefit since the plants would not produce
good yields. They would prefer to apply the fertiliser
to the higher-value inter-cropped crops directly.
Opportunities. There is an opportunity to develop
larger banana orchards to increase the production of
high-quality bananas for the supermarket trade, pos-
sibly by establishing a larger management structure
for banana growers in the same area. This could be on
a village basis or involve several villages. There is
support available from local government to assist
with this.
The potential market for processed banana could
be expanded, including processing of other banana
varieties. At the moment, only one variety is proc-
essed.
Threats. Among the threats are poor regulation to
restrict the movement of diseased plants, competition
from banana imports, and the discriminatory policies
on banana trade of European countries such as the
application on higher import tariffs for non-EU coun-
tries.
Company X supply chain (SC2)
Product flows. Previously, bananas from Cikalong
and Lebak were delivered to the collectors in
bunches. However, beginning in 2003 Company X
requested some of the collectors to supply fruit in
hands, so as to reduce fruit damage and allow better
packing of bananas in the trucks and reduced wastage
at the markets. Fruit from Cikalong and Lebak repre-
sent about 70% of the fruit supplied to Company X,
with the remainder coming from several growers
from Cicurug. These growers have about 2–5 ha of
banana, and Company X works closely with these
growers to produce high-quality fruit. On occasion,
Company X obtains banana fruit from the wet
markets when normal supplies are low.
Company X separates the fruit according to quality
at its main holding facility.
The fruit are delivered to the supermarkets as
hands in plastic crates.
Some 55–60% of Company X fruit goes to about
five medium-size supermarkets. The company does
not supply the larger supermarkets such as Hero and
Carrefour because it does not have a large enough
supply. Some 5–10% of its fruit go directly to street
vendors. Rejected fruit are sent to traders who supply
fruit stalls, and also to local wet markets.
The retail shelf space given to local banana is very
small because of the low supply of good-quality fruit,
even though there is sufficient consumer demand to
justify increasing the shelf space. Thus, there is a
large gap between supply and demand for good-
quality local banana varieties. As a result, the super-
markets give more shelf space to Cavendish and
imported bananas.
Company X has started to process some of the
rejected bananas suitable for processing. The proc-
essed product is sold directly to food stalls.
Cash flow. Company X usually pays cash directly
to the collectors on delivery of the banana. For the
growers that deliver directly to Company X, because
they are larger growers, payment is normally one day
later by bank transfer. One problem is that supermar-
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kets promise a delay of 2 weeks between delivery and
payment, but this has sometimes blown out to 6
weeks.
Prices paid by the supermarkets are set by negoti-
ation between Company X and the supermarkets. It is
not a fixed price. However, there is a fixed price for
its processed product.
Some of the supermarkets require a payment from
the trader to secure shelf space. This is usually a one-
off payment at the beginning. Every 3 months the
supermarkets asks the traders to join a discount (spe-
cials) program. The supermarkets determine the price
of specials and the traders have to comply, sometimes
taking a loss.
Services. Collectors collect fruit from the growers
and deliver to Company X. Some of the collectors are
starting to de-hand. Sometimes the collectors actu-
ally do the harvesting. Some growers harvest them-
selves and deliver to the market directly.
Company X provides education to collectors and
traditional wet-market sellers on how to handle
banana to prevent damage, and also some training to
growers on how to grow well and how to the bananas
for quality (in Lebak only). Company X supplies pro-
motional material to all of its outlets. It transports the
fruit to the supermarkets, and collects fruit from its
larger growers and, occasionally, from the traditional
markets.
Company X does not consider that it is its respon-
sibility to educate its supply chain members, but con-
siders it to be the role of the provincial and district
public-sector staff.
Information flow. Company X considers itself as
an ‘information resource’. Company X had very
good information flow to all supply chain members
such as collectors, traders at the wet markets, and
traders in Ciawi. Company X also collects informa-
tion from supermarkets. However, the information
flow was strong only between Company X and the
street vendors. Between the company and supermar-
kets, traditional markets, and consumers of processed
and fresh product information flow was quite good,
while with traders it was marginal.
How effective are the information flows? The
closer one gets to the growers the less effective is the
information flow.
Having effective grower groups would make it
more worthwhile and efficient providing information
to these groups. Also, the grower groups could also
create a larger ‘production unit’, which could
improve security and production practices.
How well does Company X know its customers?
Company X knows its customers well, but it needs to
mobilise its collectors to better educate the growers.
The government will facilitate this mobilisation. If
the company knew its supermarket clients better it
might not have to pay the shelf fee and payment for
fruit might become more rapid.
How effective are the relationships? Relations
between Company X and growers do not exist,
except for the two larger growers that live near its
facilities. These are the ones that provide good-
quality fruit.
How right is the product? There are always quality
and quantity problems with respect to local varieties
for the supermarkets. The supply of the lower-quality
fruit required for the wet markets is not a problem
because of its greater supply.
Some of the larger food caterers would also like to
include bananas in their food packs for factory
workers etc., but they often cannot get enough good-
quality fruit. This may be a potential, new client
group.
Company X SWOT
Strengths. Strengths are the education provided by
Company X to its supply chain members, good rela-
tionships with supermarkets and collectors, reputa-
tion for supplying good-quality fruit, short distance
to the markets, good leader to develop the chain,
good knowledge of fruit-quality requirements, good
relationships with government institutions, a good
management team and good collectors.
Weaknesses. Every supermarket in Indonesia has
its own quality standards. There needs to be more
standardisation.
Opportunities. There are nevertheless opportuni-
ties to provide better education to the supply chain
members. It is not enough to just tell the farmers how
to improve, there needs to be someone living in the
villages to continually assist the farmers. Company X
would like to do this but it needs assistance to do so
from government or non-government organisations.
Workshop 2
The second workshop was attended by the full
Indonesian and Australian team, including Dr
Dimyati (Director, Centre Research for Horticulture)
and Dr Winarno (Director, Fruit Production Directo-
rate), Ms Mega (Agriculture Service, Cianjur Dis-
trict), Udih Samanhudi (banana trader/supplier
representative for the wet market, Cibedug, Ciawi)
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and Dr Greg J ohnson (ACIAR) (see Ledger et al.
2002). The objective was to develop and test the
SCM method for analysing banana-industry develop-
ment in Indonesia using the information collected in
the above activities, with a view to identifying and
prioritising the medium and long-term R&D require-
ments based on the market requirements and oppor-
tunities of the banana industry as a whole
agribusiness unit.
The information gathered during the desk and field
studies was presented. During the ensuing discus-
sions, areas for improvement were listed and grouped
under the six principles of SCM: knowing customers
and consumers; creating and sharing value; getting
the product right; logistics and distribution; informa-
tion and communication; and effective relationships.
Each workshop attendee then voted for what they
considered to be the five issues that would have the
biggest impact in improving the supply chain. The
results are presented in Tables 1 and 2.
For the Cikalong supply chain, the issues that
received the highest votes were:
Table 1. Voting on steps to improve the Cikalong banana supply chain.
Improvement Number of persons who voted
Supply chain
members
Indonesian
team
Australian
team
Getting the product right
Village local management – grower groups to increase security, supply
and quality
Improve standardisation of product
Expand area of production; existing banana growers and additional
growers
Improve growers knowledge and practices; cultivation techniques,
immaturity, orchard management
Improve local varieties – breed new varieties
Improve postharvest handling
• loading and unloading systems
• collecting places (temperature, sun exposure)
• handling of bunches.
3
1
2
2
7
1
1
5
7
2
1
2
6
Knowing customers and consumers
Better information about consumers
Develop niche markets
Develop new processing markets e.g. baby foods and chips
Develop export markets e.g. to the Middle East and China etc.
1 3
2
3
1
1
Creating and sharing value
Growers capture more value – de-hand – ripen 1 4
Logistics/distribution
Agribusiness terminal
Improve infrastructure – e.g. roads.
Improve delivery system – reduce time lag
1
2 3
1
2
Information/communication
Better information from wholesaler – market intelligence signals
Better information to growers – standards
Better information from grower up the chain
1 1
3
2
3
2
Effective relationships
Improve wholesale × grower interaction. 1 3 1
Other
Better regulation to protect Indonesia from imported fruit 1 3
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1. village local management – grower groups which
could increase security, supply and quality (17
votes)
2. improvement of postharvest handling, loading and
unloading systems, collecting places – temperature,
sun exposure, and handling on bunches (13 votes)
3. all actors in the supply chain need to participate in
knowing about and achieving the necessary
standards for the particular markets (10 votes).
For Company X the issues that received the highest
votes were as follows:
Table 2. Voting on steps to improve the Company X banana supply chain.
Improvement Number of persons who voted
Supply chain
member
Indonesian
team
Australian
team
Knowing customers and consumers
A better understanding of what consumers want
Educate consumers to recognise and demand higher quality
If growers knew the desired product and had the necessary technology
and resources (Rp) they could decide whether to respond
Need to expand market for quality bananas (the market segment is so
small it limits investment, despite the opportunity)
2
1
1
1
4
1
2
4
1
2
Creating and sharing value
Need more Company Xs (innovative)
Opportunity to increase supply to street vendors, traders, caterers (new
customers)
Need collectors to de-hand to increase supply (may be done by
terminals)
Indonesian banana supply chain needs to be competitive with imported
bananas/other fruit 1
4
6
1
1
2
1
Getting the product right
Increase all aspects to get high quality
Ability to ripen bananas more quickly and consistently
Improve supply in low-supply months (5 months)
All actors in the supply chain need to participate in knowing about and
achieving the necessary standards for the particular markets.
1
2
1
1
1
2
5
3
1
1
4
Logistics and distribution
Improve packaging of de-handed bananas to prevent damage during
transport 2 2
Information and communication
Need to educate/empower traders, and through them the growers, to
increase high quality supply
Increase information flow to small growers by forming grower groups
for improve information flow and crop management 1
1
3
6
4
Effective relationships
Note system dynamics – not just commercial opportunities 2 1
Potential improvements for those who support/facilitate chains
Government should facilitate easy access to financial institutions able to
assist
Many actors limited by lack of access to capital (Company X,
collectors, growers)
Better environment for new investments (incentives for new plantations
from local government)
2
1
3
3
3
4
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1. all actors in the supply chain need to participate in
knowing about and achieving the necessary
standards for the particular markets (10 votes)
2. increase information flow to smallholder growers
by forming grower groups to improve information
flow and crop management (8 votes)
3. government should facilitate easy access to
financial institutions to assist.
For both supply chains (Cikalong and Company
X), most of the issues receiving the highest votes
related to ‘Getting the product right’, using
approaches such as:
1. formation of local grower groups improving post-
harvest handling (loading and unloading systems,
collecting places, and handling of bunches)
2. active participation of all actors to agree on the
necessary standards for particular market segments.
It was interesting to note similar voting patterns
between the Indonesian and Australian team members.
Conclusions
Analysing the Indonesian banana industry using a
supply-chain concept provided many insights in rela-
tion to constraints to industry development. In addi-
tion, the SCM concept represents a conceptual
framework within which strategies could be devel-
oped to analyse the competitiveness of the banana
industry, and to identify and prioritise the R&D activ-
ities required to improve the banana industry.
According to Indrajit and Djokopranoto (2002),
there are several stages in the development of supply
chains:
1. independence between among the members of
chains
2. integrated planning among several members of the
chain
3. integrated planning and monitoring
4. supply chain integration in planning, implemen-
tation and monitoring.
On the basis of the information collected in this
study, the two supply chains examined were at stage
two.
The methods used in this study could be improved
by getting more information and input from all
members of the supply chains, and involve their rep-
resentatives in the decision process for identifying
the main constraints. In the Indonesian context, this
input may be better obtained by having one-on-one
discussions with members, or discussion groups with
peers. Discussions with several sectors of the chain
may result in reduced participation from those
sectors perceived to have less ‘power’ in the chain.
The concept developed in this study is being
applied to other horticulture situations in Indonesia.
The SCM concept is being combined with soft-
systems methodology to analyse problems and solu-
tions in the citrus and pepper industries in eight prov-
inces, and the concepts are being presented and
discussed in a number of different forums. Continual
assessment and improvement of these methods
would be valuable.
Acknowledgments
We thank ACIAR, the Department of Primary Indus-
tries and Fisheries (Queensland) and the University
of Queensland for financial support.
References
Anon. 2003. Value chains, what are they and how do you
identify them? <http://www.agrifood.info>.
Badan Pusat Statistik 2002. Bulletin Perdagangan Luar
Negeri, Februari 2000.
Indrajit, R.E. and Djokopranoto, R. 2002. Konsep
Manajemen Supply Chain, Cara Baru Memandang Mata
Rantai Penyediaan Barang, J akarta, GRASINDO, 264.
Ledger, S.N., Lindsay, S., Hofman, P.J ., Woods, E.J . and
Singgih, S. 2002. Company X supply chain workshop.
23–24 J uly 2002. South J ohnstone, Queensland,
Australia. Centre for Wet Tropics Agriculture.
Tahlim Sudaryanto et al. 1992. Review on banana marketing
in Indonesia.
Woods, E.J . 1999. Supply chains: what are they and why be
interested? ACIAR Postharvest Technology Program
Internal Workshop No. 20, Canberra 1–2 December
1999. View at <http://www.linkingfarmerswith-
markets.net/index.php?p=3&id=3>.
Woods, E.J ., Wei, S., Singgih, S., and Adar, D. 2000. Supply
chain management as beyond operational efficiency.
Acta Horticulturae, 575, 425–431
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69
Improving the Marketing System for Fresh Produce
from the Highlands of Papua New Guinea
John Spriggs,* Barbara Chambers,* Carole Kayrooz,* Ernest Natera,
†
Norah Omot
§
and Margaret Vatnabar
¶
Abstract
As the title suggests, the aim of this research project is “to improve the marketing system for fresh produce
from the PNG Highlands for the benefit of all stakeholders.” Note that the aim is not to do a study about the
problems of marketing fresh produce, but rather to bring about change that intentionally will improve the
marketing system. As such, the methodology being used for this project does not follow the traditional
scientific research approach, but rather follows in the mould of critical action research. In this paper, we
provide an introduction to the problems of the marketing system for fresh produce in the Papua New Guinea
(PNG) Highlands. This is followed by a discussion of the methodology used in the project, how the project has
unfolded during the first year (it is a 3-year project) and, finally, the conclusions are given.
Papua New Guinea (PNG) has been struggling in
recent years. If we look at the index of economic
prosperity (Figure 1) we can see that the average
person is not as well off today as they were a few
years ago.
The International Monetary Fund (2003) recently
blamed this on:
• growing governance and law-and-order problems
• a lack of new mineral exploration activities
• deteriorating physical infrastructure in the rural
areas (that has inhibited agricultural production)
• the Asian crisis (that has reduced export demand).
Given the prospect of further declines in the
mining sector, the National Government of PNG is
looking to other forms of economic activity to help
reverse this downward trend in prosperity. Chief
among these is an export-oriented agricultural sector,
of which fresh produce is an important part. Fol-
lowing the above-mentioned International Monetary
Fund report, it also recognises that a major difficulty
in achieving this is the deterioration of physical infra-
structure in rural areas.
The National Government’s strategy for the future
prosperity of PNG provides an important backdrop to
this project, but this project is more than just gener-
ating increased gross domestic product (GDP) for
PNG. It is about generating cash income for the
people who most need it.
The PNG Highlands region is home to more than
half the total population of PNG. It is also a region in
which rural poverty is widespread. Cash income is
required by these rural families to provide for such
things as education and health care. The production
and sale of fresh produce of the PNG Highlands rep-
resents one of the few sources of cash income for a
very large number of rural families. Moreover, the
production and marketing of fresh produce is very
much an activity in which rural women can and do
play an important role. This is significant because
* Institute for Regional Community Development,
University of Canberra, Canberra, ACT 2600, Australia.
Email: <[email protected]>.
†
Fresh Produce Development Company, Goroka, PNG.
§
National Agricultural Research Institute, Lae, PNG.
¶
National Research Institute, Port Moresby, PNG.
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cash income in the hands of rural women is much
more likely to be used on family needs than is the
case of cash income in the hands of rural men.
The fresh produce grown in the PNG Highlands is
dominated by traditional foods like sweet potato and
taro. But increasingly, farmers are turning to Euro-
pean-style vegetables, such as potatoes, cabbage, broc-
coli, cauliflower, capsicum, spring onions, zucchini,
carrots, tomatoes, and lettuce. The PNG Highlands
region is unique in that it is one of the few places in the
region that has a temperate climate and where high-
quality European-style vegetables can be grown
organically all year round. The region has the potential
to meet the needs not only of consumers in the High-
land area but also of the coastal cities of PNG as well
as to supply offshore markets. According to prelimi-
nary interviews with stakeholders in the fresh-produce
industry (both buyers and sellers), the main drawback
in fulfilling this potential is the marketing system.
Many farmers told us that they know how to grow
fresh produce but they do not have the markets. Super-
market managers in Port Moresby told us that they
would love to buy more fresh produce from the High-
lands but they were unable to get a consistent supply of
good-quality produce. A fairly general comment we
heard was that the marketing system was fragmented
with poor coordination and communication between
the different players in the marketing system.
Methodology
This is not the first project to examine the marketing
system for fresh produce in the PNG Highlands.
There have been several such studies, including Scott
and Atkinson (1989), Fresh Produce Development
Company (1997), Burden (1998) and Epstein (2000).
These studies all end with recommendations for
change, but do not actually engage the change
process per se. Hence, their capacity to make a dif-
ference is limited. Methodologically, they are exam-
ples of positivistic science in which hypotheses are
tested and conclusions drawn in a linear research
process. Positivistic science is a powerful approach
when dealing with natural phenomena such as plants
and animals. However, most social scientists would
regard this as inadequate when attempting to research
human social behaviour.
The present project is different in that engaging the
change process is an integral part of the project. To
achieve this, the project adopts the methodology of
action research. Action research involves a cyclic
process of:
In this approach, the research team generates
understandings of the marketing system (reflection/
research) and, working with stakeholders in the
system, facilitates change (planning and action). In
its facilitative role, the research team is cognisant that
the process itself and any changes to emerge from the
process are owned and directed by the stakeholders.
Action research has been widely used in the fields
of social change and education (including agricul-
tural ‘extension’). However, the use of action
1988
100
0
200
300
400
500
600
1990
K
i
n
a
1992 1994 1996
Year
1998 2000 2002
Figure 1. Economic prosperity in Papua New Guinea (real GDP per
capita), 1990–2001.
Research Planning Action Reflection
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ACIAR Proceedings No. 119e
(printed version published in 2004)
71
research in exploring and improving supply-chain
relationships is relatively new. We have used it in
previous research (Spriggs et al. 2002) and there is
some work ongoing in the United Kingdom (e.g. at
Sheffield University).
During this 3-year project, we expect to pass
through two or three phases (action research cycles or
spirals). During the first phase we expect to:
• carry out a comprehensive situation analysis
(mapping) of the marketing system as it currently
exists and examine potential areas for
improvement (this is the initial research element
of an action research cycle)
• facilitate a workshop comprising all the
stakeholders in the marketing system for fresh
produce — this workshop is carefully constructed
to encourage collaborative discussion of problems
and strategies and ends with an action plan for
change (this involves the planning and start of
action of an action research cycle)
• develop and work with a steering committee of
stakeholders to ensure that the action plans
determined by the workshop participants are
carried out (this is the action element of the action
research cycle)
• hold a meeting of the research team with the
steering committee to reflect on the actions taken
and to develop the next phase of research (this is
the reflection element of the action research
cycle).
Project Work to Date
The project began with a 2-week training program for
the for four PNG members of the research team. The
training program was conducted at the University of
Canberra and covered the topics of marketing,
supply-chain management, action research and
workshop facilitation. The methodology of work-
shop facilitation was used during the training course
to determine an action plan for the situation analysis
(i.e. the mapping exercise which is the research
element of the first phase of the action research
cycle). This action plan consisted of a number of
activities including:
• background data (history, types of fresh produce,
quantities, prices)
• environment (economic, government, socio/
cultural, technological, natural)
• process mapping (data loggers, process record)
• profitability analysis (marketing costs)
• semi-structured interviews (all stakeholders)
• consumer questionnaire (at supermarkets).
During the first year of the project, all of these
activities were carried out except for the consumer
questionnaire. The other activities provided valuable
information, which was provided to the various
stakeholder participants of the first workshop.
1
The
following is a brief overview of the findings of that
research.
• Broadly, there are two types of marketing system
for fresh produce from the PNG Highlands: the
open market and direct marketing. The open
market is often called the informal market.
Farmers set up a stall with their produce and
buyers come around and purchase their
requirements, but there is no long-term
relationship between buyer and seller. Direct
marketing is where a final buyer (e.g. a
supermarket) buys directly from a supplier without
going through the open market. In the latter, the
buyer and seller build up a relationship, which
tends to lower transaction costs.
• The fresh-produce sector in PNG is currently
restricted to the domestic market; there are no fresh-
produce exports. The present marketing system is
fragmented, with poor communication and
coordination and little attention to quality control.
Currently, the domestic marketing system is not in
sufficiently sound shape for PNG fresh produce to
be competitive in the very demanding export
market. From a business strategy perspective, it
makes sense to focus first on improving the
domestic direct-marketing system with a view to
using this improved system as a springboard to the
export market. The direct-marketing system has the
potential to become an appropriate model where the
critical characteristics of consistent quality and
reliability of supply can be encouraged in a way not
possible with the open market. Within this direct-
marketing system, sales to local supermarkets are
most important, as they are the most demanding
buyers of fresh produce.
• Special attention needs to be paid to the potential
importance of women in the fresh-produce
marketing system. They are heavily involved in
1
At the time of the Bali workshop, the workshop for
stakeholders of the fresh produce marketing system was
only in the planning stages. It has since been successfully
concluded and is discussed briefly on page 73.
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edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
72
the production of fresh produce and are also
importantly involved in selling at the local open
markets. However, concerns about their physical
security and lack of facilities in the open markets
inhibit their greater participation. An earlier
workshop on Women’s Voices in the Food Chain
(run by the National Agricultural Research
Institute) (NARI, undated) showed that women
were experiencing significant problems at urban
and rural markets — lack of toilet facilities, no
running water, no shade from the hot sun etc. It
also revealed that women tend to be marginalised
in PNG society.
• The Fresh Produce Development Company
(established by the National Government with the
aim of assisting in the development of the fresh-
produce industry) has begun working with grower
groups to provide training in production and
postharvest management of the produce. It has also
assisted them in finding buyers for their produce.
• The two main supply chains for moving fresh
produce from the Highlands to Port Moresby
supermarkets has been by road/sea and by air.
There is no road leading from the Highlands to
Port Moresby. Thus, produce must either be
airfreighted or transported by road to Lae on the
north-eastern coast of PNG and then shipped by
boat from Lae to Port Moresby. Airfreight is the
more expensive (at about PGK2/kg), but may be
cost-effective for high-valued, highly perishable
fresh produce. The flight time is less than 2 h.
Road/sea transport is less expensive (at about
PGK0.60/kg) and, if all goes well, takes a
minimum of 3 days.
• The potential comparative advantage for the
Highlands is in organically grown, temperate-
climate fruits and vegetables. However, most
temperate-climate vegetables are highly
perishable and the optimum temperature for
storage after harvest is between 0°C and 4°C. This
creates a problem, as refrigeration is expensive and
only professional marketers currently have the
capacity for this. There is a rough rule of thumb
that for every 10°C above the optimum, shelf life
drops by a factor of two to three. For example, with
broccoli, the ideal storage temperature is 0°C and
at this temperature, the shelf life is about 24 days.
At 10°C, the shelf life drops to about 8 days, and at
20°C, the shelf life is about 3 days. At 30°C, the
shelf life is about 1 day.
• Currently, there is one significant professional
marketer of fresh produce by road/sea and one by
airfreight. They both use refrigerated transport to
maintain the quality of their produce. There are
also many growers and grower groups marketing
their own produce to Port Moresby without the
benefit of refrigeration. They either take small
loads with them on the plane or they take produce
by road to Lae (on unrefrigerated trucks) and then
put it on a container ship for the journey to Port
Moresby. Figures 2 and 3 show the type of
unrefrigerated truck that is often used to transport
produce to Lae.
• In Figure 3, notice the sacks used to carry cabbages
and other produce. These provide no protection for
the produce and often require it to not only support
the weight of the produce itself, but also the weight
of those looking after it!
Figure 2. The type of unrefrigerated truck that is
often used to transport produce to Lae.
Figure 3. Interior of unrefrigerated truck, showing
unprotected produce.
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
73
• Self-marketing is inefficient and often the produce
is badly damaged by the time it reaches its
destination. Figures 4 to 6 show the results of
temperature trials on unrefrigerated road
shipments of fresh produce by a self-marketer
from Goroka (in the Highlands) to Lae.
• Notice that by the time they reached Lae, all three
loads had reached temperatures of around 30°C,
which meant that the shelf life was certainly less
than that required to make the journey to Port
Moresby (at least 2 days). It seems clear that a
successful, quality-based domestic marketing
system cannot be based on a system involving self-
marketers.
• Grower groups were asked why they were not
already using professional marketers in the
Highlands. The most plausible answer was a lack
of competition — even with all their quality losses
and high transaction costs, growers thought they
could do better marketing themselves.
The insights gained from the mapping exercise
were fed into a workshop of stakeholders of the mar-
keting system for fresh produce. This workshop had
not taken place by the time of the Bali workshop.
However, by the time of writing this revised paper,
the stakeholder workshop had been held. We would
like to just offer a few comments on this workshop.
• It was decided to hold a separate meeting of
women stakeholders in the marketing system
before the stakeholder workshop. This was
intended to obtain their perspective on the issues as
well as their suggestions for strategies of
improvement. This decision was taken because of
the fear that the women might tend to be
marginalised in the larger workshop and their
concerns not heard. It was expected there would be
15 women participants at this meeting. In fact there
were 24. The meeting was facilitated by two of the
authors (Associate Professors Barbara Chambers
and Carole Kayrooz).
• The workshop was limited to a cross-section of
stakeholders with a view that numbers would be
limited to 30 participants. In fact, we had 36
participants, including representatives of grower
groups, wholesalers, transporters, supermarkets in
Lae and Port Moresby, national government (led
by the Secretary of Agriculture) and provincial
government (from the Highland provinces).
Data logger
and produce
placed in box
and then put in
depot
Box loaded onto
PMV on bottom
with poor air
circulation and
driven to Lae
PMV
arrives in
Lae
Produce
weighed
and
handed
over to
buyer
Produce
unloaded and
left outside in
sun
32.0
30.0
28.0
26.0
24.0
22.0
20.0
18.0
16.0
14.0
12.0
T
e
m
p
e
r
a
t
u
r
e
(
°
C
)
7/9 06:00 7/10 00:00 12:00 18:00 06:00
Time (starting 7/9/2003 06:00:07)
S/N 224522
Figure 4. The results of temperature trials on unrefrigerated road shipments of fresh tomatoes
from Goroka (in the Highlands) to Lae by a self-marketer (PMV =public motor
vehicle).
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
74
Data logger and
produce placed
in box and then
put in depot
Box loaded into
PMV on top with
good air
circulation and
driven to Lae
PMV arrives in
Lae
Produce
weighed and
handed over
to buyer
32.0
30.0
28.0
26.0
24.0
22.0
20.0
18.0
16.0
T
e
m
p
e
r
a
t
u
r
e
(
°
C
)
7/9 06:00 7/10 00:00 12:00 18:00 06:00
Time (starting 7/9/2003 06:00:07)
S/N 224719
Produce
unloaded and
left outside in
sun
Figure 5. The results of temperature trials on unrefrigerated road shipments of fresh lettuce from
Goroka (in the Highlands) to Lae by a self-marketer (PMV =public motor vehicle).
Data logger and
produce placed in
box. Box left
outside depot
Box loaded onto
passenger seat (beside
driver) of PMV, which
had been sitting in sun
all day with windows
closed
Windows opened
on PMV, other
produce loaded
and PMV driven
to Lae
PMV
arrives in
Lae
Produce
weighed and
handed over
to buyer
Produce
unloaded
and left
outside
in sun
32.0
30.0
28.0
26.0
24.0
22.0
20.0
18.0
16.0
T
e
m
p
e
r
a
t
u
r
e
(
°
C
)
36.0
34.0
7/9 05:59 23:59 11:59
17:59
7/10 05:59
Time (starting 7/9/2003 06:00:07)
S/N 224524
Figure 6. The results of temperature trials on unrefrigerated road shipments of fresh beans from
Goroka (in the Highlands) to Lae by a self-marketer (PMV =public motor vehicle).
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ACIAR Proceedings No. 119e
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75
• The workshop was professionally facilitated (by
Barbara Chambers and Carole Kayrooz) using
robust techniques intended to encourage
collaborative participation and decision-making.
• At the beginning of the workshop, one of the
authors (J ohn Spriggs) presented a summary of the
findings from our mapping exercise and also
presented a report on the women’s group meeting,
prepared by the two facilitators. (Five of the
women who were participants at the women’s
group meeting were also participants at the
workshop.)
• Following this, J ohn Spriggs proposed that the aim
of the workshop should be “to improve the
marketing system for fresh produce from the PNG
Highlands for the benefit of all stakeholders” and
proposed the following as our vision:
– to recognise the important role of women in the
fresh-produce industry in the Highlands
– to encourage a professionally managed mar-
keting system (to improve efficiency and effec-
tiveness
– to ensure that a significant share of the benefits
from a professionally managed marketing
system accrue to rural households in the High-
lands
– to encourage government policy initiatives that
are supportive of these vision statements.
• Discussion ensued on the proposed aim and vision
and these were accepted by consensus of the
workshop participants. The facilitators then led the
workshop participants through a process of
discussion of the issues, the development of
strategies and an action plan.
• At the end of the workshop, the participants chose
a steering committee (which J ohn Spriggs was
asked to chair) to carry on the work to ensure that
the action plan is put into effect.
Conclusion
This project differed from earlier studies of the mar-
keting system for fresh produce of the PNG High-
lands. Those earlier studies were more in the mould
of positivistic science, while this one is in the mould
of action research. We believe this approach is more
appropriate when dealing with issues concerned with
socioeconomic change. We (in the Institute for
Regional Community Development, University of
Canberra) have previously used this approach suc-
cessfully in Australian settings. However, this is our
first attempt to use it in a different and cross-cultural
setting. It may be noted that the PNG case study
involves a cross-cultural setting where grower
groups involve PNG nationals, while other players in
the supply chain (wholesalers, transporters, super-
markets) tend to come from a western cultural back-
ground. Our experience to date suggests this
approach is robust and effective in this different and
cross-cultural setting.
Acknowledgments
The authors gratefully acknowledge the financial and
other support provided to this project by the Aus-
tralian Centre for International Agricultural Research
based in Canberra, the Fresh Produce Development
Company based in Goroka, and the National Agricul-
tural Research Institute based in Lae.
References
Burden, J .N. 1998. Improvements in the storage and
transportation of fresh produce from the Highlands of
Papua New Guinea to Port Moresby. Report for the Fresh
Produce Development Company. Auckland, New
Zealand, HortResearch.
Epstein, T.S. 2000. A review of STABEX Project 4.17.
Papua New Guinea, Fresh Produce Development
Company.
Fresh Produce Development Company 1997. PNG markets:
yesterday, today and tomorrow. Workshop report,
Granville Hotel, Port Moresby.
International Monetary Fund 2003. Executive Board of the
IMF 2003 Article IV Consultation with Papua New
Guinea, Public Information Notice No. 03/78, J une.
NARI (National Agricultural Research Institute) undated.
Women’s voices in the food chain: shouts and whispers
from PNG women in the natural resource sectors. Project
document. Lae, Australian Contribution to the (PNG)
National Agricultural Research System (ACNARS).
Scott, K.J . and Atkinson, G. 1989. Transport of vegetables in
Papua New Guinea. ACIAR Technical Report No. 14.
Canberra, Australian Centre for International
Agricultural Research, 26 p.
Spriggs, J ., Chambers, B., Fromholtz, M. and Dunn, T.
2002. Socioeconomic change in the Coleambally
irrigation area. Paper presented at the 46th annual
conference of the Australian Agricultural and Resource
Economics Society, 13–15 February.
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edited by G.I. Johnson and P.J. Hofman
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76
Developing Systems to Maintain Quality through
the Supply Chain: Getting the Product Right for the
Customer
George Beers*
Abstract
This contribution is about designing and building, in a business environment, supply chains that can deliver
top-quality products. The concept of co-innovation is explained as a structure in which companies and
knowledge institutes are joining forces to use and obtain the sorts of knowledge and expertise that are required
to build high performance, competitive supply chains. Some of these large-scale, co-innovation programs
focusing on chains and networks have operated in The Netherlands for the past 8 years. Some characteristics
and experiences with these public–private partnership programs for agribusiness chain development will be
discussed.
An important part of the agribusiness chain program is the development of cross-border supply chains. The
projects are developed for Dutch food companies that operate internationally and which are implementing
logistic and quality systems for agricultural products all over the world. Examples of the building of advanced
logistic systems, food safety and quality programs throughout the whole supply chain will be presented from
projects in Thailand, Brazil and Ghana. Capabilities of all supply chain partners have to be matched with the
added value they have to deliver, and with an adequate participation in costs and benefits and governance
structures involved. The step from the current situation to a supply chain with high-quality, certified products
is usually too big and involves too many uncertainties. The projects therefore use growth strategies and
evolutionary approaches. The realisation of a well-balanced partnership for the project (local–international and
business–academics) has proven to be an important factor in meeting the ambitions of the companies. The roles
of national and international government in this type of project will be discussed.
* Wageningen University and Research Centre,
The Netherlands.
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edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
77
Consumer Sovereignty: Exploring Consumer Needs
Peter J. Batt*
Abstract
In the transitional economies, international aid agencies have traditionally focused on improving productivity.
While the introduction of improved seed, agronomic practices and improved postharvest handling systems
may indeed result in significant improvements in productivity per unit area, this is no guarantee that producers
will benefit financially. In a market where prices are determined primarily by supply and demand, any marked
increase in production may exert significant downward pressure on price. The extent to which this eventuates
will be determined by the perishability of the product, the availability of postharvest storage systems, the
consumer demand for the product, product quality, and the cost and availability of substitute products. This
paper argues that even in the transitional economies, the adoption of the marketing concept is as equally
applicable as it is in the industrialised nations, given the increasing globalisation of agribusiness food chains.
Most primary producers, especially those in the tran-
sitional economies, are primarily concerned with
seeking to improve productivity per unit area. Since
many rely upon the sale of fresh produce as their sole
source of income, improving productivity is the most
readily available means of improving household
income. As most farms are quite small, any increase
in production at an individual farm level is unlikely
to have any significant impact on the market. How-
ever, if, as a result of adopting some improved tech-
nology, productivity increases across an entire
industry, producers may find to their dismay that
prices have declined. In an industry that still relies
primarily on manual labour, there are few economies
of scale to be gained in the majority of the transitional
economies. While output prices may decline, the
costs of labour may even increase, thus eroding any
financial benefit the farmers might have otherwise
achieved.
However, of equal concern but so often ignored by
farmers, is the extent to which the product produced
will satisfy buyers’ needs. Satisfying buyers’ needs is
perhaps the most basic concept underlying modern
marketing thought. Most marketing textbooks indi-
cate that the most successful firms are those most
able to determine the wants and needs of target
markets and to deliver the desired satisfaction more
effectively and efficiently than competitors. Even
within the transitional economies, while it is often
assumed that the market is driven primarily by price,
not only are there significant variations in product
quality, but significant variations in buyers’ propen-
sity to pay.
To take advantage of these differences, farmers
must acknowledge that markets are not homoge-
neous, but comprised of an indeterminate number of
smaller sub-markets or segments. While buyers
occupying the same segment have similar needs,
those buyers who occupy other segments may have
quite different needs. At a consumer level, these seg-
ments may be aggregated on the basis of differences
in demographic variables (age, income, occupation,
education, race); geographical variables (place of
residence); psychographic variables (values and life-
styles); and behavioural variables (purchase occa-
sion, benefits sought, usage rate, loyalty).
* Horticulture, Curtin University of Technology, GPO
Box U1987, Perth, Western Australia 6845, Australia.
Email: <[email protected]>.
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However, few producers sell directly to con-
sumers: most must transact with one or more market
intermediaries. Depending upon the role each inter-
mediary plays in the marketing process, various cri-
teria will be more or less important in the decision to
purchase. While various collector agents and traders
endeavour to aggregate the product from a multitude
of small farmers, to grade and repack the produce and
when necessary to store the produce, wholesalers
usually disaggregate the consignment into smaller
parcels to meet the needs of individual retailers, res-
taurants and food service outlets. Even at this level,
different buyers may express quite different needs
with respect to the desired cooking characteristics,
maturity, variety and size and even the source or
place of origin.
Using the results from a number of supply-chain
studies conducted in both Australia and various
countries in Southeast Asia, this paper will explore
the various criteria used by consumers in selecting
fresh fruits and vegetables from a retail store. Regret-
tably, very little information is from the transitional
economies, thus preventing any meaningful compar-
ison. The paper then continues to explore how actors’
perceptions of consumers’ needs differ along the
supply chain. It is anticipated that those market inter-
mediaries closest to the final purchaser are generally
the most able to accurately determine consumers’
needs. Conversely, those closer to production are
more often embroiled in agronomic problems and
issues relating to the orderly supply of consistent-
quality produce to downstream customers.
A Review of Consumer Sovereignty
The concept of consumer sovereignty rests on the
premise that economic activities aim to satisfy con-
sumers’ needs (Hansen and Schrader 1997). Needs
arise primarily from an unfulfilled desire. Derived
primarily from labour relations (motivation) theory,
consumers have various needs that must be fulfilled.
At the most basic level, there are the physiological
needs for food, clothing and a place to live. Once
these needs have been fulfilled, safety and security
needs become more important, leading in turn
towards the various social needs for belonging and
affection and finally, individual needs for knowledge
and self-expression.
When a need is unsatisfied, a consumer may do
one of two things: either look for an object to satisfy
the need, or reduce their desires and satisfy them-
selves with what they already have. Assuming in this
instance that the consumer is able to maximise utility
by making a decision to purchase, the product the
consumer ultimately buys will be influenced by the
culture, individual personality and the consumer’s
financial resources. Taking food as an example, to
satisfy hunger, whether the consumer chooses rice,
pasta or potatoes will largely depend upon the society
within which they have been raised. Nevertheless, as
a society evolves, the wants of its members will
expand. As people are exposed to more objects that
arouse their interest and desire, producers try to
provide more products and services to satisfy those
wants. However, while it is most often assumed that
consumers have identifiable needs and wants before
consumption, these needs and wants can be as much
a consequence of marketing and other supplier activ-
ities as they are a property of the individual them-
selves. Furthermore, many consumers do not know
what they want. Needs often emerge only when pro-
voked by the product itself.
However, while most consumers have unlimited
wants, most are constrained by limited financial
resources. Consumers therefore must make choices
and, according to the utility maximisation theory,
they will choose those products that best satisfy their
needs. This assumes that consumers are not only fully
informed, but that they are both knowledgeable and
interested in the products on offer. However, in
reality, most consumers are unable to accurately
judge quality, especially for intangible products such
as fresh fruits and vegetables. Since fresh produce is
inherently variable, the various search attributes
commonly used such as size, colour, variety, freedom
from blemishes and even characteristics such as
freshness, may not necessarily result in a favourable
consumption experience. Furthermore, various
external marketing signals including price, promo-
tion and the presence (or absence) of suitable alterna-
tives may also impact upon the consumer’s decision
to purchase. For other consumers, the decision to pur-
chase may be based on the reputation of the firm
(brand) or convenience.
Nevertheless, in a competitive market and more so
within a saturated market, since consumers are able
to choose between alternative suppliers’ offers, con-
sumers wield the majority of power. It thus becomes
the responsibility of producers and various market
intermediaries to offer those goods and services that
will best satisfy consumers’ needs to the extent that it
is profitable to do so, or at least to match the compe-
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79
tition. However, as consumers’ needs are continu-
ously changing, producers may find they are more
successful if they have fewer competitors. Such will
provide the incentive to invest in the development of
innovative products and new markets.
What Do Consumers Want?
Marketing theory suggests that consumers will
favour those products that offer the most quality, per-
formance and features (Kotler et al. 1994). However,
the products must not only be affordable, they must
also be available.
Within Australia, numerous studies have been
undertaken to identify the various criteria that con-
sumers use in their decision to purchase fresh fruits.
Flanagan (1991) indicates that consumers generally
have very positive attitudes towards fresh fruits. The
products are seen to provide a nutritionally valuable,
convenient snack. However, most consumers regard
fruits as discretionary items rather than essential
items in the food budget. Whereas fresh vegetables
are considered staple foods, fresh fruits are luxury
items.
One of the reasons Flanagan (1991) gives for the
apparent paradox is the inability of consumers to self-
select good-quality fruits. Many of the physical
attributes commonly used by consumers to choose
fresh fruits are poor predictors of eating quality and
thus many consumers are dissatisfied with the con-
sumption experience. Variations in quality exist
between growers, between each piece of fruit, and
between retail stores. Consequently, selecting fruits
becomes a high-risk decision. These self-doubts will
have a negative influence on the quantities of fresh
fruits consumers buy. When disappointed with the
eating quality of fresh fruits, consumers will either
withdraw from the market or purchase fruits in
smaller quantities.
The Horticulture Research and Development Cor-
poration (1990) identified a number of important
attributes that consumers used to select their fruits
including freshness, quality, firmness, colour,
variety, price and size. Yuen et al. (1994) identified
size, colour, freedom from blemishes, crispness and
taste as being the most favoured variables. However,
point-of-sale information such as brand name,
variety, nutritional value and origin were also
helpful. Surprisingly, less than 10% of respondents
appeared to be concerned with price.
Drawing upon the results of a number of under-
graduate and postgraduate student projects con-
ducted in Perth, Western Australia, it appears that the
most important variables influencing the consumer’s
decision to purchase fresh fruits are freedom from
blemishes, firmness, colour, variety, price and size
(Table 1).
In only one of the five cases (oranges) did price
appear as the most important variable, indicating that
the quality of the fruit offered for sale was generally
more influential than price in the consumer’s deci-
sion to purchase.
Table 1. Importance of the criteria used by consumers in their decision to purchase fresh fruits (% =proportion of
respondents who indicated unaided that they used this criterion in their decision to buy fresh fruit; ‘rank’
signifies the order of importance of the criteria as perceived by the respondents).
Criterion Apples 1 Apples 2 Bananas Oranges Mangoes
% Rank % Rank % Rank % Rank % Rank
Freedom from blemishes
Firmness
Colour
Variety
Price
Size
Appearance
Crispness
Taste
Aroma
27
20
22
19
13
29
17
2
4
3
5
1
12
17
20
31
19
14
19
5
4
5
2
1
4
3
34
32
12
8
1
2
3
4
16
22
36
7
31
4
3
1
5
2
56
51
25
19
74
2
3
4
5
1
Sources: apples 1, Stewert-Dawkins (1995); apples 2, Sadler (1997); bananas, Daniel (2000); oranges, Hobley (2003); mangoes, Hickey
(1998).
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(printed version published in 2004)
80
For exotic fruits such as mangoes, while they are
expensive (at least in Western Australia; WA), they
are not ordinarily considered unless the consumer
can afford to purchase them. In this instance, pro-
viding the fruit is in good condition, price becomes
relatively unimportant. However, as the quantity of
fruit available in the market increased and prices
declined, consumers were observed to purchase sig-
nificantly greater numbers of fruit (since mangoes
are generally sold by piece rather than by weight)
(Hickey 1998)(Table 2).
The price elasticity of demand is expected to have
some influence on the consumer’s decision to pur-
chase, especially when there are marked variations in
the retail price from week to week. However, most
consumers are unlikely to sacrifice quality for price.
Furthermore, there is evidence to suggest that a lower
price for one commodity will result in a reduction in
the demand for one or more alternative fruits. Known
as the cross elasticity of demand (Cramer and J ensen
1988), a reduction in the price of bananas (for
example) is likely to result in a reduction in the quan-
tities of apples and oranges purchased. This occurs
because the consumer is generally purchasing either
for themselves or their family who, in any given
week, will consume a fixed quantity of fruit. It is also
highly likely that consumers will allocate a fixed pro-
portion of household expenditure to the purchase of
fresh fruits. Since there is much variation in both fruit
quality, prices and the availability of preferred varie-
ties from week to week, consumers are therefore
expected to allocate these funds to the various fruits
offered for sale, depending upon quality, price and
availability in-store.
While ranked of only moderate importance, the
size of the fruits presented for sale is believed to be
more influential than the ranking suggests. The fruit
size sought is very much dependent upon the ultimate
consumer, culture and the financial position of the
purchase decision-maker. While there is some posi-
tive relationship between fruit size and price (as size
increases, price increases), where the fruits are
largely consumed as snacks by children or placed in
school lunch boxes, there is an increasing demand for
smaller pieces of fruit that a child can eat. To their
dismay, most parents find that if the fruit is cut into
smaller pieces, the child refuses to eat it because it
has discoloured. However, when the fruit is pur-
chased as a gift (especially among Asian cultures),
large-sized fruit is preferred so that all members of
the family may participate in its consumption. Yet in
Malaysia, because of low household incomes, the
demand is for smaller fruits.
At least in Australia, this relationship between
quality and price means that most small fruits are sold
in pre-packed bags of between 1–2 kg, depending on
the product. However, there is a universal perception
among consumers in WA that pre-packed fruits are
second-quality fruits. Within the pre-packed bags,
consumers often find misshapen, blemished, poorly
coloured and damaged fruits. Hence, most consumers
prefer to self-select fruits from the retail shelves.
While less research has been conducted on vege-
table products, there is some evidence of the per-
ceived relationship between quality and size. In
Vietnam, significant price premiums are paid in both
the wholesale and retail markets for larger tubers
(Table 3).
Table 2. Price elasticity of demand for fresh mangoes in Perth, Western Australia.
Price per piece
(AUD)
Number of pieces of fruit purchased
a
0 1 2–3 4–5 6–10 10+
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
2
20
54
99
147
194
232
242
242
26
32
43
53
55
45
15
14
6
54
75
92
76
44
13
11
5
2
61
68
40
22
13
8
2
–
–
34
35
23
10
3
2
2
–
–
85
33
11
2
–
–
–
–
–
a
Numbers in the body of the table signify the numbers of people surveyed who purchased the given numbers of fruit pieces at the
corresponding prices.
Source: Hickey (1998).
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edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
81
However, there is some anecdotal evidence to
suggest that consumers prefer to buy the large rather
than the extra large tubers, because the extra large
tubers are often hollow inside and some consumers
perceive that they have been treated with growth-pro-
moting chemicals. Similarly, among the food service
industries, the demand is for smaller tubers, presum-
ably because they are less expensive to purchase.
Staying with the consumer market for potatoes in
Vietnam, in asking consumers what criteria they used
in their decision to purchase, 24% of consumers
reported that freedom from chemical residues was
one of the most important criteria. However, in the
reported studies on the fresh fruit industry in WA,
freedom from chemical residues was seldom an issue
unless consumers were prompted. As a latent vari-
able, freedom from chemical residues will only
become an issue when visible residues are present on
the fruits, thus bringing it to the consumer’s attention,
or when consumers specifically want organically
grown produce.
Within most of the world’s industrialised econo-
mies, there is an increasing desire to purchase fresh
produce that is not only healthy and nutritious but
also beneficial for the environment and society at
large. As consumers become more affluent and find
themselves able to make more choices, consumers
also become increasingly concerned about environ-
mental and social issues. This is leading towards the
concept of ‘triple bottom line’ reporting, where
financial performance, concern for the environment,
and social equity are given equal consideration (Spri-
egel 2001). As a result, there is an increasing demand
for organic produce, although there is evidence to
indicate that consumers in Australia are unlikely to
pay more than 10% extra (Batt and Giblett 1999).
However, more fundamental than this is the con-
sumer demand for safe product. Following an
alarming increase in the incidence of food poisoning,
most governments have responded by enacting a raft
of legislation which requires retail buyers to take all
reasonable steps to ensure that the food they sell is
safe (Wilson 1996). As a result, most major super-
markets now require fresh produce to come from sup-
pliers who have an appropriately accredited quality-
management system. A genuine and visible quality-
management program is a prerequisite for any fresh
produce company who wishes to supply the super-
markets (Fearne and Hughes 1999).
In Australia, most consumers show little concern
towards the possible presence of chemical residues,
because most wash the fresh fruits and vegetables
they have purchased before consumption (Batt and
Giblett 1999). However, there is also an implicit
assumption that under the various quality-manage-
ment systems that most modern supermarkets
operate, and random in-store sampling of the produce
by the Department of Health, that growers have
adhered to the prescribed withholding periods and
applied chemicals at the appropriate rates. Within
many of the transitional economies, given the chem-
icals currently available, the growers’ lack of knowl-
edge and the high incidence of pests and disease,
such assumptions are ill-founded. Anecdotal evi-
dence from Kapatagan (a barangay on the slopes of
Mt Apo in southern Mindanao, Philippines), suggests
that farmers seldom eat the vegetables they have
grown because of the high quantities of chemicals
applied.
In most industrialised countries, consumers are
protected under legislation that requires producers
and manufacturers to not only ensure that the prod-
ucts available for sale are not hazardous to health or
life, but that consumers also have the right to expect
products to perform as promised and the right to be
informed. While potentially this means that con-
sumers are entitled to return fruits to the store from
which they were purchased and to expect a refund
when fruits fail to meet their expectations, very few
consumers actually do. Largely because consumers
are unable to accurately self-select fruits that not only
look good but also eat well, many simply withdraw
Table 3. Price differentials at which tubers are purchased by tuber size (VND/kg).
Tuber size Farmers
sell
Traders
buy
Wholesalers
buy
Retailers
buy
Extra large
Large
Medium
+185
1385
–180
+170
1595
–170
+240
2180
–480
+450
2550
–885
Source: Batt (2002).
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82
from the market or purchase significantly fewer fruits
(Sadler 1997). Often, retailers do not even know
there is a problem, for as long as the product con-
tinues to look good and does not deteriorate on the
shelf, there is no reason for them to suspect that there
is anything fundamentally wrong with the product.
Poor eating quality is normally associated with that
fruits which have been harvested early (and often
immature) in order to capture high prices in the
wholesale market and fruits (particularly apples) that
have been stored for extended periods of time.
While food manufacturers must provide informa-
tion on the date of manufacture and advise consumers
on the likely expiry date, producers of fresh produce
are under no such obligation. Food manufacturers
must also provide consumers with information on the
various ingredients, preservatives and processes used
and, increasingly, to provide information on the
country of origin. With greater concentration and
aggregation in the food-processing industries, manu-
facturers are able to search the world to identify the
most reliable supply of high-quality inputs for the
most competitive price. Given that many of these
global suppliers are able to provide the product at
prices substantially below the domestic costs of pro-
duction, domestic growers often embark upon
various promotional programs to differentiate their
product, appealing to the superior benefits of the
local product (freshness). For example, Australian
consumers differentiate between imported and recon-
stituted orange juice (from Brazil) and local product.
In this regard, consumers must also be protected from
fraudulent, deceitful or deceptive information and
advertising.
One of the other foundations upon which modern
consumerism is built is competition. Consumers
must be given the right to choose, but equally impor-
tant, is that consumers may not be discriminated
against on the basis of age, gender, race, religion or
political affiliation. Competition generally ensures
that consumers have access to good-quality produce
at a lower price. However, competition may also
elevate some costs. Rising prices reflect improved
services that consumers want such as more conven-
ience, greater choice and larger stores. Furthermore,
consumers not only want functional products but
many also seek psychological value. While many
argue that brands and the associated cost of pack-
aging and promotion only add psychological value,
brands give consumers greater confidence. Brands
imply a certain quality for which many consumers
are willing to pay.
While the use of brands — particularly generic, in-
store brands — is rapidly increasing in the retail
sector (Fearne and Hughes 1999), branding fresh
produce remains problematic. In Australia, most
growers are labelling apples, irrespective of the
quality, resulting in mixed grades and no guarantee of
delivering premium quality (Batt and Sadler 1999).
However, other variables are involved. The product
is perishable, thus irrespective of quality at the time
of branding, the product will deteriorate because of
inappropriate postharvest treatments or poor product
handling. With each grower having their own percep-
tion of quality, fruits of vastly different quality stand-
ards will emerge on the retail shelf, so even if
individual growers do differentiate between grades,
quality differences will be lost at the retail level.
While nutritionists recommend that we should eat
seven serves of fresh fruits and vegetables per day
(Moxon 1999), most Australians eat only 4.1 serves
per day. Many fruits, including oranges, mangoes
and pineapples, present a problem for consumers —
fresh fruits are inconvenient, expensive and incon-
sistent (Hughes 1999). Furthermore, with more
women in the workforce, household incomes are
steadily increasing. With more personal disposable
income, consumers are not so much cash-constrained
as they are time-constrained. Hence, consumers are
constantly searching for new innovative product
solutions that will reduce the amount of time required
to purchase, prepare, cook and consume their food.
What Do the Market Intermediaries
Want?
For most retailers, fresh produce is regarded as the
key determinant in the consumer’s choice of store
because it provides an attractive, fresh and colourful
display and is a symbol of the pervading quality
standards throughout the store (Retail Business
1997). While shoppers accord great importance to the
quality, price, range and availability of fresh produce
(Hughes and Merton 1996), fresh produce also gen-
erates some of the highest profit margins of any
product category in-store. However, while fresh
produce is high profile, the products are highly per-
ishable and very sensitive to mishandling and
damage at all levels of the supply chain (White
2000).
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edited by G.I. Johnson and P.J. Hofman
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(printed version published in 2004)
83
Quality, price and the ability to deliver are gener-
ally regarded as the most important criteria by which
organisational buyers evaluate potential suppliers
(Cunningham and White 1973; Lehmann and
O’Shaughnessy 1974; Dempsey 1978; Wilson 1994).
Where there is no difficulty in accurately specifying
the exact nature of the product and there are several
reliable suppliers in the market, a buyer can simply
choose that supplier who offers the lowest price from
among all those suppliers who fulfil the functional
requirements (Hakansson et al. 1977). However,
where a number of alternative suppliers have
equalled one another in terms of quality, delivery and
price, various attributes such as the supplier’s reputa-
tion, financial position, communication and attitude
towards the buyer may become decisive (Dempsey
1978).
Hutt and Speh (1995) suggest that when industrial
buyers purchase a product, they purchase not only a
package of benefits derived from the physical
product features, but also a bundle of services
attached to the product. While the exact meaning of
the term ‘service’ varies with the nature of the
product and the requirements of the buying organisa-
tion, service may encompass such things as just-in-
time delivery, the provision of technical assistance
and support, innovations and adaptations, credit
arrangements, support for special needs, or advance
notice of impending price changes or shortages in
delivery. Leenders and Fearon (1993) suggest that
preferred suppliers will endeavour to find new ways
of developing products and services that will allow
customers to perform their activities more economi-
cally. A preferred supplier should react favourably to
unforeseen needs such as suddenly accelerated or
decelerated volumes of business, changes in product
or deliver specifications, service problems or any
other legitimate request. They will provide technical
support and other expertise when requested by cus-
tomers or whenever the supplier believes it can assist
the purchaser to remain competitive.
However, while a great deal has been published on
the various criteria customers use in choosing
between alternative suppliers, very few studies have
sought to examine how members at different stages
in the distribution chain perceive the quality of the
products offered. Fundamentally, it is assumed that
supply chains operate to maximise consumer satis-
faction. However, quality can be assessed in various
ways according to various objective or subjective cri-
teria. Since quality expectations may also be influ-
enced by the actual context in which the buyers and
users are embedded, their perceptions of product
quality may vary. Furthermore, as product quality
may change during the distribution process, quality
assessment becomes even more complicated.
How chain members perceive quality and the
quality desired by downstream customers will influ-
ence the quality they try to obtain. In other words, if
chain members perceive quality in different ways,
they will pursue different quality standards (Kor-
neliussen and Grønhaug 2003). To bring products
from a producer to consumers, a variety of activities
have to be performed. Many of these activities are
performed in a sequence: for example, the grower
produces the product, hands it over to a trader who
organises transportation to and makes contact with a
wholesaler and so on. Together, this can be consid-
ered an activity chain where the various activities and
their performance are interdependent. The value of
these activities is heavily dependent on the extent to
which the product offered satisfies the requirement of
the consumers. Thus, it is the concerted effort of all
the chain members (including the producer) that
makes the complete set of activities valuable.
Nevertheless, the total value generated by the
chain will ultimately depend upon the extent to which
it is able to deliver products and services desired by
consumers. The importance of a market or customer
orientation as the basis for continuous creation of
superior value for customers is well known in mar-
keting (Kohli and J aworski 1990). According to
Narver and Slater (1990), customer orientation
includes all the activities involved in acquiring infor-
mation about buyers in the target market and dissem-
inating it throughout the supply-chain participants.
According to Day and Wensley (1988), being cus-
tomer-oriented implies that a seller understands a
buyer’s entire value chain. In order to be customer-
oriented, an upstream supplier may need to be able to
identify each of the customers downstream in the
chain as well as the end consumer and to understand
what each of them wants. At present, there is little
empirical knowledge of what companies actually
know about the chains of which they form a part
(Storer et al. 2003).
Drawing upon the results of a supply-chain study
in Vietnam (Batt 2002), while it is abundantly clear
that retailers have a good appreciation of the con-
sumers’ needs, the other market intermediaries are
significantly more detached (Table 4).
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
84
Farmers were found to undervalue the importance
of skin colour, tuber size and tuber shape. Con-
versely, farmers overvalued the importance of
storage characteristics and cooking characteristics.
No doubt, the overvaluing of storage characteristics
is related to the various problems farmers experience
themselves, for unlike the other intermediaries who
generally hold the potatoes for only a few days,
farmers must retain a proportion of their harvest for
seven to eight months to provide seed for the next
crop. Consumers, on the other hand, will generally
only purchase sufficient potatoes to satisfy their
family’s need in the immediate future.
The high importance attributed to the cooking
characteristics is no doubt related to the farmers ten-
dency to either consume those potatoes that are dam-
aged, poorly shaped or considered unfit for sale
themselves, or to feed the tubers to livestock. The
importance of potatoes as an alternative food crop in
the Red River Delta is widely acknowledged. Never-
theless, it is interesting to note that both taste and the
cooking characteristics of the tubers are deemed to be
of little importance in the national potato-breeding
program in Vietnam. Much greater attention has been
directed towards improving the productivity per unit
area, imparting greater resistance to various pests and
disease, and extending the length of the dormancy
period (to overcome the problems associated with the
need to store seed for seven to eight months).
Both traders and wholesalers were found to signif-
icantly undervalue the importance of presenting
tubers for sale that were substantially free of pests
and disease and physical defects. While not only
reducing the shelf life of the tubers, potatoes that
have been damaged by infection by pests and disease
or physical injury are both cosmetically less attrac-
tive and the cooking qualities and taste may be
impaired. Furthermore, while both traders and
wholesalers undervalued freedom from physical
defects, they overvalued the importance of tuber
shape. This can only mean that there is much varia-
tion in the quality of the tubers delivered from the
farmers to the market intermediaries. In surveys of
traders and wholesalers, procuring sufficient quanti-
ties of potatoes that were free of pests and disease and
physical damage were among the most frequently
cited impediments (Batt 2002).
Noting both the inability of the traders to provide
potatoes that were less expensive and the pressure
retailers put on wholesalers to procure a less-expen-
sive source of potatoes, wholesalers overvalued the
importance of price to the consumers. Retailers indi-
cated, however, that price was perceived to be of least
importance to the consumer. Consumers purchased
potatoes because they wanted to, not because they
had to. While this would suggest that numerous alter-
natives were available, Batt (2002) reports that for
many consumers, potatoes are too expensive, hence
they are simply not considered in the consumer’s
decision to purchase. Nevertheless, as prices
decreased, consumers were found to purchase greater
quantities of potatoes (Table 5).
While no meaningful relationship could be found
between income and either the frequency of purchase
or the quantity of fresh potatoes purchased, as house-
hold income increased, consumers tended to eat more
potatoes away from home (in restaurants) and to
consume greater quantities of processed potato prod-
Table 4. Ranking of the importance of purchasing criteria for potatoes in the Red River Delta
(Vietnam) (F =farmers, T =traders, W =wholesalers, R =retailers, C =consumers).
Criterion F T W R C
Flesh colour
Freedom from pests and diseases
Skin colour
Freedom from physical defects
Tuber size
Tuber shape
Taste
Cooking characteristics
Variety
Storage characteristics
High price relative to other vegetables
2
1
6
3
7
9
8
5
10
4
11
2
5
4
6
3
1
7
8
10
11
9
2
7
4
9
3
1
8
6
10
11
5
1
2
3
4
6
7
5
8
11
9
10
1
2
3
4
5
6
7
8
9
10
11
Source: Batt (2002).
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
85
ucts (crisps). Van der Zaag (1990) noted that as
household income increases, potatoes move from a
staple food to a snack food.
In a study undertaken in Perth, WA, Sadler (1997)
noted comparatively little difference in the pur-
chasing criteria between wholesalers, retailers and
consumers for fresh apples (Table 6).
With the exception of the wholesalers, who under-
valued the importance of price and overvalued the
importance of the grower, the selection criteria were
all accorded very similar rankings. Although yet to be
verified, it is assumed that in a more developed
economy, information between the market interme-
diaries and consumers is more readily exchanged,
especially where wholesalers are supplying the major
supermarkets. Nevertheless, from the wholesaler’s
perspective, since there is a significant variation in
the quality of the fruit presented for sale by alterna-
tive growers, wholesalers will endeavour to trade
with those growers who provide the best-quality
fruits on a consistent and reliable basis. In business-
to-business markets, price is generally of less impor-
tance than quality (Wilson 1994).
Acknowledgments
For the data presented, I am indebted to the following
undergraduate and postgraduate students: Wesley
Daniel, Pamela Hickey, Lynlee Hobley, Cara Sadler
and Simon Stewert-Dawkins.
References
Batt, P.J . 2002. Report for Deutsche Gesellschaft für
Technische Zusammenarbeit (GTZ) on the market for
seed potatoes, fresh potatoes and processed potato
products in Vietnam. Hanoi, GTZ.
Batt, P.J . and Giblett, M. 1999. Organic produce viability:
a consumer perspective. Good Fruit and Vegetables,
10(3), 57.
Table 5. Price elasticity of demand for potatoes in the Red River Delta, Vietnam.
Price (VND/kg) Quantity of tubers purchased (kg)
a
0 0.5 1.0 1.5 2.0 2.5 3.0 >3.1
1000
1500
2000
2500
3000
3500
4000
4500
5000
5500
37
38
17
41
75
98
161
202
220
220
7
6
26
34
27
47
39
13
–
–
20
40
59
68
68
49
16
4
–
–
4
12
22
17
23
11
2
1
–
–
70
62
53
35
14
11
1
–
–
–
1
3
3
10
5
–
–
–
–
–
35
20
14
6
2
1
–
–
–
–
46
39
26
10
6
3
1
–
–
–
a
Numbers in the body of the table signify the numbers of people surveyed who purchased the given tuber quantities at the corresponding
prices.
Table 6. Ranking of importance of purchasing criteria for apples in Perth,
Western Australia.
Criterion Wholesalers Retailers Consumers
Firmness
Freedom from blemishes
Variety
Colour
Price
Size
Brand
Grower
2
1
4
3
8
6
7
5
1
2
3
4
6
5
8
7
1
2
3
4
5
6
7
8
Source: Sadler (1997).
ACRC084.book Page 85 Monday, October 18, 2004 2:35 PM
Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
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(printed version published in 2004)
88
Aflatoxin in Indonesian Peanuts: How Can the
Contamination within the Food Chain
Be Managed?
Okky Setyawati Dharmaputra,* Agustina A. Rahmianna,
†
Nageswara Rao Rachaputi,
§
Graeme C. Wright
§
and Greg Mills
§
Abstract
Among the various raw and processed peanuts collected from different points of the delivery chain (farmer,
penebas, collector, processor and retailer) in Pati Regency, Central J ava, the highest Aspergillus flavus
infection and aflatoxin contamination were found in raw kernels of peanuts collected from retailers in
traditional markets.
Postharvest handling methods prior to peanuts being delivered to retailers and especially at the retailer level
in traditional markets severely impact on the level of aflatoxin contamination in the Indonesian food chain.
Some potential initiatives to minimise aflatoxin contamination, both at the pre and postharvest stages, are
discussed in this paper. Critical to the further development of this work is a concentrated effort to monitor
postharvest handling methods carried out by farmers, collectors and retailers in traditional markets and identify
the critical control points for potential changes needed in their procedures.
Aflatoxin is a human carcinogen that can contami-
nate peanuts and hence is a major food-safety
problem throughout the world. It is particularly
severe in developing countries such as Indonesia. It
occurs when kernels become infected by Aspergillus
flavus, A. parasiticus and A. nomius, under drought
stress before harvest, during the drying phase in the
field, or under unsuitable storage conditions.
Based on the report of the 23rd Session of the J oint
Food and Agriculture Organization of the United
Nations/World Health Organization (FAO/WHO)
Food Standards Programme, held in Rome, Italy, 28
J une – 3 J uly 1999, the Codex Alimentarius Commis-
sion adopted 15 parts per billion (ppb) as the
maximum level of total aflatoxins in peanuts
intended for further processing. In Australia, the
maximum allowable limit of aflatoxin in peanut and
peanut products is 15 ppb (QDPI 2000).
As part of an ongoing Australian Centre for Inter-
national Agricultural Research (ACIAR) project on
management of aflatoxin in Indonesia and Australia
(PHT 97/017), a survey has been conducted to
* SEAMEO BIOTROP, J l. Raya Tajur km. 6, PO Box 116,
Bogor, Indonesia; and Faculty of Mathematics and
Natural Sciences, Bogor Agricultural University, J l. Raya
Pajajaran, Bogor, Indonesia.
Email: <[email protected]>, <[email protected]>.
†
Research Institute for Legumes and Tuber Crops
(RILET), J l. Raya Kendalpayak km 6, PO Box 66, Malang
65101, Indonesia. Email: <[email protected]>.
§
Farming Systems Institute, Queensland Department of
Primary Industries (QDPI), Kingaroy, PO Box 23,
Queensland 4610, Australia.
Email: <[email protected]>,
<[email protected]>,
<[email protected]>.
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
89
monitor aflatoxin contamination in peanuts and
assess the critical hazard points along the market
supply chain in the Pati Regency in Central J ava. In
this regency, the peanut delivery chain can be classi-
fied into five levels — farmer, penebas (one who
buys crops before harvest), collector, processor (fac-
tory) and retailer.
Occasionally farmers may deliver the peanuts
directly to a local market or collector who buys the
peanuts from the farmers before harvest. To prepare
flour-coated kernels, processors also buy peanut
kernels from other regencies or other countries
(China, India and Vietnam).
This paper describes:
• the results of interviews with farmers, penebas,
collector/traders and factories concerning pre and
postharvest handling of peanuts
• the results of a research project entitled
‘Aspergillus flavus and aflatoxin in peanuts at
various stages of the delivery chain in Pati
regency, Central J ava’
• what initiatives should be carried out to overcome
the aflatoxin problem in Indonesian peanuts.
Methodology
During the survey, interviews using questionnaires
with farmers, penebas, collectors and processors
(factories) on pre and postharvest handling of
peanuts were conducted, together with random sam-
pling of various kinds of peanuts and peanut prod-
ucts.
Interviews and sampling were carried out during
the wet (J anuary 2002) and dry (August 2002) sea-
sons. The number of respondents at farmer, penebas
and collector levels in each season was 48, 10 and 4,
respectively. The number of samples of wet raw pods
at farmer, penebas and collector levels were 48
(derived from 48 farmers), 30 (derived from 10
penebas) and 12 (derived from 4 collectors), respec-
tively. The samples were obtained from the inter-
viewed respondents. The number of interviewed
farmers, penebas and collectors were determined in
proportion to the numbers of each group in the dis-
tricts where peanut samples were collected. The
determination of the districts where peanut samples
were collected was based on their high peanut pro-
duction. This information was obtained from the
Indonesian Government’s Regional Office of Agri-
cultural Crop and Animal Husbandry in Pati. In each
district, peanut samples were collected from peanut
farms or penebas located in the scattered areas. The
questionnaires consisted of questions about pre and
postharvest handling of peanuts. Interviews were
conducted using the Indonesian language or dialect.
At the farmer level, each peanut sample derived
from a peanut farm. About 20 peanut plants were
selected randomly; they were than pulled out manu-
ally to obtain about 2 kg of wet raw pod peanuts. At
the penebas level, three samples (=three replicates)
of wet raw pod peanuts (about 2 kg/sample) were col-
lected randomly from each penebas; the peanuts had
been placed in woven polypropylene bags or they
were still in piles. At the collector level, three
samples (=three replicates) of wet raw pod peanuts
(about 2 kg/sample) were collected randomly from
each collector; the peanuts had been placed in woven
polypropylene bags.
Results
Results of interviews regarding pre and
postharvest handling of peanuts
Interviews with farmers
Forty-eight farmers of Pati Regency were inter-
viewed either during the wet or dry seasons. Some of
the farmers interviewed during the wet season were
the same individuals as interviewed during the dry
season. Most of the farmers (85% and 96% of the
respondents interviewed during the wet and dry sea-
sons, respectively) sold the peanuts to penebas before
harvest, while 15% and 4% of the respondents,
respectively, harvested the crop themselves. The har-
vesting method was the same in either case — peanut
plants were pulled out and stripped manually, and the
peanuts were not dried. In the latter case, farmers sold
the crop directly to the collectors. All respondents
(100%) were unaware of the aflatoxin problem in
peanuts.
Interviews with penebas
Ten penebas of Pati Regency were interviewed
either during the wet or dry season. Some of the
penebas interviewed during the wet season were the
same individuals as interviewed during the dry
season. Harvesting was carried out by pulling the
peanut plants manually as well as by manual pod-
stripping. Drying and storing of peanuts were not
carried out before sending them to collectors or fac-
tories. All respondents (100%) were unaware of the
aflatoxin problem in peanuts.
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ACIAR Proceedings No. 119e
(printed version published in 2004)
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Interviews with collectors
Four collectors of Pati regency were interviewed
either during the wet or dry seasons. Of the respond-
ents interviewed during the wet and dry seasons, 50%
and 20%, respectively, stored peanut pods before
sending them to the factory. During the wet season,
peanuts were stored in woven polypropylene bags for
one night (25% of the respondents) or up to a
maximum of 7 days (25% of the respondents).
During the dry season, peanuts were stored by
spreading them on a paved floor for 4–30 days.
During both seasons, most peanut pods were sold to
factories in the form of ‘fresh’ raw peanuts. All
respondents (100%) were unaware of the aflatoxin
problem in peanuts.
Interviews with factories (processors)
The results of questionnaires were based on a visit
to the PT Garuda Food factory in Pati, Central J ava
(Dharmaputra and Maysra 2003). The processing
steps undertaken for different products are outlined
below.
Flour-coated peanut processing:
• sorting — peanut kernels derived from collectors
are sorted according to kernel colour using
‘sorteks’ (machines that sort on a visual basis)
• storage — raw peanut kernels are stored in a grain
Cooler Silo
• coating — peanuts are coated with a mixture of
salt, tapioca flour, sugar and garlic (the garlic is
imported from China) in a container made from
stainless steel, fitted with a rotation system
• frying — peanuts are fried in palm oil (1 t flour-
coated peanuts takes 30 minutes to fry); the oil is
used for 24 h and then discarded
• packing — peanuts are packed by weight, i.e. 20 g,
100 g etc.
• product storage — flour-coated peanuts are stored
in cardboard boxes on shelves; the maximum
storage period is 7 days before the peanuts are
distributed to retailers (supermarkets and
traditional markets)
• monitoring of aflatoxin contamination — this is
undertaken every 3 months using the enzyme-
linked immunosorbent assay (ELISA) method.
Roasted peanut processing — peanuts (in the form of
wet, raw pods) should be processed within 24 h of
harvest:
• grading — this is conducted based on the soil
attached to the pods and pod colour
• pre-cleaning — wet, unshelled peanuts derived
from penebas in the Pati region are washed
manually using well water, while those derived
from collectors in other regions are washed in four
stages
• cooking — the peanuts are cooked using water
mixed with salt
• drying — the peanuts are dried at ±80°C using
ovens
• grading — peanuts are sorted both manually and
mechanically into one of three grades
– grade I, two seeds and mature
– grade II, two seeds and mature–young, or three
seeds and mature
– grade III, almost mature seeds
• storage — roasted peanuts are stored for a
maximum of 7 days after processing, before they
are distributed to retailers (supermarkets and
traditional markets).
Results of sampling within the supply chain
Dharmaputra et al. (2003) reported moisture con-
tents, the incidence of A. flavus, and aflatoxin B
1
con-
tamination of raw and processed peanut products
collected from different points of the delivery chain
in the Pati Regency in Central J ava during the wet
and dry seasons in 2002.
Fresh pod samples were collected from farmers’
fields (48 samples), penebas (30 samples) and collec-
tors (12 samples). Nine samples of roasted kernels
were collected from peanut factories. Three samples
of raw and flour-coated kernels, and various roasted
pod samples were collected from the markets in Pati,
Bogor, Yogyakarta and Malang cities. In all, during
each season, 135 samples of various kinds of peanuts
and peanut products were collected for analysis
(Table 1).
Moisture content, the percentage of peanut kernels
infected by A. flavus, and aflatoxin B
1
content were
determined using the oven method, plating method
on Aspergillus flavus and parasiticus agar (AFPA)
medium, and ELISA method, respectively.
Moisture content
The results showed that moisture contents of
peanuts collected from farmers’ fields, penebas and
collectors were generally very high, i.e. 46.7–48.5%
(wet season) and 40.1–47.5% (dry season), roasted
peanuts collected from factories or retailers were
3.1–3.8% (wet season), and 2.1–2.9% (dry season),
and flour-coated kernels collected from retailers
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
91
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
92
were 3.8% (wet season) and 2.9% (dry season). Raw
kernel samples collected from retailers in traditional
markets were 8.4% and 7.0% during the wet and dry
seasons, respectively. Mean moisture contents of
peanut kernels derived from various kinds of peanuts
collected from different points of the delivery chain
during the wet and dry seasons are presented in
Tables 2 and 3 and Figure 1.
Incidence of A. flavus
Peanut samples from farmers’ fields, penebas and
collectors were generally significantly lower in A.
flavus infection than those found among processors
and retailers, i.e. 17–25% (wet season) and 25–40%
(dry season). During the wet season, A. flavus infec-
tion in roasted peanut samples collected from proces-
sors and retailers was 11% and 50%, respectively,
while those collected during the dry season were 89%
and 17%, respectively. Raw kernel samples collected
from retailers in traditional markets had 100% infec-
tion with A. flavus during both seasons. The highest
mean percentage of kernels infected by A. flavus in
infected samples in both seasons was found in raw
kernels collected from retailers in traditional mar-
kets, i.e. 53.1% (wet season) and 30.4% (dry season)
(Tables 2 and 3). The mean percentage of peanut
samples infected with A. flavus from various types of
raw and processed peanuts collected from different
points of the delivery chain during the wet and dry
seasons are presented in Tables 2 and 3 and Figure 2;
while those mean percentages of kernels infected by
A. flavus in infected samples are presented in Tables
2 and 3 and Figure 3.
Aflatoxin contamination
In general, the aflatoxin B
1
content of peanuts col-
lected from farmers’ fields, penebas, and collectors
and processed samples were low (less than 15 ppb).
The highest aflatoxin B
1
contents were found in
peanuts collected from retailers in the traditional
markets, with the range of 2–124 ppb and <4–342
ppb during the wet and dry seasons, respectively
(Table 4). The percentage of raw kernel samples con-
taminated with aflatoxin B
1
(exceeding 15 ppb) col-
lected during the wet and dry seasons was 33% and
25%, respectively (Table 4, Figures 4 and 5).
Discussion and Conclusions
Potentially there are some strategic areas where
efforts could be carried out to overcome the aflatoxin
problem in Indonesian peanuts. This is regardless of
whether the problem is generated via pre and/or post-
harvest handling practices, or from domestic versus
imported production. The high incidence of A. flavus
infection immediately postharvest and the subse-
quent high levels of contamination of all peanuts
after processing in local markets or retailing opera-
tions suggest that much of the problem is of local
Indonesian origin.
Figure 1. Mean moisture content of peanut kernels derived from
various types of peanuts collected from different points
of the delivery chain during the wet and dry seasons
(Dharmaputra et al. 2003).
ACRC084.book Page 92 Monday, October 18, 2004 2:35 PM
Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
93
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5
ACRC084.book Page 93 Monday, October 18, 2004 2:35 PM
Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
94
The results of the survey showed that the highest
percentages of samples infected by A. flavus and
mean percentages of infected kernels in infected
samples, and the highest aflatoxin B
1
contamination
were found in raw kernels collected from retailers in
traditional markets in Pati, Bogor, Yogyakarta and
Malang cities. The raw kernels may have been
sourced from farmers or collectors in their respective
regencies. There is, however, the possibility that con-
taminated raw kernels were imported from other
countries, such as China, India and Vietnam, and it is
difficult to determine the exact source. Despite this
possibility, it is clear that in Indonesia, both pre and
postharvest handling methods prior to peanuts being
delivered to retailers (and especially at the retailer
level in traditional markets) severely impact on the
level of aflatoxin contamination in the Indonesian
food chains.
Figure 2. Mean percentage of peanut samples infected with
Aspergillus flavus. Samples were derived from
various types of peanuts collected from different
points of the delivery chain during the wet and dry
seasons (Dharmaputra et al. 2003).
Figure 3. Mean percentage of kernels infected by Aspergillus
flavus in infected samples. Samples were derived
from various types of peanuts collected from different
points of the delivery chain during the wet and dry
seasons (Dharmaputra et al. 2003).
*
*
ACRC084.book Page 94 Monday, October 18, 2004 2:35 PM
Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
95
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
96
Preharvest practices
Preharvest management plays an important role in
reducing the risk of aflatoxin contamination in Indo-
nesian peanuts. It is well known that although the
aflatoxin-producing fungus, A. flavus, is widely dis-
tributed in soils, it invades peanut pods/kernels only
when the shell is physically ruptured, either mechan-
ically via splitting during severe end-of-season
drought stress, or as a result of injury via soil-insect
damage. Even though the A. flavus fungus is present
in pods and kernels, aflatoxin contamination will
only occur under very special conditions of kernel
moisture content (below about 30%, Mehan et al.
1986) and temperature. Cole et al. (1985) and
Sanders et al. (1985) reported that preharvest afla-
toxin contamination will only occur when pod-zone
soil temperatures are in the range of 25–32°C, with
associated drought conditions during the last 30–50
days of the growing season.
To maintain healthy peanuts that can resist A.
flavus infection and subsequent aflatoxin production,
it is therefore important that a series of agronomic
management practices are implemented in farmers’
fields, including the following:
• Pods should be grown with adequate soil moisture
during the last 30 days of pod growth to avoid pod
splitting arising from drought stress. Where
irrigation is available, watering should be
undertaken every 10–15 days, depending on the
evaporative demand.
Figure 5. Percentage of peanut samples contaminated with different levels of
aflatoxin B
1
during the dry season 2002. Samples were derived from
various types of peanuts collected from different points of the delivery
chain (Dharmaputra et al. 2003).
Figure 4. Percentage of peanut samples contaminated with different levels of
aflatoxin B
1
during the wet season 2002. Samples were derived from
various types of peanuts collected from different points of the delivery
chain (Dharmaputra et al. 2003).
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
97
• Pods should be free from mechanical injury
resulting from field implements such as weeding
equipment. In Indonesia, this practice is relatively
rare, as farmers usually conduct weeding
operations around 20–40 days after sowing. Care
should be taken during the harvesting operation to
prevent pod injury when plants are pulled
manually.
• Pods should be free of soil-pest infection, such as
white grubs, in a range of peanut cropping systems.
Some farmers broadcast the pesticide Carbofuran
onto the soil and then apply irrigation water. Most
farmers, however, tend to leave crops without
doing any pest management.
• Pods should be harvested at optimal maturity. Late
harvesting will result in higher susceptibility of
kernels and shells to fungal invasion (McDonald
and Harkness 1967). Under very hot and severe
end-of-season drought conditions, it is
recommended that crops even be harvested 1–2
weeks early to avoid crop water deficits and the
associated high risk of aflatoxin contamination
(Nageswara Rao et al. 2002; Rahmianna et al.
2003).
Postharvest practices
To overcome, or at least minimise, aflatoxin con-
tamination in Indonesian peanuts, effort is warranted
in the following areas:
• obtain more information on postharvest handling
of peanuts in other peanut-growing areas in
Indonesia
• monitor postharvest handling methods carried out
by farmers, collectors and retailers (especially in
traditional markets)
• obtain more information on the supply chain for
imported peanuts and ensure that regulators have
the knowledge and capacity to reduce the
importation of inferior-quality product
• monitor the quality of imported peanuts, especially
their aflatoxin content, in an effort to help define
the extent of the problem and contribution being
made by domestic versus imported production
• identify the most effective means of informing the
postharvest-handling industry sectors about
aflatoxin and its potential management
• develop information and training packages for
processors and retailers to inform them about the
dangers of aflatoxin and the handling methods that
can reduce the problem
• encourage collectors and processors to place
emphasis on improved production and handling
techniques by farmers and penebas
• publicise to the wider community the potential
health problems associated with consuming poor-
quality peanuts.
References
Cole, R.J ., Sanders, T.H., Hill, R.A. and Blankenship, P.D.
1985. Mean geocarphosphere temperatures that induce
pre-harvest aflatoxin contamination of peanut under
drought stress. Mycopathologia, 91, 41–46.
Dharmaputra, O.S and Maysra, E. 2003. Report of a visit to
Kacang Garuda Factory (PT. Garuda Food) in Pati,
Central J ava on 27 May 2003. Internal report. Bogor,
Southeast Asian Regional Centre for Tropical
Agriculture (SEAMEO BIOTROP).
Dharmaputra, O.S., Retnowati, I., Putri, A.S.R. and
Ambarwati, S. 2003. Aspergillus flavus and aflatoxin in
peanuts at various stages of the delivery chain in Pati
regency, Central J ava. Paper presented at the 21
st
ASEAN/3
rd
APEC Seminar on Post-harvest Technology,
Nusa Dua, Bali, 23–26 August 2003.
McDonald, D. and Harkness, C. 1967. Aflatoxin in
groundnut crop at harvest in northern Nigeria. Tropical
Science, IX(3), 148–161.
Mehan, V.K., McDonald, D., Ramakrishna, N. and
Williams, J .H. 1986. Effects of genotype and date of
harvest on infection of peanut seed by Aspergillus flavus
and subsequent contamination with aflatoxin. Peanut
Science, 13(2), 46–50.
Nageswara Rao Rachaputi, Wright, G.C. and Krosch, S.
2002. Management practices to minimize pre-harvest
aflatoxin contamination in Australian peanuts. Australian
J ournal of Experimental Agriculture, 42, 595–605.
QDPI (Queensland Department of Primary Industries)
2000. Aflatoxin in peanuts; tips to reduce the risk.
Kingaroy, Crop Link, Queensland Department of
Primary Industries (QDPI), Farming Systems Institute.
Rahmianna, A.A., Taufiq, A., Wright, G.C. and Nageswara
Rao C. Rachaputi 2003. Pre harvest management
practices to minimize aflatoxin contamination in peanut
(Arachis hypogaea L.) in Indonesia. Paper presented at
the 21
st
ASEAN/3
rd
APEC Seminar on Post-harvest
Technology, Nusa Dua, Bali, 23–26 August 2003.
Sanders, T.H., Cole, R.J ., Blakenship, P.D. and Hill, R.A.
1985. Relation of environmental stress duration to
Aspergillus flavus invasion and aflatoxin production in
pre-harvest peanuts. Peanut Science, 12(2), 90–93.
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(printed version published in 2004)
98
Improved Marketing of Mandarins for East Nusa
Tenggara in Indonesia
Sherrie Wei,* Damianus Adar,
†
Elizabeth J. Woods
§
and Herman Suheri
¶
Abstract
In the highland areas of West Timor, where the climate is relatively cool, the mandarin variety Keprok Soe is
widely grown in the districts of Timor Tengah Selatan (TTS) and Timor Tengah Utara (TTU) in Nusa
Tenggara Timur (NTT) Province. Largely due to its economic value and popularity among local consumers,
the Indonesian Government adopted some measures to promote Keprok Soe. Good grades of Keprok Soe fetch
a premium price in direct competition to imported mandarins from various countries including China,
Pakistan, Israel and Australia. Basically, there are two supply chains for mandarins grown in West Timor.
About 90% of the mandarins are sold locally, with only 10% sold to other provinces. In general, there are three
methods by which farmers can sell their mandarins: forward-sale by tree, per tree sale at harvest and per kilo
sale after harvest. Farmers’ use of different selling methods is often related to the size of their mandarin farm,
income, price of mandarins in that year, availability of family labour, farmers’ educational experiences, length
of farming experience, and distance from the farm to the local market.
Established traders play a key role as channel managers in the supply chain, especially for the inter-island
supply chain. Quite exceptionally, traders have motivated farmers to strive for good products, be competitive
and become ‘champions’. Hence, the traders have been observed to play a mixed role of channel manager,
information supplier, co-investor and extension officer. These activities and alliances suggest that a reciprocal
rather than a win–lose relationship exists.
Supply-chain constraints include production (cultural production, plant protection), poor infrastructure, and
postharvest losses (20%). Potential strategies for chain improvements include horizontal integration at the
farmer level, enhancement of the capacity of traders as supply-chain coordinators, and branding of Keprok
Soe. In relation to improving the likelihood of implementing these strategies, this Australian Centre for
International Agricultural Research (ACIAR) project conducted production and marketing workshops, and
broadcast information and knowledge by radio.
In the highland areas of West Timor, where the
climate is relatively cool, the mandarin variety
Keprok Soe is widely grown in the districts of Timor
Tengah Selatan (TTS) and Timor Tengah Utara
(TTU) in Nusa Tenggara Timur (NTT) Province.
Keprok Soe was first planted in the 1970s, but com-
mercialisation of the product started only in the
1990s. In some of the villages of the two districts,
* School of Natural and Rural Systems Management,
University of Queensland, St Lucia, Queensland 4072,
Australia. Email: <[email protected]>.
†
Faculty of Agriculture, University of Nusa Cendana, J I
Adisupcitou, Kampus Baru Penfui, Kupang Timor, NTT,
Indonesia. Email: <[email protected]>.
§
School of Natural and Rural Systems Management,
University of Queensland, Gatton, Queensland 4345,
Australia. Current address: Executive Director, Research
and Development Policy, Department of Primary
Industries, Meiers Road, Indooroopilly, Queensland
4067, Australia. Email: <[email protected]>.
¶
Faculty of Agriculture, University of Mataram,
Mataram–NTB, Indonesia.
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edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
99
Keprok Soe (literally ‘mandarin from Soe’) consti-
tutes the main source of income (70%) for subsist-
ence farmers with farms less than one hectare.
In recent times, the price of Keprok Soe has
steadily risen. While part of this price rise has been
due to the influx of refugees from East Timor and
Ambon and United Nations personnel, another
important factor has been the increased appreciation
and consumption of the locally grown fruit by local
residents since the 1990s.
In contrast to most other domestic mandarins in
Indonesia, Keprok Soe has a mixed gold-and-green
skin colour, and is easy to peel, juicy and relatively
sweet in taste. To encourage farmers in the region to
focus on this variety, and perhaps for administrative
reasons, the government discourages the planting of
other varieties. Keprok Soe has not performed well in
trials in other production areas (such as J ava),
meaning that the variety is exclusive to West Timor.
Good grades of Keprok Soe fetch a premium price in
direct competition to imported mandarins from
various countries, including China, Pakistan, Israel
and Australia. Mandarins are in high demand in Indo-
nesia and the supply of Keprok Soe is largely
demand-pull. Nevertheless, the presence of imported
fruit indicates that the Keprok Soe chain is already
competing with import chains to maintain its price
premium.
Largely due to its economic value and popularity
among local consumers, the Indonesian government
adopted some measures to promote Keprok Soe.
They included providing free seedlings and discour-
aging farmers from planting other varieties of man-
darins. Some non-governmental organisation (NGO)
projects in West Timor have also provided free seed-
lings and irrigation assistance to expand the current
production of Keprok Soe. With a substantial
increase in production area, the outturn of Keprok
Soe is expected to double in a couple of years. Hence,
market competition will increase. Moreover, as
Keprok Soe already competes with imported prod-
ucts, the quality of competitors’ products can be
expected to improve.
According to a recent survey conducted in five vil-
lages in TTS (Tobu, Netpala, Bijeli, Oelbubuk and
Fatumnasi), the average age of farmers growing man-
darins in TTS was about 46 years (range 26–68 years
old). The average experience in growing Keprok Soe
was about 18 years (range 5–30 years). The average
number of trees owned by each farm household was
about 90. The average production was 55 kg per tree,
with a maximum of 68 kg per tree. About 68% of the
yield of Keprok Soe was sold to make a living, with
the rest used for social purposes, such as gifts for
friends and relatives, church ceremonies and own
consumption. In the villages of Oelbubuk and Net-
pala, 80% of total mandarin production was used to
make a living. The main reason why their crops could
make a higher contribution to household income was
because these villages are closer to the subdistrict
market and transportation is less of an issue com-
pared to other villages (Leki and Wadu 2000).
Methods of Selling Keprok Soe
In general, there are three methods by which farmers
can sell their mandarins: forward-sale by tree, per
tree sale at harvest and per kilo sale after harvest. For
the last method, farmers are generally responsible for
taking the fruit to the venue of the trader or to local
markets by themselves.
Forward-sale by tree
Sales using this method generally occur 2–3
months before harvest, when farmers are in need of
cash. Around J anuary, February or March, when
there are mandarins on the trees, farmers go to a local
trader in their village and ask the trader to have a look
at the mandarins on their trees. After negotiation, and
if a deal is made, the trader pays half of the price to
the farmer. The balance will be paid at the harvest
time. Traders can also pay by goods, such as food,
clothes, radios, tape recorders etc. After half-
payment by the trader, the crop is then owned by the
trader and the farmer is obligated to look after the
trees to prevent such things as stealing and attack by
pests. Price per tree is generally very low. For
example, the price per tree was about IDR40,000/tree
in Netpala village. In contrast, when farmers sell
mandarins by weight, they can get over IDR200,000/
tree at harvest time — five times more than from
forward-sale (Leki and Wadu 2000).
This method of sale is practised when farmers are
in urgent need of cash for food, medical, or educa-
tional expenses, or even for paying taxes. With more
involvement by NGOs in the form of training work-
shops to assist in farm credits and to inform farmers
about the undesirable nature of forward-selling, this
method of sale is decreasing over time. According to
one survey in the two subdistricts of North Molo and
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(printed version published in 2004)
100
South Molo in TTS, 3% of farmers used this method
in 2000 (Leki and Wadu 2000).
Per tree sale at harvest
This method is used at harvest time — mandarins
are sold by the tree, and farmers are not involved in
the packaging, transport and sale of individual fruit.
When mandarins are ready to harvest, farmers go to
traders, or vice versa, and ask for the price per tree for
the mandarins. Traders may harvest in stages,
depending on the ripeness of the fruit on the trees. In
general, traders harvest twice. As in the forward-sale
situation, traders own the crop after agreement and
farmers are obligated to look after the trees between
the first and final harvest. According to one survey in
TTS (Leki and Wadu, 2000), the price is about
IDR75,000/tree, but according to one farmer leader,
the price could be about IDR150,000–200,000 in
Oelbubuk village. Farmers are generally content with
this price because it is close to what they can get if
they sell by themselves, after taking into account all
the expenses, e.g. transport, packaging, renting a stall
etc.
There are several reasons why farmers sell by per
tree rather than by weight at harvest time:
• there are no harvesting costs to farmers
• farmers are saved the trouble of transportation,
grading and postharvest loss
• farmers have little information about the price of
mandarins in town — selling by tree avoids the
risk of receiving an unexpectedly low price
• farmers can sell in a larger volume by tree than by
weight, hence saving labour costs.
There are two other social reasons that farmers
choose this method of sale. Selling by the tree at
harvest time is possible when the farmers and traders
involved have a long-standing, good relationship.
The trader needs to trust that the farmer will look
after the trees after the first harvest and that no
stealing will occur. Farmers, of course, rely on
traders to give a fair offer. Financially better-off
farmers are more likely to use this method because
taking mandarins to markets by themselves lowers
their social status. Farmers with some prestige are not
supposed to be seen to toil themselves and to compete
with less better-off farmers in making a living.
Per kilogram sale after harvest
In this method, farmers harvest their own fruit. If
required, occasionally they also grade and package
the fruit. Farmers or their family members either take
their mandarins to traders in the village or town, or
directly to markets. In this method of sale, farmers
assume several functions in the supply chain and are
rewarded more in return.
Factors affecting farmers’ choice of selling
method
Farmers’ use of different selling methods is often
related to the size of their mandarin farm, income,
price of mandarins or trees at the time, availability of
family labour, farmers’ educational experiences,
length of farming experiences, and distance from the
farm to the local market (Leki and Wadu 2000).
Farmers with larger mandarin farms have lower
costs per tree and the differences between selling by
the tree and by weight are also greater. Hence,
farmers with more mandarin trees tend to sell by
weight. As stated before, farmers with higher
incomes tend to sell their mandarins by the tree at
harvest time. Higher prices during the season
encourage farmers to sell by weight, as reflected in
the recent years. Larger farm households that have
more helping hands during the harvesting season are
more likely to harvest themselves and sell by weight.
Farmers who have more education (formal or
informal) are more likely to sell by weight. Similarly,
more experienced farmers are more likely to sell by
weight. Transport is an issue for farms far away from
the subdistrict, district or provincial market. Many
villages in North Molo and South Molo are not con-
nected to good roads. Farmers often take mandarins
to the market on foot. This is rather inconvenient, as
the weather is still a bit wet at the start of the har-
vesting season in April. Farmers with farms closer to
markets are more likely to harvest themselves and
sell by weight at the markets.
Supply Chains of Keprok Soe
As indicated in Figure 1, there are two supply chains
for mandarins grown in West Timor. About 90% of
the mandarins are sold locally; the other 10% are sold
to other provinces. In drought years, none are avail-
able to sell to other provinces.
Local supply chain
Farmers have several avenues through which they
can sell their mandarins in the NTT Province. They
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Agriproduct supply-chain management in developing countries
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ACIAR Proceedings No. 119e
(printed version published in 2004)
101
can sell by themselves at street stalls at any time, or
sell at the subdistrict markets that open once a week.
Their fruit can appear at the subdistrict, district, or
provincial market through the business activities of
traders. The most desirable avenue for growers is to
sell directly at the Kupang provincial market run by
the government, but no farmers can sell through this
channel at this stage. An eligible retailer in the gov-
ernment market must purchase the space of a stand
and farmers cannot afford the cost.
At present, there are about 15–20 local traders
dealing with mandarin farmers. Some of them sell to
retailers and others sell directly in the local market.
There are also about 15–20 mandarin retailers at the
daily Kupang wet market.
Inter-island mandarin supply chain
Selling mandarins to other, more prosperous
islands is the aspiration of the industry in West
Timor. This occurred a few times since 1997 when
two traders embarked on the venture with farmer
groups in Bijeli and Oelbubuk villages. The traders
sold to the central market in J akarta, supermarkets
and the food service industry in Bali.
This supply chain currently represents only a small
proportion of the outturn. As the supply of Keprok
Soe is still not sufficient even to meet current local
demand, there is no urgency to work on this supply
chain. However, if production increases in the near
future as predicted, it will be necessary to address the
issues involved. According to the traders, farmers
were unable to supply to specifications for the
desired maturity level, grading and packaging
requirements. Another issue is payment terms.
Growers operate on a ‘no cash, no goods’ principle,
which makes it difficult for traders to do business as
their customers require credit for a few weeks.
Traders as supply-chain managers
Established traders play a key role as channel man-
agers in the supply chain, especially for the inter-
island supply chain. The incentive for traders to
undertake supply-chain management is partly that
Keprok Soe is a premium variety and exclusive to
West Timor. For example, one established trader has
been actively involved in upstream external resource
management with farmers. Under the auspices of
NGOs, traders conduct workshops for farmer groups
Figure 1. Mandarin supply chains in West Timor.
Farmers or farmer groups
Village markets
Subdistrict markets
District markets
Local traders
Merchants
Cross-island traders
Provincial markets
Supermarkets
Speciality fruit shops
Food
services
Local consumers Provincial consumers Consumers in Bali and J ava
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102
in various areas, covering fruit fly control, organic
farming principles, re-use of water and postharvest
handling to meet market requirements. The traders’
requirements for mandarins at the farm level include
grading by size and appearance, packaging prefer-
ences and maturity level for harvesting. In another
instance, a trading company taught farmers how to
make wooden boxes, and provided grading guide-
lines and definitions of maturity levels. Apparently
simple guidelines on picking, grading and packing
can be difficult for subsistence farmers whose atten-
tion is distracted by their immediate need for cash.
The entrepreneurial actions that traders have initiated
to address farmers’ cash shortages include offering
working capital and fertilisers to farmers. Repayment
is deducted later from the sale of mandarins back to
the trader. The presence of NGOs moderates the
potentially adversarial relationship between traders
and farmers.
It is quite exceptional that traders have motivated
farmers to strive for good products, to be competitive
and to become champions. Hence, the traders have
been observed to play a mixed role of channel man-
ager, information supplier, co-investor and extension
officer. These activities and alliances suggest that a
reciprocal rather than a win–lose relationship exists
(Brandenburger and Nalebuff 1996; Moore 1996).
From a power perspective, such a relationship is
likely to represent a high barrier to market entry for
other serious traders, and thus an advantage of a
closed market for the established traders (Cox 1999).
In the recent past, one trading company with a sub-
sidiary in West Timor tried to work with farmer
groups to sell mandarins to J ava. A complicated
model was tested where the company and the farmer
groups had a joint account for the payment from J ava.
Unfortunately, the relationship did not last, mainly
for two reasons: improper packaging by farmer
groups, and perceived unfair distribution of subse-
quent loss by farmers. The careful selection of traders
or trading companies and the sound functioning of
farmer groups are antecedents for a good working
relationship between farmer groups and their trading
partners.
Figure 2. A trial model of alliance between farmers and a trader.
Farmer group
Functions:
• provide own mandarins
• purchase mandarins from
other farmers
• grade and pack
Trader
Functions:
• lend to farmers
• train farmers in making
wooden boxes
• sell mandarins in J ava
Farmer 1 Farmer 2 etc.
Merchant in Java
Flow of product
Payment to a joint account
50% of profit 40% of profit 10% of profit
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In the late 1990s, an inter-island trading company,
with the support of an NGO, tried an alliance model
with the farmers (Figure 2). Under this model, the
trading company provided training to farmers on
grading, packaging and manufacture of wooden
boxes. The company also provided loans to farmer
groups to purchase mandarins from other farmers.
Farmer groups sent products directly to the central
market in J akarta. Payment was sent to a joint
account with the agreed breakdown of profits as 50%
to farmers, 40% to the trading company and 10% to
farmers’ groups. However, according to the trading
company, due to improper packaging and grading,
the price for Keprok Soe was slashed, causing losses
to the joint effort. The farmers, suffering from great
losses, disagreed on the reason and suspected fraud in
the deal.
There are several explanations as to why the alli-
ance did not work out. To start with, it was a rather
complicated model for businesses that had never
worked together before. Many scenarios were not
envisaged, such as the allocation of payment when
there were losses. The transaction between the West
Timor trading company and the merchant in J akarta
was not transparent to the farmers. As there was no
contact between farmers and the merchant in J akarta,
farmers later did not trust the actual amount of
payment from the merchant. Farmers needed at least
a season to perfect grading and packaging practices
before selling their products to markets in other
islands that had strict requirements.
Farmers’ relationships with local traders
Unlike the relationship with inter-island traders,
farmers’ relationships with local traders are more
transaction-based. According to our interviews, local
traders often hid from farmers the price information
at the Kupang provincial market. Farmers were often
told that the market in Kupang was sluggish and the
prognosis would be worse if they would not sell
quickly at the price set by traders. Farmers are gener-
ally price-takers rather than price-negotiators in this
supply chain. One reason that farmers would sell with
any price suggested by traders is that farmers gener-
ally do not have a good idea about the costs of pro-
ducing mandarins, hence there is no bottom-line
price as a guideline for a desirable price. In fact,
many farmers see almost no cost for their produce
because there is little farm investment apart from
labour and land.
Distribution of benefits
The value chain is not readily available, as most
farmers do not keep a record of their costs. Many
farmers do not use farm inputs and often ascribe no
costs to the production of mandarins if they have not
hired any labour. The inter-island value chain shown
in Table 1 has been approximated by including the
equivalent costs of labour and median-level farm
inputs to produce a good grade of mandarins. Inter-
estingly, the farmers’ share in the value chain is
larger than the traders. As in many other developing
countries, traders in Indonesia are not just engaged in
Table 1. A value chain for mandarins in West Timor.
Chain members Costs and price/kg (IDR) Margin/kg (IDR) Relative share (%)
Farmers Farm-gate price: 4000
Costs: 2000
2000 29
Traders in West Timor Price: 10,000
Costs: mandarins, 4000
transport, 4000
damage, 500
packaging, 500
1000 14
Traders in other islands Price: 11,000
Costs: 10,000
1000 14
Retailers Price: 15,000
Costs: mandarins, 11,000
overheads and damage, 1000
3000 43
Total 7000 100
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trading one line of product. They have multiple
sources of income by trading in several areas where
they see the potential for making a profit. While the
farmers’ share is about 30% of value created in the
chain, this income from mandarins is the main source
of revenue for many farmers in TTS and TTU.
Supply-chain Constraints
Production
The mandarin industry in West Timor faces
several constraints in the production of Keprok Soe.
Overall, farmers lack proper cultural skills and do not
use farm inputs to grow good fruit. The area is gen-
erally short of water and can be affected by drought,
as in 2000. Several NGO projects were designed to
install irrigation facilities but for management
reasons were not successful in addressing the issues.
The industry also faces serious disease challenges,
including Diplodia canker, pink disease, sooty
mould, Phytophthora, powdery mildew, citrus
greening etc. Inappropriate harvesting methods,
involving pulling the fruit from the tree, are still used
by farmers — this causes exposed flesh and stress to
the tree.
Poor road infrastructure and transport
Currently, fruit is transported on foot, via the
public transport system or using the traders’ own
trucks. With public vehicles, passengers and produce
are transported together. Public vehicles run only
during the daytime, and only two bags are allowed
per passenger. This means of transport is less than
ideal, as the daytime heat contributes to fruit losses.
In addition, people often sit on the fruit, causing more
losses.
Subdistrict markets open once a week (e.g. Thurs-
days in Kapan subdistrict) and district markets open
daily (e.g. the market in Soe — the capital city of TTS
— about 20 km from Kapan). Depending on the loca-
tion of the farm, on average it takes about an hour to
take fruit to the subdistrict markets.
Farmers can transport their mandarins by traders’
truck, for a fee, but there is a maximum of 10 bags,
i.e. 400 kg (per farmer), because traders need to load
other fruits and vegetables, such as avocado, banana,
onion and pumpkin. The maximum load of one truck
is 6000 kg.
When asked why farmers cannot consolidate fruit
and hire a private truck, one farmer leader said that
they have not looked into this option. However, he
expressed that farmers are willing to pay for
IDR200,000 for a 3 t load pick-up for fruit to go to
Kupang — in other words, about IDR70/kg (or 2% if
the price is IDR3500/kg) for transport.
Postharvest losses
Postharvest losses were estimated to be 20%. Most
of the losses were due to a lack of proper cold storage.
Keprok Soe is planted in the highland areas of 800 m
in TTU or above 1000 m in TTS. As the fruit is trans-
ported from cooler areas to warmer and humid
lowland areas during the daytime heat, fruit ripens
fast and unsold fruit deteriorates quickly under
ambient conditions.
For fruit sold to other islands, no refrigerated con-
tainers were used. There was a shortage of refriger-
ated containers and priority was given to high-value
products, such as meat and seafood.
In 2000, one NGO — Winrock — worked with one
trader to refurbish and redesign a second-hand cold
storage of a 6 m container with 6 t capacity. Second-
hand storage is adequate for fruits and vegetables
since they do not require storage below 0°C. How-
ever, cold storage is generally unavailable for fresh
produce.
For inter-island trade, fruit was graded and pack-
aged twice, either at Kupang, the capital of West
Timor, or at the central markets in other islands. At
this stage, farmers are unable to set a common
standard to meet the grading needs of their cus-
tomers. This function is unlikely to be fulfilled
without the sound performance of farmer groups.
Potential for Chain Strategies
Horizontal integration at the farmer level
There are various kinds of informal social groups
in Indonesia, such as youth groups, women’s groups,
veterans’ groups etc. Similarly, in villages, there are
informal farmer groups. Members of a farmer group
help each other during busy times of crop cycles,
such as harvest seasons. They might share equipment
with each other. In West Timor, farmer groups are
also affiliated with church; one church might have a
few farmer groups. Many of the activities of an NGO
in West Timor are based on existing farmer groups,
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as members already know each other well and are
easier to mobilise as most of them go to the same
church. NGOs’ soft-loan programs for farmer groups
capitalise on existing farmer groups for implementa-
tion through the network of churches.
For farmers to be effectively integrated to improve
the efficiency of the supply chain, groups need to
develop norms for their members. A popular model
of group development described that groups usually
go through four stages: (1) the forming stage; (2) the
storming stage, where interpersonal conflicts emerge
as people try to express their individuality and resist
the emerging group structure; (3) the norming stage,
where the group starts to evolve methods of working
together; and (4) the task-performing stage, where
members accept their own and others’ abilities and
limitations, and organise activities to achieve their
goals (Tuckman 1965). It is fair to say that most of
the farmer groups in West Timor are in the middle or
leaving the second stage. There was some evidence
that in certain groups, individual farmers were having
problems that affected the activities of the whole
group. The challenge for the farmer groups is to rec-
ognise and accept group structures and develop
norms to organise activities and achieve group goals.
The policy implication is to train extension officers
and key farmers in group management skills in addi-
tion to production techniques. This support is neces-
sary until group members and the leader have gone
through the dependent, the counter-dependent and at
the interdependent phases (Banet 1976).
Traders as managers of inter-island supply
chains
Keprok Soe was first introduced to other islands in
Indonesia by a trader in West Timor, who stated, “I
travelled to J ava and compared Keprok Soe with
mandarins from Madura and Lumajang. I felt Keprok
Soe is superior because of its taste, juiciness and skin
colour.” Traders have been targeted by NGOs for
participation in various activities, including training,
micro-finance and logistics management. There
appears to be a mutual interest for farmers and traders
to work cooperatively to improve the production,
harvesting, and packaging of Keprok Soe, with a
view to selling beyond the local market. The man-
darin supply chain in West Timor is operating in a
lightly contested environment between cross-island
traders and a reciprocal environment between
farmers and traders. Certain circumstances facilitated
the development of such a relationship between
farmers and traders. The demand for Keprok Soe
exceeds supply. The exclusive production of Keprok
Soe in West Timor assures that both parties retain the
benefits of a reciprocal relationship at least in the
short term, and the existence of a social network
among farmer groups means traders need to commu-
nicate effectively with only the groups’ leaders. The
involvement of NGOs as third parties in the chain
provides funding and opportunities for traders and
farmers to interact and to address the serious disease
problems which threaten the medium-term sustaina-
bility of the industry. Finally, at this stage, both
farmers and traders will not and could not integrate
backward or forward to further appropriate value in
the supply chain.
In developing countries, as products are pushed
through the channel, the business skills and foresight
of traders are crucial to the linkage between farmers
and retailers, and consequently the success of a chain.
Traders can work better with farmer groups that are at
the task-performing stage, or at least at the norming
stage.
Branding
Until now, Keprok Soe has been marketed under
the traders’ own names, losing its identity. While
Keprok Soe is considered as a superior product, no
effort has been made to market the product. Because
of the high transportation costs and the exclusiveness
of Keprok Soe to West Timor, an ultimate marketing
strategy would be to sell the product as ‘Keprok Soe’
(mandarins from Soe) rather than just as Keprok
(mandarins). This would reduce the risks and uncer-
tainties for consumers and businesses purchasing the
fresh produce. In this environment, a good, consistent
product identifiable by a brand may lead to a mar-
keting advantage (Owen et al. 2000).
However, one
issue is that such effects might be difficult to gauge,
as the identity of the produce can be lost at the retail
level since fresh produce is often not packaged.
To build capacities for developing these strategies,
this project implemented two hands-on training
workshops on marketing and production, and radio-
broadcasted related issues. The project purposefully
invited an inter-island trader to conduct training on
production, packaging and grading. Awareness of the
benefits of horizontal integration at the farm level
was raised through farmers working together under
the project activities. Preharvest and postharvest
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training workshops have provided the industry with
the necessary knowledge and skills for potential
branding of Keprok Soe.
References
Banet, A.G. J r 1976. Yin/yang: a perspective on theories of
group development. In: Pfeiffer, J .W. and J ones, J .E., ed.,
The 1976 annual handbook for group facilitators. La
J olla, California, University Associates.
Brandenburger, A.M. and Nalebuff, B.J . 1996. Co-
opetition. New York, Doubleday, 290 p.
Cox, A. 1999. Power, value and supply chain management.
Supply Chain Management, 4, 167–176.
Leki, S. and Wadu, M.M. 2000. Factors affecting farmers in
selecting marketing strategies in NTT. Unpublished
working paper, University of Nusa Cendana.
Moore J .F. 1996. The death of competition. New York,
Harper Collins.
Owen, K., Wright, V. and Griffith, G. 2000. Quality,
uncertainty and consumer valuation of fruits and
vegetables. Australian Agribusiness Review, 8 (August),
paper 4.
Tuckman, B.W. 1965. Developmental sequence in small
groups. Psychological Bulletin, 63, 384–399.
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Getting Farmers to Work Together:
the Experiences of Mango Growers in
the Mekong Delta Region of Vietnam
Nguyen Minh Chau,* Sherrie Wei,
†
Vo The Truyen,* Marlo Rankin
§
and Iean Russell
¶
Abstract
In September 2001, The University of Queensland (UQ), Australia, and the Southern Fruit Research Institute
(SOFRI), Vietnam, embarked on an ambitious project funded under the Australian Agency for International
Development (AusAID) Capacity-building for Agriculture and Rural Development (CARD) program, to
establish four collaborative marketing farmer groups in two provinces in the Mekong Delta region of southern
Vietnam. The four groups were established in the provinces of Tien Giang and Tra Vinh. In both provinces,
over 80% of the population rely on agriculture as their main source of income and both provinces are known
for producing superior varieties of mango, such as Cat Hoa Loc (considered to have the best taste), Cat Chu
(high yield), Cat Trang and Cat Den.
The problems faced by the majority of mango farmers involved in this project are indeed no different from
most farmers in developing countries. Factors such as small farm size, low level of knowledge relating to
production techniques, and little or no knowledge of market pricing beyond the local collector agents were
common challenges among project participants.
This paper reports on the success factors and challenges encountered with the establishment and maintenance
of the farmer groups, supply-chain characteristics of the mango industry in southern Vietnam, and intervention
strategies for the development of successful collaborative farmer marketing groups.
In September 2001, The University of Queensland
(UQ), Australia, and the Southern Fruit Research
Institute (SOFRI), Vietnam, embarked on an ambi-
tious project funded under the Australian Agency for
International Development (AusAID) Capacity-
building for Agriculture and Rural Development
(CARD) program, to establish four collaborative
marketing farmer groups in two provinces in the
Mekong Delta region of southern Vietnam. The four
farmer groups were established in the provinces of
Tien Giang and Tra Vinh. In both provinces, over
80% of the population rely on agriculture as their
main source of income and both provinces are known
for producing superior varieties of mango, such as
Cat Hoa Loc (considered to have the best taste), Cat
Chu (high yield), Cat Trang and Cat Den.
This study discusses the experiences, over a two-
year period (2001–2003), of getting mango farmers
in the four villages of southern Vietnam to work
together. While the groups are still in the process of
developing, the first two years were most chal-
lenging and their experiences could be relevant to
other crops in Vietnam and other developing coun-
tries with similar social and economic back-
grounds.
* Southern Fruit Research Institute, Tien Giang, Vietnam.
Email: <[email protected]>(NMC);
<[email protected]>(VTT).
†
School of Natural and Rural Systems Management,
University of Queensland, St Lucia, Queensland 4072,
Australia. Email: <[email protected]>.
§
Australian Youth Ambassador to Vietnam.
Email: <[email protected]>.
¶
School of Natural and Rural Systems Management,
Gatton, Queensland 4345, Australia.
Email: <[email protected]>.
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Background
The Mekong Delta of southern Vietnam is an impor-
tant area for fruit production. In 2000, the area had
323,600 ha under fruit production, compared with the
Vietnamese total of 544,700 ha. About 3 million t of
various tropical fruits were produced in this region
(Ministry of Agriculture and Rural Development
2002). Vietnam has less than 20 years of experience
of being a market economy. As the fruit industry was
deregulated very fast, many problems have since
become evident.
At the nursery level, there was a shortage of
planting material relative to market demand as many
farmers quickly quit planting rice to growing cash-
crop fruit trees. Many farmers also took the opportu-
nity to sell fruit seedlings. These farmers had inade-
quate nursery hygiene practices and no propagation
skills. Consequently, there was widespread distribu-
tion of diseased planting material, as well as prob-
lems associated with the authenticity of varieties.
Amongst other problems, lack of access to reliable
planting material has inhibited farmers from
engaging in larger-scale production and marketing.
At the orchard level, problems include poor agro-
nomic conditions, poor planning and lack of cultural
skills. Because of the potential of increasing farmer
income through fruit cultivation, many areas that
were previously used for rice production have since
been turned into fruit orchards. These new orchards
often face problems due to unsuitable soil types,
drainage problems and high watertables. Due to
lack of experience in fruit-tree growing, new
orchards are often planted with little knowledge of
cultural practices, such as appropriate planting den-
sity, orchard layout, pruning and training tech-
niques, plant nutrition etc. The average size of each
farm is small (approximately 0.5 ha) and farmers
often grow many types of fruit. All these factors
combine to make produce unsuitable for large-scale
marketing.
At the industry level, the key problems include
lack of effective farmer organisations, poor posthar-
vest handling, and inadequate agribusiness skills.
Farmer associations and extension staff are poorly
organised and have difficulty identifying and
achieving group objectives and delivering potential
services such as market information, sharing of
equipment and establishing quality standards. Until
the recent formation of the farmer cooperatives,
farmers sold all produce individually and were
subject to price-setting by first-level fruit collectors.
Limited knowledge of postharvest techniques and
lack of appropriate packaging and storage materials
result in farmers harvesting immature fruit in an
attempt to extend the shelf life of the fruit and reduce
transport damage. Lack of agribusiness skills, insti-
tutional problems and an overall poor understanding
of free-market functioning has limited industry
stakeholders (farmers, traders, extension personnel,
researchers etc.) from fully embracing and imple-
menting a market-oriented production system.
The aforementioned problems have had a negative
impact on the efficiency of fruit production in the area.
By working individually on small farms, fruit growers
produce small quantities of produce, with high input
costs, making their products uncompetitive and
resulting in low farmer income. Retaining this situa-
tion, in the long term, they can neither establish a
stable marketing system nor develop new markets.
This study included four mango-growing groups:
Hoa Hung and Cam Son villages of Tien Giang Prov-
ince; and Binh Phu and Nhi Long villages of Tra
Vinh Province. The majority of Binh Phu village con-
sists of Khmers who have similar customs to Cambo-
dian Khmers. Hoa Hung and Nhi Long villages are
mature production areas, whereas Cam Son and Binh
Phu villages are new mango-planting areas. Each
village has distinct needs and issues.
Establishment and Maintenance of
Farmer Groups
By initially establishing farmer groups, then
upgrading some of these groups to grower coopera-
tives, mango farmers involved in the project have
begun to realise the benefits of working together. In a
recent evaluation of the project, farmers were asked
to identify any benefits they believe that they have
experienced as a result of participating in the farmer
group/cooperative. Key benefits highlighted were:
access to technical production training, sharing of
knowledge and experience in production with other
growers, access to lower-priced inputs, sharing of
price information, greater understanding of how the
market functions, increased confidence when dealing
with traders, increased understanding of fruit grading
and basic quality assurance practices, higher fruit
prices by selling through the cooperative, and greater
community understanding.
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Steps involved in group/cooperative
formation
Cooperative farming under a centrally planned
economy was practised in Vietnam during 1976–
1980, but was unsuccessful for numerous reasons.
This failure is still fresh in the minds of many farmers
and hence this was a difficult mind-set to overcome
when attempting to introduce the benefits of farmer
groups and collaborative marketing. From the expe-
rience of the farmers and extension staff involved in
the project, some guidelines for farmer group/coop-
erative formation have been identified. Five phases
and their associated problems, needs and benefits of
group formation were identified: learning, steering,
forming, implementing and developing (Tuckman
1965; Banet 1976; Chamala 1995).
Learning
This was an important initial step conducted by the
project team to identify potential farmers in each
catchment with similar needs. At this stage, identi-
fied problems included lack of ideas, negative impact
of variable market conditions and poor technical
skills. As problems could not be solved individually,
there was a need for funding to organise group meet-
ings. At this stage, farmers experienced the benefit of
group formation through access to technical training
and sharing of production knowledge. In addition,
agribusiness principles were introduced. The training
workshops conducted proved to be critical to the
success of later farmer-group formation, as they stim-
ulated community interest and provided some imme-
diate individual benefits via access to new
information.
Steering
At this stage, a steering committee was formed by
a handful of interested and respected farmers in the
community who began by visiting the local-level
government to request permission to begin the pro-
ceedings for the formation of a grower group/cooper-
ative. Farmers in the area were visited by the steering
committee to generate further awareness of current
issues facing mango producers and gauge the interest
of potential farmer-group members. Farmers were
asked to decide if they wanted to register as mem-
bers. Technical training continued during this stage
to sustain and increase farmer interest, with emphasis
on cooperative learning and sharing of experiences.
Key problems during this phase included a lack of
skilled persons to form the steering committee and
poor understanding of provincial grower group/coop-
erative registration requirements and related laws.
Depending on the skills of the steering-committee
members and the individual farmers involved, this
phase progressed rapidly or slowly for different
groups according to the interest and commitment of
the farmers. Group needs during this phase included
permission from the local government to begin pro-
ceedings and funds to gather farmers together for reg-
istration and individual farm visits. The main benefits
of group formation at this stage were increased iden-
tification and awareness of production-related issues
and continuing to share production techniques and
experiences amongst farmers.
Forming
At this stage, farmers had already registered to
become a member of the farmer group or coopera-
tive. Government approval and registration were
achieved and the first meeting was held at which the
management board was democratically elected.
Cooperative law and government guidelines were
read out at this meeting and the management board
began to discuss roles and allocate tasks. During this
stage, members decided how they wished the coop-
erative to function, including sale of cooperative
shares to group members and the community to gen-
erate funds.
Key problems during this phase included heavy
responsibilities placed on the management board,
weak linkages between members who were still
unsure of the potential benefits of participation, lack
of group-specific rules and objectives, and no clear
vision of where the group was heading. Needs
included training in cooperative principles and func-
tions, understanding of cooperative registration and
local law, support from institutions to monitor group
progress, provision of ongoing technical training to
keep members involved, and skills training for the
management board. Marketing concepts and the
potential benefits of selling collectively were intro-
duced again at this stage. Benefits of group formation
included an improved understanding of cooperative
functions, increasing technical knowledge and devel-
opment of a good relationship with supporting insti-
tutions.
Implementing
This stage was the most complicated of the four
phases thus far, as it required the farmer groups to
design action plans and begin implementing strate-
gies. It required the management board and members
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to be able to conduct a situation analysis to determine
common member needs. They used this analysis to
identify key achievable goals, designed an action
plan with set dates to achieve the goals, realised the
action plan and evaluated the results. Critical prob-
lems included poor management skills resulting in
inferior action plans which could not be implemented
and evaluated, internal conflict amongst members
who were often reluctant to commit to the group
because they were unsure of the benefits to be real-
ised, and poor facilities, such as lack of a set meeting
place. At this stage, members needed to directly
experience some benefits of group participation to
solidify commitment.
Needs were extensive during this stage and signif-
icant institutional support was necessary to monitor
the progress of the cooperatives and help them imple-
ment their action plans. Further training and
upgrading of management skills were crucial, partic-
ularly focusing on financial management as the coop-
erative began to generate some income. Introduction
to potential trading partners and basic quality-assur-
ance training and introduction of practices were
incorporated at this stage as the cooperative began to
become more market-oriented. Benefits can take
various forms depending on the developmental stage
of the cooperative but should hopefully include
increased income and stability for the marketing
channel. Benefits realised by the four farmer groups
in this project included:
• improved price for fruit by selling directly to the
cooperative and bypassing intermediaries
• access to current price information through
establishing an information channel amongst
members
• cooperative seedlings purchased at low cost for
members
• trialling of new production techniques and sharing
the results.
Developing
None of our current farmer groups/cooperatives
have reached this stage yet due to limited experience
in cooperative functioning. The key objective for the
future will be to build mechanisms for sustainability,
including ‘train-the-trainer’ methods that will
empower cooperative members and reduce reliance
on external institutional support. Ongoing manage-
ment training is essential to ensure cooperative prin-
ciples are upheld throughout the developmental
stage. As the farmer group/cooperatives continue to
develop, they are likely to encounter a number of
internal problems for which they will need to develop
guidelines and detailed business plans to cope.
Quality-assurance practices should be upgraded with
increasing sophistication according to domestic and
export market requirements. Once they begin gener-
ating consistent income, they should be able to
directly access the support they require by hiring
external experts to provide training and services as
needed.
Conclusions
Throughout the course of this project, much has been
learnt about the formation and functioning of farmer
groups or cooperatives in the Mekong Delta region of
Vietnam. The aforementioned guidelines for the five
stages — learning, steering, forming, implementing
and developing — provide a framework for farmer
group/cooperative formation from the experience
gained. Each stage encountered its own list of prob-
lems, however one concept is clear — in order to
maintain commitment and interest in the farmer
group/cooperative, farmers must continue to recog-
nise the increased benefits of working together. This
required significant support from local institutions
and extension staff. In the initial stages, access to
ongoing technical training appeared to be sufficient
to sustain commitment. In the latter stages, more
emphasis was placed on reinforcing farmer group
and cooperative principles. This included ongoing
management training, helping to create commercial
linkages between farmers and traders and beginning
to work with both groups to increase understanding
of market needs and to introduce basic quality-assur-
ance practices.
Further work will be directed at building the social
capital to support the sustainable operation of the
cooperatives. This will involve continuing involve-
ment in technical issues, such as training in improved
production techniques, but an increasing emphasis on
the development of management capabilities is seen
as a key aspect of successful scaling-up. The Govern-
ment of the Socialist Republic of Vietnam recognises
that farmer cooperatives can play a key role in rural
development. The preliminary success of the fruit
growers’ cooperatives in Tien Giang and Tra Vinh
Provinces has attracted considerable attention within
the country and there is mounting pressure for con-
tinued progress with the formation and development
of further groups. It is essential to learn from the
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experience of the existing cooperatives to assist them
to survive and prosper. Continued input into the
training of government staff and cooperative leaders
will be necessary to achieve these ends.
Acknowledgment
The authors would like to thank the Australian
Agency for International Development (AusAID) for
its funding support under the Capacity-Building for
Agricultural and Rural Development (CARD)
program for Vietnam.
References
Banet, A.G. J r. 1976. Yin/yang: a perspective on theories of
group development. In: Pfeiffer, J .W. and J ones, J .E., ed.,
The 1976 annual handbook for group facilitators. La
J olla, California, University Associates.
Chamala, S. 1995. Overview of participative action
approaches in Australian land and water management. In:
Chamala, S. and Keith, K., ed., Participative approaches
for Landcare: perspectives, policies and programs.
Brisbane, Australian Academic Press, 5–42.
Ministry of Agriculture and Rural Development 2002.
Statistics of Agriculture and Rural Development, 1996–
2000 [Vietnam].
Tuckman, B.W. 1965. Developmental sequence in small
groups. Psychological Bulletin, 63, 384–399.
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Fruit and Vegetable Production in Vietnam
and the Role of Traders in Marketing
Tran Cong Thang*
Abstract
Over the past 10 years, Vietnam’s agricultural production has grown at an average rate of 4.3% per year, one
of the highest growth performances of agriculture in the world. Over the next 10 years, the policy emphasis will
be on maintaining this high growth rate, while focusing on a more diversified agriculture. The fruits and
vegetables subsector might well play an important role, as the potential world demand for these commodities
is quite high and Vietnam might have a strong comparative advantage in their production.
The main objective of this paper is to describe the marketing of fruits and vegetables of Vietnam and the main
constraints to fruit and vegetable commerce. Production trends in the fruits and vegetables subsector of
Vietnam since the 1990s are reviewed, and the role of private traders (including assemblers, wholesalers and
retailers) is discussed. At present, about 80% of fruit and vegetable output is sold to wholesalers and
assemblers in spot market transactions. The constraints to marketing of fruits and vegetables in Vietnam are
discussed. These include inconsistent quality, low per-capita consumption, high transportation costs, poor
infrastructure, lack of facilities such as refrigerated vehicles for long-distance trade and cold stores for fresh
fruits and vegetables; and especially uncertainty in the export market.
* Information Center for Agricultural Research and
Development, Ministry of Agriculture and Rural
Development, Hanoi, Vietnam.
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Who Benefits from Enhanced Management
of Agri-Food Supply Chains?
Chris Wheatley* and Dai Peters
†
Abstract
Improved management of agricultural supply chains affects the livelihoods and wellbeing of many different
groups of people. Most obviously, it affects the different actors in the chain itself, and especially those most
dependent on the produce or product, including producers, traders and processors. It also affects those actors
who provide services to the chain, including input suppliers, equipment makers, credit providers, and research
and development (R&D) institutions (e.g. extension, information and facilitation services). These effects can
be beneficial — improved and/or more secure income, reduced use of pesticides, better food quality — but
negative effects can also occur, for example, if some actors are excluded from the improved chains, or if
increased market power for some actors results in reduced income for others.
Analysis of the balance of positive and negative outcomes from improving supply chains depends on a
consideration of the wider context in which the chains are operating, and especially as regards the:
•rural community within which production occurs, and the impact of improving this supply chain on other
agricultural and livelihood activities, and on the natural environment over time
•structure, conduct and performance of the wider market for the produce/products to which the chain adds
value, especially considering changes in concentration within the subsector and of market power along
vertically integrated chains (e.g. in the case of traders and retailers)
•overall impact on target (urban) consumers (considering food cost, quality and safety, and availability).
Mechanisms for enhancing the benefits that accrue to smallholder producers, including gaining access to
specialised markets through alternative trading schemes, are discussed. Examples of strengthening agri-food
supply chains in both Asia and Latin America, with which the International Centre for Tropical Agriculture
(CIAT) has been involved, are presented to illustrate these issues.
Globalisation, urbanisation and the reduced role of
governments in providing services are major trends
affecting Asian agriculture. As markets become more
important, the agri-food sector is increasingly con-
centrated (fewer, larger enterprises) and vertically
coordinated. This expansion of the role and impact of
organised supply chains is occurring internationally,
but is also apparent at the national level across the
region.
An excellent example and indicator of this is the
rapid expansion in the role of supermarkets in Asia.
Supermarkets now account for a 15–20% share of the
processed/packaged food market in Southeast Asia
and for 30% in East Asia (ex-PR China, including the
Philippines). In the People’s Republic of China (PR
China), the supermarket share of urban food markets
grew from 30% in 1999 to 48% in 2001 (Reardon et
al. 2003). Supermarkets provide an entry point for
foreign investment in national economies of the
region, with many national chains now owned by
regional or global firms. In 2002, five global retail
food chains invested USD120 million in Thailand
alone (J itpleechep 2002).
Over the last 20 years in both the European Union
(EU) and United States of America (USA), food
supply chains have become both more concentrated,
especially at retail level, and vertically coordinated.
The end result of this has been to make supermarkets
* Rural Agroenterprise Development Project, Inter-
national Centre for Tropical Agriculture (CIAT), PO Box
462, Nelson, New Zealand.
Email: <[email protected]>.
†
67 To Ngo Van, Tay Ho, Hanoi, Vietnam.
Email: <[email protected]>.
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the dominant power in these chains, increasingly able
to set prices, product quality standards, production
and postharvest practices, and terms of sale to food
manufacturers and produce suppliers (Hughes 1994).
For example, in the United Kingdom (UK), the five
major retail chains’ recent unanimous and coordi-
nated decision to refuse to stock genetically modified
(GM) food products has essentially pre-empted the
government’s pro-GM crop production strategy, by
denying such produce and products access to the only
retail market that matters (Morris 2003).
The growth of supermarket power across Asia
illustrates the dramatic changes now occurring in the
agri-food sector at local and national levels (let alone
in global markets). This transformation of food
retailing, coupled with increased vertical coordina-
tion of their supply chains, will have equally dramatic
effects on the production components of these chains.
Supermarkets are gaining great power to influence
rural commodity and produce markets by the com-
petitive pressures they face to reduce purchase and
transaction costs, raising and assuring product
quality and safety, and procuring year-round sources
of supply. These factors all favour larger-scale pro-
ducers, as do the adverse terms of trade (payment at
60–90 days) that they are frequently obliged to
accept. Some of the mechanisms that retail chains use
to achieve their goals are:
• centralisation of chain procurement (distribution
centres)
• contracts and supply agreements specifying
production and postharvest practices, and
providing security over time (i.e. longer-term and
more stable transactional relationships)
• logistics efficiency and technology — investments
by suppliers for seamless interfaces
• growing use of specialised wholesalers to cut
transaction costs and enforce private standards that
trend towards international standards
• growth of private standards to harmonise product
— as a substitute for absent public standards and
for competitive advantage.
The picture across Asia is of increasing develop-
ment of organised supply chains for agri-food prod-
ucts/produce and a strong drive to improve the
performance of those chains along the lines detailed
above. More organised and efficient supply chains
are not, however, an end in themselves, but a means
to enhancing the benefits derived from participation
in those chains. Key issues are, thus: who partici-
pates; how the benefits are apportioned among par-
ticipants; and why this is the case.
Development aims to improve the life and liveli-
hoods of the poor. Agri-food supply chains involve
two groups of poor as major participants — rural pro-
ducers and urban consumers, and other chain actors
who may also be poor — processors, farm labourers,
and enterprise employees. The impact of the major
changes in the agri-food sector on their livelihoods is
critical to meeting (or not) global targets for poverty
reduction. Implications also exist for environmental
development goals.
Who? Actors and Stakeholders
Participants in the chain are those who directly pro-
duce, transform, handle or otherwise add value to the
produce/products — this includes farmers/producers,
processors, assembly agents, traders, wholesalers,
transporters and retailers. Relationships between
these actors are usually transactional, although not all
of them necessarily take title to the goods, but may
participate on a commission basis. Consumers can
also be considered as participants.
Participants can also be looked at from an ‘enter-
prise’ or ‘economic organisation’ perspective,
including informal household micro-enterprises,
cooperatives and associations with social as well as
economic objectives, and formal enterprises in
various scales of operation and legal constitution. At
the small scale, ‘household’ may be synonymous
with ‘enterprise’, although one household can under-
take more than one enterprise, especially in rural
areas, when seasonal factors are important (e.g. crop-
processing seasons).
Other stakeholders in supply chains are those who
provide services to the main participants or actors.
These can be input suppliers (of fertiliser, seeds and
pesticides), credit providers, equipment makers/sup-
pliers, extension services and other providers of tech-
nical assistance, marketing services, legal and
accounting services, and so on.
A common feature of rural agri-food sector serv-
ices is that they are often ‘embedded’, so that, for
example, a trader may also provide some inputs,
credit and technical assistance, covering the costs of
such services through the marketing margin, rather
than charging direct fees.
Finally, there are other stakeholders in the process
who neither participate directly nor provide services,
but whose income, wellbeing or livelihoods are
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affected by the performance of the chain, or whose
actions impact on the chain participants. Local gov-
ernment is one example — receiving (or not) tax
income from participants, and perhaps regulating
some aspects of the enterprises involved. The rural
community in general is another stakeholder, through
(for example) changes in land use, off-farm employ-
ment prospects, and the effects of by-products and
wastes of any processing.
Figure 1 presents a complex supply chain — or
system — found in a root crop, starch-processing
cluster in Dong Lieu, in peri-urban Hanoi, Vietnam.
This system contains a number of direct participants
(starch processors and traders, producers of added-
value products from starch, pig producers using the
by-products) as well as some key input and service
providers (e.g. equipment makers). Two raw mate-
rials (cassava and canna) are used by small, house-
hold enterprises and two added-value products
(maltose and noodles) made also at household level,
as well as a refined starch product that enters several
high-value industrial markets (textiles, paper). Starch
COMMUNE
Fish/pig
raisers
Fish/pig
raisers
Residue
collectors
Residue
collectors
Root traders
Root
producers
Root
traders
Dry root
graters
Starch
processors
Starch
traders
Starch
refiners
Consumers
Canna noodle
makers
Candy
manufacturers
Maltose
users
Food &
candy
manufac-
turers
Maltose
processors
Communal
engineer
credit
cash
cash and credit
Figure 1. Root-crop starch-processing system in Dong Lieu, Vietnam (Peters et al. 2002).
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is also sold to a large-scale starch producer, Vedan, in
southern Vietnam, that in turn uses the starch to
produce monosodium glutamate (MSG), high fruc-
tose syrup (HFS) and other derived products for the
food market. The starch system thus supplies both
traditional (noodles, maltose) and modern (starch
derivatives) food markets.
What? Effects and Outcomes
The effects of improving supply-chain performance
need to be identified and evaluated at three levels:
• the supply chain itself
• the market in which the supply chain operates
• the wider society (including rural livelihoods) and
the natural environment.
The supply chain
According to Kaplinsky and Morris (2002), an
understanding of the ‘value chain’ involves obtaining
information, over time, on:
• gross output and net output (gross output less input
costs) values
• physical and human resource flows along the chain
• employment (including disaggregation by gender,
ethnicity and skills, as appropriate), sales
destination and concentration among buyers, and
imports/exports.
Net output can also be considered as the value
added, and can be calculated for each stage in the
supply chain. The distribution of this added value
among the participants in each link of the chain is
also crucial — perhaps one trader handles the bulk of
the product, for example. Such profits are related to
barrier to entry at that stage of the chain — higher
barriers lead to less competition and greater profits.
Trends over time in volumes, value added and profits
of the participants are important.
The market
The market for a particular good may be composed
of several distinct supply chains. Over time, this is
becoming clearer as vertical coordination increases
and each retail outlet is associated with preferred sup-
pliers governed by long-term relationships. If one
chain improves its performance through a particular
innovation, this can lead to negative consequences
for other managed supply chains operating the same
market, and for participants who do not form part of
any integrated chain. As vertical coordination
spreads though chains operating in a particular
market subsector, there is potential for:
• marginalisation of those participants who remain
outside the integration process
• relative differences in market share, profits and
employment potential among the different chains.
This leads to the topic of industrial organisation,
especially the relationships between market structure
and conduct (strategic behaviour) and enterprise per-
formance, and the analysis of market power.
Market structure affects competitiveness and
market power and can be understood through infor-
mation obtained on:
• number and size of enterprises in the market, and
the market concentration ratio (the proportion of
sales, value added, employment etc. due to the
largest three, four or five firms)
• social networks between and within enterprises
• degree of product differentiation — something that
makes substitution of other products more
difficult, and thus increases concentration
• degree of vertical and horizontal integration
• barriers to entry of new firms or chains into the
market
• barriers to exit — these are especially important in
agriculture and lead to output levels that cause the
market equilibrium to fall below the cost of
production for many producers. Smallholder
coffee production is a good example
• economies of scale and scope (making more than
one product from a particular process, e.g. fruit
processing) — these greatly influence enterprise
size.
Market conduct (or behaviour) is important, espe-
cially under conditions of imperfect competition, as
occur in vertically coordinated market situations. In
such chains, the locus of decision-making in these
areas is a key indicator of market power. Market
conduct is essentially the balance between competi-
tive and cooperative behaviours:
• competitive behaviours — pricing policies, levels
of output, product designs, sales and promotion
• cooperative behaviours — processes of interaction
and coordination of policies between competing
sellers, influenced by numbers of enterprises in the
market, product and cost homogeneity,
substitution possibilities, and frequency of orders.
These are both affected by industrial and competi-
tion policies and their enforcement.
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Market performance, the outcome of structure and
conduct, is measured through:
• levels of technical efficiency (processes) and
allocative efficiency (inputs, resource use)
• capacity utilisation
• innovation processes and incentives (for cost
reduction, product improvement and consumer
satisfaction).
This section provides a brief overview of the dif-
ferent aspects of the market for a particular good that
may be affected by the operation of a coordinated
supply chain. But the impacts of these chains go
beyond any specific market to include effects on
society and the environment in general.
The wider society and environment
Livelihoods of rural chain participants
In rural areas, the income and other benefits
derived from involvement in any particular supply
chain (as raw material/produce producer, small proc-
essor etc.) frequently constitute one of several com-
ponents of household livelihood. Other components
may be crop production, livestock raising, day labour
for other farmers, off-farm employment and so on.
Livelihood strategies can also be seasonal;
responding to crop harvest and processing times.
In rural Asia, changes in a particular supply chain
may impact on other livelihood options. If the chain
becomes more competitive and demand for produce
and processed products increases, this may increase
the need for resources and time dedicated to that
supply chain, and thus decrease the potential for
deriving benefits from other livelihood options. The
inability or unwillingness to forgo these options can
also be a constraint to supply-chain growth. Thus, the
benefit of improved supply-chain performance at the
level of individual participants needs to be evaluated
from a holistic livelihoods perspective, rather than
just calculating benefits derived from chain partici-
pation itself.
An example of this can be found in Dong Lieu.
Although root crop starch processing is a major
source of livelihood (49% of income), the production
of pigs using processing by-product as a feed is
almost as important (45% of income). Improving the
starch extraction efficiency of the process would
enhance the technical efficiency of the starch chain,
and hence its performance, but would impact nega-
tively on the pig production system — by reducing
the feed value of the by-product that is fed to the pigs.
An improvement of one component of rural liveli-
hoods thus has a potentially negative impact on
another equally important source of income. Starch
processors have not prioritised improving starch
extraction rates as an objective, focusing more on
improving process efficiency to reduce time dedi-
cated to the production of starch, and reducing pollu-
tion (Peters et al. 2002).
Other impacts on the rural economy and the
environment
Supply-chain performance also affects demand for
rural services, and thus the income and livelihoods of
people who provide them. These backward linkages
to such services as input supply (fertiliser, animal
feed, technical services, accounting services) serve to
stimulate rural employment in general. Increased
incomes from direct chain participants and from
these service providers can also enter the rural
economy through forward linkages, as these people
spend their incomes locally on other, unrelated goods
and services. The opposite impact, where small pro-
ducers are marginalised from supply chains as ver-
tical coordination proceeds, will have knock-on
effects for the rural economy in general unless other
employment or income-generation opportunities
emerge to replace them. Migration to urban areas is
another option.
Improved chain performance may result in
changes in farm practices and land-use patterns that
impact on the sustainability of agricultural systems.
If enhanced efficiency, as mandated by contractual
arrangements, is derived from more intensive pro-
duction practices, and a greater percentage of land
area is devoted to a particular crop/commodity (i.e.
replacement of multi- by mono-cropping) the long-
term environmental impacts need to be assessed.
Equally, if food quality and safety assurance prac-
tices control abuses of pesticides, these environ-
mental benefits are positive outcomes that need to be
included in any chain analysis.
Added-value processing often results in pollution
from wastes and by-products. Improved technical
efficiency, scale-up and capital investment may
reduce this, and provide opportunities for converting
these low-value outputs into raw materials for other
value-added products (e.g. animal feed). Both envi-
ronmental impacts and positive income-generation
opportunities should thus be considered.
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Urban effects
Market conduct — especially pricing policy and
competitive behaviour — will play a great role in
determining whether urban consumers benefit from
improved supply-chain efficiency, or whether these
benefits are captured by chain participants (espe-
cially retail chains). The potential certainly exists for
urban consumers to benefit greatly from more effi-
cient supply-chain management — production prac-
tices, distribution logistics, procurement — in terms
of year-round product availability, product price, and
also through enhanced product quality and safety.
Employment will also be generated through these
activities. Indeed, quantitative financial benefits to
individual consumers need only be fractional in order
to generate very significant benefits for urban popu-
lations in general.
However, as concentration advances at the retail
level to approach the degree seen in the EU, for
example, the potential for anti-competitive arrange-
ments between chains may occur — to capture profits
from enhanced efficiency rather than pass them on to
consumers through lower prices, especially if compe-
tition law is weak or poorly enforced for regional or
multinational retail chains.
How? Mechanisms for Enhancing
Positive Developmental Outcomes
Current trends in agri-food chains and markets across
Asia are tending to marginalise small farmers and
processors. The same phenomenon that has already
occurred in the EU and USA of increased retailer
concentration and market power, combined with ver-
tical coordination of supply chains, is making it dif-
ficult for small-scale actors to remain major
participants in these chains. Supply-chain improve-
ments run the risk of benefiting mainly urban retail
chains and their rural agents, together (under favour-
able competitive market conditions) with urban con-
sumers, rather than rural producers and processors.
This is true for chains focused on both national and
international markets.
Is this process largely inevitable? Are there any
mechanisms that will enable small-scale chain partic-
ipants to maintain or increase their level of activity in
such chains as they develop over time?
This section will review some options, based on
different levels of intervention:
• macro or policy level
• meso or institutional level
• micro or individual enterprise/household level.
Policy level
Since this meeting discussed policy in another ses-
sion, this paper highlights the importance of indus-
trial and competition (anti-trust) policy in ensuring a
truly competitive market that limits the potential of
chain participants with market power to capture
excessive rent to the detriment of other chain partic-
ipants and wider society.
Other relevant policies are:
• credit policy, especially for capital investment by
small-scale enterprises — the lack of collateral and
formal legal status can be a major barrier to
investment and upgrading of equipment and
practices
• trade policy — especially subsidies and tariffs for
particular subsectors and products that can distort
rational decision-making
• research and development (R&D) policy,
especially the degree to which public-sector
agencies align their priorities with the small-scale
agricultural sector, and understand the need to re-
orient both their clients and their own organisation
towards market-based decision-making and
priority-setting
• food safety and quality standards and regulations.
Institutional level
Organisational innovation is critical for rural pro-
ducers and processors, aiming to reduce transaction
costs involved in linking with vertically integrated
supply chains. This involves community-level plan-
ning for production (volumes and year-round
supply) and negotiation of contractual agreements
with other chain actors. Benefits can also be found
for the organised supply of inputs and other services
(veterinary, technical assistance). Traditionally,
farmer cooperatives have attempted, with mixed
success, to accomplish these tasks. Another
approach, using informal intermediaries (traders)
with such experience, is another an option and may
be especially valuable if the intermediary also
comes from the same rural community, so that trust
is easier to establish.
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Micro level
Another alternative is to prioritise and develop
supply chains that do not link to concentrated retail
markets, for example, to high-value, speciality prod-
ucts that depend more on quality than price. How-
ever, this involves investment in product
differentiation and marketing that is usually beyond
the capacity of rural organisations. Such services will
need to be contracted in, or the capacity for them
developed in-house. A variation of this is to develop
markets that value the quality or other attributes of
produce/products from a specific region (following
the French concept of terroir). It also helps to focus
on crops and products that, through their inherent
production characteristics, are not amenable to econ-
omies of scale, e.g. where skilled labour require-
ments are high.
The process of deciding which supply chains to
develop, from the perspective of a rural community,
is one that needs much thought. It is easy to rush into
new, market-based activities, only to find the market
saturated because others are doing the same. Time
spent in selecting the best options for any given com-
munity — taking market, farmer and environmental
criteria into account — is a good investment. Meth-
odologies for this exist (e.g. Ostertag 1999).
Alternative trade supply chains
Alternative trade markets have potential to benefit
small-scale producers. Three types of alternative
trade markets exist — organic, ethical and fair trade.
Fair trade
The following definition was agreed by the Fair-
trade Labelling Organizations International (FLO
International), the International Federation for Fair
Trade (IFAT) and the European Fair Trade Associa-
tion (EFTA). Fair trade is an alternative approach to
conventional international trade. It is a trading part-
nership which aims at sustainable development for
excluded and disadvantaged producers. It seeks to do
this by providing better trading conditions, by aware-
ness raising and by campaigning.
Fair-trade goals are to:
• improve livelihoods and wellbeing of producers by
enhancing market access, producer organisations,
paying a better price, and providing continuity to
the trading relationship
• promote development opportunities for the
disadvantaged (women, indigenous peoples) and
protect children from exploitation
• raise consumer awareness
• set an example of trade partnerships
• campaign for trade rule and practice changes
• protect human rights.
Fair-trade schemes are the most attractive to small-
scale producers/processors since scale and direct par-
ticipation of the poor is one essential criterion for
accessing these markets. Fair trade differs from
standard trade in five principal ways (Traidcraft
2003). As an organisation committed to fair trade,
Traidcraft focuses on:
• trading with poor and marginalised producer
groups, helping them to develop skills and
sustainable livelihoods through the trading
relationships
• paying fair prices that cover the full cost of
production and enable a living wage and other fair
rewards to be earned by producers
• providing credit when needed to allow orders to be
fulfilled and paying premiums to be used to
provide further benefits to producer communities
• encouraging the fair treatment of all workers, and
ensuring good conditions in the workplace and
throughout the supply chain
• aiming to build up long-term relationships, rather
than looking for short-term commercial advantage.
CafeDirect is the most frequently cited example,
and is now the sixth largest brand of coffee in the UK.
In total, sales of fair-trade agri-produce — coffee,
bananas, tea, chocolate, fruit juice, cocoa, and honey
sourced from around 0.5 million producers in the
topics — exceeded USD70 million in the UK in
2001. A similar number of producers is now linked to
fair-trade coffee markets internationally (Traidcraft
2003). Key fair-trade food products can be identified
by the Fairtrade logo on their packaging. Accessing
these markets thus requires certification and contacts
with relevant organisations. Product quality is
increasingly important. Thus, while fair trade is still
only a very small proportion of the total agri-food
market, it shows high rates of growth (24% in the UK
in 2001–2002) and makes a difference to the liveli-
hoods of millions of disadvantaged producers around
the world. One point of note — in Asia, Traidcraft’s
producer partnerships are almost entirely in the small
artisan and handicraft sector, not agriculture.
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Ethical trade
Ethical trade is complementary to fair trade, and
involves working with mainstream corporate firms,
including multinationals, to ensure that they apply
best practice in their relationships with suppliers,
especially as regards labour law, e.g. exploitation of
children, paying a living wage, rights to union mem-
bership and so on. The International Labour Organi-
zation (ILO) is important in setting these standards.
Consumer pressure has been a major factor in driving
compliance with these standards.
Organic supply chains
While fair trade is still a niche market, organic
products are a USD20 billion segment of the global
agri-food market, and are heading towards a 5%
share of total sales in major developed countries, with
5–10% annual growth rates (Yussefi and Willer
2003) and a trend for the product range to expand
from fresh to processed, added-value products.
Fifteen per cent of this market is based on interna-
tionally traded goods and produce. The J apanese
market alone is over USD3 billion/year. Other major
markets in Asia are Taiwan, Hong Kong and Singa-
pore, with rapid development also occurring in major
urban centres of other countries. In Thailand, the
organic market reportedly grew by 60% in 2001
(FAO 2002). A specific feature in some countries
(Malaysia, Philippines, India) is the role of interna-
tional supermarket chains in pushing the develop-
ment of the organic sector (Yussefi and Willer 2003).
The Food and Agriculture Organization of the
United Nations/World Health Organization (FAO/
WHO) Codex Alimentarius Commission Committee
on Food Labelling has proposed Draft guidelines for
the production, processing, labelling and marketing
of organically produced foods. According to their
definition, “organic agriculture is a holistic produc-
tion management system which promotes and
enhances agro-ecosystem health, including biodiver-
sity, biological cycles, and soil biological activity. It
emphasizes the use of management practices in pref-
erence to the use of off-farm inputs, taking into
account that regional conditions require locally
adapted systems. This is accomplished by using,
where possible, agronomic, biological, and mechan-
ical methods, as opposed to using synthetic materials,
to fulfil any specific function within the system.”
This definition goes further than simply eliminating
use of artificial pesticides and fertilisers, to encom-
pass issues relating to system sustainability, biodi-
versity, soil health etc.
From small beginnings, organic produce and prod-
ucts are now undergoing ‘mainstreaming’ into many
international markets. As organic products progress
from niche to mainstream supply chains, price pre-
miums are falling and the scale of production is
increasing. Thus, ‘organic agribusiness’ — which
maintains the pesticide and chemical fertiliser-free
status (and certification) while defaulting on the
other, sustainable-systems aspects of organics (e.g.
using monocrops, not multi-cropping) — has devel-
oped. Large-scale production of organic produce is
thus a reality, and pesticide and fertiliser-free agricul-
ture is no longer an area in which small farmers have
advantages, except insofar as other sustainable pro-
duction criteria are valued in the marketplace.
Two possible entry points exist for the develop-
ment of organic agriculture in Asia, according to
FAO (2002):
• input-intensive production systems, where yield
has reached a plateau and environmental damage
from excessive application of fertilisers and
pesticides is apparent
• resource-poor smallholders, who have never used
artificial fertilisers or pesticides (organic by
poverty), making the transition to organic
certification faster and lower-cost than for other
producers, and offering potential for over 200%
yield increases.
The latter of these two situations should provide
real incentives for supply chains actively seeking to
procure organic produce to invest in developing a
relationship with these small-scale producers, but
only if they:
• can be organised, to reduce the transaction costs of
maintaining a commercial relationship
• produce reliable, good-quality produce —
something that requires support services to provide
technical assistance, credit and so on.
Certification costs are a major constraint for these
small-scale producers. These costs can be reduced by
development of group schemes that divide the cost
among members of associations, and also by appro-
priate local (low-cost) certification services that are
affiliated with and recognised by international
bodies. This latter option has made progress in Thai-
land, for example (Organic Agriculture Certification
Thailand), but not yet in the Philippines.
Scope for small-scale production of organic
produce also exists in:
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• local markets, usually not requiring certification
• high-value outlets in major urban centres (e.g.
restaurants, high-income sector box schemes)
• supply chains that combine fair-trade and organic-
production entry criteria.
Methodology
The methodology through which interventions are
made to enhance chain innovation is important. At
the International Centre for Tropical Agriculture
(CIAT; Centro Internacional de Agricultura Trop-
ical), the starting point is not a particular chain, but
the rural community for which benefits are sought.
‘Working groups’ are formed in each community,
comprising local organisations (e.g. government,
non-governmental organisations (NGOs), farmers’
organisations) interested in agro-enterprise develop-
ment. These groups take responsibility for facili-
tating change at the local level. The first joint activity
is selecting the best options for supply-chain devel-
opment — a process that combines market informa-
tion and contacts, producer preferences and
environmental criteria. Once a ‘basket of options’ has
been identified, supply-chain development can
proceed for each one.
Processes that are genuinely participatory,
involving all chain actors, will allow scope for inno-
vations that are relevant for smaller-scale rural
actors. All participants can identify critical points in
the chain where problems (or opportunities) are
located, and use this information to generate solu-
tions. Building trust among chain participants and
good communication are critical. Traditional supply
chains are usually characterised by very limited com-
munication among actors in different links of the
chain — something that results in misunderstandings
and mistrust. This process can therefore benefit from
neutral facilitation. The solutions generated through
this process can translate into ‘projects’ that chain
participants can themselves implement, with external
assistance as needed, to improve the chain. These
may be technology, organisation or investment
related. This process also requires detailed informa-
tion on the chain (chain mapping) as a basis for iden-
tifying critical points and solutions, which can be
obtained in two ways:
• through formal surveys, by external agents — the
information is analysed and presented to chain
actors
• through group participatory exercises. Different
types of actors can generate one map together, or
separate maps can be produced by (for example)
producers and traders — this approach allows each
party to see the chain as perceived by others.
More information on these methodologies,
together with detailed examples from Latin America
and Southeast Asia, are given in the companion paper
that was presented at the 21
st
ASEAN/3
rd
APEC
Seminar on Postharvest Technology (Wheatley et al.
2003), and can also be obtained from the CIAT
Agroenterprise Project (see <www.ciat.cgiar.org>).
Examples
These approaches to supply-chain improvement
have been used by CIAT’s Agroenterprise Project,
mainly in Latin America, but more recently in South-
east Asia. One example from Latin America (Yorito,
Honduras) and one from Asia (Dong Lieu, Vietnam)
are briefly presented here. In addition, during the
recent Rural Agro-enterprise Development Training
Course (CIAT-PHTI-SEARCA-UPWARD, April
2003) in Ho Chi Minh City, the participants were
given an opportunity to trial the methodology during
a two-day field visit to agri-food supply chains in
Ninh Thuan Province. They were divided into three
groups to focus on different chains (grapes, sheep and
goats, and cotton), with the production component of
each chain based in a different district. During this
exercise, participants interacted with chain actors
(producers, processors, traders etc.) and support serv-
ices and agencies (including local government).
Basic chain mapping was undertaken (from the per-
spective of different actors, in most cases), critical
points were identified, and solutions to the problems
developed with the chain participants. From this an
action plan was developed, that involved:
• research and development
• short-, medium- and long-term actions
• actions that can be implemented using local
resources and cooperation between chain
members, plus those requiring external assistance.
Yorito, Honduras
In Yorito, where CIAT works with a local consor-
tium of farmer organisations (CLODEST), the coffee
supply chain was prioritised for attention, based on
the potential to develop niche and alternative markets
for a high-quality product. The existing chain was
mapped using participatory methods that involved
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122
producers and processors in one rural community.
Based on this, critical points were identified, and
communication between chain members increased
(especially between the producer association and
traders).
One short-term outcome of this was a negotiation
with existing traders of higher prices for coffee
beans. A medium-term outcome was the decision by
the farmers’ association to seek organic certification
for its members (about 45 households). This was
obtained in early 2003. As a result, the main local
trader is now interested in working with the group to
access high-value markets, in which he will not only
provide marketing services, but also technical assist-
ance and credit for capital investments needed to
improve and standardise quality. No formal ‘project’
exists to achieve this, but it is nonetheless an outcome
of a process that improved communication and trust
between producers and the trader.
Dong Lieu, Vietnam
In Dong Lieu, a formal survey of the starch cluster
of enterprises was made in 2002. This involved inter-
views with representative samples of all the different
types of chain participants (Peters et al. 2002). Anal-
ysis of these results indicated a number of critical
problems related to space limitations, disorganisation
of procurement, and pollution. These were presented
to a meeting of all the enterprises, together with local
authorities. From this, the idea emerged to organise a
study tour of a larger-scale root-crop starch cluster in
southern Vietnam. Representatives selected for this
mission were a processor, an equipment maker and a
local government official. The visit was highly suc-
cessful. The group reported back to the community in
Dong Lieu, and a strategy for the development of the
whole cluster has now been developed, based on
practical solutions to the problems identified earlier.
These solutions are basically organisational in
nature, and involve re-ordering the territorial layout
of the fresh root market in relation to individual
processing households, and of the arrangement of
processing operations at the household level, to
reduce space limitations and improve waste and by-
product management. Equipment modifications are
also in process. A further study tour to China is also
planned. One lesson learned from this participatory
process is that identification of key actors (change
agents) within the supply chain is critical. In this
case, through working with a few individual equip-
ment makers and traders (who themselves are not
among the poor), it has been possible to facilitate the
introduction of innovations (identified by partici-
pants, not experts) that can potentially benefit hun-
dreds of poor processing households and (through
linkages to crop production) thousands of cassava
and canna producers.
Conclusions
While current trends in the agri-food sector are not
favourable for the sustainable development of the
Asian small farm sector in general, several options
exist that can counteract this, including policy devel-
opment, institutional innovations, and expansion of
participation in alternative trade supply chains.
A clear understanding of supply chains is needed,
including who participates and is affected by them,
how the economic and other benefits and costs of par-
ticipation are apportioned among these actors, and
how chain development affects other livelihood
activities and the wider environment.
Participatory methods that allow the perceptions of
different actors to emerge, and that facilitate commu-
nication, information exchange and building of trust
(social capital) among chain members are essential
for smallholder farmers to integrate equitably into
these more managed supply chains.
References
FAO (Food and Agriculture Organization of the United
Nations) 2002. Report of the Regional Workshop on
Exploiting the Potential of Organic Agriculture for Rural
Poverty Alleviation in Asia–Pacific, 26–29 November
2001. Rome, FAO.
Hughes, D. 1994. Breaking with tradition: building
partnerships and alliances in the European food industry.
Wye, UK, Wye College Press, 218 p.
J ipleechep, S. 2002. Who is who? Bangkok Post article. On
the Internet: <www.siamfuture.com>.
Kaplinsky, R. and Morris, M. 2002. A handbook for value
chain research. Canada, International Development
Research Centre (IDRC), 105 p. Available on the Internet:
<www.ids.ac.uk/ids/global/pdfs/vchnov01.pdf>.
Morris, S. 2003. Shops unlikely to stock GM foods. The
Guardian, 16 J uly 2003.
Peters, D., Wheatley, C., Prain, G., Slaats, J . and Best, R.
2002. Improving agroenterprise clusters: root crop
processing and piglet production clusters in peri-urban
Hanoi. Presented at the Symposium on Local Agrifood
Systems: products, enterprises and the local dynamics,
16–18 October 2002. Montpellier, France, Centre de
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edited by G.I. Johnson and P.J. Hofman
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(printed version published in 2004)
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Coopération Internationale en Recherche Agronomique
pour le Developpement (CIRAD), 21 p.
Ostertag, C.F. 1999. Manual for market opportunity
identification with small farmers. Hillsides ecosystem
training manual No. 7. Cali, Colombia, Centro
Internacional de Agricultura Tropical (CIAT;
International Centre for Tropical Agriculture).
Reardon, T., Timmer, C.P., Barrett, C.P. and Berdegue, J .
2003. The rise of supermarkets in Africa, Asia and Latin
America. American J ournal of Agricultural Economics,
85(5) (in press).
Traidcraft 2003. Traidcraft: fighting poverty through trade.
On the Internet:<www.traidcraft.co.uk>.
Wheatley, C., Best, R. and Peters, D. 2003. Supply chain
management and agro-enterprise development: CIAT’s
approach in SE Asia. Paper presented at the 21
st
ASEAN/
3
rd
APEC Post-Harvest Technology Seminar, Bali,
Indonesia, 23–26 August 2003.
Yussefi, M. and Willer, H. 2003. World of organic
agriculture 2003 — statistics and future prospects.
International Federation of Organic Agriculture
Movements (IFOAM). On the Internet:
<www.ifoam.org>.
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124
Farmers’ Misconceptions about Quality and
Customers’ Preferences: Contributing
Inefficiencies to the Vegetable Supply Chain in
Southern Mindanao
Sylvia Concepcion,* Marilou Montiflor,* L.T. Hualda,* L.R. Migalbin,*
L.N. Digal,* E.T. Rasco,* N.M. Manalili,
†
M.J. McGregor,
§
P.J. Batt,
§
R. Murray-Prior
§
and F.M. Rola-Rubzen
§
Abstract
A supply-chain framework encourages producers to ensure that their downstream customers are happy and
satisfied. A study to determine vegetable growers’ perceptions of vegetable quality and customer preferences
was undertaken in Kapatagan, Digos City in southern Mindanao in the Philippines. Results revealed
misconceptions about the nature of the demand for their products, reflecting the low farmers’ awareness of
their market’s needs and putting these farmers at a disadvantage. Their divergent, often erroneous, ideas and
concepts about vegetable quality and the market contributed to waste and inefficiency in the supply chain.
Correct information, a vital factor in maintaining balance and efficiency along the chain, is a rare privilege
for the Kapatagan farmers. They do not have direct and valid information about market preferences and rely
on the information provided to them by intermediaries in the chain. Generally price-takers, farmers produce on
the basis of current availability of inputs and not on market demand. They are generally unaware of the
characteristics of the market for temperate vegetables.
This paper discusses farmers’ perceptions of vegetable quality and customers’ preferences regarding
attributes of quality vegetables, such as variety, size and shape, colour, taste, shelf life, and freedom from pests,
diseases, physical damage and defects.
This study is a part of a research project which aims
to understand the systems that small farmers in
southern Mindanao employ to produce and market
selected temperate fresh vegetables and which aims
to examine the efficiency of the agribusiness supply
chain. There are numerous factors affecting the effi-
ciency of the agribusiness supply chain for temperate
vegetables, and this paper discusses only the extent to
which farmers know (or do not know) their cus-
tomers’ preferences regarding the desired quality
attributes for fresh vegetables. The differences in the
perceptions of the farmers and their customers help
to explain why farmers are not able to optimise the
return from their produce. This paper also discusses
perceptions of the farmers and their marketing inter-
mediaries on the attributes of quality vegetables.
* University of the Philippines – Mindanao, Anda Campus,
Davao City, Mindanao, Philippines.
Email: <[email protected]>(S. Concepcion).
†
SEAMEO Regional Center for Graduate Study and
Research in Agriculture (SEARCA), Los Baños, Laguna
4031, Philippines.
§
Curtin University of Technology, GPO Box U1987,
Perth, Western Australia 6845, Australia.
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125
Customers’ perceptions of the quality of a product
or service and their overall satisfaction have some
observable indicators. The terms customer satisfac-
tion and perception of quality are labels used to sum-
marise a set of observable actions related to the
product and/or service (Govindasamy 1997).
Opara (1999) defined quality of agricultural prod-
ucts, as “involving all of the attributes, characteris-
tics, and features of a product that the buyer,
purchaser, consumer, or user expects”, and stated that
quality assurance “involves those planned activities
designed to consistently satisfy customer expecta-
tions by defining objectives, planning activities, and
controlling variability”.
One popular view is that quality is intangible,
similar to truth, beauty, and goodness (Burrill and
Ledolter 1999). It is also seen as a ‘feature of excel-
lence’ or an ideal (Saunders 1997; APICS Dic-
tionary; Burrill and Ledolter 1999). On the other
hand, quality is seen as a combination of characteris-
tics that are critical in establishing a product’s con-
sumer acceptability, including fitness of use,
freedom from deficiencies and provision of satisfac-
tion (Satin 1997; Saunders 1997; J uran and Gryna
1998, cited in Saunders 1997; APICS Dictionary,
cited in Fredendall and Hill 2001).
The food industry defines quality as an integrated
measure of purity, flavour, texture, colour, appear-
ance, and workmanship (Satin 1997). This is an idea
similar to total quality. “The concept of total quality,
however, widens attention to include all aspects of
the offering, including service and delivery time”
(Saunders 1997, p. 187).
Marketers define quality as value or a consumer’s
perception of the worth of the product in relation to
price (Satin 1997; Saunders 1997, pp. 184–187;
APICS Dictionary, cited in Fredendall and Hill
2001). Quality also refers to a product’s consistent
adherence or conformance to a standard, specifica-
tion or requirement (Satin 1997; Saunders 1997;
Crosby 1979, cited in Burrill and Ledolter 1999; Fre-
dendall and Hill 2001).
Collins (1994) believed that there are contradic-
tory perceptions of quality due to differences in back-
ground and training. Hill and Chung (1995) stressed
that a person’s concept of quality depends on her/his
approach to that understanding.
The differences in perceptions of quality between
farmers and their marketing intermediaries con-
tribute to market inefficiency. In southern Mindanao,
market orientation among vegetable growers still
needs to be developed in order for the marketing
system to become more responsive to customers’
needs. Market efficiency includes the aspects of
quality, quantity and price of goods and the cost of
performing marketing functions. Although efforts
have been made to promote market-orientated
approaches to production, to enhance markets and
marketing activities and to provide policy support,
problems with efficiency, such as high production
losses and product rejects still persist in developing
countries like the Philippines (Masajo-Manalili
2000).
Methodology
Data for this paper came from a research project
1
funded by the Australian Centre for International
Agricultural Research (ACIAR) and various data
gathering methods were used. In Kapatagan, Digos
Citiy, southern Mindanao, key informants were inter-
viewed, focus group discussions were conducted
among farmers, agents, and storage operators, and
surveys of households were undertaken using purpo-
sive sampling methods. There were three sets of
interview schedules prepared for the household
survey: crop production, social organisation and mar-
keting. The majority of the data used for this paper
came from the marketing survey. A total of 207
households were interviewed, accounting for 12.2%
of the total households in Kapatagan.
Meanwhile, a downstream survey was conducted
based on the names of the buyers mentioned by the
farmers in the household survey. There were 47
respondents interviewed. Additional information
from other players in the vegetable supply chain was
taken from interviews with farmers from other tem-
perate vegetable areas in southern Mindanao, central
Mindanao, and northern Mindanao. Wholesalers
from Divisoria, the largest wholesale market in
Metro Manila, were also interviewed, as well as
supermarket representatives in Davao City and
Metro Manila.
1
ASEM/2000/101: “Improving the Efficiency of the
Agribusiness Supply Chain and Quality Management for
Small Agricultural Producers in Mindanao.”
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The Project Site
Barangay
2
Kapatagan was created on 10 May 1971
under Republic Act No. 6210, despite the fact that it
was declared as a National Park in 1932 by the Com-
monwealth Government. Logging operations started
in the 1960s and continued to proliferate. When the
logging workers started bringing their families, set-
tlement areas were established. After the logging
companies ceased operations, some of the workers
remained. They started utilising the area for agricul-
tural purposes, particularly for coffee plantations.
Residents from nearby towns started coming because
of the promise of fertile, productive and vast lands in
Kapatagan. Modes of transportation both for the
people and the products include horses, motorcycles,
jeepneys, tricycles, trucks, and L300 vans.
As of J anuary 2002, the total population of Kapat-
agan was 8193 with 1694 households. Most of the
constituents were farmers (80%), while others were
businessmen (15%), and professionals (5%).
The name Kapatagan means ‘plains’ or ‘flat
lands’. However, its topography ranges from level to
gently sloping terrain (0% to 8%), strongly sloping
(18% to 20%) and hilly areas (30% to 50%). The
level terrain is in the centre of the Barangay.
According to theBarangay records, its land use as of
2001 was 2500 ha or 37.45% of its 6675 ha total land
area. It lies at the foot of Mt Apo
3
at an elevation of
around 1100–1600 m above sea level.
The climate is cool at 22–25°C, with no pro-
nounced maximum rain period or long dry season.
The prevalent wind direction is north-east to south-
west throughout the year (Mercado et al. 2000). It is
safe from typhoons because it lies outside the
typhoon belt and is further protected by its moun-
tainous borders.
Kapatagan is an ideal place for planting temperate
vegetables (cabbage, tomato, bell pepper, Chinese
cabbage, Kentucky bean, carrot), coffee, root crops
and other agricultural products. Table 1 shows the
primary crops planted by Kapatagan farmers in the
first quarter of 2002. Most farmers in Kapatagan
(38.2%) planted cabbages. Tomatoes (16.9%) and
potatoes (16.4%) follow as the next most-planted
crops in the area. Other crops planted in 2002 were
chayote, bell pepper, onion and eggplant. Generally,
farmers from Kapatagan believed that cabbage was the
most saleable vegetable in retail. While 31% tried to
sell directly to retail markets, only 5% continued to do
so. The rest sold through agents and wholesalers. The
farmers, locally known as planters, brought their prod-
ucts from their farms or ‘gardens’ to the Trading Post,
through the karyador.
4
Marketing was done through
the ahente or agent who received the produce from the
farmers at the Trading Post in Kapatagan. Then the
ahente passed on the produce to the wholesale buyers
with a PHP1–2 per kilogram profit margin. Buyers
mostly decided the price, while farmers were generally
price-takers. In some cases, buyers pre-ordered some
vegetables through the agents, who obtained the
supply from various farms. Negotiations for the price
took place during the day. Most of the vegetables were
sold wholesale within a day, particularly in the
morning. There were also owners and operators of
bodegas or storage areas who bought the vegetables,
especially potatoes and carrots.
Vegetables were marketed mainly to the sur-
rounding cities, including Digos City, Kidapawan
City, Cotabato City and Davao City. Other Mindanao
buyers came from Cagayan de Oro City and Surigao
and Agusan provinces. There were also some buyers
from the Visayas, such as Tacloban City, Iloilo City
and Cebu City.
Most transactions happened during the market
days: Monday, Thursday, Saturday (Kidapawan
City, Cotabato City, Surigao City, Tacloban City,
Iloilo City, Cebu City etc.); every day for Davao City
and Digos City.
2
Village; the lowest local government unit in the
Philippines.
3
Mt Apo is the highest peak in the Philippines with an
elevation of 2954 m (9691 feet) above sea level.
Table 1. Primary crops planted in Kapatagan.
Crop No. of farmers
planting
Percentage
Cabbage
Tomato
Potato
Carrot
Chinese cabbage
Kentucky bean
Other
Total
79
35
34
27
11
6
15
207
38.2
16.9
16.4
13.0
5.3
2.9
7.2
100
Source: Survey of Kapatagan farmers, 2002.
4
People who transport vegetables on horses’ backs.
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Some Issues in the Kapatagan Supply
Chain
Several issues became apparent in the Kapatagan
supply chain. First, the sustainability of farms in
Kapatagan was seriously challenged because of inse-
cure land ownership. Farmers paid taxes on the use of
the land but did not have title to the land because
Kapatagan is part of a national park. Different gov-
ernment agencies had different ideas of whether the
farmers should stay or not.
Second, the production of quality vegetables
begins with the agronomic practices of the farmers.
In Kapatagan, traditional farming was used and
farmers generally had poor agronomic practices,
basically because of a lack of technical knowledge or
lack of finance for the proper farm inputs.
Third, farmers had very little market knowledge
and relied mostly on what their ahentes or immediate
buyers said about the market. Most of them saw their
market as the person who took the goods off their
hands, and rarely looked beyond this buyer.
Fourth, farmers were generally price-takers. They
produced based on current availability of inputs and
not on market demand. Since they did not have any
storage or sophisticated postharvest facilities, espe-
cially for the leafy vegetables, they disposed of their
products at any available price.
Fifth, Kapatagan had very poor road conditions
and rough terrain. Until 2002, many of the roads
leading to the farms were unpaved. Barangay Kapat-
agan received access to electricity only in 2000. Res-
idents had no access to irrigation on the farms, nor
plumbing in their homes.
Sixth, different stakeholders in the supply chain
did not see each other as partners but as persons who
need to be watched. While there was some degree of
trust among several farmers and their buyers, other
farmers felt that the traders may not be giving them
the right price information (Batt et al. 2003).
These issues are typical in traditional supply
chains of agricultural products in developing coun-
tries. Supply chains in developed economies are
demand-driven, with ultimate consumers seeking
benefits such as health and nutrition, safety, quality
and convenience. In developing countries, traditional
chains dominate, driven by traders who act as finan-
ciers for farmers at the same time. Examples of these
are goods delivered to wet markets by viajeros (trav-
ellers). However, some chains in developing coun-
tries have begun to improve — brought about by
increasing urbanisation, globalisation, changing con-
sumer preferences, and agribusiness consolidation.
Examples of these are the exports of banana and tuna
and some agribusiness ventures catering to the fast-
food market.
Non-traditional vegetable supply chains in
northern Mindanao supply the high-end market (high
quality, high price). These are managed chains where
small farm holders collaborate through marketing
clusters.
To help improve the Kapatagan supply chain for
temperate vegetables, members of the chain need to
be market-oriented. This market orientation will lead
to greater efficiency in response to customer prefer-
ences and lead to more competitiveness.
To begin to be market-oriented, farmers need to
know what their customers want. In this study,
farmers’ perceptions of their customers’ preferences
or quality criteria are examined and compared with
what their customers actually say they want.
Findings and Discussion
Desired attributes of vegetables according to
farmers
Attributes to define quality in vegetables used in
the survey came from the farmers themselves during
the initial visits to the village. In preliminary face-to-
face interviews with the farmers, they were asked to
describe, in their own words and language, what
quality in vegetables meant. Some would simply
describe features of vegetables in general, while
others would first state what vegetable they would
like to describe. Those who proceeded to describe
without qualifying the vegetable would give general
comments like ‘that which is not rotten’ (kanang dili
lata), or ‘that which has a few worms’. These initial
descriptions gave us a general sense of the level of
quality awareness of the farmers of Kapatagan. They
were primarily concerned only with wilting or fresh-
ness and pest infestation of vegetables.
Farmers described the vegetables they grew using
descriptors in the vernacular and these descriptors
were translated into English. Other attributes from
secondary materials that define vegetable quality
were added to the list. This list of attributes was used
in the survey. Eleven attributes were used: shape,
size, weight, maturity, colour, freedom from pests, no
or little physical defect, no or little mechanical injury,
cleanliness, freshness, and firmness. Farmers were
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128
asked to rank the 11 attributes of quality in vegetables
according to the order of importance, 1 being the
most important and 11 the least important.
The attributes of vegetables that were important
from the perspective of the farmers were those over
which they had some degree of control, like maturity
at harvest and freedom from pests (Table 2). The
farmers decided when to harvest their crops and con-
trolled the quality of their produce by preventing
insect infestation through proper cultural practices.
Maturity referred to the appropriateness of the matu-
rity of the product at the time of harvest (Lizada
2000). This seemed to be an important quality
attribute for the farmers for almost all the crops.
There were also respondents who said that quality
vegetables were those that were free of pests and dis-
eases. During the in-depth interviews with farmers,
some noted that vegetables with a few insects were of
good quality. Farmers referred to the vegetables as
naay ulod (with worms — since the insects were
observed in the larval stage) and tung naay buslot
(those with holes) for leafy vegetables. They
explained that the presence of these insects was proof
of food safety. If an insect survived, the vegetable
was perceived to be free from chemicals. These
farmers, however, clarified that there must only be
one or two of such pests in each head of cabbage or
lettuce. Beyond that, it was considered an infestation.
Size and cleanliness of the produce affected the
price they received for their produce, hence farmers
tended to give these quality attributes higher rank-
ings. Cleanliness meant that the vegetable was free
from any dirt or stains. In the survey, most of the
farmers who planted cabbages and carrots said these
two vegetables should be clean to be of good quality.
Farmers gave very low ranks to attributes like no or
little mechanical injury, especially for crops like
carrot and Chinese cabbage. Mechanical injuries
were those caused by careless handling, packaging or
storage, such as damage caused by impact, pressure
or compression, or vibration. This damage appeared
as abrasions (especially in potatoes and tomatoes)
bruising, distortions, cracks, cuts, punctures, skin
breaks, skinning, or splitting (Lizada 1993). Many of
the farmers did not give this quality attribute a high
ranking. This may be due to the fact that the farm-to-
market roads from Kapatagan to the retail markets
were very bad and farmers felt powerless to prevent
the mechanical damage.
There was a standard practice in Kapatagan of
deducting 30% from the volume weight of leafy veg-
etables to allow risk and shrinkage, locally known as
reseko. Shrinkage and other forms of mechanical
injury affected the quality of leafy vegetables.
In Kapatagan, vegetables were packed in pink
sacks, except for tomatoes, which were packed in
crates. The sacks did not provide any protection
against mechanical injuries, but did allow flexibility
in the amount of produce tightly packed in. While
packaging in sacks induced more mechanical
damage, farmers were paid by the weight and size of
the produce as well as the physical appearance.
Farmers apparently did not perceive mechanical inju-
ries during harvest or transit as variables affecting
vegetable quality.
Overall, farmers in Kapatagan believed that
quality was reflected in the physical appearance of
vegetables. In an interview with a farmer from Mar-
ilog, another village in southern Mindanao, he
believed that high-quality tomatoes should be good
to look at — large and shiny. The emphasis on the
physical characteristics of vegetables was the same
for Marilog as it was in Kapatagan. The Marilog
farmer also believed that cabbages and other leafy
vegetables like lettuce should not be completely free
of pests. The visibility of a few pests, he said, was
proof that the vegetable had just the appropriate
amount of chemicals.
Very few farmers in Kapatagan mentioned the
nutritional content (salubrity) of their crops as a
descriptor of quality. Most of their definitions of the
quality of their produce rested on the physical char-
Table 2. Farmer rankings of desired attributes of
vegetables (where 1 =most important and
11 =least important).
Attribute Mean Standard
deviation
Shape
Size
Weight
Maturity
Colour
Freedom from pests
No or little physical defect
No or little mechanical injury
Cleanliness
Freshness
Firmness
6.06
5.34
5.78
4.54
6.49
5.03
6.03
6.81
5.35
5.75
6.45
0.51
0.76
1.01
0.82
1.41
0.69
1.08
0.70
0.98
0.63
0.89
Source: Survey of Kapatagan farmers, 2002.
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(printed version published in 2004)
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acteristics of the product — something that could be
validated with their eyes, like shape and size. Taste
was also mentioned only after some prodding. While
some farmers related quality to price, this construct
did not become part of the definitions that the farmers
used to define quality.
Desired attributes of vegetables according to
downstream customers
There were 47 respondents who came from the list
of buyers identified by the farmers during the house-
hold survey. Most of these buyers were 20–59 years
old. Around 23% belonged to 35–39 age group, while
2% belonged to 55–59 age group, and 44.7% of the
respondents came from Kapatagan. Other buyers
were from Davao City (21.3%), Tagum City
(17.0%), Digos City (8.5%), Dujali (2.1%), General
Santos City (4.3%) and Panabo (2.1%). Almost half
of the respondents (46.9%) were wholesalers, while
others were farmers (8.5%), farmer-agents (4.3%),
agents (2.1%), retailers (34%) or food service sup-
pliers (2.1%). The majority of the respondents (83%)
primarily bought their produce from Kapatagan.
The downstream customers were asked to rank the
importance of 21 criteria in their decision to purchase
vegetables on as scale of 1 to 4 — where 1 was ‘not
at all important’ and 4 was ‘very important’.
Table 3 shows that the respondents were unani-
mous in ranking freshness, good taste, and cooking
characteristics as very important quality attributes in
choosing which vegetables to purchase. This is con-
sistent with what the farmers perceived the ultimate
customers would want — freshness and good taste.
However, while farmers believed that customers
want well-graded vegetables, the downstream cus-
tomers themselves did not assign this much impor-
tance.
Desired quantity and colour tied in second place
with mean score of 3.98. Since the respondents also
sold the products they bought, it was important for
them to have enough in quantity to supply the
demands of their downstream buyers. A good-col-
oured vegetable was also an indication of a visually
appealing, fresh and saleable vegetable. Likewise,
the immediate delivery of the products was consid-
ered to be more important than physical characteris-
tics (size, shape, freedom from pests, freedom from
physical and mechanical injury). The farmers did not
mention this attribute during the in-depth interviews.
Farmers were not aware that on-time delivery is a
quality consideration of the downstream customers.
Downstream customers gave importance to com-
petitive price but the farmers did not perceive this as
important to the ultimate customers. Filipino con-
sumers are price-sensitive (Agbayani et al. 2000) but
the farmers are not aware of this.
Comparison of farmers’ responses with
those of their customers
Table 4 shows the responses of the farmers and
downstream buyers using 13 attributes. The farmers
were asked to rank, on a scale of 1 to 6, what they
think their customers want where 1 is ‘not at all
important’ and 6 is ‘very important’. On the other
hand, the downstream buyers used a scale of 1 to 4,
where 4 is ‘very important’ to rank what they want.
Since the farmers and downstream buyers used dif-
ferent scales, the lowest common denominator (6)
Table 3. Desired attributes of vegetables as perceived
by downstream customers.
Attribute Mean Standard
deviation
Freshness
Good taste
Cooking characteristics
Desired quantity
Good colour
Well packed
Competitive price
Attractive, good-looking
produce
Immediate delivery
Firm
Good size
Good shape
Well-graded
Freedom from pest/disease
damage
Product that stores well
Desired variety
Freedom from chemical residues
Freedom from physical injury
Assortment of produce
Free of soil
Freedom from mechanical
injury
4
4
4
3.98
3.98
3.95
3.95
3.93
3.91
3.91
3.86
3.86
3.86
3.84
3.81
3.79
3.73
3.71
3.70
3.59
3.66
0
0
0
0.15
0.15
0.21
0.31
0.26
0.29
0.48
0.41
0.52
0.64
0.53
0.55
0.71
0.77
0.72
0.71
0.92
0.73
Source: Survey of market intermediaries, southern Mindanao,
2002.
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130
was derived and the responses were recomputed to
have a standard measure.
The corresponding ranks and standard deviation
were included to illustrate the different degrees of
importance given by the farmers and downstream
buyers. Although both the farmers and the buyers
ranked freshness of produce as the most important
criteria, all other attributes have different and oppo-
site rankings. Using rank correlation coefficient cal-
culations, the computed rank correlation was less
than the critical value of ? =0.01. Thus, the ranking
of the responses of the farmers was significantly dif-
ferent from what their customers say they want.
The second and third most important attributes for
the farmers were the proper grading of the produce
and having the desired size(s), respectively, while
together these were only the sixth most important for
the buyers. The second most important attribute for
the buyers was having produce available in the quan-
tities required. Unlike farmers who only transact
downstream, the buyers have to transact with
upstream (farmers, traders) and downstream
(retailers, wholesalers, institutions) customers, so
they must have enough volume of products to main-
tain their business arrangements.
Meanwhile, farmers thought that having a wide
range of produce of the desired variety was very
important for their customers. However, the down-
stream buyers ranked this attribute much lower,
therefore assigning it less importance.
The farmers put least importance on providing
produce that is competitively priced. However, the
customers considered it to be the third most impor-
tant attribute. The farmers are more concerned with
easy and early disposal of their products, since they
lack facilities for postharvest storage. The faster it
can be sold, the lesser the problem with wastage.
However, the farmers will complain later that they
got a low price for their products. Customers, on the
other hand, have to set a lower price for the products
since they will sell these products to their down-
stream buyers and they must get profit from this
transaction.
Farmers and their customers seem to be empha-
sising different aspects of vegetable quality. Farmers
have several misconceptions about what their market
wants, as manifested in Table 4, exhibiting their lack
of market awareness. There is a need to coordinate
farmer and customer product specifications so that
there is increased efficiency in the chain.
Summary
The gap in perceptions of the farmers and the down-
stream customers was manifested in the results pre-
sented. The farmers defined quality according to the
physical and biological characteristics of the vegeta-
Table 4. Comparison of the responses of farmers and downstream buyers to perceived importance of vegetable
attributes, based on responses where 1 =not at all important and 6 =very important.
a
Desired vegetable attributes Farmer Buyer
Adjusted
mean
Standard
deviation
Rank Adjusted
mean
Standard
deviation
Rank
Have fresh produce
Have produce that is appropriately graded
Have produce of desired size(s)
Have wide range of produce
Have produce that is appropriately packed
Have produce of desired variety
Have produce available in quantities required
Have produce that is free from physical injury
Can deliver produce when needed
Have produce that is free of pests and diseases
Have produce with long shelf life
Have produce that is free of chemical residues
Provide produce that is competitively priced
5.832
5.813
5.740
5.725
5.563
5.637
5.392
5.225
5.207
4.824
4.721
3.764
3.350
0.78
0.68
0.72
0.80
1.05
1.02
1.11
1.30
1.36
1.76
1.65
1.98
1.96
1
2
3
4
5
6
7
8
9
10
11
12
13
6.0
5.795
5.795
5.557
5.932
5.693
5.966
5.591
5.864
5.761
5.727
5.148
5.932
0.0
0.95
.61
1.05
0.32
1.05
0.23
1.04
0.44
0.79
0.81
1.95
0.45
1
6.5
6.5
12
3.5
10
2
11
5
8
9
13
3.5
a
Downstream buyer responses were actually given on a 1–4 scale and had to be adjusted accordingly (see text for further details).
Sources: Survey of Kapatagan households, 2002; Survey of downstream buyers, 2003.
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ACIAR Proceedings No. 119e
(printed version published in 2004)
131
bles, such as maturity, weight, size, shape, pest/
mechanical and physical damage/defects, cleanliness
and freshness. Price was also mentioned as an indi-
cator of quality. Farmers believed that the ultimate
customer would want fresh vegetables that are well
graded and taste good. They also thought that the
consumer would be concerned with physical appear-
ance, such as colour and defects caused by insect
damage.
However, the downstream customers defined
quality not only in the attributes described by the
farmers, but most especially in terms of taste, fresh-
ness, cooking characteristics, colour, timely delivery
and consistent supply. The right maturity of the veg-
etable, referring to the right timing of harvest, was
important to the farmer but not to the downstream
customers. Market intermediaries were concerned
with mechanical injuries but the farmers were not.
The market intermediaries connect the producer and
the end user so they interact with both players. They
are concerned with the delivery of goods so that they
will have a consistent supply of merchandise with the
proper assortment and in the desired varieties. Logis-
tical issues are crucial to them because they bear the
risk of carrying the inventory.
Furthermore, farmers’ misconceptions of their
customers’ criteria were emphasised when the rank-
ings of the farmers and the buyers on certain
attributes were compared.
Conclusions
Farmers use quality attributes that are within their
control — like the right maturity of the vegetable or
the freedom from pest damage. Weight is an impor-
tant attribute for farmers because it affects their earn-
ings. However, the farmers do not feel that it is within
their financial or physical power to consider other
seemingly uncontrollable quality attributes.
Many of the problems related to the quality of the
vegetables produced are due to the agronomic prac-
tices of the small farmers and the low level of their
awareness of what is important to the market. Their
primary focus is their income, which affects the sur-
vival of their family.
Improving quality in the vegetable supply chain
from Kapatagan must begin with raising the capacity
of farmers to produce quality vegetables and helping
them to understand market requirements for quality.
Their perceptions are based on their reality and their
reality is the time of harvest and the physical
attributes, which they can control. The downstream
customers, on the other hand, base their under-
standing of quality on their own reality which is the
demand of the retailers and the reliability of their
supply.
Helping both farmers and intermediaries see the
entire supply chain rather than focusing on only their
part of the chain can help to align their perceptions.
The promotion of cooperation and partnership to
sustain the entire chain will lead to improved supply-
chain efficiencies. This will mean a reorientation for
all stakeholders and capacity building for farmers to
increase their production skills and market orienta-
tion.
Recommendations
The data showed that farmers and their customers
had varying ideas on desired vegetable quality
attributes. Quality perceptions of the farmers are not
the same as the intermediaries. Farmers look at the
physical characteristics of the product but intermedi-
aries are more concerned with the consistency and
promptness of delivery. With this differing perspec-
tive, a quality system infrastructure needs to be
devised and implemented. A quality system infra-
structure is the set of programs, policies and proce-
dures aimed at defining the quality characteristics
and standards of agricultural commodities and agri-
based products, disseminating the standards to the
producers, wholesalers, traders, retailers, consolida-
tors, processors and end consumers, implementing
these standards in the concerned sectors and moni-
toring the application and adherence to these stand-
ards along the entire supply chain. The quality system
infrastructure requires that standards and quality
assurance systems be in place, with adequate incen-
tives, and communicated to farmers. Correct infor-
mation is vital in ensuring the efficiency of the chain.
With the current scenario, farmers are dependent on
the buyers and agents for information.
Quality system infrastructure also requires
increasing professionalism among farmers, traders
etc. to get the product right, and collaboration to get
the required volume. Downstream customers put
high importance on having produce available in the
quantities required. There is also a need for capacity-
building for all chain members to ensure the effi-
ciency and effectiveness of the supply chain in terms
of training, livelihood seminars, market awareness
exercises, and farmer education. Moreover, to ensure
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ACIAR Proceedings No. 119e
(printed version published in 2004)
132
efficient access to the market, the roads from farms to
markets should also be good and passable.
When the quality system infrastructure is set up,
farmers will be able to access correct information —
a vital factor in maintaining balance and efficiency
along the chain. They will have direct and valid infor-
mation about market preferences, quality standards,
training and livelihood programs. They will be aware
of the characteristics of the market for temperate veg-
etables. If the farmer gets some degree of improve-
ment from the quality system infrastructure being set
up, this will trickle down to other members along the
chain, thus creating an efficient and effective vege-
table supply chain, where all chain members benefit.
Acknowledgment
This project was funded by the Australian Centre for
International Agricultural Research (ACIAR).
References
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edited by G.I. Johnson and P.J. Hofman
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133
The Melon Value Chain in Gansu Province,
Western China: Benefits to Growers from
Improved Disease-Control Practices
Zhang Yanrong* and Sherrie Wei
†
Abstract
Melons are widely grown in the Minqin County of Gansu Province in western China. Besides supplying
consumers within the province, good grades of melons are transported over 1000 km to interstate markets. The
current supply chains of melons have various constraints that prevent delivery of satisfactory and consistent
products to consumers in the local as well as interstate markets. These include technical issues of pests and
diseases and inadequate handling in cold-chain storage, packaging and quality standards. There are also
management issues of growers harvesting their melons prematurely in order to capture an early-season
premium price. As a consequence, the industry suffers from decreasing consumption, albeit slowly, and poorer
price returns to growers. While these issues are recognised by the growers, no action has been taken to address
the problems as growers are yet to be integrated for collective actions for common interests.
This study addressed the potential to deal with some of the industry’s constraints in a collective way through
controlling diseases, and improving cultural practices and selection of melon varieties. Extension workshops to
address these issues, based on scientific research, can be used to encourage farmers to work together, and other
supply-chain issues are also being targetted. The potential benefits to farmers include a bigger ‘slice of the pie’ in
the value chain, but whether farmers can reap these benefits depends on the extent to which they can work together.
For centuries, Chinese consumers have regarded
melon as a delicacy. Melons are grown in the irri-
gated arid remote areas of China, including the prov-
inces of Xinjiang and Gansu. More recently, they
have been planted in Mongolia and a few places in
southern China during the off-season. Melons from
western China are especially well known for their
good taste and sweetness. Besides supplying the
local market, good grades of melons from western
China are transported over thousands of kilometres to
interstate markets.
This study focused on Huanghemi melon (literally
Yellow River melon), grown in the Minqin County of
Gansu Province in western China. Huanghemi melon
is a cross-breed developed by a team at Gansu Agri-
cultural University. This variety is one of the very
few research and development (R&D) products that
have been successfully commercialised. However,
like other melon varieties, Huanghemi melons suffer
from downward price pressures. While this issue is
recognised by growers and other supply-chain part-
ners, due to its complexity, there has been little action
to address the problem.
The objective of this study was to use value-chain
analysis to look at the supply-chain issues in the
Gansu melon industry and discuss grower benefits
from a value-chain perspective. Value-chain analysis
refers to the full range of activities that are required to
* Agricultural Economics Department, Gansu
Agricultural University, People’s Republic of China.
Email: <[email protected]>.
†
School of Natural and Rural Systems Management,
University of Queensland, St Lucia, Queensland 4072,
Australia. Email: <[email protected]>.
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edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
134
bring a product from production to delivery to con-
sumers. The costs and benefits of these activities at
all levels in the supply chain are analysed and com-
pared (Kaplinsky and Morris 2002). Value-chain
analysis is useful in that it provides an indication of
the relative power of chain partners (Cox 1999). Part-
ners who gain the larger shares of the value created
by the whole chain are, in theory, performing the
most important functions in the chain and hence
reaping larger rewards. In practice, they possess the
power over their suppliers and customers due to their
relative competitiveness (Porter 1980, 1985). Value-
chain analysis also offers an insight into chain inno-
vation. Partners with larger shares are more likely to
invest in innovation than those with smaller shares.
The application of new technologies for improved
disease control by farmers requires a value-chain
approach to better understand the incentive mecha-
nisms for technology adoption.
Melon Supply Chains in Gansu,
China
Over 80% of Huanghemi melons are sold in the inter-
state market. The partners in the supply chains
include farmers, collectors, interstate wholesalers,
and retailers in other provinces. There are various
constraints within the current supply chains in the
delivery of satisfactory and consistent products to
consumers in the local as well as interstate markets.
These include technical issues of pests and diseases,
and inadequate handling in cold-chain storage, pack-
aging and quality standards. There are also related
issues of growers harvesting their melons prema-
turely in order to capture an early-season premium
price.
Farmers
The average size of melon farms in Gansu is about
10 Mu or 0.67 ha (15 Mu =1 ha or 1 Mu =66.7 m
2
).
Farmers have modest infrastructure for growing
melons. Many of them use fertilisers and plastic
mulch, but not herbicides or pesticides, as melon
disease problems do not often show up at the farm-
gate stage. Besides growing and harvesting, farmers
may grade, package and transport melons to collec-
tion points in the village. Harvesting is done manu-
ally by collecting melons in hessian bags. Grading
and packaging are mostly based on instructions from
collectors or wholesalers. Standards vary between
wholesalers and are not written down. Common indi-
cators are size and blemishes, and judgments are
made visually. There are two types of packaging:
large netted nylon bags of 20 kg capacity for the
Gansu market; and cartons of 10–15 kg capacity for
interstate markets.
Collectors
Collectors buy melons from farmers and sell to
interstate wholesalers. They are often farmers them-
selves, who have a bit more capital and have sources
of information and contacts with wholesalers. There
are generally a few collectors in each village. They
build their own simple undercover stands by the
roadside near the production areas through which
wholesalers and trucks can pass.
Wholesalers
Wholesalers are normally from other provinces and
operate as merchants rather than agents. They travel
around the country to obtain melon supplies in dif-
ferent seasons. Wholesalers perform a critical function
in the chain by linking local production to interstate
markets. They have the potential to become supply-
chain managers, as they are the only channel partners
that know both production (through collectors) and
markets. However, this has not occurred for various
reasons. Given that individuals are not able to get loans
from banks, wholesalers cannot operate on a large
scale. Two to three of them work as a team on a small
amount of capital. One of them travels to the produc-
tion area to buy the fruit and the other(s) sells the fruit
at the central markets in other provinces. They only do
one deal a year, at most twice, for each production area
in Gansu, Xinjiang, Mongolia etc. The scale of each
deal is one or two truckloads, about 10 or 20 t, but
often stretches to the limit of 14 or 28 t. Because
wholesalers go to each production area only once a
year, it is unlikely that farmers receive any feedback
from them about the current season.
Retailers
Retailers are located thousands of kilometres away
from Gansu. Wholesalers leave the scene completely
once they sell the fruit to the retailers. There is little
feedback of information between wholesalers and
retailers unless serious problems occur.
The whole supply chain from farmer to retailer is
transaction-based and payment is always made in
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ACIAR Proceedings No. 119e
(printed version published in 2004)
135
cash, on the spot. This is not surprising, given few
institutional bases for supply-chain coordination —
including an absence of consolidation at all levels of
the supply chains, an ineffective contract-implemen-
tation system, and lack of cultural underpinning for
inter-organisational collaboration (Wei 2003).
Logistics, transport and losses
In the current study, losses at the farm level were
about 9.1%. Most of the losses were due to blemishes
caused by diseases and pests. Farmers normally did
not apply sprays to control diseases and most of the
time they were able to get away with it. However,
there were times where it was too late to save the crop
and losses were devastating. Losses during shipping
were about 3.75% if everything went well, including
weather conditions, maturity level and no serious
disease threats. Losses at the retail level were most
variable, depending on how long retailers kept the
fruit, but losses were regularly about 10%. Total
losses in the Gansu-to-Shanghai supply chain were
about 23%.
Methodology
Supply-chain partners were interviewed about their
costs and profits in producing Huanghemi melons.
Because the costs and benefits were based on dif-
ferent lengths of time, their profits have been stand-
ardised. Shoucheng Town of Minqin County in
Gansu Province is the major Huanghemi melon pro-
duction area. Three major villages (Xing-J in, Zhong-
Xing and Tien-Cheng) from the town were selected
for this study. Thirty farm households were randomly
selected for in-depth interviews about their cost
structures in growing Huanghemi melons. Collec-
tors, wholesalers and retailers were very sensitive
about the cost/profit figures and were often unwilling
to divulge information. The research team had to
interview a few collectors, wholesalers and retailers
that the team members already knew. While these
were convenient samples, there is no particular
reason to believe the samples were biased. Conven-
ient samples could be an advantage in this study as
the respondents were less likely to give false infor-
mation. Given the high competition at all levels of
supply chains in the melon industry, the cost struc-
tures of those interviewed were not likely to deviate
much from their competitors.
Results
Based on interviews with supply-chain partners, their
returns were approximated and analysed at the firm
level and their shares in the supply chain analysed
from a value-chain perspective. Table 1 shows the
costs and returns to farmers in 2002, in which there
was no major disease attack and the weather condi-
tions were good. The results were based on the
average of 30 farmers surveyed. Average total yield
in 2002 was 2750 kg/Mu (or over 41 t/ha), but mar-
ketable yield was 2500 kg/Mu. That meant farm-gate
losses of 9.1%. Farmers’ costs included, in
descending order, labour, fertilisers, seeds, taxes,
plastic mulch, and irrigation. Expenditure on pesti-
cides was negligible at about CNY1–2/Mu. Returns
to farmers were about CNY0.11/kg (AUD1 =
CNY4.5 at the time of the survey), or 40% for a 4-
month production cycle.
Collectors’ costs and profits details are shown in
Table 2. Collectors had no transport costs as farmers
took the fruit to the collection points. They had no
rent either, as they built simple undercover stands by
the roadside. They charge wholesalers (CNY250 per
14 t truckload) without farmers’ knowledge of it. The
total return for collectors was about 10% for a period
of 3–4 days. There were few losses to collectors as
they were generally able to clear the goods quickly
during the peak season.
As mentioned before, over 80% of the melons from
Gansu were sold to interstate markets. Wholesalers in
China are merchants rather than agents. Deals were
Table 1. Costs and returns to melon farmers in Gansu
Province (CNY4.5 =AUD1; 15 Mu =1 ha).
Factor CNY/Mu CNY/kg Proportion
of costs
(%)
Labour
Fertiliser
Seeds
Taxes
Plastic mulch
Irrigation
Total variable
costs
Farm-gate price
Profit
Return (4 months)
240
200
100
50
48
40
678
0.0960
0.0800
0.0400
0.0200
0.0192
0.0160
0.2712
0.3800
0.1088
40%
35
29
15
7
7
6
100
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136
made in cash, on the spot. In addition to payments to
collectors, their costs included packaging materials
for farmers, transport costs and losses during trans-
port. In this study, the costs and profits in selling to
the Shanghai wholesale market were surveyed. As
shown in Table 3, wholesalers’ returns were about
9% over a 2-week period.
Costs to retailers included purchasing price, labour
costs and an average of 10% losses. Rental costs were
minimal as they sold a variety of fruits at a stand. As
indicated in Table 4, returns to retailers were about
11% over a 1-week period.
To compare the returns to supply-chain partners,
their returns were standardised over a 1-week period,
as indicated in Table 5. This showed that farmers had
the lowest return of 2.5% per week during the 4-
month production season. Collectors had the highest
return of 20% per week during the peak season.
Wholesalers had 4.5% per week for a shipment from
Gansu to Shanghai. Retailers in Shanghai gained
11% per week for selling Huanghemi melons. It is
not surprising that some collectors have quit farming
to focus on collecting melons. In the off-season for
melons, they collected different products in different
seasons or engaged in other lines of business.
Looking at returns at firm levels could not answer
profit distribution issues in the supply chain. Value-
chain analysis was required to see how profits were
distributed among farmers, collectors, wholesalers and
retailers. As can be seen from Table 6, a total chain
value of CNY0.482 was created, indicating lean and
thin value for Huanghemi melon from Gansu to the
Shanghai markets. Retailers had the largest share of
the melon value chain from Gansu to Shanghai with
41%. This is not surprising for a perishable product.
Wholesalers, who linked farmers with markets, had
the second largest share with 28%. Interestingly, col-
lectors — who had the highest return at the individual
level — had the lowest share of 8% in the supply
chain. Farmers had a 23% share of the total value.
Discussion
In recent years, melons, including Huanghemi
melons, have been under downward price pressure.
The main reasons for this are unsatisfactory product
quality and the availability of local and imported sub-
stitutes, especially in large cities such as Shanghai,
Beijing and Guangzhou. Value-chain analysis
showed that the total value created in the supply
chains for Huanghemi melons were thin and lean.
Table 2. Costs and returns to melon collectors in Gansu
Province (AUD1 =CNY4.5).
Factor CNY/14 t
load
CNY/kg
Purchase price
Selling price, nominal
Charge to wholesalers
Selling price, effective
Profit
Return (3–4 days)
250
0.380
0.400
0.018
0.418
0.038
10%
Table 3. Costs and returns to wholesalers in the
Gansu-to-Shanghai melon supply chain
(CNY4.5 =AUD1).
Factor CNY/kg
Purchase price
Transport
Packaging
Losses during transport, 3.75%
Labour
Total costs
Selling price
Profit
Return (2 weeks)
0.418
0.714
0.281
0.025
0.025
1.463
1.600
0.137
9%
Table 4. Costs and returns to retailers of melons in
Shanghai (CNY4.5 =AUD1).
Factor CNY/kg
Purchasing price
Losses, 10%
Cost of labour for 7 days
Total costs
Selling price
Profit
Return (1 week)
1.6000
0.178
0.025
1.803
2.000
0.197
11%
Table 5. Comparison of returns for partners in the
Gansu-to Shanghai melon supply chain.
Partners Returns for the
season
One-week stand-
ardised returns
Farmers
Collectors
Wholesalers
Retailers
40% for 4 months
10% for 3–4 days
9% for 2 weeks
11% for 1 week
2.5%
20%
4.5%
11%
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137
Off-season melons from Shangdong Province were
sold for four times the price of those from Gansu
during the peak season. This indicates much scope
for improving the Gansu value chain through
improving product quality. Farmers get the lowest
returns (2.5% per week) among the supply-chain
partners. Consequently, they may have little incen-
tive to improve the supply chain. Paradoxically,
quality products start at the production and posthar-
vest stages, through the adoption of proper cultural
and disease-control practices. Losses at harvest and
during the transport and retail stages (23%, Gansu to
Shanghai in 2002) could be greatly reduced if proper
disease-control practices were implemented.
Growers would also benefit from improved disease
control if product differentiation was then under-
taken, and a premium price paid by consumers.
Product differentiation
Contrary to the Chinese consumers’ traditional per-
ception about melons, the industry now competes on
price and has, over time, turned melons into commodity
products, which are handled as such at all levels of the
supply chains. Improved disease-control practices
allow for better quality products with longer shelf life.
Such improvements offer an opportunity for product
differentiation and a potential branding strategy.
Improved quality for premium prices
There is a temptation to harvest melons prema-
turely to capture early-season premium prices and to
hide the symptoms of diseases. Farmers reported that
this often occurred at the request of wholesalers.
Improved disease-control practices allow melons to
be harvested at a more mature stage, which results in
better taste and sugar levels.
Improved disease control requires implementation
of farm and postharvest-level practices by farmers.
Value-chain analysis indicated that retailers and
wholesalers had the largest shares in the value chain.
Innovations that affect the whole chain, such as
improved disease-control practices, have the best
chance of success if partners with larger shares are
involved. Retailers in melon supply chains are
located in other provinces and have never had any
interactions with farmers. To introduce new disease-
control mechanisms at the preharvest and postharvest
stages, it is essential that the wholesalers are involved
at the outset. It is through the wholesalers that the
efforts of farmers can be relayed to retailers. If the
retailers, who currently capture the largest share of
the value chain, appreciate the value of these efforts
in terms of both improved quality and reduced losses,
they will be more willing to pay a premium price for
the melons.
For farmers to gain an improved ‘share’ of the
value chain with the introduction of new disease
control practices, two issues must be considered.
Firstly, the practices need to be coordinated at a
group level to ensure adequate quantities of
improved products. In other words, some horizontal
integration at the farmer level needs to occur, albeit
not at a wide scale. Secondly, farmers should also be
strongly encouraged to perform the postharvest
disease-control function, rather than leaving it to col-
lectors or wholesalers.
Horizontal integration at the farm level
The application of disease-control strategies could
itself facilitate farmer cooperation as farmers have
the opportunity to interact at workshops, demonstra-
tions etc. These activities will also help farmers who
sell to the same wholesalers to work together to con-
solidate larger quantities of melons. The government
could make use of the existing farmer network
embedded in the ‘natural–social constitutes’ of the
Chinese rural society (Murdoch 2000). The current
decentralised and short-term relationships will not
achieve the goal of improving the benefits for
farmers.
Table 6. Summary of the Huanghemi melon value
chain — from Gansu to the markets in
Shanghai.
Item Cost and
price
(CNY/kg)
Profit
(CNY/kg)
Share of
value
(%)
Farmers: costs
Farm-gate price
0.270
0.380
0.110 23
Collectors: costs
Collectors: price
0.380
0.418
0.038 8
Wholesalers: costs
Wholesalers: price
1.463
1.600
0.137 28
Retailers: costs
Retailers: price
1.803
2.000
0.197 41
Total value 0.482 100
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138
Farmers performing more functions in the
supply chain
Unlike farmers in developed countries who clean,
grade and pack their fruit, farmers in China only
perform the basic production function. Melon
farmers only pack and grade melons if instructed to
do so by their wholesalers. With the introduction of
the improved disease-control strategies, farmers
could potentially work together to perform some
basic postharvest handling tasks, such as washing,
dipping and packaging. The more supply-chain func-
tions that farmers undertake, the more likely they will
be to ‘catch’ a larger share of the value chain.
Conclusion
In summary, this study used a value-chain approach
to investigate the returns to supply-chain partners and
how the value is apportioned among them. The
results indicated that there is much scope to improve
the value chain if the quality of Huanghemi melons
can be improved, by introducing disease-control
practices at the farmer level. This could result in
higher prices being paid by consumers, which would
benefit all members of the supply chain. However, to
ensure that farmers capture the benefits, they need to
be consolidated and perform more functions in their
supply chain.
References
Cox, A. 1999. Power, value and supply chain management.
Supply Chain Management, 4, 167–176.
Kaplinsky, K and Morris, M. 2002. A handbook for value
chain research. Ottawa, Canada, International
Development Research Centre (IDRC).
Murdoch, J . 2000. Networks — a new paradigm of rural
development? J ournal of Rural Studies, 17, 70–94.
Porter, M. 1980. Comparative strategy. New York, The Free
Press, Chapters 1 and 2.
— 1985. Competitive advantage: creating and sustaining
superior performance. New York, The Free Press,
Chapter 1.
Wei, S. 2003. Supply chain management and one dragon
approach: institutional basis for agro-industrialisation in
China. Paper presented at the ASEAN/APEC Postharvest
Conference, Bali, Indonesia, 20–22 August 2003.
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139
Improving Indonesian Vegetable Supply Chains
Wendy Morgan,* Syukur Iwantoro
†
and Ibu Alifah Sri Lestari
§
Abstract
An Australia–Indonesia collaborative project used a case-study approach to introduce farmers, packing-house
staff and consumers (via retailers) to the concepts of food safety and meeting customers’ expectations.
Activities undertaken to achieve this have included:
•selection of supply chains and personnel in five locations to participate in case studies, after discussions with
senior Ministry of Agriculture (MOA) staff in J akarta and the provinces
•a training of trainers (TOT) workshop for 10 MOA staff at the Centre for Standardisation and Accreditation,
J akarta, on food safety for packing houses, including packing-house hazard-analysis and critical control
point (HACCP), development of a packing-house HACCP manual, and accreditation preparation
•TOT on integrated pest management (IPM) and farmer field school (FFS) methodology for selected MOA
staff and experienced farmers at five locations
•FFS for farmers in each supply chain (over 400 farmers have received on-farm training)
•packing-house food-safety awareness for the community at each supply chain’s location
•packing-house food-safety training and HACCP methodology for managers, staff and farmers supplying
packing houses at five locations
•training in product handling and storage for retail fresh-produce buyers, managers and senior store staff in
one supply chain.
It is too early to evaluate the impact of the project, but change has occurred at farmer, packing-house and
retail sectors of the case-study supply chains.
In 2002, the Australian Government’s Department of
Agriculture Forestry and Fisheries (AFFA) funded
an Australian-led project team to help the Indonesian
vegetable industry to improve the safety and quality
of vegetables supplied to consumers in Indonesia.
The Indonesian Vegetable Supply Chains project
was a one-year project, undertaken by the Victorian
Department of Primary Industries (DPI) and the
Indonesian Ministry of Agriculture’s Center for
Standardisation and Accreditation (CSA). The
project used a case-study approach to introduce
farmers, packing-house staff and consumers (via
retailers) to the concepts of food safety and meeting
customers’ expectations by providing reliable sup-
plies of vegetables of consistent, acceptable quality.
Specific objectives were:
• to improve skills and knowledge of Indonesian
vegetable farmers and packing-house staff
• to improve production efficiency and safety
• to increase linkages between sectors of the supply
chains and government research and development
agencies
• to increase the awareness of supply chain players
of the importance of safe, quality production.
Project Activities
Following lengthy discussions with senior Ministry
of Agriculture (MOA) staff in J akarta and the prov-
inces, supply chains and personnel in five locations
* Department of Primary Industry, Victoria, Australia.
†
Indonesian Ministry of Agriculture, Center for
Standardisation and Accreditation, J akarta.
†
FIELD Indonesia.
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— East J ava, South Sulawesi, Bali, South Sumatra
and West J ava — were selected as case studies.
A training of trainers (TOT) workshop was held in
Darwin, Australia in February 2003. There were 10
participants from CSA. This food-safety refresher
workshop covered food-safety risks for packing
houses, including packing-house hazard analysis and
critical control point (HACCP) methodology, devel-
opment of a packing-house HACCP manual, and the
steps involved in developing and implementing an
accreditation system.
TOT was also provided to selected MOA staff and
experienced farmers at the five case-study locations
in Indonesia. This covered integrated pest manage-
ment (IPM) and farmer field school (FFS) training
methodology. Over 400 farmers from all five supply
chains have received on-farm training in IPM and
food safety.
Other activities included:
• raising packing-house food safety awareness for
the community at each location
• providing packing-house food safety and HACCP
training for managers, staff and farmers supplying
packing houses at four locations
• providing training in product handling and storage
for retail fresh-produce buyers, managers and
senior store staff in a supermarket chain in Bali.
Project Outcomes
HACCP/food safety training for packing-
house and DINAS staff and farmers
CSA is running this component of the project at
four locations.
HACCP is a method used to identify the food-
safety risks associated with the operations of a busi-
ness, in this case the vegetable packing house.
HACCP and food safety are complex concepts and
very new in the Indonesian food industries. It was
anticipated that it would be difficult to introduce the
ideas and procedures involved to packing-house staff
and farmers. The program of the refresher course in
Darwin thus covered the three food-safety risks
(microbiological, chemical and physical) and revised
the 12 steps taken for analysis of these risks in the
HACCP methodology. Also covered were product
identification and traceability, and staff training.
Support was provided to CSA staff to produce a
Food Safety Manual for Indonesian packing houses.
This was published in the Bahasa Indonesia lan-
guage, and used during training of packing house
staff.
It has proven difficult to improve packing house
procedures, as there is little demand from purchasers
to improve food safety in packing houses or on farms,
and even the simplest modifications to packing house
operations are expensive. Indonesian consumers are
aware of the issue, but supermarkets are generally
finding it difficult to source all their produce require-
ments domestically and are therefore reluctant to
specify consistent supply of safe product.
It took some time for participants in the TOT activ-
ities to accept that it is impractical, due to cost, to
implement at this stage some of the changes required
to achieve food safety and quality assurance (QA)
accreditation. These include, for example, manage-
ment of temperature and water quality. Indeed, it
might be better in terms of food safety if there were
no washing steps at the packing house. This possi-
bility needs to be discussed with the next links in the
supply chain and with CSA. Its implementation
would need to be accompanied by an education cam-
paign to explain its rationale to the whole commu-
nity.
Despite the various difficulties, the CSA group’s
activities are having an impact on the staff of the
packing houses they are training. They are seeing
changes in staff behaviour (personal hygiene and no
smoking), and procedural practices (logistics,
cleaning programs and storage) occurring at all loca-
tions.
Training for farmers
This component of the project is being run by
FIELD Indonesia, a non-government organisation
(NGO), at four locations.
The FFS model for delivering on-farm training has
as its first step community consultation. Even at this
step, each location has different expectations, gov-
ernment structures and personalities, and accommo-
dating these variations requires considerable
discussion.
An issue of great interest is that competition to
attend FFS is always so intense that farmers are inter-
viewed for selection. They will attend training for 12
hours and still have to be told to go home. They are
very hungry for information. Indonesian farmers are
compensated for attending training but this cannot be
the sole reason they attend.
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Retail fresh-produce handling training in a
supermarket chain in Bali
A key issue at this level in the supply chain is that
the major supermarket chains were not interested in
participating. They view staff training as their com-
petitive edge and are therefore secretive about their
training programs. Nevertheless, there is a problem
in that their in-store produce appeared to be no better
than that of the small chain which participated in the
training in this project.
This project component included the following
activities:
• TOT in Australia for an Indonesian postharvest
university lecturer. This training covered the
component content, methodology for delivery and
selection of modules suitable for the supermarket
chain’s business. The Indonesian presenter also
translated much of the documentation into Bahasa.
• A two-day workshop titled “Fresh produce
retailing and profit improving practices” was held
in Denpasar on 18–19 March 2003. Seventeen
fresh-produce managers (storage and in-store
selling) and buyers from the Tiara Dewata
supermarkets in Bali participated. Topics covered
included: delivery checks, storage, product care
and handling, wastage and shrinkage,
merchandising, cleaning and sanitation, managing
customer feedback. Temperature and
refrigeration, humidity, and information on the
shelf lives of different types of vegetables were
considered by participants as important to
maintaining product quality.
Results and Evaluation
The workshop participants rated the workshop highly
and have asked for further training modules. The
supermarket contributed financially to the training,
which is quite unusual in Indonesia, and made
improvements to in-store and storage practices
almost immediately.
Conclusions
Although it is too early to evaluate the overall impact
of this project, the project team has already observed
that some change has occurred at the farmer,
packing-house and retail levels of the supply chains
concerned. The project team plans to evaluate the
longer-term impact of project activities.
Putting an emphasis on the retail component of the
supply chain has had an impact already. The super-
markets are looking into developing product specifi-
cations and giving farmers more consistent orders,
and to meeting farmers’ requests for more notice of
what and when they want a product. This will allow
these farmers a greater opportunity to schedule pro-
duction, something that Australian farmers take for
granted. Farmers and packing houses are using safer
farming practices than before the project started.
Communication between members of the supply
chain has been enhanced, but needs to be continually
improved. Indeed, communication is a major con-
straint to outcomes at all levels of the project — plan-
ning, socialisation, delivery, expectations — as well
as between the diverse personnel — from two coun-
tries and cultures, central and provincial government,
government and business, farmers, packers, agents
and retailers.
Project follow-up activities should facilitate com-
munication between supply chain members, so as to
maximise the benefits of initial activities and
enhance overall understanding of the requirements of
each member.
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142
Indonesia’s Strategic Agricultural Commodities
in Meeting the WTO Agreement
Rina Oktaviani*
Abstract
Indonesia is a developing country that is committed to the World Trade Organization (WTO) agreements. The
latest WTO agreement, reached in Doha in 2001, allows agricultural products in developing countries to have
the special and different treatment in terms of market access, export subsidies and domestic support. The
problem is how Indonesia can take advantage of this special treatment in the context of its strategic agricultural
products, so as to develop its economy and alleviate poverty, and be ready for the next round of WTO
decisions. This paper analyses these problems and suggests the proposed agenda for the next WTO round for
Indonesia as an individual country and as a member of various groupings. The paper first considers what
Indonesian agricultural trade performance, how the Indonesian government chooses and defines its strategic
agricultural products, and how to use supply-chain methods to select these products.
Indonesian economic policy has moved from protec-
tionism (during the several years after independence
in 1945), to outward orientation (late1960s up to the
1980s) to deregulation and openness (during the
1990s and 2000s). Numerous trade and investment
reform packages have been launched by the govern-
ment since 1989 in order to face the more open and
competitive world economy. Since 1989, the restric-
tions on trade, including the tariff and non-tariff bar-
riers, have been gradually eliminated. Trade
regulations have followed investment regulations to
encourage direct foreign investment. The year 1994
saw a significant change in investment: essentially
unrestricted direct foreign investment was permitted
for the first time in all sectors. It was hoped that the
comprehensive economic reforms would improve
economic efficiency and lead to an expansion of the
Indonesian economy, which would stimulate further
investment and export trade activity.
As an open economy, Indonesia is committed to
regional and global free trade. In the East Asian
countries, Indonesia is a member of the Asian Free
Trade Area (AFTA) agreement and, in the world
economy, of the World Trade Organization (WTO).
The objective of the agreements is free trade among
nations in the region. According to economic theory,
free trade would increase the welfare of nations that
join the agreement, based on the comparative advan-
tage it brings. The gains from trade liberalisation can
be identified as coming from two sources: increasing
the efficiency of use of domestic resources, and
increasing access to other countries’ markets
(Stephenson 1994). However, in reality, most coun-
tries try to protect themselves with tariff and non-
tariff barriers.
Before the last WTO Ministerial meeting in Doha
in 2001 and the Uruguay Round agreement in 1994,
there were several rounds of multilateral trade nego-
tiations under the General Agreement on Tariffs and
Trade (GATT). Before the Uruguay Round, agricul-
* Head of Agricultural and Resource Economic Study
Program, Department of Socio-Economic Sciences,
Faculty of Agriculture, Bogor Agricultural University, J l.
Kamper, Kampus IPB Darmaga, Bogor 16680,
Indonesia. Email: <[email protected]>.
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143
tural trade was largely kept off the agenda by the
United States of America (USA) and other developed
countries. Consequently, agricultural trade was
afflicted with high levels of protection, increasing
use of subsidies, worsening fluctuations in world
prices and an increasing cost to the national budget to
support production. Especially for developing coun-
tries, often predominantly agricultural in export ori-
entation, it was hoped that the agreement would
reduce restrictions on agricultural trade between
countries. The Uruguay Round Agreement on agri-
culture has three main components: markets access,
export competition, and domestic support outlays.
The Doha Ministerial Conference in November
2001 delivered new declarations, especially in agricul-
ture. The declarations emphasised the importance of
international trade in promoting economic growth and
alleviating poverty (Roberts et al. 2002). Growth on
world trade will enhance the economic wellbeing of
developing countries. Indonesia supports the Doha
declaration, which will reduce barriers to market
access, and reduce export subsidies and domestic
support for agricultural product. As a developing
country, Indonesia receives ‘Special and Differential’
(S&D) Treatment in agriculture (Roberts et al. 2002).
The treatment allows Indonesia to reduce its barriers
against imports and its market-distorting forms of
domestic support to a lesser extent than developed
countries. Indonesia must capitalise on the this special
treatment to promote its agricultural and economic
development.
Despite a declining share in output and exports,
agriculture has maintained its dominant role in the
Indonesian economy. In 2000, agriculture accounted
for 16.9% of the gross domestic product (GDP) and
provided work for around 40% of the active popula-
tion (World Bank 2001). Devaluation of the rupiah
helped boost agricultural exports (in value terms), par-
ticularly during the post-crisis period. However, Indo-
nesia could not depend on the weakness of the rupiah
in order to increase its trade balance. Indonesia must
also meet its WTO commitment. For the WTO Minis-
terial Conference held in September 2003, Indonesia,
together with other developing countries, had to be
ready to meet additions and/or revisions to the special
treatment on agriculture. The question was what and
how the Indonesian Government should choose and
define strategic agricultural products?
The high dependence on the agricultural sector in
the Indonesian economy means that Indonesia needed
to be well prepared for any pushes at the WTO Minis-
terial conference. This paper analyses the Indonesian
agreement on agriculture and Indonesia’s strategy for
market access, export subsidies and domestic support
and the proposal for S&D treatment at the next WTO
Ministerial Conference. The paper also seeks to iden-
tify Indonesian agricultural trade performance and
how the Indonesian Government defines and chooses
strategic agricultural commodities.
Indonesian Agricultural Trade and
Strategic Agricultural Products
Indonesia is the world’s largest producer of coconuts,
the second-largest producer of copra, palm kernels,
palm oil and natural rubber, and the third-largest pro-
ducer of rice (WTO 2003). However, most farms are
small and only 13% of cultivated land is worked by
large state-owned and private estates. The small scale
of farms contributes to the low productivity of land.
For example, the profitability of rice production fell
from 5.3% in the 1980s to 1.5% in the 1990s (FAO
2002). It was followed by a fall in the harvested area
and productivity growth. The fluctuation in harvested
area was caused by the depredations of pests and dis-
eases and the sensitivity of the rice to climate change.
The stagnation of productivity could be the result of
stagnation in new technology development following
the green revolution in the 1980s. Before Indonesia
gained the rice self-sufficiency in 1984, rice produc-
tivity in Indonesia was the highest one in the world.
However, after 1985, the productivity growth in
Indonesia was the lowest in Asia. Rice productivity
growth in Indonesia was negative in the period of
1996–2001, while productivity in China and Vietnam
continued to increase (Oktaviani 2002).
Besides facing a low productivity rate, Indonesian
agricultural exports have declined in recent years.
Table 1 shows that the export value increased during
the huge devaluation of the rupiah. Agricultural
export commodities become more competitive
during the Asian economic crisis. The Indonesian
Government hopes that this will lead to an export-led
recovery from the economic crisis. Recently, how-
ever, the agriculture sector has shown poor export
performance, the worst case being rubber. It can be
seen from Table 1 that the prices of imported goods
have fallen, except for fruits and vegetables.
The weak export performance should increase the
efforts of Indonesian negotiator in the next WTO
round to put a case that will help to recover export
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performance, even though trade policy is not the only
influence on export value. The business environ-
ment, such as a perceived increase of Indonesia’s
country risk, also contribute to export performance.
Indonesia also imports agricultural products. Table
2 shows that the annual value of food and agricultural
imports increased dramatically in the 10 years between
1984–86 and 1994–96. This caused a decline in the
agricultural trade surplus. Annual agricultural import
value grew slowly and annual food import value fell
slowly between 1994–96 and 1998–2000. The large
devaluation of the rupiah contributed to this import
performance between 1994–96 and 1998–2000.
The value and quantity of rice and sugar imports
rose rapidly between 1994–96 and 1998–2000.
Besides the effect of the stagnancy in rice production
between 1996 and 2002 (Tabor et al. 2002), the
increase of rice imports was caused by a change in
rice policy, in line with the trend to globalisation in
the world market. The National Logistics Agency
(BULOG) does not monopolise the rice market any
more, since Indonesia signed an International Mone-
tary Fund (IMF) agreement in 1998. Private importer
can now bring rice into the country through normal
market channels. At the same time, the rice import
price has tended to fall, because of dumping from
other countries such as the USA, Thailand and
Vietnam (Tabor et al. 2002). Increasing rice imports
caused the domestic price of rice to fall. On 19
December 1999, the government applied a rice
import tariff of Indonesian rupiah (IDR) 340, equiv-
alent to 30%.
The sugar industry faces a structural problem —
the state-owned mills are inefficient and it is more
profitable to grow other crops (Magiera 2002). Even
though the government has made an effort to move
the cane production to extensive areas off J ava, the
sugar imports continue increase. As with other food
commodities, the world market in sugar commodities
is thin. Production growth is less than the export and
import growth in the world market (Oktaviani 2002).
This means that if sugar production in one country
falls, an increase of the import demand might
increase the world market price. Indonesia is one
Table 1. Indonesian agricultural exports, 1984–2000.
Commodity Period average Annual percentage change
1984–1986
(A)
1994–1996
(B)
1998–2000
(C)
B/A C/B
Animal/vegetable oil
Value (USD million)
Quantity (‘000 t)
Unit value (USD/t)
249
696
357
1413
2693
525
1705
4461
382
19.0
14.5
3.9
4.8
13.4
–7.6
Rubber
Value (USD million)
Quantity (‘000 t)
Unit value (USD/t)
753
951
792
1676
1306
1283
936
1490
628
8.3
3.2
4.9
–13.6
3.4
–16.4
Coffee, tea, spices
Value (USD million)
Quantity (‘000 t)
Unit value (USD/t)
1017
469
2170
1274
763
1670
1305
957
1364
2.3
5.0
–2.6
0.6
5.8
–4.0
Fruits/vegetables
Value (USD million)
Quantity (‘000 t)
Unit value (USD/t)
70
540
130
327
1054
310
294
728
403
16.6
6.9
9.1
–2.6
–8.8
6.8
Food exports (USD million) 1244 1987 2038 4.8 0.6
Agricultural exports (USD million) 2488 5414 5045 8.1 –1.7
Source: FAOSTAT, cited in Magiera (2002).
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such example; we have a decrease of production
growth but an increase in import growth.
The information in Tables 1 and 2 makes it clear that
Indonesia both exports and imports large quantities of
agricultural commodities. Because of the high propor-
tion of the population who are engaged with the agri-
cultural sector, the trade policy will strongly affect
economic welfare. A careful and strategic agenda
should be made for the next WTO round to minimise
the detrimental impacts of trade liberalisation.
As mentioned in Doha Mandate, strategic products
relate to the Non-Trade Concerns of food security,
rural development and poverty alleviation. The Indo-
nesian Government has identified four commodities
as strategic products — rice, maize, soybean and
sugar. The basis for the government’s choice of these
products is not clear. The argument of food security
is relevant for rice, but not for sugar. As mentioned
above, the main problem for the sugar industry is
inefficient, state-owned mills. Protection of the
industry does not deliver a direct benefit to sugar
farmers. The poverty alleviation argument may be
relevant to these industries as a whole, since Sawit
(2003) argues that rice, maize, soybean and sugar
involve 23 million, 9 million, 2.5 million and 1
million households, respectively, or 68% of total
households in 1999. However, because of IMF pres-
sure, the dependence on imports of those products
has increased dramatically (Table 2).
Although the product is related with food crops,
Indonesia can actually choose other products as stra-
tegic, such as exported goods. Through supply-chain
Table 2. Indonesian agricultural imports, 1984–2000
Period average Annual percentage change
1984–1986
(A)
1994–1996
(B)
1998–2000
(C)
B/A C/B
Rice
Value (USD million)
Quantity (‘000 t)
Unit Value ($/ton)
49
159
309
603
1976
305
836
2999
279
28.5
28.7
–0.1
8.5
10.9
–2.2
Other cereals
Value (USD million)
Quantity (‘000 t)
Unit Value ($/ton)
297
1581
188
1014
4871
208
688
4327
159
13.1
11.9
1.0
–9.2
–2.9
–6.5
Textile fibres
Value (USD million)
Quantity (‘000 t)
Unit Value ($/ton)
200
174
1149
875
475
1840
726
497
1459
15.9
10.6
4.8
–4.6
1.1
–5.6
Sugar/sweeteners
Value (USD million)
Quantity (‘000 t)
Unit Value ($/ton)
10
25
422
285
694
411
417
1735
240
39.3
39.7
–0.3
10.0
25.8
–12.5
Animal feeds
Value (USD million)
Quantity (‘000 t)
Unit Value ($/ton)
85
376
226
402
1405
286
309
1348
229
16.8
14.1
2.4
–6.4
–1.0
–5.4
Oilseeds
Value (USD million)
Quantity (‘000 t)
Unit Value ($/ton)
118
402
295
337
882
382
265
1084
245
11.0
8.2
2.6
–5.8
5.3
–10.5
Food imports (USD million) 589 2963 2901 17.5 –0.5
Agricultural imports (USD million) 985 4545 4145 16.5 2.3
Source: FAOSTAT, cited in Magiera (2002).
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analysis, Indonesia can identify weaknesses in the
supply chain for exported goods. The approach can
be used to choose strategic products for the global
market (Kaplinsky and Morris 2000). The approach
can identify levels of competitiveness and help
understanding of the advantages and disadvantages
of firms and countries specialising in individual
products. Production efficiency is just one of the pre-
requisites for entering the global marketplace. We
need also to understand how the ways in which pro-
ducers are connected to final market influence the
ability to win in the global market and determine the
distribution of benefits to participants.
Indonesia could argue to the developed countries to
open their markets to Indonesian exports if market
access is a barrier in the supply chain. In practice, Indo-
nesia promotes its exports less than do other developing
countries. Instead of supporting agricultural exports,
the Indonesian Government has applied export taxes to
goods such as for palm oil (Sawit 2003).
The WTO Agreement on Agriculture
and Indonesia’s Trade Policy
The agricultural negotiations in the WTO began in the
early 2000, under Article 20 of the WTO agreement.
The Doha Ministerial Conference in November 2001
reconfirmed the present WTO agreement to establish a
fair and market-oriented trading system through a
program of fundamental reforms. The program
encompasses strengthened rules, and specific commit-
ments on government support and protection for agri-
culture. The purpose is to correct and prevent
restrictions and distortions in world agricultural
markets (WTO 2003, paragraphs 13 and 14). The
member governments, including Indonesia, commit
themselves to reducing the barriers to market access,
export subsidies and domestic support. The declara-
tion makes special and differential treatment for devel-
oping countries integral throughout the negotiations
such that they should be able to meet their needs, in
particular in food security and rural development. The
explanation below about the agreement on agriculture
is based on WTO (2002).
Market access
Reducing barriers to market access means that the
WTO members should reduce tariff and non-tariff
barriers to agricultural products as a result of the
Uruguay Round. The Uruguay Round has focused
broadly on two issues: the high levels of tariffs
outside the quotas (with some countries pressing for
larger cuts on the higher tariffs), and the quotas them-
selves — their size, the way they have been adminis-
tered, and the tariffs charged on imports within the
quotas. Another market access agreement is a special
agricultural safeguard.
The tariffs cover both tariffs on quantities within
quotas and those outside. Traditionally, the tariff
reductions that resulted from trade negotiations came
from bilateral product-by-product bargaining, or they
were based on formulas that applied over a broad
range of products, or a combination of the two. How
the reductions will be handled in the present negotia-
tions is still undecided. The developing countries
argue that tariffs and other import barriers are neces-
sary in order to protect domestic production and main-
tain food security. For this reason, some countries are
linking lower import barriers with disciplines on other
countries’ export restraints and export taxes — if pro-
ducing countries do not restrict their exports, then
importing countries can feel more secure about being
able to obtain food from them. Some developing coun-
tries say they need flexibility in deciding the level of
import duties they charge to protect their farmers
against competition from imports whose prices are
low because of export subsidies.
The tariff quotas are the regulation covering
whether a product exported from one country can
gain access to the market of another country at the
lower, within-quota tariff. The method for giving
exporters access to quotas include first-come, first-
served allocations, import licensing according to his-
torical shares and other criteria, administered through
state trading enterprise, bilateral agreements, and
auctioning. The terms can also specify time periods
for using the quotas — for example, periods of time
for applying for licences, or for delivering the prod-
ucts to the importing countries. Exporters are some-
times concerned that their ability to take advantage of
tariff quotas can be handicapped because of the way
the quotas are administered. Sometimes they also
complain that the licensing timetables put them at a
disadvantage when production is seasonal and the
products have to be transported over long distances.
Each method has advantages and disadvantages,
and many WTO members acknowledge that it can be
difficult to say conclusively whether one method is
better than another. Several countries want the nego-
tiations to deal with tariff quotas: to replace them
with low tariffs, to increase their size, to sort out what
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they consider to be restricting and non-transparent
allocation methods, or to clarify which methods are
legal or illegal under WTO rules in order to provide
legal certainty.
Safeguards are contingency restrictions on imports
taken temporarily to deal with special circumstances
such as a sudden surge in imports. The special safe-
guard provisions for agriculture differ from normal
safeguards. In agriculture, unlike with normal safe-
guards:
• higher safeguards duties can be triggered
automatically when import volumes rise above a
certain level, or if prices fall below a certain level
• it is not necessary to demonstrate that serious
injury is being caused to the domestic industry.
The special agricultural safeguard can only be used
on products to which tariffs applied — which amount
to less than 20% of all agricultural products (as
defined by ‘tariff lines’). But they cannot be used on
imports within the tariff quotas, and they can be used
only if the government reserved the right to do so in
its schedule of commitments on agriculture. In prac-
tice, the special agricultural safeguard has been used
in relatively few cases.
Proposals range from continuing with the provision
in its current form, to its abolition, or its revision to
prevent its use on products from developing countries.
Some developing countries have proposed that only
they should be allowed to use special safeguards —
developed countries should not be allowed to do so.
Export subsidies
Proposals to reduce export subsidies differ
between countries. Some countries are proposing the
total elimination of all forms of export subsidies.
Others are prepared to negotiate further progressive
reductions without going so far complete elimina-
tion, and without any ‘down payment’.
Many developing countries argue that their
domestic producers are handicapped if they have to
face imports whose prices are depressed because of
export subsidies, or if they face greater competition
in their export markets for the same reason. This
group includes countries that are net food importers
and also want help to adjust if world prices rise as a
result of the negotiations. In addition, many countries
would like to extend and improve the rules for pre-
venting governments circumventing their commit-
ments on export subsidies — including the use of
state trading enterprises, food aid and subsidised
export credits.
Domestic support: amber, blue and
green boxes
In WTO terminology, subsidies are in general
identified by ‘boxes’ which are given the colours of
traffic lights: green (permitted), amber (slow down
— i.e. be reduced), red (forbidden). In agriculture,
things are, as usual, more complicated. The Agricul-
ture Agreement has no red box, although domestic
support exceeding the reduction commitment levels
in the amber box is prohibited; and there is a ‘blue
box’ for subsidies that are tied to programs that limit
production. There are also exemptions for devel-
oping countries (sometimes called the ‘S&D box’).
(a) The ‘amber box’
For agriculture, all domestic support measures
considered to distort production and trade (with some
exceptions) fall into the ‘amber box’. The total value
of these measures must be reduced. Various pro-
posals deal with how much further these subsidies
should be reduced, and whether limits should be set
for specific products rather than having overall
‘aggregate’ limits.
(b) The ‘green box’
In order to qualify for the ‘green box’, a subsidy
must not distort trade, or at most cause minimal dis-
tortion. These subsidies have to be government-
funded (not by charging consumers higher prices)
and must not involve price support. They tend to be
programs that are not directed at particular products,
and include direct income support for farmers that is
not related to (is ‘decoupled’ from) current produc-
tion levels or prices. ‘Green box’ subsidies are there-
fore allowed without limits, provided they comply
with relevant criteria. They also include environ-
mental protection and regional development pro-
grams (for details, see Article 6 and Annex 2 of the
Agriculture Agreement, available at <http://
www.wto.org>).
(c) The ‘blue box’
The ‘blue box’ is an exemption from the general
rule that all subsidies linked to production must be
reduced or kept within defined minimal levels. It
covers payments directly linked to acreage or animal
numbers, but under schemes which also limit produc-
tion by imposing production quotas or requiring
farmers to set aside part of their land. Countries using
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these subsidies — and there are only a handful — say
they distort trade less than alternative ‘amber box’
subsidies.
Before WTO agreements are applied to developing
countries, Indonesia already has investment and trade
regulations, which is in line with WTO agreement and
affect the agricultural sector. For the first 25-year
Indonesian development program, government policy
for the agricultural sector has focused on food self-suf-
ficiency, and primarily on rice. On the other hand,
assistance received by the major agricultural exporting
industries was below average, often negative. Export
commodities such as cassava, rubber, coconut oil,
palm oil, coffee, pepper, nutmeg and tea were, in
effect, taxed by the trade policies of Indonesia (GATT
1991). However, some changes have been made in
trade policy on export commodities since the mid-
1980s. Quantitative trade restrictions (Qts) were, on
paper at least, eliminated in October 1989 for cassia-
vera (cinnamon), for nutmeg and mace in the policy
package of May 1990 (PakMei 1990), and for crude
palm oil, other palm oil, palm kernel oil, copra and
coconut oil in the policy package of 3 June 1991
(PakJun 1991) (Tomich 1992). Regulations on agri-
cultural export commodities meant the assistance that
was offered to those commodities was lower than the
assistance provided to the other crop sectors, and even
to the manufacturing sector. Even though there is
limited assistance for estate crops, these commodities,
especially coffee, oil palm, cocoa and rubber, have a
lower cost than those in other exporting countries. In
rubber production, for which Indonesia is not so prom-
inent in the world market, the smallholder costs of pro-
duction are lower than the cost for estates in Malaysia
and Thailand (Tomich 1992). Palm oil production in
Indonesia also has the lowest cost in the world. Based
on Sucofindo data, Larson (1996) showed that the pro-
duction costs for crude palm oil, ex-factory, was
USD127/t in 1993. Compared with the 1995 average
international price of USD600/t and the historically
low price in 1990 of USD290/t, the Indonesian palm-
oil sector still profitable.
Besides the regulation in these commodities, there
was re-regulation in some estate crops in 1992. The
BPPC (Badan Penyangga dan Pemasaran Cengkeh)
was established as a Clove Marketing Board and
given monopoly rights for clove marketing. The
BPPC was not successful in terms of increasing
farmer incomes because, according to field reports,
the purchase price was well below the floor price in
the harvesting period (Tomich 1992). The West Kali-
mantan citrus industry was also regulated, restricting
inter-island trade and pushing down the local
farmers’ incomes.
The financial crisis that began in the middle of
1997 has induced the government to deregulate in
several areas, including trade policy. The following
steps in relation to trade regulation to be imple-
mented as part of an agreement reached with the IMF
for receiving international aid to help with the crisis
(Soesastro and Basri 1998):
• gradual reduction of import tariffs to 5–10% by the
year 2003, including those on chemical products,
iron and steel, and fisheries products
• trade deregulation for various commodities
• wheat and wheat flour, soybeans, and garlic would
be able to be imported freely under a general
importer licence from 1 J anuary 1998
• with imports of soybeans and garlic subject to a
20% tariff, and imports of wheat flour to a 10%
tariff, those tariffs to be reduced to 5% by 2003,
the government would provide a temporary
subsidy for wheat flour to protect consumers.
• the administrative retail price of cement would be
eliminated in the near future
• gradual reduction of barriers to exports, including
export taxes
• elimination of the special tariff for automobile
producers by 2000
• government review of investment and expenditure
by the public sector.
The failure of the IMF Agreement led the IMF to
reinforce the economic program. On 15 J anuary
1998, the President signed a second agreement, the
IMF II Agreement. The microeconomic reforms
under IMF II included the following (Soesastro and
Basri 1998):
• elimination of BULOG’s monopoly over the
importation and distribution of sugar and over the
distribution of wheat flours. In contrast to the
November IMF reform package, in which wheat
was to be distributed through BULOG for a 3–5
year transition period, the Letter of Intent
deregulated the distribution of wheat, allowing
flour millers to market it from 1 February 1998
• complete deregulation of domestic trade in all
agricultural products; elimination of the Clove
Marketing Board by J une 1998
• abolition of all other restrictive marketing
arrangements by February 1998; specifically the
dissolving of the cement, paper and plywood
cartels
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• elimination of internal and external trade
restrictions on cement; permission for traders to
buy and distribute all cement brands in all
provinces and to export under the general exporter
license
• with respect to foreign investment, removal of
formal and informal barriers to investment in palm
oil plantations from 1 February 1998, and lifting
all restrictions on investment in wholesale and
retail trade in March 1998
• discontinuation of special taxes, customs and
credit privileges to the National Car Project, as
well as any budgetary and extra-budgetary support
and credit privileges to IPTN (the state-owned
aircraft industry) projects
• reduction in tariffs on all food items to a maximum
of 5% in order to secure food supplies for lower
income groups
• abolition of local content rules on dairy products
• abolition of import restriction on all new and used
ships
• abolition of export taxes on a wide range of
products such as leather, cork, ores and waste
aluminium from 1 February 1998
• reduction in export taxes on sawn timber, rattan
and minerals to a maximum of 10%; elimination of
quotas by the end of the year 2001
• exemption of export restrictions on palm oil, to
ensure adequate domestic supplies; this exception,
however, was to be eliminated by March 1998.
The IMF agreement represents radical changes,
even before the WTO implementation for developing
countries. The IMF agreement serves to further
encourage trade liberalisation in Indonesia. It can be
seen from the IMF agreement that Indonesia has
already implemented aspects of the Uruguay Round,
such as:
1. To maintain actual tariff rates at or below bound
rates, and reduce bound rates by an average of
33% by 2004. In this case, Indonesia has
already fulfilled this commitment because the
tariffs for agricultural commodities were mostly
below bound rate.
2. To eliminate all non-tariff imports. In this case,
Indonesia has eliminated BULOG’s sole import
rights, even though it is legal under the WTO.
However, Indonesia has introduced new license
which restrict imports to sugar producers that
would be illegal under WTO agreement.
Indonesia also already eliminated the local
content rules for soybean meal and dairy
products.
Indonesia’s Proposed Agenda
As a developing country, Indonesia can propose
special and differential treatment at the WTO Minis-
terial meeting. Indonesia can make a proposal as an
individual country or as a members of a group of
countries such as the Association of South-East
Asian Nations (ASEAN) and the Cairns Group, the
latter consisting of Argentina, Australia, Bolivia,
Brazil, Canada, Chile, Colombia, Costa Rica, Guate-
mala, Indonesia, Malaysia, New Zealand, Paraguay,
Philippines, South Africa, Thailand, and Uruguay.
This group favours much greater liberalisation in
agricultural trade and is an alliance that cuts across
the developed–developing country boundaries.
Because 14 of its 17 members are developing coun-
tries, the Cairns Group would also like to see devel-
oping countries given some kind of ‘special and
differential’ treatment to take account of their needs.
However, some developed countries that protect their
agricultural sector with subsidies, including the
European Union, Switzerland, Norway, J apan, and
South Korea, have been resisting such a move. Indo-
nesia could seek special and differential treatment as
an individual or jointly with other developing coun-
tries in the Cairns Group.
ASEAN could take a position similar to that of the
Cairns Group. The Group urges negotiations on all
aspects of market access including all tariffs, tariff
peaks, tariff escalation, tariff quota volumes, and
tariff quota administration and other rules applying to
market access commitments. Further, ASEAN could
push for a better market access for all agricultural and
food products, including value-added products in
processed forms.
Avila (2001) argues that developing countries seek
greater acknowledgment of their difficulties and a
broader application of S&D Treatment provisions of
the GATT and other WTO agreements, particularly
through: a lower level of obligations; more flexible
implementation schedule; best endeavour commit-
ments by developed countries; more favourable treat-
ment for least-developed countries; and technical
assistance and training. Indonesia also seeks this
greater acknowledgment. As an individual country,
Indonesia can also propose more flexible WTO
arrangements so that it can support and protect its
agricultural and rural development and protect the
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livelihoods of its large agrarian populations whose
farming is quite different from the scale and methods
in developed countries. Indonesia can argue subsi-
dies and protection are needed to ensure food secu-
rity, to support small-scale farming, to make up for a
lack of capital, or to prevent the rural poor from
migrating into already over-congested cities.
In the market-access agenda, a possible Indonesian
proposal is in the areas of access to developed-
country markets, food security, tariff binding, special
safeguards and anti-dumping, and minimum access.
Indonesia could complain that its exports still face
high tariffs and other barriers in developed countries’
markets, and that its attempts to develop processing
industries are hampered by tariff escalation (higher
import duties on processed products compared with
raw materials). Indonesia should propose to devel-
oped countries, especially its trading partners, such
as J apan, the USA and the European Union, to
provide quota-free and tariff-free access for products
from Indonesia. This would expand the market
access of Indonesian agricultural products. Careful
analysis using supply-chain methods can identify the
critical points maintenance of the competitiveness of
the products.
Indonesia also can propose to raise tariffs, based on
food security argument to reduce the market access to
Indonesia. The Food and Agricultural Organization
of the United Nations defines food security in three
dimensions — availability, stability and accessibility
(FAO 1997). Adequate food availability access to
food supplies that are sufficient to meet the consump-
tion needs. Formally, food security can be defined as
a situation in which all households have both phys-
ical and economic access to adequate food for all
members, and where households are not at risk of
losing such access. Actually the food is not only rice;
however, as the main staple food, the Indonesian
government has always focused on rice.
The choice of trade regime will influence food
security in Indonesia. Trade liberalisation for food
commodities, which was fulfilling the IMF II agree-
ment in 1998, increased food imports, especially of
rice and soybean (Oktaviani 2002). In the short run,
food security can be achieved through an increase in
import volume and the availability of food at lower
prices. However, this will discourage farmers from
increasing production and productivity, reduce the
farmers’ incomes and disadvantage the rural-based
milling and marketing sector (Tabor et al. 2002). In
the long run, greater reliance on importing countries
will accelerate high dependency not only in the eco-
nomic area but also in the political and social arenas.
To reduce the high rice imports, the government
applies an import tariff. However, the import tariff
policy is not applied very effectively. There is an
indication of smuggling and under-invoicing of rice
imports (Oktaviani 2002). An increase in the import
tariff gives an even greater incentive for smuggling
and under-invoicing.
In order to minimise an ineffective import tariff,
Tabor et al. (2002) suggest a tariff quota. They also
suggest BULOG could use the government portion of
the rice import quota and establish a rice policy
council. However, it seems that BULOG’s monopoly
in the rice market could re-emerge. Controlling and
deciding of who is the importer, how many quotas per
year, how many quotas for each importer is also diffi-
cult. Moreover, tariff quota policy is more difficult to
apply than the import tariff in terms of the manage-
ment system. Tariff management is needed in order to
make the simple rice tariff policy effective. Indonesia
can propose to increase the tariff, to even higher than
that tariff binding in the harvest season and otherwise
in the dry season. Indonesia needs flexibility in the
tariff rates for food crops, especially rice.
In the domestic support agenda, Indonesia can
make proposals the area of S&D Treatment and
‘green box’. For the S&D Treatment, Indonesia
could propose that subsidised credit and other
capacity-building measures should be permitted as
exemptions when provided to low-income or
resource-poor farmers. Indonesia could argue to have
greater flexibility because of an ‘unequal playing
field’ with developed countries, such as the level of
economic development, technology, infrastructure
and human resources. The greater flexibility to
increase the domestic support could be proposed
within the ‘green box’ framework.
As a country that exports agricultural products,
Indonesia has a strong interest in seeing developed
countries export subsidies further reduced. This
would improve Indonesia’s competitiveness in inter-
national trade.
Because there are differences in transaction costs
between developed and developing countries, the
domestic strategic policy should be aligned with the
international trade policy. The Indonesian Govern-
ment should increase the investment on infrastruc-
ture, better apply competition policy, provide greater
access to international services and transportation,
increase the efficiency and effectiveness of law and
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order, and disseminate information about and
promote the agreement reached.
Conclusion
This presentation has outlined the numerous trade
and investment reform packages that have been
launched by the Indonesian Government since 1989
in order to face the more open and competitive world
economy. Indonesia signed the commitment of
regional free-trade agreement various region which
are AFTA, APEC and WTO. The Doha Ministerial
Conference in November 2001 delivered new decla-
rations, especially on agriculture. The declarations
emphasise the importance of international trade in
promoting economic growth and alleviating poverty.
Indonesia agrees on the declaration, which will
reduce barriers to market access, export subsidies and
domestic support for agricultural product. The ‘Spe-
cial and Differential’ (S&D) Treatment allows Indo-
nesia as a developing country to reduce its barriers
against imports and its market-distorting forms of
domestic support by less than developed countries.
In the market-access agenda, a possible Indonesian
proposal is in the areas of access to developed-
country markets, food security, tariff binding, special
safeguards and anti-dumping, and minimum access.
Indonesia could complain that its exports still face
high tariffs and other barriers in developed countries’
markets, and that its attempts to develop processing
industries are hampered by tariff escalation (higher
import duties on processed products compared with
raw materials). Indonesia should propose to devel-
oped countries, especially its trading partners, such
as J apan, the USA and the European Union, to
provide quota-free and tariff-free access for products
from Indonesia. This would expand the market
access of Indonesian agricultural products. Careful
analysis by supply-chain methods and management
can be applied to find the critical points affecting the
competitiveness of agricultural products.
Acknowledgment
The author thanks the Australian Centre for Interna-
tional Agricultural Research (ACIAR) for funding
participation in the workshop to make this presenta-
tion.
References
Avila, J .A. 2001. From Seattle to Doha: prospects for a new
round of multilateral trade negotiations. Paper was
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Next WTO Round, 9–11 September 2001, Hanoi,
Vietnam.
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Nations) 1997. FAO year book 1997, production. Rome,
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www.fao.org>(accessed 2 J uly 2002).
GATT (General Agreement on Tariffs and Trade) 1991.
Trade policy review, Indonesia, volume 1. Geneva,
GATT Secretariat.
Larson, D.F. 1996. A review of the palm oil sub-sector in
Indonesia. Washington, International Economics
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World Bank.
Magiera, S.L. 2000. Indonesia’s international trade policy
commitments. J akarta, Nathan Associates, Partnership
for Economic Growth.
Oktaviani, R. 2002. Food security and rice import tariffs: a
background paper for the Indonesian Case Study on the
Macroeconomics of Poverty Reduction, September 2002.
J akarta, United Nations Development Programme.
Roberts, I., Buetre, B. and J otzo, F. 2002. Agricultural trade
reform and special treatment for developing countries in
the WTO. Canberra, Australian Bureau of Agricultural
and Resource Economics (ABARE).
Sawit, H. 2003. The development of the WTO agreement of
agriculture: Harbonson proposal and Indonesian need.
Paper presented at Road to Cancun: Indonesian
preparation to the next WTO Agreement, J akarta.
Soesastro, H. and Basri, M.C. 1998. Survey of recent
developments. Bulletin of Indonesian Economic Studies,
34(1), 3–54.
Stephenson, S.M. 1994. The Uruguay Round and its benefit
to Indonesia. J akarta, Ministry of Trade, Republic of
Indonesia.
Tabor, S.R., Sawit, M.H. and Dillon, H.S. 2002. Indonesia
rice policy and the choice of a trade regime for rice in
Indonesia. J akarta, INDEF Roundtable Discussion.
Tomich, T.P. 1992. Survey of recent developments. Bulletin
of Indonesian Economic Studies, 28(3), 3–39.
World Bank 2001. Indonesia: the imperative reform. Brief
for the Consultative Group on Indonesia.
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negotiations, the issues, and where we are now. On the
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Market Access and Job Creation: a Supply Chain
Action Agenda (the Case of the Philippine Fruit
Export Winners)
Nerlita M. Manalili
*
Abstract
Philippines’ bananas, pineapples and mangoes have a niche in the international market and are among the
country’s export winners. With a combined export value of US$236.5m, they account for approximately 38%
of the value of the country’s top 10 exports. The country has much to gain by tapping the potential of these
export winners, not only to gain foreign earnings, but also for job creation among its primarily agriculture-
dependent rural population.
To position Philippine fruits in the global market, will necessitate a review of the market, the product and
product flow, to ensure that they come together. This involves issues of market access as well as the
functioning of the supply chain.
The paper examines the supply chain for the Philippine fruit export winners (bananas, pineapples and
mangoes) and identifies three areas needing attention: product flow (internal), trade impediments (market), and
policy support. The focus is to enhance market access, as it is a means to expand trade, stimulate growth and
development, and create job opportunities in the agricultural sector. A framework for market promotion and
development within the context of the supply chain is outlined.
* Research and Development Department and Agro-
industrial Development Program, SEARCA,
Philippines
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Public Policy Issues in Supply-Chain Management
Donna Brennan*
Abstract
In this paper, the organisation of agricultural markets is explained from the perspective of economic
interdependence between agents in the supply chain. The high transactions’ costs associated with conveying
information about quality, monitoring and testing quality of inputs in the supply chain, and the high degree of
financial risk associated with investing in specialised agri-food enterprises, has led to a move away from spot
markets to integrated supply chains. Various forms of vertical organisation, including contracting and vertical
ownership, have evolved as solutions to information and incentive problems associated with this economic
interdependence.
The experience of contract farming as a means of providing opportunities to smallholders to participate in
agri-food supply chains of developing countries is presented in this context. While the private sector has an
increased role in the development of agricultural marketing services that were traditionally provided by the
public sector, there is still an important facilitative and regulatory role for government. The public policy issues
surrounding the vertical organisation of supply chains, particularly contract farming, are discussed.
The traditional form of agricultural marketing
involves the physical exchange of goods after har-
vest, where the prevailing market price is determined
by the interaction of demand and supply. Spot-
market transactions occur along the supply chain at
different stages of exchange, between farmers and
traders; traders and processors; and on to the retail
sector. Where goods are homogeneous or where
quality is easy to measure against industry standards,
prices determined through these spot-market transac-
tions contain the necessary incentives to direct farm
output and marketing decisions.
In contrast, in satisfying today’s food consumer,
the emphasis is on product differentiation and the
supply of quality attributes that are difficult to
measure. This has led to a revolution in the organisa-
tion of modern agri-food systems. Two main ele-
ments of change that stem from this consumer-
focused revolution are increased technical innova-
tion in agri-food production, and the high cost of
monitoring and assuring quality along the supply
chain.
Technical innovations in the food chain, which
have generally led to more capital- and knowledge-
intensive production, have led to economies of scale
at the food-processing level, and there is increased
dependency between players in the marketing chain.
Investors bear the risk of stranded assets if they do
not have a ready source of raw material input (farm
produce). The farmer may also face asset specificity
risk if there are sunk start-up costs with entering into
a new type of production. The increased concentra-
tion of industry that results from economies of scale
in the food processing and marketing end of the
supply chain raises the potential for abuse of market
power.
The high transactions’ costs associated with con-
veying information about quality, monitoring and
testing quality of inputs in the supply chain also con-
tribute to the trend towards vertical reorganisation of
markets. If it is impossible or too costly to measure
* REAP Research, PO Box 453, North Perth, Western
Australia 6906, Australia.
Email: <[email protected]>.
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the quality of a product at the time of sale, the scope
for using premiums to reflect quality differences, and
thus provide market incentives for quality produc-
tion, is diminished.
Management of the supply chain has become an
essential element of modern food-production sys-
tems. In this paper, the policy issues associated with
modern agri-food systems are discussed. The issues
are presented by first examining the main factors
influencing the vertical organisation of supply
chains. Economic interdependence has led to the
emergence of alliances between the downstream
private sector and the agricultural producer, which
implies a much greater role for the private sector in
agricultural sector development. The main type of
vertical organisation is contract farming, and after
outlining the main forms of contracts, the literature
on developing-country experience with contract
farming is reviewed. The discussion then turns to the
question of private and public sector roles in agri-
food supply chains in developing countries, and
public-policy issues are presented.
Characteristics of Agri-food
Marketing Problems that Promote
Vertical Coordination
There are two main explanations for the rise in ver-
tical coordination in agri-food industries. These are:
• asset-specific investments required by parties to a
transaction create dependencies that can be
protected better through contracting vis-a-vis open
markets (financial interdependence)
• the transactions’ costs of producing and
monitoring quality throughout the interdependent
production and marketing decisions associated
with modern food chains (information
interdependence).
Financial interdependence (asset specificity)
The asset specificity problem refers to relation-
ship-specific investments that are made in setting up
a supply chain. As long as the asset has a lower value
outside the supply-chain relationship, there is a risk
that parties to the transaction will act opportunisti-
cally. For example, a farmer may invest in a partic-
ular type of machinery in order to supply a particular
product to a processor. The farmer may make his
investment decision based on a negotiated price, but
once he has made the investment he bears the risk that
the processor will renege on the agreement. The proc-
essor will have the incentive to renegotiate prices if
the farmer has incurred a sunk cost and the asset has
little resale value. Having made the sunk investment,
the farmer will be forced to accept a lower return to
the invested capital because it has low opportunity
cost elsewhere. This problem is also referred to as a
‘hold up’ problem, because fear of opportunism asso-
ciated with asset specificity can prevent investments
from going ahead.
Asset specificity problems can arise at any point in
the supply chain. At the farm level, examples of
asset-specific investments include tree crops and
investments specific to livestock handling or posthar-
vest handling. Production of highly perishable crops
also represents an asset specificity problem. Once the
product is ready for harvest, the producer has little
bargaining power because the value of the product
rapidly diminishes, and thus the buyer has the incen-
tive to threaten to delay purchase and offer a lower
price. Forward-contracting of supply schedules and
delivery prices can assist in removing the risk of
opportunism associated with selling perishable pro-
duce.
In the downstream end of the marketing chain,
asset specificity problems also arise. For example,
the investor in a processing plant makes a highly
location-specific investment and is dependent on
acquiring raw-material input from the farms in the
vicinity of the plant. High economies of throughput
imply that a steady source of material is required, and
there is potential for opportunistic behaviour by the
farm sector. The severity of this threat will depend on
the nature of the farm product — if long-distance
transport of alternative raw-input supplies is unfea-
sible, such as in the case of eggs, then the farm sup-
pliers have stronger bargaining power in the post-
investment situation.
In many cases, the entire supply chain has relation-
ship-specific investments that imply that there is
potential for opportunistic behaviour by all parties.
While this co-dependency may lead to a mutually
beneficial outcome being struck even in the absence
of formal arrangements between the agents, there is a
tendency for relationships to be formalised through
contractual arrangements. These contracts attempt to
spell out various contingencies and reduce the scope
for opportunistic behaviour in a post-investment sit-
uation, thus providing greater incentives for mutually
beneficial supply-chain investments.
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Information interdependence
Increased dependency between decision-makers in
supply chains is a characteristic of modern agri-food
production systems. This interdependency gives rise
to information and incentive issues in the design of
supply chains. Problems arise where a decision-
maker, whose actions affect the wealth of another
agent in the supply chain, can hide information about
their actions. In this situation, it is necessary to design
monitoring and enforcement mechanisms to over-
come incentive-incompatibility problems. Contrac-
tual arrangements between agents in the supply chain
provide a lower-cost means of dealing with informa-
tion-asymmetry problems than in open market trans-
actions.
The source of many of these information-asym-
metry problems stems from the value placed on
quality attributes in the consumer product, where
these quality attributes are difficult or costly to
measure. Agents in the supply chain have little incen-
tive to supply quality if it is not possible to trace low
quality back to the individual supplier. Other sources
of information asymmetry include opportunities for
cheating on agreed supply-chain arrangements —
this problem arises because one individual has an
information advantage over the other and because it
is costly (or impossible) to monitor his performance.
There are two distinct classes of information-
asymmetry problems, hidden information and hidden
action (Sexton 1994).
Hidden information (adverse selection)
One of the important adverse-selection problems
in agri-food supply chains stems from the fact that
food consumers have strong preferences for
embodied attributes that are difficult to measure from
visual inspection of the consumer good. For example,
consumers have preferences for food safety and pro-
duction technique (e.g. free-range eggs) and are
willing to pay premiums for these attributes. They are
unable to assess whether these attributes are in the
product they are consuming and rely on information
provided to them by suppliers. There is an incentive
for suppliers to lie about these attributes and claim
the premium. The adverse-selection problem, if not
dealt with, results in a sub-optimal supply of quality
because, in the absence of screening information,
consumers base their willingness to pay on a proba-
bility-weighted expected value — which only low-
quality suppliers have the incentive to supply (Ack-
erlof 1970).
There are various ways in which product differen-
tiation (markets for quality) can be established, even
where it is difficult for the consumer to judge quality
from appearance of the good. Branding or labelling
provides one mechanism for signalling the quality of
a good. For example, companies using branding rely
on an established reputation to signal quality, and
consumers can obtain information about the quality
of the good through advertising or repeated pur-
chases and can be assured that quality will be main-
tained because of the cost to the supplier of lost
reputation. Mandatory labelling of food attributes is
an example of how public regulation can assist in
promoting markets for quality (Antle 1996). How-
ever, in many cases, there is considerable uncertainty
about food safety and the cost of measuring quality is
prohibitively costly, so alternative means of quality
assurance, such as monitoring of production proc-
esses (e.g. hazard analysis and critical control point
— HACCP), are necessary.
Information-asymmetry problems regarding the
quality of agri-food products pervade the entire mar-
keting chain. For example, the provision of product
guarantees at the consumer end also requires that
hidden-information problems be dealt with along the
length of the supply chain. Vertical coordination in the
supply chain is one means of overcoming these infor-
mation-asymmetry problems — for example, through
contracts that specify measurable quality. However,
other means include advertising and branding by input
suppliers; or by government intervention in licensing
or quality standards in upstream processes.
While contracting helps to overcome adverse-
selection problems related to the provision of food
quality, it can give rise to other types of information-
asymmetry (moral-hazard) problems, which are dis-
cussed below. Moreover, contracting does not neces-
sarily overcome all adverse-selection problems. For
example, participants in the contracting process face
adverse-selection problems in selecting with whom
to contract.
Hidden action (moral hazard)
Hidden-action problems arise in a post-contracting
situation, where there is an incentive for the agent to
cheat on the deal that has been struck. Such cheating
could be undertaken by the farmer, such as using
inferior (cheaper) inputs to production or not fol-
lowing specified production protocols aimed at pro-
viding the processor with desired quality of raw
materials. Successful development of contract
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farming requires that attention be paid to the design
of incentives and monitoring procedures to overcome
moral-hazard problems. The nature of these prob-
lems is specific to the good being produced, and
some examples of contract design to overcome such
problems are provided in the next section.
Vertical Organisation in Agri-food
Marketing Chains
Contractual arrangements between agents in the
supply chain can take a range of forms, and the nature
of the arrangements can be categorised by the degree
of control offered to the contractor. The choice of
control will be determined largely by the nature of the
industry, such as the degree of asset specificity and
the extent of information asymmetry at points along
the supply chain. The degree of control ranges along
the spectrum from the spot market, where market
prices provide the only information guiding produc-
tion and marketing decisions, to vertical integration,
where the downstream and upstream operations are
owned and managed by a single decision-maker. This
continuum is represented in Figure 1.
In practice, there is no clear distinction between
different types of contracts along the continuum, but
the marketing contract generally refers to a contract
regarding delivery schedules, pricing methods and
quality requirements. There is little direct input into
production decisions, and the contract helps to assure
both the farmer and the buyer of a market, whilst
managing the timing of marketing and conveying
information about quality premiums. This type of
contract is commonly used by small-scale con-
tracting operators (classified by Eaton and Shepherd
2001 as the ‘informal sector’). Characteristics of
these systems are products that have minimal
processing and few scale economies. Technical
advice is usually limited to grading and quality con-
trol, with little advice on production techniques. The
success of these systems is to some extent dependent
on the availability of public extension services (by
Eaton and Shepherd 2001), and also on the competi-
tiveness of the market, which affects the opportuni-
ties for buying or selling outside the contract.
Production contracts generally confer more
control to the contractor, and can include provision of
raw material inputs such as seed and fertiliser, tech-
nical directions regarding production technique, as
well as specifications regarding price schedules. The
specification of production contracts can help to
overcome monitoring problems by specifying inputs
(Martinez 2002). Where managing throughput in a
downstream processing plant is important, contracts
may include a delivery quota that helps assure a
regular delivery schedule.
Vertical integration is associated with a higher
degree of uncertainty, where it is difficult to specify
all contingencies via a contract (Hobbs 1996). How-
ever, the management costs of full vertical integra-
tion can preclude its use in some industries. It is more
likely to occur in industrialised production systems
where there is less reliance on decentralised decision-
making skills (like local farmer decision-making).
Use of Contract Farming in
Developed Countries
Contract farming is becoming an important form of
agricultural production in developed countries, par-
ticularly for crops that have a high degree of asset
specificity at the processing level; where quality
control and timing of delivery are important. Such
industries include pig and chicken meat production,
egg production, and the canning and frozen food
industries. For example, more than 80% of broiler
production and 70% of pig production is under con-
tract in the United States of America (USA) (e.g.
Martinez 2002). Overall, about one-third of the value
of agricultural production in the USA is now pro-
duced under contract (Young and Hobbs 2002).
That contracts are widely adopted in some indus-
tries indicates that they have cost advantages in over-
coming quality control and investment issues
associated with spot markets, while avoiding the
large investment and difficult management costs
associated with vertical integration. Contract design
varies from industry to industry, as contracts are
designed to deal with transactions’ problems that are
specific to that industry. However, problems are still
Least
Control offered to contractor
Most
Marketing
contract
Production
contract
Vertical
integration
Spot
market
Figure 1. Methods of vertical organisation along the
spectrum of control. Source: Martinez
(2002).
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encountered in contract farming for a number of rea-
sons. Firstly, it is difficult to specify all contingencies
in a contract, so there is always some scope for rene-
gotiation in an ex post setting, and this can lead to fear
of opportunism. Secondly, recourse to litigation is
often expensive or non-existent. Thirdly, even if it
were possible to specify fully the terms of the con-
tract, it is not possible to determine without cost
whether the terms of a contract are being fulfilled.
High costs of monitoring mean that the information
and incentive problems in agri-food production
systems continue to be an issue. Other problems with
contract farming are associated with the high degree
of concentration at the downstream end of the
industry. The potential for exercise of market power
by these firms in developed-country agri-food
systems is an issue of ongoing debate (e.g. Griffiths
2000; Young and Hobbs 2002).
Contract Farming in Developing
Countries
In the past few decades, the use of contract farming
has expanded rapidly in developing countries. Con-
tracts are used to source raw-material supply for
processing industries, such as canned and frozen
fruits and vegetables in Mexico (Key and Runsten
1999) and fresh horticultural exports from African
countries. In Indonesia, smallholder contracts
include production of seed corn, mangosteens, ginger
and fresh vegetables for the tourist trade (Simmons
2000). Firms entering into contract farming have had
mixed success (Key and Runsten 1999), and there is
much debate about who in the farming sector benefits
from successful contracts (e.g. Warning and Soo Hoo
2000; Echanove-Huacuja 2001).
Contract farming is used in developing countries to
overcome asset specificity and quality-control prob-
lems in agri-food marketing, just as it is in developed
countries. However, there are other dimensions to
contract-farming practices in developing countries
that affect the attractiveness of contracts to down-
stream firms. They also affect the scale at which con-
tracts will be offered and the distributional impact on
the farming sector. These extra dimensions to con-
tract farming relate to problems of imperfect or
missing markets in developing countries. Much of
the literature on contract farming in developing coun-
tries focuses on production or resource providing
contracts which have the advantage of overcoming
constraints associated with access to farm inputs
(factors of production, extension) commonly
encountered in these countries. In some cases, these
missing markets are associated with removal of par-
astatal marketing agencies; and agribusiness has
stepped in to fill the void by providing input supply
services in their contractual dealings with farmers
(Eaton and Shepherd 2001).
The question of whether contract farming can
benefit smallholders by giving them access to global
agri-food opportunities really comes down to three
issues. These are the attractiveness of market devel-
opment in the developing country, and hence the
number of contracting opportunities available; the
ability of smallholders to access these contract
opportunities; and the extent to which farmers ben-
efit, which depends on the terms of the contract.
Second-round impacts of contract farming also affect
poverty. These matters are discussed below and their
policy implications highlighted.
Smallholder access to contracting
opportunities
There is concern that smallholders do not get
access to opportunities for contracting, and there are
a number of reasons why this may be so. One of the
most commonly cited reasons is the high transac-
tions’ costs of dealing with smallholders (e.g. Sarto-
rius et al. 2003). These include costs of search and
negotiation; administration costs; higher costs of pro-
viding extension advice because farmers have a
greater need for it, and there are more of them; costly
communication because there is no access to tele-
phones; and higher monitoring due to pesticide vio-
lations (Key and Runsten 1999). In addition, there is
a need to provide more resources to these growers,
and while this invested capital can be recouped at
harvest/payment, there is a greater loss incurred
when there is a default on the contract.
Other reasons promoting contracts with larger
growers versus smallholders are that technology used
in farm production usually comes from developed
countries and consequently is capital-intensive and
has economies of scale. Larger farmers are usually
better educated and are better at adapting to new tech-
nologies. Larger farmers can also deal better with
yield risk, as they can self-insure through crop diver-
sification. It is difficult for downstream contractors to
assist in providing insurance against yield risk
because of the difficulty in monitoring whether crop
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failure is due to bad luck or bad management. Thus,
smallholders cannot be readily involved in produc-
tion of highly risky crops (Key and Runsten 1999).
However, there are some reasons why small-
holders might be advantaged over larger farmers in
the choice of contracting partners. These relate to
missing or imperfect markets. For example, they are
likely to be credit constrained, which can work to the
contractor’s advantage if there is a premium to be
earned from filling missing credit markets. One of the
problems with supplying credit to farmers is that the
cash can be diverted into other activities, but Key and
Runsten (1999) argue that the risk of default can be
reduced by supplying credit in-kind. Since produc-
tion contracts are normally more lucrative than tradi-
tional crops, the desire to maintain the contract over
the longer term can provide a further incentive for
compliance. Group dynamics and peer pressure can
provide an effective self-monitoring role where a
smallholder group faces the prospect of losing a con-
tract if one of the members defaults.
Where price (as opposed to yield) risk is the key
problem in a new crop, there may be an incentive to
contract with smallholders because of the returns to
providing ‘price insurance’. That is, smallholders are
likely to be more risk averse and hence will be willing
to accept a lower (fixed) price in the contract, which
essentially reflects a market risk premium afforded to
the contractor.
Another feature of smallholders is that they nor-
mally have an abundance of labour and are thus
willing to take on labour-intensive activities at a
return less than what would be achieved if the con-
tractor had to hire labour. Some examples of case
studies that have demonstrated a smallholder advan-
tage in contract farming are illustrated in Table 1.
The requirements of large and small farmers differ
in that the latter require a much higher level of service
(e.g. resources and information) and are also much
more costly to deal with. In theory, both types of
farmers could be accommodated in contracts as long
as the agribusiness firm can discriminate between
them, offering a range of contracts that provide a dif-
ferent level of service and a different price, to account
for the extra cost of service. However, experience
from Mexico reveals that this can be politically unac-
ceptable — for example, Campbells offered seven
types of contracts designed to cover large and small-
holder requirements but were eventually pressured to
remove their ‘price discrimination’ practices; and
were thus no longer able to offer contracts that recov-
ered the transactions’ costs to smallholders (Key and
Runsten 1999).
Since the main cost disadvantage of contracting
with smallholders is the cost of transactions, policies
aimed at reducing this cost will assist in levelling the
playing field for smallholders. For example, govern-
ments can play a development role by introducing
sponsors to farmer groups (and helping in selection
of suitable regions). They can also act as intermedi-
aries and protect farmers by scrutinising the spon-
sors’ plans and intentions on behalf of the farmer
before contract development. Such a developmental
role reduces the search costs associated with finding
and negotiating with potential contractors. This facil-
itating role could also be played by non-govern-
mental organisations (NGOs), and there is some
evidence to suggest that the involvement of NGOs
does contribute to contract success (Simmons 2000).
One of the reasons for failure of contracts is a lack
of understanding on the part of agribusiness firms as
to the social and cultural constraints to production.
For example, lack of awareness of the religious or
social calendar could result in contracts that have
inappropriate demands on labour that conflict with
social or religious obligations. Government (or
NGO) mediators could play a role in scrutinising the
terms and conditions of the contract to ensure that
they do not pose such conflicts.
Developing the capacity of the smallholder to par-
ticipate in contract farming, through provision of
public extension advice concerning production, will
also reduce the private cost of contracting with small-
holders. The public sector might also provide public
extension services to advise farmers on the implica-
tions of various contracting decisions. One of the
problems with contracting is the lack of transparency
in market transactions, which makes it difficult for
farmers to assess the merits of contracting. The gov-
ernment may play a role in advising farmers on
assessing contract terms and in dealing with contract
disputes (Young and Hobbs 2002). Similarly, provi-
sion of public market-information services will assist
the farmer in choosing between agribusiness mar-
keting alternatives.
Land policies that restrict foreign ownership may
be conducive to improving opportunities for small-
holders because they preclude plantation farming and
vertical integration. Warning and Soo Hoo (2000)
present the case of a particular region in Mexico
where local constraints on land markets meant that
smallholders had a cost advantage (low rent) and
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were thus chosen as contractors. However, it should
be noted that there are other factors that go against
plantation farming, such as a high cost of investment,
and the production risk. The high cost of supervising
labour in less industrialised agricultural systems,
such as tree crops, is cited as the reason why many
crops formerly grown as plantation industries are
now being farmed under contract (Key and Runsten
1999; Eaton and Shepherd 2001).
Most of the studies of smallholder experience with
contracts have focused on resource-providing pro-
duction contracts associated with processed or fresh
export marketing. The nature of the contract is that a
high degree of quality control is important and small-
holders are generally disadvantaged because of the
high transactions’ costs of monitoring performance.
However, other opportunities for contract farming
are possible in domestic urban markets. For example,
contract farming of vegetables and milk for the
domestic market is common in Asia. In the case of
fresh vegetable markets, there are lower investment
costs (and less distinct scale economies) in the down-
stream sector; and there are likely to be less stringent
quality standards than in export marketing. These
two factors imply that the degree of control required
by the contractor will be less, and vertical organisa-
tion of markets is more likely to have a spot-market
or marketing-contract orientation. Policies specific to
the promotion of marketing contracts will improve
smallholder access to these opportunities. One
important factor impinging on the success of mar-
keting (as opposed to production) contracts is that
problems of missing markets must be overcome. For
example, if contractors only supply marketing serv-
Table 1. Some case studies on smallholder experience with contract farming.
Commodity Country Smallholder disadvantage/advantage Reference
Frozen vegetables Mexico Disadvantaged. They did not have access to
reliable irrigation water (as timing of delivery
was unreliable due to common-property nature
of wells).
Echanove-Huacuja (2001)
Frozen vegetables Mexico
(one region)
Advantaged. Farm family members worked in
processing factory and this ensured compliance
of farmers, for fear of relatives’ job loss.
Smallholders had lower land rental costs to
local land policy.
Warning and Soo Hoo (2002)
Processing tomatoes Mexico Advantaged. Large holders were defaulting on
contracts due to lucrative fresh market.
Smallholders couldn’t access this market so
were more reliable. They were also credit
dependent, which promoted compliance due to
longer-term demand for credit.
Warning and Soo Hoo (2002)
Peanuts Senegal Neutral. Simple technology did not
disadvantage smallholders. Firm used local
intermediaries to screen and monitor potential
growers, keeping transactions’ costs low.
Warning and Soo Hoo (2002)
Seed corn Indonesia Potentially neutral. Firm used traditional
grower groups to keep transactions’ costs low.
Contracted with 40 groups involving 10,000
individual growers. However, comparison of
contracted and non-contracted farmers revealed
contracted farmers generally larger scale.
Simmons (2002)
Pickling cucumbers Mexico Advantaged due to low labour cost. Warning and Soo Hoo (2000)
Frozen vegetables Mexico
(one case)
Used as last resort because larger growers were
attracted to grain production due to pro-grain
agricultural policy.
Warning and Soo Hoo (2000)
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ices, smallholders will need to be able to access
extension services, credit and obtain access to factors
of production through alternative means. Rural
development policy aimed at overcoming these
missing-market problems will assist in promoting the
use of marketing contracts, and may improve the
access of smallholders to marketing opportunities
associated with rapidly growing domestic urban mar-
kets. Under such improved conditions, marketing
contracts may offer a better alternative to spot-
market transactions because of the value added by
giving growers signals on the quality and type of
product demanded in urban markets, and in man-
aging the timing of delivery.
There are, however, other problems associated
with marketing contracts that need consideration.
These are that volatile markets provide one of the
contracting parties an incentive to renege on the
agreement, and source/sell outside of the contract.
For example, the contracting party, after agreeing to
buy a certain crop at a particular price may ‘disap-
pear’ if there is a glut in the market. Similarly,
growers may sell elsewhere if prices are better.
Buyer/seller default is a commonly cited problem in
fresh-produce markets (e.g. Poole 1998). Govern-
ment intervention to facilitate a bonding or down-
payment scheme could assist in providing greater
security to contracting parties (Key and Runsten
1999).
Terms of contract — market power issues
The extent of market power that can be achieved in
an agri-food market is affected by the relative bar-
gaining power between the contracting firm and the
farmer. The bargaining power of the contractor is
stronger where they have a monopoly on input or
output markets. For example, production of non-tra-
ditional crops that have no market demand domesti-
cally, such as cauliflowers in Mexico, require special
inputs (seed) and access to an export market — this
offers significant market power to the contracting
firm. Farmers have some bargaining power where
they are able to form groups; and where they have
access to other factors of production, other markets
for their products, and to other production opportuni-
ties.
In situations where the contracting firm has signif-
icant market power, there may be a role for govern-
ment in regulating their pricing behaviour. Antitrust
legislation provides a framework for protection in
developed countries although it has not been success-
fully used in appeal against pricing behaviour of agri-
business firms (Simmons 2000). One factor that
makes regulation of pricing behaviour in agri-food
chains difficult is the associated decline of spot
markets (Young and Hobbs 2002). Thin spot markets
do not provide a reliable measure of market condi-
tions and therefore make it difficult to compare con-
tract returns with a market benchmark.
Difficulties in applying antitrust regulation in
developed countries would imply that prospects for
its use in developing countries, where the legal
system is poorly developed, are dim. J ones (1995)
points out that attempts to regulate behaviour can be
counterproductive, as enforcement relies on the local
administration, which is likely to be influenced by
local political pressures. Measures designed to
control exploitation, such as licensing and the restric-
tion of trade to certain locations, can actually be used
to reduce competition. Some authors raise concerns
that the threat of overzealous regulation could reduce
the attractiveness of investment. For example, Key
and Runsten (1999) argue that investors need to be
guaranteed of some profits to justify the risks and, in
particular, the start-up costs associated with industry
development, and that excess profits will be removed
by the threat of entry anyway.
Echanove-Huacuja (2001) reports that exploitation
of growers usually occurs through ‘quality’ down-
grades when there is an excess supply. Growers say
that there is much more argument over quality assess-
ment than price. This implies that the public sector
may play a role in ensuring consistency in the appli-
cation of quality standards, either by creating
industry standards, if appropriate, or by providing
mediation over quality disputes between growers and
contracting firms.
One of the developmental roles that the govern-
ment can play is in supporting and assisting producer
organisations. These associations are particularly
important for dealing with transactions between
smallholders and large firms, because of the associ-
ated transactions’ costs (Key and Runsten 1999). In
the USA, several states have recently passed legisla-
tion to strengthen the rights of producers to form bar-
gaining groups, in response to concern over market
power associated with increased concentration in the
downstream market (Young and Hobbs 2002).
Scrutiny of contract terms and conditions at the
start of a contract may not be sufficient to guarantee
smallholder welfare. There is a perception that con-
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tract terms and conditions gradually deteriorate over
time, although there is little hard evidence on whether
or not this is true. Some conjecture that initially better
terms are provided to cover grower set-up costs; an
alternative explanation is that firms can tighten
pricing as they identify the cheaper operators and
sack high-cost farmers from their contracts (Sim-
mons 2000). Further research on the experience of
smallholders with contracts over time is warranted to
assist in the public debate over the long-term benefits
of contract farming for smallholders. Meanwhile,
one method of scrutinising the merits of contracts
during the set-up phase is to examine the likely ‘exit’
costs imposed on farmers. If there are sunk costs
associated with moving into contract farming, or if
contract farming results in loss of traditional markets,
then smallholders are less able to move back to tradi-
tional practices. These higher exit costs mean that
farmers have lower bargaining power and are likely
to be subject to deterioration of contract terms after
they have been induced to switch into contracted
farming.
Encouraging market development
Opportunities for smallholder access to supply
chains are ultimately limited by the development of
these supply chains by investors. There are a number
of areas where the public sector can play a role in
facilitating such development.
Much of the promotion of contract marketing in
developing countries can be attributed to foreign
firms that have brought their experience with con-
tracting from developed countries. They have access
to appropriate technology, output markets and distri-
bution networks in the exporting country and are
therefore in a good position to develop supply chains
in developing countries. They also provide spillover
benefits through the technology they introduce (Gow
and Swinnen 1998). Consequently, policy towards
foreign direct investment (FDI) will have an impor-
tant bearing on opportunities for agribusiness devel-
opment. Echanove-Huacuja (2001) reports on the
experience of frozen food sector in Mexico, which
was initiated by two large multinationals, but now
domestically owned agribusiness firms have the
largest market share.
Suitable laws of contract and an efficient legal
system are prerequisites for a strong agribusiness
sector. The state has a role in providing a regulatory
framework that defines what constitutes legitimate
contracts, and a system of authority to enforce con-
tracts (J ones 1996). The government sector can assist
in assuring food quality either directly by providing
laws relating to food quality and public health; as
well as indirectly by assisting with voluntary certifi-
cation schemes. For example, it could play a role in
the verification of industry quality-assurance
schemes, industry standards and accreditation. It may
also invest in research to reduce monitoring costs,
thus reducing transactions’ costs.
Whilst agribusiness firms are active in research
and often bring technology to bear in a contract, there
are many cases where public research and extension
can assist the development of agri-food chains. In
many cases, private-sector developers find it easier to
move on than to invest research funds in local issues
such as pest management. A stronger research and
development system, centred on local agro-ecolog-
ical issues where spillover benefits to the country are
possible, is likely to promote development of agri-
business ventures.
Agricultural policies may impact on the attractive-
ness of contract farming. For example, if there are
agricultural subsidies used in promoting traditional
crop production for food security, the relative attrac-
tiveness of contract farming will be distorted and it
will cost more to entice farmers to enter contracts.
Agricultural policies can affect the participation of
larger farmers in contract farming and thus affect
opportunities for smallholders. For example,
Warning and Soo Hoo (2000) note that opportunities
for smallholder participation in contract farming in
Mexico arose because large producers were attracted
to grain production as a result of pro-grain agricul-
tural policy. A subsequent policy shift reduced the
profitability of grain production and, as a result, the
pool of available large growers increased and small-
holders were shut out of contract opportunities.
Customs and quarantine arrangements will affect
the transactions’ costs associated with exporting the
agri-food product. High taxes, cumbersome proce-
dures, and corruption can all affect the cost of setting
up export markets and therefore impact upon incen-
tives to invest in a particular country. Inadequate
quarantine arrangements and poor capacity in pest
management can affect the export attractiveness of
certain crops, through the exercise of sanitary and
phytosanitary (SPS) measures in importing coun-
tries. The government has a role to play in promoting
good quarantine and conducting research in quaran-
tine issues of national importance.
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Public investment in infrastructure will improve
the access of smallholders to markets and reduce the
costs associated with transacting with them. One of
the successful smallholder contracting experiences in
Mexico was attributed to the selection of farmers
adjacent to the national highway (Warning and Soo
Hoo 2000). A strong transport infrastructure also
stimulates development of other market opportuni-
ties, including spot markets, and creates opportuni-
ties for market development by smaller domestic
agribusiness firms.
Governments also have a role in setting an effec-
tive general environment for agribusiness develop-
ment. Sound macro-economic policy is essential for
industry development. For export-oriented supply
chains, a stable exchange rate is necessary to ensure
the viability of the operation, which earns receipts in
one currency and incurs costs in another. A stable
political environment is also essential for assuring
access to markets and services. For example, Eaton
and Shepherd (2001) give the example of the disrup-
tion caused to tourism, and hence access to air-freight
services, that can result from military coups.
Broader issues
There are broader issues associated with contract
farming that can impact on the welfare of small-
holders. These are the second-round effects associ-
ated with adoption of contract farming in a particular
region. Widespread adoption of contract farming in a
particular area could cause thinning of traditional
markets, which can impact on those producers still
producing for that market. For example, if market
size is significantly diminished, it may not be viable
for traders to source any product from that region.
Where a region’s traditional markets are lost, oppor-
tunities to moving out of contract farming are dimin-
ished and this can reduce the bargaining power of
contracted farmers. Other potential negative effects
of contract farming may be an increase in factor
prices as production of high-input crops increases
factor scarcity. Food prices will also go up if contract
farming is associated with a reduction in food pro-
duction and markets are fragmented. Where contracts
are only awarded to larger-scale farmers, the net
effect on smallholders may be negative. Positive
second-round impacts of contract farming are those
associated with increased income in the region,
which can increase demand for goods and services.
The potential importance of all of these factors
should be accounted for in the process of selecting
regions for promotion of contract farming, and poli-
cies for alleviating any adverse distributional impacts
should be considered.
Promotion of alternative institutions for
local agribusiness growth
The importance of transactions’ costs in the vertical
organisation of agricultural markets implies that gov-
ernments may have a role to play by providing insti-
tutional arrangements that reduce these costs, in order
to influence the structure of the industry. Hubbard
(1997) notes that weak institutions in developing
countries lead to a bi-modal industry structure where
the only firms able to enter the high-value export
market are those with large enough capital, their own
institutional arrangements for overcoming missing
markets etc. The implication for the agri-food sector
is that market concentration could reduce the benefits
to the farming community, and to the domestic
economy. The potential for growth of smaller-scale
regional firms into the agri-food industry could be
improved by improving public institutions relevant to
the agri-food trade. For example, the need for brand-
based quality assurance at a large scale may be due to
the lack of standards/legislation in food handling that
would otherwise guarantee compliance to safe food
practices by the small–medium enterprise sector. An
improved food-standards code may promote opportu-
nities for domestic agribusiness firms to enter the
domestic food market in competition with multina-
tionals. This will reduce the market power of large
agribusiness firms providing a better outcome for
both domestic consumers and farmers.
Similarly, a publicly coordinated strategy for
improving national reputation in the export sector may
assist the smaller-scale sector from establishing export
markets, by reducing establishment costs associated
with individual firm reputation development. This will
provide a more competitive industry structure that will
reduce the potential problems associated with current
vertical arrangements in the food industry.
Conclusion
The agri-food sector has moved from a production-
driven to a customer-driven focus, and this has
resulted in a restructuring of vertical arrangements in
the industry. Contract farming has emerged as a
means of managing supply-chain interdependencies
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in both developed and developing countries. There is
considerable debate about whether such arrange-
ments actually benefit smallholders, and evidence on
this matter is mixed. In general, the high transactions’
costs associated with dealing with this sector places
them at a competitive disadvantage, although in some
circumstances other factors may contribute to their
attractiveness as contractees.
Public policies that promote the role of the small-
holder in contract farming will ensure that small-
holders can capitalise on the opportunities in today’s
global agri-food market. Efforts to reduce the transac-
tions’ costs of dealing with smallholders, through pro-
motion and facilitation of smallholder links to
agribusiness, and provision of research and extension
services, will improve smallholders access to con-
tracts. Governments may need to play a role in over-
seeing the terms of contracts to ensure that
agribusiness does not abuse market power associated
with the high degree of concentration in the down-
stream sector. Promotion of growers’ organisations
and monitoring of contract terms and conditions are
means of achieving this. Finally, attention needs to be
given to policies that affect the attractiveness of
investment in the country’s agri-food sector, and these
include foreign direct investment (FDI) policies,
general macro-economic stability, as well as agricul-
tural and trade policies that affect the comparative
advantage of establishing supply chains in that
country.
Over the longer term, policies aimed at improving
the competitive structure of the industry should be
investigated. These would be focused on removing
the technology bias towards large-scale firms by pro-
viding public institutions for quality assurance, and
other public services such as extension, that will
reduce the large (private) set-up costs associated with
agri-food market development.
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Supply-chain Management and Agro-Enterprise
Development: CIAT’s Approach in Southeast Asia
Christopher Wheatley,* Rupert Best,
†
Dai Peters
§
and John Connell
¶
Abstract
The Rural Agroenterprise Development Project of the International Centre for Tropical Agriculture (CIAT)
has taken a territorial approach to equitable, market-oriented, agriculturally based development in the rural
tropics, with the objectives of poverty reduction (through income generation) and environmental
sustainability. A four-stage methodology has evolved based on experiences in South America, Africa and,
more recently, Southeast Asia. These stages are:
•formation of working groups at the level of rural communities, comprising stakeholders interested in
equitable, market-oriented agro-enterprise development, and building consensus on a vision for the future
•prioritisation of agri-food subsectors for further development, based on integration of market demand,
production and environmental criteria, and economic profitability, and in line with overall working-group
objectives
•strengthening of the supply (value) chains associated with each prioritised subsector, with active
involvement of local community groups, support organisations and supply-chain actors from outside the
rural area
•development of sustainable services (business development services) to support and further enhance the
competitiveness of the supply chains into the future.
Examples of this approach from South America and Vietnam — the root-crop starch subsector — are
presented, along with details of a new project in Vietnam and Laos, funded by the Swiss Agency for
Development and Cooperation (SDC) — Small-scale Agroenterprise Development in the Uplands (SADU) —
which aims to adapt the process to the situation of these two Southeast Asian countries.
Globalisation, trade and public-sector reforms, urban-
isation and technological advances are all contributing
to an agricultural sector in rapid change across the
developing world. Rural smallholders, who must be
reached if the millennium goal of reducing poverty
rates by 50% by 2015 is to be met, face declining real
prices for their basic commodities. Competitive pres-
sures, often from imported foodstuffs, are driving a
process of intensification in the use of natural
resources. This has potentially serious consequences
for sustainability in the longer term.
Markets are penetrating deep into what were for-
merly rural subsistence economies. To survive, pro-
ducers now need to operate successfully in a
different, market-oriented environment where new
skills and knowledge are needed to make different
types of decisions. At the same time, the agri-food
industry is itself changing, with a rapidly increasing
role for managed, coordinated supply chains that are
Rural Agroenterprise Development Project, International
Centre for Tropical Agriculture (CIAT),
* PO Box 462, Nelson, New Zealand.
Email: <[email protected]>.
† PO Box 6247, Kampala, Uganda.
Email: <[email protected]>.
§
67 To Ngo Van, Tay Ho, Hanoi, Vietnam.
Email: <[email protected]>.
¶
PO Box 783, Vientiane, Lao People’s Democratic
Republic (PDR). Email: <[email protected]>.
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dominated by a few large — often multinational —
supermarket retailers.
This trend of increasing concentration and vertical
coordination in agri-food supply chains tends to mar-
ginalise smaller-scale producers. In turn, rural pro-
ducers are seeking options that will provide
opportunities for them to improve their livelihoods
and incomes. These can include production of
higher-value crops (rather than basic commodity sta-
ples), differentiation and added value through pro-
duction practices (e.g. organics), product quality,
packaging and marketing strategies (e.g. fair trade).
Options also include leaving agriculture to seek off-
farm income, either in the local rural area or via
migration to urban centres.
To achieve success with the demand-side options,
smallholder producers need to participate in supply
chains for added-value products with growing mar-
kets. This means finding ways to participate in the
type of managed supply chains that are now devel-
oping, in a manner that is both efficient (i.e. compet-
itive), but that is also compatible with environmental
and social sustainability. This implies a need to
combine a supply-chain approach with local devel-
opment processes in specific communities (a territo-
rial approach). This paper presents an approach by
the International Centre for Tropical Agriculture
(CIAT; Centro Internacional de Agricultura Trop-
ical) Rural Agroenterprise Development Project to
meet this challenge.
The Rural Agroenterprise
Development Project at CIAT
1
Based in Cali, Colombia, the project started in 1996
as an outgrowth of previous work on postharvest
technology, marketing and enterprise development
of cassava. The purpose of the project is to link small-
holders with growth markets and motivate the adop-
tion of natural resource conservation practices
through the development of techniques and informa-
tion for the establishment and strengthening of rural
agro-enterprises and their complementary support
services. In particular, the project focuses on
strengthening local capacities for rural business
development through information, methods and
institutional schemes, all in collaboration with local
partners.
Basic values of the project include: (a) an entrepre-
neurial, market-oriented focus, (b) participatory deci-
sion-making with partners, (c) a focus on
strengthening existing local skills and building new
ones, (d) a search for consensus among actors, (e)
equal access to opportunities for participating
groups, and (f) social, economic and environmental
sustainability.
The territorial focus has been developed in three
specific field sites in Latin America: Pucallpa, Peru;
Cauca, Colombia; and Yorito, Honduras. In each of
these sites, CIAT has worked with a variety of local
partners including producer groups, non-govern-
mental organisations (NGOs), governmental organi-
sations, the private sector and others. It is out of this
field work and dialogue with partners that the
approach has evolved.
Before explaining the approach in detail, it is impor-
tant to explain why CIAT has chosen to combine a ter-
ritorial approach with the development of supply
chains for specific, prioritised commodities or prod-
ucts. By focusing on a given geographical area or ter-
ritory, it is hoped that a local skills base may be built
that not only generates positive returns for a specific
subsector or supply chain, but also produces spillover
effects which contribute to a diverse and dynamic local
economy. Market systems will change, so by not lim-
iting work to a specific product, a territorial approach
allows flexibility and adaptive learning which the
working groups can continue to apply as the market
opportunities change. For agricultural products, a
focus on the land where they are produced also helps
the development of more sustainable and diverse pro-
duction systems, whereas a single supply-chain focus
could tend to do the opposite. In addition, the selection
of a number of options for a given territory makes it
possible to target different socioeconomic groups or
agro-ecological niches, providing for more balanced
social and agricultural development. Finally, the crea-
tion of human capital and the improvement of both
bonding and bridging social capital among organisa-
tions are embedded in this approach. This last point is
important for achieving sustainable gains against
poverty in a region.
The territorial approach consists of four major
areas of work:
(a) identification of a specific working group
composed of diverse local organisations with
interest in rural business development
1
This section draws on the paper prepared by the CIAT
project staff in Latin America (Lundy et al. 2002).
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(b) identification of supply-chain priorities based
on the market opportunities available to the
region
(c) participatory supply-chain analysis and devel-
opment, through consensus-building with chain
actors
(d) provision of appropriate and sustainable
business-development services for the region.
The entry point for this approach is the identifica-
tion and consolidation of a local working group in a
particular community or territory. The other areas of
work are subsequently developed in collaboration
with that group.
Local working-group formation
The formation of a working group around the theme
of rural business development is an iterative process
that varies depending on the organisations present in
the area, previous experiences and the necessities of
the local population. In our experience, these groups
usually include strong representation from producer
organisations and NGOs, with somewhat lesser partic-
ipation by public- and private-sector actors. Member-
ship in the interest group and the organisational form
are decided by the participants, as is the demarcation
of the territory in which the interest group seeks to
work. To facilitate these decisions, two specific activ-
ities are carried out with the interest group at the begin-
ning of the process. First, a profile of the territory,
including biophysical, social, organisational, institu-
tional, economic and political concerns, is developed
with secondary data and the use of rapid rural-
appraisal tools. This information provides a common
basis for decision-making among group members.
Based on this information, a consensus for action is
developed that builds on agreements around a
common vision, mission and values, and the organisa-
tional structure and rules for working-group operation.
An initial action plan is then developed. At this stage,
topics like market orientation, entrepreneurship, par-
ticipation and alliances are debated. This process is
key, since it allows group members to discuss and
analyse past experiences and decide on what actions
are appropriate in the future.
Identification and management of market
opportunities
Once the working group exists, one of the first
questions is which products and/or areas are most
likely to generate positive impact for the region. To
avoid past mistakes where increased production of a
single or restricted range of crops/products led to sat-
urated markets, low prices and continuance of the
poverty cycle, a market orientation is fostered by
involving the local actors directly in the identifica-
tion of market opportunities. This process consists of
two types of work: specific market studies and the
on-going management of market intelligence. In the
first area, CIAT has developed a market-opportuni-
ties identification manual (Ostertag 1999) which
seeks to respond to three main questions:
(a) what products show strong market demand in
terms of increasing volumes and prices
(b) which of these products can be produced in the
region, given the biophysical characteristics,
infrastructure and access to productive
resources
(c) of those products identified in (a) and (b), which
are of interest to smallholders?
This opportunity-identification process involves
the collection of information from different market
outlets, including produce markets, local shops and
supermarkets, food processors and traders in order to
assess the prospects and potential for developing
produce and product supply options. These market
outlets can be local to the territory or beyond, in
urban centres, or in some cases in neighbouring coun-
tries. Opportunities for export can also be considered.
The end result is a portfolio of options. The size
and diversity of this portfolio depends on market con-
ditions, biophysical characteristics and potential of
the territory to produce any given alternative, profit-
ability and on farmer interest, but normally includes
from 10–30 possibilities. Sustainable-production cri-
teria — soil conservation, biodiversity etc. — can be
included in the evaluation and prioritisation process.
In the area of market intelligence, we seek to build
local capacity to generate, manage and disseminate
key market information on a permanent basis. This
capacity involves not only direct market visits by
working-group members and/or interested groups of
farmers, but also strategic alliances with national
market information system programs and the devel-
opment of information dissemination tools appro-
priate to the rural context and local culture.
The end result of a market-opportunity identifica-
tion study is a basket of possible options for develop-
ment in the selected region. At this stage, the working
group prioritises these options based on local criteria
in a participatory fashion. Local criteria used have
included strength of market demand, product profit-
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edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
167
ability, environmental impact, perceived ex ante
development impact, and interest in the product by
organisations, among others. These criteria vary by
region and culture. Using local criteria, the market
options are ranked and a decision made on which
option(s) to pursue first.
Integrated supply-chain projects
At this stage, the local working group moves into
the participatory analysis of the selected product
supply chain. CIAT has developed a method that
seeks to facilitate the analysis of the market chain by
the actors directly involved and, through this process,
to generate collectively owned information and a
consensus for action. The scope of this analysis is
somewhat broader than a typical subsector approach
in that it includes not only the supply chain as such
(production, postharvest/processing and marketing),
but also two important cross-cutting areas: business
organisation and the provision of business develop-
ment services (see Figure 1).
Business (enterprise) organisation and support
services present in a supply chain are key to under-
standing the prospects for improving chain perform-
ance through the effective use of existing skills and
services, as well as identifying important bottlenecks
that constrain such improvements.
Once priority supply chains have been agreed, spe-
cific market contacts are identified. This is comple-
mented by a broader identification of relevant actors
(those involved in production, postharvest and mar-
keting operations) who can participate in the analysis
of the chain. Participatory tools, focus groups and
direct interviews with the different actors are used to
collect supply-chain information (chain mapping).
This helps to group actors so that the perceptions of
traders, producers etc. can emerge independently, for
later comparison and analysis in a wider group set-
ting. All actors then review this information to iden-
tify and analyse bottlenecks and propose solutions.
At the end of the process, facilitated consensus-
building workshops are held where all the informa-
tion is shared and discussed with the various actors
with the goal of identifying positive synergies among
actors, common interests and critical points where
strategic investments can achieve high returns.
Figure 2 shows the steps used in this analysis.
After the process of negotiation with actors occurs,
an action plan, or integrated agro-enterprise project
(IAP), is drafted, which includes research and devel-
opment (R&D) activities in the short, medium and
long term. The goal of this project is to improve the
competitiveness and sustainability of the chain
through the development of a common business-
development vision among various actors. Once a
common vision has been established, specific devel-
opment or research activities may be disaggregated
into discrete projects, depending on funding opportu-
nities and donor interest, while conserving a clear
idea of where everything fits together.
The implementation of activities is coordinated by
the working group, which sources appropriate funds
and technical services based on the demands identi-
fied during this process. By learning how to design
and implement an IAP — diagnose, analyse, design,
source funds and coordinate implementation activi-
ties — the local working group builds important
capacities, which are needed for other future projects.
Provision of appropriate and sustainable
business development services
A final component in the CIAT approach is the
provision of appropriate and sustainable business
development services (BDS) that support the partici-
pation of rural communities in these more efficient
supply chains. A methodology is now under develop-
ment at CIAT for assessing the supply and demand
for services in local communities, and for ensuring
that gaps in the market for services are filled in a sus-
tainable manner. This covers financial, non-finan-
cial, formal and informal services and seeks to build
functional markets for BDS that link specific
demands with suppliers either at the local, regional or
national level. This is currently under development in
Figure 1. The scope of supply-chain analysis.
Production
Postharvest
handling and/or
processing
Marketing
Business organisation
Support services
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a project in Honduras and Colombia supported by the
New Zealand Agency for International Development
(NZAID).
These methods have been developed through par-
ticipation in local and supply-chain development
projects in Latin America — see Lundy et al. (2002)
for more information on the results obtained in Peru,
Colombia and Central America to date.
CIAT Project Activities in Asia
Between 1998 and 2002, CIAT’s Agroenterprise
Project has had two areas of activity in Asia, one
focused on the root-crop starch subsector in Vietnam
— especially the small-scale processing enterprises
around Hanoi — and the other concerned with devel-
oping a strategic alliance with the SEAMEO (South-
east Asian Ministers of Education Organization)
Regional Center for Graduate Study and Research in
Agriculture’s Agroindustry Development Pro-
gramme (SEARCA-AIDP) and the network Users’
Perspectives With Agricultural Research and Devel-
opment (UPWARD) for capacity-building in the
agro-enterprise development area. During 2003, a
major agro-enterprise development project for Lao
People’s Democratic Republic (PDR) and Vietnam
has been initiated, funded by the Swiss Agency for
Development and Cooperation (SDC), representing
an opportunity to adapt the methodologies developed
in Latin America (and now also being trialled in
Africa) to the Asian regional situation.
Rural agro-enterprise development training
courses with SEARCA and UPWARD
Two regional courses have been conducted, one at
SEARCA, Los Baños, Philippines, in 2001, and a
second at the Post-Harvest Technology Institute, Ho
Chi Minh City (PHTI-HCMC), Vietnam, in April
2003. The courses stressed markets and supply-chain
development in the context of territorial (micro-
regional) processes and priorities. Each course com-
prised modules on:
• Asian context — macro policies and trends in rural
development and the agri-food sector
• local participation
• methods for designing and implementing rural
agro-enterprise projects
• learning from experiences
• project design, including field work.
Figure 2. Steps in the supply-chain analysis method.
Prioritise the
production chain
Identify market
contacts
Identify and
convene actors
Map the farm to
market chain
Analyse business
organisations
Evaluate the
business
development
services system
Analyse critical
points
Market chain
diagnosis
Negotiate and design
the integrated agro-
enterprise project
Map the farm-to-
market change
Analyse business
organisations
Evaluate the
business
development
services system
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Participants in the first course (13 from 3 coun-
tries) were mainly from academic or research institu-
tions, while those in the second course (25 from 4
countries) were principally from rural development
agencies in both the NGO and public sectors (provin-
cial level). Course evaluations have proved very pos-
itive, and a further Southeast Asian regional course is
planned for 2004, perhaps in Indonesia. PHTI-
Vietnam is planning to adapt course materials for a
Vietnamese national course, also in 2004. A loose
network of course participants exists, and the new
CIAT project in Vietnam will serve to strengthen this
further, especially in Vietnam and Laos.
Vietnam starch cluster project
A national study of the small-scale root-crop starch
industry in 1998 (Goletti et al. 2001) identified the
potential of rural industrialisation to generate income
and reduce poverty. Since then, an more detailed
study has been undertaken of the cluster of root-crop
processing enterprises in Dong Lieu commune, some
20 km from Hanoi. This has since developed into a
more development-oriented project to improve the
performance of the supply chain (or system of enter-
prises), supported by Urban Harvest (formerly
SIUPA; the Strategic Initiative on Peri-Urban and
Urban Agriculture of the Consultative Group for
International Agricultural Research — CGIAR).
The area is traditionally agricultural but has, since
the late 1960s, specialised in household-level root-
crop (cassava and canna) processing, due to its prox-
imity to Hanoi and access to its growing markets.
Since then, processing capacity has increased 3–10
times, an average of 600% increase over 15–25 years.
The average amount of cassava processed increased
from 0.05 t/household (hh)/day in 1978 to 3 t/hh/day
in 2001, while the average amount of canna proc-
essed has increased from 0.04 t/hh/day in the 1960s
to 9 t/hh/day. Thus, the volume of roots handled by
each trader has increased by 200–300% over recent
times. Of the 2193 households in the commune, 1410
households (64%) are directly involved in root-crop
processing, while others supply raw materials, trade
end products, use processing by-products, or provide
a wide range of support services. On average, pig
raising using the residue from cassava processing as
a major feed ingredient is a common supplemental
livelihood activity in root-crop processing house-
holds (1409, or 64% of households raise pigs). Only
4% of households obtain a livelihood mainly from
crop production. In the 2000–2001 processing season
(approximately September to April), the commune
processed 680 t of cassava roots and 314 t of canna
roots daily.
As the starch processing developed, a starch-based
cluster of enterprises emerged in support or in asso-
ciation with starch processing (Table 1). The ever-
increasing enterprises are packed in the small village
area with little space to operate and no space to
expand. The major constraints facing the starch proc-
essors are not the technologies, as they are developed
appropriately, but the limited space and the associ-
ated constraints to production.
Consequently, the women often queue for hours
(some claim 3–4 hours) to obtain roots before
pushing/pulling the heavy cartload back home,
which, for some, can be a fairly long journey,
depending on location. Thus, much time and labour is
wasted on root procurement. Moreover, due to
limited space for drying, many processors push cart-
loads of starch products to the fields and spread them
Table 1. Frequency of different household enterprises
in Dong Lieu, Vietnam (total number of
households surveyed =2193).
Household activity No. of households
Cassava starch processing
Canna starch processing
Cassava starch filtering
Cassava root grating (service)
Canna waste drying for sale
Canna waste filtering
Maltose production
Canna noodle production
Sugar processing
Rice noodle production
Candy production
Tofu production
Processing solid waste trade
Cassava/canna root trade
Rice production for maltose
Agricultural labour for hire
Industrial labour for hire
Green bean processing
Mushroom production
Pig raising
Alcohol production
Tile cutting
Drying cassava waste (fuel)
Other (including services)
Total number of activities
630
141
311
59
209
32
146
65
2
86
32
8
11
33
3
201
91
15
12
1409
21
2
432
847
4798
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out to dry in the morning and collect them in the after-
noon. Again, depending on the location of the house
in relation to the field, this can also be a time-con-
suming activity. The limited space also contributes to
low starch quality, as there is not enough space to set
up various settling tanks to produce high-quality
starch. The starch quality is further adversely
affected by drying on the very dusty or muddy road-
side. Thus, the limited space has resulted in serious
wasted labour and low starch quality.
In addition to the adverse effects it has on produc-
tion, the confined space has caused another serious
environmental pollution as starch processing gener-
ates a large amount of wastewater and solid matter.
Dong Lieu generated almost 1.45 million m
3
of
wastewater during the processing season of 1999–
2000, and estimated 51,750 t of solid wastes.
During a stakeholders’ meeting with the commune
leaders and processors, limited space, wasted labour,
and environmental pollution were clearly recognised
by the participants as the major constraints to their
enterprise development. During the meeting, no pro-
posals emerged for viable solutions. The constraints
were evident, but solutions were elusive.
Subsequently, a trip to Dong Nai Province in
southern Vietnam to visit some medium-size proces-
sors was organised for Dong Lieu to help generate
relevant ideas for overcoming the constraints. The
visiting team (comprising processors, an equipment
maker and a local government representative) was
most impressed with the continuous filtering tank
system, which accounted for the high quality of the
starch, and the way in which the wastes were proc-
essed or disposed. Based on this observation, the
commune brainstormed the idea of designing a
processing zone in Dong Lieu that creates a space to
accommodate the continuous filtering tank system
and a better organised processing layout. The solu-
tion came from the commune itself when they
observed another production system and compared it
with the constraints they face. Concrete steps to
implementing the solution may be learned in another
visit to a processing zone of the similar nature,
planned for late 2003.
Small-scale agro-enterprise development in
the uplands of Lao PDR and Vietnam
There are continuing high levels of poverty (40–
50%) in the upland areas of both Lao PDR and
Vietnam. While poverty alleviation is a major aim of
rural development programs, market limitations
remain a major impediment to success in develop-
ment. Agro-enterprise development can contribute to
poverty alleviation through creating more diverse
income sources by providing improved access to
markets, improving product quality, adding value to
raw products through intermediate processing, and in
providing service industries. The Small-scale
Agroenterprise Development in the Uplands project
proposes to develop approaches to agro-enterprise
development at the district and community levels that
are appropriate to the economic, cultural and political
setting in Lao PDR and Vietnam. The goal is “to
develop sustainable agroenterprise initiatives with
upland rural communities that generate income and
employment opportunities through diversifying and
adding value to local natural resources”.
Lao PDR
In Lao PDR, the project is initiating work in the
poorest districts of the relatively isolated Xieng
Khouang Province. Contacts with the local provin-
cial government have confirmed that community
development should be a major concern of the
project, in addition to the development of specific
supply chains based on identified market opportuni-
ties.
The province is changing rapidly — new roads to
both Vientiane and to the Vietnamese frontier are
now open, electricity in urban centres is now much
more reliable (power cuts were common) and flights
have been increased to bring greater numbers of
international tourists to the area.
Although the project is still in the initial phase of
working-group formation, some market opportuni-
ties are already appearing, based on the improved
market access that recent infrastructure develop-
ments have brought. These include potential in local
and national markets to obtain higher prices for new
varieties of fruit (plums, nectarines) and prospects for
higher prices for local asparagus, if selection and
packaging can be improved. In international markets,
the region is already exporting a specialty rice (gluti-
nous rice) to Vietnam, and a local mushroom is being
air freighted via Taiwan to J apanese supermarkets.
These and other options will be used as a basis for
participatory market-opportunity identification as the
project progresses.
Vietnam
Understanding the potential role of private enter-
prises in the economic development of the country,
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the Vietnamese government has recently introduced
many policies with regard to small-enterprise estab-
lishment, operations, and tax burdens to favour the
development of small and medium enterprises, in
both agricultural and non-agricultural sectors. Thus,
the current environment is very favourable for the
project to introduce, test, and adapt CIAT’s experi-
ence and approach in agro-enterprise development to
Vietnam.
The CIAT approach will eventually be tested in the
upland districts of three provinces in Vietnam —
Tuyen Quang, Thue Thien Hue, and Dak Lak. As in
Laos, the project is still in its initial stages. Previous
experiences of working in these areas have helped
identify some opportunities among the current prod-
ucts and potential projects. In Yen Son District of
Tuyen Quang, there are opportunities to improve pro-
duction of tea, coffee, various fruit trees, and live-
stock, such as pig, fish, and meat cattle. The potential
markets for Tuyen Quang include non-timber forest
products (NTFPs), which are yet to be identified,
private nurseries, or perhaps organic tea and gourmet
coffee. Nam Dong District of Thue Thien Hue cur-
rently produces NTFPs (rattan, bamboo), fruit trees,
pepper, fish, and rubber, but pigs, chickens, and veg-
etables also have potential to contribute income if
properly developed. Coffee, NTFPs (rattan, bamboo,
medicinal plants), timber, maize, rice, pepper in Dak
R’Lap District of Dak Lak can be improved to
increase their market opportunity, while fruit trees
and livestock also should not be overlooked as poten-
tial enterprises.
The complete supply chain of current enterprises
will be evaluated from production to market to
examine breakdowns or bottlenecks in the chain that
cause low profitability of the enterprises. Once a bot-
tleneck has been identified, strategies can be devel-
oped to modify or eliminate it, or to enhance
performance so that obstacles can be removed. For
example, if product quality is identified as a major
constraint, further investigation into all areas of the
crop — variety, agronomic practice, field manage-
ment, harvesting and handling, and storage — will be
necessary to understand the root of the problem.
Once that is understood, uncomplicated and short-
term on-farm or farmer participatory trials can be
conducted to seek solutions. If transportation or
volume of produce to meet purchaser requirements
are identified as a major constraint, investigation into
group marketing, various transportation pros and
cons, alternative means of transport, and negotiation
with buyers on sharing the burden will need to be
considered. Each step of the supply chain will have
several aspects that can be considered for improving
the function of the whole chain. Through this
process, the working groups will learn to analyse the
weaknesses of the supply chain and ways to find
solutions to overcome them. This skill, once learned,
can be applied to analyse the supply chain of each of
the income-generating activities.
Going beyond the current products to explore
uncharted markets involves risk, time, and possible
cash investment. For cash-strapped and risk-averse
farmers, such an endeavour must proceed with
caution and comprehensive understanding of market
demand and requirements. Both the supply and
demand sides must be considered. For example, in
order to consider gourmet coffee or organic tea as
potential enterprises for Yen Son District of Tuyen
Quang Province, the working group must have the
knowledge of markets — where the market is and
how to connect to it directly or indirectly, quality
requirements, quantity required, frequency of
delivery, and price stability, as well as production
knowledge in order to meet the quality, quantity, and
seasonal demand with a profit, while withstanding
the occasional risk caused by market fluctuation.
Such endeavours take time to develop, but the poten-
tial benefits of developing new agro-enterprises to
meet new market challenges could be enormous and
should not be overlooked.
The strategy of the project is to focus on the
improvement of the supply chain of current enter-
prises that show strong demand growth for the short
run, while beginning to assess new market opportu-
nities and assist the working groups in developing the
supply chain to meet the market demand in the long
run. An important output of the project is that the
working group will learn to assess the weaknesses
and find solutions for the current supply chains, and
assess the potential and find entry-ways into the
potential supply chains. The principles of assessing
the supply chains are the same, but the different
starting points require different methods in these
assessments.
Conclusions
The agri-food sector is changing fast in Asia.
Managed supply chains are expanding, and will soon
take a major share of processed-food and fresh-
produce markets in many countries in the region. Can
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ACIAR Proceedings No. 119e
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172
smallholder producers bridge the gap that currently
exists between the traditional and the more coordi-
nated, efficient supply chains? Can they participate
equitably in such chains?
CIAT believes that opportunities for this do exist,
but that success requires a pro-active R&D effort that
links supply-chain and local-development processes,
combined with conducive local and national policies
that support entrepreneurial endeavours in rural
areas. CIAT’s Rural Agroenterprise Development
Project, with its national and regional partners, is a
contribution to this end.
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identification with small farmers. Hillsides ecosystem
training manual No. 7. Cali, Colombia, Centro
Internacional de Agricultura Tropical (CIAT;
International Centre for Tropical Agriculture).
Peters, D., Wheatley, C., Prain, G., Slaats, J . and Best, R.
2002. Improving agroenterprise clusters: root crop
processing and piglet production clusters in peri-urban
Hanoi. Presented at the Symposium on Local Agrifood
Systems: products, enterprises and the local dynamics,
16–18 October 2002. Montpellier, France, Centre de
Coopération Internationale en Recherche Agronomique
pour le Developpement (CIRAD), 21 p.
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The Supply Chains of Melons in Western China
Sherrie Wei,* Zhang Yanrong
†
and Niu Gang
§
Abstract
Melons are regarded as a delicacy among the Chinese consumers. They are well known for their good flavour,
sweetness and crispness. Melons are grown in the arid, remote areas of China, including Xinjiang, Gansu and
Mongolia. The major markets for melons, however, are located hundreds of kilometres away, or even over
1000 km away. This study illustrates the supply of melons in western China at each of the supply levels:
production, harvest, grading, purchasing, wholesale and retail, and the transport logistics. It highlights some
of the issues that are obstacles to the effective supply of melons to other regions. This includes small-scale
production, postharvest losses, large distances between growing areas and end markets, transaction-based
relationships between growers and traders, and little information flow from end markets to farmers and
collectors.
To address these issues in the Chinese context, this study proposes to focus on the following to improve the
supply chain: formalising the existing relationships among farmers with a view to sharing experiences and
exchanging information; carrying out projects to identify and involve appropriate extension officers; and
improving technological knowledge through the participation of in research and development (R&D) projects.
Melons have traditionally been regarded as a deli-
cacy among the Chinese consumers. They are well
known for their good flavour and sweetness. They
are grown in the irrigated arid remote areas of Xin-
jiang and Gansu provinces in western China and,
more recently, have been introduced to Mongolia,
Shandong (where they are grown in greenhouses)
and some dry areas in southern provinces, to capture
off-season premium prices. Among all the melons,
Hami melons have been the best known for centu-
ries — ever since the Hami king brought them from
thousands of kilometres away as a special offering
to a Chinese emperor.
Most Hami melons are grown in Xinjiang Province,
but more recently are also grown in Mongolia and
some southern provinces. Gansu Province is rather
well known for honeydew melons, including Huang-
hemi melons (literally Yellow River melons) — a
variety developed two decades ago by a research team
in Gansu. Over 85% of the melons from western China
are transported over thousands of kilometres to inter-
state markets. While melons were once regarded as
fruits exclusive to the imperial family, they now suffer
from downward price pressures. Industry-level prob-
lems include technical issues of pests and diseases,
lack of cold-chain storage, packaging and supply-
chain relationships. The issues are recognised by all
stakeholders in the industry and the government.
However, there have been few systematic actions to
address these problems.
This study looked at each level of the melon supply
chains in western China, including supply-chain
functions, transport logistics and relationships. Some
issues that are obstacles to effective supply chains are
discussed, such as small-scale production, long-dis-
* School of Natural and Rural Systems Management,
University of Queensland, St Lucia, Queensland 4072,
Australia. Email: <[email protected]>.
†
Department of Agricultural Economics, Gansu
Agricultural University, People’s Republic of China.
Email: <[email protected]>.
§
Department of Agricultural Economics, Xinjiang
Agricultural University, People’s Republic of China.
Email: <[email protected]>.
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174
tance transport, and transaction-based relationships
between chain partners. The discussion is based on
interviews with farmers, collectors, wholesalers and
extension officers in Gansu and Xinjiang provinces.
Melon Supply Chains in Western
China
The partners in the melon supply chains include
farm-input suppliers, farmers, collectors, whole-
salers and retailers. The bulk of the melons sold at
interstate markets pass through all levels in the chain.
For the local market, melons may go straight to
wholesaler, retailers or directly to consumers.
Suppliers of farm inputs and services
These suppliers include seed companies, chemical
suppliers and county-level extension service stations.
Many of the suppliers, especially seed companies,
are state owned or with state shares. There are
increasingly more private businesses selling seeds.
However, farmers have had bad experiences with
them in regard to quality standards and authenticity
of the claimed varieties. Under the recent ‘one
dragon’ policy of agro-industrialisation, some farm-
input corporations now work closely with farmers or
farmer groups to integrate production and distribu-
tion functions (Wei and Zhang, these proceedings).
This has not yet occurred in the melon industry, but
the potential exists for input suppliers to work more
closely with farmers.
Farmers
Farmers in Gansu and Xinjiang have very different
scales of production. In Xinjiang, many melon
farmers rent large blocks of land from the govern-
ment’s ‘military settlement farms’: normally 50–100
Mu, up to a few hundred Mu (15 Mu =1 ha or 1 Mu
=67 m
2
). Military farms were unique in Xinjiang.
They were established by massive migration of sol-
diers to the areas soon after the liberation in 1949.
The soldiers played the dual roles of maintaining sta-
bility and farming the vast tracts of undeveloped land
in Xinjiang. Now that the soldiers are passing away,
the land is rented to younger members of the soldiers’
families. In the past, military settlement farms gave
orders to the tenants as to what to plant and bought
back the produce for distribution. They had their own
technical teams to assist farmers in preharvest prac-
tices. Recently, the government quit its distribution
role and farmers are now responsible for their own
losses and profits. Farmers have much autonomy in
making planting decisions. In addition to military
farms, some melons are produced by small farm
households. In Gansu, farm size is much smaller —
about 10 Mu (0.67 ha) for an average household, and
farmers are used to making their own planting deci-
sions.
Melon farmers in both Gansu and Xinjiang have
modest infrastructure for growing melons. Many of
them use fertilisers and plastic mulch but not herbi-
cides or pesticides, as their disease problems do not
often show up at the farm-gate stage. Disease prob-
lems are most serious for Hami melons. To address
the problems, some Xinjiang farmers are now only
renting land that has not been planted with melon in
the past few years. Some also use sheep manure
rather than fertilisers as they see its benefits in
reducing disease problems and improving quality
and shelf life.
Besides growing and harvesting, farmers may
grade, package and transport melons to collection
points in the village. Harvesting is done manually by
collecting melons in hessian bags. Grading and pack-
aging are mostly based on instructions from collec-
tors or wholesalers. Standards vary between
wholesalers, and are not written. Common indicators
are size and blemishes and judgments are made by
visual observations. There are two types of pack-
aging: large, netted nylon bags of 20 kg capacity for
the local market; and cartons of 10–15 kg capacity for
interstate markets.
Collectors
In Xinjiang, collectors (known as Ma Zai) merely
play the role of go-between. They bring wholesalers
from interstate to farms to inspect the fruit and collect
fees. They are not involved in the actual business. In
Gansu, collectors buy melons from farmers and sell
to interstate wholesalers. They are often farmers
themselves, who have a bit more capital and have
sources of information and contacts with whole-
salers. There are generally a few collectors in each
village. They build their own simple, undercover
stands by the roadside near the production areas
through which wholesalers and trucks can pass.
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Wholesalers
Wholesalers are normally from other provinces
and operate as merchants rather than agents. They
travel around the country to obtain melon supply in
different seasons. Wholesalers perform a critical
function in the chain by linking local production to
interstate markets. They have the potential to become
supply-chain managers, as they are the only channel
partners that know both production (through collec-
tors) and markets. However, this has not occurred for
various reasons. Given that individuals are not able to
get loans from banks, wholesalers cannot operate on
a large scale. Two to three of them work as a team on
a small amount of capital. One of them travels to the
production area to buy the fruit and the other(s) sells
the fruit at the central markets in other provinces.
They only do one deal a year, at most twice, for each
of the production areas in Gansu, Xinjiang, Mongolia
etc. The scale of each deal is one or two truckloads,
about 10 or 20 t, but often stretches to a limit of 14 or
28 t. Because wholesalers go to each production area
only once a year, it is unlikely that farmers get any
feedback from them about the current season.
Wholesalers are the link in the supply chain who
that have the whole picture of melon production,
transport and marketing. They have years of experi-
ence in the marketing of melons in their region. How-
ever, they may not purchase melons in any particular
year if they do not expect it to be profitable. Before
travelling to Gansu, wholesalers first contact collec-
tors by phone on supply and price.
Local business people from the production area are
hesitant to enter the wholesale business due to lack of
an interstate network, and lack of understanding of
the end markets. In addition, melons are shipped with
no refrigeration and these people would be under
pressure to find an outlet in cities in which they have
no contacts.
Retailers
Retailers are located thousands of kilometres away
from the production areas. Wholesalers leave the
scene completely once they sell the fruit to the
retailers. There is little feedback of information
between wholesalers and retailers unless serious
problems occur.
The whole supply chain from farmers to retailers is
transaction-based and payment is always made in
cash, on the spot. This is not surprising, given few
institutional bases for supply-chain coordination,
including an absence of consolidation at all levels of
the supply chains, an ineffective contract-implemen-
tation system and lack of cultural underpinning for
inter-organisational collaboration (Wei 2003).
It was estimated that in the Gansu melon value
chain, retailers have the largest share (41%), fol-
lowed by wholesalers (28%), farmers (23%) and,
lastly, collectors (8%) (Zhang and Wei, these pro-
ceedings). One complaint from farmers was that they
paid over 7% of their cost of production in various
taxes.
Characteristics of Melon Supply
Chains in Western China
The melon supply chains as described above have
several characteristics that make supply-chain man-
agement difficult to implement, as discussed below.
Undifferentiated product
The industry competes on price and has turned an
exclusive product into a commodity product. Given
that interstate, urban consumers are able to pay a
premium price for quality, there is an opportunity for
product differentiation and a branding strategy.
While Hami melons have been introduced to other
provinces, consumers still perceive Hami melons
from Xinjiang as the best. Hami melons from other
provinces are often sold with the false claim of
‘Product of Xinjiang’ on the box.
A vast market
China has a vast production area and a vast market
with many segments. Both top and poor quality prod-
ucts find their way to consumers. While China is
opening up its doors to overseas commodities, local
produce still has a large share of the market. Some of
the reasons why the domestic market has not become
more integrated include the huge distances between
production and consumption areas, poor road infra-
structure, and imperfect information flow.
No horizontal integration at each level of the
supply chain
Consolidation of supply-chain levels has been one
driver for supply-chain management in the food and
fibre industries in developed countries. In China,
businesses are not consolidated at any level of the
melon supply chains. There are myriads of unorgan-
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ised producers, collectors, wholesalers and retailers.
Wholesalers operate on low capital costs and can
enter and exit the industry easily. The prosperity or
downturn of the melon industry will thus not affect
the wholesalers in a significant way.
Transaction-based supply chains
Competition has forced business operators with
limited capital to enter into short-term businesses for
immediate benefits. Melon supply chains are charac-
teristically loose, fragmented and unstable over time.
They involve a series of decentralised, dyadic inter-
actions, with no purposeful intention to deliver the
best products to the end consumers. As no channel
manager exists, the chain partners do not see the pos-
sibility of coordinating the marketing functions
among all chain actors.
Low bargaining power by farmers
For several reasons, melon farmers do not have
equal bargaining power over collectors or whole-
salers. One of the main limitations is the absence of
cool-chain storage, which forces farmers to sell their
perishable products at the earliest opportunity after
harvest. During the one-month peak season, there is
much competition for price within the same melon-
growing village, rather than the farmers cooperating
to achieve any collective power in determining the
price paid for their melons.
Farmers performing only the basic function
of production
Unlike farmers in developed countries who clean,
grade and pack their own fruit, farmers in China only
perform the production function. They grade and
pack only when this is requested by wholesalers.
Farmers can sell only in their own neigbourhood or to
organisations with which they have contacts.
Declining quality
There is a temptation to harvest melons prema-
turely to capture early-season premium prices. This
often occurs at the request of wholesalers, as the best
prices may be obtained by being first on the market.
Declining fruit quality has resulted in poor returns for
the industry. The concept of a consumer focus
remains only a concept and has not been translated
into action. At this stage, the whole chains are not
capable of being coordinated to best serve the market.
Declining fruit quality needs to be addressed as
melons face competition from a range of other
summer fruits, such as stone fruits, mangoes etc.
Improving the Melon Supply Chains
in China
Improved disease control practices and
product differentiation
Diseases are a serious threat to Hami melons in
Xinjiang. To reduce losses from disease, wholesalers
often instruct farmers to harvest melons prematurely.
Consequently, poor-quality melons in the market
have affected the industry as a whole. Improved
disease control technologies, such as enhancing the
self-defence mechanisms of plants, are available
through research organisations. The challenge is to
speed up the adoption process through an effective
extension system. Product differentiation can follow
if the quality of fruit is improved. The success of the
strategy also relies on state power to prosecute those
who use misleading branding. As this is not going to
occur quickly, one way to identify quality product is
through reputation from defined supply chains.
Consolidation at the farmer level
At all levels of the melon supply chains in China,
there is no horizontal integration. One strategy to
improve this is to start at the farmer level. Farmers in
the same village know each other quite well. Such
‘natural–social constituents’ (Murdoch 2000) can be
harnessed to get farmers to work together — firstly
on production and postharvest areas, and later on
group marketing. This concept is consistent with the
government policy of getting farmers into groups.
However, the approach needs to emphasise self-
managed groups, not government-directed groups. It
is a critical success factor to identify and involve
motivated extension officers. Consolidation at the
farmer level will allow better collaboration between
farmers and wholesalers and an opportunity for
farmer groups to link with supermarkets directly.
Farmers to perform more functions in the
supply chain
For farmers to improve their share of the value
chain, they need to perform more functions, both
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177
technical and business ones, in the supply of products
to consumers. Potential technical functions at the
farm level include washing, dipping and packaging.
In terms of business functions, once farmer groups
are developed, they may take over the function cur-
rently fulfilled by collectors. Whether farmers can
perform these potential functions in the supply chain
depends to a large extent on whether self-managed
groups can be developed.
China is a large recipient of international aid pro-
grams. A postharvest and economic program for the
melon industry is currently funded for by the Aus-
tralian Centre for International Agricultural
Research. Technologies for disease control are being
developed to suit local agronomic conditions. The
long-term effort to improve the ‘soft infrastructure’
will include training on extension techniques, infor-
mation provision, credit system and other business
services (Morgan 1997).
The government will need to play a facilitative role
in the whole process. There have been complaints
that various farm taxes add to the burden of produc-
tion costs. With the increasing tax base from the
urban population, the government needs to consider
an alternative way of obtaining revenue. At the ‘play
of the game’ level (Williamson 2000), the govern-
ment needs to improve the effectiveness of imple-
menting contract laws and accreditation systems
(Wei and Zhang, these proceedings). This will assist
industries to restore business order and improve
supply-chain management.
References
Morgan, K. 1997. The regional animateur: taking stock of
the Welsh Development Agency. Regional and Federal
Studies, 17, 70–94.
Murdoch, J . 2000. Networks — a new paradigm of rural
development? J ournal of Rural Studies, 16, 407–419.
Wei, S. 2003. Supply chain management and one dragon
approach: institutional basis for agro-industrialisation
China. Paper presented at the 21
st
ASEAN/3
rd
APEC
Postharvest Seminar, 20–22 August, Bali, Indonesia.
Williamson, O. 2000. The new institutional economics:
taking stock, looking ahead. J ournal of Economic
Literature, 38, 595–613.
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178
Development in Agribusiness Chains and
Challenges for Postharvest Technology:
Experiences from The Netherlands
George Beers*
Abstract
The definition of quality in fresh produce has gone well beyond classical physiological concepts, and the food
system is now confronted with the situation that the consumer is defining quality. Product quality will be
determined by a broad set of attributes. Not only are there more parameters, but also the values of these
parameters will vary for different consumers, purposes, times and places. Led by this new consumer-driven
paradigm, this contribution identifies some implications for the treatment of fresh produce.
Society is ‘individualising’; people are more and more following their own lines of life. There are many
attributes that can differentiate products; some of them are appreciated by only a (small) part of the consumer
market. The food system is challenged to look for opportunities to make money out of this urge for
differentiation; product differentiation is a strategy for many companies. So product differentiation will lead
to differentiation in postharvest treatment.
Another aspect is the dynamics of the scope of the firms involved in food chains. Companies have developed
around so-called asset specificity; equipment, knowledge and capabilities to do things they are good enough
to make money with. If products and product requirements are changing, it might happen that the capabilities
of the businesses in the supply chain change more drastically. Many examples can be observed of new
(sometimes unusual) companies entering the supply chain. An issue in this that it might be interesting to look
at from a postharvest technology point of view, is that the flow of fresh produce has to be integrated in a system
with substantial differences from other product flows. Also, new types of companies, so called ‘trusted third
parties’, emerge and take responsibility for food safety and other quality attributes.
There are many opportunities for reducing quality loss in the last stage of the chain — the consumers.
‘Consumer equipment’, in the kitchen or during transportation, is evolving rapidly. More dedicated equipment
and ICT-driven opportunities will create new challenges for the postharvest community.
Shifting from supply to consumer-driven food production, some interesting contributions from postharvest
technology are expected. These can be considered to be challenges to exploit the postharvest knowledge and
expertise in the context of the consumer-driven paradigm.
* Wageningen University and Research Centre, The
Netherlands.
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Linking Farmers with Markets: the Case of Cocoa
G.I. Johnson,* Arief Iswanto,
†
J. Ravusiro,
§
P.J. Keane,
¶
N. Hollywood,**
S.V. Lambert,
††
and D.I. Guest
§§
Abstract
‘Supply-chain management’ means very little to most smallholders — they are concerned with managing their
farms, saving sufficient for their own needs and selling any surplus for the best price they can get. Their contact
with ‘markets’ is often limited to dealing with a produce collector, or to sales at the local ‘fresh market’.
Limited contact with markets probably means that growers have little awareness of product suitability, quality
or choice of crop. While crop choice is often dictated by what other local growers find profitable, crops in
demand can quickly become ‘surplus to requirements’. In the case of cocoa, however, global demand is strong
at present, and growers in Asia can earn good incomes from the crop. Cocoa is a crop of the developing world,
while chocolate is largely consumed in the developed world. In Indonesia, a large smallholder cocoa industry
has developed in Sulawesi over the past 20 years, while in Papua New Guinea (PNG) there has also been a
major shift from plantation to smallholder production. Cocoa has been a good source of income to smallholder
farmers for meeting financial commitments such as school fees in these countries, but this may not be assured
in the longer term. As communities continue to develop, greater focus on ‘linking farmers with markets’ might
be the key to sustainable income generation from cocoa. This paper describes some characteristics of the cocoa
industries in Indonesia and PNG, discusses the key issues for sustainability of their industries, and describes
research and development initiatives that aim to improve smallholder incomes.
Cocoa fortunes Indonesia is currently the third-
largest producer of cocoa with about 20% of global
production (Table 1), mainly of bulk cocoa based on
Forastero hybrids. Papua New Guinea (PNG) pro-
duces only 2% of the world crop, but supplies a niche
market of ‘fine’ cocoa based on Trinitario × Amazo-
nian hybrids. Global demand for cocoa is strong, and
supply projections suggest potential shortfalls in
supply. As a consequence, interest in overcoming
deficiencies in supply has become stronger amongst
chocolate manufacturers and government agencies in
developed countries (such as USA), where local
farms produce milk and sugar, which are also used in
chocolate manufacture. While global demand for
cocoa is strong, threats such as the potential for
market oversupply by emerging future producers
such as Vietnam, and a decline in demand due to the
use of non-cocoa fats in chocolate manufacture,
heighten the need for producing countries to have
greater market focus in planning research and devel-
opment (R&D).
* ACIAR, GPO Box 1571, Canberra, Australian Capital
Territory 2601, Australia.
†
Research Institute for Coffee and Cocoa, Jalan PB.
Sudirman 90, Jember 68118, Indonesia.
§
Cocoa and Coconut Institute, PO Box 1846, 10 Rabaul,
East New Britain, Papua New Guinea.
¶
Department of Botany, LaTrobe University, Bundoora,
Victoria 3083, Australia.
** Centre for Food Technology, Department of Primary
Industries, GPO Box 46, Brisbane, Queensland 4001,
Australia.
††
Masterfoods Australia, PO Box 397, Wyong, New
South Wales 2259, Australia.
§§
Department of Botany, University of Melbourne,
Parkville, Victoria 3052, Australia. (Present address:
Department of Botany, University of Sydney, Sydney,
New South Wales 2006, Australia.)
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Cocoa in Indonesia
In Sulawesi, an industry involving more than
300,000 smallholders has developed since the 1980s.
Key drivers in the development of the industry have
been the improvement of land access, the settling of
transmigrants and the experience of returnees from
Malaysian cocoa plantations bringing farming
knowledge and seed. The Sulawesi industry supplies
‘bulk cocoa’ used for cocoa butter. Annual produc-
tion os over 300,000 tonnes, 90% of this by small-
holders. Smallholder yields average 800–1000 kg/ha,
as compared with 1800 kg/ha on plantations, but
smallholder input costs are lower (Bedford et al.
2002).
The main factors affecting productivity include:
• weather extremes
• pest (particularly the cocoa pod-borer moth (CPB),
Conopomorpha cramerella) and disease losses
• labour shortages
• restricted access to finance and high interest rates
(Bedford et al. 2002).
Industry characteristics
• Labour requirements in Indonesia are higher than
those of the West African producers. Labour is
needed throughout the year during establishment,
but the requirement falls to 80–90 days/per year/ha
in established but non-bearing plantings, and to 30
days/ha when trees are bearing (although the last-
mentioned input may not be sufficient for optimal
maintenance). As a consequence, a family of 2–4
can care for a 2–4 ha farm.
• Rainfall patterns allow harvesting throughout the
year, so labour requirements for harvesting are
higher than in the West African industry.
• Producers can be owner–farmers, sharecroppers or
farm managers.
• There are few co-operatives or farmer groups.
• Most producers sell semi-dry beans of 15–20%
moisture to village collectors.
• The industry has a fairly efficient marketing
system, fostered by the marketing policies of the
Indonesian Government, but there are few
incentives to improve quality. Industry middlemen
have limited knowledge of handling, quality and
storage.
• Indonesian cocoa sells for a lower average price
than cocoa from Ghana and Côte d’Ivoire (which
produce ‘fine’ cocoa), but Sulawesi cocoa farmers
earns a higher percentage (70% +) of ‘free-on-
board’ (FOB) prices.
• Recent trends in the industry include the growth of
primary processing in producing countries, e.g. the
PT Effem (Masterfoods) processing factory in
Macassar, Sulawesi, and multinationals now
dominate the trade (declining from 60 national
traders in 1998 to 2 in 2000, with 11 international
trading companies).
• As a ‘bulk’ cocoa supplier, the provenance of
cocoa at grower level is less important, and
processors can address the quality issue of low or
no fermentation, but the real quality problem is the
physical quality of cocoa, specially the percentage
waste (placenta and flat beans, small beans and
clumps due to CPB infestation, and contaminant
residues may also become a problem) (Bedford et
al 2002).
Although processors can address minor quality
defects through blending and processing technology,
there is the risk that the mean quality can become too
low, for example when CPB damage becomes exces-
sive.
Table 1. Cocoa bean production (Mt) in the Americas, Africa, Indonesia, Malaysia and Papua New Guinea,
1996– 2003. Source: FAO STAT (2004).
Country/region Year
1996 1997 1998 1999 2000 2001 2002 2003
Africa 2,144,525 1,940,505 2,169,731 2,136,463 2,344,348 2,048,042 1,891,396 1,892,396
Americas 571,117 575,282 540,750 474,320 435,270 456,566 561,659 471,726
Indonesia 350,800 329,700 430,800 442,700 465,700 380,900 450,000 450,000
Malaysia 120,071 106,027 90,183 83,700 70,200 58,000 47,661 47,661
Papua New Guinea 36,000 40,000 29,800 35,600 46,800 38,800 45,000 42,000
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In summary, there is little traceability of product
(cf. horticultural produce), grower–trader relations
are often short-term, quality and reliability of volume
have not been high enough to favour long term links,
and chain members may be tempted to add foreign
matter to boost weight. While the quality of bulk
cocoa is important, managing it is complex and the
Indonesian value chain for cocoa is less suited to the
introduction of ‘quality improvements’ than are
those for the horticultural industries (Bedford et al.
2002).
Critical issues for industry improvement in
Indonesia
• Product supply needs to be more reliable (in
quality and quantity).
– Losses due to pests and disease need to be
reduced.
– Cocoa butter levels in cocoa beans need to be
improved.
• Any new inputs for crop improvement must not be
too labour intensive, as labour is already in short
supply.
• Strategies for improving grower returns through
improved production and quality are needed.
Sulawesi farmers already have the highest
percentage of world cocoa price and the cocoa
pipeline is very efficient with very low margins for
the intermediary collectors/traders.
• In dealing with these issues, chocolate
manufacturers are important drivers.
Some 85% of the cocoa from Sulawesi, worth
US$140 million in 2000, goes to the USA, but the
CPD has destroyed 40% of recent crops and reduces
quality in the remainder.
Research and development
The Indonesian Government has placed high pri-
ority on extension and implementation of R&D in the
last few years, while devolving more responsibility to
the provincial level. The Balai Pengkajan Teknologi
Pertanian (BPTP) centres have the charter of
extending and developing all forms of agricultural
technology in regional areas. Cocoa, after rice and
other subsistence food crops, is the most important
crop in Sulawesi and has underpinned a large part of
the recent economic development. In tandem with
BPTP, the Dinas Perkebunans provide the provincial
extension service for small-scale plantations. While
cocoa R&D is centred at the Indonesian Cocoa and
Coffee Research Institute (ICCRI) in J ember, Indo-
nesia, investment in infrastructure and resources in
Sulawesi has been strengthened (for example, the
BPTP facility in Kendari). This investment is com-
plemented by the following suite of international
development initiatives which seek to overcome
major industry constraints.
ACDI/VOCA SUCCESS Alliance project:
1
(USAID funded)
This initiative focuses on integrated farmer
training, information exchange and applied research
on pest control (regular harvests etc.) in the Sulawesi
cocoa industry. Between 2000 and 2002, more than
10% of Sulawesi cocoa farmers were trained, crop
losses for trained farmers dropped by 30%, and
farmer incomes rose by more than US$500 p.a.
In a second stage of the SUCCESS Alliance there
is a new focus on quality, farmer organisation and
leadership. Under the Alliance, PT Effem (Master-
foods) Sulawesi started to buy small quantities of
cocoa directly from smallholders, and private sector
partners have agreed to buy cocoa worth more than
US$10 million p.a.
The project has a spillover activity in the Philip-
pines and is also planning work in Vietnam. In Indo-
nesia, challenges for the Alliance include:
• accessing locally proven germplasm and
technologies
– there are good opportunities for synergy with
ACIAR initiatives (see below)
• assuring some carryover of experience when the
Alliance ends. Options include:
– maintenance of links with processors
– continuing to build local extension and
information dissemination capacity
– fostering farmer organisations.
1
ACDI/VOCA was formed in 1997 by the merger of
Agricultural Cooperative Development International
(ACDI) and Volunteers in Overseas Cooperative
Assistance (VOCA). The merger blended ACDI’s
systemic, long-term approach to development and
VOCA’s people-to-people volunteer activities. ACDI
(first known as the International Cooperative
Development Association) was formed in 1963 by major
US cooperatives and farm credit banks to assist
cooperatives in developing countries. ACDI eventually
grew into an international technical and management
assistance organisation with rural finance, natural
resource management and agribusiness capabilities
<http://www.acdivoca.org/acdivoca/acdiweb2.nsf/
whoweare/history?opendocument >.
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Pest Reduction Integrated Management (PRIMA)
The main aim of the PRIMA project (under Neth-
erlands Government funding) is to assist a group of
900 Sulawesi farmers on a 1000 ha area to improve
their production and quality of cocoa by using an
integrated management approach. Development of a
quality cocoa pipeline, with training of farmers and
traders on grading and cocoa quality, is also a very
important part of this project. The most efficient
methods for biological control of CPB are also being
tested. One component of this approach is the reha-
bilitation of plantations by side grafting with CPB-
resistant cocoa clones, aiming at improved produc-
tion and quality. The project is not undertaking
primary collection of putative resistant material —
this is being undertaken in a parallel ACIAR project,
and some of the most promising locally selected
clones from the ACIAR trial will be re-tested in the
field trial in PRIMA project area in Noling, near
Palopo, Sulawesi. In this way, the superior agro-
nomic characteristics and pest and disease resistance
of clones will be confirmed and budwood multiplied.
Budwood from the ACIAR selected clonal materials
will then be made available for the farmers trained on
integrated management in the PRIMA project.
ACIAR support
ACIAR project PHT/2000/102, ‘Selection for
improved quality and resistance to Phytophthora pod
rot, cocoa pod borer and vascular-streak dieback in
cocoa in Indonesia’, in Sulawesi began 2000, after
the start of ACDI–VOCA SUCCESS Alliance
project and before the start of the PRIMA project.
The project focuses on evaluation of germplasm with
putative pest or disease resistance or improved
quality, collected from across Indonesia by Dinas
Perkebunan personnel (Iswanto et al. 2003). The
project has stronger links with Indonesian agencies
than do the ACDI–VOCA and PRIMA initiatives and
emphasises:
• evaluation of local selections with resistance to
pod borer, disease (Phytophthora pod rot and
canker caused by Phytophthora palmivora and
vascular streak dieback (VSD) caused by
Oncobasidium theobromae), and higher cocoa
butter and bean size
• farmer participatory side-grafting of bearing trees
with grower/adviser selected superior material
• improvement of Phytophthora pod rot and VSD
control.
The project is linked to and complements the other
initiatives.
Potential impacts of the ACIAR project include:
• risk reduction if lines with resistance to one or
more pests are identified
• lines may give more cocoa butter, less shell
• growers will be able to move to improved cultivars
through side grafting
• there is likely to be an interest from manufacturers
to source cocoa from improved clones.
Summary and conclusions
The Sulawesi cocoa supply chain is very efficient,
with farmers receiving probably a larger share of the
selling price than any other cocoa farmers around the
world. There are few intermediary collectors and
trader intermediaries, and they make relatively low
profits. Nevertheless, quality (as percentage waste,
flat and small beans, and the lower fat percentage in
such beans, which are a result of the CPB infestation)
is critical. Manufacturers can play a key role in over-
coming these problems. Probably the best solution
would be to introduce differential pricing. Differen-
tial pricing would encourage farmers to produce
better-quality cocoa. This way, farmers could
increase their incomes and manufacturers would
obtain more cocoa of the preferred quality standard.
The other element of quality improvement and
income generation is to reduce losses through
improved, pest-and-disease-resistant planting mate-
rials (as is being investigated in the ACIAR project),
and training of farmers in integrated pest manage-
ment (as in the SUCCESS Alliance and PRIMA
projects).
The Indonesian cocoa industry and the R&D pro-
grams that support it have many of the elements crit-
ical to sustainability: a crop with a well-identified
market, and strategies to reduce losses and improve
productivity. The challenges will be to foster wide
adoption of improved cultivars, and to encourage
adherence to control measures recommended for pod
borer and diseases. Given the labour shortages, and
the costs and extension challenges associated with
encouraging farmers to use other control methods,
resistance is a good option for sustainable crop
improvement, with the larger market for ‘bulk’ cocoa
remaining as a better option than ‘fine’ cocoa. For
industry improvements to be sustainable, links
between farmers and manufacturers that enable ade-
quate income improvements to cover increased costs
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of management, will be critical. The strong commit-
ment by some manufacturers to participatory R&D
offers hope that this will happen.
Cocoa in Papua New Guinea
Papua New Guinea (PNG) supplies just 2% of the
world market, a tenth of that of Indonesian produc-
tion. However, the 35,000 tonnes produced each year
(mostly from East New Britain) is acidic, ‘fine’
cocoa, with most (80%) now coming from small-
holder production. In contrast to Sulawesi, where
under-fermented beans are sold for processing as
bulk cocoa, PNG cocoa is fermented and dried
locally. Papua New Guinea cocoa beans are recog-
nised worldwide for the quality attributes that reflect
their Trinitario origin.
2
However, they also have a
reputation for some undesirable characteristics, such
as excessive acidity, high shell content and smoky
flavour (especially in smallholder produce), the latter
a result of smoke contamination during drying or
storage In addition, the introduction of hybrids of
inferior flavour led, in recent years, to a decline in the
premium paid for PNG cocoa, with PNG’s 75% ‘Fine
or Flavour’ rating being reduced to 25%. Other
dimensions of the industry include the following:
• yield averages are increasing (in East New Britain)
from 300 kg/ha in 1989 to 620 kg/ha in 1999
• industry growth has been hampered by
– the decline in the value of local currency
– the civil unrest in Bougainville, one of the main
production areas,
– problems with weather, pests and diseases
–volcanic eruptions
• Productivity has also been affected by the
inefficiency of smallholder production and low
levels of inputs.
PNG contrasts with Indonesia
• ‘Fine’ versus ‘bulk’ cocoa
• Diseases are the more serious problem in PNG
versus the pod borer in Indonesia (CPB is not yet a
problem in PNG)
• as a subsistence crop, cocoa will provide some
income even when neglected
• traditional land rights in PNG affect access
• lower literacy levels affect information access,
extension and financial management
• high transport costs cut into profits
• civil unrest and natural disasters have had more
adverse impacts
• less experience in repayment of microfinance
affects credit availability to smallholders.
Nevertheless, PNG receives prices above world
averages for its cocoa and, as in Indonesia, manufac-
turers have a strong interest in fostering improvement
of the PNG industry: improvement of cocoa quality
and ensuring that smallholder production is sustain-
able are key focuses of R&D.
Research and development
The PNG Government also places high priority on
fostering improvement and expansion of the cocoa
industry. Research and development is undertaken by
the PNG Cocoa and Coconut Institute, formed in
2003 by the amalgamation of Cocoa and Coconut
Research Institute and the Cocoa and Coconut Exten-
sion Agency (CCEA). Cocoa and Coconut Institute
cocoa research is centred on East New Britain.
AusAID Cocoa Improvement Project 1992–1996
To re-establish and improve the quality character-
istics of PNG cocoa beans, the PNG Cocoa and
Coconut Research Institute (CCRI) started a R&D
project in 1992, supported by the Australian Agency
for International Development (AusAID) (the Cocoa
Quality Improvement Project). The project investi-
gated several aspects of fermentation and quality
improvement:
• screening of germplasm for cocoa quality traits to
improve the genetic base for quality cocoa
production in PNG
• development of fermentation and drying methods
to enable smallholders to increase their income
through the sale of fermented, dried beans rather
then wet beans.
• a review of the regulations for fermentaries and
drying facilities in order to provide advice to the
Cocoa Board of PNG on changes needed to enable
smallholders to undertake these processes.
More recently, AusAID, in partnership with the
United Nations Development Program (UNDP), has
provided further support for the PNG cocoa industry
2
The original material, from early last century was
Trinitario. Since the early 1980s and now, material
distributed by CCRI has been Trinitario × Amazonian
hybrids. There have been claims that this has diluted the
Trinitario attributes. However, PNG cocoa is still sought
by manufactures for its’ flavour attributes.
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under initiatives for the rehabilitation of cocoa on
Bougainville.
ACIAR Project PHT/1995/136 ‘Cocoa fermentation,
drying and genotype × product quality assessment
The ACIAR project
3
was initiated in 1998 as a
follow-on to the AusAID-funded activities at the
Cocoa and Coconut Research Institute (CCRI). In
collaboration with the Queensland Department of
Primary Industries and the University of New South
Wales, its objective was to complete assessment of an
integrated approach to quality improvement
involving changes to fermentation, drying and selec-
tion of cocoa varieties with superior flavour.
ACIAR later extended the project to (a) finalise
evaluation of fermentaries and dryers, and to develop
and implement technology transfer strategies, partic-
ularly in relation to the re-establishment of the
industry on Bougainville, and (b) finalise participa-
tion in the International Cocoa Confectioners’
Organisation (ICCO) collaborative project to estab-
lish the benchmark physical, chemical and orga-
noleptic parameters that differentiate between fine
and bulk cocoa. Papua New Guinea cocoa was com-
pared with the industry bulk standard (West African)
and with cocoa produced by other partners (Trinidad
and Tobago, Ecuador and Venezuela).
The project has investigated the following key ele-
ments of quality improvement and industry develop-
ment:
• fermentation process and time (smaller volumes of
beans, shorter times) (Hollywood 1998)
• cocoa drying (A-framed solar collectors)
(Hollywood et al. 1997)
• varieties with better ‘PNG fine’ flavour
• revision of cocoa industry regulations
• industry extension and uptake
• support for the Bougainville industry through
testing of methodologies, particularly related to
drying
• ‘PNG’ chocolate options
• benchmarking of PNG cocoa in an ICCO
collaboration
• income generation for smallholders.
Table 1 summarises achievements to date and the
factors that remain to be dealt with in order to realise
the benefits of the current investment.
What are the key messages from the PNG
research?
Smallholder issues
• Fermentation. Fermentation methods for small
quantities of cocoa (down to 25 kg) have been
developed. This means that virtually any size
producer could ferment their harvest and produce a
good quality cocoa.
• Solar drying. The original dryers distributed
during the AusAID program had limited success
due to severe maintenance problems. Most of the
maintenance problems have now been solved and
there is a need to ensure recommendations
regarding construction are adhered to. Farmers
also need to be encouraged to take greater
ownership for acquisition and maintenance of
drying units.
• In provinces or districts with similar rainfall to
East New Britain Province, stand-alone solar
dryers are an option, provided the maintenance
recommendations are adhered to.
• For wetter provinces, combination solar/kiln
dryers have been developed and test units
distributed on Buka Island and Bougainville.
These have proven a popular development with the
local population. However, their long-term value
will depend upon maintenance by users.
Quality issues
• The Cocoa Quality Laboratory of CCRI has
developed good capabilities for quality assessment
and sample throughput.
• Recommendations regarding fermentation
procedures to improve quality attributes have been
developed; e.g. by reducing fermentation times
from 7 to 5 days, shell content is reduced by 2%,
acidity of the cocoa is lower and flavour attributes
improved (enabling distinctive ‘PNG chocolate’ to
be made).
• With PNG export cocoa, successful participation
in the ICCO project could enhance PNG’s
reputation as a producer of fine-flavour cocoas.
Provided support from CCRI is ongoing, further
improvements in fermentation and drying
technologies and selection for flavour attributes in
plant breeding could be expected. 3
Funded under the ACIAR-AusAID Record of
Understanding for PNG.
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Table 1. Cocoa quality improvement in PNG: issues, achievements and future needs.
Element of quality
improvement
Key achievements What needs to be done now?
Fermentation process
and time
Smallholder technologies
developed: for shorter
fermentation times and smaller
volumes of beans
Procedures for small-scale fermentation and the amended
regulations need to be approved by the PNG Cocoa Board, and
follow-up extension activities undertaken.
Cocoa drying Small-scale, solar-drying
technologies have proven
useful for East New Britain
Recommendations regarding their construction, use and
maintenance, and amendments to regulations need to be
approved by the Cocoa Board and follow-up extension
activities undertaken.
Options for wetter areas require more work.
Varieties with better
‘PNG fine’ flavour
Large range of germplasm
screened, and testing for quality
incorporated into routine
breeding.
New release lines shown to
have good ‘PNG fine’ flavour.
Training of CCRI cocoa quality
laboratory staff in cocoa quality
assessment. Training for
chemist in taste panel
procedures.
CCRI should continue screening of breeding lines for quality
traits.
Resources and experience in taste panel evaluation should be
established and maintained. This will reduce need for taste
evaluation by manufacturers.
Cocoa industry
regulations
Revisions to industry
regulations drafted and
presented to the Cocoa Board.
Board needs to formally consider and approve the revised
regulations before cocoa produced with smallholder
fermentation and drying technologies can be sold.
Industry extension and
uptake
Training manual drafted.
Extension personnel trained.
Manual needs to be updated to include recommendations for
smaller fermentations, down to 25 kg, and the latest
developments in solar-dryer construction.
Need to increase commitment to extension and involve other
groups (training institutions, NGOs) in training and
implementation of the technology.
Bougainville industry
rehabilitation
Support for United Nations
Development program/AusAID
installations
The PNG Cocoa Board needs to approve modified
specifications on dryer size in cocoa regulations.
Consideration should be given to distributing combination
solar/kiln dryers (as a method of saving of firewood) and/or
purely solar alternatives for drying in suitable weather
conditions.
PNG and donor agencies need to review future needs/
sustainability of industry on Bougainville.
‘PNG’ chocolate Distinctive flavour of ‘PNG’
chocolate demonstrated through
collaboration with Masterfoods
Australia.
An economic analysis should be undertaken of opportunities
which could include: local marketing of products made from
cocoa nibs, and links with a specialist manufacturer who might
want to market ‘PNG fine’ chocolate to international markets.
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ICCO ‘Fine/Flavour
Project’. Partner
countries and
commercial users of
PNG cocoa are
involved in
‘benchmarking’ fine/
flavour criterion.
b
Some progress has been made
in ‘bench-marking’ PNG
standard fine cocoa against
other producers.
Ongoing support is needed for CCI participation in the current
project. Future directions/needs will depend on progress made
in current ICCO project.
Income generation for
smallholders
This project has developed
affordable options for
smallholders to produce higher
quality cocoa and potentially
earn more income.
In 2003–2005, a new ACIAR
project will provide additional
resources and effort in this area.
The Cocoa Board has to approve revised regulations before
farmers can use project-developed technologies to produce and
market cocoa.
International
collaboration
Partnership initiated in ICCO
project
a
International cocoa conference
presentations made
CCCRI staff participated in an
ACIAR–Indonesia cocoa
workshop in 2001, and
discussions were held between
CCRI and the Indonesian
Cocoa and Coffee Research
Institute (ICCRI) about
fostering collaboration.
Collaboration in the current ICCO project could foster future
links and funds.
The profile of CCI in international cocoa R&D should be
maintained.
Links with Indonesia and other ASEAN cocoa producers
(including Vietnam) should be fostered both for research gains
(e.g in developing strategies for exotic pests such as cocoa
pod-borer) and to enable the PNG industry to have a better
understanding of future competition.
CCRI should continue to foster good links with manufacturers.
Table 1. (Cont’d) Cocoa quality improvement in PNG: issues, achievements and future needs.
Element of quality
improvement
Key achievements What needs to be done now?
Extension liaison
• This is the most critical and challenging issue to
handle at the present time (resources, farmer
linkages and security). There is a major need for a
concerted effort for the recently merged CCRI and
Cocoa and Coconut Extension Agency (CCEA),
and the Cocoa Board, to deliver research outcomes
to the field and foster adoption by farmers.
Adoption of recommended procedures country-
wide would automatically deliver an improvement
in quality attributes of PNG cocoa (and thus
reputation and income). The challenge will be in
getting this message across.
Future ACIAR support
In parallel with the ACIAR support for research on
cocoa fermentation, drying and genotype evaluation,
another ACIAR project in PNG has promoted
options for income generation in the smallholder oil
palm sector of PNG, including the increased partici-
pation of women in the industry through the ‘Mama
Lus Frut’ card scheme. In recognition of the oil palm
project achievements and of the opportunities for
cocoa industry improvement described here, a new
project funded by ACIAR (ASEM/2002/014) will
focus on improving productivity and the participa-
tion of young people and women in the Papua New
Guinea cocoa, coconut and oil palm industries. Part-
ners in the project are Curtin University, CCRI/
CCEA and the PNG Oil Palm Research Association.
The new project will capitalise on the oil-palm
project interventions that led to significant increases
in smallholder productivity. The new project aims to
replicate such achievements in the PNG smallholder
cocoa and coconut sectors. Researchers will also
conduct an in-depth evaluation of a promising new
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payment system (also arising from the earlier ACIAR
project) for oil-palm smallholders at Hoskins, West
New Britain, and seek to further adapt it for other
smallholder oil-palm regions and for the smallholder
cocoa sector in PNG. The project will promote the
sharing of knowledge and expertise between the key
smallholder extension agencies and research organi-
sations in the three industries.
For the farmers of PNG to be better linked to mar-
kets, the most important issue is to enable them to
ferment small quantities of beans harvested from
hybrids that produce cocoa of superior flavour. There
must also be a continuing effort to refine postharvest
procedures suitable for farmer use and which would
enable them to match manufacturers needs more
closely and deliver superior product to traders, with a
price premium paid for beans of superior quality. In
this way, smallholders in remote locations would
have the chance to improve their incomes while
enhancing the quality and reliability of PNG cocoa.
One option to consider is that proposed by local
industry leaders in Bougainville — the concept of
‘cocoa traders’ as middlemen between growers and
export companies. Traders would have their own
transport and travel to villages both close to and
distant from export outlets. This would, in theory, do
away with problems farmers have in transport of crop
to buying points, and the traders would also act as
quality assessors, as they would wish to establish a
good reputation for the product they handle, with the
exporters. Under such a system, traders could also
provide advice at the village/smallholder level, about
such matters as what needs to be done to correct
quality problems encountered (i.e. they would act as
extension people). Such an approach might also be
suitable for other provinces and ensure that the PNG
Cocoa Board developed policies that were in tune
with industry needs.
In PNG cocoa, smoke contamination of cocoa is
another problem that farmers should seek to solve
through better dryer management. The ACIAR/
AusAID collaborations have demonstrated a suitable
option for regions such as East New Britain, but other
options (such as combination dryers) are needed for
areas that experience annual rainfalls above 2500
mm. Critically, Cocoa Board approval is also needed
for the smallholder dryers. In managing smoke con-
tamination, it also needs to be determined if dried
beans are being further contaminated by cook-fires
during household storage.
References
Bedford, A., Blowfield, M., Burnett, D. and Greenhalgh, P.
2002. Value chains: lessons from the Kenya tea and
Indonesia cocoa sectors. In: Focus 3, summary and report,
Natural Resources Institute and the Resource Centre for
the Social Dimensions of Business Practice, International
Business Leaders Forum, London, UK.
Iswanto Arief, Guest, D., Keane, P., Lambert, S. and
McMahon, P. 2003. Selection for disease and pest
resistance in cocoa in Sulawesi. In: 14th International
Cocoa Research Conference (COPAD), October 2003,
Ghana, Abstracts of posters, No. 124E, 194.
Hollywood, N. 1998. The effect of fermentation time and
washing of cocoa prior to drying on cocoa quality in
Papua New Guinea. Cocoa Growers’ Bulletin, No. 51.
Hollywood, N., Brown, S. and Toreu, B. 1997. A design for
improved efficiency in solar drying of cocoa. Cocoa
Growers’ Bulletin, No. 50.
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188
The Benefits of Supply-Chain Practice in
Developing Countries – Conclusions from
an International Workshop
Chris Wheatley,* Elizabeth J. Woods
†
and Setyadjit
§
Abstract
Interest in supply-chain management (SCM) in developed countries has grown as consumers demand product
quality and integrity that can be achieved only by integrated management from farm to retail shelf. Effective
relationships between members of a supply chain have been shown to contribute to improving its efficiency
and innovativeness, and enhance its competitiveness. As food security is achieved in developing countries,
farmers are seeking to generate income by sale of a more diverse range of products. This trend, combined with
increasing urbanisation, population growth, rising standards of living and gradual changes to traditional
markets for foodstuffs, has created interest in application of the concept of SCM to market situations in
developing countries.
An international workshop (Bali, August 2003) attended by personnel from Asia–Pacific countries associated
with projects that had a supply chain dimension reviewed the theory of SCM as it relates to developing countries,
and the approaches that are being used to work with local supply-chain members on improving their products
and service to meet the demands of markets. A key question considered by workshop participants was the
distribution of the benefits which arise from SCM approaches, and the extent to which small farmers and traders
share in these benefits. This paper reports on the key conclusions of the international workshop.
Supply-chain management (SCM) is ‘the manage-
ment of the entire set of production, distribution, and
marketing processes by which a consumer is supplied
with a desired product’ (E. Woods <www.lfwm.net>;
see also Woods (2004)). Interest in better management
of supply chains in developed countries has expanded
in line with increased consumer demand for quality,
convenience, novelty and other non-food attributes in
the food products they buy, together with an increased
concern over food-product integrity and safety. Satis-
fying these consumer demands can be achieved only
by integrated management of the supply chain from
farm to retail shelf. Many food-industry experiences
demonstrate that effective, cooperative relationships
between members of a supply chain can contribute to
improving the efficiency of the chain, enhancing both
innovation and competitiveness.
An international workshop on this topic was
sponsored by ACIAR and the ATSE Crawford Fund
(19–22 August 2003, Bali, Indonesia). The work-
shop reviewed the theory of SCM as it relates to
developing countries, and the approaches that are
being used to work with local supply-chain
members on improving their products and service to
* Braun Wheatley Partners, PO Box 462, Nelson, New
Zealand.
†
University of Queensland Gatton, Gatton, Queensland
4343, Australia. Current address: Executive Director,
Research and Development Policy, Department of
Primary Industries, Meiers Road, Indooroopilly,
Queensland 4067, Australia.
Email: <[email protected]>.
§
Indonesian Agricultural Postharvest Technology
Research Institute, J alan Ragunan 29A, Pasar Minggu,
J akarta, Indonesia.
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meet markets demands. The 39 workshop partici-
pants included staff from current supply-chain
projects in Australia, China, Ghana, Indonesia,
Laos, Papua New Guinea, the Philippines, Thailand
and Vietnam.
Supply chains in developing countries are typi-
cally long and fragmented, involving multiple small-
holder producers delivering produce to collectors.
Product then moves to traders and wholesalers and
possibly several layers of retail distribution. Primary
and secondary food processing may also occur, often
at a small to medium enterprise scale. These chains
are characterised by multiple product handling steps,
poor information flows and a predominance of spot
transactions over longer-term buyer– seller relation-
ships.
As basic agricultural commodity prices continue
their worldwide decline, and food security is largely
achieved in most developing countries, farmers in
Southeast Asia are increasingly concerned to
improve their livelihoods through income derived
from the sale of a more diverse range of high or
added-value produce and products. This has pro-
duced a strong trend towards a more market-oriented
agriculture, even at smallholder level in remote areas.
Alongside this, population and incomes are rising,
the region is becoming more urbanised, and food
habits and markets are changing accordingly. The
result of this is an increasing dualism in the agri-food
sector. Shorter, more efficient, coordinated supply
chains are growing, especially those associated with
higher-value commodities and large-scale retail
outlets (supermarkets and hypermarkets). Mean-
while, traditional supply chains continue to handle
bulk commodities and basic food products for most
of the population.
Given the current trend towards more managed
supply chains in Southeast Asia, the workshop was
organised to undertake a review of theory and current
practice, to provide participants with a greater under-
standing of the potential benefits of the SCM
approach, to enhance the capability of supply chains
in the Southeast Asian region to supply produce to
higher-value markets (e.g. supermarkets and the hos-
pitality trade), to identify constraints to improving
supply chains in the region (for better targeted
research and development (R&D) activities), and to
understand the implications of the rapid growth of the
SCM approach for governments, the agri-food
industry and rural communities.
Learnings from the Workshop
The potential benefits and implications of supply-
chain management for smallholders
Experience with the development of more efficient
and managed supply chains in Southeast Asia and
elsewhere is that the number of suppliers tends to fall
over time, as the nature of the relationship between
producers and retailers deepens. Working with mul-
tiple smallholder producers entails additional trans-
action costs for SCM at retail level. Opportunities for
smallholders to participate (and benefit) from such
high-value chains are therefore uncertain. Mecha-
nisms that reduce the transaction costs associated
with small-scale production are needed, and this may
well require significant R&D assistance.
One option to improve prospects for small farmers
to participate and benefit from these chains is to form
producer groups or associations. These may enable
smallholders to work together to obtain the product
volumes and economies of scale needed, continuity of
supply over time, and increased market power. Pro-
ducers need assistance to make the transition from a
production to a market-orientation, to obtain and use
information on consumer demand, to access and adopt
better production and postharvest technology, and to
incorporate quality and safety management systems.
Experience in the projects represented at the work-
shop indicates that existing supply-chain actors
provide many services in addition to their principal
marketing function (e.g. traders may provide
informal market information, credit and technical
assistance services). These services are also provided
in a manner that is compatible with local cultures and
values, something that may not be the case for exter-
nally driven SCM approaches. Another option for the
development of efficient supply chains that include
the small-farm sector is to build on existing supply
chains, specifically incorporating a role for some
actors (e.g. traders) to provide these and other serv-
ices (e.g. organisation of produce supply volumes
over time) in a culturally appropriate manner, so that
transaction costs are reduced without the need for the
creation of formal farmer organisations.
Enhanced capability for supplying produce to the
higher priced supermarket and hospitality trades,
by increasing product quality and supply
efficiency
Timely, reliable information about consumer
requirements is required if farmers are to become
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more market-oriented, and to ‘produce what they can
sell’, rather than trying to ‘sell what they produce’.
Workshop participants identified two types of market
information:
• information on long-term consumer trends,
influencing decisions on what to produce
• information on current market prices, important
for decisions on when to sell.
Producers currently have poor access to both types
of information, and may have basic misconceptions
about consumer preferences. Examples of this were
clear from the workshop cases presented (e.g. for
potatoes in northern Vietnam and vegetables in
Mindanao). Often this is to the result of poor commu-
nication between producers and traders.
Potential does exist to build on existing supply
chains, e.g. for high-quality, local variety bananas to
supermarkets in Indonesia, where adoption of SCM
practices could be beneficial. This would require
implementation, through the chain, of quality-assur-
ance practices and standards, with culturally appro-
priate incentives in place for producers, and
communication strategies to reach them. It also
requires organisation to obtain required volumes
over time from many small producers, and increased
professionalism at producer and trader levels to get
the product right; capacity building is therefore an
essential component of any SCM program.
An additional barrier remains in many areas; the
existing transport, storage and communications
infrastructure is inadequate to ensure efficient access
to the market. This has implications for national and
local governments.
The development of enhanced and efficient supply
chains for high-quality produce in domestic markets
will help chain actors prepare for their eventual par-
ticipation in export markets.
Better identification of the real constraints pre-
venting improvement in the targeted industries,
so that research and development activities can be
implemented more effectively
There are few documented experiences of the
SCM approach in the developing world, and espe-
cially for national markets in Southeast Asia. Partic-
ipants felt that, based on these experiences, we still
have only a preliminary understanding of the SCM
approach in these situations. There is a real need to
investigate, document and systematise cases, in order
to be able to demonstrate actual and potential benefits
to rural producers.
There is plenty of relevant technology on produc-
tion and postharvest handling available, but it is not
‘organised’ or readily available to supply-chain
actors, resulting in missed opportunities and in
wasted R&D effort that duplicates existing knowl-
edge. Better organisation of, and access to, informa-
tion on existing postharvest technologies would
permit much greater efficiency through identification
of knowledge gaps and better prioritisation of future
R&D activities.
Workshop participants also acknowledged that we
still lack a good understanding of the constraints
(infrastructure, capital and policy) to adopting
market-oriented approaches that farmers face in spe-
cific contexts. These range from illegal taxes to lack
of tools to monitor quality at the farmer level.
Understanding the implications for governments,
the agri-food industry and rural communities
Rural communities will benefit from adopting a
market orientation only if smallholder producers in
that community are able to gain from participating in
higher-value chains. In this context, proactive facili-
tation is required to ensure that smallholders do
indeed benefit from improved SCM. Some of the
projects represented at the workshop were able to
demonstrate effective facilitation of the supply chain
improvement process by local and national govern-
ment. Other actors (e.g. non-government organisa-
tions (NGOs)) can also undertake this role. Ensuring
that smallholders can access higher-value markets
will often require different levels of government
working together with NGOs, the private sector, and
academics to deliver training and facilitate integrated
efforts.
It is important that the process of improving supply
chains is carried out in a manner that is compatible
with, and takes advantage of, the existing local
culture and social structures. Opportunities should be
sought to build on existing social capital (e.g. through
engaging women and village leaders) and trying to
work with the high levels of trust that already existing
in some chains. This will facilitate the development
of sustainable and efficient supply chains (by using
social capital to minimise the transaction costs
inherent in incorporating smallholder producers) and
reduce any social impact of market-induced changes
in these communities.
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Priorities for Future Action:
What Next?
During the workshop, group discussions took place
to identify major issues where future R&D activity
should be concentrated. These were subsequently
synthesised and organised around three levels of
intervention:
• macro level – policies and regulations
• meso/institutional level – R&D and capacity building
• micro level – local chain development and infra-
structure provision.
This synthesis was presented to the 21
st
ASEAN/
3
rd
APEC Post-Harvest Technology Seminar, which
immediately followed the SCM workshop in Bali.
This section of the paper summarises the synthesis of
the SCM workshop outcomes at these three levels.
Policies and regulations
While the group discussions identified several spe-
cific policy areas where government action is needed,
they also highlighted some deficiencies in the current
policy-making process itself. The potential benefits
that flow from including smallholder producers in
high-quality supply chains, and the negative implica-
tions for equitable economic and social development
if they are not included, are often poorly communi-
cated to governments and policy makers. This may
mean that the concerns and needs of rural communi-
ties and smallholder farmers are not adequately taken
into account in the formulation of policies that affect
these rural people, with implications for the success
of poverty-alleviation initiatives in the medium to
long term. It is vital that governments recognise the
importance of creating an environment where small-
holders can also benefit, in an equitable manner, from
their active participation in higher-value supply
chains.The institutions involved in SCM projects and
initiatives in Southeast Asia have a responsibility to
provide information and advice to national govern-
ments (and appropriate regional bodies) in fulfilling
this policy-development function.
Specific areas where government policy interven-
tions are needed if smallholders are to maximise their
potential to be involved in, and to benefit from,
higher value supply chains, are as follows:
• Suitable legal systems must be established and
enforced. This will include creating a legal
framework for contracts agreed between parties in
supply chains, and ensuring that the capacity and
ability to enforce these contracts exists.
• Improving the availability of capital for business
infrastructure investments (e.g. storage and
distribution facilities) and access to credit for all
actors in supply chains.
• Providing the public infrastructure that is a
precondition for rural communities to gain access
to markets and for business to prosper. This
includes roads, harbours, law and order, and
political stability.
• Provision of market information and support for
training in business management and marketing
for small and medium enterprises.
• Ensuring smooth operation of the markets within
which supply chains function, through appropriate
competition policies, regulatory frameworks for
businesses and markets, and regulations and
standards for food quality and safety.
Research and development
Workshop participants identified R&D activities
in four distinct areas: markets, supply-chain develop-
ment, postharvest technology and food quality/
safety. In all cases, this is action-oriented (i.e.
involves working with chain participants, govern-
ment agencies and other stakeholders in a range of
situations) and is thus highly collaborative. Many of
the topics are framed as ‘how’ questions, the answers
often involving the development of methods to help
chain actors, and especially smallholders, to make
better decisions as they enter supply chains and then
participate in their subsequent development.
Markets – Key questions in this area include the fol-
lowing:
• How can timely market information be made
available to farmers so they can decide who to sell
to in ‘spot transactions—, and reduce the
information imbalances often present in farmer–
trader negotiations? Many projects attempt to
provide market information to rural communities,
but transforming these into sustainable services
that continue after projects finish is more complex.
This implies creation of sufficient demand for the
service to support the cost of its provision, unless
long-term public sector subsidies are available.
• Understanding the long-term trends in consumer
markets can help farmers and other chain members
decide what to produce. How can this type of
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longer-term demand forecasting be made
accessible to chain actors, including farmers?
• Once a chain is operating, how can the chain
members explore new options and identify market
segments?
Supply-chain development – The key issue here is
how to ensure that smallholder farmers can be
included in the development of higher-value and
more-coordinated supply chains. As mentioned ear-
lier, mechanisms are needed to reduce the additional
transaction costs that are involved in working with
many smallholders, rather than one or few major sup-
pliers.
One option is to encourage the formation of farmer
groups, so that from the perspective of a major retail
chain, for example, the farmer group acts as a single
supplier. In Southeast Asia, this approach has had
mixed success to date, with such farmer groups often
requiring extensive support for their formation
(reducing prospects for replication), and lacking sus-
tainability once such support is removed. Practical
methods for forming and strengthening such farmer
groups need to be developed. Group formation should
be focused on a commercial opportunity (rather than
being an goal in itself) and on following the process
through to delivering business success. The process
must be replicable and not too expensive.
Another option is to include traders in supply
chains, specifically for their ability to organise small-
holder farmers in a sustainable, low-cost and culturally
appropriate manner. This implies building on existing
arrangements to include technical assistance to pro-
ducers in critical areas, such a quality assurance and
related production practices. There has been very little
documented experience of working with traders and
smallholders in this way, and methods for accom-
plishing this— across the range of cultural situations
found in Southeast Asia—are urgently needed.
For both these options, it is essential to communi-
cate the incentives and rewards of participation in
these new supply chains to farmers and rural commu-
nities in a culturally appropriate way, and to improve
the business skills of these rural actors. Methods to
achieve this are needed; they could involve training,
facilitation and working with existing traders as pro-
viders of these services.
Once these supply chains are operating, their
future development and competitiveness is related to
several other key issues that were identified at the
workshop, and which require further research. These
include how to Trust and credibility must be built
between the different stakeholders in the chain. This
type of social capital can reduce transaction costs
(e.g. the need for formal contracts) between actors in
the chain. Mechanisms that chain actors and facilita-
tors can use to build trust in these situations may be
culturally driven.
Benefit distribution along the chain is a key issue.
Experience from the developed world suggests that
benefits may accrue disproportionately to actors with
most power in the chain (usually retailers). Mecha-
nisms to ensure that smallholders receive an equi-
table return from their participation in these high-
value chains are needed. These could include farmer
organisation, to increase market power, and/or the
adoption of ethical trading standards through the
chain.
Small farmers are often at a disadvantage to other
chain actors, for example as regards access to credit
(where they may lack collateral) and to legal services
(e.g. for contract enforcement). How to resolve these
imbalances, through, for example, novel credit
arrangements, needs investigation.
Finally, a supply chain is necessarily focused on
one commodity, product and market. Enhancing the
performance of one chain may have implications for
others, and for the wider society and natural environ-
ment. For example, increasing production of one
commodity as demand within a supply chain
expands, could greatly affect land-use patterns and
livelihood strategies in a rural community, affecting
(positively and/or negatively) both environmental
and social sustainability. It is important that these
wider implications of supply-chain development are
captured in the decision-making processes of the dif-
ferent actors involved in the chain. Mechanisms to
facilitate this need to be developed.
Postharvest technology – Workshop participants
were more concerned with accessing existing post-
harvest technologies than with the development of
new technology. This requires better organisation of
existing information, and enhanced access to this
information at the level of rural communities and the
agencies that provide technological support services.
Short-term technological priorities for small farmers
were identified as:
• cold-chain development
• shelf-life improvement
• quality assurance.
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Food quality and safety – Existing knowledge about
food quality and safety issues is not extending down
the chain to farmers, or to consumers. Mechanisms to
ensure that farmers are aware of the issues, and the
steps they need to take to overcome any problems,
are needed. Direct involvement of other chain actors
— traders and retailers — in communicating and
addressing these issues (and implementing appro-
priate assurance systems) is probably essential.
Capacity building
Training topics that the workshop identified
included:
• increasing the market orientation of chain
members
• building the business skills of chain members
• enhancing chain members’ awareness of food
safety issues and measures to deal with them.
If smallholder producers across Southeast Asia are
to benefit from their involvement in supply chains,
this implies a massive effort. Strategies at national
(and perhaps regional) level for developing and
delivering this training need to be defined, including
who should be responsible for delivery, and who
exactly should be trained. As agriculture becomes
increasingly market-oriented, it is clear that training
smallholder farmers (and their organisations) in these
areas is essential, but how this should be accom-
plished when support services are weak, especially in
more remote areas, is not clear. The strategy should
meet the need to strengthen rural support service
institutions capable of providing this type of training.
Building supply chains at the local level
In order to maximise the prospects for small
farmers to benefit from their involvement in higher-
value supply chains, it is important that lessons are
learned from supply chains that are now being devel-
oped. The key process at local level will be action
learning; that is, learning by doing. It is likely to
involve processes such as benchmarking, best prac-
tice, and case-study analysis across of range of
supply chains in different countries (in order to
provide culturally acceptable solutions), types of
products and market situations, aiming to improve
the efficiency of individual chains, and the benefits
they provide to all actors. The results of such a cross-
case analysis should translate into improved per-
formance and a greater scale of benefits to all partic-
ipants from these chains.
The question of entry points for small farmers and
how to build on existing products and chains to
access higher quality and new markets is also likely
to be informed by case analysis.
Practical, local-level pilot activities will also help
to identify appropriate and high priority roles for
government, NGOs, producer organisations, and the
private sector, in supporting chains. One positive
feature of the current environment is that decentrali-
sation policies in many countries have created an
opportunity for local (provincial or district level) ini-
tiatives. This creates scope for piloting a range of
innovative solutions, including local policies.
Infrastructure provision
Infrastructure constitutes a major barrier to small
farmers participating in high-value chains. Ensuring
adequate storage, handling and transport facilities
will be critical to chain competitiveness, as will
ensuring that the chains have access to that infra-
structure. Decentralisation can also be important, so
that the provision of basic infrastructure investment
can be addressed through appropriate local policies,
as well as at a national level.
Conclusions
Workshop participants concluded that SCM is
becoming increasingly important in developing
countries because:
• the supermarket sector is already well established
(in major urban centres) and shows high levels of
capital investment and market share growth
• traditional food products in domestic markets will
face increasing competition from imports
• consumers across the region, and international
retailers, share a desire to ensure that all products
(in both traditional and more-managed supply
chains) move towards global standards of food
safety and health.
The growth of managed, high-value supply chains
has profound implications for smallholder producers
across the developing world. One key issue identified
and considered by workshop participants was that of
the distribution of benefits that arise from enhanced
SCM, and the extent to which rural communities,
smallholder farmers and traders across Southeast
Asia can share in these benefits. Several key areas
were identified where action is required in order to
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maximise the potential of small farmers to participate
in, and benefit from, such supply chains.
It is important that action, based on these ideas and
issues, is indeed taken. Governments need to be
informed of the implications of these changes for the
small-farm sector of their economies. Agencies
working in the rural development and agricultural
sectors need to incorporate these major agri-food
sector developments into their strategies. Retail
chains need to become more aware of the wider
social and environmental consequences of a SCM
approach that tends to place most emphasis on eco-
nomic efficiency. The people, communities, enter-
prises and other actors involved in producing,
processing, and marketing food products need to
learn to take a more market-oriented approach, some-
thing that (for many) requires a new set of skills,
including how to work together in different ways.
There is much we still need to learn about this
process. Supply-chain management in developing
countries crosses many disciplinary boundaries.
Research institutions and donor agencies will need to
adjust to these realities and ensure that they are
addressed in a coherent and holistic manner. It is also
essential that research be action oriented, involving
the various supply-chain actors themselves. This will
help to ensure that efficient, competitive supply
chains can make a significant and positive contribu-
tion to the development of prosperous and sustain-
able rural communities in Southeast Asia.
Reference
Woods, E. 2004. Supply-chain management: understanding
the concept and its implications in developing countries.
In: J ohnson, G.I. and Hofman, P.J ., ed., Agriproduct
supply-chain management in developing countries.
Proceedings of a workshop held in Bali, Indonesia, 19–22
August 2003. ACIAR Proceedings No. 119, 18–26.
ACRC084.book Page 194 Monday, October 18, 2004 2:35 PM
doc_235111548.pdf
Using transaction cost analysis, gap analysis and the key dimensions of long-term buyer–seller relationships (satisfaction, trust and power-dependence), it is possible to demonstrate that the supply chain for potatoes cultivated in the Red River Delta (Vietnam) is surprisingly efficient.
Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
Agriproduct Supply-Chain
Management in
Developing Countries
Proceedings of a workshop held in Bali, Indonesia,
19–22 August 2003
Editors:
G.I. Johnson and P.J. Hofman
Australian Centre for International Agricultural Research
Canberra 2004
ACRC084.book Page 1 Monday, October 18, 2004 2:35 PM
Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
The Australian Centre for International Agricultural Research (ACIAR) was established
in J une 1982 by an Act of the Australian Parliament. Its mandate is to help identify agri-
cultural problems in developing countries and to commission collaborative research
between Australia and developing country researchers in fields where Australia has a
special research competence.
Where trade names are used this constitutes neither endorsement of nor discrimination
against any product by the Centre.
ACIAR PROCEEDINGS
This series of publications includes the full proceedings of research
workshops or symposia organised or supported by ACIAR. Numbers in this
series are distributed internationally to selected individuals and scientific
institutions.
© Australian Centre for International Agricultural Research, GPO Box 1571,
Canberra, ACT 2601.
J ohnson, G.I. and Hofman, P.J ., ed. 2004. Agriproduct supply-chain management in
developing countries. Proceedings of a workshop held in Bali, Indonesia, 19–22
August 2003. ACIAR Proceedings No. 119, 194p.
ISBN 1 86320 479 2 (print)
1 86320 480 6 (electronic)
Cover design: Design One Solutions.
Technical editing and typesetting: Clarus Design Pty Ltd
Printing: Pirion Printing
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3
Foreword
A major theme of many ACIAR projects is ‘linking farmers with markets’. In a complex,
global market, price and supply fluctuations for rural produce affect resource and infra-
structure planning and access to credit, at both farm and national levels. Production sur-
pluses may not translate into higher incomes. The efficiency of enterprises is affected by
the choice of commodity, product end-use or market, as well as sourcing of inputs such as
fertilisers, seed, pesticides and technology.
Rural communities and governments must become more ‘market smart’. They need to
forecast, interpret and respond to supply signals from domestic and global markets, and to
capitalise on consumer preferences for perceived nutritional benefits, novelty and conven-
ience. They must balance sustainable resource use and demands for quality with the chal-
lenges of higher food safety standards and long and complex supply chains.
Progressing beyond self-sufficiency, whether at the farm or national level, requires the
capacity for reliable production and profitable marketing of products sought by con-
sumers. The challenge is to provide rural communities with the capability and resource-
fulness for social adjustment and improvement of enterprise profitability during their
integration into the global community. The need is especially acute for small, remote and
resource-poor communities because of their small production bases and greater vulnera-
bility to natural disasters, new pests, political instability and other ‘shocks’. Developed
countries must be proactive in enabling remote communities in developing countries to
obtain a fair share of global prosperity.
ACIAR considers that, in the face of globalisation, rural community progress and resil-
ience will depend increasingly on their understanding of and access to markets, the flex-
ibility and strength of their financial base, and the quality, efficiency and versatility of
their production, processing, distribution and marketing systems.
ACIAR will support research that enables improvements in product integrity, processing
and storage, and quality assurance and supply-chain management.
The papers in this proceedings were presented at a workshop in Bali in August 2003. Many
of them report on work carried out in ACIAR projects. More information is available
through ACIAR’s Linking Farmers With Markets, electronic newsletter (www.lfwm.net).
Peter Core
Director
Australian Centre for International Agricultural Research
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Contents
Foreword 3
Opening Address 7
Ahmad Dimyati
Preamble 11
Supply-chain Management: Understanding the Concept and Its Implications in
Developing Countries 18
Elizabeth J. Woods
Incorporating Measures of Satisfaction, Trust and Power-dependence into an Analysis
of Agribusiness Supply Chains 27
Peter J. Batt
Banana Supply Chains in Indonesia and Australia: Effects of Culture on Supply Chains 44
Shinta Singgih and Elizabeth J. Woods
Supply-chain Management and the ‘One Dragon’ Approach: Institutional Bases for
Agro-industrialisation in China 53
Sherrie Wei and Zhang Yanrong
Analysis of the Constraints to Banana Industry Development in Indonesia Using the
Supply Chain Concept 59
Setyadjit, Ahmad Dimyati, Erna Maria Lokollo, Sri Kuntarsih, Rofik Sinung Basuki,
Ahmad Hidayat, P.J. Hofman, S.N. Ledger and E.J. Woods
Improving the Marketing System for Fresh Produce from the Highlands of Papua New Guinea 69
John Spriggs, Barbara Chambers, Carole Kayrooz, Ernest Natera, Norah Omot
and Margaret Vatnabar
Developing Systems to Maintain Quality through the Supply Chain: Getting the Product
Right for the Customer [Abstract only] 76
George Beers
Consumer Sovereignty: Exploring Consumer Needs 77
Peter J. Batt
Aflatoxin in Indonesian Peanuts: How Can the Contamination within the Food Chain
Be Managed? 88
Okky Setyawati Dharmaputra, Agustina A. Rahmianna, Nageswara Rao Rachaputi,
Graeme C. Wright and Greg Mills
Improved Marketing of Mandarins for East Nusa Tenggara in Indonesia 98
Sherrie Wei, Damianus Adar, Elizabeth J. Woods and Herman Suheri
Getting Farmers to Work Together: the Experiences of Mango Growers in the Mekong Delta
Region of Vietnam 107
Nguyen Minh Chau, Sherrie Wei, Vo The Truyen, Marlo Rankin and Iean Russell
Fruit and Vegetable Production in Vietnam and the Role of Traders in Marketing
[Abstract only] 112
Tran Cong Thang
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Who Benefits from Enhanced Management of Agri-Food Supply Chains? 113
Chris Wheatley and Dai Peters
Farmers’ Misconceptions about Quality and Customers’ Preferences: Contributing
Inefficiencies to the Vegetable Supply Chain in Southern Mindanao 124
Sylvia Concepcion, Marilou Montiflor, L.T. Hualda, L.R. Migalbin, L.N. Digal,
E.T. Rasco, N.M. Manalili, M.J. McGregor, P.J. Batt, R. Murray-Prior
and F.M. Rola-Rubzen
The Melon Value Chain in Gansu Province, Western China: Benefits to Growers from
Improved Disease-Control Practices 133
Zhang Yanrong and Sherrie Wei
Improving Indonesian Vegetable Supply Chains 139
Wendy Morgan, Syukur Iwantoro and Ibu Alifah Sri Lestari
Indonesia’s Strategic Agricultural Commodities in Meeting the WTO Agreement 142
Rina Oktaviani
Market Access and J ob Creation: a Supply Chain Action Agenda (the Case of the Philippine
Fruit Export Winners) [Abstract only] 152
Nerlita M. Manalili
Public Policy Issues in Supply-Chain Management 153
Donna Brennan
Supply-chain Management and Agro-Enterprise Development: CIAT’s Approach in
Southeast Asia 164
Christopher Wheatley, Rupert Best, Dai Peters and John Connell
The Supply Chains of Melons in Western China 173
Sherrie Wei, Zhang Yanrong and Niu Gang
Development in Agribusiness Chains and Challenges for Postharvest Technology:
Experiences from The Netherlands [Abstract only] 178
George Beers
Linking Farmers with Markets: the Case of Cocoa 179
G.I. Johnson, Arief Iswanto, J. Ragisvaru, P.J. Keane, N. Hollywood, S.V. Lambert
and D.I. Guest
The Benefits of Supply-Chain Practice in Developing Countries – Conclusions from
an International Workshop 188
Chris Wheatley, Elizabeth J. Woods and Setyadjit
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Opening Address
Supply-Chain Management in Indonesia:
Prospects for Methodological Adjustment
and Practical Applications
Ahmad Dimyati
Secretary,
Indonesian Agency for Agricultural Research and Development
(IAARD)
Background
The Ministry of Agriculture of the Republic of Indonesia has defined two core
programs of national agricultural development, namely improving food security and
enhancing the development of competitive, sustainable, people-centred and
decentralised agribusinesses. The two core programs require better understanding and
implementation of a systems approach in identifying, analysing and improving
problematic situations in agricultural development. Therefore, the application of the
supply-chain management (SCM) concept in agribusiness is quite in line with the
current needs of the agriculture sector’s decision-makers and practitioners.
Supply-chain management has been widely used in the manufacturing industry. Its use
in agribusiness has been initiated in a study entitled ‘Market-based analysis of
constraints for the development of banana industry in Indonesia and Australia’. The
study was carried out by the Indonesian Center for Horticulture Research and
Development (ICHORD) in collaboration with Queensland Department of Primary
Industries (QDPI), with joint funding of the Government of Indonesia and the
Australian Centre for International Agricultural Research (ACIAR).
The introduction of the SCM concept within ICHORD programs coincided with the
introduction of another systems approach method, named ‘soft systems methodology’
(SSM) developed by Peter Checkland of the University of Edinburgh, Scotland. Our
research team tried to combine and integrate the two methods in analysing and
improving the problematic situations pertaining to the development of horticulture in
Indonesia.
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Lessons Learned
The six principles of successful SCM were used to measure the performance of banana
production and marketing systems in several locations in the provinces of Banten, West
J ava, and J akarta. The six principles are: (1) understanding and meeting customers’ and
consumers’ needs; (2) getting the products right; (3) creating and sharing values; (4)
logistics and distribution; (5) information and communication; and (6) effective
relationships among supply-chain members.
The results of the study will be reported in detail in later sessions of this workshop.
However, it is necessary to underline several lessons learned from this study. After
discussing various problems and constraints in the banana industry, new ideas to improve
research and development programs in horticulture were revealed. On-farm oriented
research, which has dominated research programs for years, was supplanted by market-
oriented research programs, such as consumer preferences, components and determining
factors of fruit quality, and packaging, storage and processing. New ideas for on-farm
research also emerged, such as selection of better varieties and planting material, and
cultural practices related to fruit qualities.
Our short experience in applying the supply-chain concept also revealed that, between
different chains, variation is possible in the emphasis on different principles in achieving
success. One supply chain may emphasise the creation and sharing of new values to
improve income and welfare of the members, while another SC may emphasise the
importance of open and fair information flow and efficient communication.
The success of applying the supply chain concept and improvement of SCM depends
largely on effective contributions by various members of an interdisciplinary, or even a
cross-functional, team. No single scientific discipline or professional field can claim all
the credit for success. Researchers in various disciplines, extension workers, practitioners
and policy makers should collaborate in analysing the problems, formulating the
improved schemes and designing the actions needed to implement them.
Since SCM is a holistic approach with human-activity systems, similar to soft systems
methodology (SSM), we found it possible to integrate SCM with SSM. Such integration
permits:
1. mapping the situation of SCM in a richer picture according to SSM, to make it richer
and more dynamic than the linear flow charts usually used in SCM
2. use of interactive and iterative multilateral dialogues among supply chain members
3. characterisation of the chain, using SWOT (strengths, weaknesses, opportunities,
threats) analysis and root definition of the systems
4. mapping of narrative areas for improvement of SCM in the conceptual models used in
SSM
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5. formulation of follow-up actions based on SWOT analysis can be further
elaborated using the SSM approach to define actions and changes that are logically
desirable as well as culturally and politically feasible.
Both SSM and SCM require an interactive and iterative egalitarian dialogue that suits
Western culture. Their application in the Indonesian cultural setting will need
adjustment of the style of dialogue. One of the drawbacks of the two methods lies in the
nature of decision-making process in the supply-chain systems. Supply-chain
improvement requires the decision of various ‘equally authorised’ partners. Hence, the
process is owned by these various partners. Multiple ownership of the processes and
the diversity of stakeholders, make the processes of improvement slow and
complicated.
Both SCM and SSM have good prospects for wider application in agribusiness
development. Among the areas that will benefit from the use of the two methodologies
are:
• analysis of constraints to agribusiness development made by various central
Directorates within and outside the Ministry of Agriculture
• assessment of location-specific and commodity-specific agribusiness models as
components of action research conducted by 26 provincial Assessment Institutes
for Agricultural Technology
• commodity-based ‘Action Programs’ conducted jointly by the Indonesian Agency
for Agricultural Research and Development (AARD) and Directorate General of
Horticulture Production Development
• integration of the two methodologies in the education and training curricula related
to the agribusiness development.
Since we are still in the early learning stage, we are expecting the workshop to make
a large contribution to the enhancement of SCM application in Indonesia, particularly
within AARD. Among possible contributions are:
• exchange of lessons learned in diverse social and economic conditions
• improvement and enrichment of the concept
• refinement of the procedures
• suggested adjustments for varied cultural situations and commodities
• strategy and tactics for wider application.
Finally, I wish you all productive deliberations and an enjoyable stay in this country.
Thank you.
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Preamble
An adequate and stable supply of agricultural com-
modities is the keystone of food security and eco-
nomic development. Globalisation and trade
liberalisation can help communities to improve rural
incomes, but these benefits may be compromised by
inadequacies in infrastructure or governance, by dif-
ficulties in controlling postharvest deterioration or by
an inability to produce competitive products.
ACIAR considers that, in the face of globalisation,
the progress and resilience of rural communities will
depend increasingly on their understanding of and
access to markets, the flexibility and strength of their
financial base, and the quality, efficiency and versa-
tility of their production, processing, distribution and
marketing systems. Rural communities and govern-
ments must become more ‘market smart’. They must
balance sustainable resource use with the challenges
of quality requirements, higher food-safety standards
and long and complex supply chains.
At the international workshop at which the papers
in these proceedings were presented, experts outlined
the theory, methods and approaches of supply-chain
management (SCM), and practitioners discussed
their practical experience in SCM. The workshop
then considered how SCM can best be used in devel-
oping countries to optimise benefit flows.
The main focus of ACIAR support for supply-
chain projects has been to consider whether evalu-
ating an industry using the supply chain as a founda-
tion (that is, looking at all aspects from farm to plate)
would better indicate the areas that need to be tar-
geted to improve industry efficiency and profita-
bility, for the individual members of the supply chain
and the chain as a whole. An important priority of the
ACIAR projects (listed later in this preamble) has
been to identify whether and how changes in SCM
can ensure that the benefits extend to farmers.
This workshop provided a forum for discussing
how SCM can assist in developing appropriate
systems from farm to plate, to the mutual benefit of
all involved, and what implications there are for
governments and communities. In addition, it
sought to assess whether this approach can assist in
identifying the most important constraints to these
improvements. These constraints would then be the
areas that R&D providers and policy makers could
focus on in order to assist industry development.
Workshop Objectives
The workshop sought to achieve:
• a greater understanding of the potential benefits
and application of the SCM approach to increasing
returns to smallholders
• an enhanced capability for supplying produce to
the higher-returns supermarket and hospitality
trades, by increasing product quality and supply
efficiency
• a better identification of the real constraints to
improvements in the targeted industries, so that
R&D activities can be implemented more
effectively
• an understanding of the implications of increasing
market sophistication for governments, industries
and communities
• publication, in the ACIAR Proceedings series, of
the papers presented. The papers in this volume
cover the theory of supply chain R&D and practical
experiences in application of the supply-chain
approach in developed and developing countries.
Participating Projects
The projects described on the following pages pro-
vided the support for many of the papers presented at
the workshop. The information was collated by
ACIAR, using the best information available at the
time of preparation, for use as a resource in the work-
shop. Further information on the projects can be
obtained from the contact person listed in the project
summary.
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ACIAR Project PHT/1997/161 — Market based
analysis of constraints to banana industry
development in Indonesia and Australia. Active to
31/12/2003.
This small project developed a participatory
process to identify the major constraints to the com-
petitive performance of a horticultural industry in
Indonesia and Australia to:
• assist in industry development
• more effectively direct R&D to priority areas with
the greatest potential for improving producer
profitability.
The project tested the feasibility of using the con-
cepts of product market performance and supply-
chain management both as drivers of industry devel-
opment and to guide the contribution of R&D to
industry development.
Commissioned organisation:
Queensland Depart-
ment of Primary Industries, Brisbane (P.J . Hofman,
Email: <[email protected]>).
Collabo-
rators:
Central Research Institute for Horticulture,
Indonesia; University of Queensland, Australia;
Indonesian Agricultural Postharvest Technology
Research Institute (Indonesia); Directorate of Fruit
Plantation (Indonesia); Central Research Institute for
Socio Economic Development (Indonesia); Directo-
rate of Marketing of Horticulture (Indonesia);
Central Research Institute for Vegetables (Indo-
nesia).
The market for seed potatoes, fresh potatoes and
processed potato products in Vietnam (AusAID
CARD and other funds)
Funded initially under the CARD project, this
project sought to identify the principal source of seed,
the costs of seed, the various criteria farmers used in
their decision to purchase seed and the extent to which
the seed available met the farmers’ expectations.
Based on the performance of seed imported from
Western Australia, it was readily apparent that
improved seed had a significant positive impact on
yield, lifting the average yield of 12 tonnes per
hectare to more than 30 tonnes per hectare. Since
most of the potato crops in the Red River Delta are
harvested within an eight-week period, concern were
expressed as to what impact the improved produc-
tivity would have on prices in the fresh market.
Various exploratory studies were then undertaken to
examine the downstream implications on the whole-
sale market. Discussions focused on current whole-
sale prices, the seasonality of demand, competitors
(in China and Da Lat, Vietnam), tuber quality and
size, postharvest storage and the extent to which the
potatoes available in the Red River Delta met the
market intermediaries’ needs. Various discussions
were also undertaken with small-scale potato proces-
sors and the food service sector.
In presenting the results to a potato industry work-
shop in November 2001, the German technical assist-
ance agency Deutsche Gesellschaft für Technische
Zusammenarbeit (GTZ) advised that it was about to
embark upon a more extensive investigation of the
entire supply chain, including consumers. As a result,
the two research programs were combined. It was
proposed to interview consumers in both northern
Vietnam (the Red River Delta) and southern Vietnam
(the Mekong River Delta) and to undertake an anal-
ysis of both the domestic market and export market
for potatoes cultivated in the Red River Delta. Infor-
mation was sought on consumers’ attitudes towards
fresh potatoes, substitute crops (taro, sweet potato
and radish), the frequency of consumption, how the
product was used, how much consumers paid to pur-
chase potatoes, consumer preferences, and the
demand for both processed potato products and pota-
toes that were consumed away from home (restau-
rants). Various demographic variables were also
collected to evaluate such measures as the income
elasticity of demand.
A comprehensive analysis of the supply chain for
potatoes in both the Red River Delta and Mekong
River Delta was undertaken. Both quantitative and
qualitative interviews were conducted with farmers,
traders, wholesalers and retailers, and various food
service outlets. Information was collected on the
prices paid to purchase potatoes, the various activities
undertaken, the costs of performing those activities,
and the prices at which the potatoes were sold. Infor-
mation was sought on how prices varied over the year,
between the different grades, the different suppliers
(China and Da Lat), and the extent to which the quality
of the potatoes sold met the buyers’ needs. The final
aspect of the research included a number of relational
dimensions (trust, satisfaction, commitment, power-
dependence and relationship-specific investments) to
explore to what extent market intermediaries were sat-
isfied with the exchange relationship.
Commissioned Organisation:
Agriculture Western
Australia (Peter Batt, Email: <[email protected]>).
Collaborating Organisations:
Food Crops Research
Institute Vietnam; Curtin University of Technology;
GTZ.
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ACIAR Project PHT/1998/140 — Postharvest
handling and disease control in melons in China
and Australia. Active 1/1/2002 to 31/12/2004.
ACIAR funded an earlier small project, ‘Posthar-
vest handling and disease control in melons’, which
affirmed the priorities for melon industry develop-
ment in western China and the scope for improve-
ments in disease control and supply-chain
technologies. This project follows on from that
research. It is aiming to improve postharvest disease
control and market quality of melons and other
cucurbits, and improve returns to growers in China
and Australia. Project activities include the strategic
application of preharvest treatments to boost natural
defence mechanisms in melons, and postharvest
treatments to control disease and maintain quality.
Researchers are also developing and testing interven-
tions that improve supply-chain management,
analyse the economic benefits associated with using
modern postharvest technologies and transport sys-
tems, and identify the most practical options to
improve profitability for farmers.
Commissioned Organisation:
University of
Sydney, Australia (Dr Robyn McConchie, Email:
<[email protected]>).
Collabo-
rating Institutions:
Gansu Agricultural University,
China; China Agricultural University, China; Sydney
Postharvest Laboratory, Australia; Xinjiang Depart-
ment of Agriculture, China; University of Queens-
land, Australia; Xinjiang Agricultural University,
China.
ACIAR project ASEM/2001/037 — Improving
the marketing system for fresh produce of the
highlands of PNG. Active 01/01/2003–31/12/2005.
The Papua New Guinea (PNG) Highlands region
represents a unique environment in which high
quality temperate-zone horticultural produce is
grown year-round. The region has the potential to
meet produce needs of populous coastal cities of
PNG as well as to supply offshore markets. The main
drawback to fulfilling this potential is an inadequate
marketing system, and marketing improvements
have been given a high priority in the PNG Govern-
ment’s National Food Security Policy, 2000–2010.
Project researchers will map the marketing system
and its institutional environment (governmental and
infrastructural), identify the constraints and capaci-
ties for change, and evaluate the potential for
improvement. They will facilitate a process of
change, focusing on two particular supply chains —
a land/sea chain (bulky, less-perishable produce) and
a land/air chain (highly perishable, high-value pro-
duce).
Commissioned Organisation:
University of Can-
berra, Australia (Dr J ohn Spriggs, Email:
<[email protected]>).
Collabo-
rating Institutions:
National Agricultural Research
Institute, Papua New Guinea; Fresh Produce Devel-
opment Corporation, Papua New Guinea.
ACIAR Project ASEM/2000/101 — Improving
the efficiency of the agribusiness supply chain and
quality management for small agricultural
producers in Mindanao. Active 01/01/2001–31/12/
2003.
This project examined the factors affecting the per-
formance of the agribusiness supply chain for
selected fresh vegetables produced by smallholders
in Mindanao, Philippines, with particular emphasis
on the potential for farmer cooperatives to perform
the agribusiness functions and deliver greater bene-
fits to the farmer. The project involved rapid
appraisal and case study methods to assess the per-
formance of the current marketing arrangements and
sought to identify impediments to the functioning of
the supply chain. The researchers aimed to determine
whether there is adequate information flow between
market intermediaries and farmers, to reflect the
market requirements for quality management.
Training programs, workshops and seminars with
farmer groups and institutional participants aimed to
facilitate the adoption of quality management
systems and improve the success rates among agri-
cultural cooperative groups.
Commissioned Organisation:
Curtin University of
Technology, Australia (Dr Murray McGregor,
Email: <[email protected]>). Project
website: <http://www.curtin.edu.au/curtin/muresk/
aciarmindanao/>.
Collaborating Institutions:
Uni-
versity of the Philippines, Mindanao, Philippines.
ACIAR Project PHT/1997/017 — Reducing
aflatoxin in peanuts using agronomic
management and bio-control strategies in
Indonesia and Australia. Collaborating
Countries: Indonesia and Australia.
Several ACIAR bilateral projects have investi-
gated aspects of aflatoxin assessment and significant
progress is finally being made in developing inte-
grated control strategies. This project builds on this
and other work on drought tolerance (a trait that was
found to reduce contamination risk). Advances in
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agronomic management of aflatoxin since the earlier
projects means that reduction of aflatoxin contamina-
tion risk in peanuts, including the use of drought-
resistant peanut cultivars, is now feasible. This
project will determine the extent and relative impor-
tance of pre- and postharvest aflatoxin contamination
in peanuts, and develop biocontrol, management and
crop/fungus modelling strategies to minimise the
impact of aflatoxins in both Indonesian and Aus-
tralian cropping systems. Scientists will evaluate a
number of crop management and varietal methods to
control ‘on-farm’ aflatoxin contamination. As well, a
simulation modelling approach — integrating the
interaction between crop, soil, environment and
Aspergillus flavus
(the fungus producing the afla-
toxin) — will enable assessment of the probability of
aflatoxin formation at various stages during growth,
harvest and storage of peanuts.
Commissioned Organisation:
Queensland Depart-
ment of Primary Industries, Australia (Dr Graeme
Wright, Email: <[email protected]>).
Collaborating Institutions:
Research Institute for
Legumes and Tuber Crops, Indonesia; Assessment
Institute for Agricultural Technology, Indonesia;
Gadjah Mada University, Indonesia; University of
Sydney, Australia; SEAMEO Regional Centre for
Tropical Biology, Indonesia.
ACIAR Project ASEM/1999/013 — Improved
marketing of mandarins in East Nusa Tenggara in
Indonesia and northern Queensland. Completed
project.
Regional horticultural farmers in East Nusa Teng-
gara (NTT) and northern Queensland operate on a
small scale and lack a systematic marketing strategy
for their products, which are often of poor and incon-
sistent quality. The Indonesian farmers have addi-
tional problems associated with poor infrastructure
and lack of investment. The project focused on small-
holder mandarin farmers in NTT and northern
Queensland. The aim was to assist farmers to
improve quantity and quality of fruit production,
define specific market requirements and improve
marketing strategies. The findings of the project were
also applicable to East Timor.
Commissioned Organisation:
The University of
Queensland (Dr Sherrie Wei, Email:
<[email protected]>).
Collaborating Insti-
tutions:
Universitas Nusa Tendara; Queensland
Department of Primary industries; Metaram Univer-
sity, Lombok.
Improving the performance of the fruit industry
in Tien Giang and Tra Vinh Provinces. AusAID
CARD (Capacity-Building for Agriculture and
Rural Development) Project for Vietnam. July
2001–July 2003.
This project focused on the mango industry in the
Mekong Delta area of Vietnam and aimed to:
• enhance the capacity of agribusiness marketing of
the Southern Fruit Research Institute (SOFRI),
provincial agricultural services, selected farmer
associations and farmers
• strengthen the capacity of farmer associations in
service delivery, quality assurance management
and group marketing
• upgrade the capacity of SOFRI and provincial
agricultural services in fruit tree propagation,
production and protection, including expanded
capacity for certifying planting material to meet
market demand.
Four farmer groups were established and they
worked with Australian partners (including mango
farmers from Queensland) to develop a trial of QA
standards for the 2003 season and other group func-
tions.
Commissioned Organisation:
University of Queens-
land (Sherrie Wei, Email: <[email protected]>).
Collaborators:
Southern Fruit Research Institute,
Vietnam; Curtin University of Technology; Queensland
Fruit and Vegetable Growers; Cantho University.
Victorian Government and Australian
Department of Agriculture, Forestry and
Fisheries (AFFA) Project VG MIS: Indonesian
vegetable supply chains: case studies. Active to 30/
09/2003.
This one-year project used a case study approach
to introduce farmers, packing house staff and con-
sumers (via retailers) to the concepts of food safety
and meeting customers’ expectations. The project
was proposed as a five-year project and was
extremely ambitious. Activities undertaken to
achieve this included:
• selection of supply chains and personnel in five
locations to participate in case studies after lengthy
discussions with senior MOA staff in J akarta and
provinces
• a training-of-trainers (TOT) workshop for 10
MOA staff at CSA, J akarta on food safety for
packing houses, including packing-house HACCP
analysis, development of a packing-house HACCP
manual, and accreditation preparation
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• TOT for selected MOA staff and experienced
farmers at five locations, on integrated pest
management (IPM) and farmer field school (FFS)
methodology
• FFS for farmers in each supply chain (425 farmers
currently in FFS)
• packing-house food safety awareness for the
community at each supply chain’s location
• packing-house food safety training and HACCP
analysis for manager, staff and farmers supplying
packing houses at five locations
• training in product handling and storage for retail
fresh-produce buyers, managers and senior store
staff of one of the supply chains.
It is too early to evaluate the impact of the project,
but change has occurred at farmer, packing-house
and retail sectors of the case study supply chains
Commissioned Organisation:
Victorian Depart-
ment of Primary Industries (Dr Wendy Morgan,
Email: <[email protected]. gov.au>).
Col-
laborators:
Indonesian MOA’s Centre for Standard-
isation and Accreditation (Mr Syukur Iwantoro),
FIELD Indonesia (Ibu Alifah Sri Lestari), MOA &
Dinas staff in five provinces: East J ava, South
Sulawesi, Bali, South Sumatra and West J ava.
Rural Agroenterprise Development Project:
International Center for Tropical Agriculture
(CIAT). Active.
http://www.ciat.cgiar.org/
agroempresas/ingles/projectdescript.htm
This global project is promoting rural business
development and encouraging improved business
and market orientation in small rural producers’
organisations and support service organisations.
Small-scale farmers and entrepreneurs face
numerous barriers that prevent them from taking full
advantage of marketing opportunities. Usually, eco-
nomic models and policies do not favour them; they
have little business experience, and lack information
on technologies, markets, and prices; and receive
little support in terms of training, advisory services,
and credit. The mission of the project is to promote
the linkage of small farmers with growth markets,
and motivate the adoption of conservation practices
through the development of methodologies, tools,
information, and models of institutional organisation
for establishing and strengthening rural agro-enter-
prises and their complementary support services.
Currently, the project works with five modules that
integrate the essential elements for developing rural
agro-enterprises: marketing, postharvest technology,
business organisation, integrated agro-enterprise
projects (organised around commodity chains) and
local support systems, and training and strategic
planning. The project’s direct clients are civil society
NGOs and CBOs (community based organisations),
public sector development agencies and institutions
involved in building human capital. The project has
developed a methodological framework based on a
‘territorial approach to rural business development’,
which consists of four phases:
1. formation of a work team interest group) and
development of a common vision
2. identification of market opportunities
3. design of integrated agroenterprise projects (i.e.
oriented towards improving the commodity
chain)
4. proposal for strengthening the local support
system.
This methodology is implemented in reference
sites in collaboration with public and private-sector
development agencies. The project is decentralised,
having regional coordinators in Africa, Asia, Central
America, and the Andean region of northern South
America.
In Asia, the project has previously undertaken
research in Vietnam on clusters of root crop starch-
processing enterprises (understanding and enhancing
local innovation systems) and has conducted two
regional agroenterprise development training courses
with SEARCA and UPWARD (Los Baños 2001 and
Ho Chi Minh City 2003).
A new SDC-funded agro-enterprise development
project for Laos and Vietnam started in 2003. The
SDC project goal is ‘to develop sustainable agroen-
terprise initiatives with upland rural communities
that generate income and employment opportunities
through diversifying and adding value to local
natural resources’. The objectives embody the
process that will be followed in facilitating agro-
enterprise development, ensuring its sustainability,
and setting the context for extension of the
approaches developed, viz:
i. identify and evaluate market opportunities for
agroenterprise development through local stake-
holder interest groups
ii. design and facilitate the implementation of
agroenterprise initiatives with supply-chain
actors
iii. establish a strategy and local capacity for
promoting agroenterprises and strengthening
local business support services
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iv. institutionalise the agroenterprise development
process at district, provincial and national levels.
Project Agency:
International Center for Tropical
Agriculture (CIAT) (Project Manager Dr Rupert Best,
Email: <[email protected]>; Asian Regional Coordi-
nator: Dr Dai Peters, Email: <[email protected]>;
Consultant: Dr Chris Wheatley; Email:
<[email protected]>.
Collaborating Agencies:
Various national and regional partners.
IFPRI — The development of postharvest
activities and agroindustry as a strategy to
improve rural livelihoods. Project completed.
<www.beaf.de/dnload/IFPRI_Katalog.pdf>
This project aimed to develop recommendations
for the continued expansion and development of the
fruit and vegetable sector in Vietnam. Outputs sought
were:
• preliminary assessment of postharvest constraints
and selection of product groups for in-depth study
• identification and characterisation of household and
community management of postharvest operations
and agrofood-based rural industrialisation
• identification and characterisation of market
structure, marketing, and processing enterprises
involved in postharvest operations and agrofood-
based rural industrialisation
• identification and characterisation of institutional
mechanisms involved in lowering the transaction
costs and increase the access of rural households to
information, markets, and assets
• empirical analysis of economic behaviour,
adoption of technology and institutional
mechanisms
• analysis of impact of alternative policies and
strategies at the rural household level, at the
market level, and at the institutional level
• intensive dissemination of results in the country
and internationally.
Project Partners:
Vietnam Ministry of Agriculture
and Rural Development (MARD); International
Food Policy Research Institute (IFPRI), Nicolas
Minot; Email: <[email protected]>; International
Agrifood Consulting Company.
ACIAR Project ADP/2000/100 – Contract
farming, smallholders, and rural development in
East Java, Bali and Lombok. Active 01/01/2001–
30/06/2003.
This research aimed to examine contract farming
arrangements between smallholders and agribusiness
firms in Indonesia. Contract farming helps to over-
come problems of imperfect markets in developing
countries, and has been successfully adopted in Latin
America. The agribusiness firms ensure a guaranteed
source of supply and reduce transactions costs, while
the farmers are given access to input supplies (such as
credit, information on new technologies) and guaran-
teed prices. However, there are concerns that small
farmers may not appropriate much of the benefit
from these arrangements, and this project collected
baseline information on the use of contract farming in
Indonesia, with particular emphasis on opportunities
for smallholders in East J ava, Bali and Lombok. The
results from the study should also have relevance to
agribusiness firms and government decision-makers
at both local and national levels.
Commissioned Organisation:
University of New
England, Australia (Dr Phillip Simmons; Email:
<[email protected]>).
Collaborating Insti-
tutions:
Balai Pengkajian Teknologi Pertanian,
Indonesia; Bogor Agricultural University, Indonesia;
Brawijaya University, Indonesia; Udayana Univer-
sity, Indonesia.
Technical assistance on market promotion and
development of the Philippine fruit export
winners
This proposed project would aim to foster the
development of a thriving Philippine fruit export
industry that will help create jobs and improve the
lives of the people through a two-pronged approach
of formulating the needed strategies and corre-
sponding actions that will enable the country to gain
market access in developed countries and to improve
further product quality and competitiveness of its
export winners. The specific objectives are:
• To promote agricultural winners, specifically
tropical fruits, in key international markets
through:
– the conduct of marketing activities that promote
Philippine fruits and negotiate tariffs on imports
and
– the identification and evaluation of legal and
technological barriers to agricultural trade in
target markets.
• To ensure adoption of continuing product and
product quality improvement in the fruit export
industry through:
– the conduct of industry assessment focusing on
product and product flow (supply chain), to
identify areas for quality and efficiency
improvement and
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(printed version published in 2004)
17
– the establishment of an institutional mechanism
that will convene the stakeholders as well as
facilitate the interface between export industry
leaders and government agencies.
• To formulate policy recommendations in line with
the strategies identified.
Proponent:
SEAMEO Regional Center for Graduate
Study and Research in Agriculture (SEARCA)
ACIAR Project ADP/2001/066 – Strengthening
agricultural market information activities in
Vietnam. Active 01/01/2003–30/06/2005
Vietnam faces many challenges in the area of agri-
cultural marketing but lacks experience and capacity
in market-based research. This project will develop a
framework to analyse agricultural marketing issues.
Researchers will describe (and quantify) the current
marketing channels for pigs, vegetables and canned
fruit in Vietnam, and identify the role of the public
and private sectors in marketing these products. They
will also compare the experiences of public and
private agricultural marketing services in China,
Thailand and Australia with the situation in Vietnam.
The researchers will work with the Information
Centre for Agriculture and Rural Development
(ICARD) – the market research and market informa-
tion unit of Vietnam’s Ministry of Agriculture and
Rural Development — to determine how the Centre
can provide ongoing market information services to
these and other industries.
Commissioned Organisation:
University of Western
Australia, Australia: (Associate Professor Michael
Burton; Email: <[email protected]>).
Col-
laborating Institutions:
Ministry of Agriculture and
Rural Development, Vietnam; Department of Agricul-
ture, Western Australia, Australia
Other initiatives
PHT/1996/004 – Monitoring mycotoxins and
pesticides in grain and food production systems for
risk management in Vietnam and Australia
PHT/2000/102 – Selection for improved quality and
resistance to Phytophthora pod rot, cocoa pod borer
and vascular-streak dieback in cocoa in Indonesia
Australia–Indonesia Working Group on Agriculture
and Food Cooperation (WGAFC)
<www.affa.gov.au/exportgrowth>.
The Working Group on Agriculture and Food Co-
operation (WGAFC) was established by the Aus-
tralia–Indonesia Ministerial Forum in November
1992 to identify opportunities for greater cooperation
in agriculture and food between both countries and to
facilitate trade and investment. This mechanism has
provided a valuable opportunity for developing link-
ages between high-level government officials and
private sector interests of both countries. Most of the
cooperative activities of the WGAFC are undertaken
by its four task forces: Meat, Dairy and Livestock;
Horticulture; Food Processing, Storage, Transport
and Distribution; and Agribusiness Support Systems,
although activity is not necessarily limited to these
sectors. The task forces comprise mainly industry
representatives but are co-chaired and facilitated by
Australian and Indonesian government representa-
tives. Several commercial joint venture opportunities
and areas for collaborative training and research were
identified at its J uly 2003 meeting.
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18
Supply-Chain Management: Understanding the
Concept and Its Implications in Developing
Countries
Elizabeth J. Woods*
Abstract
During the 1990s, academic and commercial interest in supply-chain management (SCM) in agribusiness rose
in Europe and the USA. The driving forces included the trend towards consolidation of organisations (at farm
input, farms, processor and supermarket levels), along with government deregulation of agribusiness markets.
Interest was also rising in quality-management systems and food safety, and competition in markets was
increasing, associated with global trade in agribusiness products. SCM as a field of study draws contributions
from several disciplines including transaction-cost economics, relationship marketing, agency theory and
systems studies. This paper analyses the role of SCM in the context of concepts of operational effectiveness
and strategy put forward by M. Porter in 1996.
SCM implies managing the relationships between the businesses responsible for the efficient production and
supply of agribusiness products from farm level to consumers, to reliably meet consumers’ requirements in terms
of quantity, quality and price. In practice, this often includes the management of both horizontal and vertical
alliances. Meeting customers’ requirements involves integrated management of the transactions and relationships
between firms as well as processes within firms. Managing these relationships provides an opportunity for overtly
negotiating the shares between chain members of the value produced within the chain. More importantly, joint
planning of collaborative strategies is possible, to grow the shared value. The latter contrasts with the usual
conflict between agribusiness suppliers and buyers about their relative shares of the value generated.
Traditional supply chains in developing countries typically involve many players, and are tightly linked with
long-standing social structures. As developing countries enter into World Trade Organization arrangements their
agricultural industries will be subject to increasing competition in their domestic markets, and have greater
incentives to meet global standards in export markets. SCM provides one approach to planning the improvements
needed in the management of their agricultural production and marketing systems to meet future challenges.
During the 1990s, academic and commercial interest
in supply-chain management (SCM) in agribusiness
rose in Europe and the USA. The concept and its
application have become one of the key areas of
research and commercial focus in agribusiness for
the past decade. Interest has spread in the past five
years to include not only SCM in agribusiness prac-
tice in Western countries, but also the potential and
implications of the concept in developing countries.
This paper outlines the background to rising
interest in the concept of SCM. It presents working
definitions of the concept, and describes the theoret-
ical contributions that have guided the development
* School of Natural and Rural Systems Management,
University of Queensland Gatton, Gatton Queensland
4343, Australia.
Current address: Executive Director, Research and
Development Policy, Department of Primary Industries,
Meiers Road, Indooroopilly, Queensland 4067,
Australia. Email: <[email protected]>.
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of the concept and the field of study. The paper
presents arguments which show that SCM in its prac-
tical application straddles the concepts of operational
effectiveness and of strategy, both of which are crit-
ical to business success.
SCM provides a useful framework for analysing
the relationships between businesses engaged in both
vertical and horizontal alliances as a means to pur-
suing consumer responsiveness, and is concerned
with the development and nature of relationships
between businesses in the supply chain. This includes
the contribution to the development of value by the
chain and the way in which value is shared between
the chain partners. The role of new technologies in
enabling SCM is also noted.
Finally, the potential application and value of the
concept in planning, developing and managing agri-
business in developing countries are explored.
Background
Several changes in the operating environment of the
food and agribusiness sectors contributed to rising
interest in SCM, but it can be argued that the heart of
the development was growing intensity in the com-
petition for consumer expenditure. In line with other
retail developments, greater differentiation of food
products, improvements in product quality, and the
ability to transport products in cost-effective ways
provided consumers with a greatly increased array of
products from which to choose. At the consumer
level, the driving forces changing agribusiness
included increasing consumer sensitivity to quality,
safety, health and nutritional aspects of food prod-
ucts, and consumer interest in place of origin and
means of production, including non-food values such
as environmental sustainability and animal welfare.
Consumers responded by exercising their ability to
choose, and by this means, began to exert greater
power than previously over the food production and
marketing systems. In turn, it became clear to food
suppliers that market success depended on respon-
siveness to consumer demands.
A term coined to describe this reorientation—
chain reversal or consumer-driven chains—empha-
sises that the rise of consumer power spelt the end to
the prevailing assumption at farm and agribusiness
level that the job was simply to supply a product
without concern about the consumers’ requirements
or the existence of a market for the product. Tradi-
tional agricultural and food businesses that had
focused strongly on price were not equipped to
respond to a widening range of consumer demands.
Individually, they lacked the means to deliver effec-
tive consumer response. Each represented only part
of the processes involved in production of an agribus-
iness product and its subsequent transport,
processing and retailing to the consumer. SCM pro-
vided a means to conceptualise management of the
changes required in the system to efficiently respond
to consumer needs, based on integration and co-ordi-
nation of the efforts of all the business units involved
in the production and delivery processes.
Changes in the macro environment were occurring
parallel to the changes at consumer level. These
included a trend towards consolidation of organisa-
tions (at farm input, farm, processor and supermarket
levels), principally to drive down the costs of produc-
tion through economies of scale, but also to gain
market share and competitive strength in an increas-
ingly global market place. Preparing for global trade
also led to deregulation of agribusiness markets by
government withdrawal from marketing in several
countries. This created the opportunity to rethink the
business strategy, and create new supply-chain rela-
tionships.
Australia’s recent deregulation of the dairy industry
is an excellent example of change in a domestic market
responding to the requirements for international trade,
as mediated through the World Trade Organization
(WTO). The deregulation process resulted in the com-
mercial renegotiation of supply-chain relationships
that had previously been subject to heavy government
intervention and regulation. Consolidation following
deregulation has provided one approach to the new
competition between supply chains for market share
and scale, and to generating efficiencies which could
support greater investment in differentiation, brands
and marketing of products, than had been possible
within regulated markets.
Underpinning Theories
Supply-chain management simply refers to the man-
agement of the entire set of production, distribution,
and marketing processes by which a consumer is sup-
plied with a desired product. Folkerts and Koehorst
(1998, p.385) define a supply chain as:
…a set of interdependent companies that work closely
together to manage the flow of goods and services along
the value-added chain of agricultural and food products,
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in order to realize superior customer value at the lowest
possible costs.
Some authors prefer the term
demand chain
as
more clearly focusing on the consumer’s require-
ments. The related term,
value chain
, highlights the
contribution of functional parts of the chain (either
within an enterprise or across a supply chain) to the
development of customer value across the chain.
While consumers do determine the market size and
preference, they do not play an active role in the man-
agement of the chain. Implementing practical
improvements to allow the chain to be more compet-
itive and more responsive, requires active manage-
ment initiated by one or more members of the supply
chain, and supports the focus on supply-chain
man-
agement
as a basis for moving actively towards
delivery of improved chain performance. In other
words, all products reach consumers through a
supply chain but not all chains have sufficient com-
mitment and interaction to consistently improve effi-
ciency, customer value and competitiveness through
integrated management.
It is important to note that, in developed countries,
SCM implies a focus on agribusiness units and busi-
ness-to-business relationships. This differs from the
industry or commodity focus traditionally adopted in
agronomic research or in agricultural economics
analyses of business improvement. It also differs
from the community and participatory models that
commonly form the basis of regional economic
development and natural resource management
studies. This focus on business units tends to lead to
most SCM work being with larger industry players,
and in markets where products are valuable and dif-
ferentiated, rather than in commodity markets.
SCM as a field of study draws on several disci-
plines. These are summarised briefly below, with ref-
erence to literature through which the topics can be
more fully explored.
•
Transaction-cost economics
analyses the costs
associated with the exchange of goods and services
(Hobbs 1996). This includes the costs of acquiring
information, costs associated with negotiating and
enforcing contracts, definitions of property rights,
and the monitoring and changing of institutional
arrangements which define the processes by which
business transactions occur between companies.
Transaction-cost economics emphasises asset
specificity. The underlying assumption is that the
more specific an asset is, the greater the incentive
to develop long-term cooperation and
relationships which will enable the asset to make a
long-term contribution to profitability.
•
Agency theory
involves defining the most
appropriate forms of contract to protect the
relationships between chain members (Eisenhardt
1989). The aim is to produce a contract or
agreement which achieves a balance in relation to
information asymmetry between chain members,
uncertainty of outcomes, and the different levels of
risk aversion held by chain members,
The agency theory approach is complementary
to transaction-cost economics; together they focus
on improving the economic efficiency of doing
business between firms.
•
Power and power relationships
between
businesses within a supply chain, and between the
chain members and the government, have been
studied by political scientists (French and Raven
1959). Boehlje et al. (1998) argue that the power of
one business over another is dependent on the
economic structure of the relationships. Power is
related to dependency, and dependency is related
to the availability of alternatives. The more
alternatives a firm has, the less dependent it will be
and the smaller the chance that it will be unduly
affected by the power (real or perceived) of
another firm.
The consolidation of agribusiness firms over
the last two decades has much to do with
attempting to gain real or perceived market power.
At the upstream end, the small and fragmented
businesses of smallholders have very little indi-
vidual power, which may provide them with a
strong incentive to work together.
•
Relationship marketing
refers to the move away
from adversarial buyer–seller relationships to
cooperative and collaborative marketing
strategies, to deal with increasingly fierce
competition (Gronroos 1994; Morgan and Hunt
1994). Relationship marketing recognises the
importance of commitment and trust in business-
to-business relationships, and that such
relationships are dynamic and can develop only
over time.
•
Network theory
recognises the reality that if
A
does
business with
B
who then does business with
C
,
A
can affect
C
’s business performance despite the
fact that they never do business together. The
strategic networks concept emphasises that firms
can gain stronger competitive positions by
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working cooperatively than they can by operating
individually (Easton 1992), and that networks with
long-term supply-chain relations featuring trust
and knowledge sharing are well positioned to
deliver lower business costs than firms relying
solely on spot transactions. As well as emphasising
the importance of skills in managing relationships,
the concept of networks emphasises the
development by each firm of capabilities that are
unique and hard to copy, thus ensuring that the
firm will continue to be in demand as a chain
partner able to fulfil specific functions.
• Production/operations management and logistics
emphasise operational efficiency through
minimising inventory and just-in-time supply.
They have contributed to SCM as a management
approach for planning gains through operational
efficiencies. Some authors (Westgren (1998), for
example) view the disciplines of operations
management and logistics as the initial source of
SCM studies.
SCM is a holistic approach that moves past the
level of the individual manager or business to
address all the processes from the initial assembly
of raw materials to the final retail processes that
provide the customer with access to the product.
In that sense, it is a systems approach (Beers et al.
1999). It represents a significant step forward
from analysis at the level of an individual farm or
agribusiness in isolation from its wider context. It
could be viewed as a parallel to the step between
crop or animal husbandry research and the study
of farming systems, where the latter has greater
potential to optimise both production outcomes
and protection of natural resources (at the system
level).
SCM: for Operational Effectiveness
or Strategy?
Porter is recognised as a leading figure in the study of
strategic management in the late part of the twentieth
century. In his seminal paper ‘What is strategy’
(Porter 1996), he draws the distinction between the
pursuit of operational effectiveness and the develop-
ment of strategy. He argues that, by their nature,
many popular management tools of the last 20
years—including benchmarking, best practice, and
quality systems—are designed to match competitors
in operational effectiveness. Along with the trend to
greater outsourcing (which can lead to competing
firms sourcing key inputs from the same supplier)
these approaches contribute to greater uniformity
between industry competitors and reduced consumer
choice.
Given the diversity of consumer interests and the
desire of consumers to choose products that match
their needs, perceptions and values, strategies which
result in a move towards greater industry uniformity
are unlikely to lead a business to a successful market
position. Hence, operational effectiveness is a neces-
sary but not sufficient condition for improving busi-
ness performance. Many aspects of SCM (improved
logistics, shared information systems and better
information flows, reduced transaction costs, preser-
vation of product quality, standards and integrity
throughout the chain) are, at their heart, efforts to
improve the operational effectiveness of a chain.
Adopting these approaches is important in matching
competitors and increasingly they are a necessary
condition for access to certain markets (export mar-
kets, supplying to supermarkets). However these
approaches will not guarantee a sustainable compet-
itive advantage.
By comparison, Porter argues that the crux of
strategy is doing something different that is hard for
competitors to match. Critical to developing sustain-
able competitive advantage is recognising that
choices need to be made, since doing more of one
thing will necessitate doing less or none of another
(termed trade-offs). The more that activities or func-
tions within a firm or a supply chain can be made self-
reinforcing (to deepen the strategic position), or the
more they depend on human capabilities and rela-
tionships, the more likely it is that the strategy will
lead to sustainable competitive advantage, because
these approaches are intrinsically hard to copy.
SCM provides opportunities to develop strategies
that meet these criteria. Potential strategies include:
• reducing market risks by working towards
interdependency (where business activities are
interdependent to the point that the costs of
switching to a new supplier or customer are
sufficiently high to inhibit the development of new
relationships)
• cooperating to learn how to create value together
and then collaborating to consistently utilise the
new value as a source of competitive advantage
(Collins et al. 2002)
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• using the established relationship as a platform to
build additional product lines or new markets; that
is, to innovate together.
Porter’s concept of strategy has relevance in the dis-
cussion of SCM as a useful management concept. The
key to development of chain relationships is commit-
ment to longer-lasting relationships instead of spot
transactions (which may offer short-term advantages
in certain parts of the price cycle). Chain relationships
are built on the relationships developed at a range of
levels between two firms (typically between senior
managers, distribution/receivals, sales/accounts, sales/
production). Developing relationships requires signif-
icant effort, and the maintenance of the relationships is
an ongoing commitment. As the investment in a rela-
tionship grows, so the cost grows to duplicate a similar
relationship. Hence, the cost of leaving a relationship
increases over time, leading to interdependency. It is in
the interests of a chain member to proactively work
with its chain partners to ensure their mutual ongoing
viability, because the alternative (creating new rela-
tionships) is too costly.
Application and Implications of
Supply-Chain Management
Recent studies of supply chains in Australia identi-
fied six key principles of successful SCM (AFFA et
al. 2002). These are:
• a focus on customers and consumers
• the chain creates and shares value with all its
members
• making sure the product fits the customers’
specifications
• effective logistics and distribution
• an information and communication strategy that
includes all chain members
• effective relationships that give leverage and
shared ownership.
The discussion in this section on the application
and implications of SCM will be structured around
these six features.
Since the driving force behind the developing
interest in SCM was the need for new strategies to
achieve sustainable advantage in increasingly com-
petitive agribusiness markets, a critical factor to
success is how effectively the chain addresses cus-
tomers’ wants and needs. The value built by a chain
(which can then sustain the future operations of the
chain members) depends on coordinated responsive-
ness to customers’ requirements.
In principle, SCM can shift the traditional conflict
between supply-chain partners about their relative
shares of benefits to a focus on increasing the total
value available to be shared. This should be attrac-
tive, because potentially there are better gains for all
in this approach. In practice, all levels of the chain
must derive value from the chain and from potential
improvements, to ensure all chain members agree to
proposed change.
Implementation of SCM in Western countries has
emphasised participatory and/or facilitated processes
that build relationships and increase understanding
and trust between chain members in the process of
developing shared plans and identifying opportuni-
ties for long-term collaboration. A skilled outsider
may facilitate such processes. In practice, there is
also a need for ‘chain champions’. These are
members (or a member) of the chain with a vision of
the opportunities that could arise from closer collab-
oration and with the energy to organise and drive
processes of relationship building and collaboration.
In new agro-industry development, building a supply
chain has been demonstrated to be just as critical to
the success of the industry as establishing adequate
agronomic and pest-management practices.
As noted earlier, SCM provides a framework for
the analysis and recognition of power in supply chain
relationships and for the discussion of how to share
the value generated by the chain. Achieving more
efficient SCM often requires horizontal collaboration
at levels in the chain where there are multiple small
players. This reduces the transaction costs between
the vertical levels in the chain and may reduce power
imbalances that occur in interactions between large
powerful players (such as supermarkets) and small
individual growers.
Closer relationships and better understanding of
the chain and customer value may provide opportu-
nities for farmers to extend their operations along the
chain. For example, additional grading that improves
product shelf life and reduces wastage (and the asso-
ciated labour costs for retailers to ‘pick over’ shelves)
represents extra value added by the farmer and may
be recognised with higher payment by retailers,
offset by their savings in labour costs. Similarly, a
farmer who develops the capacity to pack into con-
sumer-friendly trays is helping the retailer to manage
product safety and reduce the risk of in-store contam-
ination of the product. If the farmer’s packs also carry
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(printed version published in 2004)
23
a bar code, the costs of weighing product at the check
out and of training retail staff to identify fresh
produce can also be saved.
SCM enables the development of quality systems
and product-integrity systems throughout the chain.
When they focus on the features that customers
value, such systems are the tools by which transac-
tions costs may be decreased and operational effec-
tiveness increased. Similarly, SCM allows for
sophisticated management of logistics including
optimisation problems and through chain inventory
control. There are opportunities to minimise waste
(shrinkage) along the chain, which is often a major
cost in marketing fresh food items.
Working in the supply chain context may offer par-
ticipants new insights into the relative importance of
alternative products and markets. In the absence of an
attempt to achieve integrated management, most
supply chain members will have regular contact and
communication with only their immediate supplier
and immediate buyer.
SCM may lead to detailed descriptions, and
mapping of flows of product, information, and
revenue throughout the chain. It also provides an
opportunity to examine activities undertaken and serv-
ices performed at each level in the supply chain, ena-
bling all the participants in SCM to gain a broader
understanding of the way in which customer value is
developed in the chain, and the possibilities to develop
new value or develop value more effectively. SCM can
provide similar insights to scientists whose usual focus
is on technical issues at a particular level in the chain,
and to economists who routinely analyse the industry
at one level in the chain (e.g. production economics at
farm level), but not the business or business-to-busi-
ness interactions. Government policy makers have
also utilised SCM to identify factors that may inhibit
chain development and performance, and to conceptu-
alise policy measures that might assist businesses to
overcome barriers and achieve more competitive
export performance (see, for example, Gifford et al.
(1998)). The Australian Government has initiated a
research, training and industry program in SCM in
response to its realisation that despite growing export
opportunities in Asia, Australia’s market share for
both commodity and processed food products was
declining in these markets.
1
The nature of chain relationships is informed by
substantial business and management literature on
strategic alliances, and by an increasing literature on
SCM in relation to agribusiness. Relationship issues
to be considered may include:
• agreeing to share long-term development goals
and seasonal business planning
• developing relationships between operational staff
within the businesses on issues such as, for
example, timing, amount, ripeness and
temperature of deliveries
• developing shared quality and safety standards and
agreeing how and when they will be measured and
monitored
• linking information systems to track product flows
and standards.
In SCM the focus is usually on long-standing rela-
tionships based on informal or trust arrangements
rather than ownership or contract relationships. The
former are valued because they allow flexibility and
they constantly reinforce how each partner will
benefit from collaborating to ensure a successful and
competitive chain.
Rising interest in SCM has been strongly sup-
ported by the capabilities of new technologies. In par-
ticular the application of information systems can
improve information flows and, with the addition of
e-commerce facilities, can facilitate revenue flows.
Satellite positioning system technologies are an
example of technology can be used to monitor
product flows. Conversely, well-developed SCM is
contributing to the management of other frontier
technologies. SCM enables management of supply
chains where the products have embedded intellec-
tual property (e.g. unique germplasm), through its
potential to tightly control product flows and main-
tain clearly differentiated lines of product with
unique and valuable characteristics.
SCM: What Value in Developing
Country Agribusiness?
Finally, in this section the potential application and
value of the SCM concept in planning, developing
and managing agribusiness in developing countries is
explored.
Farmers in the developing world face a similar
cost–price squeeze to that affecting farmers in the
1
Publications arising from this program are listed on the
AFFA website, <http://www.affa.gov.au/content/
output.cfm?ObjectID=D2C48F86-BA1A-11A1-
A2200060B0A01607>.
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
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(printed version published in 2004)
24
developed world. The need to feed rapidly growing
populations tends to result in policies to keep food
prices low, making innovation and investment unat-
tractive even if the capital and management capacity
needed are available.
However, there are opportunities for developing
country farmers in the expanding total population
and increasing urban populations, and hence a
growing consuming class. At least in the short term,
this group can be expected to spend more on higher
quality and more varied produce than do people at
lower income levels. Projections on future trends
(Coates et al. 1997) suggest that, in terms of volume,
most of the growth in demand for food will be
middle-class consumption in the large countries of
the developing world including China, India, Indo-
nesia and large countries in South America (termed
World 2 in their scenario). Much of this demand will
be met domestically (by World 2 countries) but
against competition from exporting countries. The
primary basis of competition will be price but the
presence of exporting competitors will also mean the
gradual adoption of ‘world’ quality standards. This
represents an incentive for better SCM in developing
countries.
This effect is enhanced by the increasing implica-
tions of the WTO for developing countries. The pri-
ority to increase the competitiveness of domestic
agriculture and agribusiness is demonstrated by the
following extract from a publication of the Indone-
sian Ministry of Agriculture (MOA 2001):
…liberalisation of international trade that has been hap-
pening or is still in the process of being established is a
challenge facing agribusiness development. WTO/
GATT commitments to reduce or eliminate various
forms of protection, tariff or non-tariff, mean opportu-
nities as well as challenges. For nations with the ability
to improve their competitive strength, the opportunity is
open to increase domestic and international market
share. Conversely, for nations with no capacity to
improve their competitive strength, it means adverse
effects, the challenge to recede and step down. For this
reason, there is no option for Indonesia but to accelerate
strengthening competitive capacity.
In helping developing country farmers take advan-
tage of the growth opportunity to supply the con-
suming classes, the aim should be to build the
capacity of domestic producers to match the products
that exporting countries will be aiming to put into
Asian markets. SCM provides one conceptual
approach to meet this need. To not assist developing
country farmers to participate would see them cut out
of the major growth sector in food markets in the
world. Their displaced product would depress
domestic prices for lower class consumption and
further exaggerate the cost–price squeeze.
Many authors, including Heilbron and Larkin
(1995), have commented on the developing dualism
in food markets in Asia. Traditional markets continue
to provide for the bulk of the population through
delivery to wet markets and subsequent distribution
by a variety of small retailers. These chains are char-
acterised by multiple levels, fragmentation, highly
variable standards, and poor infrastructure and logis-
tical support. In parallel, large Western style retailers
are providing global standard goods and services to
the elite and middle classes in major cities. These
retail developments were begun by J apanese retailers
in the 1980s and followed in the 1990s by Western
food retailers. The Asian economic crisis provided
many of these Western companies with opportunities
to rapidly expand their foothold at low prices (DFAT
2002).
Supermarkets are most profitable when they are
located in areas of high rate of population growth of
people with consumer incomes, high-income growth
rates, and low supermarket penetration. This is the
precise description of the long-term trends in much of
Asia. SCM practices for this sector might be expected
Table 1. Projected population growth to 2025 (in billions).
1994 2025
Total world
World 1: the affluent, advanced nations, e.g. Europe, the USA and J apan
World 2: middle countries with needs and resources in balance, e.g. China,
India, Indonesia, large countries in South America
World 3: the destitute countries, e.g. sub-Saharan Africa
5.6
1.0
3.5
1.1
8.4
1.3
5.1
2.0
Data sourced from Coates et al. (1997).
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
25
to be similar to Western supply chains at the down-
stream end. At the upstream end, consolidation could
be expected, relative to traditional supply chains, to
achieve reliable supply and consistent quality. Inter-
national retailers will also seek to provide food safety
and health standards similar to their operations in the
West. The risk of a major accident is serious for a
global retailer, both in terms of their international
reputation and because their pockets are perceived to
be very deep in relation to compensation and penalty
payments.
Studies of the traditional supply channels in devel-
oping countries often focus on issues of lack of power
of farmers, linked to the lack of timely information
flows. The traders or merchants are usually identified
as powerful and able to extract value at the expense of
farmers who are cash and information poor. How-
ever, there are alternative views. Kono and Goto
(2002) in a study of marketing channel development
in the banana industry in Indonesia, conclude that all
parties—growers, collectors and traders—must con-
tribute to developing pluralistic and reliable mar-
keting channels. Woods et al. (2000) noted a
workshop situation in which a trader motivated
farmers to strive for good products, being competi-
tive and becoming a champion. Hence, traders have
been observed to play a mixed role—of channel man-
ager, information supplier, co-investor and extension
officer—suggesting a mutual benefit rather than a
win–lose relationship may exist with smallholders, at
least in some circumstances.
In situations where trust already exists, the most
profitable application of SCM may be to improve
operational effectiveness. Options for improvements
might include training to increase the skills and
capacities of chain members so that they are more
able to adapt to change, improved infrastructure and
logistics, and better information flows, especially in
relation to markets and consumer preferences.
Improvements that took traditional supply chains in
these directions might provide a step towards the pos-
sibility of these chains developing export capabili-
ties.
Trienekens and Beulens (2003) present a research
agenda on innovation through food supply chains and
networks in developing countries. Based on case
studies that investigate supply chains involving
upstream production in developing countries for
export, or for Western style retailing in developing
countries, they identify the following three key ques-
tions:
• Do innovations at the consumer end induce
innovations at the upstream (farmer) end of supply
chains in developing countries?
• Are there any system effects, for example, on
economic development, sustainable development
and standards, of innovations at the consumer end
of the chain?
• Which institutional arrangements within chains
and networks are best able to survive in developing
countries and why?
Similar questions need to be asked about the poten-
tial impacts of improving traditional supply chains in
developing countries. Questions for a research
agenda might include:
• Can improved management of traditional supply
chains improve the quality of life of smallholders?
• Can improved management in traditional supply
chains improve the supply and quality of food for
increasing numbers of urban residents in
developing countries?
• Which institutional arrangements are best able to
deliver benefits, and how can these benefits be
shared to encourage further improvements?
References
AFFA (Department of Agriculture, Forestry and Fisheries
Australia), University of Queensland, and National Food
Industry Strategy 2002. Forming and managing supply
chains in agribusiness: learning from others. Canberra,
AFFA, CD–ROM.
Beers, G., Beulens, A. and van Dalen, J . 1999. Chain science
as an emerging discipline. In: Proceedings of the Third
International Conference on Chain Management in
Agribusiness and the Food Industry, Wageningen
Agricultural University, The Netherlands.
Boehlje, M., Schrader, L. H. and Akridge, J . 1998.
Observations on formation of food supply chains. In
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Chain Management in Agribusiness and the Food
Industry, Wageningen Agricultural University, The
Netherlands, 393–403.
Coates, J .F., Mahaffie, J .B. and Hines, A. 1997. 2025:
scenarios of U.S. and global society reshaped by science
and technology. Greensboro, NC, Oakhill Press, 516p.
Collins, R., Dunne, T. and O’Keeffe, M. 2002. The ‘locus’
of value: a hallmark of chains that learn. Supply Chain
Management, 7(5), 318–321.
DFAT (Department of Foreign Affairs and Trade) 2002.
Subsistence to supermarket II: agrifood globalisation and
Asia. Vol. II, Changing agrifood distribution in Asia.
Canberra, Australia, DFAT, 316p.
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ACIAR Proceedings No. 119e
(printed version published in 2004)
26
Easton, G. 1992. Industrial networks: a review. In: Axelson,
B. and Easton, G., ed., Industrial networks: a new view of
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Eisenhardt, K.M. 1989. Agency theory: an assessment and
review. Academy of Management Review, 14, 57–74.
Folkerts, H. and Koehorst, H. 1998. Challenges in
international food supply chains: vertical co-ordination in
the European agribusiness and food industries. British
Food J ournal, 100, 385–388.
French, J.R.P. and Raven, B. 1959. The bases of social power.
In: Cartwright, D., ed., Studies in social power. Michigan,
Michigan Institute for Social Research, 150–167.
Gifford, D., Hall, L. and Ryan, W. 1998. Chains of success:
case studies on international and Australian food
businesses cooperating to compete in the global market.
Canberra, Australian Government Publishing Service.
Gronroos, C. 1994. From marketing mix to relationship
marketing: towards a paradigm shift in marketing.
Management Decision, 32, 4–20
Heilbron, S. and Larkin, J .T. 1995. Corporate strategies and
structure: penetrating Asian markets. Canberra, Rural
Industries Research and Development Corporation,
Research Paper 95–7.
Hobbs, J.E. 1996. A transaction cost approach to supply chain
management. Supply Chain Management 1(2),15–27.
Kono, Y. and Goto, J . 2002. Marketing channel
development. In: Goto, J . and Mayrowani, H., ed.,
Potentials and constraints of banana based farming
systems: a case of an upland village in West J ava.
Tsukuba, J apan, J IRCAS Working Report No. 29, 41–46.
MOA (Ministry of Agriculture) 2001. Agribusiness system
development as prime mover of the national economy
(1st ed.). J akarta, Government of Indonesia, 80 p.
Morgan, R.M. and Hunt, S.D. 1994. The commitment–trust
theory of relationship marketing. J ournal of Marketing,
58, 20–38.
Porter, M. 1996. What is strategy? Harvard Business
Review 74(6), 61–78.
Trienekens, J. and Beulens, A. 2003. Innovation through
(international) food supply chain development. A research
agenda. In: 13th Annual World Food & Agribusiness
Symposium, Cancun, Mexico, 21–24 June 2003. <http://
www.ifama.org/conferences/2003Conference/papers/
trienekens.pdf>, 12p.
Westgren, R.E. 1998. Innovation and future directions of
supply chain management in US agrifood. Canadian
J ournal of Agricultural Economics, 46, 519–524.
Woods, E.J ., Wei, S., Singgih, S. and Adar, D. 2000. Supply
chain management as beyond operational efficiency.
Acta Horticulturae, 575, 425–431.
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(printed version published in 2004)
27
Incorporating Measures of Satisfaction, Trust
and Power-dependence into an Analysis
of Agribusiness Supply Chains
Peter J. Batt*
Abstract
Using transaction cost analysis, gap analysis and the key dimensions of long-term buyer–seller relationships
(satisfaction, trust and power-dependence), it is possible to demonstrate that the supply chain for potatoes
cultivated in the Red River Delta (Vietnam) is surprisingly efficient. While the price paid to the farmers is
ultimately determined by supply and demand, the price that farmers receive from traders and collector agents
is influenced by tuber quality and the costs of transportation. Contrary to expectations, farmers are generally
satisfied with the exchange and display considerable trust in their preferred trading partner. Farmers are
seldom dependent upon their preferred trading partner and indicate that numerous alternative traders are
available to purchase the potatoes they have harvested. While the traders similarly enjoy a strong positive
relationship both with farmers and collector agents and their downstream customers, wholesalers report that
they are much less satisfied in their exchange relationship with both traders and retailers. Wholesalers are more
dependent upon their upstream and downstream trading partners and more dissatisfied and less trusting of
exchange partners.
In most developing countries, the agricultural mar-
keting system is characterised by a highly atomistic
production side (where there are many small widely
dispersed farmers growing perishable crops) and an
oligopolistic marketing system (where there are
only a few traders) (Mendoza and Rosegrant 1995).
Marketing costs are high because of an inefficient
transport system, inadequate cool-storage capacity,
and significant variations in product form, variety
and quality (Harris-White 1995). The supply chain
itself is often long and protracted, involving a large
number of market intermediaries (Lele 1981). Fur-
thermore, information and locational factors poten-
tially limit the number of intermediaries available to
transact with primary producers (Pomeroy and
Trinidad 1995). In other instances, various credit
arrangements may lock farmers into long-term busi-
ness-to-business relationships where the farmer is,
to varying degrees, more or less dependent upon the
market intermediary (Mendoza and Rosegrant
1995).
There is also a growing recognition that economic
exchange is embedded within various overarching
social institutions including locality, class, ethnicity,
religion, gender and age (Zucker 1986; Fukuyama
1995; Harris-White 1997). The importance of trust
and social capital as a means of reducing risk and
facilitating exchange is being increasingly recog-
nised when producers and market intermediaries
have limited access to the legal system as a means for
redress (Mendoza and Rosegrant 1995; Fafchamps
1996; Humphrey and Schmitz 1998).
* Agribusiness Marketing, Curtin University of
Technology, GPO Box U1987, Perth, Western Australia
6845, Australia. Email: <[email protected]>.
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edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
28
Using three alternative methods of evaluation, this
paper seeks to examine the efficiency of the mar-
keting system for fresh potatoes in the Red River
Delta (Vietnam). It is proposed that before any inter-
vention is contemplated, the supply chain must be
examined to identify the marketing margins
extracted by the various market intermediaries, the
extent to which suppliers are able to fulfil the needs
of their downstream customers, the constraints that
adversely impact upon the suppliers’ ability to meet
customers’ needs, and the nature of the long-term
relationships that exist between suppliers and their
customers.
Analysing Performance in
Marketing Channels
Developed primarily by Williamson (1979, 1985),
transaction cost theory assumes that various costs are
associated with an exchange. These costs are com-
prised of the costs of obtaining and processing infor-
mation, negotiating contracts, monitoring agents and
enforcing contracts. These costs may become signif-
icant in the presence of information asymmetry,
uncertainty and transaction-specific investments.
Although there are several different approaches for
measuring transaction costs, the market is said to be
efficient if the price consumers ultimately pay ade-
quately reflects storage costs, transportation costs
and differences in price due to product form (Harris-
White 1995). Since price data are usually the most
readily available and most reliable source of market
information in developing countries (Goletti and
Christina-Tsigas 1995), the performance of the
supply chain is most often evaluated using price mar-
gins. However, a large marketing margin may result
in little or no profit for an actor and may even result
in a trading loss, depending on the buying and selling
prices and the costs of marketing (Mendoza 1995).
Marketing margins will also fluctuate according to
the perishability of the product, the number of actors
involved in the exchange, the marketing services pro-
vided, and the risk and uncertainty borne by each
actor (Pomeroy and Trinidad 1995).
Industrial purchasing theory suggests that cus-
tomers will seek to purchase goods from those sup-
pliers who are best able to deliver the desired
quantity, within predetermined quality specifica-
tions, on time, at an agreed price (Monzcka et al.
1998). In describing quality, Gronroos (1990) finds it
necessary to differentiate between technical quality
and functional quality. Technical quality describes
the customer’s specifications. This is a physical
description of the product in terms of its size; shape;
colour; freedom from pests and diseases; purity (in
terms of its freedom from chemical contaminants,
pathogenic organisms and genetically modified
plants); maturity or freshness; and the manner in
which the product is packed. Functional quality
describes the way a supplier goes about delivering
the product to the customer. While this fundamen-
tally means being able to deliver the product when
the customer wants it — by implication, it involves
many inter-related activities such as production
scheduling, storage and warehousing, logistics,
ordering and invoicing. Since most market interme-
diaries purchase products in the expectation that they
will be able to sell them on, the timely and efficient
receipt of goods is critical to the success of most
downstream manufacturing and retail operations.
More recently, Parasuraman (1998) has introduced
a third dimension called service quality. Service
quality describes the extra things a supplier is willing
to do to retain the customer’s business. While the
exact meaning of the term ‘service’ varies with the
nature of the product and the requirements of the
buying organisation, service may include such varia-
bles as providing technical assistance, innovative
suggestions, credit arrangements, support for special
needs, or providing advance notice of impending
price changes or shortages in supply (Hutt and Speh
1995).
In measuring the extent to which suppliers are able
to meet the needs of their customers, Parasuraman et
al. (1985) proposed the concept of a service gap. The
service gap is a measure of how well the service level
delivered by a supplier matches a customer’s expec-
tations. An integral part of this analysis is concerned
with the identification of the constraints that prevent
the supplier from fulfilling the customer’s needs. It is
only after these constraints have been identified that
the supplier can improve their performance.
The Emergence of Relationship
Marketing
Traditionally, in order to cut costs, customers have
gone out of their way to identify the cheapest supplier
(Monczka et al. 1998). The traditional approach to
purchasing required the buyer to take three or more
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
29
bids, then to play one supplier off against another
until they got the lowest price. Since this approach
relied primarily upon the use of short-term contracts,
it led to what can best be described as an adversarial
relationship. Both customers and suppliers sought to
extract as much as they could from the transaction,
knowing that at any time, if either party found a better
deal, the contract would be cancelled. However, such
short-term opportunism stifles innovation and pro-
vides few incentives to invest in productivity
improvements or new technology.
Technology is the reason for interaction between
firms (Thomas and Ford 1995). Since technology
may substantially alter the value chain and the way
the value chains are linked, strong mutual interde-
pendencies arise, so that the level of technology in
one firm will influence the product and process tech-
nologies of its partner. As a result, a firm’s unique
market position, power and competitive advantage is
created through its interactions with suppliers, cus-
tomers and other third parties.
Firms are establishing relationships with their sup-
pliers because these enable them to be more efficient
and to be more effective (Kalwani and Narayandas
1995). By developing relationships with their sup-
pliers, buyers and sellers can achieve cost savings
through: reduced search and evaluation costs;
reduced transaction costs (Hakansson 1982); and the
learning effects and relationship-specific scale econ-
omies (Gundlach et al. 1995). However, the primary
reason for establishing relationships with suppliers is
that customers realise that suppliers create value
(Kalwani and Narayandas 1995). Developing long-
term relationships can improve access to markets and
reliable market information (Low 1996) and cus-
tomers can anticipate improved access to a more reli-
able supply of production inputs (Hakansson 1982),
improved product quality and performance (Han et
al. 1993), and a higher level of technical interaction
in the form of information exchange, potential
product adaptations and technical assistance (Cun-
ningham and Homse 1982).
Through becoming closer to customers and better
understanding and satisfying customers’ needs, sup-
pliers can achieve greater customer loyalty and
higher repeat sales (Kalwani and Narayandas 1995).
Relationship marketing provides a stronger, longer-
term customer benefit that is more difficult for com-
petitors to match and it becomes more difficult for
competitors to enter the market (Hakansson 1982).
Buyers become less sensitive to price competition
and suppliers may even benefit from higher prices
(Kalwani and Narayandas 1995). Suppliers benefit
from being able to better plan and forecast production
schedules (Lohtia and Krapfel 1994), coordinate
deliveries, and undertake joint promotions (Easton
and Araujo 1994). However, the greatest benefit
arising from long-term relationships is the reduction
in uncertainty (Arndt 1979; Hakansson 1982;
Noordewier et al. 1990).
While much has been written about the develop-
ment and maintenance of long-term buyer–seller
relationships, the greatest support has emerged for
the key constructs of satisfaction and trust (Anderson
and Narus 1990; Anderson and Weitz 1992; Morgan
and Hunt 1994). However, in context of the devel-
oping countries, where farmers are often subject to
exploitation by opportunistic traders, the power-
dependence construct is expected to become quite
influential in governing the farmers’ relationships
with preferred trading partners.
Satisfaction
Satisfaction lies at the very foundation of modern
marketing thought. Satisfaction is derived from the
result of a comparison between the preferred sup-
plier’s performance and the customer’s expectations
(Fornell 1992). Whenever performance exceeds
expectations, satisfaction will increase, but whenever
performance falls below expectations, customers will
become dissatisfied.
Since satisfaction is defined as a positive affective
state resulting from an appraisal of all aspects of a
firm’s working relationship with another (Frazier
1983), Geyskens et al. (1999) propose that satisfac-
tion should capture both the economic and social
aspects of the exchange. Economic satisfaction is
defined as the channel member’s positive affective
response to the economic rewards that flow from the
relationship with its partner. An economically satis-
fied channel member considers the relationship a
success when it is satisfied with the effectiveness and
productivity of the relationship with its partner and
the resulting financial outcomes. Social satisfaction
is derived from the channel member’s positive affec-
tive response to the non-economic aspects of the rela-
tionship in that interactions with the exchange
partner are fulfilling, gratifying and easy. A channel
member satisfied with the social aspects of the
exchange appreciates the contact with their exchange
partner and, on a personal level, likes working with
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
30
the preferred partner because they believe the partner
is concerned, respectful and willing to exchange
ideas.
Trust
For any particular potential exchange, trust will be
critical if two situational factors are present — risk
and incomplete buyer information (Hawes et al.
1989). Since most sales transactions present some
degree of risk and uncertainty to the potential buyer,
without some degree of trust, the perceived risk may
be too great for the transaction to occur. More specif-
ically, trust becomes important whenever there is a
high level of performance ambiguity, and poor
product performance will have a significant, adverse
impact on the value derived by the buyer (Singh and
Sirdeshmukh 2000). In such circumstances, trust acts
as an information resource that directly reduces the
perceived threat of information asymmetry and per-
formance ambiguity.
However, trust also relates to the focal firm’s
intention to rely upon its exchange partner. Ganesan
(1994) describes this component as benevolence,
because it is based on the extent to which the focal
firm believes that its partner has intentions and
motives beneficial to it. A benevolent partner will
subordinate immediate self-interest for the long-term
benefit of both parties and will not take actions that
may have a negative impact on the firm. Singh and
Sirdeshmukh (2000) describe trust as a belief that an
exchange partner will act in a manner that is respon-
sible, with integrity and without injury to the focal
firm.
In building trust, Sako (1992) finds it necessary to
differentiate between trust at three levels. Contrac-
tual trust is an expectation that the exchange partner
will abide by their written or oral contractual obliga-
tions and act according to generally accepted busi-
ness practice. Competence trust is derived from the
assumption that the entrusted firm will carry out the
activities competently and reliably. Goodwill trust
arises where both parties have developed mutual
expectations that the other will do more than what it
is formally committed to perform. Here, the firm not
only expects the other not to act opportunistically, but
that it will, altruistically, go out of its way to help
(McCutcheon and Stuart 2000).
Power-dependence
When the outcomes obtained from the relationship
are important or highly valued; when the outcomes
from the relationship are better than the outcomes
available from alternative suppliers; and when fewer
alternative sources of exchange are available to the
firm, dependence is said to increase (Heide and J ohn
1988).
Whenever a channel member controls resources
that another channel member needs, various power
relations emerge that potentially enable the party
controlling those resources to exert some influence or
power (Andaleeb 1996). With greater dependence
comes greater vulnerability, for the more powerful
exchange partner may be in a position to create more
favourable terms of trade for itself (Heide and J ohn
1988). Since this may include access to markets or
access to capital, farmers are often more dependent
upon their preferred trading partner(s).
Dependence is also increased when the outcomes
available from the relationship are comparatively
better than the outcomes available from alternative
relationships. Firms dealing with the best trader are
more dependent because the outcomes associated
from dealing with that trader are better than those
available from alternative traders. In this context,
dependence is a measure of the overall quality of the
outcomes available to the focal firm from the best
alternative exchange relationship (Anderson and
Narus 1990).
In general, firms will seek to reduce their depend-
ence on other firms and to increase the dependence of
other firms upon themselves (Lohtia and Krapfel
1994). Firms may either seek to reduce and manage
dependence by purposely structuring their exchange
relationships with other firms (Heide 1994), or to
transact with multiple entities (Ganesan 1994).
Where there are many alternatives, the need to
interact is reduced, but as the number of alternative
exchange partners declines, the need to interact will
increase (Andaleeb 1996). Hence, when fewer alter-
native sources of exchange are available to the focal
firm, or when replacing or substituting a current
exchange partner is difficult because there are fewer
potential alternatives, dependence will increase
(Heide and J ohn 1988; Frazier et al. 1989).
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
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(printed version published in 2004)
31
Background to the Analysis
Potatoes have been cultivated in Vietnam since 1890,
when they were first introduced by the French colo-
nialists. In 1980, Vietnam was the largest producer of
potatoes in Southeast Asia, with more than 100,000
hectares under cultivation (Schmiediche 1995).
However, in the absence of a reliable supply of good-
quality seed, productivity per hectare declined and
the area of potatoes cultivated subsequently
decreased. Today, only some 35,000 hectares of
potatoes are cultivated in Vietnam, primarily in the
Red River Delta (Tung and Ho 1995).
Potatoes are the second most important crop in the
Red River Delta and, understandably, are a priority
crop for development by the Vietnamese Government.
Potato is an alternative food crop to rice — capable of
feeding an expanding population and providing both a
valuable source of nutrition and a valuable source of
income for many impoverished rural families.
The majority of potato farmers in the Red River
Delta are very small family enterprises, cultivating
fewer than 0.15 ha of potatoes. Most farmers plant
potatoes in either October or November and harvest
their crops in J anuary. With such a short cropping
season, inclement overcast weather during most of
the growing season, poor quality seed, soil compac-
tion, and the inappropriate use of chemicals and fer-
tilisers, the average yield in the Red River Delta is
just 16.7 t/ha (Batt 2002).
For most potato farmers in the Red River Delta,
collector agents and traders provide the major mech-
anism for the disposal of the potato crop. However,
traders purchase only the large and extra-large
tubers — farmers generally retain some proportion
of the medium-size tubers for seed, and the small
tubers are primarily used for stock feed. Not unex-
pectedly, the price that farmers receive for the pota-
toes they have harvested is dependent upon supply
and demand and tuber size. As potatoes provide the
majority of on-farm income for most farm house-
holds in the Red River Delta, any reduction in the
prices received will have a significant adverse
impact on the household. With 88% of potato
farmers earning less than USD67/month (Batt
2002), most farm households in the Red River Delta
are severely cash constrained.
The function of the various traders is to collect the
potatoes from the farmer’s property and to transport
and deliver the tubers to wholesalers in the major
metropolitan centres throughout Vietnam. The
majority of traders are also small enterprises, with
most purchasing fewer than 1500 kg of vegetables
per week. However, during the potato season, there is
a marked increase in the quantity of product pur-
chased, with most traders handling more than 10 t of
potatoes per week (Batt 2002).
In some potato-growing districts, collector agents
provide an intermediary function. It is the function of
the collector agent to aggregate potatoes from a
number of small growers, to pay the growers, and to
store the potatoes until the traders come to collect
them. Quite clearly, by aggregating the tubers in one
place, the traders do not have to travel to as many
farms to fill their truck. In most cases, the collector
agents are potato growers themselves.
In comparison to the traders, the wholesale enter-
prises are significantly larger, with most handling in
excess of 5000 kg of fresh vegetables per week.
Wholesalers deal with traders and collector agents
rather than farmers, as traders and collector agents
are more able to provide tubers of the desired variety
in the required quantity and desired size. Traders and
collector agents offer a more competitive price and
are able to deliver the potatoes when the wholesalers
require them (Batt 2002).
Wholesalers operate in the supply chain as market
intermediaries, but unlike traders and collector
agents, whose function it is to source potatoes from
many small farmers and to aggregate these into larger
quantities, wholesalers break the consignment down
into quantities sufficient to meet the needs of retail
customers and the food service sector.
Excluding sales to the food service sector and
processing industries, retailers provide the final link
with household buyers in the supply chain for fresh
potatoes. However, the scale of retail operations has
been found to vary enormously between the rural and
metropolitan areas and between and within the major
metropolitan cities. Businesses range in size from
those selling fewer than 500 kg of fresh vegetables
per week, to those selling in excess of 5000 kg/week.
The price at which retailers both buy and sell potatoes
also differs markedly between and within the regions,
depending upon the source of supply, supply and
demand (Batt 2002).
Data Collection and Analysis
In analysing the supply chain for fresh potatoes in the
Red River Delta, detailed interviews were conducted
with 60 potato farmers using a structured question-
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
32
naire. Information was sought on the cultivation and
postharvest practices adopted by the farmer and the
average price farmers received for the potatoes they
sold by month, tuber size and variety. Farmers were
then asked what criteria they believed a market inter-
mediary would use in choosing to purchase potatoes
from them. The questionnaire was based on the
industrial purchasing literature, and farmers
responded to 15 statements about the quality of their
offer on an importance scale of 1 (not at all impor-
tant) to 6 (very important). Farmers then rated their
ability to meet these same criteria on a scale of 1 (not
at all well) to 6 (very well). Farmers were then asked
to indicate why they perceived they were unable to
meet the market intermediary’s needs and the various
constraints that prevented them from improving their
offer quality.
In the final section of the questionnaire, farmers
were asked to describe the nature of their relationship
with their preferred trading partner and to respond to
24 prepared statements. The various statements,
developed from the literature on buyer–seller rela-
tionships, were divided into three groups (satisfac-
tion, trust and power-dependence). Farmers were
asked to respond on a six-point scale where 1 was ‘I
disagree a lot’ and 6 was ‘I agree a lot’. Twenty
potato farmers were interviewed from each of the
three major potato-producing provinces in the Red
River Delta (Hai Duong, Thai Binh and Bac Giang).
Enumerators were instructed to interview four
farmers from a minimum of five districts and to inter-
view no more than two farmers from any one village.
Interviews were conducted by research staff from the
Food Crops Research Institute, Gia Loc.
At the conclusion of the interview, farmers were
asked to identify the trader with whom they most fre-
quently interacted. Based on the number of names
received, ten traders in each province were randomly
selected for interview. Traders were asked to indicate
the average quantity of potatoes purchased and from
whom they purchased those potatoes. Information
was sought on the prices paid to purchase potatoes by
month, tuber size and variety. Traders were then
asked to indicate whether they graded the potatoes or
stored the potatoes before resale and the prices at
which those potatoes were sold to market intermedi-
aries. Traders then described the various criteria they
used in choosing to purchase potatoes from a farmer
or collector agent. Traders then responded to the
same 15 questions about the quality they expected
from suppliers and the extent to which their current
suppliers were able to meet their needs. Traders were
then asked to describe the nature of their relationship
with the farmers and collector agents from whom
they most often purchased potatoes and the nature of
their relationship with the market intermediaries to
whom they most frequently sold potatoes.
At the conclusion of the interview, traders identi-
fied the potato wholesaler with whom they most fre-
quently interacted. From the names received, ten
wholesalers were randomly selected for interview in
Hanoi. Information was sought on the average quan-
tity of potatoes purchased and from whom they pur-
chased those potatoes. Information was sought on the
prices paid to purchase potatoes by month, tuber size
and variety. Wholesalers were then asked to indicate
whether they graded the potatoes or stored the pota-
toes before resale and the prices at which those pota-
toes were sold. Wholesalers then described the
various criteria they used in choosing to purchase
potatoes from a potential supplier and the extent to
which current suppliers were able to meet the same
criteria. Wholesalers then described the nature of
their relationship with the various traders and col-
lector agents from whom they most often purchased
potatoes and the nature of their relationship with the
retailers to whom they most often sold potatoes.
Finally, 25 random interviews with retailers were
undertaken: ten in Hanoi and five in each of three
provincial centres. Information was sought on the
average quantity of potatoes purchased and from
whom they purchased those potatoes. Information
was sought on the prices paid to purchase potatoes by
month, tuber size and variety. Retailers were then
asked to indicate whether they graded the potatoes or
stored the potatoes before resale and the prices at
which those potatoes were sold. Retailers were also
asked to describe the various criteria they used in
choosing to purchase potatoes from a supplier and to
indicate the extent to which current suppliers were
able to meet these same criteria. Retailers were then
asked to describe the nature of their relationship with
the supplier from whom they most often purchased
potatoes.
Data were entered into the SPSS program (Version
10.0) for analysis. Although the mean ratings across
the supply chain were analysed using one-way anal-
ysis of variance (ANOVA), the sample sizes were
generally too small to enable any meaningful statis-
tics to be calculated. Hence, the majority of the anal-
ysis undertaken is descriptive.
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edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
33
Examining the Price Margins in the
Supply Chain
Since few farmers and market intermediaries main-
tain any written records of the prices at which they
buy and sell potatoes, some errors in reporting are
inevitable. Furthermore, since there is a degree of
confidentiality associated with the reporting of
market prices, respondents may deliberately choose
to overvalue the prices at which they have purchased
potatoes and to undervalue the prices at which they
have been sold to reduce their perceived profit
margin.
Farmers in Hai Duong indicated that they sold
potatoes to traders for an average price of
VND1385/kg (USD0.092/kg). Traders indicated
that they purchased potatoes from farmers for an
average price of VND1470/kg and sold those pota-
toes to both wholesalers in Hanoi and retailers in
Hai Duong for an average price of VND1770/kg. In
Hai Duong, retailers indicated that they purchased
potatoes from traders for VND1795/kg and then
sold those potatoes for an average price of
VND2150/kg. However, in Hanoi, wholesalers sold
these potatoes for an average price of VND2180/kg
to retailers who sold the potatoes for an average
retail price of VND2920/kg (Table 1).
In Bac Giang, there was a difference of VND200
between the reported price at which farmers sold
potatoes and traders purchased potatoes. No doubt
this was the result of intervention in the market by
collector agents. Collector agents are responsible for
sourcing the potatoes from many small farmers and
arranging for the transportation of those potatoes to
some central collection point. Farmers are paid in
cash for their potatoes when the collector agent takes
possession of the product. The potatoes are then
graded and stored for between 5–7 days until the
trader comes to pick them up. Depending upon the
level of service provided by the collector agent,
traders appear willing to pay an additional VND50–
200/kg (Batt 2002).
While there was a difference of VND145/kg between
the price at which traders indicated they sold the
potatoes and retailers purchased the potatoes, this
was attributed to sampling error, for the retail margin
was reported to be VND385/kg; a figure that was
consistent with other estimates.
In Thai Binh, it is apparent that farmers grossly
over-reported the prices at which they sold potatoes,
for both the traders’ margin and the retail margin
were consistent with the other two potato-growing
districts. This was supported by anecdotal evidence
and various unstructured interviews with growers
undertaken during the preliminary phase of this
research project. Furthermore, and similar to Bac
Giang, the majority of potato farmers transacted with
collector agents rather than traders.
An examination of the marketing margins along the
supply chain reveals that the marketing margin
increased as the product moved closer to the con-
sumer. Traders were able to extract an average mar-
keting margin of VND260/kg, or 19%. In the rural
areas, retailers extracted an average marketing margin
of VND410/kg (or 25%). However, in Hanoi, whole-
salers were able to extract a marketing margin in the
region of VND395/kg (or 22%), and retailers were
able to extract a marketing margin of VND615/kg (or
27%). However, the marketing margin that market
intermediaries were able to extract was not consistent
over the season. At both the beginning (December)
and the end (February) of the harvest season, the mar-
keting margins declined. Conversely, in January,
during the peak harvest period, the marketing margins
for all market intermediaries increased. Such pricing
behaviour has been reported by Batt and Parining
(2000) who accredited the reduced marketing margin
during times of reduced supply to the increased com-
petition between traders to secure the farmers’ pro-
duce. At the consumer level, research undertaken by
Table 1. Prices (VND/kg) along the supply chain for potatoes produced in the Red River Delta of Vietnam.
Location Farmer Trader Wholesaler Retailer
Sell Buy Sell Buy Sell Buy Sell
Hai Duong
Thai Binh
Bac Giang
Hanoi
1385
1420
1170
1470
1280
1370
1770
1450
1680
1785 2180
1795
1465
1535
2305
2150
1950
1920
2920
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
34
Batt (2002) reveals that the consumers in the rural
areas seldom purchase potatoes for more than
VND2200/kg and in Hanoi, consumers are unlikely to
purchase potatoes at prices exceeding VND3500/kg.
While traders may be able to extract an average
marketing margin of VND260/kg, the traders must
not only grade and store the tubers they have pur-
chased, but also pay for the costs of transporting the
tubers from the farm to the various wholesale and
retail markets. Although most of the potatoes pur-
chased by the traders had been graded by farmers and
collector agents (59%), a significant proportion were
purchased ungraded. Furthermore, over 54% of
traders indicated that they regraded the potatoes they
had purchased before resale. Although the costs of
grading ranged from VND10–50/kg, the market was
willing to pay a significant price premium for larger
tubers.
At the farm level, farmers received an average
price of VND1385/kg for the large tubers (5–8 tubers
per kg). For the extra-large tubers (3–4/kg), farmers
received a price premium of VND185/kg and for the
medium-size tubers (9–15/kg), the price was reduced
by some VND180/kg. For the small tubers (more
than 16 tubers per kg), farmers received only
VND500/kg — hence, most farmers retained the
small tubers for feeding livestock. As the product
moved through the supply chain, not only did the
price premium increase for the larger tubers but the
disincentive for smaller tubers became more pro-
nounced (Table 2).
Despite the differences in price, 74% of whole-
salers and 70% or retailers reported that they did not
regrade the potatoes they had purchased before
resale. Presumably, having purchased the tubers
from traders and collector agents, wholesalers and
retailers had no recourse; what they could not sell,
they would either have to eat themselves or incur the
loss. No doubt, in the absence of any enforceable
quality standards, wholesalers and retailers sought to
reduce the perceived risk by transacting with repu-
table traders and collector agents.
While the majority of traders (70%) stored pota-
toes for 5–7 days, no doubt as an integral part of the
process of consolidation, the majority of wholesalers
(63%) indicated that they did not store potatoes. Con-
versely, some 57% of retailers indicated that they
stored potatoes for up to one month. Presumably such
storage practices were undertaken to accommodate
the abrupt reduction in the supply of potatoes in Feb-
ruary–March. Storage losses generally ranged from
1–5% and, quite surprisingly, were not related to the
storage duration. This would suggest that the storage
losses incurred were the result of either damaged or
diseased tubers being placed in storage, rather than
any contamination occurring during the storage
period.
Transportation costs consumed a significant pro-
portion of the traders’ marketing margin. Of the three
areas studied, Hai Duong was the closest to Hanoi.
Hence, traders were able to pay a significantly higher
price and to transact directly with the farmers. Since
both Bac Giang and Thai Binh were located at a
greater distance, farmers were paid lower prices to
accommodate the higher transportation costs. While
it is unclear whether prices in Hanoi are set at the
wholesale level or the retail level, traders apparently
work backwards, subtracting the costs of transport
and the profit margin they seek to arrive at a price
they are prepared to pay the farmers and collector
agents.
On the other hand, since most wholesalers neither
regrade nor store the potatoes they have purchased, a
much greater proportion of the marketing margin will
be profit. However, given the significant price disin-
centive for small tubers, should wholesalers inadvert-
ently purchase a large quantity of small to medium-
size tubers, they may be exposed to a potential
trading loss. Being the last market intermediary in the
chain, the retailer has no recourse. Having purchased
the potatoes, they must sell them, lose them to infec-
tion by disease, or consume them themselves.
Table 2. Prices differentials at which tubers are purchased by tuber size (VND/kg).
Tuber size Farmers
sell
Traders
buy
Wholesalers
buy
Retailers
buy
Extra large
Large
Medium
+185
1385
–180
+170
1595
–170
+240
2180
–480
+450
2550
–885
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
35
Gap Analysis
Traders want to buy potatoes that are free of chemical
residues, free of pests, diseases and physical injury, of
the desired size (large), and which provide an accept-
able shelf life. In order to meet the needs of their down-
stream customers, traders need to buy sufficient
quantities of potatoes at a competitive price and to be
able to pick them up when required (Table 3).
Regrettably, while a very simple methodological
error resulted in the enumerators failing to collect
data from the wholesalers, retailers’ expectations
were not greatly dissimilar to those of the traders.
However, retailers did place greater emphasis on the
ability of suppliers to meet their immediate needs.
Since retailers purchased in much smaller quantities,
being able to secure sufficient quantities of potatoes
was much less important. Similarly, since most pur-
chased from market intermediaries rather than
directly from farmers, geographical proximity to
their source was much less important. However,
retailers placed more importance on purchasing a
consistent, well-graded line of potatoes. Variety was
of little importance to retailers, presumably because
most of their customers did not differentiate between
varieties. While the market preferred large, evenly
shaped tubers, the principal criteria consumers used
in their decision to purchase were skin colour and
flesh colour. Over many years, consumers had
learned to associate yellow skin and yellow flesh
with potatoes that tasted good and cooked well.
Traders indicated that the collector agents were
generally better able to meet their perceived needs
than farmers. As the principal function of the col-
lector agents is to aggregate the potatoes from many
small farmers and to grade those potatoes before col-
lection, such is not unexpected. However, since even
this most fundamental task requires some effort, col-
lector agents will only undertake these activities if
they are adequately rewarded. As a result, traders
report that it is more expensive to purchase potatoes
from collector agents (Table 4).
Farmers were generally perceived as being unable
to deliver sufficient quantities of potatoes that were
free of pests and diseases, physical injury, of the
desired size and to deliver tubers of the desired shelf
life. Although the traders placed little importance on
packing, most reported that the manner in which
farmers packed potatoes was significantly below
their expectations.
Even although collector agents regraded the pota-
toes before resale, shelf life and freedom from phys-
ical injury remained a problem for the traders. Since
the majority of potatoes in the Red River Delta are
harvested before they are mature (Batt 2002), the skin
is unlikely to have hardened sufficiently. As a result,
the tubers are more susceptible to damage, dehydra-
tion and decay. The high incidence of physical
damage is no doubt related to harvesting practices.
Although no data were collected that quantified the
wholesalers’ expectations, it was apparent that most
wholesalers were dissatisfied with both the technical
quality and the functional quality of the product they
received from traders and collector agents. Whole-
salers reported that the tubers they received were
often too small and excessively damaged by both
pests and disease and physical injury. As a result, the
shelf life of the product was generally too short. Sup-
pliers were often unable to meet the wholesalers’
immediate needs and variations in product quality at
the farm level made it difficult for traders and col-
lector agents to provide potatoes of consistent
quality. While the inability to meet wholesalers’
immediate needs was no doubt the result of geo-
graphical distance — since both the traders and col-
lector agents operated in the rural areas — most
wholesalers reported that the prices that traders and
collector agents expected for the potatoes they sold
were too expensive (Table 5).
Table 3. Mean rating for what market intermediaries
desire from upstream suppliers (where 1 =
‘not at all important’ and 6 = very
important).
Factor Traders Retailers
Free from chemical residues
Free from pests and disease
Desired size
Long shelf life
Sufficient quantity
Meet immediate needs
Good reputation
Competitively priced
Deliver when required
Free from physical injury
Desired variety
Proximity (close)
Well graded
Appropriately packed
Supply a wide range of
fresh vegetables
5.74
5.70
5.52
5.52
5.45
5.39
5.39
5.35
5.30
5.27
4.87
4.48
4.26
3.48
3.39
5.21
5.37
5.42
5.37
4.68
5.47
5.42
5.26
4.74
5.42
3.79
3.32
5.05
3.00
3.06
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
36
Conversely, for the majority of retailers, suppliers
either met or exceeded their expectations. Although
problems were reported in the same key areas —
tuber size, freedom from physical injury, shelf life
and price — it was only the inability of suppliers to
provide tubers that were substantially free from pests
and diseases that proved to be significantly different.
The high price of potatoes was recognised as a
major constraint by two of the three market intermedi-
aries (Table 6). Traders indicated that it was too expen-
sive to purchase potatoes from both farmers and
collector agents; retailers indicated that it was too
expensive to purchase potatoes from wholesalers.
Since wholesalers did not indicate that it was too
expensive to buy potatoes from traders, this would
imply that wholesalers, being in perhaps the most
powerful position in the market, were able to extract
the margin they desired irrespective of the purchase
price and to pass these higher costs onto the metropol-
itan retailers who had no alternative source of supply.
Table 4. The extent to which farmers (F) and collector agents (CA) meet traders’ needs.
Factor Trader
wants
Trader gets Probability (p =0.05)
F CA F CA
Free from chemical residues
Free from pests and disease
Desired size
Long shelf life
Sufficient quantity
Meet immediate needs
Good reputation
Competitively priced
Deliver when required
Free from physical injury
Desired variety
Proximity (close)
Well graded
Appropriately packed
Supply a wide range of fresh vegetables
5.74
5.70
5.52
5.52
5.45
5.39
5.39
5.35
5.30
5.27
4.87
4.48
4.26
3.48
3.39
5.30
4.87
4.74
4.70
4.43
4.91
4.91
5.04
4.91
4.13
4.91
5.04
4.14
2.17
3.43
5.55
5.05
5.32
4.91
5.27
4.86
5.14
4.91
5.64
4.86
5.05
4.77
4.91
3.45
2.85
0.066
0.034
0.005
0.013
0.021
0.077
0.164
0.259
0.025
0.005
0.803
0.163
0.751
0.001
0.877
0.056
0.061
0.545
0.015
0.480
0.030
0.284
0.107
0.096
0.016
0.436
0.521
0.313
0.910
0.438
Table 5. The extent to which upstream suppliers meet wholesalers’ (W) and retailers’ (R) needs.
Factor Want Get Probability
(p =0.05)
W R W R
Meet immediate needs
Good reputation
Desired size
Free from physical injury
Free from pests and disease
Long shelf life
Competitively priced
Free from chemical residues
Well graded
Deliver when required
Sufficient quantity
Desired variety
Proximity (close)
Supply a wide range of fresh vegetables
Appropriately packed
5.47
5.42
5.42
5.42
5.37
5.37
5.26
5.21
5.05
4.74
4.68
3.79
3.32
3.06
3.00
4.70
4.40
4.80
4.40
4.50
3.80
4.80
3.70
5.00
5.00
5.30
3.80
3.40
2.60
3.80
5.63
5.26
5.26
5.00
4.68
5.16
5.11
5.32
5.05
5.58
5.53
4.16
4.05
3.22
3.37
0.420
0.578
0.625
0.119
0.015
0.429
0.506
0.695
1.000
0.038
0.061
0.309
0.105
0.721
0.185
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
37
From the wholesalers’ perspective, the major
problem they experienced with traders was the
narrow range of vegetables delivered. This would
imply that wholesalers sought to buy more than just
potatoes from the traders, but since most traders
bought and sold potatoes only when potatoes were
available from the farmers, this would not seem pos-
sible. Various other problems were experienced with
the quality of the tangible product, including inappro-
priate varieties (to meet the customers’ intended use),
tubers infected with disease and contaminated with
chemical residues, small tuber size, and a high inci-
dence of physical damage to tubers. Problems with
the functional quality included poor packing and an
inability to deliver sufficient potatoes so that the
wholesaler could satisfy their customers’ needs. No
doubt, since the traders operated in the rural areas and
presumably, since wholesalers were not able to
readily communicate with their suppliers, excessive
distance was perceived to be a major impediment.
For the retailers, while wholesalers could generally
supply sufficient potatoes to meet their needs, whole-
salers were unable to respond to their immediate
needs. Retailers also experienced more problems
with inconsistent tuber quality.
Comparing the various impediments that traders
experienced with purchasing potatoes from farmers
and collector agents provided some interesting
results. Traders deemed that it was more expensive to
purchase potatoes directly from farmers. Presumably
this resulted from farmers demanding a high price,
yet they presented the trader with only small quanti-
ties of largely ungraded tubers. Thus, the traders
experienced more quality problems when transacting
directly with farmers. However, when dealing with
collector agents, traders experienced more problems
with inappropriate varieties, small tuber size, phys-
ical injury and tubers being infected with disease.
The only plausible explanation for this would seem to
be derived from the ability of the trader, when pur-
chasing directly from farmers, to select for himself
those tubers he wants to buy and to reject others.
Conversely, when purchasing from a collector agent,
the trader must purchase the entire quantity. It would
also seem highly likely that, since collector agents
store potatoes for 7–10 days, any problems regarding
tuber decay would be more likely to show up after a
short period of storage rather than immediately after
harvest.
While traders indicated that they experienced more
problems with poor packing when purchasing
directly from farmers, farmers acknowledged that
poor packing was one the major impediments that
prevented them from meeting the needs of their
downstream customers (Table 7).
Poor grading, contamination by disease, a high
incidence of physical injury, poor appearance and
small tuber size were also perceived to be problem-
atic. However, that variable which farmers
believed most prevented them from meeting the
needs of downstream customers was the high pur-
chase price.
Table 6. Why suppliers fail to meet downstream customers’ needs (%) (F =farmer, CA =
collector agent, T =trader, W =wholesaler, R =retailer).
Factor T >F T >CA W >T R >W
High price
Poor grading
Inappropriate varieties
Narrow range of vegetables
Poor quality
Small tuber size
Not free of physical injury
Cannot meet immediate needs
Poor packing
Not free of disease
Poor storage capability
Poor reputation
Not free of chemical residues
Cannot deliver required quantity
Excessive distance
75
21
41
8
17
13
8
48
33
24
24
29
5
10
10
10
10
50
78
10
10
22
30
33
30
56
50
18
16
16
13
11
11
11
10
8
8
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
38
Farmers believed that the major factor contributing
to their inability to meet customers’ perceived needs
was insufficient capital (62%), which impacted
adversely upon their ability to purchase good-quality
seed and to purchase sufficient quantities of inputs to
maximise productivity (Table 8).
Nevertheless, various other agronomic constraints
affected the farmers’ ability to produce good-quality
potatoes, including heavy rain and the cropping pres-
sures under which farmers found themselves oper-
ating, for many farmers reported that the compost
applied had not broken down completely. At some
point in time, it must be recognised that the agro-eco-
logical environment of the Red River Delta is far
from optimal for the production of potatoes. How-
ever, it is also readily apparent that not all farmers
possess the skills necessary to know how to improve
productivity. If such is true and farmers are operating
below their full potential, costs per unit output will be
proportionately higher.
Lack of knowledge was also perceived to be a
major problem for the traders. While it is readily
apparent that farmers would benefit most by
improving their agronomic knowledge, traders may
not have the knowledge to differentiate between vari-
eties, to identify infected tubers, to know how to store
tubers or to understand the dynamics of the market.
Downstream Relationships in the
Potato Supply Chain
Contrary to expectations, it is apparent that most
farmers had a very positive relationship with their
preferred trading partner. The majority of farmers
were very satisfied with their trading partner and
most farmers trusted their preferred trading partner.
Farmers reported that their preferred trading partner
was always honest and kept their promises. Since
their preferred trading partner seldom acted oppor-
tunistically, farmers had confidence in their preferred
trading partner and generally believed the informa-
tion provided. Most farmers maintained that they had
a close personal friendship with their preferred
trading partner (Table 9).
It is also apparent that most farmers were able to
act independently of their preferred trading partner.
Most farmers indicated that they could readily
choose an alternative trading partner, although most
Table 7. Variables that prevent suppliers from meeting customers’ needs (%) (F =farmer, T =
trader, W =wholesaler, R =retailer).
Factor F >T T >W W >R
Insufficient quantity
Inappropriate varieties
Not free of diseases
Insufficient range
Too far from customer
Not free of physical injury
Small tuber size
Price too high
Poor grading
Tubers not packed
Poor appearance
Cannot source better quality
5
17
18
2
48
33
20
8
29
38
25
32
26
21
21
21
16
16
Table 8. What prevents suppliers from better meeting customers’ needs (%).
Factor Farmer Trader Wholesaler
Lack of capital
Inability to buy good-quality seed
Agronomic issues
Lack of knowledge
Do not have the desired variety
62
35
32
12
29
42
8
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
39
wished to maintain their relationship with their pre-
ferred trading partner because they made the best
offer relative to the alternatives. Furthermore, most
farmers indicated that their preferred trading partner
seldom had all the power in the relationship, nor did
they control all the information. Consequently, the
preferred trading partner was seldom able to coerce
the farmer into making decisions that were not in
their best interests.
The traders’ relationship with their most preferred
wholesale trading partner was also quite positive,
with most traders indicating high levels of trust and
satisfaction in the exchange. However, it was
apparent that the traders were more dependent upon
their preferred wholesale trading partner, even
though they did not necessarily provide the best offer.
Traders perceived that their wholesale trading part-
ners had more power and controlled more of the
information, although they were less willing to
provide financial assistance or to share the risks.
Conversely, the majority of wholesalers indicated
very low levels of both satisfaction and trust in their
relationships with retail customers. Transactions
entailed a high degree of risk and there was a greater
possibility of being exposed to opportunistic behav-
iour and conflict in the relationship. There was
minimal cooperation between wholesalers and
retailers and minimal trust. As a result, most whole-
salers indicated that their retail trading partners had a
poor reputation. Wholesalers were not only more
dependent, but retailers also wielded more market
power and controlled more of the information.
Upstream Relationships in the Potato
Supply Chain
In reviewing their relationship with farmers and col-
lector agents, the majority of traders also indicated
that they experienced high levels of satisfaction and
Table 9. Mean ratings of relationship variables for downstream relationships between market
intermediaries (1 =‘I disagree a lot’, 6 =‘I agree a lot’; F =farmer, T =trader, W =
wholesaler, R =retailer).
Factor F >T T >W W >R
Satisfaction
Trading with preferred partner is less risky
Good cooperation with preferred trading partner
Expect to continue to trade with partner
Preferred trading partner meets expectations
Treats me fairly and equitably
Adequately rewarded
Quick to handle complaints
Much conflict with preferred trading partner
5.82
5.64
5.61
5.55
5.49
5.44
5.22
2.09
5.83
5.70
4.40
5.43
5.77
5.57
4.10
2.47
4.20
3.70
4.64
3.10
4.10
4.30
3.10
2.90
Trust
Confidence in preferred trading partner
Always keeps promises
Always honest
Good reputation
Trust preferred trading partner
Believe information provided
Close personal friendship
Trading partner always considers best interests
5.58
5.54
5.53
5.46
5.36
5.05
5.03
3.81
5.03
5.20
5.37
5.33
4.93
4.53
4.77
3.10
3.90
4.00
4.00
2.70
4.30
3.70
3.80
3.30
Power-dependence
Free to choose another trading partner at any time
Has best offer relative to alternatives
Must adhere to partner’s demands
Trading partner has all the power
Trading partner controls all the information
Trading partner often acts opportunistically
More dependent on trading partner
5.71
5.31
2.78
2.28
2.21
2.15
2.07
4.90
4.57
2.37
2.83
2.40
2.03
2.37
2.90
4.30
3.78
4.30
3.00
3.22
4.50
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
40
trust with the exchange. Understandably, because the
collector agents accumulated potatoes from many
small farmers, traders generally felt they could rely
more upon the collector agents than they could upon
individual farmers. However, somewhat surpris-
ingly, traders indicated that they were more
dependent on farmers than they were upon their col-
lector agents. Since the farmers could choose the
trader to whom they sold their potatoes, farmers gen-
erally exercised more power and controlled more
information (Table 10).
J ust as the wholesalers reported that their relation-
ship with their downstream trading partners was not
entirely satisfactory, the wholesalers indicated that
they were equally dissatisfied in their relationship
with the traders and collector agents. Wholesalers
reported that traders seldom treated them fairly and
equitably and on many occasions, failed to meet their
expectations. Traders were slow to respond to the
wholesalers’ complaints and there was evidence of
only moderate levels of cooperation in the exchange.
Wholesalers also reported that despite the opportu-
nity to choose from several alternative suppliers,
traders and collector agents had more power and con-
trolled more of the information. Nevertheless, whole-
salers indicated that they were neither dependent nor
did they have to adhere to the trader’s demands. This
was achieved because most wholesalers (68%) pur-
chased potatoes from more than two traders and col-
lector agents (Batt 2002).
No doubt because of the potential variation in the
quantity and quality of the tubers delivered by traders
and collector agents, wholesalers demonstrated the
least amount of trust in their relationship with their
upstream suppliers. Wholesalers believed that traders
and collector agents were more dishonest and less
likely to keep their promises. Wholesalers also
seemed less willing to believe in the information pro-
Table 10. Mean scores on relationship variables for upstream relationships between market
intermediaries (1 =‘I disagree a lot’, 6 =‘I agree a lot’; F =farmer, T =trader, CA =
collector agent, W =wholesaler, R =retailer).
Factor T >F T >CA W >T R >W
Satisfaction
Trading with preferred partner is less risky
Good cooperation with preferred trading partner
Preferred trading partner meets expectations
Treats me fairly and equitably
Adequately rewarded
Expect to continue to trade with partner
Quick to handle complaints
Much conflict with preferred trading partner
5.83
5.70
5.48
5.48
5.41
4.82
4.26
2.17
5.55
5.68
5.32
5.68
5.41
5.18
4.77
2.27
3.90
4.10
4.60
3.50
4.70
4.60
2.70
2.60
5.40
5.45
5.60
5.50
5.10
5.13
4.90
2.05
Trust
Trust preferred trading partner
Always honest
Good reputation
Always keeps promises
Confidence in preferred trading partner
Close personal friendship
Believe information provided
Trading partner always considers best interests
5.35
5.17
4.95
4.91
4.87
4.68
4.10
3.04
5.00
5.29
4.68
5.23
5.27
4.73
4.23
3.18
4.40
4.00
4.00
4.10
4.20
4.20
4.10
3.50
5.16
4.90
4.60
4.85
5.10
4.42
4.95
2.70
Power-dependence
Free to choose another trading partner at any time
Has best offer relative to alternatives
Trading partner has all the power
Trading partner controls all the information
Must adhere to partner’s demands
More dependent on trading partner
Trading partner often acts opportunistically
4.77
4.05
2.91
2.82
2.77
2.36
2.36
5.10
4.14
2.59
2.27
2.32
2.23
2.00
4.40
4.60
3.30
2.80
2.60
2.70
2.33
5.80
5.25
3.70
1.90
2.30
2.45
2.20
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
41
vided by traders and collector agents and perceived
them to engage more frequently in opportunistic
trading. Such would suggest that price was of consid-
erable importance in the transaction. Wholesalers
believed that if traders and collector agents could
obtain a higher price from an alternative customer,
they would be more likely to abandon their relation-
ship. In turn, traders and collector agents could
readily blame their inability to deliver on the incon-
sistent supply from farmers.
While the wholesalers were generally dissatisfied
in their relationship with their retail customers,
retailers expressed quite high levels of satisfaction
and trust in their relationship with the wholesalers.
Indeed, most retailers intended to continue to trade
with their wholesale trading partner, even although
there were plenty of alternatives, noting that their
current wholesale supplier provided the best offer
relative to the alternatives. However, retailers
expressed some doubt as to whether wholesalers
always acted in their best interests.
Conclusions and Implications
With the majority of the potatoes harvested in the
Red River Delta being derived from some 235,000
small farmers, there is considerable uncertainty with
regard to both the quantity and quality of tubers avail-
able. In the absence of any definitive quality stand-
ards and in order to secure a more reliable supply of
potatoes, each of the market intermediaries agreed
that transacting with their preferred trading partner
was significantly less risky.
However, in a market where more than 85% of the
crop is harvested in just one month, the market will
demonstrate considerable price volatility. While a
long-term relationship may reduce some of the
uncertainty associated with procuring a more reliable
supply of good-quality potatoes, the relationship is
unable to provide any price certainty. As a result,
each of the actors may abandon their relationship
from time to time to secure a better price. Within such
an environment, one would expect the various actors
to engage in opportunistic trading practices, yet —
with the exception of the wholesalers, who reported
dissatisfaction with both their suppliers and their cus-
tomers — there was little evidence of market exploi-
tation.
While market intermediaries may find that they
have occasionally paid too much to purchase pota-
toes, they are in a position to respond to the market
and to modify their buying and selling practices in
order to reduce the extent of the loss. However, since
the potatoes are often dug immaturely and have only
a limited shelf life, farmers must accept the pre-
vailing market price at the time of harvest. While
farmers will ordinarily transact with those traders
who offer the best price, since the average farmer has
less than 1.5 t of potatoes at their disposal (Batt
2002), there is some doubt as to what benefit the
farmer will derive from selling to an alternative
trader. Since most Vietnamese potato farmers are not
constrained by any pre-existing credit arrangements
that might limit their ability to choose an alternative
trading partner, farmers choose to stay with their pre-
ferred trading partner because they want to, not
because they have to.
Within the supply chain itself, it is apparent that
the market intermediaries have adopted a cost plus
pricing approach. To the purchase price, the market
intermediaries add the various costs of grading,
storage and transportation, plus their desired profit
margin. In a market where there are many small
traders, wholesalers and retailers, few switching bar-
riers and few barriers to entry and exit (with the pos-
sible exception of the wholesalers), competitive
market forces will prevent the market intermediaries
at any one level in the supply chain from being able to
extract an extraordinary price margin. Both Faf-
champs (1996) and Lyon (2000) make similar con-
clusions from their respective analyses of the fresh
vegetable industries in Ghana.
Nevertheless, it is at the wholesale level where
most of the dissatisfaction arises in the supply chain
and, no doubt, it is at this level that there are the
greatest barriers to entry. Perhaps much of the whole-
saler’s relational dissatisfaction is derived from their
inability to exercise greater market power and to
extract a greater economic rent. However, despite
being the most concentrated sector, wholesalers exer-
cise minimal control over the traders that supply
them. Unless the wholesalers have made some pre-
existing arrangement to purchase all the potatoes
from a particular trader, the trader will park their
truck in a designated area in the wholesale market
and sell potatoes to whoever wants to buy them, pro-
viding they buy no less than one sack (Batt 2002).
While larger retailers can also buy directly from the
truck, many of these might be better described as sec-
ondary wholesalers, for they will distribute the pota-
toes to various retail markets throughout the
metropolitan area. That then leaves the wholesalers
ACRC084.book Page 41 Monday, October 18, 2004 2:35 PM
Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
42
very much dependent upon their local customer base,
who it seems may use that knowledge to their advan-
tage.
In conclusion, it is apparent that the prices that
farmers in the Red River Delta receive for the pota-
toes they have grown is determined more by supply
and demand than by the exercise of any coercive
power by market intermediaries.
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44
Banana Supply Chains in Indonesia and Australia:
Effects of Culture on Supply Chains
Shinta Singgih and Elizabeth J. Woods*
,1
Abstract
Research on banana supply chains (BSCs) was conducted in 2001 and 2002 through two case studies, BSC1
(Indonesia) and BSC2 (Australia). BSC1 supplied local banana varieties from small farmers in the Bayah
District in Banten Province to traditional markets in J akarta through the J akarta central market. In BSC2,
Cavendish bananas from growers in North Queensland were marketed through a wholesale agency in Sydney
to supermarkets and other high-quality retailers. This paper discusses the effects of culture on the operation of
both chains. Data were derived from interviews with chain members and observation of their daily activities,
and transcripts were categorised using qualitative software.
In both chains, strong and long-term relationships formed the basis of all chain activities, however the nature
of relationships between the chain members differed significantly between those in BSC1 and BSC2,
particularly at the upstream (farmer and village) levels. Culture affected the way in which members related and
communicated their ideas to each other. Relationships in BSC1 villages were dominated by traditional value
systems, social stratification and indebtedness that encouraged paternalistic approaches by the buyers toward
the sellers. Chain members’ relationships in BSC2 were more egalitarian and in some cases developed into
strong friendships. The culture, as expressed through the nature of these relationships, affected the pricing
mechanisms and farmers’ bargaining inclination. Despite the differences, each chain performed relatively
effectively, adapting to its needs within its cultural environment.
Supply-chain management (SCM) concepts origi-
nated from the fields of production/operations man-
agement and logistics (Westgren 1998), particularly
in the United States of America (USA) (Wilson
1996). SCM drew from the lean management
approach practised by the J apanese automotive
industry in the 1970s and 1980s, including non-con-
frontational ways of undertaking exchanges and just-
in-time distribution. The concepts can generally be
divided into two groups — traditional and the new
concepts of SCM. The traditional SCM concept
views the supply chain as a means of obtaining the
lowest possible initial purchase price while assuring
supply (Spekman et al. 1998). Hence, SCM is char-
acterised by the presence of multiple partners who
are evaluated based on purchase price, arms-length
bargaining, formal short-term contracts, and central-
ised purchasing. In such situations, fierce horizontal
competition among suppliers is encouraged because
the prevalent assumption is that suppliers would
behave opportunistically once the buyers become
dependent on their products.
The new paradigm of SCM, on the other hand,
emphasises the importance of good coordination of
all phases within the chain to transform raw materials
* School of Natural and Rural Systems Management, The
University of Queensland, Gatton, Queensland 4343,
Australia. Email: <[email protected]>;
<[email protected]>.
1
Current address: Executive Director, Research and
Development Policy, Department of Primary Industries,
Meiers Road, Indooroopilly, Queensland 4067,
Australia. Email: <[email protected]>.
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edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
45
into finished products or services and distribute them
to the end consumers (Spekman et al. 1998; Dunne
1999). This includes “designing, developing, opti-
mizing and managing the internal and external com-
ponents of the supply system …” (Spekman et al.
1998, p. 54). Baatz (1995) goes even further to
include recycling or re-use of the product, though this
inclusion is still relatively uncommon in SCM litera-
ture. Viewed as a system, the chain should also be
managed as a whole (Beers et al. 1999). Hence, in
SCM, the competition is no longer between business
units at the same level, but between chains operating
in the same or alternative industries.
The majority of SCM literature, including in the
agri-food industry, focuses on the application and
implementation of SCM in developed countries. The
differences in the nature of agri-food industries in
developed and developing countries mean that SCM
concepts derived from experiences in developed
countries cannot be easily applied in developing
countries without understanding the differences in
the nature of the industries in both types of countries,
caused by factors such as culture, and the systems
and regulations in place. Many SCM authors, for
example, Wilson (1995) and Fearne (1998), believe
that SCM is all about managing good relationships
among the chain members, with the financial gains
distributed according to the distribution of value
added. This paper focuses on the relationship nature
of the supply chain and the effects of culture, rather
than the issue of value-sharing within the chain.
Understanding how culture might affect supply
chains in particular countries is critical because of the
effects it might create in the logistic-relationships
management of supply chains. Culture here refers to
“the context of symbols, norms, interpretation
models and values shared by a social group. Values
form the core of culture and concern what is good/
bad, clean/dirty, normal/abnormal, logical/illogical,
rational/ irrational, fair/unfair etc.” (Aquilon 1997, p.
77). Two dimensions of culture described by Hof-
stede (1993, 1997), power distance and individu-
alism, will be used to describe the differences in the
Indonesian and Australian culture that might affect
the management of the chains and relationships
between their members.
In the following sections, the similarities in the
banana industries in Indonesia and Australia will be
briefly explained, followed by a description of the
research methods used in the study. The two case
studies are then described, focusing particularly on
the logistic management occurring within each chain.
The following sections describe the effects of culture
on banana supply chain logistic-relationships and the
chain members’ bargaining inclination. Finally, a
brief conclusion and implications of the study are
provided.
Banana Industries in Indonesia and
Australia
Although each chain studied is unique and has its
own characteristics, both operate in the banana indus-
tries within their respective countries, and share some
similar features. At the production end, the industries
are made up of mainly small family farms, although
large plantations also exist in each industry, particu-
larly in Australia, where less than 5% of growers
produce 70% of Australian bananas. For many small
banana farmers, growing bananas formed an impor-
tant part of their income. Since bananas are grown as
a monoculture in Australia, they were the main
source of income for the farmers, while in Indonesia
bananas are grown together with annual crops and
contributed to farmers’ regular income, although not
necessarily as their main source of income. Bananas
are produced mainly to serve domestic consumption
in each country.
At the marketing end, the banana industries in both
countries are part of the global fruit-marketing
industry. Imported fruit has been making its way to
Indonesia, and applications have been made to
import bananas into Australia. In Indonesia,
imported fruits can be found easily, not only in super-
markets in the cities, but also in traditional markets in
urban towns. These high-quality fruits are competi-
tors to the local bananas. As markets become more
competitive, small farmers can easily become
uncompetitive. To be successful in this environment,
good collaboration between all members of the chain
is critical to ensure competitive quality, quantity, and
price of their product to meet the changing consumer
preferences.
The banana industries in both countries are charac-
terised by informal, non-contractual relationships,
with farmers being price-takers and exercising the
least power compared to other members of the chain.
Those at the front-line interface with end consumers
normally benefit from the information to hand, and
hence often exercise power over others and create
dependency. The long and complex chains may also
ACRC084.book Page 45 Monday, October 18, 2004 2:35 PM
Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
46
discourage good communication and information-
sharing among members of the chains. Most
members communicated only with those at the pre-
vious and following level.
Research Methods
Two banana supply chains (BSCs) were studied, one
in Indonesia and the other in Australia. The Indonesian
BSC (BSC1) involved farmers from three villages in
the Bayah District of Lebak Regency in the Banten
Province in West Java. The main fruit commodity in
Lebak Regency is banana, and it is one of the largest
banana production centres in West Java, together with
Sukabumi and Cianjur Regencies. The three villages
were selected on the recommendation of the Bayah
Agricultural office, banana production statistics, and
access to study their systems. The Australian chain
(BSC2) was selected based on its comparability with
the Indonesian banana industry through consisting of
small banana family-farms, its attempts to operate
competitively and innovatively to survive in the
industry, its supply to supermarkets (the most common
retail outlet for Australians to buy bananas), and its
willingness to provide access to the researcher.
Data were collected in a series of interviews with
channel members and by observing them while
working. Interviews and observation findings were
transcribed and analysed with the assistance of NUD-
IST (Non-numerical Unstructured Data Indexing,
Searching, and Theorizing) software, which was
useful in allowing theory to emerge from the data
(Richards and Richards 1991). A summary of find-
ings was verified by the chain members for accuracy.
Description of BSC1 and BSC2
As typically occurs in developing countries, BSC1
was characterised by the existence of multi-layers at
both the upstream and downstream levels of the
chain. BSC1 supplies local banana varieties from
three villages, Cibareno, Cikatomas, and Cikamun-
ding, to end consumers in J akarta and neighbouring
cities such as Depok and Bogor through the central
Farmers
Collectors
Village wholesalers
Agents at the central markets
Traditional markets
Snack vendors Fruit and vegetable
vendors
Small restaurants Small markets
End consumers
Transporters
Transporters
Transporters
Flow of
information and
money
V
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L
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G
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I
T
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E
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Figure 1. Logistic flows of banana supply chain 1 (BSC1), Indonesia.
ACRC084.book Page 46 Monday, October 18, 2004 2:35 PM
Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
47
market in J akarta (PIKJ – Pasar Induk Kramat J ati or
Kramat J ati Central Market). The logistic flow within
BSC1 is shown in Figure 1. Bananas were commonly
grown in the villages with minimal input and atten-
tion from farmers, on their rice banks or mixed with
hardwood trees/annual crops.
In BSC1, farmers sold their bananas to their
regular buyers — either collectors or directly to
village wholesalers — and only occasionally to
others. Two selling methods existed, weight-based
and tree-based. In the weight-based method, banana
bunches were carried on foot to the buyers’ ware-
houses to be weighed and priced according to one of
the buyers’ standard four price groups. In the tree-
based method, collectors actively searched around
the villages for young or mature bunches to be bought
on the tree. While a fixed-price system ruled almost
all transactions in the weight-based method, bar-
gaining governed the transactions in the tree-based
method. Competition among wholesalers ensured
relatively fair prices to suppliers. Banana ripening
was conducted using traditional methods, such as
smoking (burning dried coconut leaves) or carbide, at
the village wholesaler level. Bananas’ movement
within BSC1 was always accompanied by a change
of banana ownership at each chain level, apart from at
the central market, where the banana agents operated
on a 10% commission basis. No formal grading
standards existed within BSC1; bananas were graded
somewhat differently at each level using subjective
assessment of parameters such as bunch weight,
maturity, finger length, and cosmetic appearance.
A banana wholesale agent in Sydney was the focal
point that linked growers in North Queensland with
buyers in Sydney (BSC2). The predominantly Caven-
dish bananas were sold to major supermarket chains,
both high-quality and price-sensitive independent
retailers, and other wholesalers. The bananas were
sourced from specialised growers who produced high-
, good- and average-quality bananas. Supply from
small-scale, average-quality growers was discour-
aged. Growers typically consistently supplied to two
or three agents to spread their risks and obtain market
information from different cities. Growers were paid
on each consignment, several weeks after delivery to
the agent, who worked on a commission basis.
Growers graded unripened bananas by removing
defective fingers that fell outside the product specifi-
cation, and categorised the hands or clusters based on
the finger length. They trusted the agent to decide
which customers their bananas should supply, based
on assessment of the quality and consistency of the
ripe fruit. The characteristics of each chain are summa-
rised in Table 1.
Effects of Culture on Logistic
Relationships
In both chains, most chain members had known their
buyers/sellers for a relatively long time. In fact, strong
and long-term relationships formed the basis of all
activities in the chains. However, the nature of rela-
tionships between the chain members differed signifi-
cantly between those in BSC1 and BSC2, particularly
at the upstream (farmer/village) levels. Culture
affected the way members related and communicated
their ideas to each other. In turn, this affected the
pricing mechanisms and farmers’ bargaining inclina-
tion. This paper focuses only at the effects of culture
on chain members’ relationships and pricing mecha-
nisms at the upstream end of both BSCs. The effects of
culture on the logistic relationships of chain members
in this paper are viewed using Hofstede’s power dis-
tance and individualism dimensions (1993, 1997).
Power distance dimension
Power distance index (PDI) is a measure of the ine-
quality among people that is considered normal in a
country, from the perspective of the least powerful
partners in the relationship. Using a scale of 11 (small
power distance) to 104 (large power distance), less
powerful members of a group in a country with a low
PDI accept that power is distributed relatively equally,
which encourages interdependence. On the other
hand, high PDI refers to cases where the less powerful
members of a group depend emotionally on the more
powerful members. The PDI of Indonesia is 78, while
Australia’s is 36. If these scores are indicative of how
people from both countries perceive equality among
themselves, it might explain some of the attributes of
chain members’ relationships within each chain.
In high-PDI societies, inequality is considered as
the basis of societal order (Hofstede 2001). People
with social status, prestige, wealth, or simply greater
age, may be treated with a mixture of respect and fear
in these societies. In BSC1, social stratification
existed in the villages. Wholesaling is quite a
respected occupation, which positioned the whole-
salers relatively high in the village societies. Whole-
salers earned villagers’ respect because of their
business success, wealth, or simply their personality.
ACRC084.book Page 47 Monday, October 18, 2004 2:35 PM
Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
48
For example, the inequalities among BSC1’s
farmers, collectors, and village wholesalers were
apparent through the differences in materialistic pos-
sessions among them — wholesalers commonly
lived in relatively large houses equipped with a tele-
vision and antenna to receive TV channels from
J akarta, something that many small farmers in BSC1
could only dream of owning.
Koentjaraningrat (1967) argued that Sundanese vil-
lages, such as those in this study, tended to have social
stratification based on occupations and positions
within the village. Thomas (1975), who studied vil-
lagers’ perceptions of social stratification in three vil-
lages in West Java in 1965, also found occupation to be
one of the most significant determinants of social pres-
tige and power in village society. As a result, supplier–
buyer relationships are often characterised by pater-
nalistic attitudes by the buyers, which make small
farmers reluctant to bargain in a straightforward
manner. Similar, status-based relationships were also
found among the Madaymen farmers and middlemen
(Russel 1987). That these relationships have continued
to exist from the 1960s to 2002 in Sundanese villages
suggests they are rooted in stable social values.
Suppliers’ indebtedness toward their buyers,
which stemmed from the buyers’ role in guaranteeing
a market for their bananas and the credit provision
given to suppliers whenever they needed extra cash,
contributed to the inequality between suppliers and
buyers in BSC1 villages. Buyers offered loans
because they predicted that the future benefit of
having the farmers’ voluntary commitment to sell
only to them exceeded their current costs. However,
unlike in Thomas’ 1975 study of Sundanese villages,
where credit often caused conflicts because of the
high interest rates charged, credit in the villages
studied here was given without interest and without
an enforced repayment schedule. For many, the
feeling of indebtedness reduced their propensity to
bargain with the wholesalers. But for some (particu-
larly farmers who owed only a little money to their
buyers), it had less impact on their propensity to bar-
gain. They did not consider their financial ties a
barrier to bargaining or even to selling their bananas
to others if the buyers failed to meet the prices they
demanded. Some farmers who used to be collectors
and were still paid slightly higher than other farmers
also felt indebted toward their wholesalers, which
decreased their inclination to bargain.
As depicted by its relatively low PDI, relationships
between people in Australia tended to be based on
egalitarian principles. Such perception of equality
among people (such as the farmers and the agent in
BSC2) in a country with low PDI was also associated
with more modern agricultural practices, more social
mobility, and better education (Hofstede 1997). In
BSC2, communication between two parties could be
conducted in a relaxed atmosphere where neither of
them dominated the interactions. Conversation topics
between BSC2 farmers and the agent covered not
only bananas but also other interests such as sport or
sharing of jokes. BSC2 farmers saw themselves as
equal to the agent in social status, which allowed
friendships to develop from the trading relationships.
The four farmers interviewed have supplied the agent
for a long period of time and have turned their trading
relationships into friendship, although the distance
between their places of work meant face-to-face
meetings could only be conducted occasionally,
when the agent conducted his annual visit to produc-
tion centres in North Queensland. One of the farmers
was already the agent’s friend before also becoming
his supplier.
J ap et al. 1999 assert that friendliness in buyer–
seller relationships encourages them to share openly
and collaboratively and this provides a basis for
increased trust, which has to be continually worked
out between them. Batt (2003) concluded that
growers must have a certain minimum level of trust
in an agent before considering him/her as a potential
exchange partner. Compared to other horticultural
industries, trust is an even more critical issue in the
relationships between farmers and their agents in the
banana industry in Australia (and also in the mango
and avocado industries), because of the agent’s
important role in ripening the fruits before selling.
Quality-conscious independent retailers interviewed
claimed that banana condition (ripeness) was the
single most important criterion in banana selling
them. It was the agent’s responsibility to ensure that
the bananas were handled and ripened properly to
achieve the ripening stage desired by customers. This
meant that the agent must be capable of selling the
right fruit to the right customers at the right price, and
also of transforming the unripe bananas into ripe
ones. On the other hand, the agents depended on the
farmers to supply them with good-quality bananas
that were sought by their customers. This encouraged
interdependency between both the farmers and the
agent, and increased the importance of trust in their
relationships, since each party had little or no control
over the way the other did their job.
ACRC084.book Page 48 Monday, October 18, 2004 2:35 PM
Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
49
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
50
Individualism dimension
Hofstede’s individualism dimension refers to the
degree to which people in a country prefer to act as
individuals rather than as members of a group (Hof-
stede 1997). Indonesia scored 14 here, while Aus-
tralia scored 90, within a 0 to 100 range. What these
numbers tell is that Indonesians tend to be loyal to
their groups, while Australians tend to be more indi-
vidualistic. Loyalty to the group also means sharing
resources. This is well expressed through the peasant
solidarity existing in BSC1 villages, which focuses
on the wellbeing of everybody in the group, rather
than the individual.
As most chain members in the villages had been
living in the same village all their lives, they knew
each other relatively well. Like many other peasant
societies in Indonesia, they valued high solidarity
among themselves and emphasised the sharing of
resources, mutual help, and the right to subsistence
for everybody (Alexander 1987). Peasant solidarity
stems from the gotong royong community spirit long
existing in many villages in Indonesia (Koentjaranin-
grat 1967). Self-sacrifice for the common benefit is
highly appreciated, while individualism is highly dis-
approved of. Cooperation was the basis of social
interactions among villagers, with implications for
the way bananas were traded in the villages. The two
most common features of peasant solidarity shown
among BSC1 members in the villages were the right
to subsistence and trust.
Many in the villages believed that everybody
should be given a chance to earn money for their fam-
ilies. The common manifestation of this belief was
farmers’ acceptance of the practice by village whole-
salers of paying collectors a slightly higher price for
bananas compared to the prices given to farmers who
supplied directly to the same wholesalers. Whole-
salers who tried to take over other wholesalers’ col-
lectors by offering them higher prices were regarded
as greedy by villagers and were considered disre-
spectful of the other wholesalers’ right to earn
money. In the spirit of respecting his former col-
lector’s right to earn money, a wealthy farmer refused
to supply directly to a wholesaler (hence disregarding
a chance to earn more money for himself); rather, the
farmer preferred to share the increased prices offered
to him by suggesting the wholesaler buy his bananas
through the collector.
Such values in village life encouraged people to
trust each other. When selecting buyers for their
bananas, many farmers considered mainly the dis-
tance between their field and the buyers’ warehouses,
rather than whether or not the buyer was a trust-
worthy person. By default, farmers believed that as
fellow villagers, the buyers would respect their right
to earn money and act in the best interest, price-wise,
of both parties most of the time. In a system where
most transactions were not recorded formally (apart
from those by village wholesalers who dealt with
large quantities of bananas), trust acted as an assur-
ance that the trading relationships were intended to
bring profit for both parties.
Consequently, many farmers believed the act of
bargaining risked being interpreted as lacking trust in
the wholesaler’s judgement. Bargaining could also
be interpreted as a direct confrontation with the
buyers, which was usually avoided in a society that
respected harmonious relationships. Suppliers
(farmers and collectors) tended to believe that most
of the time they would receive fair prices according
to market prices in the city and they could accept
occasional delays in receiving price increases. So
strong was the trust that many suppliers did not feel it
necessary to search for updated market information.
They also believed that forcing wholesalers to buy
bananas beyond their prices might cause losses for
the wholesalers, which in the long term would disad-
vantage the suppliers themselves. Hence, suppliers
might prefer to trust the wholesalers’ judgement on
appropriate prices and risk the amount of profit they
could get in the short term in favour of long-term sus-
tainable relationships. After all, bananas were seen as
a means of providing security and stable income for
most people in the villages.
In line with Australians’ tendency to be individu-
alistic, a farmer in BSC2 would rate his business
wellbeing as a higher priority than the whole chain’s
success. Farmers’ attempts to bargain with their
agents over prices were not considered as a confron-
tation but as an honest expression of disappointment
in the agent’s failure to satisfy their expectation, and
as such, did not necessarily affect the relationships
negatively. Each stated openly what they expected of
the other to progress their business. However,
because of the nature of the industry, wherein trust
developed slowly over time, costs of switching
between agents were high; it was in the best interest
of both parties to maintain a good relationship
between them. As transactions were repeated, trust
also increased, resulting in decreased need to bargain
and increased need to maintain the relationship (cal-
ACRC084.book Page 50 Monday, October 18, 2004 2:35 PM
Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
51
culated trust). BSC2 farmers managed their risks by
consistently supplying a certain amount or per-
centage of their bananas to several agents regardless
of their daily price differences. Any extra bananas
they produced would, however, always be sold to the
agent who gave them better prices in the previous
week. This practice is also common among other hor-
ticultural producers in Australia (Batt 2003). Good
relationships with each agent were particularly crit-
ical to ensure a market for farmers’ bananas in times
of over-supply, which usually coincide with the
summer fruit season. Farmers who pursued a spot-
transaction approach might find difficulties mar-
keting their bananas during those times.
In contrast to the high switching cost in BSC2, the
switching cost in BSC1 was low. In BSC1 villages,
trust was considered to be pre-existing in any farmer–
buyer relationship due to the collectivist nature of the
relationships within the village community. This
trust, combined with the low production costs and the
guaranteed market for bananas, resulted in farmers’
confidence in their capacity for one-off selling or if
necessary, shifting permanently to another buyer.
However in practice, farmers did not switch easily or
supply more than one buyer consistently. The latter
was due mostly to farmers’ small production scale.
Even large-scale village wholesalers only supplied
regularly to a single agent in the city. The loyalty
ethos embedded in a collectivist society as in Indo-
nesia meant that anybody who consistently supplied
more than one buyer would be labelled as disloyal
and their relationships would tend not to last. Fortu-
nately, because of the competition for banana supply,
reliance on a single buyer would not necessarily
decrease a supplier’s bargaining power, but would
increase the risk should the buyer’s business col-
lapse.
Supply-chain literature suggests that high ease of
switching between buyers is not consistent with
attaining chain integration and interdependency.
However, in practice, chain members in the villages
have established supply-chain values through their
socio-cultural value systems. Pre-existing trust and
respect for each other’s right to earn money has inte-
grated the chain, particularly at the village levels, as
has the provision through the chain relationships of
an informal system of micro-credit. In this sense,
traders are established in the role of chain champions.
Implications
The creation of Western-style supply chains in Indo-
nesia to secure supply to large supermarkets may
challenge the established socio-cultural norms. A
focus exclusively on superior, standardised quality
would represent a shift away from the current situa-
tion where all bananas find a market. Such a shift
would potentially divert income flows which cur-
rently seek to ensure that all farmers and collectors
are able to earn income (effectively an informal
welfare system). Losing their access to informal
credit and to cash payments (through moving to
delayed payments which are the norm from super-
markets) would also be difficult for many small-
holders to sustain.
In the Australian case study, established cultural
values and risk-management strategies were shown
to favour multiple simultaneous supply-chain rela-
tionships by banana farmers. By contrast, Indonesian
banana farmers already operate within supply chains
with a high degree of trust and stability. Under-
standing how these current Indonesian supply chains
operate and the culture and the deep-rooted values
which underpin them, should assist both academics
and practitioners to adapt Western supply-chain
practices associated with the growing supermarket
sector in Indonesia. The opportunity is to design
supply-chain practices which better fit with the soci-
etal needs as well as meeting the needs of super-
market owners and their customers.
References
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Netherlands.
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Fearne, A. 1998. Building effective partnerships in the meat
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— 1997. Cultures and organizations: software of the mind.
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Koentjaraningrat, ed., Villages in Indonesia. Ithaca,
Cornell University Press, 386–405.
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qualitative data analysis system. Qualitative Sociology,
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of exchange in a highland Philippine economy. J ournal of
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empirical investigation into supply chain management: a
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Agriproduct supply-chain management in developing countries
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ACIAR Proceedings No. 119e
(printed version published in 2004)
53
Supply-chain Management and the ‘One Dragon’
Approach: Institutional Bases for
Agro-industrialisation in China
Sherrie Wei*
and Zhang Yanrong
†
Abstract
A supply-chain approach for food and fibre industries has been widely discussed and practised with well-
known success stories, particularly in developed countries. Interest in supply-chain management (SCM)
among developing countries has risen in recent years as they aim for international standards with a view to
exporting their food and fibre products overseas.
Since the economic reform of the 1980s, the Chinese government and academics alike have promoted a
method of SCM for agro-industrialisation: vertical integration at the grower and wholesaler level. They have
popularised the phrase ‘one dragon of production and marketing’ — the head and body of the dragon are
integrated. This type of integration has been encouraged in two ways: one way is for large distribution
corporations to integrate back with contracted growers, or for the corporation to extend its supply-chain
function to production. The second common method comes from government-assisted grower cooperatives
that extend their chain function from growing to marketing their products.
The first stage in developing a supply-chain methodology is to understand the network and the environment
of the supply chains involved. This study looked at the drivers of SCM in China and used the concepts of ‘new
institutional economics’ to look at the social infrastructure for SCM in China. In 2000, O. Williamson
described four levels for the economics of institutions: embeddedness, institutional environment, governance,
and resource allocation. We conclude that the conditions of social infrastructure necessary for SCM are yet to
be developed in China. It will only be possible to extend the ‘one dragon’ approach to SCM when the
institutional environment is ready to support SCM requirements.
A supply-chain approach for food and fibre indus-
tries has been widely discussed and practised, with
well-known success stories. Supply-chain manage-
ment (SCM) simply refers to the management of the
entire set of production, distribution and marketing
processes by which a consumer is supplied with a
desired product (Woods et al. 2002). Rather than a
transactional or dyadic-based (one-to-one) orienta-
tion, as traditionally used in conducting businesses,
the focus of SCM is on more coordinated supply
among agribusiness units for desirable products. The
approach offers an opportunity for supply-chain part-
ners to see where they fit into this bigger picture and
how they need to position themselves to take advan-
tage of emerging trends and developments.
At this stage, the supply-chain approach has been
successfully applied in many industries in developed
countries, such the Netherlands, United Kingdom,
the United States of America and Australia. Interest
* Department of International Business Management,
Chien Kuo Institute of Technology, Taiwan/School of
Natural and Rural Systems Management, University of
Queensland, St Lucia, Queensland 4072, Australia.
Email: <[email protected]>.
†
Department of Agricultural Economics, Gansu
Agricultural University, People’s Republic of China.
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edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
54
in SCM among developing countries has increased in
recent years as they aim to meet international stand-
ards with a view to exporting their food and fibre
products.
Harland et al. (1993) pointed out a decade ago that
the first stage in developing a supply-chain method-
ology is to understand the network and the environ-
ment of the chain involved. It is relevant to examine
the drivers or antecedents of SCM and its institu-
tional basis. Williamson’s (2000) concepts of ‘new
institutional economics’ are particularly useful in
looking at the social infrastructure for SCM in China.
Williamson described four levels for the economics
of institutions: embeddedness, institutional environ-
ment, governance, and resource allocation.
From the current study, we believe that the social
infrastructure for effective SCM is yet to be devel-
oped in China. The Chinese government’s recent
‘one dragon’ policy for agro-industrialisation is an
alternative to SCM that does not make as much
demand on social infrastructure as the SCM
approach. However, the outcomes of the ‘one
dragon’ policy have been mixed. Its experiences,
both positive and negative, are relevant for policy-
makers in other developing countries interested in
agro-industrialisation. This study makes particular
reference to the melon industry in western China as it
is a well-known crop in western China and has the
potential to regain the fine reputation it had in the
past.
Institutional Basis for SCM in China
China and drivers of SCM
Research has identified several drivers in the
external environment of developed countries that
contribute to a more consolidated approach between
agribusiness units vertically involved in the same
supply chain. They include:
• cost-price squeeze in the larger environment of
globalisation
• increased demand for ‘traceability’ for food safety
and quality
• increasingly specific demands by consumers for
certain attributes, such as ‘green’, or ethically
sound products.
Since its accession to the World Trade Organiza-
tion (WTO), China has been under pressure to open
up its agricultural markets, however this process is
happening very modestly. The drivers of SCM in
developed countries stated above are not imminent in
China as yet, despite warning and recurring com-
ments in the media and from academics.
Cost-price squeeze
China possesses lower costs of production, such as
land and labour costs. Although more farm house-
holds are now using chemicals and commercial
seeds, many still use minimal farm inputs to save on
production costs. The cost of food in China is gener-
ally inexpensive. Local agricultural products of low
to mid-range value still have a substantial share in the
Chinese market.
Traceability
In China, any initiatives pertaining to food safety
issues are currently imposed by the government
rather than demanded by communities. There is a
lack of effective consumer groups pressing for safe
foods and this situation is not likely to change in the
near future.
‘Green’ and ethically sound products
There is little awareness of ‘green’ (inflicting no or
minimal environmental damage) products among
Chinese consumers even though some provincial and
city governments have the procedures for certifica-
tion of such products. It is still difficult to gauge to
what extent consumers are willing to pay more for
products that are produced using environmentally
friendly practices. In China, there is currently no con-
sideration given to the ethical issues implicit in pro-
duction, such as worker exploitation, animal testing
etc.
In developed countries, drivers for SCM have
forced small players out of business and consolidated
supply-chain partners at each level. In China, there is
little consolidation at any level as yet. There is a
myriad of small players at each level of the supply
chain. For example, in the melon industry in Gansu
Province, there are many small-farmer households
with an average of 2/3 ha of honeydew melon per
household. At the wholesale level, hundreds of
traders travel to Gansu from other provinces during
the peak season seeking melon supplies (Zhang and
Wei 2003).
A lack of institutional basis for SCM in
China
Williamson (2000) described four levels in the
economics of institutions. The higher level imposes
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edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
55
constraints on the level immediately below. They are
summarised as follows:
• level 1, embeddedness — this consists of informal
institutions, customers, traditions, norms and
religion. It takes centuries to change in any
significant way. It is spontaneous and often non-
calculative and as such has no manifestation in
teleology.
• level 2, institutional environment — this consists
of formal rules of the game; for example, contract
laws. It takes decades to change. The purpose of
the rules is to get the institutional environment
right.
• level 3, governance —this is the play of the game.
It takes several years to change with a view to
getting the governance structure right.
• level 4, resource allocation — this relates to
continuous, everyday transactions which result in
prices and quantities. The teleology is to get the
marginal conditions right.
SCM and the embeddedness in the Chinese
society
In China, as in many other societies, informal rules
and values have a pervasive influence upon the long-
run character of the economy. There are various ele-
ments in Chinese society that impact on how busi-
nesses are conducted. A few of these are highlighted
below.
Low social status for traders — traditionally, the
Chinese had a hierarchy for different professions: the
gentry, the peasants, the labourers and lastly the
traders. There was a general low regard for traders or
businesspeople as they were perceived to be making
profits through tricky tactics. While today China is
actively involved in world trade, this low regard for
businesspeople is still entrenched in the culture. It is
somewhat accepted even today that businesspeople
need to have tricky strategies to outsmart their com-
petitors. There is little room for righteousness in busi-
ness, which the traditional Chinese culture
emphasised.
This perspective may not necessarily be the same
in other developing countries. One study found that
traders in Indonesia were normally well respected by
villagers for several reasons, such as their ability to
perform beyond the village level, their broader
knowledge of the industry, and their wealth (Wei et
al. 2001). The Chinese situation is quite different. In
the melon industry, for example, traders move
around the country for product supply in different
seasons of the year. Farmers are unlikely to respect
these wholesalers, as they do not know them well,
and the traders seek to purchase their produce at the
lowest possible price.
This prevailing attitude among the Chinese as con-
tributed has contributed, to a certain extent, to the dif-
ficulty of adopting a SCM approach to doing
business. In order to be prudent, business people gen-
erally adopt a transactional-based and short-term
dyadic relationship with their suppliers and cus-
tomers.
Homogeneity of ideas as the foundation for social
order — traditional Chinese concepts of social order
were based on homogeneity of ideas through a deep
socialisation process, rather than on a forced obedi-
ence to laws (North 1978). Such ideas of Confu-
cianism were deeply entrenched among the Chinese
people, forming a society with homogeneous ideas to
a considerable extent. Good government derived
from the people’s acquiescence to their roles in
society. Confucian scholar-officials known as man-
darins ruled China in the name of the Emperor until
the beginning of the twentieth century (Rajendra et
al. 1995). Confucian teachings have had great influ-
ence and control on the Chinese people, just as reli-
gion has done.
The implication for China in business relationships
is that the respect for law has not been nourished.
Agribusiness issues affected include the implementa-
tion of forward contracts, branding of products and
quality standards, to just name a few.
Collectivism, harmony and the disuse of conflict
— as part of the influence of Confucianism, the
Chinese culture emphasised collectivism and har-
mony. Empirical research in management areas
showed that the Chinese favoured harmony and com-
promise approaches to conflict rather than a direct
give-and-take collaboration (Kirkbride et al. 1991).
Research also showed that task conflict or conflict
management over issues reinforces interdependence
where people value each other’s abilities and
resources. Interdependence facilitates communica-
tion, exchanges and mutuality that in turn results in
collaboration between negotiators (Lawler and Yoon
1993). Parties who avoid conflict come to deny that
they need to rely on others or to resolve conflict to
move forward in a mutually beneficial way. Conflict
resolution may take the form of competition at
another level (Deutsch 1973).
The implication for SCM in China is that mutuality
and give-and-take between business partners is diffi-
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
56
cult to develop. Supply-chain learning based on
information exchange at all levels is difficult to
achieve.
Close ties between family and friends, but weak
social ties — the Chinese show clearly differential
treatment between people they do and do not know
well. Largely due to this influence, family businesses
are common among the Chinese, including those who
have been overseas for generations. The sociological
theory of weak ties suggests that people who are less
well known to each other are more likely to divulge
needed information. Many Chinese business owners
and farmers may acquire superfluous or useless
knowledge as they are securely linked to a few
sources of information.
In the melon industry in western China, farmers
regularly send their produce every season to their rel-
atives who work at government institutions or uni-
versities to sell to colleagues. This also occurs in the
bok choy industry where the expression ‘patriotic
bok choy’ refers to the purchase of bok choy by the
employees of these organisations.
In the supply-chain context, close working rela-
tionships with suppliers and customers who are not
friends or relatives can be difficult if partners cannot
perceive the mutual benefits of divulging needed
information. Insufficient attention to weak ties may
also contribute to a general reluctance to coordinate
across organisational boundaries. Potential innova-
tions involving more than one level in the supply
chain can also be difficult to achieve.
SCM and the institutional environment
The institutional environment refers to the formal
rules of the game that set the parameters for the play.
The definition and enforcement of contract laws are
important features. China has less than 100 years’
experience of being a republic. It was a traumatic
experience to break away from its past and establish
a new legal system. Moving from a centrally planned
economy to a market economy in the mid-1980s,
China has even a shorter history of utilising market
mechanisms. Its legal system to define and arbitrate
disputes is yet to be perfected. Practical details such
as what constitutes a contract, relationship parame-
ters, cooperative laws, and sanctions for default are
largely left to the individual parties involved. Busi-
ness relationships rely on goodwill, but this is not
backed-up by state laws.
In China, there have been incidences of strategic
behaviour of default by farmers when dealing with
agribusiness corporations in forward contracts. Indi-
viduals and firms have been often able to get away
with default without adequate sanction. Widespread
negative experiences have discouraged the use of a
more collaborative approach such as SCM in doing
business in China. As a consequence, business is con-
ducted on-the-spot on a cash basis with little after-
sale service or information feedback in the supply
chain. This has increased both the risks and costs of
doing business and reinforced a transactional-based
approach to doing business in China.
SCM and governance structure
The governance structure is the play of the game.
Approaches to business relationships, such as SCM,
may be described under this level. “Governance is an
effort to craft order, thereby to mitigate conflict and
realise mutual gains” (Williamson 2000).
As discussed above, cultural and institutional ele-
ments essential for a supply-chain approach are not
present in China. It is difficult for supply-chain part-
ners to realise the benefits of mutuality, exchange and
to learn to collaborate toward long-term goals. The
current Chinese governance structure in business
also lacks some drivers of SCM found in developed
countries. A successful chain often has an effective
‘channel manager’ — a role often taken by supermar-
kets in developed countries. While the supermarket
sector is growing slowly China, it is yet to become a
driver for SCM.
There is little horizontal integration at each supply-
chain level to facilitate exchange and collaboration.
The population of farmers numbers nearly one billion
in China. In the melon industry, there is also a large
number of small-scale wholesale businesses and
numerous retailers (Zhang and Wei, these proceed-
ings).
SCM and resource allocation
This level refers to day-to-day transactions and
continuous adjustments to prices and output. In the
Chinese melon industry, there are no defined supply
chains. Businesses are based on short-term profits.
Competition is predominantly based on price and
undifferentiated lower or mid-value products. The ad
hoc nature of business operations may protect
supply-chain partners from some unfavourable
market forces in terms of entry and exit flexibility.
Transactions may be efficient in terms of offering
lower prices, but not effective in terms of delivering
desirable products to consumers.
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The Chinese Approach of Vertical
Coordination: the ‘One Dragon’
Policy
In the mid-1990s, as China experienced oversupply
of agricultural products, agribusiness marketing con-
cepts received more attention. Both the government
and academics promoted agro-industrialisation
through vertical integration. The slogan ‘one dragon
of production and distribution’ was soon popularised
— the head and body of the dragon are integrated. In
practice, this refers to the vertical integration of pro-
duction and wholesale operations under a corporate
structure, thus saving the need for coordination
between farmers and wholesalers. Leading corpora-
tions, or ‘dragon-head corporations’, are charged
with the privilege and responsibility of ‘dragging’
along the body and tail.
The ‘one dragon’ policy of integrating production
and wholesale distribution is a step forward from pre-
vious agricultural policies that emphasised produc-
tion alone. Earlier policies resulted in an oversupply
of low-value agricultural products. The ‘one dragon’
policy is different from the previous ones in that the
emphasis is on distribution as well as production of
mid- or higher value products. This policy of supply-
chain integration has been pushed by administrative
intervention rather than pulled by agribusiness
actors.
The ‘one dragon’ approach to agro-industrialisa-
tion has been implemented in two major ways. One
common method has been for large distribution cor-
porations to integrate back through supply contracts
with farmers, or for corporations to extend their
supply-chain function to production under a corpo-
rate structure. An example of this is for leading cor-
porations to provide improved varieties of seeds to
farmers or farmer groups and then buy their produce
from those farmers. Under this method, the focus is
on integration at the upper end of the supply chain,
rather than coordination of the chain as a whole. The
expectation was that these leading corporations
would set an example that other corporations would
follow in other villages and hence lead to wide adop-
tion on the path to agro-industrialisation. But the
implementation of ‘dragon-head’ corporations has
had mixed outcomes in efficiency and effectiveness.
Many of the leading corporations were state-owned
enterprises or jointly owned, receiving subsidy and
preferential treatment. As a consequence, many of
them were not managed according to market princi-
ples and modern management concepts. In other
instances, farmers defaulted on their contracts for
short-term gains.
The second means of implementing the ‘one
dragon’ approach is a more broad-based one of
setting up state-directed farmer groups. These groups
were to extend their chain function from growing to
marketing their products by administrative interven-
tion. For the marketing, the groups sent their products
to a consolidator, which could be a relevant local
government office or a state corporation. The
produce was sold under the village name or brand.
The emphasis was on developing products over
which villages had a comparative advantage. It was
hoped that each village would best utilise its advan-
tage under the slogan ‘one village one product’.
Directing farmers into groups was well justified. It
is believed that China, with a huge rural population
and proportionately inadequate farmland, is not fit
for large-scale farming. While some of the rural pop-
ulation is moving to urban areas, this process is
occurring very slowly, as unemployment in urban
areas has been a serious issue. The problem of pro-
viding work to a huge number of surplus rural
labourers will be the greatest obstacle for large-scale
agricultural production. The agricultural policy of
directing farmers into groups serves multiple pur-
poses of production and marketing as well as rural
development. In practice, there are only a few
success stories of state-directed farmer groups — for
example, one group in Shouguang County of Shan-
dong Province has been able to supply vegetables to
supermarkets in Beijing. In some instances, failure
has been due to inadequate planning and monitoring,
such as farmers packing inferior products which con-
solidators are still obliged to accept as they have the
responsibility to take all supply from farmers.
Conclusion and Discussion
In the Chinese ‘one dragon’ of production and distri-
bution approach to agro-industrialisation, the gov-
ernment assumed a large role in the process. There
are two related assumptions in the ‘one dragon’
policy: the inability of supply-chain partners to coor-
dinate the supply functions of production and distri-
bution under market conditions; and the capacity of
the government to plan and implement these func-
tions effectively.
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The heavy state role in agro-industrialisation is
consistent with the lack of ‘soft infrastructure’ for
SCM, as discussed above. There is little expectation,
under the current institutional bases in China, that
agribusiness actors in an increasingly decentralised
market system can coordinate their supply-chain
activities to deliver products that meet market
requirements.
While product distribution was emphasised in the
‘one dragon’ policy, it was implemented through
administrative intervention. This required compre-
hensive planning, based on predictions of market
forces, including supply, demand, consumer trends,
and other market intelligence. Dragon-head corpora-
tions and farmer groups were able to set up quickly
through state directives. However, success stories
were isolated rather than widespread (Waldron et al.
2003).
In light of Williamson’s (2000) four levels of insti-
tutional bases discussed earlier, one recommendation
came through this study — that the government could
improve the institutional infrastructure for agro-
industrialisation if it works on the second level of
improving the institutional environment, and facili-
tates changes in governance structure (at the third
level). At the institutional (second) level, this
includes devising mechanisms for more effective
implementation of accreditation programs, quality
assurance standards (there are already hundreds of
them) and contract laws. At the third level, horizontal
integration at the farmer level may be encouraged
through establishing government-facilitated farmer
groups. However, the emphasis needs to be on self-
managed farmer groups with the government playing
only a facilitative role — it may be appropriate to use
participatory techniques as have been used by non-
governmental organisations (NGOs) and other aid
projects in China. Horizontal integration at the farm
level is likely to bring about consolidation at the
wholesale level over time by squeezing out uncom-
mitted wholesalers. This will improve the likelihood
of exchanges and collaboration between farmer
groups and wholesalers in China. This may be the
first driver towards SCM in China.
References
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North, R.C. 1978. The foreign relations of China. Belmont,
California, Dickenson Publishing Company.
Rajendra, N., Rajendra, V. and Barwick, R. 1995.
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edition. Sydney, Longman.
Waldron, S.A., Brown, C.G. and Longworth, J .W. 2003.
Transforming lives with livestock-based agribusiness. A
paper presented at the Australian Academy of
Technological Sciences and Engineering (ATSE)
Crawford Fund 2003 Annual Conference held in
Canberra, Australia, 13 August.
Wei, S., Woods, E.J ., Adar, D. and Singgih, S. 2001. West
Timor mandarin marketing case study — implications for
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O’Hare, T., Bagshaw, J ., Li, W. and J ohnson, G., ed.,
Postharvest handling of fresh vegetables. ACIAR
Proceedings No. 105. Canberra, Australian Centre for
International Agricultural Research, 49–53.
Williamson, O. 2000. The new institutional economics:
taking stock, looking ahead. J ournal of Economic
Literature, 38 (September), 595–613.
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chain management as beyond operational efficiency.
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Symposium on Tropical and Subtropical Fruits), 2, 425–
432.
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59
Analysis of the Constraints to Banana Industry
Development in Indonesia Using the
Supply Chain Concept
Setyadjit,* Ahmad Dimyati,
†
Erna Maria Lokollo,
§
Sri Kuntarsih,
¶
Rofik Sinung Basuki,** Ahmad Hidayat,
††
P.J. Hofman,
§§
S.N. Ledger
¶¶
and E.J. Woods***
Abstract
Banana is the highest production fruit in Indonesia. The fruit is sold mostly on the domestic market. A supply-
chain approach was used to analyse constraints to banana industry development in Indonesia, with a view to
determining research and development (R&D) priorities. Two supply chains were characterised through
participatory interviews and discussions involving the research team and the respective participants in the
chains. The first supply chain was a traditional banana supply chain from the Cikalong subdistrict, Cianjur
district, West J ava, supplying mainly the traditional markets in Bandung and J akarta. The second supply chain
was that of ‘company X’ supplying bananas to supermarkets in the J akarta, Bogor, Tangerang and Bekasi
metro areas. The chain characteristics were mapped to describe the flow of product, funds and information.
SWOT analysis was performed to identify areas for improvement in the chains. The suggested improvements
were compiled and classified under the six principles of supply-chain management (SCM): knowing
customers and consumers; creating and sharing value; getting the product right; logistics and distribution;
information and communication; and effective relationships. The research team and representatives of the
supply chain selected the five most-important issues for both supply chains. The results indicated that the most-
important constraint in both supply chains was getting the product right. This indicates that the current
emphasis of research and development on improving on-farm production and postharvest practices should
continue. However, there are other factors that need to be addressed, such as getting adequate supply of the
right product, and making sure that improvements do not impair sociological and other aspects of the chain.
* Indonesian Ministry of Agriculture, Balitpasca, J l.
Ragunan 29a, Pasarminggu, J akarta Selatan, DKI
J akarta, Indonesia.
†
Indonesian Ministry of Agriculture, Puslibang
Hortikultura, J l. Ragunan 19, Pasarminggu, J akarta
Selatan, DKI J akarta, Indonesia.
§
Indonesian Ministry of Agriculture, Puslit Sosial
Ekonomi, Pasarminggu, J akarta Selatan, DKI J akarta,
Indonesia.
¶
DitTanaman Buah, Indonesian Ministry of
Agriculture, Pasarminggu, J akarta Selatan, DKI
J akarta, Indonesia.
** Indonesian Ministry of Agriculture, Puslibang
Hortikultura, J l. Ragunan 19, Pasarminggu, J akarta
Selatan, DKI J akarta, Indonesia.
††
Dit Pengolahan dan Pemasaran, J l. Harsono, Gd D, No.
3, Pasarminggu, J akarta Selatan, DKI J akarta,
Indonesia.
§§
Agency for Food and Fibre Sciences, Department of
Primary Industries and Fisheries, Centre for
Subtropical Fruits, Nambour, Queensland 4560,
Australia.
¶¶
Agency for Food and Fibre Sciences, Department of
Primary Industries and Fisheries, Indooroopilly,
Queensland 4068, Australia.
*** School of Natural and Rural Systems Management,
University of Queensland Gatton, Gatton, 4343,
Australia. Current address: Executive Director,
Research and Development Strategy, Department of
Primary Industries and Fisheries, Meiers Road,
Indooroopilly, Queensland 4067, Australia.
Email: <[email protected]>.
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60
Production of banana in Indonesia is the highest of all
fruit crops. For example, banana production was
4,384,384 t in 2002, compared with 1,402,906 t for
mango and 968,132 t for citrus (Badan Pusat Statistik
2002). The main banana production areas are in J ava,
Sumatra, Celebes, Bali and, increasingly, Kali-
mantan. In J ava, production occurs in West, Central
and East J ava. West J ava includes the districts of
Sumedang, Tasikmalaya, Lebak and Cianjur. Central
J ava includes Cilacap, Grobogan, Brebes and
Kendal, and East J ava includes Bojonegoro,
Sumenep, J ember and Pasuruan.
The markets for banana are located in cities on the
producing islands, such as metropolitan J akarta,
Bandung, Semarang, Yogyakarta, Surabaya and
Malang for J ava. There are also holiday resort areas
like Bali and, potentially, neighbours like Singapore
which is close to Sumatra. Distance from the pro-
ducing areas to these markets can be short, such as
from West J ava to J akarta or Bandung, or long, such
as from Sumatra to J ava. There are two main types of
market: the traditional, long-established markets, and
the rapidly expanding supermarket businesses such
as Matahari, Carrefour, Goro, Hero and Kemchicks.
In Indonesia, there are two broad groups of
farmers. The smallholder farmer has 0.5–5 ha of
banana. These farmers often use low technology.
They are the main clients for the technology pro-
duced by the Indonesian Agency for Agriculture
Research and Development (IAARD), in close col-
laboration with extension workers. The large-scale
farmers have more than 5 ha (in one case up to 2000
ha). They often use more production and postharvest
technology than the small farmers. In some instances,
the technology is sourced through collaboration with
larger producers such as Chiquita and Del Monte.
Justification
The Indonesian government is eager to improve the
banana industry and incomes to growers. In the past,
emphasis has been mainly on improving production
practices. However, with the growing supermarket
sector, it is important to reassess the R&D effort to
ensure it is addressing the main areas that are
affecting the performance of the industry.
The focus of the Indonesian R&D effort is on
smaller growers and their supply chains. These
chains involve a large number of members, with both
economic and sociological characteristics. In devel-
oped countries, the supply chain or value chain is
increasingly being analysed and treated as the whole
unit rather than as individual components, on the
basis that the chain is an interdependence of members
seeking to develop a competitive advantage for the
whole chain (Woods 1999; Anon. 2003). However,
in developing countries the chains have rarely been
studied as a whole unit, but rather as individual links.
Methods
The method was developed by considering both the
concept of supply-chain management (SCM) and the
nature of the banana industry in Indonesia (empirical
evidence). The supply chain concept itself is more
established in the manufacturing industry sector than
in agriculture. Therefore, to apply the SCM concept
to the banana industry, the concept needed some
adjustment, so that it could be adopted in the circum-
stances applying in Indonesia. Previous experience
and the results of the desk study confirmed that eval-
uation of banana industry development required a
more-comprehensive and systematic approach. Pre-
vious banana-industry studies focused heavily on the
production sector (agronomy, cultivation etc.), while
only some touched briefly on socioeconomic aspects
(marketing, socioeconomics characteristics of the
producers and consumers etc.).
Relatively little has been written about the process
engendering chain management in Indonesian agri-
culture, especially in banana growing, where overall
production is scattered and involves very small-scale
farms.
At a first workshop, held at IAARD, Indonesia, the
concept of SCM and the empirical evidence came
together, which ensured that the final methods used
would be relevant to smallholders and would be par-
ticipatory in nature. The workshop was attended by
representatives of key members of the Indonesian
supply chains (small growers, traders, traditional
markets, and supermarkets), as well as members of
both the Indonesian and Australian project team. At
the workshop, the research team strategically identi-
fied case-study locations (Cikalong representing
SC1, and company X representing SC2). During the
workshop, the team identified the relevant partners
from each of the supply chains and collected baseline
information on the nature of banana supply chains in
Indonesia. It also gathered data on the banana
industry, including previous R&D activities.
As a result of workshop 1, the Indonesian team
developed the framework for their study. The frame-
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61
work was then refined during discussions with the
Australian project team to provide the final methods
used.
In the case studies, the Cikalong supply chain
(SC1) was chosen because it is the major producer of
banana to J akarta, the chain has the potential to
improve, with benefits to the members, and because
it is a good example of how the local government
(‘Pemda through Otonomi Daerah’) has enthusiasm
to take the initiative to create new value and greater
competitiveness for the banana industry in its region.
Company X (SC2) was chosen because it is inno-
vative and is a key driver in the chain to increase the
flow of benefits to the members from any improve-
ments made to the chain.
Information was gathered through individual dis-
cussions with members of the supply chains, and
through discussion groups with representatives of
several sectors of each chain.
At a second workshop, held at the Department of
Primary Industries (DPI), Brisbane, Australia, the
results of the two case studies were presented and dis-
DESK STUDY
– Field study
– J oint team meetings
WORKSHOP 1
(IAARD)
Indonesia
Discussion with the
Australian team; methods
finalised
CASE STUDIES
WORKSHOP 2
DPI, Queensland, Australia
Follow-up
Output
Output
– case study location
– develop partnership
– information system and database
(1) Supply chain, Cikalong
(2) Supply chain, Company X
(3) Other supply chains
Output
Figure 1. Outline of the methods used in the supply chain analyses.
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cussed. The workshop was attended by the Indone-
sian and Australian teams, as well as a trader
representative from Cibedug, Ciawi, Indonesia, and
one representative of local government from the
Agriculture Service of Cianjur District, Indonesia.
The objectives of the second workshop were to
develop and test the SCM method for the banana
industry. The six areas of SCM were used to develop
a list of potential improvements for both case studies
(SC1 and SC2), and prioritise these improvements in
relation to their potential to improve the industry.
Results and Discussion
Background data
Desk study
Information regarding the general overview, statis-
tical data, and previous research results on breeding,
crop management, crop protection, postharvest, and
agri-economics were collected during the desk study.
The results are briefly presented as follows:
Indonesian banana production is mainly by small-
holders, with the average area of farmers’ plantations
less than 0.5 ha. Banana production was about
4,384,384 t in 2002, about 68% of it from J ava.
Banana-production systems in Indonesia can be cat-
egorised into backyard, mixed crop, commercial
smallholder and agribusiness enterprises.
Indonesia is part of the centre of origin of banana.
There are more than 325 banana cultivars, with about
14 cultivars being commercially grown. Among
these are Ambon Putih, Ambon Lumut, Emas, Raja
Bulu, Raja Sere, Badak and Lampung (table bananas)
and Tanduk, Uli, Nangka, Kepok, Siem and Kapas
(plantain).
Although banana production has increased from
1997 to 2002, the production area has declined from
1997 to 1999. This has been caused by the outbreak of
several pests and diseases, especially in the main areas
of banana production such as Central Java, East Java,
Sumatra, and Sulawesi. The major banana diseases in
Indonesia are Panama disease (Fusarium wilt disease),
blood disease and moko disease (bacterial wilt disease).
Banana research has been receiving more attention
lately because of the increased domestic demand for
good-quality fruit.
Research in breeding
Very little research in banana breeding has been
done in Indonesia. This is understandable, considering
the wide diversity of banana germplasm existing.
Breeding has been done through hybridisation, soma-
clonal mutation and selection. The Indonesian Fruit
Research Institute (IFRURI) had established two cul-
tivars, Ketan-01 and Raja Siem, which are tolerant to
bacterial wilt. Two promising cultivars, i.e. Barifta 01
(mutant from cv. Barangan which is productive and
dwarf) and Sepatu Amora (tolerant to the vector of
bacterial wilt). The assessment of Fusarium resistance
via in vitro selection has also been done to find
resistant cultivars to this disease.
Crop management
The characteristics of banana production in Indo-
nesia are small-scale, minimum technological inputs,
high variability of the cultivars, little capital, no irri-
gation and planting material coming from suckers.
Crop protection
Reported pests are leaf curler (Erionatha thax L.),
pseudo stem borer (Cosmopolities sordidud,
Germar), stem borer (Odoiporus longicollis Oliv),
thrips (Chaetanapothrips signipennis), scab moth
(Nacoleia adasema), and nematodes such as Rhado-
pholus similes Cobb, Pratylenchus spp., Helicotyle-
chus multicinctus Cobb and Meloidogyne spp.
The main diseases are Fusarium wilt, bacterial
wilt, leaf spot/black sigatoka and bunchy top. The
other diseases are anthracnose, Panama, Cordona and
rotten young fruit.
Postharvest
In developing postharvest technologies for Indo-
nesia, there are still some gaps for research such as
the characteristics of plantains, more applied
research on improvement of ripening, and disease
resistance of the peel. Socioeconomic aspects have
received little attention.
Agro-economy
A study of agro-economics by Sudaryanto et al.
(1992) described the circumstances of the interna-
tional and domestic markets in mainly J akarta, and
reported two different marketing channels for
bananas coming from Lampung and from South
Sumatra. This study also investigated the marketing
margin in West J ava and gave examples of the flow
of bananas from the major producing centres in West
J ava to a major consuming centre in Bandung.
Field study
Both teams visited the Lampung banana-pro-
ducing centre to collect additional information. They
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visited the regional agriculture authority, Nusantara
Tropical Fruits (NTF), a small farmer at Padang
Cermin, West Lampung, a banana crisp company,
and a truck driver at Bakahueni port (connecting J ava
and Sumatra). One aspect of improvement was more
rapid movement of trucks through the port.
Workshop 1
Recommendations from the workshop were as fol-
lows:
In developing the banana industry in Indonesia, a
breadth of information is required, such as knowl-
edge of banana production, including the agro-eco-
logical zones (AEZ), farmer behaviour and
organisations in relation to improving knowledge
and practices, and research on production, posthar-
vest and processing practices.
There were two types of farmer in Indonesia:
large-scale farmers such as NTF, and small-scale
farmers. Large-scale farmers need little assistance,
whereas the small farmer still requires assistance.
Small-scale farmers had characteristics such as sub-
sistence with little technological inputs, scattered
location, low productivity and low-quality product.
The main pests and diseases are Fusarium and bacte-
rial wilt, there are many varieties of bananas grown,
and low adoption of research results.
Improvement of postharvest handling practices
cannot be made without considering on-farm prac-
tices. There are still research gaps. Banana-crisp
processors can produce high-quality product and
establish good markets even though the quality of
fresh produce remains low.
The percentage of the retail price received by the
farmer was considered to be low. Thus, increasing
the market or retail price in the market may not
increase the price to the farmer.
Cikalong, Cianjur was recommended as a location
for a case study since Cianjur is a model for banana
agribusiness development and there are loosely
organised and structured grower groups ‘Gapoktan
Serba Pisang’.
Supply-chain case studies
Cikalong (Cianjur) supply chain (SC1)
Product flow. Bananas are distributed from
farmers to consumers in wet markets and supermar-
kets in the big cities through village collectors, large
traders or supermarket suppliers. Some farmers sold
their best-quality product directly to street vendors.
The percentages of product sold to the wet markets,
supermarkets and street vendors are ca. 95, 4 and 1%,
respectively.
Cash flow. Village collectors were the primary
buyers of farmers’ product. They bought the product
from farmers at harvest in cash, or made an advance
payment before harvest and the balance at harvest.
Many village collectors received funds from large
traders in the consumer markets, but some used their
own capital.
Information flow. The main information shared by
every member of the chain was the quality required
by customers and consumers, both wet market and
supermarket. The quality requirements were deter-
mined by the variety and maturity. The highest prices
were for varieties Tanduk and Raja Sereh, followed
by Raja Bulu, Ambon Lumut, Muli and Nangka in
that order. For all varieties, the more mature the har-
vest, the higher the price.
Information about price was limited to the large
trader level. Collector–traders and farmers were price
takers.
Although farmers knew that the price received for
bananas was influenced by variety and maturity,
most of them did not direct their production strategy
to fulfil consumer demand because of the cash
needed and lack of security. Farmers preferred to
grow the Muli and Nangka varieties because of their
early maturity and high yield, so that they can get a
cash return quickly. Farmers were reluctant to delay
harvesting to increase maturity because of the risk of
theft of the crop.
Activities to add value. Farmers often harvested
and sold their banana before they were mature. Col-
lecting agencies and chain stores and wholesalers do
most of the ripening, grading etc., but generally the
collectors do very little of this (only about 5%). Two
reasons why growers do not ripen their crop are
because they get little increase in price for adding
value, and ripening too early in the chain will result in
transporting ripe fruit with greater risk of damage.
Collectors were paid for the transportation costs from
the farmers field to their base.
Services. Credit arrangements are the major
service collectors provide to growers. Information is
not a major part of the services offered.
What determines price? Size, variety, maturity
(usually based on how angular the shape is) and ripe-
ness (if the fruit are starting to colour) are the main
determinants of price, with variety and size being the
most important.
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Relationships. Very strong relationships exist
between the collecting agent at the subdistrict and
district level, and between the district collector and
the wholesaler. Several of the relationships are weak,
but this does not always mean that they need
improving.
How value is created. Most of the value is added
from the collecting agency at district level and
onwards. Most of the bananas stay on the bunch until
they reach the wholesaler.
Key decision-makers. Wholesalers are the main
determiners of price, with decreasing influence from
retailers, traders and, last of all, the growers. Growers
have very little control over price.
SWOT analysis: Cikalong
Strengths. There is a strong capacity to expand the
supply chain, because there are many potential
players in the supply chain and there is the potential
to increase the number of players. There is also the
capacity to increase production. Farmers are familiar
with growing bananas, so they could increase pro-
duction if they are rewarded for it. Local government
is ready to support the expansion of banana produc-
tion because banana is one of the top government pri-
orities for further development. It is also the vision of
the district government to expand banana production
in the district. There is an ‘association of banana
farmers’ in Cikalong, but this is not active at the
moment. There are no such associations in other pro-
duction regions.
Weaknesses. Poor cultivation techniques is a major
issue. Because of the lack of capital, the farmers
would need to combine resources to buy fertilisers
and other inputs.
In 2001, a training program organised by the Agri-
culture Service’s office instructed growers on the
benefits of fertilising, but the farmers said it would be
of little benefit since the plants would not produce
good yields. They would prefer to apply the fertiliser
to the higher-value inter-cropped crops directly.
Opportunities. There is an opportunity to develop
larger banana orchards to increase the production of
high-quality bananas for the supermarket trade, pos-
sibly by establishing a larger management structure
for banana growers in the same area. This could be on
a village basis or involve several villages. There is
support available from local government to assist
with this.
The potential market for processed banana could
be expanded, including processing of other banana
varieties. At the moment, only one variety is proc-
essed.
Threats. Among the threats are poor regulation to
restrict the movement of diseased plants, competition
from banana imports, and the discriminatory policies
on banana trade of European countries such as the
application on higher import tariffs for non-EU coun-
tries.
Company X supply chain (SC2)
Product flows. Previously, bananas from Cikalong
and Lebak were delivered to the collectors in
bunches. However, beginning in 2003 Company X
requested some of the collectors to supply fruit in
hands, so as to reduce fruit damage and allow better
packing of bananas in the trucks and reduced wastage
at the markets. Fruit from Cikalong and Lebak repre-
sent about 70% of the fruit supplied to Company X,
with the remainder coming from several growers
from Cicurug. These growers have about 2–5 ha of
banana, and Company X works closely with these
growers to produce high-quality fruit. On occasion,
Company X obtains banana fruit from the wet
markets when normal supplies are low.
Company X separates the fruit according to quality
at its main holding facility.
The fruit are delivered to the supermarkets as
hands in plastic crates.
Some 55–60% of Company X fruit goes to about
five medium-size supermarkets. The company does
not supply the larger supermarkets such as Hero and
Carrefour because it does not have a large enough
supply. Some 5–10% of its fruit go directly to street
vendors. Rejected fruit are sent to traders who supply
fruit stalls, and also to local wet markets.
The retail shelf space given to local banana is very
small because of the low supply of good-quality fruit,
even though there is sufficient consumer demand to
justify increasing the shelf space. Thus, there is a
large gap between supply and demand for good-
quality local banana varieties. As a result, the super-
markets give more shelf space to Cavendish and
imported bananas.
Company X has started to process some of the
rejected bananas suitable for processing. The proc-
essed product is sold directly to food stalls.
Cash flow. Company X usually pays cash directly
to the collectors on delivery of the banana. For the
growers that deliver directly to Company X, because
they are larger growers, payment is normally one day
later by bank transfer. One problem is that supermar-
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kets promise a delay of 2 weeks between delivery and
payment, but this has sometimes blown out to 6
weeks.
Prices paid by the supermarkets are set by negoti-
ation between Company X and the supermarkets. It is
not a fixed price. However, there is a fixed price for
its processed product.
Some of the supermarkets require a payment from
the trader to secure shelf space. This is usually a one-
off payment at the beginning. Every 3 months the
supermarkets asks the traders to join a discount (spe-
cials) program. The supermarkets determine the price
of specials and the traders have to comply, sometimes
taking a loss.
Services. Collectors collect fruit from the growers
and deliver to Company X. Some of the collectors are
starting to de-hand. Sometimes the collectors actu-
ally do the harvesting. Some growers harvest them-
selves and deliver to the market directly.
Company X provides education to collectors and
traditional wet-market sellers on how to handle
banana to prevent damage, and also some training to
growers on how to grow well and how to the bananas
for quality (in Lebak only). Company X supplies pro-
motional material to all of its outlets. It transports the
fruit to the supermarkets, and collects fruit from its
larger growers and, occasionally, from the traditional
markets.
Company X does not consider that it is its respon-
sibility to educate its supply chain members, but con-
siders it to be the role of the provincial and district
public-sector staff.
Information flow. Company X considers itself as
an ‘information resource’. Company X had very
good information flow to all supply chain members
such as collectors, traders at the wet markets, and
traders in Ciawi. Company X also collects informa-
tion from supermarkets. However, the information
flow was strong only between Company X and the
street vendors. Between the company and supermar-
kets, traditional markets, and consumers of processed
and fresh product information flow was quite good,
while with traders it was marginal.
How effective are the information flows? The
closer one gets to the growers the less effective is the
information flow.
Having effective grower groups would make it
more worthwhile and efficient providing information
to these groups. Also, the grower groups could also
create a larger ‘production unit’, which could
improve security and production practices.
How well does Company X know its customers?
Company X knows its customers well, but it needs to
mobilise its collectors to better educate the growers.
The government will facilitate this mobilisation. If
the company knew its supermarket clients better it
might not have to pay the shelf fee and payment for
fruit might become more rapid.
How effective are the relationships? Relations
between Company X and growers do not exist,
except for the two larger growers that live near its
facilities. These are the ones that provide good-
quality fruit.
How right is the product? There are always quality
and quantity problems with respect to local varieties
for the supermarkets. The supply of the lower-quality
fruit required for the wet markets is not a problem
because of its greater supply.
Some of the larger food caterers would also like to
include bananas in their food packs for factory
workers etc., but they often cannot get enough good-
quality fruit. This may be a potential, new client
group.
Company X SWOT
Strengths. Strengths are the education provided by
Company X to its supply chain members, good rela-
tionships with supermarkets and collectors, reputa-
tion for supplying good-quality fruit, short distance
to the markets, good leader to develop the chain,
good knowledge of fruit-quality requirements, good
relationships with government institutions, a good
management team and good collectors.
Weaknesses. Every supermarket in Indonesia has
its own quality standards. There needs to be more
standardisation.
Opportunities. There are nevertheless opportuni-
ties to provide better education to the supply chain
members. It is not enough to just tell the farmers how
to improve, there needs to be someone living in the
villages to continually assist the farmers. Company X
would like to do this but it needs assistance to do so
from government or non-government organisations.
Workshop 2
The second workshop was attended by the full
Indonesian and Australian team, including Dr
Dimyati (Director, Centre Research for Horticulture)
and Dr Winarno (Director, Fruit Production Directo-
rate), Ms Mega (Agriculture Service, Cianjur Dis-
trict), Udih Samanhudi (banana trader/supplier
representative for the wet market, Cibedug, Ciawi)
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and Dr Greg J ohnson (ACIAR) (see Ledger et al.
2002). The objective was to develop and test the
SCM method for analysing banana-industry develop-
ment in Indonesia using the information collected in
the above activities, with a view to identifying and
prioritising the medium and long-term R&D require-
ments based on the market requirements and oppor-
tunities of the banana industry as a whole
agribusiness unit.
The information gathered during the desk and field
studies was presented. During the ensuing discus-
sions, areas for improvement were listed and grouped
under the six principles of SCM: knowing customers
and consumers; creating and sharing value; getting
the product right; logistics and distribution; informa-
tion and communication; and effective relationships.
Each workshop attendee then voted for what they
considered to be the five issues that would have the
biggest impact in improving the supply chain. The
results are presented in Tables 1 and 2.
For the Cikalong supply chain, the issues that
received the highest votes were:
Table 1. Voting on steps to improve the Cikalong banana supply chain.
Improvement Number of persons who voted
Supply chain
members
Indonesian
team
Australian
team
Getting the product right
Village local management – grower groups to increase security, supply
and quality
Improve standardisation of product
Expand area of production; existing banana growers and additional
growers
Improve growers knowledge and practices; cultivation techniques,
immaturity, orchard management
Improve local varieties – breed new varieties
Improve postharvest handling
• loading and unloading systems
• collecting places (temperature, sun exposure)
• handling of bunches.
3
1
2
2
7
1
1
5
7
2
1
2
6
Knowing customers and consumers
Better information about consumers
Develop niche markets
Develop new processing markets e.g. baby foods and chips
Develop export markets e.g. to the Middle East and China etc.
1 3
2
3
1
1
Creating and sharing value
Growers capture more value – de-hand – ripen 1 4
Logistics/distribution
Agribusiness terminal
Improve infrastructure – e.g. roads.
Improve delivery system – reduce time lag
1
2 3
1
2
Information/communication
Better information from wholesaler – market intelligence signals
Better information to growers – standards
Better information from grower up the chain
1 1
3
2
3
2
Effective relationships
Improve wholesale × grower interaction. 1 3 1
Other
Better regulation to protect Indonesia from imported fruit 1 3
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1. village local management – grower groups which
could increase security, supply and quality (17
votes)
2. improvement of postharvest handling, loading and
unloading systems, collecting places – temperature,
sun exposure, and handling on bunches (13 votes)
3. all actors in the supply chain need to participate in
knowing about and achieving the necessary
standards for the particular markets (10 votes).
For Company X the issues that received the highest
votes were as follows:
Table 2. Voting on steps to improve the Company X banana supply chain.
Improvement Number of persons who voted
Supply chain
member
Indonesian
team
Australian
team
Knowing customers and consumers
A better understanding of what consumers want
Educate consumers to recognise and demand higher quality
If growers knew the desired product and had the necessary technology
and resources (Rp) they could decide whether to respond
Need to expand market for quality bananas (the market segment is so
small it limits investment, despite the opportunity)
2
1
1
1
4
1
2
4
1
2
Creating and sharing value
Need more Company Xs (innovative)
Opportunity to increase supply to street vendors, traders, caterers (new
customers)
Need collectors to de-hand to increase supply (may be done by
terminals)
Indonesian banana supply chain needs to be competitive with imported
bananas/other fruit 1
4
6
1
1
2
1
Getting the product right
Increase all aspects to get high quality
Ability to ripen bananas more quickly and consistently
Improve supply in low-supply months (5 months)
All actors in the supply chain need to participate in knowing about and
achieving the necessary standards for the particular markets.
1
2
1
1
1
2
5
3
1
1
4
Logistics and distribution
Improve packaging of de-handed bananas to prevent damage during
transport 2 2
Information and communication
Need to educate/empower traders, and through them the growers, to
increase high quality supply
Increase information flow to small growers by forming grower groups
for improve information flow and crop management 1
1
3
6
4
Effective relationships
Note system dynamics – not just commercial opportunities 2 1
Potential improvements for those who support/facilitate chains
Government should facilitate easy access to financial institutions able to
assist
Many actors limited by lack of access to capital (Company X,
collectors, growers)
Better environment for new investments (incentives for new plantations
from local government)
2
1
3
3
3
4
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1. all actors in the supply chain need to participate in
knowing about and achieving the necessary
standards for the particular markets (10 votes)
2. increase information flow to smallholder growers
by forming grower groups to improve information
flow and crop management (8 votes)
3. government should facilitate easy access to
financial institutions to assist.
For both supply chains (Cikalong and Company
X), most of the issues receiving the highest votes
related to ‘Getting the product right’, using
approaches such as:
1. formation of local grower groups improving post-
harvest handling (loading and unloading systems,
collecting places, and handling of bunches)
2. active participation of all actors to agree on the
necessary standards for particular market segments.
It was interesting to note similar voting patterns
between the Indonesian and Australian team members.
Conclusions
Analysing the Indonesian banana industry using a
supply-chain concept provided many insights in rela-
tion to constraints to industry development. In addi-
tion, the SCM concept represents a conceptual
framework within which strategies could be devel-
oped to analyse the competitiveness of the banana
industry, and to identify and prioritise the R&D activ-
ities required to improve the banana industry.
According to Indrajit and Djokopranoto (2002),
there are several stages in the development of supply
chains:
1. independence between among the members of
chains
2. integrated planning among several members of the
chain
3. integrated planning and monitoring
4. supply chain integration in planning, implemen-
tation and monitoring.
On the basis of the information collected in this
study, the two supply chains examined were at stage
two.
The methods used in this study could be improved
by getting more information and input from all
members of the supply chains, and involve their rep-
resentatives in the decision process for identifying
the main constraints. In the Indonesian context, this
input may be better obtained by having one-on-one
discussions with members, or discussion groups with
peers. Discussions with several sectors of the chain
may result in reduced participation from those
sectors perceived to have less ‘power’ in the chain.
The concept developed in this study is being
applied to other horticulture situations in Indonesia.
The SCM concept is being combined with soft-
systems methodology to analyse problems and solu-
tions in the citrus and pepper industries in eight prov-
inces, and the concepts are being presented and
discussed in a number of different forums. Continual
assessment and improvement of these methods
would be valuable.
Acknowledgments
We thank ACIAR, the Department of Primary Indus-
tries and Fisheries (Queensland) and the University
of Queensland for financial support.
References
Anon. 2003. Value chains, what are they and how do you
identify them? <http://www.agrifood.info>.
Badan Pusat Statistik 2002. Bulletin Perdagangan Luar
Negeri, Februari 2000.
Indrajit, R.E. and Djokopranoto, R. 2002. Konsep
Manajemen Supply Chain, Cara Baru Memandang Mata
Rantai Penyediaan Barang, J akarta, GRASINDO, 264.
Ledger, S.N., Lindsay, S., Hofman, P.J ., Woods, E.J . and
Singgih, S. 2002. Company X supply chain workshop.
23–24 J uly 2002. South J ohnstone, Queensland,
Australia. Centre for Wet Tropics Agriculture.
Tahlim Sudaryanto et al. 1992. Review on banana marketing
in Indonesia.
Woods, E.J . 1999. Supply chains: what are they and why be
interested? ACIAR Postharvest Technology Program
Internal Workshop No. 20, Canberra 1–2 December
1999. View at <http://www.linkingfarmerswith-
markets.net/index.php?p=3&id=3>.
Woods, E.J ., Wei, S., Singgih, S., and Adar, D. 2000. Supply
chain management as beyond operational efficiency.
Acta Horticulturae, 575, 425–431
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69
Improving the Marketing System for Fresh Produce
from the Highlands of Papua New Guinea
John Spriggs,* Barbara Chambers,* Carole Kayrooz,* Ernest Natera,
†
Norah Omot
§
and Margaret Vatnabar
¶
Abstract
As the title suggests, the aim of this research project is “to improve the marketing system for fresh produce
from the PNG Highlands for the benefit of all stakeholders.” Note that the aim is not to do a study about the
problems of marketing fresh produce, but rather to bring about change that intentionally will improve the
marketing system. As such, the methodology being used for this project does not follow the traditional
scientific research approach, but rather follows in the mould of critical action research. In this paper, we
provide an introduction to the problems of the marketing system for fresh produce in the Papua New Guinea
(PNG) Highlands. This is followed by a discussion of the methodology used in the project, how the project has
unfolded during the first year (it is a 3-year project) and, finally, the conclusions are given.
Papua New Guinea (PNG) has been struggling in
recent years. If we look at the index of economic
prosperity (Figure 1) we can see that the average
person is not as well off today as they were a few
years ago.
The International Monetary Fund (2003) recently
blamed this on:
• growing governance and law-and-order problems
• a lack of new mineral exploration activities
• deteriorating physical infrastructure in the rural
areas (that has inhibited agricultural production)
• the Asian crisis (that has reduced export demand).
Given the prospect of further declines in the
mining sector, the National Government of PNG is
looking to other forms of economic activity to help
reverse this downward trend in prosperity. Chief
among these is an export-oriented agricultural sector,
of which fresh produce is an important part. Fol-
lowing the above-mentioned International Monetary
Fund report, it also recognises that a major difficulty
in achieving this is the deterioration of physical infra-
structure in rural areas.
The National Government’s strategy for the future
prosperity of PNG provides an important backdrop to
this project, but this project is more than just gener-
ating increased gross domestic product (GDP) for
PNG. It is about generating cash income for the
people who most need it.
The PNG Highlands region is home to more than
half the total population of PNG. It is also a region in
which rural poverty is widespread. Cash income is
required by these rural families to provide for such
things as education and health care. The production
and sale of fresh produce of the PNG Highlands rep-
resents one of the few sources of cash income for a
very large number of rural families. Moreover, the
production and marketing of fresh produce is very
much an activity in which rural women can and do
play an important role. This is significant because
* Institute for Regional Community Development,
University of Canberra, Canberra, ACT 2600, Australia.
Email: <[email protected]>.
†
Fresh Produce Development Company, Goroka, PNG.
§
National Agricultural Research Institute, Lae, PNG.
¶
National Research Institute, Port Moresby, PNG.
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70
cash income in the hands of rural women is much
more likely to be used on family needs than is the
case of cash income in the hands of rural men.
The fresh produce grown in the PNG Highlands is
dominated by traditional foods like sweet potato and
taro. But increasingly, farmers are turning to Euro-
pean-style vegetables, such as potatoes, cabbage, broc-
coli, cauliflower, capsicum, spring onions, zucchini,
carrots, tomatoes, and lettuce. The PNG Highlands
region is unique in that it is one of the few places in the
region that has a temperate climate and where high-
quality European-style vegetables can be grown
organically all year round. The region has the potential
to meet the needs not only of consumers in the High-
land area but also of the coastal cities of PNG as well
as to supply offshore markets. According to prelimi-
nary interviews with stakeholders in the fresh-produce
industry (both buyers and sellers), the main drawback
in fulfilling this potential is the marketing system.
Many farmers told us that they know how to grow
fresh produce but they do not have the markets. Super-
market managers in Port Moresby told us that they
would love to buy more fresh produce from the High-
lands but they were unable to get a consistent supply of
good-quality produce. A fairly general comment we
heard was that the marketing system was fragmented
with poor coordination and communication between
the different players in the marketing system.
Methodology
This is not the first project to examine the marketing
system for fresh produce in the PNG Highlands.
There have been several such studies, including Scott
and Atkinson (1989), Fresh Produce Development
Company (1997), Burden (1998) and Epstein (2000).
These studies all end with recommendations for
change, but do not actually engage the change
process per se. Hence, their capacity to make a dif-
ference is limited. Methodologically, they are exam-
ples of positivistic science in which hypotheses are
tested and conclusions drawn in a linear research
process. Positivistic science is a powerful approach
when dealing with natural phenomena such as plants
and animals. However, most social scientists would
regard this as inadequate when attempting to research
human social behaviour.
The present project is different in that engaging the
change process is an integral part of the project. To
achieve this, the project adopts the methodology of
action research. Action research involves a cyclic
process of:
In this approach, the research team generates
understandings of the marketing system (reflection/
research) and, working with stakeholders in the
system, facilitates change (planning and action). In
its facilitative role, the research team is cognisant that
the process itself and any changes to emerge from the
process are owned and directed by the stakeholders.
Action research has been widely used in the fields
of social change and education (including agricul-
tural ‘extension’). However, the use of action
1988
100
0
200
300
400
500
600
1990
K
i
n
a
1992 1994 1996
Year
1998 2000 2002
Figure 1. Economic prosperity in Papua New Guinea (real GDP per
capita), 1990–2001.
Research Planning Action Reflection
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research in exploring and improving supply-chain
relationships is relatively new. We have used it in
previous research (Spriggs et al. 2002) and there is
some work ongoing in the United Kingdom (e.g. at
Sheffield University).
During this 3-year project, we expect to pass
through two or three phases (action research cycles or
spirals). During the first phase we expect to:
• carry out a comprehensive situation analysis
(mapping) of the marketing system as it currently
exists and examine potential areas for
improvement (this is the initial research element
of an action research cycle)
• facilitate a workshop comprising all the
stakeholders in the marketing system for fresh
produce — this workshop is carefully constructed
to encourage collaborative discussion of problems
and strategies and ends with an action plan for
change (this involves the planning and start of
action of an action research cycle)
• develop and work with a steering committee of
stakeholders to ensure that the action plans
determined by the workshop participants are
carried out (this is the action element of the action
research cycle)
• hold a meeting of the research team with the
steering committee to reflect on the actions taken
and to develop the next phase of research (this is
the reflection element of the action research
cycle).
Project Work to Date
The project began with a 2-week training program for
the for four PNG members of the research team. The
training program was conducted at the University of
Canberra and covered the topics of marketing,
supply-chain management, action research and
workshop facilitation. The methodology of work-
shop facilitation was used during the training course
to determine an action plan for the situation analysis
(i.e. the mapping exercise which is the research
element of the first phase of the action research
cycle). This action plan consisted of a number of
activities including:
• background data (history, types of fresh produce,
quantities, prices)
• environment (economic, government, socio/
cultural, technological, natural)
• process mapping (data loggers, process record)
• profitability analysis (marketing costs)
• semi-structured interviews (all stakeholders)
• consumer questionnaire (at supermarkets).
During the first year of the project, all of these
activities were carried out except for the consumer
questionnaire. The other activities provided valuable
information, which was provided to the various
stakeholder participants of the first workshop.
1
The
following is a brief overview of the findings of that
research.
• Broadly, there are two types of marketing system
for fresh produce from the PNG Highlands: the
open market and direct marketing. The open
market is often called the informal market.
Farmers set up a stall with their produce and
buyers come around and purchase their
requirements, but there is no long-term
relationship between buyer and seller. Direct
marketing is where a final buyer (e.g. a
supermarket) buys directly from a supplier without
going through the open market. In the latter, the
buyer and seller build up a relationship, which
tends to lower transaction costs.
• The fresh-produce sector in PNG is currently
restricted to the domestic market; there are no fresh-
produce exports. The present marketing system is
fragmented, with poor communication and
coordination and little attention to quality control.
Currently, the domestic marketing system is not in
sufficiently sound shape for PNG fresh produce to
be competitive in the very demanding export
market. From a business strategy perspective, it
makes sense to focus first on improving the
domestic direct-marketing system with a view to
using this improved system as a springboard to the
export market. The direct-marketing system has the
potential to become an appropriate model where the
critical characteristics of consistent quality and
reliability of supply can be encouraged in a way not
possible with the open market. Within this direct-
marketing system, sales to local supermarkets are
most important, as they are the most demanding
buyers of fresh produce.
• Special attention needs to be paid to the potential
importance of women in the fresh-produce
marketing system. They are heavily involved in
1
At the time of the Bali workshop, the workshop for
stakeholders of the fresh produce marketing system was
only in the planning stages. It has since been successfully
concluded and is discussed briefly on page 73.
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the production of fresh produce and are also
importantly involved in selling at the local open
markets. However, concerns about their physical
security and lack of facilities in the open markets
inhibit their greater participation. An earlier
workshop on Women’s Voices in the Food Chain
(run by the National Agricultural Research
Institute) (NARI, undated) showed that women
were experiencing significant problems at urban
and rural markets — lack of toilet facilities, no
running water, no shade from the hot sun etc. It
also revealed that women tend to be marginalised
in PNG society.
• The Fresh Produce Development Company
(established by the National Government with the
aim of assisting in the development of the fresh-
produce industry) has begun working with grower
groups to provide training in production and
postharvest management of the produce. It has also
assisted them in finding buyers for their produce.
• The two main supply chains for moving fresh
produce from the Highlands to Port Moresby
supermarkets has been by road/sea and by air.
There is no road leading from the Highlands to
Port Moresby. Thus, produce must either be
airfreighted or transported by road to Lae on the
north-eastern coast of PNG and then shipped by
boat from Lae to Port Moresby. Airfreight is the
more expensive (at about PGK2/kg), but may be
cost-effective for high-valued, highly perishable
fresh produce. The flight time is less than 2 h.
Road/sea transport is less expensive (at about
PGK0.60/kg) and, if all goes well, takes a
minimum of 3 days.
• The potential comparative advantage for the
Highlands is in organically grown, temperate-
climate fruits and vegetables. However, most
temperate-climate vegetables are highly
perishable and the optimum temperature for
storage after harvest is between 0°C and 4°C. This
creates a problem, as refrigeration is expensive and
only professional marketers currently have the
capacity for this. There is a rough rule of thumb
that for every 10°C above the optimum, shelf life
drops by a factor of two to three. For example, with
broccoli, the ideal storage temperature is 0°C and
at this temperature, the shelf life is about 24 days.
At 10°C, the shelf life drops to about 8 days, and at
20°C, the shelf life is about 3 days. At 30°C, the
shelf life is about 1 day.
• Currently, there is one significant professional
marketer of fresh produce by road/sea and one by
airfreight. They both use refrigerated transport to
maintain the quality of their produce. There are
also many growers and grower groups marketing
their own produce to Port Moresby without the
benefit of refrigeration. They either take small
loads with them on the plane or they take produce
by road to Lae (on unrefrigerated trucks) and then
put it on a container ship for the journey to Port
Moresby. Figures 2 and 3 show the type of
unrefrigerated truck that is often used to transport
produce to Lae.
• In Figure 3, notice the sacks used to carry cabbages
and other produce. These provide no protection for
the produce and often require it to not only support
the weight of the produce itself, but also the weight
of those looking after it!
Figure 2. The type of unrefrigerated truck that is
often used to transport produce to Lae.
Figure 3. Interior of unrefrigerated truck, showing
unprotected produce.
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
73
• Self-marketing is inefficient and often the produce
is badly damaged by the time it reaches its
destination. Figures 4 to 6 show the results of
temperature trials on unrefrigerated road
shipments of fresh produce by a self-marketer
from Goroka (in the Highlands) to Lae.
• Notice that by the time they reached Lae, all three
loads had reached temperatures of around 30°C,
which meant that the shelf life was certainly less
than that required to make the journey to Port
Moresby (at least 2 days). It seems clear that a
successful, quality-based domestic marketing
system cannot be based on a system involving self-
marketers.
• Grower groups were asked why they were not
already using professional marketers in the
Highlands. The most plausible answer was a lack
of competition — even with all their quality losses
and high transaction costs, growers thought they
could do better marketing themselves.
The insights gained from the mapping exercise
were fed into a workshop of stakeholders of the mar-
keting system for fresh produce. This workshop had
not taken place by the time of the Bali workshop.
However, by the time of writing this revised paper,
the stakeholder workshop had been held. We would
like to just offer a few comments on this workshop.
• It was decided to hold a separate meeting of
women stakeholders in the marketing system
before the stakeholder workshop. This was
intended to obtain their perspective on the issues as
well as their suggestions for strategies of
improvement. This decision was taken because of
the fear that the women might tend to be
marginalised in the larger workshop and their
concerns not heard. It was expected there would be
15 women participants at this meeting. In fact there
were 24. The meeting was facilitated by two of the
authors (Associate Professors Barbara Chambers
and Carole Kayrooz).
• The workshop was limited to a cross-section of
stakeholders with a view that numbers would be
limited to 30 participants. In fact, we had 36
participants, including representatives of grower
groups, wholesalers, transporters, supermarkets in
Lae and Port Moresby, national government (led
by the Secretary of Agriculture) and provincial
government (from the Highland provinces).
Data logger
and produce
placed in box
and then put in
depot
Box loaded onto
PMV on bottom
with poor air
circulation and
driven to Lae
PMV
arrives in
Lae
Produce
weighed
and
handed
over to
buyer
Produce
unloaded and
left outside in
sun
32.0
30.0
28.0
26.0
24.0
22.0
20.0
18.0
16.0
14.0
12.0
T
e
m
p
e
r
a
t
u
r
e
(
°
C
)
7/9 06:00 7/10 00:00 12:00 18:00 06:00
Time (starting 7/9/2003 06:00:07)
S/N 224522
Figure 4. The results of temperature trials on unrefrigerated road shipments of fresh tomatoes
from Goroka (in the Highlands) to Lae by a self-marketer (PMV =public motor
vehicle).
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
74
Data logger and
produce placed
in box and then
put in depot
Box loaded into
PMV on top with
good air
circulation and
driven to Lae
PMV arrives in
Lae
Produce
weighed and
handed over
to buyer
32.0
30.0
28.0
26.0
24.0
22.0
20.0
18.0
16.0
T
e
m
p
e
r
a
t
u
r
e
(
°
C
)
7/9 06:00 7/10 00:00 12:00 18:00 06:00
Time (starting 7/9/2003 06:00:07)
S/N 224719
Produce
unloaded and
left outside in
sun
Figure 5. The results of temperature trials on unrefrigerated road shipments of fresh lettuce from
Goroka (in the Highlands) to Lae by a self-marketer (PMV =public motor vehicle).
Data logger and
produce placed in
box. Box left
outside depot
Box loaded onto
passenger seat (beside
driver) of PMV, which
had been sitting in sun
all day with windows
closed
Windows opened
on PMV, other
produce loaded
and PMV driven
to Lae
PMV
arrives in
Lae
Produce
weighed and
handed over
to buyer
Produce
unloaded
and left
outside
in sun
32.0
30.0
28.0
26.0
24.0
22.0
20.0
18.0
16.0
T
e
m
p
e
r
a
t
u
r
e
(
°
C
)
36.0
34.0
7/9 05:59 23:59 11:59
17:59
7/10 05:59
Time (starting 7/9/2003 06:00:07)
S/N 224524
Figure 6. The results of temperature trials on unrefrigerated road shipments of fresh beans from
Goroka (in the Highlands) to Lae by a self-marketer (PMV =public motor vehicle).
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edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
75
• The workshop was professionally facilitated (by
Barbara Chambers and Carole Kayrooz) using
robust techniques intended to encourage
collaborative participation and decision-making.
• At the beginning of the workshop, one of the
authors (J ohn Spriggs) presented a summary of the
findings from our mapping exercise and also
presented a report on the women’s group meeting,
prepared by the two facilitators. (Five of the
women who were participants at the women’s
group meeting were also participants at the
workshop.)
• Following this, J ohn Spriggs proposed that the aim
of the workshop should be “to improve the
marketing system for fresh produce from the PNG
Highlands for the benefit of all stakeholders” and
proposed the following as our vision:
– to recognise the important role of women in the
fresh-produce industry in the Highlands
– to encourage a professionally managed mar-
keting system (to improve efficiency and effec-
tiveness
– to ensure that a significant share of the benefits
from a professionally managed marketing
system accrue to rural households in the High-
lands
– to encourage government policy initiatives that
are supportive of these vision statements.
• Discussion ensued on the proposed aim and vision
and these were accepted by consensus of the
workshop participants. The facilitators then led the
workshop participants through a process of
discussion of the issues, the development of
strategies and an action plan.
• At the end of the workshop, the participants chose
a steering committee (which J ohn Spriggs was
asked to chair) to carry on the work to ensure that
the action plan is put into effect.
Conclusion
This project differed from earlier studies of the mar-
keting system for fresh produce of the PNG High-
lands. Those earlier studies were more in the mould
of positivistic science, while this one is in the mould
of action research. We believe this approach is more
appropriate when dealing with issues concerned with
socioeconomic change. We (in the Institute for
Regional Community Development, University of
Canberra) have previously used this approach suc-
cessfully in Australian settings. However, this is our
first attempt to use it in a different and cross-cultural
setting. It may be noted that the PNG case study
involves a cross-cultural setting where grower
groups involve PNG nationals, while other players in
the supply chain (wholesalers, transporters, super-
markets) tend to come from a western cultural back-
ground. Our experience to date suggests this
approach is robust and effective in this different and
cross-cultural setting.
Acknowledgments
The authors gratefully acknowledge the financial and
other support provided to this project by the Aus-
tralian Centre for International Agricultural Research
based in Canberra, the Fresh Produce Development
Company based in Goroka, and the National Agricul-
tural Research Institute based in Lae.
References
Burden, J .N. 1998. Improvements in the storage and
transportation of fresh produce from the Highlands of
Papua New Guinea to Port Moresby. Report for the Fresh
Produce Development Company. Auckland, New
Zealand, HortResearch.
Epstein, T.S. 2000. A review of STABEX Project 4.17.
Papua New Guinea, Fresh Produce Development
Company.
Fresh Produce Development Company 1997. PNG markets:
yesterday, today and tomorrow. Workshop report,
Granville Hotel, Port Moresby.
International Monetary Fund 2003. Executive Board of the
IMF 2003 Article IV Consultation with Papua New
Guinea, Public Information Notice No. 03/78, J une.
NARI (National Agricultural Research Institute) undated.
Women’s voices in the food chain: shouts and whispers
from PNG women in the natural resource sectors. Project
document. Lae, Australian Contribution to the (PNG)
National Agricultural Research System (ACNARS).
Scott, K.J . and Atkinson, G. 1989. Transport of vegetables in
Papua New Guinea. ACIAR Technical Report No. 14.
Canberra, Australian Centre for International
Agricultural Research, 26 p.
Spriggs, J ., Chambers, B., Fromholtz, M. and Dunn, T.
2002. Socioeconomic change in the Coleambally
irrigation area. Paper presented at the 46th annual
conference of the Australian Agricultural and Resource
Economics Society, 13–15 February.
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
76
Developing Systems to Maintain Quality through
the Supply Chain: Getting the Product Right for the
Customer
George Beers*
Abstract
This contribution is about designing and building, in a business environment, supply chains that can deliver
top-quality products. The concept of co-innovation is explained as a structure in which companies and
knowledge institutes are joining forces to use and obtain the sorts of knowledge and expertise that are required
to build high performance, competitive supply chains. Some of these large-scale, co-innovation programs
focusing on chains and networks have operated in The Netherlands for the past 8 years. Some characteristics
and experiences with these public–private partnership programs for agribusiness chain development will be
discussed.
An important part of the agribusiness chain program is the development of cross-border supply chains. The
projects are developed for Dutch food companies that operate internationally and which are implementing
logistic and quality systems for agricultural products all over the world. Examples of the building of advanced
logistic systems, food safety and quality programs throughout the whole supply chain will be presented from
projects in Thailand, Brazil and Ghana. Capabilities of all supply chain partners have to be matched with the
added value they have to deliver, and with an adequate participation in costs and benefits and governance
structures involved. The step from the current situation to a supply chain with high-quality, certified products
is usually too big and involves too many uncertainties. The projects therefore use growth strategies and
evolutionary approaches. The realisation of a well-balanced partnership for the project (local–international and
business–academics) has proven to be an important factor in meeting the ambitions of the companies. The roles
of national and international government in this type of project will be discussed.
* Wageningen University and Research Centre,
The Netherlands.
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
77
Consumer Sovereignty: Exploring Consumer Needs
Peter J. Batt*
Abstract
In the transitional economies, international aid agencies have traditionally focused on improving productivity.
While the introduction of improved seed, agronomic practices and improved postharvest handling systems
may indeed result in significant improvements in productivity per unit area, this is no guarantee that producers
will benefit financially. In a market where prices are determined primarily by supply and demand, any marked
increase in production may exert significant downward pressure on price. The extent to which this eventuates
will be determined by the perishability of the product, the availability of postharvest storage systems, the
consumer demand for the product, product quality, and the cost and availability of substitute products. This
paper argues that even in the transitional economies, the adoption of the marketing concept is as equally
applicable as it is in the industrialised nations, given the increasing globalisation of agribusiness food chains.
Most primary producers, especially those in the tran-
sitional economies, are primarily concerned with
seeking to improve productivity per unit area. Since
many rely upon the sale of fresh produce as their sole
source of income, improving productivity is the most
readily available means of improving household
income. As most farms are quite small, any increase
in production at an individual farm level is unlikely
to have any significant impact on the market. How-
ever, if, as a result of adopting some improved tech-
nology, productivity increases across an entire
industry, producers may find to their dismay that
prices have declined. In an industry that still relies
primarily on manual labour, there are few economies
of scale to be gained in the majority of the transitional
economies. While output prices may decline, the
costs of labour may even increase, thus eroding any
financial benefit the farmers might have otherwise
achieved.
However, of equal concern but so often ignored by
farmers, is the extent to which the product produced
will satisfy buyers’ needs. Satisfying buyers’ needs is
perhaps the most basic concept underlying modern
marketing thought. Most marketing textbooks indi-
cate that the most successful firms are those most
able to determine the wants and needs of target
markets and to deliver the desired satisfaction more
effectively and efficiently than competitors. Even
within the transitional economies, while it is often
assumed that the market is driven primarily by price,
not only are there significant variations in product
quality, but significant variations in buyers’ propen-
sity to pay.
To take advantage of these differences, farmers
must acknowledge that markets are not homoge-
neous, but comprised of an indeterminate number of
smaller sub-markets or segments. While buyers
occupying the same segment have similar needs,
those buyers who occupy other segments may have
quite different needs. At a consumer level, these seg-
ments may be aggregated on the basis of differences
in demographic variables (age, income, occupation,
education, race); geographical variables (place of
residence); psychographic variables (values and life-
styles); and behavioural variables (purchase occa-
sion, benefits sought, usage rate, loyalty).
* Horticulture, Curtin University of Technology, GPO
Box U1987, Perth, Western Australia 6845, Australia.
Email: <[email protected]>.
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(printed version published in 2004)
78
However, few producers sell directly to con-
sumers: most must transact with one or more market
intermediaries. Depending upon the role each inter-
mediary plays in the marketing process, various cri-
teria will be more or less important in the decision to
purchase. While various collector agents and traders
endeavour to aggregate the product from a multitude
of small farmers, to grade and repack the produce and
when necessary to store the produce, wholesalers
usually disaggregate the consignment into smaller
parcels to meet the needs of individual retailers, res-
taurants and food service outlets. Even at this level,
different buyers may express quite different needs
with respect to the desired cooking characteristics,
maturity, variety and size and even the source or
place of origin.
Using the results from a number of supply-chain
studies conducted in both Australia and various
countries in Southeast Asia, this paper will explore
the various criteria used by consumers in selecting
fresh fruits and vegetables from a retail store. Regret-
tably, very little information is from the transitional
economies, thus preventing any meaningful compar-
ison. The paper then continues to explore how actors’
perceptions of consumers’ needs differ along the
supply chain. It is anticipated that those market inter-
mediaries closest to the final purchaser are generally
the most able to accurately determine consumers’
needs. Conversely, those closer to production are
more often embroiled in agronomic problems and
issues relating to the orderly supply of consistent-
quality produce to downstream customers.
A Review of Consumer Sovereignty
The concept of consumer sovereignty rests on the
premise that economic activities aim to satisfy con-
sumers’ needs (Hansen and Schrader 1997). Needs
arise primarily from an unfulfilled desire. Derived
primarily from labour relations (motivation) theory,
consumers have various needs that must be fulfilled.
At the most basic level, there are the physiological
needs for food, clothing and a place to live. Once
these needs have been fulfilled, safety and security
needs become more important, leading in turn
towards the various social needs for belonging and
affection and finally, individual needs for knowledge
and self-expression.
When a need is unsatisfied, a consumer may do
one of two things: either look for an object to satisfy
the need, or reduce their desires and satisfy them-
selves with what they already have. Assuming in this
instance that the consumer is able to maximise utility
by making a decision to purchase, the product the
consumer ultimately buys will be influenced by the
culture, individual personality and the consumer’s
financial resources. Taking food as an example, to
satisfy hunger, whether the consumer chooses rice,
pasta or potatoes will largely depend upon the society
within which they have been raised. Nevertheless, as
a society evolves, the wants of its members will
expand. As people are exposed to more objects that
arouse their interest and desire, producers try to
provide more products and services to satisfy those
wants. However, while it is most often assumed that
consumers have identifiable needs and wants before
consumption, these needs and wants can be as much
a consequence of marketing and other supplier activ-
ities as they are a property of the individual them-
selves. Furthermore, many consumers do not know
what they want. Needs often emerge only when pro-
voked by the product itself.
However, while most consumers have unlimited
wants, most are constrained by limited financial
resources. Consumers therefore must make choices
and, according to the utility maximisation theory,
they will choose those products that best satisfy their
needs. This assumes that consumers are not only fully
informed, but that they are both knowledgeable and
interested in the products on offer. However, in
reality, most consumers are unable to accurately
judge quality, especially for intangible products such
as fresh fruits and vegetables. Since fresh produce is
inherently variable, the various search attributes
commonly used such as size, colour, variety, freedom
from blemishes and even characteristics such as
freshness, may not necessarily result in a favourable
consumption experience. Furthermore, various
external marketing signals including price, promo-
tion and the presence (or absence) of suitable alterna-
tives may also impact upon the consumer’s decision
to purchase. For other consumers, the decision to pur-
chase may be based on the reputation of the firm
(brand) or convenience.
Nevertheless, in a competitive market and more so
within a saturated market, since consumers are able
to choose between alternative suppliers’ offers, con-
sumers wield the majority of power. It thus becomes
the responsibility of producers and various market
intermediaries to offer those goods and services that
will best satisfy consumers’ needs to the extent that it
is profitable to do so, or at least to match the compe-
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
79
tition. However, as consumers’ needs are continu-
ously changing, producers may find they are more
successful if they have fewer competitors. Such will
provide the incentive to invest in the development of
innovative products and new markets.
What Do Consumers Want?
Marketing theory suggests that consumers will
favour those products that offer the most quality, per-
formance and features (Kotler et al. 1994). However,
the products must not only be affordable, they must
also be available.
Within Australia, numerous studies have been
undertaken to identify the various criteria that con-
sumers use in their decision to purchase fresh fruits.
Flanagan (1991) indicates that consumers generally
have very positive attitudes towards fresh fruits. The
products are seen to provide a nutritionally valuable,
convenient snack. However, most consumers regard
fruits as discretionary items rather than essential
items in the food budget. Whereas fresh vegetables
are considered staple foods, fresh fruits are luxury
items.
One of the reasons Flanagan (1991) gives for the
apparent paradox is the inability of consumers to self-
select good-quality fruits. Many of the physical
attributes commonly used by consumers to choose
fresh fruits are poor predictors of eating quality and
thus many consumers are dissatisfied with the con-
sumption experience. Variations in quality exist
between growers, between each piece of fruit, and
between retail stores. Consequently, selecting fruits
becomes a high-risk decision. These self-doubts will
have a negative influence on the quantities of fresh
fruits consumers buy. When disappointed with the
eating quality of fresh fruits, consumers will either
withdraw from the market or purchase fruits in
smaller quantities.
The Horticulture Research and Development Cor-
poration (1990) identified a number of important
attributes that consumers used to select their fruits
including freshness, quality, firmness, colour,
variety, price and size. Yuen et al. (1994) identified
size, colour, freedom from blemishes, crispness and
taste as being the most favoured variables. However,
point-of-sale information such as brand name,
variety, nutritional value and origin were also
helpful. Surprisingly, less than 10% of respondents
appeared to be concerned with price.
Drawing upon the results of a number of under-
graduate and postgraduate student projects con-
ducted in Perth, Western Australia, it appears that the
most important variables influencing the consumer’s
decision to purchase fresh fruits are freedom from
blemishes, firmness, colour, variety, price and size
(Table 1).
In only one of the five cases (oranges) did price
appear as the most important variable, indicating that
the quality of the fruit offered for sale was generally
more influential than price in the consumer’s deci-
sion to purchase.
Table 1. Importance of the criteria used by consumers in their decision to purchase fresh fruits (% =proportion of
respondents who indicated unaided that they used this criterion in their decision to buy fresh fruit; ‘rank’
signifies the order of importance of the criteria as perceived by the respondents).
Criterion Apples 1 Apples 2 Bananas Oranges Mangoes
% Rank % Rank % Rank % Rank % Rank
Freedom from blemishes
Firmness
Colour
Variety
Price
Size
Appearance
Crispness
Taste
Aroma
27
20
22
19
13
29
17
2
4
3
5
1
12
17
20
31
19
14
19
5
4
5
2
1
4
3
34
32
12
8
1
2
3
4
16
22
36
7
31
4
3
1
5
2
56
51
25
19
74
2
3
4
5
1
Sources: apples 1, Stewert-Dawkins (1995); apples 2, Sadler (1997); bananas, Daniel (2000); oranges, Hobley (2003); mangoes, Hickey
(1998).
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(printed version published in 2004)
80
For exotic fruits such as mangoes, while they are
expensive (at least in Western Australia; WA), they
are not ordinarily considered unless the consumer
can afford to purchase them. In this instance, pro-
viding the fruit is in good condition, price becomes
relatively unimportant. However, as the quantity of
fruit available in the market increased and prices
declined, consumers were observed to purchase sig-
nificantly greater numbers of fruit (since mangoes
are generally sold by piece rather than by weight)
(Hickey 1998)(Table 2).
The price elasticity of demand is expected to have
some influence on the consumer’s decision to pur-
chase, especially when there are marked variations in
the retail price from week to week. However, most
consumers are unlikely to sacrifice quality for price.
Furthermore, there is evidence to suggest that a lower
price for one commodity will result in a reduction in
the demand for one or more alternative fruits. Known
as the cross elasticity of demand (Cramer and J ensen
1988), a reduction in the price of bananas (for
example) is likely to result in a reduction in the quan-
tities of apples and oranges purchased. This occurs
because the consumer is generally purchasing either
for themselves or their family who, in any given
week, will consume a fixed quantity of fruit. It is also
highly likely that consumers will allocate a fixed pro-
portion of household expenditure to the purchase of
fresh fruits. Since there is much variation in both fruit
quality, prices and the availability of preferred varie-
ties from week to week, consumers are therefore
expected to allocate these funds to the various fruits
offered for sale, depending upon quality, price and
availability in-store.
While ranked of only moderate importance, the
size of the fruits presented for sale is believed to be
more influential than the ranking suggests. The fruit
size sought is very much dependent upon the ultimate
consumer, culture and the financial position of the
purchase decision-maker. While there is some posi-
tive relationship between fruit size and price (as size
increases, price increases), where the fruits are
largely consumed as snacks by children or placed in
school lunch boxes, there is an increasing demand for
smaller pieces of fruit that a child can eat. To their
dismay, most parents find that if the fruit is cut into
smaller pieces, the child refuses to eat it because it
has discoloured. However, when the fruit is pur-
chased as a gift (especially among Asian cultures),
large-sized fruit is preferred so that all members of
the family may participate in its consumption. Yet in
Malaysia, because of low household incomes, the
demand is for smaller fruits.
At least in Australia, this relationship between
quality and price means that most small fruits are sold
in pre-packed bags of between 1–2 kg, depending on
the product. However, there is a universal perception
among consumers in WA that pre-packed fruits are
second-quality fruits. Within the pre-packed bags,
consumers often find misshapen, blemished, poorly
coloured and damaged fruits. Hence, most consumers
prefer to self-select fruits from the retail shelves.
While less research has been conducted on vege-
table products, there is some evidence of the per-
ceived relationship between quality and size. In
Vietnam, significant price premiums are paid in both
the wholesale and retail markets for larger tubers
(Table 3).
Table 2. Price elasticity of demand for fresh mangoes in Perth, Western Australia.
Price per piece
(AUD)
Number of pieces of fruit purchased
a
0 1 2–3 4–5 6–10 10+
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
2
20
54
99
147
194
232
242
242
26
32
43
53
55
45
15
14
6
54
75
92
76
44
13
11
5
2
61
68
40
22
13
8
2
–
–
34
35
23
10
3
2
2
–
–
85
33
11
2
–
–
–
–
–
a
Numbers in the body of the table signify the numbers of people surveyed who purchased the given numbers of fruit pieces at the
corresponding prices.
Source: Hickey (1998).
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81
However, there is some anecdotal evidence to
suggest that consumers prefer to buy the large rather
than the extra large tubers, because the extra large
tubers are often hollow inside and some consumers
perceive that they have been treated with growth-pro-
moting chemicals. Similarly, among the food service
industries, the demand is for smaller tubers, presum-
ably because they are less expensive to purchase.
Staying with the consumer market for potatoes in
Vietnam, in asking consumers what criteria they used
in their decision to purchase, 24% of consumers
reported that freedom from chemical residues was
one of the most important criteria. However, in the
reported studies on the fresh fruit industry in WA,
freedom from chemical residues was seldom an issue
unless consumers were prompted. As a latent vari-
able, freedom from chemical residues will only
become an issue when visible residues are present on
the fruits, thus bringing it to the consumer’s attention,
or when consumers specifically want organically
grown produce.
Within most of the world’s industrialised econo-
mies, there is an increasing desire to purchase fresh
produce that is not only healthy and nutritious but
also beneficial for the environment and society at
large. As consumers become more affluent and find
themselves able to make more choices, consumers
also become increasingly concerned about environ-
mental and social issues. This is leading towards the
concept of ‘triple bottom line’ reporting, where
financial performance, concern for the environment,
and social equity are given equal consideration (Spri-
egel 2001). As a result, there is an increasing demand
for organic produce, although there is evidence to
indicate that consumers in Australia are unlikely to
pay more than 10% extra (Batt and Giblett 1999).
However, more fundamental than this is the con-
sumer demand for safe product. Following an
alarming increase in the incidence of food poisoning,
most governments have responded by enacting a raft
of legislation which requires retail buyers to take all
reasonable steps to ensure that the food they sell is
safe (Wilson 1996). As a result, most major super-
markets now require fresh produce to come from sup-
pliers who have an appropriately accredited quality-
management system. A genuine and visible quality-
management program is a prerequisite for any fresh
produce company who wishes to supply the super-
markets (Fearne and Hughes 1999).
In Australia, most consumers show little concern
towards the possible presence of chemical residues,
because most wash the fresh fruits and vegetables
they have purchased before consumption (Batt and
Giblett 1999). However, there is also an implicit
assumption that under the various quality-manage-
ment systems that most modern supermarkets
operate, and random in-store sampling of the produce
by the Department of Health, that growers have
adhered to the prescribed withholding periods and
applied chemicals at the appropriate rates. Within
many of the transitional economies, given the chem-
icals currently available, the growers’ lack of knowl-
edge and the high incidence of pests and disease,
such assumptions are ill-founded. Anecdotal evi-
dence from Kapatagan (a barangay on the slopes of
Mt Apo in southern Mindanao, Philippines), suggests
that farmers seldom eat the vegetables they have
grown because of the high quantities of chemicals
applied.
In most industrialised countries, consumers are
protected under legislation that requires producers
and manufacturers to not only ensure that the prod-
ucts available for sale are not hazardous to health or
life, but that consumers also have the right to expect
products to perform as promised and the right to be
informed. While potentially this means that con-
sumers are entitled to return fruits to the store from
which they were purchased and to expect a refund
when fruits fail to meet their expectations, very few
consumers actually do. Largely because consumers
are unable to accurately self-select fruits that not only
look good but also eat well, many simply withdraw
Table 3. Price differentials at which tubers are purchased by tuber size (VND/kg).
Tuber size Farmers
sell
Traders
buy
Wholesalers
buy
Retailers
buy
Extra large
Large
Medium
+185
1385
–180
+170
1595
–170
+240
2180
–480
+450
2550
–885
Source: Batt (2002).
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(printed version published in 2004)
82
from the market or purchase significantly fewer fruits
(Sadler 1997). Often, retailers do not even know
there is a problem, for as long as the product con-
tinues to look good and does not deteriorate on the
shelf, there is no reason for them to suspect that there
is anything fundamentally wrong with the product.
Poor eating quality is normally associated with that
fruits which have been harvested early (and often
immature) in order to capture high prices in the
wholesale market and fruits (particularly apples) that
have been stored for extended periods of time.
While food manufacturers must provide informa-
tion on the date of manufacture and advise consumers
on the likely expiry date, producers of fresh produce
are under no such obligation. Food manufacturers
must also provide consumers with information on the
various ingredients, preservatives and processes used
and, increasingly, to provide information on the
country of origin. With greater concentration and
aggregation in the food-processing industries, manu-
facturers are able to search the world to identify the
most reliable supply of high-quality inputs for the
most competitive price. Given that many of these
global suppliers are able to provide the product at
prices substantially below the domestic costs of pro-
duction, domestic growers often embark upon
various promotional programs to differentiate their
product, appealing to the superior benefits of the
local product (freshness). For example, Australian
consumers differentiate between imported and recon-
stituted orange juice (from Brazil) and local product.
In this regard, consumers must also be protected from
fraudulent, deceitful or deceptive information and
advertising.
One of the other foundations upon which modern
consumerism is built is competition. Consumers
must be given the right to choose, but equally impor-
tant, is that consumers may not be discriminated
against on the basis of age, gender, race, religion or
political affiliation. Competition generally ensures
that consumers have access to good-quality produce
at a lower price. However, competition may also
elevate some costs. Rising prices reflect improved
services that consumers want such as more conven-
ience, greater choice and larger stores. Furthermore,
consumers not only want functional products but
many also seek psychological value. While many
argue that brands and the associated cost of pack-
aging and promotion only add psychological value,
brands give consumers greater confidence. Brands
imply a certain quality for which many consumers
are willing to pay.
While the use of brands — particularly generic, in-
store brands — is rapidly increasing in the retail
sector (Fearne and Hughes 1999), branding fresh
produce remains problematic. In Australia, most
growers are labelling apples, irrespective of the
quality, resulting in mixed grades and no guarantee of
delivering premium quality (Batt and Sadler 1999).
However, other variables are involved. The product
is perishable, thus irrespective of quality at the time
of branding, the product will deteriorate because of
inappropriate postharvest treatments or poor product
handling. With each grower having their own percep-
tion of quality, fruits of vastly different quality stand-
ards will emerge on the retail shelf, so even if
individual growers do differentiate between grades,
quality differences will be lost at the retail level.
While nutritionists recommend that we should eat
seven serves of fresh fruits and vegetables per day
(Moxon 1999), most Australians eat only 4.1 serves
per day. Many fruits, including oranges, mangoes
and pineapples, present a problem for consumers —
fresh fruits are inconvenient, expensive and incon-
sistent (Hughes 1999). Furthermore, with more
women in the workforce, household incomes are
steadily increasing. With more personal disposable
income, consumers are not so much cash-constrained
as they are time-constrained. Hence, consumers are
constantly searching for new innovative product
solutions that will reduce the amount of time required
to purchase, prepare, cook and consume their food.
What Do the Market Intermediaries
Want?
For most retailers, fresh produce is regarded as the
key determinant in the consumer’s choice of store
because it provides an attractive, fresh and colourful
display and is a symbol of the pervading quality
standards throughout the store (Retail Business
1997). While shoppers accord great importance to the
quality, price, range and availability of fresh produce
(Hughes and Merton 1996), fresh produce also gen-
erates some of the highest profit margins of any
product category in-store. However, while fresh
produce is high profile, the products are highly per-
ishable and very sensitive to mishandling and
damage at all levels of the supply chain (White
2000).
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83
Quality, price and the ability to deliver are gener-
ally regarded as the most important criteria by which
organisational buyers evaluate potential suppliers
(Cunningham and White 1973; Lehmann and
O’Shaughnessy 1974; Dempsey 1978; Wilson 1994).
Where there is no difficulty in accurately specifying
the exact nature of the product and there are several
reliable suppliers in the market, a buyer can simply
choose that supplier who offers the lowest price from
among all those suppliers who fulfil the functional
requirements (Hakansson et al. 1977). However,
where a number of alternative suppliers have
equalled one another in terms of quality, delivery and
price, various attributes such as the supplier’s reputa-
tion, financial position, communication and attitude
towards the buyer may become decisive (Dempsey
1978).
Hutt and Speh (1995) suggest that when industrial
buyers purchase a product, they purchase not only a
package of benefits derived from the physical
product features, but also a bundle of services
attached to the product. While the exact meaning of
the term ‘service’ varies with the nature of the
product and the requirements of the buying organisa-
tion, service may encompass such things as just-in-
time delivery, the provision of technical assistance
and support, innovations and adaptations, credit
arrangements, support for special needs, or advance
notice of impending price changes or shortages in
delivery. Leenders and Fearon (1993) suggest that
preferred suppliers will endeavour to find new ways
of developing products and services that will allow
customers to perform their activities more economi-
cally. A preferred supplier should react favourably to
unforeseen needs such as suddenly accelerated or
decelerated volumes of business, changes in product
or deliver specifications, service problems or any
other legitimate request. They will provide technical
support and other expertise when requested by cus-
tomers or whenever the supplier believes it can assist
the purchaser to remain competitive.
However, while a great deal has been published on
the various criteria customers use in choosing
between alternative suppliers, very few studies have
sought to examine how members at different stages
in the distribution chain perceive the quality of the
products offered. Fundamentally, it is assumed that
supply chains operate to maximise consumer satis-
faction. However, quality can be assessed in various
ways according to various objective or subjective cri-
teria. Since quality expectations may also be influ-
enced by the actual context in which the buyers and
users are embedded, their perceptions of product
quality may vary. Furthermore, as product quality
may change during the distribution process, quality
assessment becomes even more complicated.
How chain members perceive quality and the
quality desired by downstream customers will influ-
ence the quality they try to obtain. In other words, if
chain members perceive quality in different ways,
they will pursue different quality standards (Kor-
neliussen and Grønhaug 2003). To bring products
from a producer to consumers, a variety of activities
have to be performed. Many of these activities are
performed in a sequence: for example, the grower
produces the product, hands it over to a trader who
organises transportation to and makes contact with a
wholesaler and so on. Together, this can be consid-
ered an activity chain where the various activities and
their performance are interdependent. The value of
these activities is heavily dependent on the extent to
which the product offered satisfies the requirement of
the consumers. Thus, it is the concerted effort of all
the chain members (including the producer) that
makes the complete set of activities valuable.
Nevertheless, the total value generated by the
chain will ultimately depend upon the extent to which
it is able to deliver products and services desired by
consumers. The importance of a market or customer
orientation as the basis for continuous creation of
superior value for customers is well known in mar-
keting (Kohli and J aworski 1990). According to
Narver and Slater (1990), customer orientation
includes all the activities involved in acquiring infor-
mation about buyers in the target market and dissem-
inating it throughout the supply-chain participants.
According to Day and Wensley (1988), being cus-
tomer-oriented implies that a seller understands a
buyer’s entire value chain. In order to be customer-
oriented, an upstream supplier may need to be able to
identify each of the customers downstream in the
chain as well as the end consumer and to understand
what each of them wants. At present, there is little
empirical knowledge of what companies actually
know about the chains of which they form a part
(Storer et al. 2003).
Drawing upon the results of a supply-chain study
in Vietnam (Batt 2002), while it is abundantly clear
that retailers have a good appreciation of the con-
sumers’ needs, the other market intermediaries are
significantly more detached (Table 4).
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84
Farmers were found to undervalue the importance
of skin colour, tuber size and tuber shape. Con-
versely, farmers overvalued the importance of
storage characteristics and cooking characteristics.
No doubt, the overvaluing of storage characteristics
is related to the various problems farmers experience
themselves, for unlike the other intermediaries who
generally hold the potatoes for only a few days,
farmers must retain a proportion of their harvest for
seven to eight months to provide seed for the next
crop. Consumers, on the other hand, will generally
only purchase sufficient potatoes to satisfy their
family’s need in the immediate future.
The high importance attributed to the cooking
characteristics is no doubt related to the farmers ten-
dency to either consume those potatoes that are dam-
aged, poorly shaped or considered unfit for sale
themselves, or to feed the tubers to livestock. The
importance of potatoes as an alternative food crop in
the Red River Delta is widely acknowledged. Never-
theless, it is interesting to note that both taste and the
cooking characteristics of the tubers are deemed to be
of little importance in the national potato-breeding
program in Vietnam. Much greater attention has been
directed towards improving the productivity per unit
area, imparting greater resistance to various pests and
disease, and extending the length of the dormancy
period (to overcome the problems associated with the
need to store seed for seven to eight months).
Both traders and wholesalers were found to signif-
icantly undervalue the importance of presenting
tubers for sale that were substantially free of pests
and disease and physical defects. While not only
reducing the shelf life of the tubers, potatoes that
have been damaged by infection by pests and disease
or physical injury are both cosmetically less attrac-
tive and the cooking qualities and taste may be
impaired. Furthermore, while both traders and
wholesalers undervalued freedom from physical
defects, they overvalued the importance of tuber
shape. This can only mean that there is much varia-
tion in the quality of the tubers delivered from the
farmers to the market intermediaries. In surveys of
traders and wholesalers, procuring sufficient quanti-
ties of potatoes that were free of pests and disease and
physical damage were among the most frequently
cited impediments (Batt 2002).
Noting both the inability of the traders to provide
potatoes that were less expensive and the pressure
retailers put on wholesalers to procure a less-expen-
sive source of potatoes, wholesalers overvalued the
importance of price to the consumers. Retailers indi-
cated, however, that price was perceived to be of least
importance to the consumer. Consumers purchased
potatoes because they wanted to, not because they
had to. While this would suggest that numerous alter-
natives were available, Batt (2002) reports that for
many consumers, potatoes are too expensive, hence
they are simply not considered in the consumer’s
decision to purchase. Nevertheless, as prices
decreased, consumers were found to purchase greater
quantities of potatoes (Table 5).
While no meaningful relationship could be found
between income and either the frequency of purchase
or the quantity of fresh potatoes purchased, as house-
hold income increased, consumers tended to eat more
potatoes away from home (in restaurants) and to
consume greater quantities of processed potato prod-
Table 4. Ranking of the importance of purchasing criteria for potatoes in the Red River Delta
(Vietnam) (F =farmers, T =traders, W =wholesalers, R =retailers, C =consumers).
Criterion F T W R C
Flesh colour
Freedom from pests and diseases
Skin colour
Freedom from physical defects
Tuber size
Tuber shape
Taste
Cooking characteristics
Variety
Storage characteristics
High price relative to other vegetables
2
1
6
3
7
9
8
5
10
4
11
2
5
4
6
3
1
7
8
10
11
9
2
7
4
9
3
1
8
6
10
11
5
1
2
3
4
6
7
5
8
11
9
10
1
2
3
4
5
6
7
8
9
10
11
Source: Batt (2002).
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ACIAR Proceedings No. 119e
(printed version published in 2004)
85
ucts (crisps). Van der Zaag (1990) noted that as
household income increases, potatoes move from a
staple food to a snack food.
In a study undertaken in Perth, WA, Sadler (1997)
noted comparatively little difference in the pur-
chasing criteria between wholesalers, retailers and
consumers for fresh apples (Table 6).
With the exception of the wholesalers, who under-
valued the importance of price and overvalued the
importance of the grower, the selection criteria were
all accorded very similar rankings. Although yet to be
verified, it is assumed that in a more developed
economy, information between the market interme-
diaries and consumers is more readily exchanged,
especially where wholesalers are supplying the major
supermarkets. Nevertheless, from the wholesaler’s
perspective, since there is a significant variation in
the quality of the fruit presented for sale by alterna-
tive growers, wholesalers will endeavour to trade
with those growers who provide the best-quality
fruits on a consistent and reliable basis. In business-
to-business markets, price is generally of less impor-
tance than quality (Wilson 1994).
Acknowledgments
For the data presented, I am indebted to the following
undergraduate and postgraduate students: Wesley
Daniel, Pamela Hickey, Lynlee Hobley, Cara Sadler
and Simon Stewert-Dawkins.
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edited by G.I. Johnson and P.J. Hofman
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(printed version published in 2004)
88
Aflatoxin in Indonesian Peanuts: How Can the
Contamination within the Food Chain
Be Managed?
Okky Setyawati Dharmaputra,* Agustina A. Rahmianna,
†
Nageswara Rao Rachaputi,
§
Graeme C. Wright
§
and Greg Mills
§
Abstract
Among the various raw and processed peanuts collected from different points of the delivery chain (farmer,
penebas, collector, processor and retailer) in Pati Regency, Central J ava, the highest Aspergillus flavus
infection and aflatoxin contamination were found in raw kernels of peanuts collected from retailers in
traditional markets.
Postharvest handling methods prior to peanuts being delivered to retailers and especially at the retailer level
in traditional markets severely impact on the level of aflatoxin contamination in the Indonesian food chain.
Some potential initiatives to minimise aflatoxin contamination, both at the pre and postharvest stages, are
discussed in this paper. Critical to the further development of this work is a concentrated effort to monitor
postharvest handling methods carried out by farmers, collectors and retailers in traditional markets and identify
the critical control points for potential changes needed in their procedures.
Aflatoxin is a human carcinogen that can contami-
nate peanuts and hence is a major food-safety
problem throughout the world. It is particularly
severe in developing countries such as Indonesia. It
occurs when kernels become infected by Aspergillus
flavus, A. parasiticus and A. nomius, under drought
stress before harvest, during the drying phase in the
field, or under unsuitable storage conditions.
Based on the report of the 23rd Session of the J oint
Food and Agriculture Organization of the United
Nations/World Health Organization (FAO/WHO)
Food Standards Programme, held in Rome, Italy, 28
J une – 3 J uly 1999, the Codex Alimentarius Commis-
sion adopted 15 parts per billion (ppb) as the
maximum level of total aflatoxins in peanuts
intended for further processing. In Australia, the
maximum allowable limit of aflatoxin in peanut and
peanut products is 15 ppb (QDPI 2000).
As part of an ongoing Australian Centre for Inter-
national Agricultural Research (ACIAR) project on
management of aflatoxin in Indonesia and Australia
(PHT 97/017), a survey has been conducted to
* SEAMEO BIOTROP, J l. Raya Tajur km. 6, PO Box 116,
Bogor, Indonesia; and Faculty of Mathematics and
Natural Sciences, Bogor Agricultural University, J l. Raya
Pajajaran, Bogor, Indonesia.
Email: <[email protected]>, <[email protected]>.
†
Research Institute for Legumes and Tuber Crops
(RILET), J l. Raya Kendalpayak km 6, PO Box 66, Malang
65101, Indonesia. Email: <[email protected]>.
§
Farming Systems Institute, Queensland Department of
Primary Industries (QDPI), Kingaroy, PO Box 23,
Queensland 4610, Australia.
Email: <[email protected]>,
<[email protected]>,
<[email protected]>.
ACRC084.book Page 88 Monday, October 18, 2004 2:35 PM
Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
89
monitor aflatoxin contamination in peanuts and
assess the critical hazard points along the market
supply chain in the Pati Regency in Central J ava. In
this regency, the peanut delivery chain can be classi-
fied into five levels — farmer, penebas (one who
buys crops before harvest), collector, processor (fac-
tory) and retailer.
Occasionally farmers may deliver the peanuts
directly to a local market or collector who buys the
peanuts from the farmers before harvest. To prepare
flour-coated kernels, processors also buy peanut
kernels from other regencies or other countries
(China, India and Vietnam).
This paper describes:
• the results of interviews with farmers, penebas,
collector/traders and factories concerning pre and
postharvest handling of peanuts
• the results of a research project entitled
‘Aspergillus flavus and aflatoxin in peanuts at
various stages of the delivery chain in Pati
regency, Central J ava’
• what initiatives should be carried out to overcome
the aflatoxin problem in Indonesian peanuts.
Methodology
During the survey, interviews using questionnaires
with farmers, penebas, collectors and processors
(factories) on pre and postharvest handling of
peanuts were conducted, together with random sam-
pling of various kinds of peanuts and peanut prod-
ucts.
Interviews and sampling were carried out during
the wet (J anuary 2002) and dry (August 2002) sea-
sons. The number of respondents at farmer, penebas
and collector levels in each season was 48, 10 and 4,
respectively. The number of samples of wet raw pods
at farmer, penebas and collector levels were 48
(derived from 48 farmers), 30 (derived from 10
penebas) and 12 (derived from 4 collectors), respec-
tively. The samples were obtained from the inter-
viewed respondents. The number of interviewed
farmers, penebas and collectors were determined in
proportion to the numbers of each group in the dis-
tricts where peanut samples were collected. The
determination of the districts where peanut samples
were collected was based on their high peanut pro-
duction. This information was obtained from the
Indonesian Government’s Regional Office of Agri-
cultural Crop and Animal Husbandry in Pati. In each
district, peanut samples were collected from peanut
farms or penebas located in the scattered areas. The
questionnaires consisted of questions about pre and
postharvest handling of peanuts. Interviews were
conducted using the Indonesian language or dialect.
At the farmer level, each peanut sample derived
from a peanut farm. About 20 peanut plants were
selected randomly; they were than pulled out manu-
ally to obtain about 2 kg of wet raw pod peanuts. At
the penebas level, three samples (=three replicates)
of wet raw pod peanuts (about 2 kg/sample) were col-
lected randomly from each penebas; the peanuts had
been placed in woven polypropylene bags or they
were still in piles. At the collector level, three
samples (=three replicates) of wet raw pod peanuts
(about 2 kg/sample) were collected randomly from
each collector; the peanuts had been placed in woven
polypropylene bags.
Results
Results of interviews regarding pre and
postharvest handling of peanuts
Interviews with farmers
Forty-eight farmers of Pati Regency were inter-
viewed either during the wet or dry seasons. Some of
the farmers interviewed during the wet season were
the same individuals as interviewed during the dry
season. Most of the farmers (85% and 96% of the
respondents interviewed during the wet and dry sea-
sons, respectively) sold the peanuts to penebas before
harvest, while 15% and 4% of the respondents,
respectively, harvested the crop themselves. The har-
vesting method was the same in either case — peanut
plants were pulled out and stripped manually, and the
peanuts were not dried. In the latter case, farmers sold
the crop directly to the collectors. All respondents
(100%) were unaware of the aflatoxin problem in
peanuts.
Interviews with penebas
Ten penebas of Pati Regency were interviewed
either during the wet or dry season. Some of the
penebas interviewed during the wet season were the
same individuals as interviewed during the dry
season. Harvesting was carried out by pulling the
peanut plants manually as well as by manual pod-
stripping. Drying and storing of peanuts were not
carried out before sending them to collectors or fac-
tories. All respondents (100%) were unaware of the
aflatoxin problem in peanuts.
ACRC084.book Page 89 Monday, October 18, 2004 2:35 PM
Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
90
Interviews with collectors
Four collectors of Pati regency were interviewed
either during the wet or dry seasons. Of the respond-
ents interviewed during the wet and dry seasons, 50%
and 20%, respectively, stored peanut pods before
sending them to the factory. During the wet season,
peanuts were stored in woven polypropylene bags for
one night (25% of the respondents) or up to a
maximum of 7 days (25% of the respondents).
During the dry season, peanuts were stored by
spreading them on a paved floor for 4–30 days.
During both seasons, most peanut pods were sold to
factories in the form of ‘fresh’ raw peanuts. All
respondents (100%) were unaware of the aflatoxin
problem in peanuts.
Interviews with factories (processors)
The results of questionnaires were based on a visit
to the PT Garuda Food factory in Pati, Central J ava
(Dharmaputra and Maysra 2003). The processing
steps undertaken for different products are outlined
below.
Flour-coated peanut processing:
• sorting — peanut kernels derived from collectors
are sorted according to kernel colour using
‘sorteks’ (machines that sort on a visual basis)
• storage — raw peanut kernels are stored in a grain
Cooler Silo
• coating — peanuts are coated with a mixture of
salt, tapioca flour, sugar and garlic (the garlic is
imported from China) in a container made from
stainless steel, fitted with a rotation system
• frying — peanuts are fried in palm oil (1 t flour-
coated peanuts takes 30 minutes to fry); the oil is
used for 24 h and then discarded
• packing — peanuts are packed by weight, i.e. 20 g,
100 g etc.
• product storage — flour-coated peanuts are stored
in cardboard boxes on shelves; the maximum
storage period is 7 days before the peanuts are
distributed to retailers (supermarkets and
traditional markets)
• monitoring of aflatoxin contamination — this is
undertaken every 3 months using the enzyme-
linked immunosorbent assay (ELISA) method.
Roasted peanut processing — peanuts (in the form of
wet, raw pods) should be processed within 24 h of
harvest:
• grading — this is conducted based on the soil
attached to the pods and pod colour
• pre-cleaning — wet, unshelled peanuts derived
from penebas in the Pati region are washed
manually using well water, while those derived
from collectors in other regions are washed in four
stages
• cooking — the peanuts are cooked using water
mixed with salt
• drying — the peanuts are dried at ±80°C using
ovens
• grading — peanuts are sorted both manually and
mechanically into one of three grades
– grade I, two seeds and mature
– grade II, two seeds and mature–young, or three
seeds and mature
– grade III, almost mature seeds
• storage — roasted peanuts are stored for a
maximum of 7 days after processing, before they
are distributed to retailers (supermarkets and
traditional markets).
Results of sampling within the supply chain
Dharmaputra et al. (2003) reported moisture con-
tents, the incidence of A. flavus, and aflatoxin B
1
con-
tamination of raw and processed peanut products
collected from different points of the delivery chain
in the Pati Regency in Central J ava during the wet
and dry seasons in 2002.
Fresh pod samples were collected from farmers’
fields (48 samples), penebas (30 samples) and collec-
tors (12 samples). Nine samples of roasted kernels
were collected from peanut factories. Three samples
of raw and flour-coated kernels, and various roasted
pod samples were collected from the markets in Pati,
Bogor, Yogyakarta and Malang cities. In all, during
each season, 135 samples of various kinds of peanuts
and peanut products were collected for analysis
(Table 1).
Moisture content, the percentage of peanut kernels
infected by A. flavus, and aflatoxin B
1
content were
determined using the oven method, plating method
on Aspergillus flavus and parasiticus agar (AFPA)
medium, and ELISA method, respectively.
Moisture content
The results showed that moisture contents of
peanuts collected from farmers’ fields, penebas and
collectors were generally very high, i.e. 46.7–48.5%
(wet season) and 40.1–47.5% (dry season), roasted
peanuts collected from factories or retailers were
3.1–3.8% (wet season), and 2.1–2.9% (dry season),
and flour-coated kernels collected from retailers
ACRC084.book Page 90 Monday, October 18, 2004 2:35 PM
Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
91
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ACRC084.book Page 91 Monday, October 18, 2004 2:35 PM
Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
92
were 3.8% (wet season) and 2.9% (dry season). Raw
kernel samples collected from retailers in traditional
markets were 8.4% and 7.0% during the wet and dry
seasons, respectively. Mean moisture contents of
peanut kernels derived from various kinds of peanuts
collected from different points of the delivery chain
during the wet and dry seasons are presented in
Tables 2 and 3 and Figure 1.
Incidence of A. flavus
Peanut samples from farmers’ fields, penebas and
collectors were generally significantly lower in A.
flavus infection than those found among processors
and retailers, i.e. 17–25% (wet season) and 25–40%
(dry season). During the wet season, A. flavus infec-
tion in roasted peanut samples collected from proces-
sors and retailers was 11% and 50%, respectively,
while those collected during the dry season were 89%
and 17%, respectively. Raw kernel samples collected
from retailers in traditional markets had 100% infec-
tion with A. flavus during both seasons. The highest
mean percentage of kernels infected by A. flavus in
infected samples in both seasons was found in raw
kernels collected from retailers in traditional mar-
kets, i.e. 53.1% (wet season) and 30.4% (dry season)
(Tables 2 and 3). The mean percentage of peanut
samples infected with A. flavus from various types of
raw and processed peanuts collected from different
points of the delivery chain during the wet and dry
seasons are presented in Tables 2 and 3 and Figure 2;
while those mean percentages of kernels infected by
A. flavus in infected samples are presented in Tables
2 and 3 and Figure 3.
Aflatoxin contamination
In general, the aflatoxin B
1
content of peanuts col-
lected from farmers’ fields, penebas, and collectors
and processed samples were low (less than 15 ppb).
The highest aflatoxin B
1
contents were found in
peanuts collected from retailers in the traditional
markets, with the range of 2–124 ppb and <4–342
ppb during the wet and dry seasons, respectively
(Table 4). The percentage of raw kernel samples con-
taminated with aflatoxin B
1
(exceeding 15 ppb) col-
lected during the wet and dry seasons was 33% and
25%, respectively (Table 4, Figures 4 and 5).
Discussion and Conclusions
Potentially there are some strategic areas where
efforts could be carried out to overcome the aflatoxin
problem in Indonesian peanuts. This is regardless of
whether the problem is generated via pre and/or post-
harvest handling practices, or from domestic versus
imported production. The high incidence of A. flavus
infection immediately postharvest and the subse-
quent high levels of contamination of all peanuts
after processing in local markets or retailing opera-
tions suggest that much of the problem is of local
Indonesian origin.
Figure 1. Mean moisture content of peanut kernels derived from
various types of peanuts collected from different points
of the delivery chain during the wet and dry seasons
(Dharmaputra et al. 2003).
ACRC084.book Page 92 Monday, October 18, 2004 2:35 PM
Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
93
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ACRC084.book Page 93 Monday, October 18, 2004 2:35 PM
Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
94
The results of the survey showed that the highest
percentages of samples infected by A. flavus and
mean percentages of infected kernels in infected
samples, and the highest aflatoxin B
1
contamination
were found in raw kernels collected from retailers in
traditional markets in Pati, Bogor, Yogyakarta and
Malang cities. The raw kernels may have been
sourced from farmers or collectors in their respective
regencies. There is, however, the possibility that con-
taminated raw kernels were imported from other
countries, such as China, India and Vietnam, and it is
difficult to determine the exact source. Despite this
possibility, it is clear that in Indonesia, both pre and
postharvest handling methods prior to peanuts being
delivered to retailers (and especially at the retailer
level in traditional markets) severely impact on the
level of aflatoxin contamination in the Indonesian
food chains.
Figure 2. Mean percentage of peanut samples infected with
Aspergillus flavus. Samples were derived from
various types of peanuts collected from different
points of the delivery chain during the wet and dry
seasons (Dharmaputra et al. 2003).
Figure 3. Mean percentage of kernels infected by Aspergillus
flavus in infected samples. Samples were derived
from various types of peanuts collected from different
points of the delivery chain during the wet and dry
seasons (Dharmaputra et al. 2003).
*
*
ACRC084.book Page 94 Monday, October 18, 2004 2:35 PM
Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
95
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ACRC084.book Page 95 Monday, October 18, 2004 2:35 PM
Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
96
Preharvest practices
Preharvest management plays an important role in
reducing the risk of aflatoxin contamination in Indo-
nesian peanuts. It is well known that although the
aflatoxin-producing fungus, A. flavus, is widely dis-
tributed in soils, it invades peanut pods/kernels only
when the shell is physically ruptured, either mechan-
ically via splitting during severe end-of-season
drought stress, or as a result of injury via soil-insect
damage. Even though the A. flavus fungus is present
in pods and kernels, aflatoxin contamination will
only occur under very special conditions of kernel
moisture content (below about 30%, Mehan et al.
1986) and temperature. Cole et al. (1985) and
Sanders et al. (1985) reported that preharvest afla-
toxin contamination will only occur when pod-zone
soil temperatures are in the range of 25–32°C, with
associated drought conditions during the last 30–50
days of the growing season.
To maintain healthy peanuts that can resist A.
flavus infection and subsequent aflatoxin production,
it is therefore important that a series of agronomic
management practices are implemented in farmers’
fields, including the following:
• Pods should be grown with adequate soil moisture
during the last 30 days of pod growth to avoid pod
splitting arising from drought stress. Where
irrigation is available, watering should be
undertaken every 10–15 days, depending on the
evaporative demand.
Figure 5. Percentage of peanut samples contaminated with different levels of
aflatoxin B
1
during the dry season 2002. Samples were derived from
various types of peanuts collected from different points of the delivery
chain (Dharmaputra et al. 2003).
Figure 4. Percentage of peanut samples contaminated with different levels of
aflatoxin B
1
during the wet season 2002. Samples were derived from
various types of peanuts collected from different points of the delivery
chain (Dharmaputra et al. 2003).
ACRC084.book Page 96 Monday, October 18, 2004 2:35 PM
Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
97
• Pods should be free from mechanical injury
resulting from field implements such as weeding
equipment. In Indonesia, this practice is relatively
rare, as farmers usually conduct weeding
operations around 20–40 days after sowing. Care
should be taken during the harvesting operation to
prevent pod injury when plants are pulled
manually.
• Pods should be free of soil-pest infection, such as
white grubs, in a range of peanut cropping systems.
Some farmers broadcast the pesticide Carbofuran
onto the soil and then apply irrigation water. Most
farmers, however, tend to leave crops without
doing any pest management.
• Pods should be harvested at optimal maturity. Late
harvesting will result in higher susceptibility of
kernels and shells to fungal invasion (McDonald
and Harkness 1967). Under very hot and severe
end-of-season drought conditions, it is
recommended that crops even be harvested 1–2
weeks early to avoid crop water deficits and the
associated high risk of aflatoxin contamination
(Nageswara Rao et al. 2002; Rahmianna et al.
2003).
Postharvest practices
To overcome, or at least minimise, aflatoxin con-
tamination in Indonesian peanuts, effort is warranted
in the following areas:
• obtain more information on postharvest handling
of peanuts in other peanut-growing areas in
Indonesia
• monitor postharvest handling methods carried out
by farmers, collectors and retailers (especially in
traditional markets)
• obtain more information on the supply chain for
imported peanuts and ensure that regulators have
the knowledge and capacity to reduce the
importation of inferior-quality product
• monitor the quality of imported peanuts, especially
their aflatoxin content, in an effort to help define
the extent of the problem and contribution being
made by domestic versus imported production
• identify the most effective means of informing the
postharvest-handling industry sectors about
aflatoxin and its potential management
• develop information and training packages for
processors and retailers to inform them about the
dangers of aflatoxin and the handling methods that
can reduce the problem
• encourage collectors and processors to place
emphasis on improved production and handling
techniques by farmers and penebas
• publicise to the wider community the potential
health problems associated with consuming poor-
quality peanuts.
References
Cole, R.J ., Sanders, T.H., Hill, R.A. and Blankenship, P.D.
1985. Mean geocarphosphere temperatures that induce
pre-harvest aflatoxin contamination of peanut under
drought stress. Mycopathologia, 91, 41–46.
Dharmaputra, O.S and Maysra, E. 2003. Report of a visit to
Kacang Garuda Factory (PT. Garuda Food) in Pati,
Central J ava on 27 May 2003. Internal report. Bogor,
Southeast Asian Regional Centre for Tropical
Agriculture (SEAMEO BIOTROP).
Dharmaputra, O.S., Retnowati, I., Putri, A.S.R. and
Ambarwati, S. 2003. Aspergillus flavus and aflatoxin in
peanuts at various stages of the delivery chain in Pati
regency, Central J ava. Paper presented at the 21
st
ASEAN/3
rd
APEC Seminar on Post-harvest Technology,
Nusa Dua, Bali, 23–26 August 2003.
McDonald, D. and Harkness, C. 1967. Aflatoxin in
groundnut crop at harvest in northern Nigeria. Tropical
Science, IX(3), 148–161.
Mehan, V.K., McDonald, D., Ramakrishna, N. and
Williams, J .H. 1986. Effects of genotype and date of
harvest on infection of peanut seed by Aspergillus flavus
and subsequent contamination with aflatoxin. Peanut
Science, 13(2), 46–50.
Nageswara Rao Rachaputi, Wright, G.C. and Krosch, S.
2002. Management practices to minimize pre-harvest
aflatoxin contamination in Australian peanuts. Australian
J ournal of Experimental Agriculture, 42, 595–605.
QDPI (Queensland Department of Primary Industries)
2000. Aflatoxin in peanuts; tips to reduce the risk.
Kingaroy, Crop Link, Queensland Department of
Primary Industries (QDPI), Farming Systems Institute.
Rahmianna, A.A., Taufiq, A., Wright, G.C. and Nageswara
Rao C. Rachaputi 2003. Pre harvest management
practices to minimize aflatoxin contamination in peanut
(Arachis hypogaea L.) in Indonesia. Paper presented at
the 21
st
ASEAN/3
rd
APEC Seminar on Post-harvest
Technology, Nusa Dua, Bali, 23–26 August 2003.
Sanders, T.H., Cole, R.J ., Blakenship, P.D. and Hill, R.A.
1985. Relation of environmental stress duration to
Aspergillus flavus invasion and aflatoxin production in
pre-harvest peanuts. Peanut Science, 12(2), 90–93.
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Improved Marketing of Mandarins for East Nusa
Tenggara in Indonesia
Sherrie Wei,* Damianus Adar,
†
Elizabeth J. Woods
§
and Herman Suheri
¶
Abstract
In the highland areas of West Timor, where the climate is relatively cool, the mandarin variety Keprok Soe is
widely grown in the districts of Timor Tengah Selatan (TTS) and Timor Tengah Utara (TTU) in Nusa
Tenggara Timur (NTT) Province. Largely due to its economic value and popularity among local consumers,
the Indonesian Government adopted some measures to promote Keprok Soe. Good grades of Keprok Soe fetch
a premium price in direct competition to imported mandarins from various countries including China,
Pakistan, Israel and Australia. Basically, there are two supply chains for mandarins grown in West Timor.
About 90% of the mandarins are sold locally, with only 10% sold to other provinces. In general, there are three
methods by which farmers can sell their mandarins: forward-sale by tree, per tree sale at harvest and per kilo
sale after harvest. Farmers’ use of different selling methods is often related to the size of their mandarin farm,
income, price of mandarins in that year, availability of family labour, farmers’ educational experiences, length
of farming experience, and distance from the farm to the local market.
Established traders play a key role as channel managers in the supply chain, especially for the inter-island
supply chain. Quite exceptionally, traders have motivated farmers to strive for good products, be competitive
and become ‘champions’. Hence, the traders have been observed to play a mixed role of channel manager,
information supplier, co-investor and extension officer. These activities and alliances suggest that a reciprocal
rather than a win–lose relationship exists.
Supply-chain constraints include production (cultural production, plant protection), poor infrastructure, and
postharvest losses (20%). Potential strategies for chain improvements include horizontal integration at the
farmer level, enhancement of the capacity of traders as supply-chain coordinators, and branding of Keprok
Soe. In relation to improving the likelihood of implementing these strategies, this Australian Centre for
International Agricultural Research (ACIAR) project conducted production and marketing workshops, and
broadcast information and knowledge by radio.
In the highland areas of West Timor, where the
climate is relatively cool, the mandarin variety
Keprok Soe is widely grown in the districts of Timor
Tengah Selatan (TTS) and Timor Tengah Utara
(TTU) in Nusa Tenggara Timur (NTT) Province.
Keprok Soe was first planted in the 1970s, but com-
mercialisation of the product started only in the
1990s. In some of the villages of the two districts,
* School of Natural and Rural Systems Management,
University of Queensland, St Lucia, Queensland 4072,
Australia. Email: <[email protected]>.
†
Faculty of Agriculture, University of Nusa Cendana, J I
Adisupcitou, Kampus Baru Penfui, Kupang Timor, NTT,
Indonesia. Email: <[email protected]>.
§
School of Natural and Rural Systems Management,
University of Queensland, Gatton, Queensland 4345,
Australia. Current address: Executive Director, Research
and Development Policy, Department of Primary
Industries, Meiers Road, Indooroopilly, Queensland
4067, Australia. Email: <[email protected]>.
¶
Faculty of Agriculture, University of Mataram,
Mataram–NTB, Indonesia.
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Keprok Soe (literally ‘mandarin from Soe’) consti-
tutes the main source of income (70%) for subsist-
ence farmers with farms less than one hectare.
In recent times, the price of Keprok Soe has
steadily risen. While part of this price rise has been
due to the influx of refugees from East Timor and
Ambon and United Nations personnel, another
important factor has been the increased appreciation
and consumption of the locally grown fruit by local
residents since the 1990s.
In contrast to most other domestic mandarins in
Indonesia, Keprok Soe has a mixed gold-and-green
skin colour, and is easy to peel, juicy and relatively
sweet in taste. To encourage farmers in the region to
focus on this variety, and perhaps for administrative
reasons, the government discourages the planting of
other varieties. Keprok Soe has not performed well in
trials in other production areas (such as J ava),
meaning that the variety is exclusive to West Timor.
Good grades of Keprok Soe fetch a premium price in
direct competition to imported mandarins from
various countries, including China, Pakistan, Israel
and Australia. Mandarins are in high demand in Indo-
nesia and the supply of Keprok Soe is largely
demand-pull. Nevertheless, the presence of imported
fruit indicates that the Keprok Soe chain is already
competing with import chains to maintain its price
premium.
Largely due to its economic value and popularity
among local consumers, the Indonesian government
adopted some measures to promote Keprok Soe.
They included providing free seedlings and discour-
aging farmers from planting other varieties of man-
darins. Some non-governmental organisation (NGO)
projects in West Timor have also provided free seed-
lings and irrigation assistance to expand the current
production of Keprok Soe. With a substantial
increase in production area, the outturn of Keprok
Soe is expected to double in a couple of years. Hence,
market competition will increase. Moreover, as
Keprok Soe already competes with imported prod-
ucts, the quality of competitors’ products can be
expected to improve.
According to a recent survey conducted in five vil-
lages in TTS (Tobu, Netpala, Bijeli, Oelbubuk and
Fatumnasi), the average age of farmers growing man-
darins in TTS was about 46 years (range 26–68 years
old). The average experience in growing Keprok Soe
was about 18 years (range 5–30 years). The average
number of trees owned by each farm household was
about 90. The average production was 55 kg per tree,
with a maximum of 68 kg per tree. About 68% of the
yield of Keprok Soe was sold to make a living, with
the rest used for social purposes, such as gifts for
friends and relatives, church ceremonies and own
consumption. In the villages of Oelbubuk and Net-
pala, 80% of total mandarin production was used to
make a living. The main reason why their crops could
make a higher contribution to household income was
because these villages are closer to the subdistrict
market and transportation is less of an issue com-
pared to other villages (Leki and Wadu 2000).
Methods of Selling Keprok Soe
In general, there are three methods by which farmers
can sell their mandarins: forward-sale by tree, per
tree sale at harvest and per kilo sale after harvest. For
the last method, farmers are generally responsible for
taking the fruit to the venue of the trader or to local
markets by themselves.
Forward-sale by tree
Sales using this method generally occur 2–3
months before harvest, when farmers are in need of
cash. Around J anuary, February or March, when
there are mandarins on the trees, farmers go to a local
trader in their village and ask the trader to have a look
at the mandarins on their trees. After negotiation, and
if a deal is made, the trader pays half of the price to
the farmer. The balance will be paid at the harvest
time. Traders can also pay by goods, such as food,
clothes, radios, tape recorders etc. After half-
payment by the trader, the crop is then owned by the
trader and the farmer is obligated to look after the
trees to prevent such things as stealing and attack by
pests. Price per tree is generally very low. For
example, the price per tree was about IDR40,000/tree
in Netpala village. In contrast, when farmers sell
mandarins by weight, they can get over IDR200,000/
tree at harvest time — five times more than from
forward-sale (Leki and Wadu 2000).
This method of sale is practised when farmers are
in urgent need of cash for food, medical, or educa-
tional expenses, or even for paying taxes. With more
involvement by NGOs in the form of training work-
shops to assist in farm credits and to inform farmers
about the undesirable nature of forward-selling, this
method of sale is decreasing over time. According to
one survey in the two subdistricts of North Molo and
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South Molo in TTS, 3% of farmers used this method
in 2000 (Leki and Wadu 2000).
Per tree sale at harvest
This method is used at harvest time — mandarins
are sold by the tree, and farmers are not involved in
the packaging, transport and sale of individual fruit.
When mandarins are ready to harvest, farmers go to
traders, or vice versa, and ask for the price per tree for
the mandarins. Traders may harvest in stages,
depending on the ripeness of the fruit on the trees. In
general, traders harvest twice. As in the forward-sale
situation, traders own the crop after agreement and
farmers are obligated to look after the trees between
the first and final harvest. According to one survey in
TTS (Leki and Wadu, 2000), the price is about
IDR75,000/tree, but according to one farmer leader,
the price could be about IDR150,000–200,000 in
Oelbubuk village. Farmers are generally content with
this price because it is close to what they can get if
they sell by themselves, after taking into account all
the expenses, e.g. transport, packaging, renting a stall
etc.
There are several reasons why farmers sell by per
tree rather than by weight at harvest time:
• there are no harvesting costs to farmers
• farmers are saved the trouble of transportation,
grading and postharvest loss
• farmers have little information about the price of
mandarins in town — selling by tree avoids the
risk of receiving an unexpectedly low price
• farmers can sell in a larger volume by tree than by
weight, hence saving labour costs.
There are two other social reasons that farmers
choose this method of sale. Selling by the tree at
harvest time is possible when the farmers and traders
involved have a long-standing, good relationship.
The trader needs to trust that the farmer will look
after the trees after the first harvest and that no
stealing will occur. Farmers, of course, rely on
traders to give a fair offer. Financially better-off
farmers are more likely to use this method because
taking mandarins to markets by themselves lowers
their social status. Farmers with some prestige are not
supposed to be seen to toil themselves and to compete
with less better-off farmers in making a living.
Per kilogram sale after harvest
In this method, farmers harvest their own fruit. If
required, occasionally they also grade and package
the fruit. Farmers or their family members either take
their mandarins to traders in the village or town, or
directly to markets. In this method of sale, farmers
assume several functions in the supply chain and are
rewarded more in return.
Factors affecting farmers’ choice of selling
method
Farmers’ use of different selling methods is often
related to the size of their mandarin farm, income,
price of mandarins or trees at the time, availability of
family labour, farmers’ educational experiences,
length of farming experiences, and distance from the
farm to the local market (Leki and Wadu 2000).
Farmers with larger mandarin farms have lower
costs per tree and the differences between selling by
the tree and by weight are also greater. Hence,
farmers with more mandarin trees tend to sell by
weight. As stated before, farmers with higher
incomes tend to sell their mandarins by the tree at
harvest time. Higher prices during the season
encourage farmers to sell by weight, as reflected in
the recent years. Larger farm households that have
more helping hands during the harvesting season are
more likely to harvest themselves and sell by weight.
Farmers who have more education (formal or
informal) are more likely to sell by weight. Similarly,
more experienced farmers are more likely to sell by
weight. Transport is an issue for farms far away from
the subdistrict, district or provincial market. Many
villages in North Molo and South Molo are not con-
nected to good roads. Farmers often take mandarins
to the market on foot. This is rather inconvenient, as
the weather is still a bit wet at the start of the har-
vesting season in April. Farmers with farms closer to
markets are more likely to harvest themselves and
sell by weight at the markets.
Supply Chains of Keprok Soe
As indicated in Figure 1, there are two supply chains
for mandarins grown in West Timor. About 90% of
the mandarins are sold locally; the other 10% are sold
to other provinces. In drought years, none are avail-
able to sell to other provinces.
Local supply chain
Farmers have several avenues through which they
can sell their mandarins in the NTT Province. They
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can sell by themselves at street stalls at any time, or
sell at the subdistrict markets that open once a week.
Their fruit can appear at the subdistrict, district, or
provincial market through the business activities of
traders. The most desirable avenue for growers is to
sell directly at the Kupang provincial market run by
the government, but no farmers can sell through this
channel at this stage. An eligible retailer in the gov-
ernment market must purchase the space of a stand
and farmers cannot afford the cost.
At present, there are about 15–20 local traders
dealing with mandarin farmers. Some of them sell to
retailers and others sell directly in the local market.
There are also about 15–20 mandarin retailers at the
daily Kupang wet market.
Inter-island mandarin supply chain
Selling mandarins to other, more prosperous
islands is the aspiration of the industry in West
Timor. This occurred a few times since 1997 when
two traders embarked on the venture with farmer
groups in Bijeli and Oelbubuk villages. The traders
sold to the central market in J akarta, supermarkets
and the food service industry in Bali.
This supply chain currently represents only a small
proportion of the outturn. As the supply of Keprok
Soe is still not sufficient even to meet current local
demand, there is no urgency to work on this supply
chain. However, if production increases in the near
future as predicted, it will be necessary to address the
issues involved. According to the traders, farmers
were unable to supply to specifications for the
desired maturity level, grading and packaging
requirements. Another issue is payment terms.
Growers operate on a ‘no cash, no goods’ principle,
which makes it difficult for traders to do business as
their customers require credit for a few weeks.
Traders as supply-chain managers
Established traders play a key role as channel man-
agers in the supply chain, especially for the inter-
island supply chain. The incentive for traders to
undertake supply-chain management is partly that
Keprok Soe is a premium variety and exclusive to
West Timor. For example, one established trader has
been actively involved in upstream external resource
management with farmers. Under the auspices of
NGOs, traders conduct workshops for farmer groups
Figure 1. Mandarin supply chains in West Timor.
Farmers or farmer groups
Village markets
Subdistrict markets
District markets
Local traders
Merchants
Cross-island traders
Provincial markets
Supermarkets
Speciality fruit shops
Food
services
Local consumers Provincial consumers Consumers in Bali and J ava
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in various areas, covering fruit fly control, organic
farming principles, re-use of water and postharvest
handling to meet market requirements. The traders’
requirements for mandarins at the farm level include
grading by size and appearance, packaging prefer-
ences and maturity level for harvesting. In another
instance, a trading company taught farmers how to
make wooden boxes, and provided grading guide-
lines and definitions of maturity levels. Apparently
simple guidelines on picking, grading and packing
can be difficult for subsistence farmers whose atten-
tion is distracted by their immediate need for cash.
The entrepreneurial actions that traders have initiated
to address farmers’ cash shortages include offering
working capital and fertilisers to farmers. Repayment
is deducted later from the sale of mandarins back to
the trader. The presence of NGOs moderates the
potentially adversarial relationship between traders
and farmers.
It is quite exceptional that traders have motivated
farmers to strive for good products, to be competitive
and to become champions. Hence, the traders have
been observed to play a mixed role of channel man-
ager, information supplier, co-investor and extension
officer. These activities and alliances suggest that a
reciprocal rather than a win–lose relationship exists
(Brandenburger and Nalebuff 1996; Moore 1996).
From a power perspective, such a relationship is
likely to represent a high barrier to market entry for
other serious traders, and thus an advantage of a
closed market for the established traders (Cox 1999).
In the recent past, one trading company with a sub-
sidiary in West Timor tried to work with farmer
groups to sell mandarins to J ava. A complicated
model was tested where the company and the farmer
groups had a joint account for the payment from J ava.
Unfortunately, the relationship did not last, mainly
for two reasons: improper packaging by farmer
groups, and perceived unfair distribution of subse-
quent loss by farmers. The careful selection of traders
or trading companies and the sound functioning of
farmer groups are antecedents for a good working
relationship between farmer groups and their trading
partners.
Figure 2. A trial model of alliance between farmers and a trader.
Farmer group
Functions:
• provide own mandarins
• purchase mandarins from
other farmers
• grade and pack
Trader
Functions:
• lend to farmers
• train farmers in making
wooden boxes
• sell mandarins in J ava
Farmer 1 Farmer 2 etc.
Merchant in Java
Flow of product
Payment to a joint account
50% of profit 40% of profit 10% of profit
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In the late 1990s, an inter-island trading company,
with the support of an NGO, tried an alliance model
with the farmers (Figure 2). Under this model, the
trading company provided training to farmers on
grading, packaging and manufacture of wooden
boxes. The company also provided loans to farmer
groups to purchase mandarins from other farmers.
Farmer groups sent products directly to the central
market in J akarta. Payment was sent to a joint
account with the agreed breakdown of profits as 50%
to farmers, 40% to the trading company and 10% to
farmers’ groups. However, according to the trading
company, due to improper packaging and grading,
the price for Keprok Soe was slashed, causing losses
to the joint effort. The farmers, suffering from great
losses, disagreed on the reason and suspected fraud in
the deal.
There are several explanations as to why the alli-
ance did not work out. To start with, it was a rather
complicated model for businesses that had never
worked together before. Many scenarios were not
envisaged, such as the allocation of payment when
there were losses. The transaction between the West
Timor trading company and the merchant in J akarta
was not transparent to the farmers. As there was no
contact between farmers and the merchant in J akarta,
farmers later did not trust the actual amount of
payment from the merchant. Farmers needed at least
a season to perfect grading and packaging practices
before selling their products to markets in other
islands that had strict requirements.
Farmers’ relationships with local traders
Unlike the relationship with inter-island traders,
farmers’ relationships with local traders are more
transaction-based. According to our interviews, local
traders often hid from farmers the price information
at the Kupang provincial market. Farmers were often
told that the market in Kupang was sluggish and the
prognosis would be worse if they would not sell
quickly at the price set by traders. Farmers are gener-
ally price-takers rather than price-negotiators in this
supply chain. One reason that farmers would sell with
any price suggested by traders is that farmers gener-
ally do not have a good idea about the costs of pro-
ducing mandarins, hence there is no bottom-line
price as a guideline for a desirable price. In fact,
many farmers see almost no cost for their produce
because there is little farm investment apart from
labour and land.
Distribution of benefits
The value chain is not readily available, as most
farmers do not keep a record of their costs. Many
farmers do not use farm inputs and often ascribe no
costs to the production of mandarins if they have not
hired any labour. The inter-island value chain shown
in Table 1 has been approximated by including the
equivalent costs of labour and median-level farm
inputs to produce a good grade of mandarins. Inter-
estingly, the farmers’ share in the value chain is
larger than the traders. As in many other developing
countries, traders in Indonesia are not just engaged in
Table 1. A value chain for mandarins in West Timor.
Chain members Costs and price/kg (IDR) Margin/kg (IDR) Relative share (%)
Farmers Farm-gate price: 4000
Costs: 2000
2000 29
Traders in West Timor Price: 10,000
Costs: mandarins, 4000
transport, 4000
damage, 500
packaging, 500
1000 14
Traders in other islands Price: 11,000
Costs: 10,000
1000 14
Retailers Price: 15,000
Costs: mandarins, 11,000
overheads and damage, 1000
3000 43
Total 7000 100
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trading one line of product. They have multiple
sources of income by trading in several areas where
they see the potential for making a profit. While the
farmers’ share is about 30% of value created in the
chain, this income from mandarins is the main source
of revenue for many farmers in TTS and TTU.
Supply-chain Constraints
Production
The mandarin industry in West Timor faces
several constraints in the production of Keprok Soe.
Overall, farmers lack proper cultural skills and do not
use farm inputs to grow good fruit. The area is gen-
erally short of water and can be affected by drought,
as in 2000. Several NGO projects were designed to
install irrigation facilities but for management
reasons were not successful in addressing the issues.
The industry also faces serious disease challenges,
including Diplodia canker, pink disease, sooty
mould, Phytophthora, powdery mildew, citrus
greening etc. Inappropriate harvesting methods,
involving pulling the fruit from the tree, are still used
by farmers — this causes exposed flesh and stress to
the tree.
Poor road infrastructure and transport
Currently, fruit is transported on foot, via the
public transport system or using the traders’ own
trucks. With public vehicles, passengers and produce
are transported together. Public vehicles run only
during the daytime, and only two bags are allowed
per passenger. This means of transport is less than
ideal, as the daytime heat contributes to fruit losses.
In addition, people often sit on the fruit, causing more
losses.
Subdistrict markets open once a week (e.g. Thurs-
days in Kapan subdistrict) and district markets open
daily (e.g. the market in Soe — the capital city of TTS
— about 20 km from Kapan). Depending on the loca-
tion of the farm, on average it takes about an hour to
take fruit to the subdistrict markets.
Farmers can transport their mandarins by traders’
truck, for a fee, but there is a maximum of 10 bags,
i.e. 400 kg (per farmer), because traders need to load
other fruits and vegetables, such as avocado, banana,
onion and pumpkin. The maximum load of one truck
is 6000 kg.
When asked why farmers cannot consolidate fruit
and hire a private truck, one farmer leader said that
they have not looked into this option. However, he
expressed that farmers are willing to pay for
IDR200,000 for a 3 t load pick-up for fruit to go to
Kupang — in other words, about IDR70/kg (or 2% if
the price is IDR3500/kg) for transport.
Postharvest losses
Postharvest losses were estimated to be 20%. Most
of the losses were due to a lack of proper cold storage.
Keprok Soe is planted in the highland areas of 800 m
in TTU or above 1000 m in TTS. As the fruit is trans-
ported from cooler areas to warmer and humid
lowland areas during the daytime heat, fruit ripens
fast and unsold fruit deteriorates quickly under
ambient conditions.
For fruit sold to other islands, no refrigerated con-
tainers were used. There was a shortage of refriger-
ated containers and priority was given to high-value
products, such as meat and seafood.
In 2000, one NGO — Winrock — worked with one
trader to refurbish and redesign a second-hand cold
storage of a 6 m container with 6 t capacity. Second-
hand storage is adequate for fruits and vegetables
since they do not require storage below 0°C. How-
ever, cold storage is generally unavailable for fresh
produce.
For inter-island trade, fruit was graded and pack-
aged twice, either at Kupang, the capital of West
Timor, or at the central markets in other islands. At
this stage, farmers are unable to set a common
standard to meet the grading needs of their cus-
tomers. This function is unlikely to be fulfilled
without the sound performance of farmer groups.
Potential for Chain Strategies
Horizontal integration at the farmer level
There are various kinds of informal social groups
in Indonesia, such as youth groups, women’s groups,
veterans’ groups etc. Similarly, in villages, there are
informal farmer groups. Members of a farmer group
help each other during busy times of crop cycles,
such as harvest seasons. They might share equipment
with each other. In West Timor, farmer groups are
also affiliated with church; one church might have a
few farmer groups. Many of the activities of an NGO
in West Timor are based on existing farmer groups,
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as members already know each other well and are
easier to mobilise as most of them go to the same
church. NGOs’ soft-loan programs for farmer groups
capitalise on existing farmer groups for implementa-
tion through the network of churches.
For farmers to be effectively integrated to improve
the efficiency of the supply chain, groups need to
develop norms for their members. A popular model
of group development described that groups usually
go through four stages: (1) the forming stage; (2) the
storming stage, where interpersonal conflicts emerge
as people try to express their individuality and resist
the emerging group structure; (3) the norming stage,
where the group starts to evolve methods of working
together; and (4) the task-performing stage, where
members accept their own and others’ abilities and
limitations, and organise activities to achieve their
goals (Tuckman 1965). It is fair to say that most of
the farmer groups in West Timor are in the middle or
leaving the second stage. There was some evidence
that in certain groups, individual farmers were having
problems that affected the activities of the whole
group. The challenge for the farmer groups is to rec-
ognise and accept group structures and develop
norms to organise activities and achieve group goals.
The policy implication is to train extension officers
and key farmers in group management skills in addi-
tion to production techniques. This support is neces-
sary until group members and the leader have gone
through the dependent, the counter-dependent and at
the interdependent phases (Banet 1976).
Traders as managers of inter-island supply
chains
Keprok Soe was first introduced to other islands in
Indonesia by a trader in West Timor, who stated, “I
travelled to J ava and compared Keprok Soe with
mandarins from Madura and Lumajang. I felt Keprok
Soe is superior because of its taste, juiciness and skin
colour.” Traders have been targeted by NGOs for
participation in various activities, including training,
micro-finance and logistics management. There
appears to be a mutual interest for farmers and traders
to work cooperatively to improve the production,
harvesting, and packaging of Keprok Soe, with a
view to selling beyond the local market. The man-
darin supply chain in West Timor is operating in a
lightly contested environment between cross-island
traders and a reciprocal environment between
farmers and traders. Certain circumstances facilitated
the development of such a relationship between
farmers and traders. The demand for Keprok Soe
exceeds supply. The exclusive production of Keprok
Soe in West Timor assures that both parties retain the
benefits of a reciprocal relationship at least in the
short term, and the existence of a social network
among farmer groups means traders need to commu-
nicate effectively with only the groups’ leaders. The
involvement of NGOs as third parties in the chain
provides funding and opportunities for traders and
farmers to interact and to address the serious disease
problems which threaten the medium-term sustaina-
bility of the industry. Finally, at this stage, both
farmers and traders will not and could not integrate
backward or forward to further appropriate value in
the supply chain.
In developing countries, as products are pushed
through the channel, the business skills and foresight
of traders are crucial to the linkage between farmers
and retailers, and consequently the success of a chain.
Traders can work better with farmer groups that are at
the task-performing stage, or at least at the norming
stage.
Branding
Until now, Keprok Soe has been marketed under
the traders’ own names, losing its identity. While
Keprok Soe is considered as a superior product, no
effort has been made to market the product. Because
of the high transportation costs and the exclusiveness
of Keprok Soe to West Timor, an ultimate marketing
strategy would be to sell the product as ‘Keprok Soe’
(mandarins from Soe) rather than just as Keprok
(mandarins). This would reduce the risks and uncer-
tainties for consumers and businesses purchasing the
fresh produce. In this environment, a good, consistent
product identifiable by a brand may lead to a mar-
keting advantage (Owen et al. 2000).
However, one
issue is that such effects might be difficult to gauge,
as the identity of the produce can be lost at the retail
level since fresh produce is often not packaged.
To build capacities for developing these strategies,
this project implemented two hands-on training
workshops on marketing and production, and radio-
broadcasted related issues. The project purposefully
invited an inter-island trader to conduct training on
production, packaging and grading. Awareness of the
benefits of horizontal integration at the farm level
was raised through farmers working together under
the project activities. Preharvest and postharvest
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training workshops have provided the industry with
the necessary knowledge and skills for potential
branding of Keprok Soe.
References
Banet, A.G. J r 1976. Yin/yang: a perspective on theories of
group development. In: Pfeiffer, J .W. and J ones, J .E., ed.,
The 1976 annual handbook for group facilitators. La
J olla, California, University Associates.
Brandenburger, A.M. and Nalebuff, B.J . 1996. Co-
opetition. New York, Doubleday, 290 p.
Cox, A. 1999. Power, value and supply chain management.
Supply Chain Management, 4, 167–176.
Leki, S. and Wadu, M.M. 2000. Factors affecting farmers in
selecting marketing strategies in NTT. Unpublished
working paper, University of Nusa Cendana.
Moore J .F. 1996. The death of competition. New York,
Harper Collins.
Owen, K., Wright, V. and Griffith, G. 2000. Quality,
uncertainty and consumer valuation of fruits and
vegetables. Australian Agribusiness Review, 8 (August),
paper 4.
Tuckman, B.W. 1965. Developmental sequence in small
groups. Psychological Bulletin, 63, 384–399.
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Getting Farmers to Work Together:
the Experiences of Mango Growers in
the Mekong Delta Region of Vietnam
Nguyen Minh Chau,* Sherrie Wei,
†
Vo The Truyen,* Marlo Rankin
§
and Iean Russell
¶
Abstract
In September 2001, The University of Queensland (UQ), Australia, and the Southern Fruit Research Institute
(SOFRI), Vietnam, embarked on an ambitious project funded under the Australian Agency for International
Development (AusAID) Capacity-building for Agriculture and Rural Development (CARD) program, to
establish four collaborative marketing farmer groups in two provinces in the Mekong Delta region of southern
Vietnam. The four groups were established in the provinces of Tien Giang and Tra Vinh. In both provinces,
over 80% of the population rely on agriculture as their main source of income and both provinces are known
for producing superior varieties of mango, such as Cat Hoa Loc (considered to have the best taste), Cat Chu
(high yield), Cat Trang and Cat Den.
The problems faced by the majority of mango farmers involved in this project are indeed no different from
most farmers in developing countries. Factors such as small farm size, low level of knowledge relating to
production techniques, and little or no knowledge of market pricing beyond the local collector agents were
common challenges among project participants.
This paper reports on the success factors and challenges encountered with the establishment and maintenance
of the farmer groups, supply-chain characteristics of the mango industry in southern Vietnam, and intervention
strategies for the development of successful collaborative farmer marketing groups.
In September 2001, The University of Queensland
(UQ), Australia, and the Southern Fruit Research
Institute (SOFRI), Vietnam, embarked on an ambi-
tious project funded under the Australian Agency for
International Development (AusAID) Capacity-
building for Agriculture and Rural Development
(CARD) program, to establish four collaborative
marketing farmer groups in two provinces in the
Mekong Delta region of southern Vietnam. The four
farmer groups were established in the provinces of
Tien Giang and Tra Vinh. In both provinces, over
80% of the population rely on agriculture as their
main source of income and both provinces are known
for producing superior varieties of mango, such as
Cat Hoa Loc (considered to have the best taste), Cat
Chu (high yield), Cat Trang and Cat Den.
This study discusses the experiences, over a two-
year period (2001–2003), of getting mango farmers
in the four villages of southern Vietnam to work
together. While the groups are still in the process of
developing, the first two years were most chal-
lenging and their experiences could be relevant to
other crops in Vietnam and other developing coun-
tries with similar social and economic back-
grounds.
* Southern Fruit Research Institute, Tien Giang, Vietnam.
Email: <[email protected]>(NMC);
<[email protected]>(VTT).
†
School of Natural and Rural Systems Management,
University of Queensland, St Lucia, Queensland 4072,
Australia. Email: <[email protected]>.
§
Australian Youth Ambassador to Vietnam.
Email: <[email protected]>.
¶
School of Natural and Rural Systems Management,
Gatton, Queensland 4345, Australia.
Email: <[email protected]>.
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Background
The Mekong Delta of southern Vietnam is an impor-
tant area for fruit production. In 2000, the area had
323,600 ha under fruit production, compared with the
Vietnamese total of 544,700 ha. About 3 million t of
various tropical fruits were produced in this region
(Ministry of Agriculture and Rural Development
2002). Vietnam has less than 20 years of experience
of being a market economy. As the fruit industry was
deregulated very fast, many problems have since
become evident.
At the nursery level, there was a shortage of
planting material relative to market demand as many
farmers quickly quit planting rice to growing cash-
crop fruit trees. Many farmers also took the opportu-
nity to sell fruit seedlings. These farmers had inade-
quate nursery hygiene practices and no propagation
skills. Consequently, there was widespread distribu-
tion of diseased planting material, as well as prob-
lems associated with the authenticity of varieties.
Amongst other problems, lack of access to reliable
planting material has inhibited farmers from
engaging in larger-scale production and marketing.
At the orchard level, problems include poor agro-
nomic conditions, poor planning and lack of cultural
skills. Because of the potential of increasing farmer
income through fruit cultivation, many areas that
were previously used for rice production have since
been turned into fruit orchards. These new orchards
often face problems due to unsuitable soil types,
drainage problems and high watertables. Due to
lack of experience in fruit-tree growing, new
orchards are often planted with little knowledge of
cultural practices, such as appropriate planting den-
sity, orchard layout, pruning and training tech-
niques, plant nutrition etc. The average size of each
farm is small (approximately 0.5 ha) and farmers
often grow many types of fruit. All these factors
combine to make produce unsuitable for large-scale
marketing.
At the industry level, the key problems include
lack of effective farmer organisations, poor posthar-
vest handling, and inadequate agribusiness skills.
Farmer associations and extension staff are poorly
organised and have difficulty identifying and
achieving group objectives and delivering potential
services such as market information, sharing of
equipment and establishing quality standards. Until
the recent formation of the farmer cooperatives,
farmers sold all produce individually and were
subject to price-setting by first-level fruit collectors.
Limited knowledge of postharvest techniques and
lack of appropriate packaging and storage materials
result in farmers harvesting immature fruit in an
attempt to extend the shelf life of the fruit and reduce
transport damage. Lack of agribusiness skills, insti-
tutional problems and an overall poor understanding
of free-market functioning has limited industry
stakeholders (farmers, traders, extension personnel,
researchers etc.) from fully embracing and imple-
menting a market-oriented production system.
The aforementioned problems have had a negative
impact on the efficiency of fruit production in the area.
By working individually on small farms, fruit growers
produce small quantities of produce, with high input
costs, making their products uncompetitive and
resulting in low farmer income. Retaining this situa-
tion, in the long term, they can neither establish a
stable marketing system nor develop new markets.
This study included four mango-growing groups:
Hoa Hung and Cam Son villages of Tien Giang Prov-
ince; and Binh Phu and Nhi Long villages of Tra
Vinh Province. The majority of Binh Phu village con-
sists of Khmers who have similar customs to Cambo-
dian Khmers. Hoa Hung and Nhi Long villages are
mature production areas, whereas Cam Son and Binh
Phu villages are new mango-planting areas. Each
village has distinct needs and issues.
Establishment and Maintenance of
Farmer Groups
By initially establishing farmer groups, then
upgrading some of these groups to grower coopera-
tives, mango farmers involved in the project have
begun to realise the benefits of working together. In a
recent evaluation of the project, farmers were asked
to identify any benefits they believe that they have
experienced as a result of participating in the farmer
group/cooperative. Key benefits highlighted were:
access to technical production training, sharing of
knowledge and experience in production with other
growers, access to lower-priced inputs, sharing of
price information, greater understanding of how the
market functions, increased confidence when dealing
with traders, increased understanding of fruit grading
and basic quality assurance practices, higher fruit
prices by selling through the cooperative, and greater
community understanding.
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Steps involved in group/cooperative
formation
Cooperative farming under a centrally planned
economy was practised in Vietnam during 1976–
1980, but was unsuccessful for numerous reasons.
This failure is still fresh in the minds of many farmers
and hence this was a difficult mind-set to overcome
when attempting to introduce the benefits of farmer
groups and collaborative marketing. From the expe-
rience of the farmers and extension staff involved in
the project, some guidelines for farmer group/coop-
erative formation have been identified. Five phases
and their associated problems, needs and benefits of
group formation were identified: learning, steering,
forming, implementing and developing (Tuckman
1965; Banet 1976; Chamala 1995).
Learning
This was an important initial step conducted by the
project team to identify potential farmers in each
catchment with similar needs. At this stage, identi-
fied problems included lack of ideas, negative impact
of variable market conditions and poor technical
skills. As problems could not be solved individually,
there was a need for funding to organise group meet-
ings. At this stage, farmers experienced the benefit of
group formation through access to technical training
and sharing of production knowledge. In addition,
agribusiness principles were introduced. The training
workshops conducted proved to be critical to the
success of later farmer-group formation, as they stim-
ulated community interest and provided some imme-
diate individual benefits via access to new
information.
Steering
At this stage, a steering committee was formed by
a handful of interested and respected farmers in the
community who began by visiting the local-level
government to request permission to begin the pro-
ceedings for the formation of a grower group/cooper-
ative. Farmers in the area were visited by the steering
committee to generate further awareness of current
issues facing mango producers and gauge the interest
of potential farmer-group members. Farmers were
asked to decide if they wanted to register as mem-
bers. Technical training continued during this stage
to sustain and increase farmer interest, with emphasis
on cooperative learning and sharing of experiences.
Key problems during this phase included a lack of
skilled persons to form the steering committee and
poor understanding of provincial grower group/coop-
erative registration requirements and related laws.
Depending on the skills of the steering-committee
members and the individual farmers involved, this
phase progressed rapidly or slowly for different
groups according to the interest and commitment of
the farmers. Group needs during this phase included
permission from the local government to begin pro-
ceedings and funds to gather farmers together for reg-
istration and individual farm visits. The main benefits
of group formation at this stage were increased iden-
tification and awareness of production-related issues
and continuing to share production techniques and
experiences amongst farmers.
Forming
At this stage, farmers had already registered to
become a member of the farmer group or coopera-
tive. Government approval and registration were
achieved and the first meeting was held at which the
management board was democratically elected.
Cooperative law and government guidelines were
read out at this meeting and the management board
began to discuss roles and allocate tasks. During this
stage, members decided how they wished the coop-
erative to function, including sale of cooperative
shares to group members and the community to gen-
erate funds.
Key problems during this phase included heavy
responsibilities placed on the management board,
weak linkages between members who were still
unsure of the potential benefits of participation, lack
of group-specific rules and objectives, and no clear
vision of where the group was heading. Needs
included training in cooperative principles and func-
tions, understanding of cooperative registration and
local law, support from institutions to monitor group
progress, provision of ongoing technical training to
keep members involved, and skills training for the
management board. Marketing concepts and the
potential benefits of selling collectively were intro-
duced again at this stage. Benefits of group formation
included an improved understanding of cooperative
functions, increasing technical knowledge and devel-
opment of a good relationship with supporting insti-
tutions.
Implementing
This stage was the most complicated of the four
phases thus far, as it required the farmer groups to
design action plans and begin implementing strate-
gies. It required the management board and members
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to be able to conduct a situation analysis to determine
common member needs. They used this analysis to
identify key achievable goals, designed an action
plan with set dates to achieve the goals, realised the
action plan and evaluated the results. Critical prob-
lems included poor management skills resulting in
inferior action plans which could not be implemented
and evaluated, internal conflict amongst members
who were often reluctant to commit to the group
because they were unsure of the benefits to be real-
ised, and poor facilities, such as lack of a set meeting
place. At this stage, members needed to directly
experience some benefits of group participation to
solidify commitment.
Needs were extensive during this stage and signif-
icant institutional support was necessary to monitor
the progress of the cooperatives and help them imple-
ment their action plans. Further training and
upgrading of management skills were crucial, partic-
ularly focusing on financial management as the coop-
erative began to generate some income. Introduction
to potential trading partners and basic quality-assur-
ance training and introduction of practices were
incorporated at this stage as the cooperative began to
become more market-oriented. Benefits can take
various forms depending on the developmental stage
of the cooperative but should hopefully include
increased income and stability for the marketing
channel. Benefits realised by the four farmer groups
in this project included:
• improved price for fruit by selling directly to the
cooperative and bypassing intermediaries
• access to current price information through
establishing an information channel amongst
members
• cooperative seedlings purchased at low cost for
members
• trialling of new production techniques and sharing
the results.
Developing
None of our current farmer groups/cooperatives
have reached this stage yet due to limited experience
in cooperative functioning. The key objective for the
future will be to build mechanisms for sustainability,
including ‘train-the-trainer’ methods that will
empower cooperative members and reduce reliance
on external institutional support. Ongoing manage-
ment training is essential to ensure cooperative prin-
ciples are upheld throughout the developmental
stage. As the farmer group/cooperatives continue to
develop, they are likely to encounter a number of
internal problems for which they will need to develop
guidelines and detailed business plans to cope.
Quality-assurance practices should be upgraded with
increasing sophistication according to domestic and
export market requirements. Once they begin gener-
ating consistent income, they should be able to
directly access the support they require by hiring
external experts to provide training and services as
needed.
Conclusions
Throughout the course of this project, much has been
learnt about the formation and functioning of farmer
groups or cooperatives in the Mekong Delta region of
Vietnam. The aforementioned guidelines for the five
stages — learning, steering, forming, implementing
and developing — provide a framework for farmer
group/cooperative formation from the experience
gained. Each stage encountered its own list of prob-
lems, however one concept is clear — in order to
maintain commitment and interest in the farmer
group/cooperative, farmers must continue to recog-
nise the increased benefits of working together. This
required significant support from local institutions
and extension staff. In the initial stages, access to
ongoing technical training appeared to be sufficient
to sustain commitment. In the latter stages, more
emphasis was placed on reinforcing farmer group
and cooperative principles. This included ongoing
management training, helping to create commercial
linkages between farmers and traders and beginning
to work with both groups to increase understanding
of market needs and to introduce basic quality-assur-
ance practices.
Further work will be directed at building the social
capital to support the sustainable operation of the
cooperatives. This will involve continuing involve-
ment in technical issues, such as training in improved
production techniques, but an increasing emphasis on
the development of management capabilities is seen
as a key aspect of successful scaling-up. The Govern-
ment of the Socialist Republic of Vietnam recognises
that farmer cooperatives can play a key role in rural
development. The preliminary success of the fruit
growers’ cooperatives in Tien Giang and Tra Vinh
Provinces has attracted considerable attention within
the country and there is mounting pressure for con-
tinued progress with the formation and development
of further groups. It is essential to learn from the
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experience of the existing cooperatives to assist them
to survive and prosper. Continued input into the
training of government staff and cooperative leaders
will be necessary to achieve these ends.
Acknowledgment
The authors would like to thank the Australian
Agency for International Development (AusAID) for
its funding support under the Capacity-Building for
Agricultural and Rural Development (CARD)
program for Vietnam.
References
Banet, A.G. J r. 1976. Yin/yang: a perspective on theories of
group development. In: Pfeiffer, J .W. and J ones, J .E., ed.,
The 1976 annual handbook for group facilitators. La
J olla, California, University Associates.
Chamala, S. 1995. Overview of participative action
approaches in Australian land and water management. In:
Chamala, S. and Keith, K., ed., Participative approaches
for Landcare: perspectives, policies and programs.
Brisbane, Australian Academic Press, 5–42.
Ministry of Agriculture and Rural Development 2002.
Statistics of Agriculture and Rural Development, 1996–
2000 [Vietnam].
Tuckman, B.W. 1965. Developmental sequence in small
groups. Psychological Bulletin, 63, 384–399.
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Fruit and Vegetable Production in Vietnam
and the Role of Traders in Marketing
Tran Cong Thang*
Abstract
Over the past 10 years, Vietnam’s agricultural production has grown at an average rate of 4.3% per year, one
of the highest growth performances of agriculture in the world. Over the next 10 years, the policy emphasis will
be on maintaining this high growth rate, while focusing on a more diversified agriculture. The fruits and
vegetables subsector might well play an important role, as the potential world demand for these commodities
is quite high and Vietnam might have a strong comparative advantage in their production.
The main objective of this paper is to describe the marketing of fruits and vegetables of Vietnam and the main
constraints to fruit and vegetable commerce. Production trends in the fruits and vegetables subsector of
Vietnam since the 1990s are reviewed, and the role of private traders (including assemblers, wholesalers and
retailers) is discussed. At present, about 80% of fruit and vegetable output is sold to wholesalers and
assemblers in spot market transactions. The constraints to marketing of fruits and vegetables in Vietnam are
discussed. These include inconsistent quality, low per-capita consumption, high transportation costs, poor
infrastructure, lack of facilities such as refrigerated vehicles for long-distance trade and cold stores for fresh
fruits and vegetables; and especially uncertainty in the export market.
* Information Center for Agricultural Research and
Development, Ministry of Agriculture and Rural
Development, Hanoi, Vietnam.
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Who Benefits from Enhanced Management
of Agri-Food Supply Chains?
Chris Wheatley* and Dai Peters
†
Abstract
Improved management of agricultural supply chains affects the livelihoods and wellbeing of many different
groups of people. Most obviously, it affects the different actors in the chain itself, and especially those most
dependent on the produce or product, including producers, traders and processors. It also affects those actors
who provide services to the chain, including input suppliers, equipment makers, credit providers, and research
and development (R&D) institutions (e.g. extension, information and facilitation services). These effects can
be beneficial — improved and/or more secure income, reduced use of pesticides, better food quality — but
negative effects can also occur, for example, if some actors are excluded from the improved chains, or if
increased market power for some actors results in reduced income for others.
Analysis of the balance of positive and negative outcomes from improving supply chains depends on a
consideration of the wider context in which the chains are operating, and especially as regards the:
•rural community within which production occurs, and the impact of improving this supply chain on other
agricultural and livelihood activities, and on the natural environment over time
•structure, conduct and performance of the wider market for the produce/products to which the chain adds
value, especially considering changes in concentration within the subsector and of market power along
vertically integrated chains (e.g. in the case of traders and retailers)
•overall impact on target (urban) consumers (considering food cost, quality and safety, and availability).
Mechanisms for enhancing the benefits that accrue to smallholder producers, including gaining access to
specialised markets through alternative trading schemes, are discussed. Examples of strengthening agri-food
supply chains in both Asia and Latin America, with which the International Centre for Tropical Agriculture
(CIAT) has been involved, are presented to illustrate these issues.
Globalisation, urbanisation and the reduced role of
governments in providing services are major trends
affecting Asian agriculture. As markets become more
important, the agri-food sector is increasingly con-
centrated (fewer, larger enterprises) and vertically
coordinated. This expansion of the role and impact of
organised supply chains is occurring internationally,
but is also apparent at the national level across the
region.
An excellent example and indicator of this is the
rapid expansion in the role of supermarkets in Asia.
Supermarkets now account for a 15–20% share of the
processed/packaged food market in Southeast Asia
and for 30% in East Asia (ex-PR China, including the
Philippines). In the People’s Republic of China (PR
China), the supermarket share of urban food markets
grew from 30% in 1999 to 48% in 2001 (Reardon et
al. 2003). Supermarkets provide an entry point for
foreign investment in national economies of the
region, with many national chains now owned by
regional or global firms. In 2002, five global retail
food chains invested USD120 million in Thailand
alone (J itpleechep 2002).
Over the last 20 years in both the European Union
(EU) and United States of America (USA), food
supply chains have become both more concentrated,
especially at retail level, and vertically coordinated.
The end result of this has been to make supermarkets
* Rural Agroenterprise Development Project, Inter-
national Centre for Tropical Agriculture (CIAT), PO Box
462, Nelson, New Zealand.
Email: <[email protected]>.
†
67 To Ngo Van, Tay Ho, Hanoi, Vietnam.
Email: <[email protected]>.
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the dominant power in these chains, increasingly able
to set prices, product quality standards, production
and postharvest practices, and terms of sale to food
manufacturers and produce suppliers (Hughes 1994).
For example, in the United Kingdom (UK), the five
major retail chains’ recent unanimous and coordi-
nated decision to refuse to stock genetically modified
(GM) food products has essentially pre-empted the
government’s pro-GM crop production strategy, by
denying such produce and products access to the only
retail market that matters (Morris 2003).
The growth of supermarket power across Asia
illustrates the dramatic changes now occurring in the
agri-food sector at local and national levels (let alone
in global markets). This transformation of food
retailing, coupled with increased vertical coordina-
tion of their supply chains, will have equally dramatic
effects on the production components of these chains.
Supermarkets are gaining great power to influence
rural commodity and produce markets by the com-
petitive pressures they face to reduce purchase and
transaction costs, raising and assuring product
quality and safety, and procuring year-round sources
of supply. These factors all favour larger-scale pro-
ducers, as do the adverse terms of trade (payment at
60–90 days) that they are frequently obliged to
accept. Some of the mechanisms that retail chains use
to achieve their goals are:
• centralisation of chain procurement (distribution
centres)
• contracts and supply agreements specifying
production and postharvest practices, and
providing security over time (i.e. longer-term and
more stable transactional relationships)
• logistics efficiency and technology — investments
by suppliers for seamless interfaces
• growing use of specialised wholesalers to cut
transaction costs and enforce private standards that
trend towards international standards
• growth of private standards to harmonise product
— as a substitute for absent public standards and
for competitive advantage.
The picture across Asia is of increasing develop-
ment of organised supply chains for agri-food prod-
ucts/produce and a strong drive to improve the
performance of those chains along the lines detailed
above. More organised and efficient supply chains
are not, however, an end in themselves, but a means
to enhancing the benefits derived from participation
in those chains. Key issues are, thus: who partici-
pates; how the benefits are apportioned among par-
ticipants; and why this is the case.
Development aims to improve the life and liveli-
hoods of the poor. Agri-food supply chains involve
two groups of poor as major participants — rural pro-
ducers and urban consumers, and other chain actors
who may also be poor — processors, farm labourers,
and enterprise employees. The impact of the major
changes in the agri-food sector on their livelihoods is
critical to meeting (or not) global targets for poverty
reduction. Implications also exist for environmental
development goals.
Who? Actors and Stakeholders
Participants in the chain are those who directly pro-
duce, transform, handle or otherwise add value to the
produce/products — this includes farmers/producers,
processors, assembly agents, traders, wholesalers,
transporters and retailers. Relationships between
these actors are usually transactional, although not all
of them necessarily take title to the goods, but may
participate on a commission basis. Consumers can
also be considered as participants.
Participants can also be looked at from an ‘enter-
prise’ or ‘economic organisation’ perspective,
including informal household micro-enterprises,
cooperatives and associations with social as well as
economic objectives, and formal enterprises in
various scales of operation and legal constitution. At
the small scale, ‘household’ may be synonymous
with ‘enterprise’, although one household can under-
take more than one enterprise, especially in rural
areas, when seasonal factors are important (e.g. crop-
processing seasons).
Other stakeholders in supply chains are those who
provide services to the main participants or actors.
These can be input suppliers (of fertiliser, seeds and
pesticides), credit providers, equipment makers/sup-
pliers, extension services and other providers of tech-
nical assistance, marketing services, legal and
accounting services, and so on.
A common feature of rural agri-food sector serv-
ices is that they are often ‘embedded’, so that, for
example, a trader may also provide some inputs,
credit and technical assistance, covering the costs of
such services through the marketing margin, rather
than charging direct fees.
Finally, there are other stakeholders in the process
who neither participate directly nor provide services,
but whose income, wellbeing or livelihoods are
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affected by the performance of the chain, or whose
actions impact on the chain participants. Local gov-
ernment is one example — receiving (or not) tax
income from participants, and perhaps regulating
some aspects of the enterprises involved. The rural
community in general is another stakeholder, through
(for example) changes in land use, off-farm employ-
ment prospects, and the effects of by-products and
wastes of any processing.
Figure 1 presents a complex supply chain — or
system — found in a root crop, starch-processing
cluster in Dong Lieu, in peri-urban Hanoi, Vietnam.
This system contains a number of direct participants
(starch processors and traders, producers of added-
value products from starch, pig producers using the
by-products) as well as some key input and service
providers (e.g. equipment makers). Two raw mate-
rials (cassava and canna) are used by small, house-
hold enterprises and two added-value products
(maltose and noodles) made also at household level,
as well as a refined starch product that enters several
high-value industrial markets (textiles, paper). Starch
COMMUNE
Fish/pig
raisers
Fish/pig
raisers
Residue
collectors
Residue
collectors
Root traders
Root
producers
Root
traders
Dry root
graters
Starch
processors
Starch
traders
Starch
refiners
Consumers
Canna noodle
makers
Candy
manufacturers
Maltose
users
Food &
candy
manufac-
turers
Maltose
processors
Communal
engineer
credit
cash
cash and credit
Figure 1. Root-crop starch-processing system in Dong Lieu, Vietnam (Peters et al. 2002).
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is also sold to a large-scale starch producer, Vedan, in
southern Vietnam, that in turn uses the starch to
produce monosodium glutamate (MSG), high fruc-
tose syrup (HFS) and other derived products for the
food market. The starch system thus supplies both
traditional (noodles, maltose) and modern (starch
derivatives) food markets.
What? Effects and Outcomes
The effects of improving supply-chain performance
need to be identified and evaluated at three levels:
• the supply chain itself
• the market in which the supply chain operates
• the wider society (including rural livelihoods) and
the natural environment.
The supply chain
According to Kaplinsky and Morris (2002), an
understanding of the ‘value chain’ involves obtaining
information, over time, on:
• gross output and net output (gross output less input
costs) values
• physical and human resource flows along the chain
• employment (including disaggregation by gender,
ethnicity and skills, as appropriate), sales
destination and concentration among buyers, and
imports/exports.
Net output can also be considered as the value
added, and can be calculated for each stage in the
supply chain. The distribution of this added value
among the participants in each link of the chain is
also crucial — perhaps one trader handles the bulk of
the product, for example. Such profits are related to
barrier to entry at that stage of the chain — higher
barriers lead to less competition and greater profits.
Trends over time in volumes, value added and profits
of the participants are important.
The market
The market for a particular good may be composed
of several distinct supply chains. Over time, this is
becoming clearer as vertical coordination increases
and each retail outlet is associated with preferred sup-
pliers governed by long-term relationships. If one
chain improves its performance through a particular
innovation, this can lead to negative consequences
for other managed supply chains operating the same
market, and for participants who do not form part of
any integrated chain. As vertical coordination
spreads though chains operating in a particular
market subsector, there is potential for:
• marginalisation of those participants who remain
outside the integration process
• relative differences in market share, profits and
employment potential among the different chains.
This leads to the topic of industrial organisation,
especially the relationships between market structure
and conduct (strategic behaviour) and enterprise per-
formance, and the analysis of market power.
Market structure affects competitiveness and
market power and can be understood through infor-
mation obtained on:
• number and size of enterprises in the market, and
the market concentration ratio (the proportion of
sales, value added, employment etc. due to the
largest three, four or five firms)
• social networks between and within enterprises
• degree of product differentiation — something that
makes substitution of other products more
difficult, and thus increases concentration
• degree of vertical and horizontal integration
• barriers to entry of new firms or chains into the
market
• barriers to exit — these are especially important in
agriculture and lead to output levels that cause the
market equilibrium to fall below the cost of
production for many producers. Smallholder
coffee production is a good example
• economies of scale and scope (making more than
one product from a particular process, e.g. fruit
processing) — these greatly influence enterprise
size.
Market conduct (or behaviour) is important, espe-
cially under conditions of imperfect competition, as
occur in vertically coordinated market situations. In
such chains, the locus of decision-making in these
areas is a key indicator of market power. Market
conduct is essentially the balance between competi-
tive and cooperative behaviours:
• competitive behaviours — pricing policies, levels
of output, product designs, sales and promotion
• cooperative behaviours — processes of interaction
and coordination of policies between competing
sellers, influenced by numbers of enterprises in the
market, product and cost homogeneity,
substitution possibilities, and frequency of orders.
These are both affected by industrial and competi-
tion policies and their enforcement.
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Market performance, the outcome of structure and
conduct, is measured through:
• levels of technical efficiency (processes) and
allocative efficiency (inputs, resource use)
• capacity utilisation
• innovation processes and incentives (for cost
reduction, product improvement and consumer
satisfaction).
This section provides a brief overview of the dif-
ferent aspects of the market for a particular good that
may be affected by the operation of a coordinated
supply chain. But the impacts of these chains go
beyond any specific market to include effects on
society and the environment in general.
The wider society and environment
Livelihoods of rural chain participants
In rural areas, the income and other benefits
derived from involvement in any particular supply
chain (as raw material/produce producer, small proc-
essor etc.) frequently constitute one of several com-
ponents of household livelihood. Other components
may be crop production, livestock raising, day labour
for other farmers, off-farm employment and so on.
Livelihood strategies can also be seasonal;
responding to crop harvest and processing times.
In rural Asia, changes in a particular supply chain
may impact on other livelihood options. If the chain
becomes more competitive and demand for produce
and processed products increases, this may increase
the need for resources and time dedicated to that
supply chain, and thus decrease the potential for
deriving benefits from other livelihood options. The
inability or unwillingness to forgo these options can
also be a constraint to supply-chain growth. Thus, the
benefit of improved supply-chain performance at the
level of individual participants needs to be evaluated
from a holistic livelihoods perspective, rather than
just calculating benefits derived from chain partici-
pation itself.
An example of this can be found in Dong Lieu.
Although root crop starch processing is a major
source of livelihood (49% of income), the production
of pigs using processing by-product as a feed is
almost as important (45% of income). Improving the
starch extraction efficiency of the process would
enhance the technical efficiency of the starch chain,
and hence its performance, but would impact nega-
tively on the pig production system — by reducing
the feed value of the by-product that is fed to the pigs.
An improvement of one component of rural liveli-
hoods thus has a potentially negative impact on
another equally important source of income. Starch
processors have not prioritised improving starch
extraction rates as an objective, focusing more on
improving process efficiency to reduce time dedi-
cated to the production of starch, and reducing pollu-
tion (Peters et al. 2002).
Other impacts on the rural economy and the
environment
Supply-chain performance also affects demand for
rural services, and thus the income and livelihoods of
people who provide them. These backward linkages
to such services as input supply (fertiliser, animal
feed, technical services, accounting services) serve to
stimulate rural employment in general. Increased
incomes from direct chain participants and from
these service providers can also enter the rural
economy through forward linkages, as these people
spend their incomes locally on other, unrelated goods
and services. The opposite impact, where small pro-
ducers are marginalised from supply chains as ver-
tical coordination proceeds, will have knock-on
effects for the rural economy in general unless other
employment or income-generation opportunities
emerge to replace them. Migration to urban areas is
another option.
Improved chain performance may result in
changes in farm practices and land-use patterns that
impact on the sustainability of agricultural systems.
If enhanced efficiency, as mandated by contractual
arrangements, is derived from more intensive pro-
duction practices, and a greater percentage of land
area is devoted to a particular crop/commodity (i.e.
replacement of multi- by mono-cropping) the long-
term environmental impacts need to be assessed.
Equally, if food quality and safety assurance prac-
tices control abuses of pesticides, these environ-
mental benefits are positive outcomes that need to be
included in any chain analysis.
Added-value processing often results in pollution
from wastes and by-products. Improved technical
efficiency, scale-up and capital investment may
reduce this, and provide opportunities for converting
these low-value outputs into raw materials for other
value-added products (e.g. animal feed). Both envi-
ronmental impacts and positive income-generation
opportunities should thus be considered.
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Urban effects
Market conduct — especially pricing policy and
competitive behaviour — will play a great role in
determining whether urban consumers benefit from
improved supply-chain efficiency, or whether these
benefits are captured by chain participants (espe-
cially retail chains). The potential certainly exists for
urban consumers to benefit greatly from more effi-
cient supply-chain management — production prac-
tices, distribution logistics, procurement — in terms
of year-round product availability, product price, and
also through enhanced product quality and safety.
Employment will also be generated through these
activities. Indeed, quantitative financial benefits to
individual consumers need only be fractional in order
to generate very significant benefits for urban popu-
lations in general.
However, as concentration advances at the retail
level to approach the degree seen in the EU, for
example, the potential for anti-competitive arrange-
ments between chains may occur — to capture profits
from enhanced efficiency rather than pass them on to
consumers through lower prices, especially if compe-
tition law is weak or poorly enforced for regional or
multinational retail chains.
How? Mechanisms for Enhancing
Positive Developmental Outcomes
Current trends in agri-food chains and markets across
Asia are tending to marginalise small farmers and
processors. The same phenomenon that has already
occurred in the EU and USA of increased retailer
concentration and market power, combined with ver-
tical coordination of supply chains, is making it dif-
ficult for small-scale actors to remain major
participants in these chains. Supply-chain improve-
ments run the risk of benefiting mainly urban retail
chains and their rural agents, together (under favour-
able competitive market conditions) with urban con-
sumers, rather than rural producers and processors.
This is true for chains focused on both national and
international markets.
Is this process largely inevitable? Are there any
mechanisms that will enable small-scale chain partic-
ipants to maintain or increase their level of activity in
such chains as they develop over time?
This section will review some options, based on
different levels of intervention:
• macro or policy level
• meso or institutional level
• micro or individual enterprise/household level.
Policy level
Since this meeting discussed policy in another ses-
sion, this paper highlights the importance of indus-
trial and competition (anti-trust) policy in ensuring a
truly competitive market that limits the potential of
chain participants with market power to capture
excessive rent to the detriment of other chain partic-
ipants and wider society.
Other relevant policies are:
• credit policy, especially for capital investment by
small-scale enterprises — the lack of collateral and
formal legal status can be a major barrier to
investment and upgrading of equipment and
practices
• trade policy — especially subsidies and tariffs for
particular subsectors and products that can distort
rational decision-making
• research and development (R&D) policy,
especially the degree to which public-sector
agencies align their priorities with the small-scale
agricultural sector, and understand the need to re-
orient both their clients and their own organisation
towards market-based decision-making and
priority-setting
• food safety and quality standards and regulations.
Institutional level
Organisational innovation is critical for rural pro-
ducers and processors, aiming to reduce transaction
costs involved in linking with vertically integrated
supply chains. This involves community-level plan-
ning for production (volumes and year-round
supply) and negotiation of contractual agreements
with other chain actors. Benefits can also be found
for the organised supply of inputs and other services
(veterinary, technical assistance). Traditionally,
farmer cooperatives have attempted, with mixed
success, to accomplish these tasks. Another
approach, using informal intermediaries (traders)
with such experience, is another an option and may
be especially valuable if the intermediary also
comes from the same rural community, so that trust
is easier to establish.
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Micro level
Another alternative is to prioritise and develop
supply chains that do not link to concentrated retail
markets, for example, to high-value, speciality prod-
ucts that depend more on quality than price. How-
ever, this involves investment in product
differentiation and marketing that is usually beyond
the capacity of rural organisations. Such services will
need to be contracted in, or the capacity for them
developed in-house. A variation of this is to develop
markets that value the quality or other attributes of
produce/products from a specific region (following
the French concept of terroir). It also helps to focus
on crops and products that, through their inherent
production characteristics, are not amenable to econ-
omies of scale, e.g. where skilled labour require-
ments are high.
The process of deciding which supply chains to
develop, from the perspective of a rural community,
is one that needs much thought. It is easy to rush into
new, market-based activities, only to find the market
saturated because others are doing the same. Time
spent in selecting the best options for any given com-
munity — taking market, farmer and environmental
criteria into account — is a good investment. Meth-
odologies for this exist (e.g. Ostertag 1999).
Alternative trade supply chains
Alternative trade markets have potential to benefit
small-scale producers. Three types of alternative
trade markets exist — organic, ethical and fair trade.
Fair trade
The following definition was agreed by the Fair-
trade Labelling Organizations International (FLO
International), the International Federation for Fair
Trade (IFAT) and the European Fair Trade Associa-
tion (EFTA). Fair trade is an alternative approach to
conventional international trade. It is a trading part-
nership which aims at sustainable development for
excluded and disadvantaged producers. It seeks to do
this by providing better trading conditions, by aware-
ness raising and by campaigning.
Fair-trade goals are to:
• improve livelihoods and wellbeing of producers by
enhancing market access, producer organisations,
paying a better price, and providing continuity to
the trading relationship
• promote development opportunities for the
disadvantaged (women, indigenous peoples) and
protect children from exploitation
• raise consumer awareness
• set an example of trade partnerships
• campaign for trade rule and practice changes
• protect human rights.
Fair-trade schemes are the most attractive to small-
scale producers/processors since scale and direct par-
ticipation of the poor is one essential criterion for
accessing these markets. Fair trade differs from
standard trade in five principal ways (Traidcraft
2003). As an organisation committed to fair trade,
Traidcraft focuses on:
• trading with poor and marginalised producer
groups, helping them to develop skills and
sustainable livelihoods through the trading
relationships
• paying fair prices that cover the full cost of
production and enable a living wage and other fair
rewards to be earned by producers
• providing credit when needed to allow orders to be
fulfilled and paying premiums to be used to
provide further benefits to producer communities
• encouraging the fair treatment of all workers, and
ensuring good conditions in the workplace and
throughout the supply chain
• aiming to build up long-term relationships, rather
than looking for short-term commercial advantage.
CafeDirect is the most frequently cited example,
and is now the sixth largest brand of coffee in the UK.
In total, sales of fair-trade agri-produce — coffee,
bananas, tea, chocolate, fruit juice, cocoa, and honey
sourced from around 0.5 million producers in the
topics — exceeded USD70 million in the UK in
2001. A similar number of producers is now linked to
fair-trade coffee markets internationally (Traidcraft
2003). Key fair-trade food products can be identified
by the Fairtrade logo on their packaging. Accessing
these markets thus requires certification and contacts
with relevant organisations. Product quality is
increasingly important. Thus, while fair trade is still
only a very small proportion of the total agri-food
market, it shows high rates of growth (24% in the UK
in 2001–2002) and makes a difference to the liveli-
hoods of millions of disadvantaged producers around
the world. One point of note — in Asia, Traidcraft’s
producer partnerships are almost entirely in the small
artisan and handicraft sector, not agriculture.
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Ethical trade
Ethical trade is complementary to fair trade, and
involves working with mainstream corporate firms,
including multinationals, to ensure that they apply
best practice in their relationships with suppliers,
especially as regards labour law, e.g. exploitation of
children, paying a living wage, rights to union mem-
bership and so on. The International Labour Organi-
zation (ILO) is important in setting these standards.
Consumer pressure has been a major factor in driving
compliance with these standards.
Organic supply chains
While fair trade is still a niche market, organic
products are a USD20 billion segment of the global
agri-food market, and are heading towards a 5%
share of total sales in major developed countries, with
5–10% annual growth rates (Yussefi and Willer
2003) and a trend for the product range to expand
from fresh to processed, added-value products.
Fifteen per cent of this market is based on interna-
tionally traded goods and produce. The J apanese
market alone is over USD3 billion/year. Other major
markets in Asia are Taiwan, Hong Kong and Singa-
pore, with rapid development also occurring in major
urban centres of other countries. In Thailand, the
organic market reportedly grew by 60% in 2001
(FAO 2002). A specific feature in some countries
(Malaysia, Philippines, India) is the role of interna-
tional supermarket chains in pushing the develop-
ment of the organic sector (Yussefi and Willer 2003).
The Food and Agriculture Organization of the
United Nations/World Health Organization (FAO/
WHO) Codex Alimentarius Commission Committee
on Food Labelling has proposed Draft guidelines for
the production, processing, labelling and marketing
of organically produced foods. According to their
definition, “organic agriculture is a holistic produc-
tion management system which promotes and
enhances agro-ecosystem health, including biodiver-
sity, biological cycles, and soil biological activity. It
emphasizes the use of management practices in pref-
erence to the use of off-farm inputs, taking into
account that regional conditions require locally
adapted systems. This is accomplished by using,
where possible, agronomic, biological, and mechan-
ical methods, as opposed to using synthetic materials,
to fulfil any specific function within the system.”
This definition goes further than simply eliminating
use of artificial pesticides and fertilisers, to encom-
pass issues relating to system sustainability, biodi-
versity, soil health etc.
From small beginnings, organic produce and prod-
ucts are now undergoing ‘mainstreaming’ into many
international markets. As organic products progress
from niche to mainstream supply chains, price pre-
miums are falling and the scale of production is
increasing. Thus, ‘organic agribusiness’ — which
maintains the pesticide and chemical fertiliser-free
status (and certification) while defaulting on the
other, sustainable-systems aspects of organics (e.g.
using monocrops, not multi-cropping) — has devel-
oped. Large-scale production of organic produce is
thus a reality, and pesticide and fertiliser-free agricul-
ture is no longer an area in which small farmers have
advantages, except insofar as other sustainable pro-
duction criteria are valued in the marketplace.
Two possible entry points exist for the develop-
ment of organic agriculture in Asia, according to
FAO (2002):
• input-intensive production systems, where yield
has reached a plateau and environmental damage
from excessive application of fertilisers and
pesticides is apparent
• resource-poor smallholders, who have never used
artificial fertilisers or pesticides (organic by
poverty), making the transition to organic
certification faster and lower-cost than for other
producers, and offering potential for over 200%
yield increases.
The latter of these two situations should provide
real incentives for supply chains actively seeking to
procure organic produce to invest in developing a
relationship with these small-scale producers, but
only if they:
• can be organised, to reduce the transaction costs of
maintaining a commercial relationship
• produce reliable, good-quality produce —
something that requires support services to provide
technical assistance, credit and so on.
Certification costs are a major constraint for these
small-scale producers. These costs can be reduced by
development of group schemes that divide the cost
among members of associations, and also by appro-
priate local (low-cost) certification services that are
affiliated with and recognised by international
bodies. This latter option has made progress in Thai-
land, for example (Organic Agriculture Certification
Thailand), but not yet in the Philippines.
Scope for small-scale production of organic
produce also exists in:
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• local markets, usually not requiring certification
• high-value outlets in major urban centres (e.g.
restaurants, high-income sector box schemes)
• supply chains that combine fair-trade and organic-
production entry criteria.
Methodology
The methodology through which interventions are
made to enhance chain innovation is important. At
the International Centre for Tropical Agriculture
(CIAT; Centro Internacional de Agricultura Trop-
ical), the starting point is not a particular chain, but
the rural community for which benefits are sought.
‘Working groups’ are formed in each community,
comprising local organisations (e.g. government,
non-governmental organisations (NGOs), farmers’
organisations) interested in agro-enterprise develop-
ment. These groups take responsibility for facili-
tating change at the local level. The first joint activity
is selecting the best options for supply-chain devel-
opment — a process that combines market informa-
tion and contacts, producer preferences and
environmental criteria. Once a ‘basket of options’ has
been identified, supply-chain development can
proceed for each one.
Processes that are genuinely participatory,
involving all chain actors, will allow scope for inno-
vations that are relevant for smaller-scale rural
actors. All participants can identify critical points in
the chain where problems (or opportunities) are
located, and use this information to generate solu-
tions. Building trust among chain participants and
good communication are critical. Traditional supply
chains are usually characterised by very limited com-
munication among actors in different links of the
chain — something that results in misunderstandings
and mistrust. This process can therefore benefit from
neutral facilitation. The solutions generated through
this process can translate into ‘projects’ that chain
participants can themselves implement, with external
assistance as needed, to improve the chain. These
may be technology, organisation or investment
related. This process also requires detailed informa-
tion on the chain (chain mapping) as a basis for iden-
tifying critical points and solutions, which can be
obtained in two ways:
• through formal surveys, by external agents — the
information is analysed and presented to chain
actors
• through group participatory exercises. Different
types of actors can generate one map together, or
separate maps can be produced by (for example)
producers and traders — this approach allows each
party to see the chain as perceived by others.
More information on these methodologies,
together with detailed examples from Latin America
and Southeast Asia, are given in the companion paper
that was presented at the 21
st
ASEAN/3
rd
APEC
Seminar on Postharvest Technology (Wheatley et al.
2003), and can also be obtained from the CIAT
Agroenterprise Project (see <www.ciat.cgiar.org>).
Examples
These approaches to supply-chain improvement
have been used by CIAT’s Agroenterprise Project,
mainly in Latin America, but more recently in South-
east Asia. One example from Latin America (Yorito,
Honduras) and one from Asia (Dong Lieu, Vietnam)
are briefly presented here. In addition, during the
recent Rural Agro-enterprise Development Training
Course (CIAT-PHTI-SEARCA-UPWARD, April
2003) in Ho Chi Minh City, the participants were
given an opportunity to trial the methodology during
a two-day field visit to agri-food supply chains in
Ninh Thuan Province. They were divided into three
groups to focus on different chains (grapes, sheep and
goats, and cotton), with the production component of
each chain based in a different district. During this
exercise, participants interacted with chain actors
(producers, processors, traders etc.) and support serv-
ices and agencies (including local government).
Basic chain mapping was undertaken (from the per-
spective of different actors, in most cases), critical
points were identified, and solutions to the problems
developed with the chain participants. From this an
action plan was developed, that involved:
• research and development
• short-, medium- and long-term actions
• actions that can be implemented using local
resources and cooperation between chain
members, plus those requiring external assistance.
Yorito, Honduras
In Yorito, where CIAT works with a local consor-
tium of farmer organisations (CLODEST), the coffee
supply chain was prioritised for attention, based on
the potential to develop niche and alternative markets
for a high-quality product. The existing chain was
mapped using participatory methods that involved
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producers and processors in one rural community.
Based on this, critical points were identified, and
communication between chain members increased
(especially between the producer association and
traders).
One short-term outcome of this was a negotiation
with existing traders of higher prices for coffee
beans. A medium-term outcome was the decision by
the farmers’ association to seek organic certification
for its members (about 45 households). This was
obtained in early 2003. As a result, the main local
trader is now interested in working with the group to
access high-value markets, in which he will not only
provide marketing services, but also technical assist-
ance and credit for capital investments needed to
improve and standardise quality. No formal ‘project’
exists to achieve this, but it is nonetheless an outcome
of a process that improved communication and trust
between producers and the trader.
Dong Lieu, Vietnam
In Dong Lieu, a formal survey of the starch cluster
of enterprises was made in 2002. This involved inter-
views with representative samples of all the different
types of chain participants (Peters et al. 2002). Anal-
ysis of these results indicated a number of critical
problems related to space limitations, disorganisation
of procurement, and pollution. These were presented
to a meeting of all the enterprises, together with local
authorities. From this, the idea emerged to organise a
study tour of a larger-scale root-crop starch cluster in
southern Vietnam. Representatives selected for this
mission were a processor, an equipment maker and a
local government official. The visit was highly suc-
cessful. The group reported back to the community in
Dong Lieu, and a strategy for the development of the
whole cluster has now been developed, based on
practical solutions to the problems identified earlier.
These solutions are basically organisational in
nature, and involve re-ordering the territorial layout
of the fresh root market in relation to individual
processing households, and of the arrangement of
processing operations at the household level, to
reduce space limitations and improve waste and by-
product management. Equipment modifications are
also in process. A further study tour to China is also
planned. One lesson learned from this participatory
process is that identification of key actors (change
agents) within the supply chain is critical. In this
case, through working with a few individual equip-
ment makers and traders (who themselves are not
among the poor), it has been possible to facilitate the
introduction of innovations (identified by partici-
pants, not experts) that can potentially benefit hun-
dreds of poor processing households and (through
linkages to crop production) thousands of cassava
and canna producers.
Conclusions
While current trends in the agri-food sector are not
favourable for the sustainable development of the
Asian small farm sector in general, several options
exist that can counteract this, including policy devel-
opment, institutional innovations, and expansion of
participation in alternative trade supply chains.
A clear understanding of supply chains is needed,
including who participates and is affected by them,
how the economic and other benefits and costs of par-
ticipation are apportioned among these actors, and
how chain development affects other livelihood
activities and the wider environment.
Participatory methods that allow the perceptions of
different actors to emerge, and that facilitate commu-
nication, information exchange and building of trust
(social capital) among chain members are essential
for smallholder farmers to integrate equitably into
these more managed supply chains.
References
FAO (Food and Agriculture Organization of the United
Nations) 2002. Report of the Regional Workshop on
Exploiting the Potential of Organic Agriculture for Rural
Poverty Alleviation in Asia–Pacific, 26–29 November
2001. Rome, FAO.
Hughes, D. 1994. Breaking with tradition: building
partnerships and alliances in the European food industry.
Wye, UK, Wye College Press, 218 p.
J ipleechep, S. 2002. Who is who? Bangkok Post article. On
the Internet: <www.siamfuture.com>.
Kaplinsky, R. and Morris, M. 2002. A handbook for value
chain research. Canada, International Development
Research Centre (IDRC), 105 p. Available on the Internet:
<www.ids.ac.uk/ids/global/pdfs/vchnov01.pdf>.
Morris, S. 2003. Shops unlikely to stock GM foods. The
Guardian, 16 J uly 2003.
Peters, D., Wheatley, C., Prain, G., Slaats, J . and Best, R.
2002. Improving agroenterprise clusters: root crop
processing and piglet production clusters in peri-urban
Hanoi. Presented at the Symposium on Local Agrifood
Systems: products, enterprises and the local dynamics,
16–18 October 2002. Montpellier, France, Centre de
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edited by G.I. Johnson and P.J. Hofman
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Coopération Internationale en Recherche Agronomique
pour le Developpement (CIRAD), 21 p.
Ostertag, C.F. 1999. Manual for market opportunity
identification with small farmers. Hillsides ecosystem
training manual No. 7. Cali, Colombia, Centro
Internacional de Agricultura Tropical (CIAT;
International Centre for Tropical Agriculture).
Reardon, T., Timmer, C.P., Barrett, C.P. and Berdegue, J .
2003. The rise of supermarkets in Africa, Asia and Latin
America. American J ournal of Agricultural Economics,
85(5) (in press).
Traidcraft 2003. Traidcraft: fighting poverty through trade.
On the Internet:<www.traidcraft.co.uk>.
Wheatley, C., Best, R. and Peters, D. 2003. Supply chain
management and agro-enterprise development: CIAT’s
approach in SE Asia. Paper presented at the 21
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ASEAN/
3
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APEC Post-Harvest Technology Seminar, Bali,
Indonesia, 23–26 August 2003.
Yussefi, M. and Willer, H. 2003. World of organic
agriculture 2003 — statistics and future prospects.
International Federation of Organic Agriculture
Movements (IFOAM). On the Internet:
<www.ifoam.org>.
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edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
124
Farmers’ Misconceptions about Quality and
Customers’ Preferences: Contributing
Inefficiencies to the Vegetable Supply Chain in
Southern Mindanao
Sylvia Concepcion,* Marilou Montiflor,* L.T. Hualda,* L.R. Migalbin,*
L.N. Digal,* E.T. Rasco,* N.M. Manalili,
†
M.J. McGregor,
§
P.J. Batt,
§
R. Murray-Prior
§
and F.M. Rola-Rubzen
§
Abstract
A supply-chain framework encourages producers to ensure that their downstream customers are happy and
satisfied. A study to determine vegetable growers’ perceptions of vegetable quality and customer preferences
was undertaken in Kapatagan, Digos City in southern Mindanao in the Philippines. Results revealed
misconceptions about the nature of the demand for their products, reflecting the low farmers’ awareness of
their market’s needs and putting these farmers at a disadvantage. Their divergent, often erroneous, ideas and
concepts about vegetable quality and the market contributed to waste and inefficiency in the supply chain.
Correct information, a vital factor in maintaining balance and efficiency along the chain, is a rare privilege
for the Kapatagan farmers. They do not have direct and valid information about market preferences and rely
on the information provided to them by intermediaries in the chain. Generally price-takers, farmers produce on
the basis of current availability of inputs and not on market demand. They are generally unaware of the
characteristics of the market for temperate vegetables.
This paper discusses farmers’ perceptions of vegetable quality and customers’ preferences regarding
attributes of quality vegetables, such as variety, size and shape, colour, taste, shelf life, and freedom from pests,
diseases, physical damage and defects.
This study is a part of a research project which aims
to understand the systems that small farmers in
southern Mindanao employ to produce and market
selected temperate fresh vegetables and which aims
to examine the efficiency of the agribusiness supply
chain. There are numerous factors affecting the effi-
ciency of the agribusiness supply chain for temperate
vegetables, and this paper discusses only the extent to
which farmers know (or do not know) their cus-
tomers’ preferences regarding the desired quality
attributes for fresh vegetables. The differences in the
perceptions of the farmers and their customers help
to explain why farmers are not able to optimise the
return from their produce. This paper also discusses
perceptions of the farmers and their marketing inter-
mediaries on the attributes of quality vegetables.
* University of the Philippines – Mindanao, Anda Campus,
Davao City, Mindanao, Philippines.
Email: <[email protected]>(S. Concepcion).
†
SEAMEO Regional Center for Graduate Study and
Research in Agriculture (SEARCA), Los Baños, Laguna
4031, Philippines.
§
Curtin University of Technology, GPO Box U1987,
Perth, Western Australia 6845, Australia.
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ACIAR Proceedings No. 119e
(printed version published in 2004)
125
Customers’ perceptions of the quality of a product
or service and their overall satisfaction have some
observable indicators. The terms customer satisfac-
tion and perception of quality are labels used to sum-
marise a set of observable actions related to the
product and/or service (Govindasamy 1997).
Opara (1999) defined quality of agricultural prod-
ucts, as “involving all of the attributes, characteris-
tics, and features of a product that the buyer,
purchaser, consumer, or user expects”, and stated that
quality assurance “involves those planned activities
designed to consistently satisfy customer expecta-
tions by defining objectives, planning activities, and
controlling variability”.
One popular view is that quality is intangible,
similar to truth, beauty, and goodness (Burrill and
Ledolter 1999). It is also seen as a ‘feature of excel-
lence’ or an ideal (Saunders 1997; APICS Dic-
tionary; Burrill and Ledolter 1999). On the other
hand, quality is seen as a combination of characteris-
tics that are critical in establishing a product’s con-
sumer acceptability, including fitness of use,
freedom from deficiencies and provision of satisfac-
tion (Satin 1997; Saunders 1997; J uran and Gryna
1998, cited in Saunders 1997; APICS Dictionary,
cited in Fredendall and Hill 2001).
The food industry defines quality as an integrated
measure of purity, flavour, texture, colour, appear-
ance, and workmanship (Satin 1997). This is an idea
similar to total quality. “The concept of total quality,
however, widens attention to include all aspects of
the offering, including service and delivery time”
(Saunders 1997, p. 187).
Marketers define quality as value or a consumer’s
perception of the worth of the product in relation to
price (Satin 1997; Saunders 1997, pp. 184–187;
APICS Dictionary, cited in Fredendall and Hill
2001). Quality also refers to a product’s consistent
adherence or conformance to a standard, specifica-
tion or requirement (Satin 1997; Saunders 1997;
Crosby 1979, cited in Burrill and Ledolter 1999; Fre-
dendall and Hill 2001).
Collins (1994) believed that there are contradic-
tory perceptions of quality due to differences in back-
ground and training. Hill and Chung (1995) stressed
that a person’s concept of quality depends on her/his
approach to that understanding.
The differences in perceptions of quality between
farmers and their marketing intermediaries con-
tribute to market inefficiency. In southern Mindanao,
market orientation among vegetable growers still
needs to be developed in order for the marketing
system to become more responsive to customers’
needs. Market efficiency includes the aspects of
quality, quantity and price of goods and the cost of
performing marketing functions. Although efforts
have been made to promote market-orientated
approaches to production, to enhance markets and
marketing activities and to provide policy support,
problems with efficiency, such as high production
losses and product rejects still persist in developing
countries like the Philippines (Masajo-Manalili
2000).
Methodology
Data for this paper came from a research project
1
funded by the Australian Centre for International
Agricultural Research (ACIAR) and various data
gathering methods were used. In Kapatagan, Digos
Citiy, southern Mindanao, key informants were inter-
viewed, focus group discussions were conducted
among farmers, agents, and storage operators, and
surveys of households were undertaken using purpo-
sive sampling methods. There were three sets of
interview schedules prepared for the household
survey: crop production, social organisation and mar-
keting. The majority of the data used for this paper
came from the marketing survey. A total of 207
households were interviewed, accounting for 12.2%
of the total households in Kapatagan.
Meanwhile, a downstream survey was conducted
based on the names of the buyers mentioned by the
farmers in the household survey. There were 47
respondents interviewed. Additional information
from other players in the vegetable supply chain was
taken from interviews with farmers from other tem-
perate vegetable areas in southern Mindanao, central
Mindanao, and northern Mindanao. Wholesalers
from Divisoria, the largest wholesale market in
Metro Manila, were also interviewed, as well as
supermarket representatives in Davao City and
Metro Manila.
1
ASEM/2000/101: “Improving the Efficiency of the
Agribusiness Supply Chain and Quality Management for
Small Agricultural Producers in Mindanao.”
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(printed version published in 2004)
126
The Project Site
Barangay
2
Kapatagan was created on 10 May 1971
under Republic Act No. 6210, despite the fact that it
was declared as a National Park in 1932 by the Com-
monwealth Government. Logging operations started
in the 1960s and continued to proliferate. When the
logging workers started bringing their families, set-
tlement areas were established. After the logging
companies ceased operations, some of the workers
remained. They started utilising the area for agricul-
tural purposes, particularly for coffee plantations.
Residents from nearby towns started coming because
of the promise of fertile, productive and vast lands in
Kapatagan. Modes of transportation both for the
people and the products include horses, motorcycles,
jeepneys, tricycles, trucks, and L300 vans.
As of J anuary 2002, the total population of Kapat-
agan was 8193 with 1694 households. Most of the
constituents were farmers (80%), while others were
businessmen (15%), and professionals (5%).
The name Kapatagan means ‘plains’ or ‘flat
lands’. However, its topography ranges from level to
gently sloping terrain (0% to 8%), strongly sloping
(18% to 20%) and hilly areas (30% to 50%). The
level terrain is in the centre of the Barangay.
According to theBarangay records, its land use as of
2001 was 2500 ha or 37.45% of its 6675 ha total land
area. It lies at the foot of Mt Apo
3
at an elevation of
around 1100–1600 m above sea level.
The climate is cool at 22–25°C, with no pro-
nounced maximum rain period or long dry season.
The prevalent wind direction is north-east to south-
west throughout the year (Mercado et al. 2000). It is
safe from typhoons because it lies outside the
typhoon belt and is further protected by its moun-
tainous borders.
Kapatagan is an ideal place for planting temperate
vegetables (cabbage, tomato, bell pepper, Chinese
cabbage, Kentucky bean, carrot), coffee, root crops
and other agricultural products. Table 1 shows the
primary crops planted by Kapatagan farmers in the
first quarter of 2002. Most farmers in Kapatagan
(38.2%) planted cabbages. Tomatoes (16.9%) and
potatoes (16.4%) follow as the next most-planted
crops in the area. Other crops planted in 2002 were
chayote, bell pepper, onion and eggplant. Generally,
farmers from Kapatagan believed that cabbage was the
most saleable vegetable in retail. While 31% tried to
sell directly to retail markets, only 5% continued to do
so. The rest sold through agents and wholesalers. The
farmers, locally known as planters, brought their prod-
ucts from their farms or ‘gardens’ to the Trading Post,
through the karyador.
4
Marketing was done through
the ahente or agent who received the produce from the
farmers at the Trading Post in Kapatagan. Then the
ahente passed on the produce to the wholesale buyers
with a PHP1–2 per kilogram profit margin. Buyers
mostly decided the price, while farmers were generally
price-takers. In some cases, buyers pre-ordered some
vegetables through the agents, who obtained the
supply from various farms. Negotiations for the price
took place during the day. Most of the vegetables were
sold wholesale within a day, particularly in the
morning. There were also owners and operators of
bodegas or storage areas who bought the vegetables,
especially potatoes and carrots.
Vegetables were marketed mainly to the sur-
rounding cities, including Digos City, Kidapawan
City, Cotabato City and Davao City. Other Mindanao
buyers came from Cagayan de Oro City and Surigao
and Agusan provinces. There were also some buyers
from the Visayas, such as Tacloban City, Iloilo City
and Cebu City.
Most transactions happened during the market
days: Monday, Thursday, Saturday (Kidapawan
City, Cotabato City, Surigao City, Tacloban City,
Iloilo City, Cebu City etc.); every day for Davao City
and Digos City.
2
Village; the lowest local government unit in the
Philippines.
3
Mt Apo is the highest peak in the Philippines with an
elevation of 2954 m (9691 feet) above sea level.
Table 1. Primary crops planted in Kapatagan.
Crop No. of farmers
planting
Percentage
Cabbage
Tomato
Potato
Carrot
Chinese cabbage
Kentucky bean
Other
Total
79
35
34
27
11
6
15
207
38.2
16.9
16.4
13.0
5.3
2.9
7.2
100
Source: Survey of Kapatagan farmers, 2002.
4
People who transport vegetables on horses’ backs.
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ACIAR Proceedings No. 119e
(printed version published in 2004)
127
Some Issues in the Kapatagan Supply
Chain
Several issues became apparent in the Kapatagan
supply chain. First, the sustainability of farms in
Kapatagan was seriously challenged because of inse-
cure land ownership. Farmers paid taxes on the use of
the land but did not have title to the land because
Kapatagan is part of a national park. Different gov-
ernment agencies had different ideas of whether the
farmers should stay or not.
Second, the production of quality vegetables
begins with the agronomic practices of the farmers.
In Kapatagan, traditional farming was used and
farmers generally had poor agronomic practices,
basically because of a lack of technical knowledge or
lack of finance for the proper farm inputs.
Third, farmers had very little market knowledge
and relied mostly on what their ahentes or immediate
buyers said about the market. Most of them saw their
market as the person who took the goods off their
hands, and rarely looked beyond this buyer.
Fourth, farmers were generally price-takers. They
produced based on current availability of inputs and
not on market demand. Since they did not have any
storage or sophisticated postharvest facilities, espe-
cially for the leafy vegetables, they disposed of their
products at any available price.
Fifth, Kapatagan had very poor road conditions
and rough terrain. Until 2002, many of the roads
leading to the farms were unpaved. Barangay Kapat-
agan received access to electricity only in 2000. Res-
idents had no access to irrigation on the farms, nor
plumbing in their homes.
Sixth, different stakeholders in the supply chain
did not see each other as partners but as persons who
need to be watched. While there was some degree of
trust among several farmers and their buyers, other
farmers felt that the traders may not be giving them
the right price information (Batt et al. 2003).
These issues are typical in traditional supply
chains of agricultural products in developing coun-
tries. Supply chains in developed economies are
demand-driven, with ultimate consumers seeking
benefits such as health and nutrition, safety, quality
and convenience. In developing countries, traditional
chains dominate, driven by traders who act as finan-
ciers for farmers at the same time. Examples of these
are goods delivered to wet markets by viajeros (trav-
ellers). However, some chains in developing coun-
tries have begun to improve — brought about by
increasing urbanisation, globalisation, changing con-
sumer preferences, and agribusiness consolidation.
Examples of these are the exports of banana and tuna
and some agribusiness ventures catering to the fast-
food market.
Non-traditional vegetable supply chains in
northern Mindanao supply the high-end market (high
quality, high price). These are managed chains where
small farm holders collaborate through marketing
clusters.
To help improve the Kapatagan supply chain for
temperate vegetables, members of the chain need to
be market-oriented. This market orientation will lead
to greater efficiency in response to customer prefer-
ences and lead to more competitiveness.
To begin to be market-oriented, farmers need to
know what their customers want. In this study,
farmers’ perceptions of their customers’ preferences
or quality criteria are examined and compared with
what their customers actually say they want.
Findings and Discussion
Desired attributes of vegetables according to
farmers
Attributes to define quality in vegetables used in
the survey came from the farmers themselves during
the initial visits to the village. In preliminary face-to-
face interviews with the farmers, they were asked to
describe, in their own words and language, what
quality in vegetables meant. Some would simply
describe features of vegetables in general, while
others would first state what vegetable they would
like to describe. Those who proceeded to describe
without qualifying the vegetable would give general
comments like ‘that which is not rotten’ (kanang dili
lata), or ‘that which has a few worms’. These initial
descriptions gave us a general sense of the level of
quality awareness of the farmers of Kapatagan. They
were primarily concerned only with wilting or fresh-
ness and pest infestation of vegetables.
Farmers described the vegetables they grew using
descriptors in the vernacular and these descriptors
were translated into English. Other attributes from
secondary materials that define vegetable quality
were added to the list. This list of attributes was used
in the survey. Eleven attributes were used: shape,
size, weight, maturity, colour, freedom from pests, no
or little physical defect, no or little mechanical injury,
cleanliness, freshness, and firmness. Farmers were
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ACIAR Proceedings No. 119e
(printed version published in 2004)
128
asked to rank the 11 attributes of quality in vegetables
according to the order of importance, 1 being the
most important and 11 the least important.
The attributes of vegetables that were important
from the perspective of the farmers were those over
which they had some degree of control, like maturity
at harvest and freedom from pests (Table 2). The
farmers decided when to harvest their crops and con-
trolled the quality of their produce by preventing
insect infestation through proper cultural practices.
Maturity referred to the appropriateness of the matu-
rity of the product at the time of harvest (Lizada
2000). This seemed to be an important quality
attribute for the farmers for almost all the crops.
There were also respondents who said that quality
vegetables were those that were free of pests and dis-
eases. During the in-depth interviews with farmers,
some noted that vegetables with a few insects were of
good quality. Farmers referred to the vegetables as
naay ulod (with worms — since the insects were
observed in the larval stage) and tung naay buslot
(those with holes) for leafy vegetables. They
explained that the presence of these insects was proof
of food safety. If an insect survived, the vegetable
was perceived to be free from chemicals. These
farmers, however, clarified that there must only be
one or two of such pests in each head of cabbage or
lettuce. Beyond that, it was considered an infestation.
Size and cleanliness of the produce affected the
price they received for their produce, hence farmers
tended to give these quality attributes higher rank-
ings. Cleanliness meant that the vegetable was free
from any dirt or stains. In the survey, most of the
farmers who planted cabbages and carrots said these
two vegetables should be clean to be of good quality.
Farmers gave very low ranks to attributes like no or
little mechanical injury, especially for crops like
carrot and Chinese cabbage. Mechanical injuries
were those caused by careless handling, packaging or
storage, such as damage caused by impact, pressure
or compression, or vibration. This damage appeared
as abrasions (especially in potatoes and tomatoes)
bruising, distortions, cracks, cuts, punctures, skin
breaks, skinning, or splitting (Lizada 1993). Many of
the farmers did not give this quality attribute a high
ranking. This may be due to the fact that the farm-to-
market roads from Kapatagan to the retail markets
were very bad and farmers felt powerless to prevent
the mechanical damage.
There was a standard practice in Kapatagan of
deducting 30% from the volume weight of leafy veg-
etables to allow risk and shrinkage, locally known as
reseko. Shrinkage and other forms of mechanical
injury affected the quality of leafy vegetables.
In Kapatagan, vegetables were packed in pink
sacks, except for tomatoes, which were packed in
crates. The sacks did not provide any protection
against mechanical injuries, but did allow flexibility
in the amount of produce tightly packed in. While
packaging in sacks induced more mechanical
damage, farmers were paid by the weight and size of
the produce as well as the physical appearance.
Farmers apparently did not perceive mechanical inju-
ries during harvest or transit as variables affecting
vegetable quality.
Overall, farmers in Kapatagan believed that
quality was reflected in the physical appearance of
vegetables. In an interview with a farmer from Mar-
ilog, another village in southern Mindanao, he
believed that high-quality tomatoes should be good
to look at — large and shiny. The emphasis on the
physical characteristics of vegetables was the same
for Marilog as it was in Kapatagan. The Marilog
farmer also believed that cabbages and other leafy
vegetables like lettuce should not be completely free
of pests. The visibility of a few pests, he said, was
proof that the vegetable had just the appropriate
amount of chemicals.
Very few farmers in Kapatagan mentioned the
nutritional content (salubrity) of their crops as a
descriptor of quality. Most of their definitions of the
quality of their produce rested on the physical char-
Table 2. Farmer rankings of desired attributes of
vegetables (where 1 =most important and
11 =least important).
Attribute Mean Standard
deviation
Shape
Size
Weight
Maturity
Colour
Freedom from pests
No or little physical defect
No or little mechanical injury
Cleanliness
Freshness
Firmness
6.06
5.34
5.78
4.54
6.49
5.03
6.03
6.81
5.35
5.75
6.45
0.51
0.76
1.01
0.82
1.41
0.69
1.08
0.70
0.98
0.63
0.89
Source: Survey of Kapatagan farmers, 2002.
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edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
129
acteristics of the product — something that could be
validated with their eyes, like shape and size. Taste
was also mentioned only after some prodding. While
some farmers related quality to price, this construct
did not become part of the definitions that the farmers
used to define quality.
Desired attributes of vegetables according to
downstream customers
There were 47 respondents who came from the list
of buyers identified by the farmers during the house-
hold survey. Most of these buyers were 20–59 years
old. Around 23% belonged to 35–39 age group, while
2% belonged to 55–59 age group, and 44.7% of the
respondents came from Kapatagan. Other buyers
were from Davao City (21.3%), Tagum City
(17.0%), Digos City (8.5%), Dujali (2.1%), General
Santos City (4.3%) and Panabo (2.1%). Almost half
of the respondents (46.9%) were wholesalers, while
others were farmers (8.5%), farmer-agents (4.3%),
agents (2.1%), retailers (34%) or food service sup-
pliers (2.1%). The majority of the respondents (83%)
primarily bought their produce from Kapatagan.
The downstream customers were asked to rank the
importance of 21 criteria in their decision to purchase
vegetables on as scale of 1 to 4 — where 1 was ‘not
at all important’ and 4 was ‘very important’.
Table 3 shows that the respondents were unani-
mous in ranking freshness, good taste, and cooking
characteristics as very important quality attributes in
choosing which vegetables to purchase. This is con-
sistent with what the farmers perceived the ultimate
customers would want — freshness and good taste.
However, while farmers believed that customers
want well-graded vegetables, the downstream cus-
tomers themselves did not assign this much impor-
tance.
Desired quantity and colour tied in second place
with mean score of 3.98. Since the respondents also
sold the products they bought, it was important for
them to have enough in quantity to supply the
demands of their downstream buyers. A good-col-
oured vegetable was also an indication of a visually
appealing, fresh and saleable vegetable. Likewise,
the immediate delivery of the products was consid-
ered to be more important than physical characteris-
tics (size, shape, freedom from pests, freedom from
physical and mechanical injury). The farmers did not
mention this attribute during the in-depth interviews.
Farmers were not aware that on-time delivery is a
quality consideration of the downstream customers.
Downstream customers gave importance to com-
petitive price but the farmers did not perceive this as
important to the ultimate customers. Filipino con-
sumers are price-sensitive (Agbayani et al. 2000) but
the farmers are not aware of this.
Comparison of farmers’ responses with
those of their customers
Table 4 shows the responses of the farmers and
downstream buyers using 13 attributes. The farmers
were asked to rank, on a scale of 1 to 6, what they
think their customers want where 1 is ‘not at all
important’ and 6 is ‘very important’. On the other
hand, the downstream buyers used a scale of 1 to 4,
where 4 is ‘very important’ to rank what they want.
Since the farmers and downstream buyers used dif-
ferent scales, the lowest common denominator (6)
Table 3. Desired attributes of vegetables as perceived
by downstream customers.
Attribute Mean Standard
deviation
Freshness
Good taste
Cooking characteristics
Desired quantity
Good colour
Well packed
Competitive price
Attractive, good-looking
produce
Immediate delivery
Firm
Good size
Good shape
Well-graded
Freedom from pest/disease
damage
Product that stores well
Desired variety
Freedom from chemical residues
Freedom from physical injury
Assortment of produce
Free of soil
Freedom from mechanical
injury
4
4
4
3.98
3.98
3.95
3.95
3.93
3.91
3.91
3.86
3.86
3.86
3.84
3.81
3.79
3.73
3.71
3.70
3.59
3.66
0
0
0
0.15
0.15
0.21
0.31
0.26
0.29
0.48
0.41
0.52
0.64
0.53
0.55
0.71
0.77
0.72
0.71
0.92
0.73
Source: Survey of market intermediaries, southern Mindanao,
2002.
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ACIAR Proceedings No. 119e
(printed version published in 2004)
130
was derived and the responses were recomputed to
have a standard measure.
The corresponding ranks and standard deviation
were included to illustrate the different degrees of
importance given by the farmers and downstream
buyers. Although both the farmers and the buyers
ranked freshness of produce as the most important
criteria, all other attributes have different and oppo-
site rankings. Using rank correlation coefficient cal-
culations, the computed rank correlation was less
than the critical value of ? =0.01. Thus, the ranking
of the responses of the farmers was significantly dif-
ferent from what their customers say they want.
The second and third most important attributes for
the farmers were the proper grading of the produce
and having the desired size(s), respectively, while
together these were only the sixth most important for
the buyers. The second most important attribute for
the buyers was having produce available in the quan-
tities required. Unlike farmers who only transact
downstream, the buyers have to transact with
upstream (farmers, traders) and downstream
(retailers, wholesalers, institutions) customers, so
they must have enough volume of products to main-
tain their business arrangements.
Meanwhile, farmers thought that having a wide
range of produce of the desired variety was very
important for their customers. However, the down-
stream buyers ranked this attribute much lower,
therefore assigning it less importance.
The farmers put least importance on providing
produce that is competitively priced. However, the
customers considered it to be the third most impor-
tant attribute. The farmers are more concerned with
easy and early disposal of their products, since they
lack facilities for postharvest storage. The faster it
can be sold, the lesser the problem with wastage.
However, the farmers will complain later that they
got a low price for their products. Customers, on the
other hand, have to set a lower price for the products
since they will sell these products to their down-
stream buyers and they must get profit from this
transaction.
Farmers and their customers seem to be empha-
sising different aspects of vegetable quality. Farmers
have several misconceptions about what their market
wants, as manifested in Table 4, exhibiting their lack
of market awareness. There is a need to coordinate
farmer and customer product specifications so that
there is increased efficiency in the chain.
Summary
The gap in perceptions of the farmers and the down-
stream customers was manifested in the results pre-
sented. The farmers defined quality according to the
physical and biological characteristics of the vegeta-
Table 4. Comparison of the responses of farmers and downstream buyers to perceived importance of vegetable
attributes, based on responses where 1 =not at all important and 6 =very important.
a
Desired vegetable attributes Farmer Buyer
Adjusted
mean
Standard
deviation
Rank Adjusted
mean
Standard
deviation
Rank
Have fresh produce
Have produce that is appropriately graded
Have produce of desired size(s)
Have wide range of produce
Have produce that is appropriately packed
Have produce of desired variety
Have produce available in quantities required
Have produce that is free from physical injury
Can deliver produce when needed
Have produce that is free of pests and diseases
Have produce with long shelf life
Have produce that is free of chemical residues
Provide produce that is competitively priced
5.832
5.813
5.740
5.725
5.563
5.637
5.392
5.225
5.207
4.824
4.721
3.764
3.350
0.78
0.68
0.72
0.80
1.05
1.02
1.11
1.30
1.36
1.76
1.65
1.98
1.96
1
2
3
4
5
6
7
8
9
10
11
12
13
6.0
5.795
5.795
5.557
5.932
5.693
5.966
5.591
5.864
5.761
5.727
5.148
5.932
0.0
0.95
.61
1.05
0.32
1.05
0.23
1.04
0.44
0.79
0.81
1.95
0.45
1
6.5
6.5
12
3.5
10
2
11
5
8
9
13
3.5
a
Downstream buyer responses were actually given on a 1–4 scale and had to be adjusted accordingly (see text for further details).
Sources: Survey of Kapatagan households, 2002; Survey of downstream buyers, 2003.
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131
bles, such as maturity, weight, size, shape, pest/
mechanical and physical damage/defects, cleanliness
and freshness. Price was also mentioned as an indi-
cator of quality. Farmers believed that the ultimate
customer would want fresh vegetables that are well
graded and taste good. They also thought that the
consumer would be concerned with physical appear-
ance, such as colour and defects caused by insect
damage.
However, the downstream customers defined
quality not only in the attributes described by the
farmers, but most especially in terms of taste, fresh-
ness, cooking characteristics, colour, timely delivery
and consistent supply. The right maturity of the veg-
etable, referring to the right timing of harvest, was
important to the farmer but not to the downstream
customers. Market intermediaries were concerned
with mechanical injuries but the farmers were not.
The market intermediaries connect the producer and
the end user so they interact with both players. They
are concerned with the delivery of goods so that they
will have a consistent supply of merchandise with the
proper assortment and in the desired varieties. Logis-
tical issues are crucial to them because they bear the
risk of carrying the inventory.
Furthermore, farmers’ misconceptions of their
customers’ criteria were emphasised when the rank-
ings of the farmers and the buyers on certain
attributes were compared.
Conclusions
Farmers use quality attributes that are within their
control — like the right maturity of the vegetable or
the freedom from pest damage. Weight is an impor-
tant attribute for farmers because it affects their earn-
ings. However, the farmers do not feel that it is within
their financial or physical power to consider other
seemingly uncontrollable quality attributes.
Many of the problems related to the quality of the
vegetables produced are due to the agronomic prac-
tices of the small farmers and the low level of their
awareness of what is important to the market. Their
primary focus is their income, which affects the sur-
vival of their family.
Improving quality in the vegetable supply chain
from Kapatagan must begin with raising the capacity
of farmers to produce quality vegetables and helping
them to understand market requirements for quality.
Their perceptions are based on their reality and their
reality is the time of harvest and the physical
attributes, which they can control. The downstream
customers, on the other hand, base their under-
standing of quality on their own reality which is the
demand of the retailers and the reliability of their
supply.
Helping both farmers and intermediaries see the
entire supply chain rather than focusing on only their
part of the chain can help to align their perceptions.
The promotion of cooperation and partnership to
sustain the entire chain will lead to improved supply-
chain efficiencies. This will mean a reorientation for
all stakeholders and capacity building for farmers to
increase their production skills and market orienta-
tion.
Recommendations
The data showed that farmers and their customers
had varying ideas on desired vegetable quality
attributes. Quality perceptions of the farmers are not
the same as the intermediaries. Farmers look at the
physical characteristics of the product but intermedi-
aries are more concerned with the consistency and
promptness of delivery. With this differing perspec-
tive, a quality system infrastructure needs to be
devised and implemented. A quality system infra-
structure is the set of programs, policies and proce-
dures aimed at defining the quality characteristics
and standards of agricultural commodities and agri-
based products, disseminating the standards to the
producers, wholesalers, traders, retailers, consolida-
tors, processors and end consumers, implementing
these standards in the concerned sectors and moni-
toring the application and adherence to these stand-
ards along the entire supply chain. The quality system
infrastructure requires that standards and quality
assurance systems be in place, with adequate incen-
tives, and communicated to farmers. Correct infor-
mation is vital in ensuring the efficiency of the chain.
With the current scenario, farmers are dependent on
the buyers and agents for information.
Quality system infrastructure also requires
increasing professionalism among farmers, traders
etc. to get the product right, and collaboration to get
the required volume. Downstream customers put
high importance on having produce available in the
quantities required. There is also a need for capacity-
building for all chain members to ensure the effi-
ciency and effectiveness of the supply chain in terms
of training, livelihood seminars, market awareness
exercises, and farmer education. Moreover, to ensure
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132
efficient access to the market, the roads from farms to
markets should also be good and passable.
When the quality system infrastructure is set up,
farmers will be able to access correct information —
a vital factor in maintaining balance and efficiency
along the chain. They will have direct and valid infor-
mation about market preferences, quality standards,
training and livelihood programs. They will be aware
of the characteristics of the market for temperate veg-
etables. If the farmer gets some degree of improve-
ment from the quality system infrastructure being set
up, this will trickle down to other members along the
chain, thus creating an efficient and effective vege-
table supply chain, where all chain members benefit.
Acknowledgment
This project was funded by the Australian Centre for
International Agricultural Research (ACIAR).
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edited by G.I. Johnson and P.J. Hofman
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133
The Melon Value Chain in Gansu Province,
Western China: Benefits to Growers from
Improved Disease-Control Practices
Zhang Yanrong* and Sherrie Wei
†
Abstract
Melons are widely grown in the Minqin County of Gansu Province in western China. Besides supplying
consumers within the province, good grades of melons are transported over 1000 km to interstate markets. The
current supply chains of melons have various constraints that prevent delivery of satisfactory and consistent
products to consumers in the local as well as interstate markets. These include technical issues of pests and
diseases and inadequate handling in cold-chain storage, packaging and quality standards. There are also
management issues of growers harvesting their melons prematurely in order to capture an early-season
premium price. As a consequence, the industry suffers from decreasing consumption, albeit slowly, and poorer
price returns to growers. While these issues are recognised by the growers, no action has been taken to address
the problems as growers are yet to be integrated for collective actions for common interests.
This study addressed the potential to deal with some of the industry’s constraints in a collective way through
controlling diseases, and improving cultural practices and selection of melon varieties. Extension workshops to
address these issues, based on scientific research, can be used to encourage farmers to work together, and other
supply-chain issues are also being targetted. The potential benefits to farmers include a bigger ‘slice of the pie’ in
the value chain, but whether farmers can reap these benefits depends on the extent to which they can work together.
For centuries, Chinese consumers have regarded
melon as a delicacy. Melons are grown in the irri-
gated arid remote areas of China, including the prov-
inces of Xinjiang and Gansu. More recently, they
have been planted in Mongolia and a few places in
southern China during the off-season. Melons from
western China are especially well known for their
good taste and sweetness. Besides supplying the
local market, good grades of melons from western
China are transported over thousands of kilometres to
interstate markets.
This study focused on Huanghemi melon (literally
Yellow River melon), grown in the Minqin County of
Gansu Province in western China. Huanghemi melon
is a cross-breed developed by a team at Gansu Agri-
cultural University. This variety is one of the very
few research and development (R&D) products that
have been successfully commercialised. However,
like other melon varieties, Huanghemi melons suffer
from downward price pressures. While this issue is
recognised by growers and other supply-chain part-
ners, due to its complexity, there has been little action
to address the problem.
The objective of this study was to use value-chain
analysis to look at the supply-chain issues in the
Gansu melon industry and discuss grower benefits
from a value-chain perspective. Value-chain analysis
refers to the full range of activities that are required to
* Agricultural Economics Department, Gansu
Agricultural University, People’s Republic of China.
Email: <[email protected]>.
†
School of Natural and Rural Systems Management,
University of Queensland, St Lucia, Queensland 4072,
Australia. Email: <[email protected]>.
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ACIAR Proceedings No. 119e
(printed version published in 2004)
134
bring a product from production to delivery to con-
sumers. The costs and benefits of these activities at
all levels in the supply chain are analysed and com-
pared (Kaplinsky and Morris 2002). Value-chain
analysis is useful in that it provides an indication of
the relative power of chain partners (Cox 1999). Part-
ners who gain the larger shares of the value created
by the whole chain are, in theory, performing the
most important functions in the chain and hence
reaping larger rewards. In practice, they possess the
power over their suppliers and customers due to their
relative competitiveness (Porter 1980, 1985). Value-
chain analysis also offers an insight into chain inno-
vation. Partners with larger shares are more likely to
invest in innovation than those with smaller shares.
The application of new technologies for improved
disease control by farmers requires a value-chain
approach to better understand the incentive mecha-
nisms for technology adoption.
Melon Supply Chains in Gansu,
China
Over 80% of Huanghemi melons are sold in the inter-
state market. The partners in the supply chains
include farmers, collectors, interstate wholesalers,
and retailers in other provinces. There are various
constraints within the current supply chains in the
delivery of satisfactory and consistent products to
consumers in the local as well as interstate markets.
These include technical issues of pests and diseases,
and inadequate handling in cold-chain storage, pack-
aging and quality standards. There are also related
issues of growers harvesting their melons prema-
turely in order to capture an early-season premium
price.
Farmers
The average size of melon farms in Gansu is about
10 Mu or 0.67 ha (15 Mu =1 ha or 1 Mu =66.7 m
2
).
Farmers have modest infrastructure for growing
melons. Many of them use fertilisers and plastic
mulch, but not herbicides or pesticides, as melon
disease problems do not often show up at the farm-
gate stage. Besides growing and harvesting, farmers
may grade, package and transport melons to collec-
tion points in the village. Harvesting is done manu-
ally by collecting melons in hessian bags. Grading
and packaging are mostly based on instructions from
collectors or wholesalers. Standards vary between
wholesalers and are not written down. Common indi-
cators are size and blemishes, and judgments are
made visually. There are two types of packaging:
large netted nylon bags of 20 kg capacity for the
Gansu market; and cartons of 10–15 kg capacity for
interstate markets.
Collectors
Collectors buy melons from farmers and sell to
interstate wholesalers. They are often farmers them-
selves, who have a bit more capital and have sources
of information and contacts with wholesalers. There
are generally a few collectors in each village. They
build their own simple undercover stands by the
roadside near the production areas through which
wholesalers and trucks can pass.
Wholesalers
Wholesalers are normally from other provinces and
operate as merchants rather than agents. They travel
around the country to obtain melon supplies in dif-
ferent seasons. Wholesalers perform a critical function
in the chain by linking local production to interstate
markets. They have the potential to become supply-
chain managers, as they are the only channel partners
that know both production (through collectors) and
markets. However, this has not occurred for various
reasons. Given that individuals are not able to get loans
from banks, wholesalers cannot operate on a large
scale. Two to three of them work as a team on a small
amount of capital. One of them travels to the produc-
tion area to buy the fruit and the other(s) sells the fruit
at the central markets in other provinces. They only do
one deal a year, at most twice, for each production area
in Gansu, Xinjiang, Mongolia etc. The scale of each
deal is one or two truckloads, about 10 or 20 t, but
often stretches to the limit of 14 or 28 t. Because
wholesalers go to each production area only once a
year, it is unlikely that farmers receive any feedback
from them about the current season.
Retailers
Retailers are located thousands of kilometres away
from Gansu. Wholesalers leave the scene completely
once they sell the fruit to the retailers. There is little
feedback of information between wholesalers and
retailers unless serious problems occur.
The whole supply chain from farmer to retailer is
transaction-based and payment is always made in
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ACIAR Proceedings No. 119e
(printed version published in 2004)
135
cash, on the spot. This is not surprising, given few
institutional bases for supply-chain coordination —
including an absence of consolidation at all levels of
the supply chains, an ineffective contract-implemen-
tation system, and lack of cultural underpinning for
inter-organisational collaboration (Wei 2003).
Logistics, transport and losses
In the current study, losses at the farm level were
about 9.1%. Most of the losses were due to blemishes
caused by diseases and pests. Farmers normally did
not apply sprays to control diseases and most of the
time they were able to get away with it. However,
there were times where it was too late to save the crop
and losses were devastating. Losses during shipping
were about 3.75% if everything went well, including
weather conditions, maturity level and no serious
disease threats. Losses at the retail level were most
variable, depending on how long retailers kept the
fruit, but losses were regularly about 10%. Total
losses in the Gansu-to-Shanghai supply chain were
about 23%.
Methodology
Supply-chain partners were interviewed about their
costs and profits in producing Huanghemi melons.
Because the costs and benefits were based on dif-
ferent lengths of time, their profits have been stand-
ardised. Shoucheng Town of Minqin County in
Gansu Province is the major Huanghemi melon pro-
duction area. Three major villages (Xing-J in, Zhong-
Xing and Tien-Cheng) from the town were selected
for this study. Thirty farm households were randomly
selected for in-depth interviews about their cost
structures in growing Huanghemi melons. Collec-
tors, wholesalers and retailers were very sensitive
about the cost/profit figures and were often unwilling
to divulge information. The research team had to
interview a few collectors, wholesalers and retailers
that the team members already knew. While these
were convenient samples, there is no particular
reason to believe the samples were biased. Conven-
ient samples could be an advantage in this study as
the respondents were less likely to give false infor-
mation. Given the high competition at all levels of
supply chains in the melon industry, the cost struc-
tures of those interviewed were not likely to deviate
much from their competitors.
Results
Based on interviews with supply-chain partners, their
returns were approximated and analysed at the firm
level and their shares in the supply chain analysed
from a value-chain perspective. Table 1 shows the
costs and returns to farmers in 2002, in which there
was no major disease attack and the weather condi-
tions were good. The results were based on the
average of 30 farmers surveyed. Average total yield
in 2002 was 2750 kg/Mu (or over 41 t/ha), but mar-
ketable yield was 2500 kg/Mu. That meant farm-gate
losses of 9.1%. Farmers’ costs included, in
descending order, labour, fertilisers, seeds, taxes,
plastic mulch, and irrigation. Expenditure on pesti-
cides was negligible at about CNY1–2/Mu. Returns
to farmers were about CNY0.11/kg (AUD1 =
CNY4.5 at the time of the survey), or 40% for a 4-
month production cycle.
Collectors’ costs and profits details are shown in
Table 2. Collectors had no transport costs as farmers
took the fruit to the collection points. They had no
rent either, as they built simple undercover stands by
the roadside. They charge wholesalers (CNY250 per
14 t truckload) without farmers’ knowledge of it. The
total return for collectors was about 10% for a period
of 3–4 days. There were few losses to collectors as
they were generally able to clear the goods quickly
during the peak season.
As mentioned before, over 80% of the melons from
Gansu were sold to interstate markets. Wholesalers in
China are merchants rather than agents. Deals were
Table 1. Costs and returns to melon farmers in Gansu
Province (CNY4.5 =AUD1; 15 Mu =1 ha).
Factor CNY/Mu CNY/kg Proportion
of costs
(%)
Labour
Fertiliser
Seeds
Taxes
Plastic mulch
Irrigation
Total variable
costs
Farm-gate price
Profit
Return (4 months)
240
200
100
50
48
40
678
0.0960
0.0800
0.0400
0.0200
0.0192
0.0160
0.2712
0.3800
0.1088
40%
35
29
15
7
7
6
100
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(printed version published in 2004)
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made in cash, on the spot. In addition to payments to
collectors, their costs included packaging materials
for farmers, transport costs and losses during trans-
port. In this study, the costs and profits in selling to
the Shanghai wholesale market were surveyed. As
shown in Table 3, wholesalers’ returns were about
9% over a 2-week period.
Costs to retailers included purchasing price, labour
costs and an average of 10% losses. Rental costs were
minimal as they sold a variety of fruits at a stand. As
indicated in Table 4, returns to retailers were about
11% over a 1-week period.
To compare the returns to supply-chain partners,
their returns were standardised over a 1-week period,
as indicated in Table 5. This showed that farmers had
the lowest return of 2.5% per week during the 4-
month production season. Collectors had the highest
return of 20% per week during the peak season.
Wholesalers had 4.5% per week for a shipment from
Gansu to Shanghai. Retailers in Shanghai gained
11% per week for selling Huanghemi melons. It is
not surprising that some collectors have quit farming
to focus on collecting melons. In the off-season for
melons, they collected different products in different
seasons or engaged in other lines of business.
Looking at returns at firm levels could not answer
profit distribution issues in the supply chain. Value-
chain analysis was required to see how profits were
distributed among farmers, collectors, wholesalers and
retailers. As can be seen from Table 6, a total chain
value of CNY0.482 was created, indicating lean and
thin value for Huanghemi melon from Gansu to the
Shanghai markets. Retailers had the largest share of
the melon value chain from Gansu to Shanghai with
41%. This is not surprising for a perishable product.
Wholesalers, who linked farmers with markets, had
the second largest share with 28%. Interestingly, col-
lectors — who had the highest return at the individual
level — had the lowest share of 8% in the supply
chain. Farmers had a 23% share of the total value.
Discussion
In recent years, melons, including Huanghemi
melons, have been under downward price pressure.
The main reasons for this are unsatisfactory product
quality and the availability of local and imported sub-
stitutes, especially in large cities such as Shanghai,
Beijing and Guangzhou. Value-chain analysis
showed that the total value created in the supply
chains for Huanghemi melons were thin and lean.
Table 2. Costs and returns to melon collectors in Gansu
Province (AUD1 =CNY4.5).
Factor CNY/14 t
load
CNY/kg
Purchase price
Selling price, nominal
Charge to wholesalers
Selling price, effective
Profit
Return (3–4 days)
250
0.380
0.400
0.018
0.418
0.038
10%
Table 3. Costs and returns to wholesalers in the
Gansu-to-Shanghai melon supply chain
(CNY4.5 =AUD1).
Factor CNY/kg
Purchase price
Transport
Packaging
Losses during transport, 3.75%
Labour
Total costs
Selling price
Profit
Return (2 weeks)
0.418
0.714
0.281
0.025
0.025
1.463
1.600
0.137
9%
Table 4. Costs and returns to retailers of melons in
Shanghai (CNY4.5 =AUD1).
Factor CNY/kg
Purchasing price
Losses, 10%
Cost of labour for 7 days
Total costs
Selling price
Profit
Return (1 week)
1.6000
0.178
0.025
1.803
2.000
0.197
11%
Table 5. Comparison of returns for partners in the
Gansu-to Shanghai melon supply chain.
Partners Returns for the
season
One-week stand-
ardised returns
Farmers
Collectors
Wholesalers
Retailers
40% for 4 months
10% for 3–4 days
9% for 2 weeks
11% for 1 week
2.5%
20%
4.5%
11%
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Off-season melons from Shangdong Province were
sold for four times the price of those from Gansu
during the peak season. This indicates much scope
for improving the Gansu value chain through
improving product quality. Farmers get the lowest
returns (2.5% per week) among the supply-chain
partners. Consequently, they may have little incen-
tive to improve the supply chain. Paradoxically,
quality products start at the production and posthar-
vest stages, through the adoption of proper cultural
and disease-control practices. Losses at harvest and
during the transport and retail stages (23%, Gansu to
Shanghai in 2002) could be greatly reduced if proper
disease-control practices were implemented.
Growers would also benefit from improved disease
control if product differentiation was then under-
taken, and a premium price paid by consumers.
Product differentiation
Contrary to the Chinese consumers’ traditional per-
ception about melons, the industry now competes on
price and has, over time, turned melons into commodity
products, which are handled as such at all levels of the
supply chains. Improved disease-control practices
allow for better quality products with longer shelf life.
Such improvements offer an opportunity for product
differentiation and a potential branding strategy.
Improved quality for premium prices
There is a temptation to harvest melons prema-
turely to capture early-season premium prices and to
hide the symptoms of diseases. Farmers reported that
this often occurred at the request of wholesalers.
Improved disease-control practices allow melons to
be harvested at a more mature stage, which results in
better taste and sugar levels.
Improved disease control requires implementation
of farm and postharvest-level practices by farmers.
Value-chain analysis indicated that retailers and
wholesalers had the largest shares in the value chain.
Innovations that affect the whole chain, such as
improved disease-control practices, have the best
chance of success if partners with larger shares are
involved. Retailers in melon supply chains are
located in other provinces and have never had any
interactions with farmers. To introduce new disease-
control mechanisms at the preharvest and postharvest
stages, it is essential that the wholesalers are involved
at the outset. It is through the wholesalers that the
efforts of farmers can be relayed to retailers. If the
retailers, who currently capture the largest share of
the value chain, appreciate the value of these efforts
in terms of both improved quality and reduced losses,
they will be more willing to pay a premium price for
the melons.
For farmers to gain an improved ‘share’ of the
value chain with the introduction of new disease
control practices, two issues must be considered.
Firstly, the practices need to be coordinated at a
group level to ensure adequate quantities of
improved products. In other words, some horizontal
integration at the farmer level needs to occur, albeit
not at a wide scale. Secondly, farmers should also be
strongly encouraged to perform the postharvest
disease-control function, rather than leaving it to col-
lectors or wholesalers.
Horizontal integration at the farm level
The application of disease-control strategies could
itself facilitate farmer cooperation as farmers have
the opportunity to interact at workshops, demonstra-
tions etc. These activities will also help farmers who
sell to the same wholesalers to work together to con-
solidate larger quantities of melons. The government
could make use of the existing farmer network
embedded in the ‘natural–social constitutes’ of the
Chinese rural society (Murdoch 2000). The current
decentralised and short-term relationships will not
achieve the goal of improving the benefits for
farmers.
Table 6. Summary of the Huanghemi melon value
chain — from Gansu to the markets in
Shanghai.
Item Cost and
price
(CNY/kg)
Profit
(CNY/kg)
Share of
value
(%)
Farmers: costs
Farm-gate price
0.270
0.380
0.110 23
Collectors: costs
Collectors: price
0.380
0.418
0.038 8
Wholesalers: costs
Wholesalers: price
1.463
1.600
0.137 28
Retailers: costs
Retailers: price
1.803
2.000
0.197 41
Total value 0.482 100
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Farmers performing more functions in the
supply chain
Unlike farmers in developed countries who clean,
grade and pack their fruit, farmers in China only
perform the basic production function. Melon
farmers only pack and grade melons if instructed to
do so by their wholesalers. With the introduction of
the improved disease-control strategies, farmers
could potentially work together to perform some
basic postharvest handling tasks, such as washing,
dipping and packaging. The more supply-chain func-
tions that farmers undertake, the more likely they will
be to ‘catch’ a larger share of the value chain.
Conclusion
In summary, this study used a value-chain approach
to investigate the returns to supply-chain partners and
how the value is apportioned among them. The
results indicated that there is much scope to improve
the value chain if the quality of Huanghemi melons
can be improved, by introducing disease-control
practices at the farmer level. This could result in
higher prices being paid by consumers, which would
benefit all members of the supply chain. However, to
ensure that farmers capture the benefits, they need to
be consolidated and perform more functions in their
supply chain.
References
Cox, A. 1999. Power, value and supply chain management.
Supply Chain Management, 4, 167–176.
Kaplinsky, K and Morris, M. 2002. A handbook for value
chain research. Ottawa, Canada, International
Development Research Centre (IDRC).
Murdoch, J . 2000. Networks — a new paradigm of rural
development? J ournal of Rural Studies, 17, 70–94.
Porter, M. 1980. Comparative strategy. New York, The Free
Press, Chapters 1 and 2.
— 1985. Competitive advantage: creating and sustaining
superior performance. New York, The Free Press,
Chapter 1.
Wei, S. 2003. Supply chain management and one dragon
approach: institutional basis for agro-industrialisation in
China. Paper presented at the ASEAN/APEC Postharvest
Conference, Bali, Indonesia, 20–22 August 2003.
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139
Improving Indonesian Vegetable Supply Chains
Wendy Morgan,* Syukur Iwantoro
†
and Ibu Alifah Sri Lestari
§
Abstract
An Australia–Indonesia collaborative project used a case-study approach to introduce farmers, packing-house
staff and consumers (via retailers) to the concepts of food safety and meeting customers’ expectations.
Activities undertaken to achieve this have included:
•selection of supply chains and personnel in five locations to participate in case studies, after discussions with
senior Ministry of Agriculture (MOA) staff in J akarta and the provinces
•a training of trainers (TOT) workshop for 10 MOA staff at the Centre for Standardisation and Accreditation,
J akarta, on food safety for packing houses, including packing-house hazard-analysis and critical control
point (HACCP), development of a packing-house HACCP manual, and accreditation preparation
•TOT on integrated pest management (IPM) and farmer field school (FFS) methodology for selected MOA
staff and experienced farmers at five locations
•FFS for farmers in each supply chain (over 400 farmers have received on-farm training)
•packing-house food-safety awareness for the community at each supply chain’s location
•packing-house food-safety training and HACCP methodology for managers, staff and farmers supplying
packing houses at five locations
•training in product handling and storage for retail fresh-produce buyers, managers and senior store staff in
one supply chain.
It is too early to evaluate the impact of the project, but change has occurred at farmer, packing-house and
retail sectors of the case-study supply chains.
In 2002, the Australian Government’s Department of
Agriculture Forestry and Fisheries (AFFA) funded
an Australian-led project team to help the Indonesian
vegetable industry to improve the safety and quality
of vegetables supplied to consumers in Indonesia.
The Indonesian Vegetable Supply Chains project
was a one-year project, undertaken by the Victorian
Department of Primary Industries (DPI) and the
Indonesian Ministry of Agriculture’s Center for
Standardisation and Accreditation (CSA). The
project used a case-study approach to introduce
farmers, packing-house staff and consumers (via
retailers) to the concepts of food safety and meeting
customers’ expectations by providing reliable sup-
plies of vegetables of consistent, acceptable quality.
Specific objectives were:
• to improve skills and knowledge of Indonesian
vegetable farmers and packing-house staff
• to improve production efficiency and safety
• to increase linkages between sectors of the supply
chains and government research and development
agencies
• to increase the awareness of supply chain players
of the importance of safe, quality production.
Project Activities
Following lengthy discussions with senior Ministry
of Agriculture (MOA) staff in J akarta and the prov-
inces, supply chains and personnel in five locations
* Department of Primary Industry, Victoria, Australia.
†
Indonesian Ministry of Agriculture, Center for
Standardisation and Accreditation, J akarta.
†
FIELD Indonesia.
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— East J ava, South Sulawesi, Bali, South Sumatra
and West J ava — were selected as case studies.
A training of trainers (TOT) workshop was held in
Darwin, Australia in February 2003. There were 10
participants from CSA. This food-safety refresher
workshop covered food-safety risks for packing
houses, including packing-house hazard analysis and
critical control point (HACCP) methodology, devel-
opment of a packing-house HACCP manual, and the
steps involved in developing and implementing an
accreditation system.
TOT was also provided to selected MOA staff and
experienced farmers at the five case-study locations
in Indonesia. This covered integrated pest manage-
ment (IPM) and farmer field school (FFS) training
methodology. Over 400 farmers from all five supply
chains have received on-farm training in IPM and
food safety.
Other activities included:
• raising packing-house food safety awareness for
the community at each location
• providing packing-house food safety and HACCP
training for managers, staff and farmers supplying
packing houses at four locations
• providing training in product handling and storage
for retail fresh-produce buyers, managers and
senior store staff in a supermarket chain in Bali.
Project Outcomes
HACCP/food safety training for packing-
house and DINAS staff and farmers
CSA is running this component of the project at
four locations.
HACCP is a method used to identify the food-
safety risks associated with the operations of a busi-
ness, in this case the vegetable packing house.
HACCP and food safety are complex concepts and
very new in the Indonesian food industries. It was
anticipated that it would be difficult to introduce the
ideas and procedures involved to packing-house staff
and farmers. The program of the refresher course in
Darwin thus covered the three food-safety risks
(microbiological, chemical and physical) and revised
the 12 steps taken for analysis of these risks in the
HACCP methodology. Also covered were product
identification and traceability, and staff training.
Support was provided to CSA staff to produce a
Food Safety Manual for Indonesian packing houses.
This was published in the Bahasa Indonesia lan-
guage, and used during training of packing house
staff.
It has proven difficult to improve packing house
procedures, as there is little demand from purchasers
to improve food safety in packing houses or on farms,
and even the simplest modifications to packing house
operations are expensive. Indonesian consumers are
aware of the issue, but supermarkets are generally
finding it difficult to source all their produce require-
ments domestically and are therefore reluctant to
specify consistent supply of safe product.
It took some time for participants in the TOT activ-
ities to accept that it is impractical, due to cost, to
implement at this stage some of the changes required
to achieve food safety and quality assurance (QA)
accreditation. These include, for example, manage-
ment of temperature and water quality. Indeed, it
might be better in terms of food safety if there were
no washing steps at the packing house. This possi-
bility needs to be discussed with the next links in the
supply chain and with CSA. Its implementation
would need to be accompanied by an education cam-
paign to explain its rationale to the whole commu-
nity.
Despite the various difficulties, the CSA group’s
activities are having an impact on the staff of the
packing houses they are training. They are seeing
changes in staff behaviour (personal hygiene and no
smoking), and procedural practices (logistics,
cleaning programs and storage) occurring at all loca-
tions.
Training for farmers
This component of the project is being run by
FIELD Indonesia, a non-government organisation
(NGO), at four locations.
The FFS model for delivering on-farm training has
as its first step community consultation. Even at this
step, each location has different expectations, gov-
ernment structures and personalities, and accommo-
dating these variations requires considerable
discussion.
An issue of great interest is that competition to
attend FFS is always so intense that farmers are inter-
viewed for selection. They will attend training for 12
hours and still have to be told to go home. They are
very hungry for information. Indonesian farmers are
compensated for attending training but this cannot be
the sole reason they attend.
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Retail fresh-produce handling training in a
supermarket chain in Bali
A key issue at this level in the supply chain is that
the major supermarket chains were not interested in
participating. They view staff training as their com-
petitive edge and are therefore secretive about their
training programs. Nevertheless, there is a problem
in that their in-store produce appeared to be no better
than that of the small chain which participated in the
training in this project.
This project component included the following
activities:
• TOT in Australia for an Indonesian postharvest
university lecturer. This training covered the
component content, methodology for delivery and
selection of modules suitable for the supermarket
chain’s business. The Indonesian presenter also
translated much of the documentation into Bahasa.
• A two-day workshop titled “Fresh produce
retailing and profit improving practices” was held
in Denpasar on 18–19 March 2003. Seventeen
fresh-produce managers (storage and in-store
selling) and buyers from the Tiara Dewata
supermarkets in Bali participated. Topics covered
included: delivery checks, storage, product care
and handling, wastage and shrinkage,
merchandising, cleaning and sanitation, managing
customer feedback. Temperature and
refrigeration, humidity, and information on the
shelf lives of different types of vegetables were
considered by participants as important to
maintaining product quality.
Results and Evaluation
The workshop participants rated the workshop highly
and have asked for further training modules. The
supermarket contributed financially to the training,
which is quite unusual in Indonesia, and made
improvements to in-store and storage practices
almost immediately.
Conclusions
Although it is too early to evaluate the overall impact
of this project, the project team has already observed
that some change has occurred at the farmer,
packing-house and retail levels of the supply chains
concerned. The project team plans to evaluate the
longer-term impact of project activities.
Putting an emphasis on the retail component of the
supply chain has had an impact already. The super-
markets are looking into developing product specifi-
cations and giving farmers more consistent orders,
and to meeting farmers’ requests for more notice of
what and when they want a product. This will allow
these farmers a greater opportunity to schedule pro-
duction, something that Australian farmers take for
granted. Farmers and packing houses are using safer
farming practices than before the project started.
Communication between members of the supply
chain has been enhanced, but needs to be continually
improved. Indeed, communication is a major con-
straint to outcomes at all levels of the project — plan-
ning, socialisation, delivery, expectations — as well
as between the diverse personnel — from two coun-
tries and cultures, central and provincial government,
government and business, farmers, packers, agents
and retailers.
Project follow-up activities should facilitate com-
munication between supply chain members, so as to
maximise the benefits of initial activities and
enhance overall understanding of the requirements of
each member.
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Indonesia’s Strategic Agricultural Commodities
in Meeting the WTO Agreement
Rina Oktaviani*
Abstract
Indonesia is a developing country that is committed to the World Trade Organization (WTO) agreements. The
latest WTO agreement, reached in Doha in 2001, allows agricultural products in developing countries to have
the special and different treatment in terms of market access, export subsidies and domestic support. The
problem is how Indonesia can take advantage of this special treatment in the context of its strategic agricultural
products, so as to develop its economy and alleviate poverty, and be ready for the next round of WTO
decisions. This paper analyses these problems and suggests the proposed agenda for the next WTO round for
Indonesia as an individual country and as a member of various groupings. The paper first considers what
Indonesian agricultural trade performance, how the Indonesian government chooses and defines its strategic
agricultural products, and how to use supply-chain methods to select these products.
Indonesian economic policy has moved from protec-
tionism (during the several years after independence
in 1945), to outward orientation (late1960s up to the
1980s) to deregulation and openness (during the
1990s and 2000s). Numerous trade and investment
reform packages have been launched by the govern-
ment since 1989 in order to face the more open and
competitive world economy. Since 1989, the restric-
tions on trade, including the tariff and non-tariff bar-
riers, have been gradually eliminated. Trade
regulations have followed investment regulations to
encourage direct foreign investment. The year 1994
saw a significant change in investment: essentially
unrestricted direct foreign investment was permitted
for the first time in all sectors. It was hoped that the
comprehensive economic reforms would improve
economic efficiency and lead to an expansion of the
Indonesian economy, which would stimulate further
investment and export trade activity.
As an open economy, Indonesia is committed to
regional and global free trade. In the East Asian
countries, Indonesia is a member of the Asian Free
Trade Area (AFTA) agreement and, in the world
economy, of the World Trade Organization (WTO).
The objective of the agreements is free trade among
nations in the region. According to economic theory,
free trade would increase the welfare of nations that
join the agreement, based on the comparative advan-
tage it brings. The gains from trade liberalisation can
be identified as coming from two sources: increasing
the efficiency of use of domestic resources, and
increasing access to other countries’ markets
(Stephenson 1994). However, in reality, most coun-
tries try to protect themselves with tariff and non-
tariff barriers.
Before the last WTO Ministerial meeting in Doha
in 2001 and the Uruguay Round agreement in 1994,
there were several rounds of multilateral trade nego-
tiations under the General Agreement on Tariffs and
Trade (GATT). Before the Uruguay Round, agricul-
* Head of Agricultural and Resource Economic Study
Program, Department of Socio-Economic Sciences,
Faculty of Agriculture, Bogor Agricultural University, J l.
Kamper, Kampus IPB Darmaga, Bogor 16680,
Indonesia. Email: <[email protected]>.
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143
tural trade was largely kept off the agenda by the
United States of America (USA) and other developed
countries. Consequently, agricultural trade was
afflicted with high levels of protection, increasing
use of subsidies, worsening fluctuations in world
prices and an increasing cost to the national budget to
support production. Especially for developing coun-
tries, often predominantly agricultural in export ori-
entation, it was hoped that the agreement would
reduce restrictions on agricultural trade between
countries. The Uruguay Round Agreement on agri-
culture has three main components: markets access,
export competition, and domestic support outlays.
The Doha Ministerial Conference in November
2001 delivered new declarations, especially in agricul-
ture. The declarations emphasised the importance of
international trade in promoting economic growth and
alleviating poverty (Roberts et al. 2002). Growth on
world trade will enhance the economic wellbeing of
developing countries. Indonesia supports the Doha
declaration, which will reduce barriers to market
access, and reduce export subsidies and domestic
support for agricultural product. As a developing
country, Indonesia receives ‘Special and Differential’
(S&D) Treatment in agriculture (Roberts et al. 2002).
The treatment allows Indonesia to reduce its barriers
against imports and its market-distorting forms of
domestic support to a lesser extent than developed
countries. Indonesia must capitalise on the this special
treatment to promote its agricultural and economic
development.
Despite a declining share in output and exports,
agriculture has maintained its dominant role in the
Indonesian economy. In 2000, agriculture accounted
for 16.9% of the gross domestic product (GDP) and
provided work for around 40% of the active popula-
tion (World Bank 2001). Devaluation of the rupiah
helped boost agricultural exports (in value terms), par-
ticularly during the post-crisis period. However, Indo-
nesia could not depend on the weakness of the rupiah
in order to increase its trade balance. Indonesia must
also meet its WTO commitment. For the WTO Minis-
terial Conference held in September 2003, Indonesia,
together with other developing countries, had to be
ready to meet additions and/or revisions to the special
treatment on agriculture. The question was what and
how the Indonesian Government should choose and
define strategic agricultural products?
The high dependence on the agricultural sector in
the Indonesian economy means that Indonesia needed
to be well prepared for any pushes at the WTO Minis-
terial conference. This paper analyses the Indonesian
agreement on agriculture and Indonesia’s strategy for
market access, export subsidies and domestic support
and the proposal for S&D treatment at the next WTO
Ministerial Conference. The paper also seeks to iden-
tify Indonesian agricultural trade performance and
how the Indonesian Government defines and chooses
strategic agricultural commodities.
Indonesian Agricultural Trade and
Strategic Agricultural Products
Indonesia is the world’s largest producer of coconuts,
the second-largest producer of copra, palm kernels,
palm oil and natural rubber, and the third-largest pro-
ducer of rice (WTO 2003). However, most farms are
small and only 13% of cultivated land is worked by
large state-owned and private estates. The small scale
of farms contributes to the low productivity of land.
For example, the profitability of rice production fell
from 5.3% in the 1980s to 1.5% in the 1990s (FAO
2002). It was followed by a fall in the harvested area
and productivity growth. The fluctuation in harvested
area was caused by the depredations of pests and dis-
eases and the sensitivity of the rice to climate change.
The stagnation of productivity could be the result of
stagnation in new technology development following
the green revolution in the 1980s. Before Indonesia
gained the rice self-sufficiency in 1984, rice produc-
tivity in Indonesia was the highest one in the world.
However, after 1985, the productivity growth in
Indonesia was the lowest in Asia. Rice productivity
growth in Indonesia was negative in the period of
1996–2001, while productivity in China and Vietnam
continued to increase (Oktaviani 2002).
Besides facing a low productivity rate, Indonesian
agricultural exports have declined in recent years.
Table 1 shows that the export value increased during
the huge devaluation of the rupiah. Agricultural
export commodities become more competitive
during the Asian economic crisis. The Indonesian
Government hopes that this will lead to an export-led
recovery from the economic crisis. Recently, how-
ever, the agriculture sector has shown poor export
performance, the worst case being rubber. It can be
seen from Table 1 that the prices of imported goods
have fallen, except for fruits and vegetables.
The weak export performance should increase the
efforts of Indonesian negotiator in the next WTO
round to put a case that will help to recover export
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performance, even though trade policy is not the only
influence on export value. The business environ-
ment, such as a perceived increase of Indonesia’s
country risk, also contribute to export performance.
Indonesia also imports agricultural products. Table
2 shows that the annual value of food and agricultural
imports increased dramatically in the 10 years between
1984–86 and 1994–96. This caused a decline in the
agricultural trade surplus. Annual agricultural import
value grew slowly and annual food import value fell
slowly between 1994–96 and 1998–2000. The large
devaluation of the rupiah contributed to this import
performance between 1994–96 and 1998–2000.
The value and quantity of rice and sugar imports
rose rapidly between 1994–96 and 1998–2000.
Besides the effect of the stagnancy in rice production
between 1996 and 2002 (Tabor et al. 2002), the
increase of rice imports was caused by a change in
rice policy, in line with the trend to globalisation in
the world market. The National Logistics Agency
(BULOG) does not monopolise the rice market any
more, since Indonesia signed an International Mone-
tary Fund (IMF) agreement in 1998. Private importer
can now bring rice into the country through normal
market channels. At the same time, the rice import
price has tended to fall, because of dumping from
other countries such as the USA, Thailand and
Vietnam (Tabor et al. 2002). Increasing rice imports
caused the domestic price of rice to fall. On 19
December 1999, the government applied a rice
import tariff of Indonesian rupiah (IDR) 340, equiv-
alent to 30%.
The sugar industry faces a structural problem —
the state-owned mills are inefficient and it is more
profitable to grow other crops (Magiera 2002). Even
though the government has made an effort to move
the cane production to extensive areas off J ava, the
sugar imports continue increase. As with other food
commodities, the world market in sugar commodities
is thin. Production growth is less than the export and
import growth in the world market (Oktaviani 2002).
This means that if sugar production in one country
falls, an increase of the import demand might
increase the world market price. Indonesia is one
Table 1. Indonesian agricultural exports, 1984–2000.
Commodity Period average Annual percentage change
1984–1986
(A)
1994–1996
(B)
1998–2000
(C)
B/A C/B
Animal/vegetable oil
Value (USD million)
Quantity (‘000 t)
Unit value (USD/t)
249
696
357
1413
2693
525
1705
4461
382
19.0
14.5
3.9
4.8
13.4
–7.6
Rubber
Value (USD million)
Quantity (‘000 t)
Unit value (USD/t)
753
951
792
1676
1306
1283
936
1490
628
8.3
3.2
4.9
–13.6
3.4
–16.4
Coffee, tea, spices
Value (USD million)
Quantity (‘000 t)
Unit value (USD/t)
1017
469
2170
1274
763
1670
1305
957
1364
2.3
5.0
–2.6
0.6
5.8
–4.0
Fruits/vegetables
Value (USD million)
Quantity (‘000 t)
Unit value (USD/t)
70
540
130
327
1054
310
294
728
403
16.6
6.9
9.1
–2.6
–8.8
6.8
Food exports (USD million) 1244 1987 2038 4.8 0.6
Agricultural exports (USD million) 2488 5414 5045 8.1 –1.7
Source: FAOSTAT, cited in Magiera (2002).
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such example; we have a decrease of production
growth but an increase in import growth.
The information in Tables 1 and 2 makes it clear that
Indonesia both exports and imports large quantities of
agricultural commodities. Because of the high propor-
tion of the population who are engaged with the agri-
cultural sector, the trade policy will strongly affect
economic welfare. A careful and strategic agenda
should be made for the next WTO round to minimise
the detrimental impacts of trade liberalisation.
As mentioned in Doha Mandate, strategic products
relate to the Non-Trade Concerns of food security,
rural development and poverty alleviation. The Indo-
nesian Government has identified four commodities
as strategic products — rice, maize, soybean and
sugar. The basis for the government’s choice of these
products is not clear. The argument of food security
is relevant for rice, but not for sugar. As mentioned
above, the main problem for the sugar industry is
inefficient, state-owned mills. Protection of the
industry does not deliver a direct benefit to sugar
farmers. The poverty alleviation argument may be
relevant to these industries as a whole, since Sawit
(2003) argues that rice, maize, soybean and sugar
involve 23 million, 9 million, 2.5 million and 1
million households, respectively, or 68% of total
households in 1999. However, because of IMF pres-
sure, the dependence on imports of those products
has increased dramatically (Table 2).
Although the product is related with food crops,
Indonesia can actually choose other products as stra-
tegic, such as exported goods. Through supply-chain
Table 2. Indonesian agricultural imports, 1984–2000
Period average Annual percentage change
1984–1986
(A)
1994–1996
(B)
1998–2000
(C)
B/A C/B
Rice
Value (USD million)
Quantity (‘000 t)
Unit Value ($/ton)
49
159
309
603
1976
305
836
2999
279
28.5
28.7
–0.1
8.5
10.9
–2.2
Other cereals
Value (USD million)
Quantity (‘000 t)
Unit Value ($/ton)
297
1581
188
1014
4871
208
688
4327
159
13.1
11.9
1.0
–9.2
–2.9
–6.5
Textile fibres
Value (USD million)
Quantity (‘000 t)
Unit Value ($/ton)
200
174
1149
875
475
1840
726
497
1459
15.9
10.6
4.8
–4.6
1.1
–5.6
Sugar/sweeteners
Value (USD million)
Quantity (‘000 t)
Unit Value ($/ton)
10
25
422
285
694
411
417
1735
240
39.3
39.7
–0.3
10.0
25.8
–12.5
Animal feeds
Value (USD million)
Quantity (‘000 t)
Unit Value ($/ton)
85
376
226
402
1405
286
309
1348
229
16.8
14.1
2.4
–6.4
–1.0
–5.4
Oilseeds
Value (USD million)
Quantity (‘000 t)
Unit Value ($/ton)
118
402
295
337
882
382
265
1084
245
11.0
8.2
2.6
–5.8
5.3
–10.5
Food imports (USD million) 589 2963 2901 17.5 –0.5
Agricultural imports (USD million) 985 4545 4145 16.5 2.3
Source: FAOSTAT, cited in Magiera (2002).
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analysis, Indonesia can identify weaknesses in the
supply chain for exported goods. The approach can
be used to choose strategic products for the global
market (Kaplinsky and Morris 2000). The approach
can identify levels of competitiveness and help
understanding of the advantages and disadvantages
of firms and countries specialising in individual
products. Production efficiency is just one of the pre-
requisites for entering the global marketplace. We
need also to understand how the ways in which pro-
ducers are connected to final market influence the
ability to win in the global market and determine the
distribution of benefits to participants.
Indonesia could argue to the developed countries to
open their markets to Indonesian exports if market
access is a barrier in the supply chain. In practice, Indo-
nesia promotes its exports less than do other developing
countries. Instead of supporting agricultural exports,
the Indonesian Government has applied export taxes to
goods such as for palm oil (Sawit 2003).
The WTO Agreement on Agriculture
and Indonesia’s Trade Policy
The agricultural negotiations in the WTO began in the
early 2000, under Article 20 of the WTO agreement.
The Doha Ministerial Conference in November 2001
reconfirmed the present WTO agreement to establish a
fair and market-oriented trading system through a
program of fundamental reforms. The program
encompasses strengthened rules, and specific commit-
ments on government support and protection for agri-
culture. The purpose is to correct and prevent
restrictions and distortions in world agricultural
markets (WTO 2003, paragraphs 13 and 14). The
member governments, including Indonesia, commit
themselves to reducing the barriers to market access,
export subsidies and domestic support. The declara-
tion makes special and differential treatment for devel-
oping countries integral throughout the negotiations
such that they should be able to meet their needs, in
particular in food security and rural development. The
explanation below about the agreement on agriculture
is based on WTO (2002).
Market access
Reducing barriers to market access means that the
WTO members should reduce tariff and non-tariff
barriers to agricultural products as a result of the
Uruguay Round. The Uruguay Round has focused
broadly on two issues: the high levels of tariffs
outside the quotas (with some countries pressing for
larger cuts on the higher tariffs), and the quotas them-
selves — their size, the way they have been adminis-
tered, and the tariffs charged on imports within the
quotas. Another market access agreement is a special
agricultural safeguard.
The tariffs cover both tariffs on quantities within
quotas and those outside. Traditionally, the tariff
reductions that resulted from trade negotiations came
from bilateral product-by-product bargaining, or they
were based on formulas that applied over a broad
range of products, or a combination of the two. How
the reductions will be handled in the present negotia-
tions is still undecided. The developing countries
argue that tariffs and other import barriers are neces-
sary in order to protect domestic production and main-
tain food security. For this reason, some countries are
linking lower import barriers with disciplines on other
countries’ export restraints and export taxes — if pro-
ducing countries do not restrict their exports, then
importing countries can feel more secure about being
able to obtain food from them. Some developing coun-
tries say they need flexibility in deciding the level of
import duties they charge to protect their farmers
against competition from imports whose prices are
low because of export subsidies.
The tariff quotas are the regulation covering
whether a product exported from one country can
gain access to the market of another country at the
lower, within-quota tariff. The method for giving
exporters access to quotas include first-come, first-
served allocations, import licensing according to his-
torical shares and other criteria, administered through
state trading enterprise, bilateral agreements, and
auctioning. The terms can also specify time periods
for using the quotas — for example, periods of time
for applying for licences, or for delivering the prod-
ucts to the importing countries. Exporters are some-
times concerned that their ability to take advantage of
tariff quotas can be handicapped because of the way
the quotas are administered. Sometimes they also
complain that the licensing timetables put them at a
disadvantage when production is seasonal and the
products have to be transported over long distances.
Each method has advantages and disadvantages,
and many WTO members acknowledge that it can be
difficult to say conclusively whether one method is
better than another. Several countries want the nego-
tiations to deal with tariff quotas: to replace them
with low tariffs, to increase their size, to sort out what
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they consider to be restricting and non-transparent
allocation methods, or to clarify which methods are
legal or illegal under WTO rules in order to provide
legal certainty.
Safeguards are contingency restrictions on imports
taken temporarily to deal with special circumstances
such as a sudden surge in imports. The special safe-
guard provisions for agriculture differ from normal
safeguards. In agriculture, unlike with normal safe-
guards:
• higher safeguards duties can be triggered
automatically when import volumes rise above a
certain level, or if prices fall below a certain level
• it is not necessary to demonstrate that serious
injury is being caused to the domestic industry.
The special agricultural safeguard can only be used
on products to which tariffs applied — which amount
to less than 20% of all agricultural products (as
defined by ‘tariff lines’). But they cannot be used on
imports within the tariff quotas, and they can be used
only if the government reserved the right to do so in
its schedule of commitments on agriculture. In prac-
tice, the special agricultural safeguard has been used
in relatively few cases.
Proposals range from continuing with the provision
in its current form, to its abolition, or its revision to
prevent its use on products from developing countries.
Some developing countries have proposed that only
they should be allowed to use special safeguards —
developed countries should not be allowed to do so.
Export subsidies
Proposals to reduce export subsidies differ
between countries. Some countries are proposing the
total elimination of all forms of export subsidies.
Others are prepared to negotiate further progressive
reductions without going so far complete elimina-
tion, and without any ‘down payment’.
Many developing countries argue that their
domestic producers are handicapped if they have to
face imports whose prices are depressed because of
export subsidies, or if they face greater competition
in their export markets for the same reason. This
group includes countries that are net food importers
and also want help to adjust if world prices rise as a
result of the negotiations. In addition, many countries
would like to extend and improve the rules for pre-
venting governments circumventing their commit-
ments on export subsidies — including the use of
state trading enterprises, food aid and subsidised
export credits.
Domestic support: amber, blue and
green boxes
In WTO terminology, subsidies are in general
identified by ‘boxes’ which are given the colours of
traffic lights: green (permitted), amber (slow down
— i.e. be reduced), red (forbidden). In agriculture,
things are, as usual, more complicated. The Agricul-
ture Agreement has no red box, although domestic
support exceeding the reduction commitment levels
in the amber box is prohibited; and there is a ‘blue
box’ for subsidies that are tied to programs that limit
production. There are also exemptions for devel-
oping countries (sometimes called the ‘S&D box’).
(a) The ‘amber box’
For agriculture, all domestic support measures
considered to distort production and trade (with some
exceptions) fall into the ‘amber box’. The total value
of these measures must be reduced. Various pro-
posals deal with how much further these subsidies
should be reduced, and whether limits should be set
for specific products rather than having overall
‘aggregate’ limits.
(b) The ‘green box’
In order to qualify for the ‘green box’, a subsidy
must not distort trade, or at most cause minimal dis-
tortion. These subsidies have to be government-
funded (not by charging consumers higher prices)
and must not involve price support. They tend to be
programs that are not directed at particular products,
and include direct income support for farmers that is
not related to (is ‘decoupled’ from) current produc-
tion levels or prices. ‘Green box’ subsidies are there-
fore allowed without limits, provided they comply
with relevant criteria. They also include environ-
mental protection and regional development pro-
grams (for details, see Article 6 and Annex 2 of the
Agriculture Agreement, available at <http://
www.wto.org>).
(c) The ‘blue box’
The ‘blue box’ is an exemption from the general
rule that all subsidies linked to production must be
reduced or kept within defined minimal levels. It
covers payments directly linked to acreage or animal
numbers, but under schemes which also limit produc-
tion by imposing production quotas or requiring
farmers to set aside part of their land. Countries using
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these subsidies — and there are only a handful — say
they distort trade less than alternative ‘amber box’
subsidies.
Before WTO agreements are applied to developing
countries, Indonesia already has investment and trade
regulations, which is in line with WTO agreement and
affect the agricultural sector. For the first 25-year
Indonesian development program, government policy
for the agricultural sector has focused on food self-suf-
ficiency, and primarily on rice. On the other hand,
assistance received by the major agricultural exporting
industries was below average, often negative. Export
commodities such as cassava, rubber, coconut oil,
palm oil, coffee, pepper, nutmeg and tea were, in
effect, taxed by the trade policies of Indonesia (GATT
1991). However, some changes have been made in
trade policy on export commodities since the mid-
1980s. Quantitative trade restrictions (Qts) were, on
paper at least, eliminated in October 1989 for cassia-
vera (cinnamon), for nutmeg and mace in the policy
package of May 1990 (PakMei 1990), and for crude
palm oil, other palm oil, palm kernel oil, copra and
coconut oil in the policy package of 3 June 1991
(PakJun 1991) (Tomich 1992). Regulations on agri-
cultural export commodities meant the assistance that
was offered to those commodities was lower than the
assistance provided to the other crop sectors, and even
to the manufacturing sector. Even though there is
limited assistance for estate crops, these commodities,
especially coffee, oil palm, cocoa and rubber, have a
lower cost than those in other exporting countries. In
rubber production, for which Indonesia is not so prom-
inent in the world market, the smallholder costs of pro-
duction are lower than the cost for estates in Malaysia
and Thailand (Tomich 1992). Palm oil production in
Indonesia also has the lowest cost in the world. Based
on Sucofindo data, Larson (1996) showed that the pro-
duction costs for crude palm oil, ex-factory, was
USD127/t in 1993. Compared with the 1995 average
international price of USD600/t and the historically
low price in 1990 of USD290/t, the Indonesian palm-
oil sector still profitable.
Besides the regulation in these commodities, there
was re-regulation in some estate crops in 1992. The
BPPC (Badan Penyangga dan Pemasaran Cengkeh)
was established as a Clove Marketing Board and
given monopoly rights for clove marketing. The
BPPC was not successful in terms of increasing
farmer incomes because, according to field reports,
the purchase price was well below the floor price in
the harvesting period (Tomich 1992). The West Kali-
mantan citrus industry was also regulated, restricting
inter-island trade and pushing down the local
farmers’ incomes.
The financial crisis that began in the middle of
1997 has induced the government to deregulate in
several areas, including trade policy. The following
steps in relation to trade regulation to be imple-
mented as part of an agreement reached with the IMF
for receiving international aid to help with the crisis
(Soesastro and Basri 1998):
• gradual reduction of import tariffs to 5–10% by the
year 2003, including those on chemical products,
iron and steel, and fisheries products
• trade deregulation for various commodities
• wheat and wheat flour, soybeans, and garlic would
be able to be imported freely under a general
importer licence from 1 J anuary 1998
• with imports of soybeans and garlic subject to a
20% tariff, and imports of wheat flour to a 10%
tariff, those tariffs to be reduced to 5% by 2003,
the government would provide a temporary
subsidy for wheat flour to protect consumers.
• the administrative retail price of cement would be
eliminated in the near future
• gradual reduction of barriers to exports, including
export taxes
• elimination of the special tariff for automobile
producers by 2000
• government review of investment and expenditure
by the public sector.
The failure of the IMF Agreement led the IMF to
reinforce the economic program. On 15 J anuary
1998, the President signed a second agreement, the
IMF II Agreement. The microeconomic reforms
under IMF II included the following (Soesastro and
Basri 1998):
• elimination of BULOG’s monopoly over the
importation and distribution of sugar and over the
distribution of wheat flours. In contrast to the
November IMF reform package, in which wheat
was to be distributed through BULOG for a 3–5
year transition period, the Letter of Intent
deregulated the distribution of wheat, allowing
flour millers to market it from 1 February 1998
• complete deregulation of domestic trade in all
agricultural products; elimination of the Clove
Marketing Board by J une 1998
• abolition of all other restrictive marketing
arrangements by February 1998; specifically the
dissolving of the cement, paper and plywood
cartels
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• elimination of internal and external trade
restrictions on cement; permission for traders to
buy and distribute all cement brands in all
provinces and to export under the general exporter
license
• with respect to foreign investment, removal of
formal and informal barriers to investment in palm
oil plantations from 1 February 1998, and lifting
all restrictions on investment in wholesale and
retail trade in March 1998
• discontinuation of special taxes, customs and
credit privileges to the National Car Project, as
well as any budgetary and extra-budgetary support
and credit privileges to IPTN (the state-owned
aircraft industry) projects
• reduction in tariffs on all food items to a maximum
of 5% in order to secure food supplies for lower
income groups
• abolition of local content rules on dairy products
• abolition of import restriction on all new and used
ships
• abolition of export taxes on a wide range of
products such as leather, cork, ores and waste
aluminium from 1 February 1998
• reduction in export taxes on sawn timber, rattan
and minerals to a maximum of 10%; elimination of
quotas by the end of the year 2001
• exemption of export restrictions on palm oil, to
ensure adequate domestic supplies; this exception,
however, was to be eliminated by March 1998.
The IMF agreement represents radical changes,
even before the WTO implementation for developing
countries. The IMF agreement serves to further
encourage trade liberalisation in Indonesia. It can be
seen from the IMF agreement that Indonesia has
already implemented aspects of the Uruguay Round,
such as:
1. To maintain actual tariff rates at or below bound
rates, and reduce bound rates by an average of
33% by 2004. In this case, Indonesia has
already fulfilled this commitment because the
tariffs for agricultural commodities were mostly
below bound rate.
2. To eliminate all non-tariff imports. In this case,
Indonesia has eliminated BULOG’s sole import
rights, even though it is legal under the WTO.
However, Indonesia has introduced new license
which restrict imports to sugar producers that
would be illegal under WTO agreement.
Indonesia also already eliminated the local
content rules for soybean meal and dairy
products.
Indonesia’s Proposed Agenda
As a developing country, Indonesia can propose
special and differential treatment at the WTO Minis-
terial meeting. Indonesia can make a proposal as an
individual country or as a members of a group of
countries such as the Association of South-East
Asian Nations (ASEAN) and the Cairns Group, the
latter consisting of Argentina, Australia, Bolivia,
Brazil, Canada, Chile, Colombia, Costa Rica, Guate-
mala, Indonesia, Malaysia, New Zealand, Paraguay,
Philippines, South Africa, Thailand, and Uruguay.
This group favours much greater liberalisation in
agricultural trade and is an alliance that cuts across
the developed–developing country boundaries.
Because 14 of its 17 members are developing coun-
tries, the Cairns Group would also like to see devel-
oping countries given some kind of ‘special and
differential’ treatment to take account of their needs.
However, some developed countries that protect their
agricultural sector with subsidies, including the
European Union, Switzerland, Norway, J apan, and
South Korea, have been resisting such a move. Indo-
nesia could seek special and differential treatment as
an individual or jointly with other developing coun-
tries in the Cairns Group.
ASEAN could take a position similar to that of the
Cairns Group. The Group urges negotiations on all
aspects of market access including all tariffs, tariff
peaks, tariff escalation, tariff quota volumes, and
tariff quota administration and other rules applying to
market access commitments. Further, ASEAN could
push for a better market access for all agricultural and
food products, including value-added products in
processed forms.
Avila (2001) argues that developing countries seek
greater acknowledgment of their difficulties and a
broader application of S&D Treatment provisions of
the GATT and other WTO agreements, particularly
through: a lower level of obligations; more flexible
implementation schedule; best endeavour commit-
ments by developed countries; more favourable treat-
ment for least-developed countries; and technical
assistance and training. Indonesia also seeks this
greater acknowledgment. As an individual country,
Indonesia can also propose more flexible WTO
arrangements so that it can support and protect its
agricultural and rural development and protect the
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livelihoods of its large agrarian populations whose
farming is quite different from the scale and methods
in developed countries. Indonesia can argue subsi-
dies and protection are needed to ensure food secu-
rity, to support small-scale farming, to make up for a
lack of capital, or to prevent the rural poor from
migrating into already over-congested cities.
In the market-access agenda, a possible Indonesian
proposal is in the areas of access to developed-
country markets, food security, tariff binding, special
safeguards and anti-dumping, and minimum access.
Indonesia could complain that its exports still face
high tariffs and other barriers in developed countries’
markets, and that its attempts to develop processing
industries are hampered by tariff escalation (higher
import duties on processed products compared with
raw materials). Indonesia should propose to devel-
oped countries, especially its trading partners, such
as J apan, the USA and the European Union, to
provide quota-free and tariff-free access for products
from Indonesia. This would expand the market
access of Indonesian agricultural products. Careful
analysis using supply-chain methods can identify the
critical points maintenance of the competitiveness of
the products.
Indonesia also can propose to raise tariffs, based on
food security argument to reduce the market access to
Indonesia. The Food and Agricultural Organization
of the United Nations defines food security in three
dimensions — availability, stability and accessibility
(FAO 1997). Adequate food availability access to
food supplies that are sufficient to meet the consump-
tion needs. Formally, food security can be defined as
a situation in which all households have both phys-
ical and economic access to adequate food for all
members, and where households are not at risk of
losing such access. Actually the food is not only rice;
however, as the main staple food, the Indonesian
government has always focused on rice.
The choice of trade regime will influence food
security in Indonesia. Trade liberalisation for food
commodities, which was fulfilling the IMF II agree-
ment in 1998, increased food imports, especially of
rice and soybean (Oktaviani 2002). In the short run,
food security can be achieved through an increase in
import volume and the availability of food at lower
prices. However, this will discourage farmers from
increasing production and productivity, reduce the
farmers’ incomes and disadvantage the rural-based
milling and marketing sector (Tabor et al. 2002). In
the long run, greater reliance on importing countries
will accelerate high dependency not only in the eco-
nomic area but also in the political and social arenas.
To reduce the high rice imports, the government
applies an import tariff. However, the import tariff
policy is not applied very effectively. There is an
indication of smuggling and under-invoicing of rice
imports (Oktaviani 2002). An increase in the import
tariff gives an even greater incentive for smuggling
and under-invoicing.
In order to minimise an ineffective import tariff,
Tabor et al. (2002) suggest a tariff quota. They also
suggest BULOG could use the government portion of
the rice import quota and establish a rice policy
council. However, it seems that BULOG’s monopoly
in the rice market could re-emerge. Controlling and
deciding of who is the importer, how many quotas per
year, how many quotas for each importer is also diffi-
cult. Moreover, tariff quota policy is more difficult to
apply than the import tariff in terms of the manage-
ment system. Tariff management is needed in order to
make the simple rice tariff policy effective. Indonesia
can propose to increase the tariff, to even higher than
that tariff binding in the harvest season and otherwise
in the dry season. Indonesia needs flexibility in the
tariff rates for food crops, especially rice.
In the domestic support agenda, Indonesia can
make proposals the area of S&D Treatment and
‘green box’. For the S&D Treatment, Indonesia
could propose that subsidised credit and other
capacity-building measures should be permitted as
exemptions when provided to low-income or
resource-poor farmers. Indonesia could argue to have
greater flexibility because of an ‘unequal playing
field’ with developed countries, such as the level of
economic development, technology, infrastructure
and human resources. The greater flexibility to
increase the domestic support could be proposed
within the ‘green box’ framework.
As a country that exports agricultural products,
Indonesia has a strong interest in seeing developed
countries export subsidies further reduced. This
would improve Indonesia’s competitiveness in inter-
national trade.
Because there are differences in transaction costs
between developed and developing countries, the
domestic strategic policy should be aligned with the
international trade policy. The Indonesian Govern-
ment should increase the investment on infrastruc-
ture, better apply competition policy, provide greater
access to international services and transportation,
increase the efficiency and effectiveness of law and
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order, and disseminate information about and
promote the agreement reached.
Conclusion
This presentation has outlined the numerous trade
and investment reform packages that have been
launched by the Indonesian Government since 1989
in order to face the more open and competitive world
economy. Indonesia signed the commitment of
regional free-trade agreement various region which
are AFTA, APEC and WTO. The Doha Ministerial
Conference in November 2001 delivered new decla-
rations, especially on agriculture. The declarations
emphasise the importance of international trade in
promoting economic growth and alleviating poverty.
Indonesia agrees on the declaration, which will
reduce barriers to market access, export subsidies and
domestic support for agricultural product. The ‘Spe-
cial and Differential’ (S&D) Treatment allows Indo-
nesia as a developing country to reduce its barriers
against imports and its market-distorting forms of
domestic support by less than developed countries.
In the market-access agenda, a possible Indonesian
proposal is in the areas of access to developed-
country markets, food security, tariff binding, special
safeguards and anti-dumping, and minimum access.
Indonesia could complain that its exports still face
high tariffs and other barriers in developed countries’
markets, and that its attempts to develop processing
industries are hampered by tariff escalation (higher
import duties on processed products compared with
raw materials). Indonesia should propose to devel-
oped countries, especially its trading partners, such
as J apan, the USA and the European Union, to
provide quota-free and tariff-free access for products
from Indonesia. This would expand the market
access of Indonesian agricultural products. Careful
analysis by supply-chain methods and management
can be applied to find the critical points affecting the
competitiveness of agricultural products.
Acknowledgment
The author thanks the Australian Centre for Interna-
tional Agricultural Research (ACIAR) for funding
participation in the workshop to make this presenta-
tion.
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Market Access and Job Creation: a Supply Chain
Action Agenda (the Case of the Philippine Fruit
Export Winners)
Nerlita M. Manalili
*
Abstract
Philippines’ bananas, pineapples and mangoes have a niche in the international market and are among the
country’s export winners. With a combined export value of US$236.5m, they account for approximately 38%
of the value of the country’s top 10 exports. The country has much to gain by tapping the potential of these
export winners, not only to gain foreign earnings, but also for job creation among its primarily agriculture-
dependent rural population.
To position Philippine fruits in the global market, will necessitate a review of the market, the product and
product flow, to ensure that they come together. This involves issues of market access as well as the
functioning of the supply chain.
The paper examines the supply chain for the Philippine fruit export winners (bananas, pineapples and
mangoes) and identifies three areas needing attention: product flow (internal), trade impediments (market), and
policy support. The focus is to enhance market access, as it is a means to expand trade, stimulate growth and
development, and create job opportunities in the agricultural sector. A framework for market promotion and
development within the context of the supply chain is outlined.
* Research and Development Department and Agro-
industrial Development Program, SEARCA,
Philippines
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Public Policy Issues in Supply-Chain Management
Donna Brennan*
Abstract
In this paper, the organisation of agricultural markets is explained from the perspective of economic
interdependence between agents in the supply chain. The high transactions’ costs associated with conveying
information about quality, monitoring and testing quality of inputs in the supply chain, and the high degree of
financial risk associated with investing in specialised agri-food enterprises, has led to a move away from spot
markets to integrated supply chains. Various forms of vertical organisation, including contracting and vertical
ownership, have evolved as solutions to information and incentive problems associated with this economic
interdependence.
The experience of contract farming as a means of providing opportunities to smallholders to participate in
agri-food supply chains of developing countries is presented in this context. While the private sector has an
increased role in the development of agricultural marketing services that were traditionally provided by the
public sector, there is still an important facilitative and regulatory role for government. The public policy issues
surrounding the vertical organisation of supply chains, particularly contract farming, are discussed.
The traditional form of agricultural marketing
involves the physical exchange of goods after har-
vest, where the prevailing market price is determined
by the interaction of demand and supply. Spot-
market transactions occur along the supply chain at
different stages of exchange, between farmers and
traders; traders and processors; and on to the retail
sector. Where goods are homogeneous or where
quality is easy to measure against industry standards,
prices determined through these spot-market transac-
tions contain the necessary incentives to direct farm
output and marketing decisions.
In contrast, in satisfying today’s food consumer,
the emphasis is on product differentiation and the
supply of quality attributes that are difficult to
measure. This has led to a revolution in the organisa-
tion of modern agri-food systems. Two main ele-
ments of change that stem from this consumer-
focused revolution are increased technical innova-
tion in agri-food production, and the high cost of
monitoring and assuring quality along the supply
chain.
Technical innovations in the food chain, which
have generally led to more capital- and knowledge-
intensive production, have led to economies of scale
at the food-processing level, and there is increased
dependency between players in the marketing chain.
Investors bear the risk of stranded assets if they do
not have a ready source of raw material input (farm
produce). The farmer may also face asset specificity
risk if there are sunk start-up costs with entering into
a new type of production. The increased concentra-
tion of industry that results from economies of scale
in the food processing and marketing end of the
supply chain raises the potential for abuse of market
power.
The high transactions’ costs associated with con-
veying information about quality, monitoring and
testing quality of inputs in the supply chain also con-
tribute to the trend towards vertical reorganisation of
markets. If it is impossible or too costly to measure
* REAP Research, PO Box 453, North Perth, Western
Australia 6906, Australia.
Email: <[email protected]>.
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the quality of a product at the time of sale, the scope
for using premiums to reflect quality differences, and
thus provide market incentives for quality produc-
tion, is diminished.
Management of the supply chain has become an
essential element of modern food-production sys-
tems. In this paper, the policy issues associated with
modern agri-food systems are discussed. The issues
are presented by first examining the main factors
influencing the vertical organisation of supply
chains. Economic interdependence has led to the
emergence of alliances between the downstream
private sector and the agricultural producer, which
implies a much greater role for the private sector in
agricultural sector development. The main type of
vertical organisation is contract farming, and after
outlining the main forms of contracts, the literature
on developing-country experience with contract
farming is reviewed. The discussion then turns to the
question of private and public sector roles in agri-
food supply chains in developing countries, and
public-policy issues are presented.
Characteristics of Agri-food
Marketing Problems that Promote
Vertical Coordination
There are two main explanations for the rise in ver-
tical coordination in agri-food industries. These are:
• asset-specific investments required by parties to a
transaction create dependencies that can be
protected better through contracting vis-a-vis open
markets (financial interdependence)
• the transactions’ costs of producing and
monitoring quality throughout the interdependent
production and marketing decisions associated
with modern food chains (information
interdependence).
Financial interdependence (asset specificity)
The asset specificity problem refers to relation-
ship-specific investments that are made in setting up
a supply chain. As long as the asset has a lower value
outside the supply-chain relationship, there is a risk
that parties to the transaction will act opportunisti-
cally. For example, a farmer may invest in a partic-
ular type of machinery in order to supply a particular
product to a processor. The farmer may make his
investment decision based on a negotiated price, but
once he has made the investment he bears the risk that
the processor will renege on the agreement. The proc-
essor will have the incentive to renegotiate prices if
the farmer has incurred a sunk cost and the asset has
little resale value. Having made the sunk investment,
the farmer will be forced to accept a lower return to
the invested capital because it has low opportunity
cost elsewhere. This problem is also referred to as a
‘hold up’ problem, because fear of opportunism asso-
ciated with asset specificity can prevent investments
from going ahead.
Asset specificity problems can arise at any point in
the supply chain. At the farm level, examples of
asset-specific investments include tree crops and
investments specific to livestock handling or posthar-
vest handling. Production of highly perishable crops
also represents an asset specificity problem. Once the
product is ready for harvest, the producer has little
bargaining power because the value of the product
rapidly diminishes, and thus the buyer has the incen-
tive to threaten to delay purchase and offer a lower
price. Forward-contracting of supply schedules and
delivery prices can assist in removing the risk of
opportunism associated with selling perishable pro-
duce.
In the downstream end of the marketing chain,
asset specificity problems also arise. For example,
the investor in a processing plant makes a highly
location-specific investment and is dependent on
acquiring raw-material input from the farms in the
vicinity of the plant. High economies of throughput
imply that a steady source of material is required, and
there is potential for opportunistic behaviour by the
farm sector. The severity of this threat will depend on
the nature of the farm product — if long-distance
transport of alternative raw-input supplies is unfea-
sible, such as in the case of eggs, then the farm sup-
pliers have stronger bargaining power in the post-
investment situation.
In many cases, the entire supply chain has relation-
ship-specific investments that imply that there is
potential for opportunistic behaviour by all parties.
While this co-dependency may lead to a mutually
beneficial outcome being struck even in the absence
of formal arrangements between the agents, there is a
tendency for relationships to be formalised through
contractual arrangements. These contracts attempt to
spell out various contingencies and reduce the scope
for opportunistic behaviour in a post-investment sit-
uation, thus providing greater incentives for mutually
beneficial supply-chain investments.
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Information interdependence
Increased dependency between decision-makers in
supply chains is a characteristic of modern agri-food
production systems. This interdependency gives rise
to information and incentive issues in the design of
supply chains. Problems arise where a decision-
maker, whose actions affect the wealth of another
agent in the supply chain, can hide information about
their actions. In this situation, it is necessary to design
monitoring and enforcement mechanisms to over-
come incentive-incompatibility problems. Contrac-
tual arrangements between agents in the supply chain
provide a lower-cost means of dealing with informa-
tion-asymmetry problems than in open market trans-
actions.
The source of many of these information-asym-
metry problems stems from the value placed on
quality attributes in the consumer product, where
these quality attributes are difficult or costly to
measure. Agents in the supply chain have little incen-
tive to supply quality if it is not possible to trace low
quality back to the individual supplier. Other sources
of information asymmetry include opportunities for
cheating on agreed supply-chain arrangements —
this problem arises because one individual has an
information advantage over the other and because it
is costly (or impossible) to monitor his performance.
There are two distinct classes of information-
asymmetry problems, hidden information and hidden
action (Sexton 1994).
Hidden information (adverse selection)
One of the important adverse-selection problems
in agri-food supply chains stems from the fact that
food consumers have strong preferences for
embodied attributes that are difficult to measure from
visual inspection of the consumer good. For example,
consumers have preferences for food safety and pro-
duction technique (e.g. free-range eggs) and are
willing to pay premiums for these attributes. They are
unable to assess whether these attributes are in the
product they are consuming and rely on information
provided to them by suppliers. There is an incentive
for suppliers to lie about these attributes and claim
the premium. The adverse-selection problem, if not
dealt with, results in a sub-optimal supply of quality
because, in the absence of screening information,
consumers base their willingness to pay on a proba-
bility-weighted expected value — which only low-
quality suppliers have the incentive to supply (Ack-
erlof 1970).
There are various ways in which product differen-
tiation (markets for quality) can be established, even
where it is difficult for the consumer to judge quality
from appearance of the good. Branding or labelling
provides one mechanism for signalling the quality of
a good. For example, companies using branding rely
on an established reputation to signal quality, and
consumers can obtain information about the quality
of the good through advertising or repeated pur-
chases and can be assured that quality will be main-
tained because of the cost to the supplier of lost
reputation. Mandatory labelling of food attributes is
an example of how public regulation can assist in
promoting markets for quality (Antle 1996). How-
ever, in many cases, there is considerable uncertainty
about food safety and the cost of measuring quality is
prohibitively costly, so alternative means of quality
assurance, such as monitoring of production proc-
esses (e.g. hazard analysis and critical control point
— HACCP), are necessary.
Information-asymmetry problems regarding the
quality of agri-food products pervade the entire mar-
keting chain. For example, the provision of product
guarantees at the consumer end also requires that
hidden-information problems be dealt with along the
length of the supply chain. Vertical coordination in the
supply chain is one means of overcoming these infor-
mation-asymmetry problems — for example, through
contracts that specify measurable quality. However,
other means include advertising and branding by input
suppliers; or by government intervention in licensing
or quality standards in upstream processes.
While contracting helps to overcome adverse-
selection problems related to the provision of food
quality, it can give rise to other types of information-
asymmetry (moral-hazard) problems, which are dis-
cussed below. Moreover, contracting does not neces-
sarily overcome all adverse-selection problems. For
example, participants in the contracting process face
adverse-selection problems in selecting with whom
to contract.
Hidden action (moral hazard)
Hidden-action problems arise in a post-contracting
situation, where there is an incentive for the agent to
cheat on the deal that has been struck. Such cheating
could be undertaken by the farmer, such as using
inferior (cheaper) inputs to production or not fol-
lowing specified production protocols aimed at pro-
viding the processor with desired quality of raw
materials. Successful development of contract
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farming requires that attention be paid to the design
of incentives and monitoring procedures to overcome
moral-hazard problems. The nature of these prob-
lems is specific to the good being produced, and
some examples of contract design to overcome such
problems are provided in the next section.
Vertical Organisation in Agri-food
Marketing Chains
Contractual arrangements between agents in the
supply chain can take a range of forms, and the nature
of the arrangements can be categorised by the degree
of control offered to the contractor. The choice of
control will be determined largely by the nature of the
industry, such as the degree of asset specificity and
the extent of information asymmetry at points along
the supply chain. The degree of control ranges along
the spectrum from the spot market, where market
prices provide the only information guiding produc-
tion and marketing decisions, to vertical integration,
where the downstream and upstream operations are
owned and managed by a single decision-maker. This
continuum is represented in Figure 1.
In practice, there is no clear distinction between
different types of contracts along the continuum, but
the marketing contract generally refers to a contract
regarding delivery schedules, pricing methods and
quality requirements. There is little direct input into
production decisions, and the contract helps to assure
both the farmer and the buyer of a market, whilst
managing the timing of marketing and conveying
information about quality premiums. This type of
contract is commonly used by small-scale con-
tracting operators (classified by Eaton and Shepherd
2001 as the ‘informal sector’). Characteristics of
these systems are products that have minimal
processing and few scale economies. Technical
advice is usually limited to grading and quality con-
trol, with little advice on production techniques. The
success of these systems is to some extent dependent
on the availability of public extension services (by
Eaton and Shepherd 2001), and also on the competi-
tiveness of the market, which affects the opportuni-
ties for buying or selling outside the contract.
Production contracts generally confer more
control to the contractor, and can include provision of
raw material inputs such as seed and fertiliser, tech-
nical directions regarding production technique, as
well as specifications regarding price schedules. The
specification of production contracts can help to
overcome monitoring problems by specifying inputs
(Martinez 2002). Where managing throughput in a
downstream processing plant is important, contracts
may include a delivery quota that helps assure a
regular delivery schedule.
Vertical integration is associated with a higher
degree of uncertainty, where it is difficult to specify
all contingencies via a contract (Hobbs 1996). How-
ever, the management costs of full vertical integra-
tion can preclude its use in some industries. It is more
likely to occur in industrialised production systems
where there is less reliance on decentralised decision-
making skills (like local farmer decision-making).
Use of Contract Farming in
Developed Countries
Contract farming is becoming an important form of
agricultural production in developed countries, par-
ticularly for crops that have a high degree of asset
specificity at the processing level; where quality
control and timing of delivery are important. Such
industries include pig and chicken meat production,
egg production, and the canning and frozen food
industries. For example, more than 80% of broiler
production and 70% of pig production is under con-
tract in the United States of America (USA) (e.g.
Martinez 2002). Overall, about one-third of the value
of agricultural production in the USA is now pro-
duced under contract (Young and Hobbs 2002).
That contracts are widely adopted in some indus-
tries indicates that they have cost advantages in over-
coming quality control and investment issues
associated with spot markets, while avoiding the
large investment and difficult management costs
associated with vertical integration. Contract design
varies from industry to industry, as contracts are
designed to deal with transactions’ problems that are
specific to that industry. However, problems are still
Least
Control offered to contractor
Most
Marketing
contract
Production
contract
Vertical
integration
Spot
market
Figure 1. Methods of vertical organisation along the
spectrum of control. Source: Martinez
(2002).
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encountered in contract farming for a number of rea-
sons. Firstly, it is difficult to specify all contingencies
in a contract, so there is always some scope for rene-
gotiation in an ex post setting, and this can lead to fear
of opportunism. Secondly, recourse to litigation is
often expensive or non-existent. Thirdly, even if it
were possible to specify fully the terms of the con-
tract, it is not possible to determine without cost
whether the terms of a contract are being fulfilled.
High costs of monitoring mean that the information
and incentive problems in agri-food production
systems continue to be an issue. Other problems with
contract farming are associated with the high degree
of concentration at the downstream end of the
industry. The potential for exercise of market power
by these firms in developed-country agri-food
systems is an issue of ongoing debate (e.g. Griffiths
2000; Young and Hobbs 2002).
Contract Farming in Developing
Countries
In the past few decades, the use of contract farming
has expanded rapidly in developing countries. Con-
tracts are used to source raw-material supply for
processing industries, such as canned and frozen
fruits and vegetables in Mexico (Key and Runsten
1999) and fresh horticultural exports from African
countries. In Indonesia, smallholder contracts
include production of seed corn, mangosteens, ginger
and fresh vegetables for the tourist trade (Simmons
2000). Firms entering into contract farming have had
mixed success (Key and Runsten 1999), and there is
much debate about who in the farming sector benefits
from successful contracts (e.g. Warning and Soo Hoo
2000; Echanove-Huacuja 2001).
Contract farming is used in developing countries to
overcome asset specificity and quality-control prob-
lems in agri-food marketing, just as it is in developed
countries. However, there are other dimensions to
contract-farming practices in developing countries
that affect the attractiveness of contracts to down-
stream firms. They also affect the scale at which con-
tracts will be offered and the distributional impact on
the farming sector. These extra dimensions to con-
tract farming relate to problems of imperfect or
missing markets in developing countries. Much of
the literature on contract farming in developing coun-
tries focuses on production or resource providing
contracts which have the advantage of overcoming
constraints associated with access to farm inputs
(factors of production, extension) commonly
encountered in these countries. In some cases, these
missing markets are associated with removal of par-
astatal marketing agencies; and agribusiness has
stepped in to fill the void by providing input supply
services in their contractual dealings with farmers
(Eaton and Shepherd 2001).
The question of whether contract farming can
benefit smallholders by giving them access to global
agri-food opportunities really comes down to three
issues. These are the attractiveness of market devel-
opment in the developing country, and hence the
number of contracting opportunities available; the
ability of smallholders to access these contract
opportunities; and the extent to which farmers ben-
efit, which depends on the terms of the contract.
Second-round impacts of contract farming also affect
poverty. These matters are discussed below and their
policy implications highlighted.
Smallholder access to contracting
opportunities
There is concern that smallholders do not get
access to opportunities for contracting, and there are
a number of reasons why this may be so. One of the
most commonly cited reasons is the high transac-
tions’ costs of dealing with smallholders (e.g. Sarto-
rius et al. 2003). These include costs of search and
negotiation; administration costs; higher costs of pro-
viding extension advice because farmers have a
greater need for it, and there are more of them; costly
communication because there is no access to tele-
phones; and higher monitoring due to pesticide vio-
lations (Key and Runsten 1999). In addition, there is
a need to provide more resources to these growers,
and while this invested capital can be recouped at
harvest/payment, there is a greater loss incurred
when there is a default on the contract.
Other reasons promoting contracts with larger
growers versus smallholders are that technology used
in farm production usually comes from developed
countries and consequently is capital-intensive and
has economies of scale. Larger farmers are usually
better educated and are better at adapting to new tech-
nologies. Larger farmers can also deal better with
yield risk, as they can self-insure through crop diver-
sification. It is difficult for downstream contractors to
assist in providing insurance against yield risk
because of the difficulty in monitoring whether crop
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failure is due to bad luck or bad management. Thus,
smallholders cannot be readily involved in produc-
tion of highly risky crops (Key and Runsten 1999).
However, there are some reasons why small-
holders might be advantaged over larger farmers in
the choice of contracting partners. These relate to
missing or imperfect markets. For example, they are
likely to be credit constrained, which can work to the
contractor’s advantage if there is a premium to be
earned from filling missing credit markets. One of the
problems with supplying credit to farmers is that the
cash can be diverted into other activities, but Key and
Runsten (1999) argue that the risk of default can be
reduced by supplying credit in-kind. Since produc-
tion contracts are normally more lucrative than tradi-
tional crops, the desire to maintain the contract over
the longer term can provide a further incentive for
compliance. Group dynamics and peer pressure can
provide an effective self-monitoring role where a
smallholder group faces the prospect of losing a con-
tract if one of the members defaults.
Where price (as opposed to yield) risk is the key
problem in a new crop, there may be an incentive to
contract with smallholders because of the returns to
providing ‘price insurance’. That is, smallholders are
likely to be more risk averse and hence will be willing
to accept a lower (fixed) price in the contract, which
essentially reflects a market risk premium afforded to
the contractor.
Another feature of smallholders is that they nor-
mally have an abundance of labour and are thus
willing to take on labour-intensive activities at a
return less than what would be achieved if the con-
tractor had to hire labour. Some examples of case
studies that have demonstrated a smallholder advan-
tage in contract farming are illustrated in Table 1.
The requirements of large and small farmers differ
in that the latter require a much higher level of service
(e.g. resources and information) and are also much
more costly to deal with. In theory, both types of
farmers could be accommodated in contracts as long
as the agribusiness firm can discriminate between
them, offering a range of contracts that provide a dif-
ferent level of service and a different price, to account
for the extra cost of service. However, experience
from Mexico reveals that this can be politically unac-
ceptable — for example, Campbells offered seven
types of contracts designed to cover large and small-
holder requirements but were eventually pressured to
remove their ‘price discrimination’ practices; and
were thus no longer able to offer contracts that recov-
ered the transactions’ costs to smallholders (Key and
Runsten 1999).
Since the main cost disadvantage of contracting
with smallholders is the cost of transactions, policies
aimed at reducing this cost will assist in levelling the
playing field for smallholders. For example, govern-
ments can play a development role by introducing
sponsors to farmer groups (and helping in selection
of suitable regions). They can also act as intermedi-
aries and protect farmers by scrutinising the spon-
sors’ plans and intentions on behalf of the farmer
before contract development. Such a developmental
role reduces the search costs associated with finding
and negotiating with potential contractors. This facil-
itating role could also be played by non-govern-
mental organisations (NGOs), and there is some
evidence to suggest that the involvement of NGOs
does contribute to contract success (Simmons 2000).
One of the reasons for failure of contracts is a lack
of understanding on the part of agribusiness firms as
to the social and cultural constraints to production.
For example, lack of awareness of the religious or
social calendar could result in contracts that have
inappropriate demands on labour that conflict with
social or religious obligations. Government (or
NGO) mediators could play a role in scrutinising the
terms and conditions of the contract to ensure that
they do not pose such conflicts.
Developing the capacity of the smallholder to par-
ticipate in contract farming, through provision of
public extension advice concerning production, will
also reduce the private cost of contracting with small-
holders. The public sector might also provide public
extension services to advise farmers on the implica-
tions of various contracting decisions. One of the
problems with contracting is the lack of transparency
in market transactions, which makes it difficult for
farmers to assess the merits of contracting. The gov-
ernment may play a role in advising farmers on
assessing contract terms and in dealing with contract
disputes (Young and Hobbs 2002). Similarly, provi-
sion of public market-information services will assist
the farmer in choosing between agribusiness mar-
keting alternatives.
Land policies that restrict foreign ownership may
be conducive to improving opportunities for small-
holders because they preclude plantation farming and
vertical integration. Warning and Soo Hoo (2000)
present the case of a particular region in Mexico
where local constraints on land markets meant that
smallholders had a cost advantage (low rent) and
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were thus chosen as contractors. However, it should
be noted that there are other factors that go against
plantation farming, such as a high cost of investment,
and the production risk. The high cost of supervising
labour in less industrialised agricultural systems,
such as tree crops, is cited as the reason why many
crops formerly grown as plantation industries are
now being farmed under contract (Key and Runsten
1999; Eaton and Shepherd 2001).
Most of the studies of smallholder experience with
contracts have focused on resource-providing pro-
duction contracts associated with processed or fresh
export marketing. The nature of the contract is that a
high degree of quality control is important and small-
holders are generally disadvantaged because of the
high transactions’ costs of monitoring performance.
However, other opportunities for contract farming
are possible in domestic urban markets. For example,
contract farming of vegetables and milk for the
domestic market is common in Asia. In the case of
fresh vegetable markets, there are lower investment
costs (and less distinct scale economies) in the down-
stream sector; and there are likely to be less stringent
quality standards than in export marketing. These
two factors imply that the degree of control required
by the contractor will be less, and vertical organisa-
tion of markets is more likely to have a spot-market
or marketing-contract orientation. Policies specific to
the promotion of marketing contracts will improve
smallholder access to these opportunities. One
important factor impinging on the success of mar-
keting (as opposed to production) contracts is that
problems of missing markets must be overcome. For
example, if contractors only supply marketing serv-
Table 1. Some case studies on smallholder experience with contract farming.
Commodity Country Smallholder disadvantage/advantage Reference
Frozen vegetables Mexico Disadvantaged. They did not have access to
reliable irrigation water (as timing of delivery
was unreliable due to common-property nature
of wells).
Echanove-Huacuja (2001)
Frozen vegetables Mexico
(one region)
Advantaged. Farm family members worked in
processing factory and this ensured compliance
of farmers, for fear of relatives’ job loss.
Smallholders had lower land rental costs to
local land policy.
Warning and Soo Hoo (2002)
Processing tomatoes Mexico Advantaged. Large holders were defaulting on
contracts due to lucrative fresh market.
Smallholders couldn’t access this market so
were more reliable. They were also credit
dependent, which promoted compliance due to
longer-term demand for credit.
Warning and Soo Hoo (2002)
Peanuts Senegal Neutral. Simple technology did not
disadvantage smallholders. Firm used local
intermediaries to screen and monitor potential
growers, keeping transactions’ costs low.
Warning and Soo Hoo (2002)
Seed corn Indonesia Potentially neutral. Firm used traditional
grower groups to keep transactions’ costs low.
Contracted with 40 groups involving 10,000
individual growers. However, comparison of
contracted and non-contracted farmers revealed
contracted farmers generally larger scale.
Simmons (2002)
Pickling cucumbers Mexico Advantaged due to low labour cost. Warning and Soo Hoo (2000)
Frozen vegetables Mexico
(one case)
Used as last resort because larger growers were
attracted to grain production due to pro-grain
agricultural policy.
Warning and Soo Hoo (2000)
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ices, smallholders will need to be able to access
extension services, credit and obtain access to factors
of production through alternative means. Rural
development policy aimed at overcoming these
missing-market problems will assist in promoting the
use of marketing contracts, and may improve the
access of smallholders to marketing opportunities
associated with rapidly growing domestic urban mar-
kets. Under such improved conditions, marketing
contracts may offer a better alternative to spot-
market transactions because of the value added by
giving growers signals on the quality and type of
product demanded in urban markets, and in man-
aging the timing of delivery.
There are, however, other problems associated
with marketing contracts that need consideration.
These are that volatile markets provide one of the
contracting parties an incentive to renege on the
agreement, and source/sell outside of the contract.
For example, the contracting party, after agreeing to
buy a certain crop at a particular price may ‘disap-
pear’ if there is a glut in the market. Similarly,
growers may sell elsewhere if prices are better.
Buyer/seller default is a commonly cited problem in
fresh-produce markets (e.g. Poole 1998). Govern-
ment intervention to facilitate a bonding or down-
payment scheme could assist in providing greater
security to contracting parties (Key and Runsten
1999).
Terms of contract — market power issues
The extent of market power that can be achieved in
an agri-food market is affected by the relative bar-
gaining power between the contracting firm and the
farmer. The bargaining power of the contractor is
stronger where they have a monopoly on input or
output markets. For example, production of non-tra-
ditional crops that have no market demand domesti-
cally, such as cauliflowers in Mexico, require special
inputs (seed) and access to an export market — this
offers significant market power to the contracting
firm. Farmers have some bargaining power where
they are able to form groups; and where they have
access to other factors of production, other markets
for their products, and to other production opportuni-
ties.
In situations where the contracting firm has signif-
icant market power, there may be a role for govern-
ment in regulating their pricing behaviour. Antitrust
legislation provides a framework for protection in
developed countries although it has not been success-
fully used in appeal against pricing behaviour of agri-
business firms (Simmons 2000). One factor that
makes regulation of pricing behaviour in agri-food
chains difficult is the associated decline of spot
markets (Young and Hobbs 2002). Thin spot markets
do not provide a reliable measure of market condi-
tions and therefore make it difficult to compare con-
tract returns with a market benchmark.
Difficulties in applying antitrust regulation in
developed countries would imply that prospects for
its use in developing countries, where the legal
system is poorly developed, are dim. J ones (1995)
points out that attempts to regulate behaviour can be
counterproductive, as enforcement relies on the local
administration, which is likely to be influenced by
local political pressures. Measures designed to
control exploitation, such as licensing and the restric-
tion of trade to certain locations, can actually be used
to reduce competition. Some authors raise concerns
that the threat of overzealous regulation could reduce
the attractiveness of investment. For example, Key
and Runsten (1999) argue that investors need to be
guaranteed of some profits to justify the risks and, in
particular, the start-up costs associated with industry
development, and that excess profits will be removed
by the threat of entry anyway.
Echanove-Huacuja (2001) reports that exploitation
of growers usually occurs through ‘quality’ down-
grades when there is an excess supply. Growers say
that there is much more argument over quality assess-
ment than price. This implies that the public sector
may play a role in ensuring consistency in the appli-
cation of quality standards, either by creating
industry standards, if appropriate, or by providing
mediation over quality disputes between growers and
contracting firms.
One of the developmental roles that the govern-
ment can play is in supporting and assisting producer
organisations. These associations are particularly
important for dealing with transactions between
smallholders and large firms, because of the associ-
ated transactions’ costs (Key and Runsten 1999). In
the USA, several states have recently passed legisla-
tion to strengthen the rights of producers to form bar-
gaining groups, in response to concern over market
power associated with increased concentration in the
downstream market (Young and Hobbs 2002).
Scrutiny of contract terms and conditions at the
start of a contract may not be sufficient to guarantee
smallholder welfare. There is a perception that con-
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tract terms and conditions gradually deteriorate over
time, although there is little hard evidence on whether
or not this is true. Some conjecture that initially better
terms are provided to cover grower set-up costs; an
alternative explanation is that firms can tighten
pricing as they identify the cheaper operators and
sack high-cost farmers from their contracts (Sim-
mons 2000). Further research on the experience of
smallholders with contracts over time is warranted to
assist in the public debate over the long-term benefits
of contract farming for smallholders. Meanwhile,
one method of scrutinising the merits of contracts
during the set-up phase is to examine the likely ‘exit’
costs imposed on farmers. If there are sunk costs
associated with moving into contract farming, or if
contract farming results in loss of traditional markets,
then smallholders are less able to move back to tradi-
tional practices. These higher exit costs mean that
farmers have lower bargaining power and are likely
to be subject to deterioration of contract terms after
they have been induced to switch into contracted
farming.
Encouraging market development
Opportunities for smallholder access to supply
chains are ultimately limited by the development of
these supply chains by investors. There are a number
of areas where the public sector can play a role in
facilitating such development.
Much of the promotion of contract marketing in
developing countries can be attributed to foreign
firms that have brought their experience with con-
tracting from developed countries. They have access
to appropriate technology, output markets and distri-
bution networks in the exporting country and are
therefore in a good position to develop supply chains
in developing countries. They also provide spillover
benefits through the technology they introduce (Gow
and Swinnen 1998). Consequently, policy towards
foreign direct investment (FDI) will have an impor-
tant bearing on opportunities for agribusiness devel-
opment. Echanove-Huacuja (2001) reports on the
experience of frozen food sector in Mexico, which
was initiated by two large multinationals, but now
domestically owned agribusiness firms have the
largest market share.
Suitable laws of contract and an efficient legal
system are prerequisites for a strong agribusiness
sector. The state has a role in providing a regulatory
framework that defines what constitutes legitimate
contracts, and a system of authority to enforce con-
tracts (J ones 1996). The government sector can assist
in assuring food quality either directly by providing
laws relating to food quality and public health; as
well as indirectly by assisting with voluntary certifi-
cation schemes. For example, it could play a role in
the verification of industry quality-assurance
schemes, industry standards and accreditation. It may
also invest in research to reduce monitoring costs,
thus reducing transactions’ costs.
Whilst agribusiness firms are active in research
and often bring technology to bear in a contract, there
are many cases where public research and extension
can assist the development of agri-food chains. In
many cases, private-sector developers find it easier to
move on than to invest research funds in local issues
such as pest management. A stronger research and
development system, centred on local agro-ecolog-
ical issues where spillover benefits to the country are
possible, is likely to promote development of agri-
business ventures.
Agricultural policies may impact on the attractive-
ness of contract farming. For example, if there are
agricultural subsidies used in promoting traditional
crop production for food security, the relative attrac-
tiveness of contract farming will be distorted and it
will cost more to entice farmers to enter contracts.
Agricultural policies can affect the participation of
larger farmers in contract farming and thus affect
opportunities for smallholders. For example,
Warning and Soo Hoo (2000) note that opportunities
for smallholder participation in contract farming in
Mexico arose because large producers were attracted
to grain production as a result of pro-grain agricul-
tural policy. A subsequent policy shift reduced the
profitability of grain production and, as a result, the
pool of available large growers increased and small-
holders were shut out of contract opportunities.
Customs and quarantine arrangements will affect
the transactions’ costs associated with exporting the
agri-food product. High taxes, cumbersome proce-
dures, and corruption can all affect the cost of setting
up export markets and therefore impact upon incen-
tives to invest in a particular country. Inadequate
quarantine arrangements and poor capacity in pest
management can affect the export attractiveness of
certain crops, through the exercise of sanitary and
phytosanitary (SPS) measures in importing coun-
tries. The government has a role to play in promoting
good quarantine and conducting research in quaran-
tine issues of national importance.
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Public investment in infrastructure will improve
the access of smallholders to markets and reduce the
costs associated with transacting with them. One of
the successful smallholder contracting experiences in
Mexico was attributed to the selection of farmers
adjacent to the national highway (Warning and Soo
Hoo 2000). A strong transport infrastructure also
stimulates development of other market opportuni-
ties, including spot markets, and creates opportuni-
ties for market development by smaller domestic
agribusiness firms.
Governments also have a role in setting an effec-
tive general environment for agribusiness develop-
ment. Sound macro-economic policy is essential for
industry development. For export-oriented supply
chains, a stable exchange rate is necessary to ensure
the viability of the operation, which earns receipts in
one currency and incurs costs in another. A stable
political environment is also essential for assuring
access to markets and services. For example, Eaton
and Shepherd (2001) give the example of the disrup-
tion caused to tourism, and hence access to air-freight
services, that can result from military coups.
Broader issues
There are broader issues associated with contract
farming that can impact on the welfare of small-
holders. These are the second-round effects associ-
ated with adoption of contract farming in a particular
region. Widespread adoption of contract farming in a
particular area could cause thinning of traditional
markets, which can impact on those producers still
producing for that market. For example, if market
size is significantly diminished, it may not be viable
for traders to source any product from that region.
Where a region’s traditional markets are lost, oppor-
tunities to moving out of contract farming are dimin-
ished and this can reduce the bargaining power of
contracted farmers. Other potential negative effects
of contract farming may be an increase in factor
prices as production of high-input crops increases
factor scarcity. Food prices will also go up if contract
farming is associated with a reduction in food pro-
duction and markets are fragmented. Where contracts
are only awarded to larger-scale farmers, the net
effect on smallholders may be negative. Positive
second-round impacts of contract farming are those
associated with increased income in the region,
which can increase demand for goods and services.
The potential importance of all of these factors
should be accounted for in the process of selecting
regions for promotion of contract farming, and poli-
cies for alleviating any adverse distributional impacts
should be considered.
Promotion of alternative institutions for
local agribusiness growth
The importance of transactions’ costs in the vertical
organisation of agricultural markets implies that gov-
ernments may have a role to play by providing insti-
tutional arrangements that reduce these costs, in order
to influence the structure of the industry. Hubbard
(1997) notes that weak institutions in developing
countries lead to a bi-modal industry structure where
the only firms able to enter the high-value export
market are those with large enough capital, their own
institutional arrangements for overcoming missing
markets etc. The implication for the agri-food sector
is that market concentration could reduce the benefits
to the farming community, and to the domestic
economy. The potential for growth of smaller-scale
regional firms into the agri-food industry could be
improved by improving public institutions relevant to
the agri-food trade. For example, the need for brand-
based quality assurance at a large scale may be due to
the lack of standards/legislation in food handling that
would otherwise guarantee compliance to safe food
practices by the small–medium enterprise sector. An
improved food-standards code may promote opportu-
nities for domestic agribusiness firms to enter the
domestic food market in competition with multina-
tionals. This will reduce the market power of large
agribusiness firms providing a better outcome for
both domestic consumers and farmers.
Similarly, a publicly coordinated strategy for
improving national reputation in the export sector may
assist the smaller-scale sector from establishing export
markets, by reducing establishment costs associated
with individual firm reputation development. This will
provide a more competitive industry structure that will
reduce the potential problems associated with current
vertical arrangements in the food industry.
Conclusion
The agri-food sector has moved from a production-
driven to a customer-driven focus, and this has
resulted in a restructuring of vertical arrangements in
the industry. Contract farming has emerged as a
means of managing supply-chain interdependencies
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in both developed and developing countries. There is
considerable debate about whether such arrange-
ments actually benefit smallholders, and evidence on
this matter is mixed. In general, the high transactions’
costs associated with dealing with this sector places
them at a competitive disadvantage, although in some
circumstances other factors may contribute to their
attractiveness as contractees.
Public policies that promote the role of the small-
holder in contract farming will ensure that small-
holders can capitalise on the opportunities in today’s
global agri-food market. Efforts to reduce the transac-
tions’ costs of dealing with smallholders, through pro-
motion and facilitation of smallholder links to
agribusiness, and provision of research and extension
services, will improve smallholders access to con-
tracts. Governments may need to play a role in over-
seeing the terms of contracts to ensure that
agribusiness does not abuse market power associated
with the high degree of concentration in the down-
stream sector. Promotion of growers’ organisations
and monitoring of contract terms and conditions are
means of achieving this. Finally, attention needs to be
given to policies that affect the attractiveness of
investment in the country’s agri-food sector, and these
include foreign direct investment (FDI) policies,
general macro-economic stability, as well as agricul-
tural and trade policies that affect the comparative
advantage of establishing supply chains in that
country.
Over the longer term, policies aimed at improving
the competitive structure of the industry should be
investigated. These would be focused on removing
the technology bias towards large-scale firms by pro-
viding public institutions for quality assurance, and
other public services such as extension, that will
reduce the large (private) set-up costs associated with
agri-food market development.
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Supply-chain Management and Agro-Enterprise
Development: CIAT’s Approach in Southeast Asia
Christopher Wheatley,* Rupert Best,
†
Dai Peters
§
and John Connell
¶
Abstract
The Rural Agroenterprise Development Project of the International Centre for Tropical Agriculture (CIAT)
has taken a territorial approach to equitable, market-oriented, agriculturally based development in the rural
tropics, with the objectives of poverty reduction (through income generation) and environmental
sustainability. A four-stage methodology has evolved based on experiences in South America, Africa and,
more recently, Southeast Asia. These stages are:
•formation of working groups at the level of rural communities, comprising stakeholders interested in
equitable, market-oriented agro-enterprise development, and building consensus on a vision for the future
•prioritisation of agri-food subsectors for further development, based on integration of market demand,
production and environmental criteria, and economic profitability, and in line with overall working-group
objectives
•strengthening of the supply (value) chains associated with each prioritised subsector, with active
involvement of local community groups, support organisations and supply-chain actors from outside the
rural area
•development of sustainable services (business development services) to support and further enhance the
competitiveness of the supply chains into the future.
Examples of this approach from South America and Vietnam — the root-crop starch subsector — are
presented, along with details of a new project in Vietnam and Laos, funded by the Swiss Agency for
Development and Cooperation (SDC) — Small-scale Agroenterprise Development in the Uplands (SADU) —
which aims to adapt the process to the situation of these two Southeast Asian countries.
Globalisation, trade and public-sector reforms, urban-
isation and technological advances are all contributing
to an agricultural sector in rapid change across the
developing world. Rural smallholders, who must be
reached if the millennium goal of reducing poverty
rates by 50% by 2015 is to be met, face declining real
prices for their basic commodities. Competitive pres-
sures, often from imported foodstuffs, are driving a
process of intensification in the use of natural
resources. This has potentially serious consequences
for sustainability in the longer term.
Markets are penetrating deep into what were for-
merly rural subsistence economies. To survive, pro-
ducers now need to operate successfully in a
different, market-oriented environment where new
skills and knowledge are needed to make different
types of decisions. At the same time, the agri-food
industry is itself changing, with a rapidly increasing
role for managed, coordinated supply chains that are
Rural Agroenterprise Development Project, International
Centre for Tropical Agriculture (CIAT),
* PO Box 462, Nelson, New Zealand.
Email: <[email protected]>.
† PO Box 6247, Kampala, Uganda.
Email: <[email protected]>.
§
67 To Ngo Van, Tay Ho, Hanoi, Vietnam.
Email: <[email protected]>.
¶
PO Box 783, Vientiane, Lao People’s Democratic
Republic (PDR). Email: <[email protected]>.
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dominated by a few large — often multinational —
supermarket retailers.
This trend of increasing concentration and vertical
coordination in agri-food supply chains tends to mar-
ginalise smaller-scale producers. In turn, rural pro-
ducers are seeking options that will provide
opportunities for them to improve their livelihoods
and incomes. These can include production of
higher-value crops (rather than basic commodity sta-
ples), differentiation and added value through pro-
duction practices (e.g. organics), product quality,
packaging and marketing strategies (e.g. fair trade).
Options also include leaving agriculture to seek off-
farm income, either in the local rural area or via
migration to urban centres.
To achieve success with the demand-side options,
smallholder producers need to participate in supply
chains for added-value products with growing mar-
kets. This means finding ways to participate in the
type of managed supply chains that are now devel-
oping, in a manner that is both efficient (i.e. compet-
itive), but that is also compatible with environmental
and social sustainability. This implies a need to
combine a supply-chain approach with local devel-
opment processes in specific communities (a territo-
rial approach). This paper presents an approach by
the International Centre for Tropical Agriculture
(CIAT; Centro Internacional de Agricultura Trop-
ical) Rural Agroenterprise Development Project to
meet this challenge.
The Rural Agroenterprise
Development Project at CIAT
1
Based in Cali, Colombia, the project started in 1996
as an outgrowth of previous work on postharvest
technology, marketing and enterprise development
of cassava. The purpose of the project is to link small-
holders with growth markets and motivate the adop-
tion of natural resource conservation practices
through the development of techniques and informa-
tion for the establishment and strengthening of rural
agro-enterprises and their complementary support
services. In particular, the project focuses on
strengthening local capacities for rural business
development through information, methods and
institutional schemes, all in collaboration with local
partners.
Basic values of the project include: (a) an entrepre-
neurial, market-oriented focus, (b) participatory deci-
sion-making with partners, (c) a focus on
strengthening existing local skills and building new
ones, (d) a search for consensus among actors, (e)
equal access to opportunities for participating
groups, and (f) social, economic and environmental
sustainability.
The territorial focus has been developed in three
specific field sites in Latin America: Pucallpa, Peru;
Cauca, Colombia; and Yorito, Honduras. In each of
these sites, CIAT has worked with a variety of local
partners including producer groups, non-govern-
mental organisations (NGOs), governmental organi-
sations, the private sector and others. It is out of this
field work and dialogue with partners that the
approach has evolved.
Before explaining the approach in detail, it is impor-
tant to explain why CIAT has chosen to combine a ter-
ritorial approach with the development of supply
chains for specific, prioritised commodities or prod-
ucts. By focusing on a given geographical area or ter-
ritory, it is hoped that a local skills base may be built
that not only generates positive returns for a specific
subsector or supply chain, but also produces spillover
effects which contribute to a diverse and dynamic local
economy. Market systems will change, so by not lim-
iting work to a specific product, a territorial approach
allows flexibility and adaptive learning which the
working groups can continue to apply as the market
opportunities change. For agricultural products, a
focus on the land where they are produced also helps
the development of more sustainable and diverse pro-
duction systems, whereas a single supply-chain focus
could tend to do the opposite. In addition, the selection
of a number of options for a given territory makes it
possible to target different socioeconomic groups or
agro-ecological niches, providing for more balanced
social and agricultural development. Finally, the crea-
tion of human capital and the improvement of both
bonding and bridging social capital among organisa-
tions are embedded in this approach. This last point is
important for achieving sustainable gains against
poverty in a region.
The territorial approach consists of four major
areas of work:
(a) identification of a specific working group
composed of diverse local organisations with
interest in rural business development
1
This section draws on the paper prepared by the CIAT
project staff in Latin America (Lundy et al. 2002).
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(b) identification of supply-chain priorities based
on the market opportunities available to the
region
(c) participatory supply-chain analysis and devel-
opment, through consensus-building with chain
actors
(d) provision of appropriate and sustainable
business-development services for the region.
The entry point for this approach is the identifica-
tion and consolidation of a local working group in a
particular community or territory. The other areas of
work are subsequently developed in collaboration
with that group.
Local working-group formation
The formation of a working group around the theme
of rural business development is an iterative process
that varies depending on the organisations present in
the area, previous experiences and the necessities of
the local population. In our experience, these groups
usually include strong representation from producer
organisations and NGOs, with somewhat lesser partic-
ipation by public- and private-sector actors. Member-
ship in the interest group and the organisational form
are decided by the participants, as is the demarcation
of the territory in which the interest group seeks to
work. To facilitate these decisions, two specific activ-
ities are carried out with the interest group at the begin-
ning of the process. First, a profile of the territory,
including biophysical, social, organisational, institu-
tional, economic and political concerns, is developed
with secondary data and the use of rapid rural-
appraisal tools. This information provides a common
basis for decision-making among group members.
Based on this information, a consensus for action is
developed that builds on agreements around a
common vision, mission and values, and the organisa-
tional structure and rules for working-group operation.
An initial action plan is then developed. At this stage,
topics like market orientation, entrepreneurship, par-
ticipation and alliances are debated. This process is
key, since it allows group members to discuss and
analyse past experiences and decide on what actions
are appropriate in the future.
Identification and management of market
opportunities
Once the working group exists, one of the first
questions is which products and/or areas are most
likely to generate positive impact for the region. To
avoid past mistakes where increased production of a
single or restricted range of crops/products led to sat-
urated markets, low prices and continuance of the
poverty cycle, a market orientation is fostered by
involving the local actors directly in the identifica-
tion of market opportunities. This process consists of
two types of work: specific market studies and the
on-going management of market intelligence. In the
first area, CIAT has developed a market-opportuni-
ties identification manual (Ostertag 1999) which
seeks to respond to three main questions:
(a) what products show strong market demand in
terms of increasing volumes and prices
(b) which of these products can be produced in the
region, given the biophysical characteristics,
infrastructure and access to productive
resources
(c) of those products identified in (a) and (b), which
are of interest to smallholders?
This opportunity-identification process involves
the collection of information from different market
outlets, including produce markets, local shops and
supermarkets, food processors and traders in order to
assess the prospects and potential for developing
produce and product supply options. These market
outlets can be local to the territory or beyond, in
urban centres, or in some cases in neighbouring coun-
tries. Opportunities for export can also be considered.
The end result is a portfolio of options. The size
and diversity of this portfolio depends on market con-
ditions, biophysical characteristics and potential of
the territory to produce any given alternative, profit-
ability and on farmer interest, but normally includes
from 10–30 possibilities. Sustainable-production cri-
teria — soil conservation, biodiversity etc. — can be
included in the evaluation and prioritisation process.
In the area of market intelligence, we seek to build
local capacity to generate, manage and disseminate
key market information on a permanent basis. This
capacity involves not only direct market visits by
working-group members and/or interested groups of
farmers, but also strategic alliances with national
market information system programs and the devel-
opment of information dissemination tools appro-
priate to the rural context and local culture.
The end result of a market-opportunity identifica-
tion study is a basket of possible options for develop-
ment in the selected region. At this stage, the working
group prioritises these options based on local criteria
in a participatory fashion. Local criteria used have
included strength of market demand, product profit-
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ability, environmental impact, perceived ex ante
development impact, and interest in the product by
organisations, among others. These criteria vary by
region and culture. Using local criteria, the market
options are ranked and a decision made on which
option(s) to pursue first.
Integrated supply-chain projects
At this stage, the local working group moves into
the participatory analysis of the selected product
supply chain. CIAT has developed a method that
seeks to facilitate the analysis of the market chain by
the actors directly involved and, through this process,
to generate collectively owned information and a
consensus for action. The scope of this analysis is
somewhat broader than a typical subsector approach
in that it includes not only the supply chain as such
(production, postharvest/processing and marketing),
but also two important cross-cutting areas: business
organisation and the provision of business develop-
ment services (see Figure 1).
Business (enterprise) organisation and support
services present in a supply chain are key to under-
standing the prospects for improving chain perform-
ance through the effective use of existing skills and
services, as well as identifying important bottlenecks
that constrain such improvements.
Once priority supply chains have been agreed, spe-
cific market contacts are identified. This is comple-
mented by a broader identification of relevant actors
(those involved in production, postharvest and mar-
keting operations) who can participate in the analysis
of the chain. Participatory tools, focus groups and
direct interviews with the different actors are used to
collect supply-chain information (chain mapping).
This helps to group actors so that the perceptions of
traders, producers etc. can emerge independently, for
later comparison and analysis in a wider group set-
ting. All actors then review this information to iden-
tify and analyse bottlenecks and propose solutions.
At the end of the process, facilitated consensus-
building workshops are held where all the informa-
tion is shared and discussed with the various actors
with the goal of identifying positive synergies among
actors, common interests and critical points where
strategic investments can achieve high returns.
Figure 2 shows the steps used in this analysis.
After the process of negotiation with actors occurs,
an action plan, or integrated agro-enterprise project
(IAP), is drafted, which includes research and devel-
opment (R&D) activities in the short, medium and
long term. The goal of this project is to improve the
competitiveness and sustainability of the chain
through the development of a common business-
development vision among various actors. Once a
common vision has been established, specific devel-
opment or research activities may be disaggregated
into discrete projects, depending on funding opportu-
nities and donor interest, while conserving a clear
idea of where everything fits together.
The implementation of activities is coordinated by
the working group, which sources appropriate funds
and technical services based on the demands identi-
fied during this process. By learning how to design
and implement an IAP — diagnose, analyse, design,
source funds and coordinate implementation activi-
ties — the local working group builds important
capacities, which are needed for other future projects.
Provision of appropriate and sustainable
business development services
A final component in the CIAT approach is the
provision of appropriate and sustainable business
development services (BDS) that support the partici-
pation of rural communities in these more efficient
supply chains. A methodology is now under develop-
ment at CIAT for assessing the supply and demand
for services in local communities, and for ensuring
that gaps in the market for services are filled in a sus-
tainable manner. This covers financial, non-finan-
cial, formal and informal services and seeks to build
functional markets for BDS that link specific
demands with suppliers either at the local, regional or
national level. This is currently under development in
Figure 1. The scope of supply-chain analysis.
Production
Postharvest
handling and/or
processing
Marketing
Business organisation
Support services
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a project in Honduras and Colombia supported by the
New Zealand Agency for International Development
(NZAID).
These methods have been developed through par-
ticipation in local and supply-chain development
projects in Latin America — see Lundy et al. (2002)
for more information on the results obtained in Peru,
Colombia and Central America to date.
CIAT Project Activities in Asia
Between 1998 and 2002, CIAT’s Agroenterprise
Project has had two areas of activity in Asia, one
focused on the root-crop starch subsector in Vietnam
— especially the small-scale processing enterprises
around Hanoi — and the other concerned with devel-
oping a strategic alliance with the SEAMEO (South-
east Asian Ministers of Education Organization)
Regional Center for Graduate Study and Research in
Agriculture’s Agroindustry Development Pro-
gramme (SEARCA-AIDP) and the network Users’
Perspectives With Agricultural Research and Devel-
opment (UPWARD) for capacity-building in the
agro-enterprise development area. During 2003, a
major agro-enterprise development project for Lao
People’s Democratic Republic (PDR) and Vietnam
has been initiated, funded by the Swiss Agency for
Development and Cooperation (SDC), representing
an opportunity to adapt the methodologies developed
in Latin America (and now also being trialled in
Africa) to the Asian regional situation.
Rural agro-enterprise development training
courses with SEARCA and UPWARD
Two regional courses have been conducted, one at
SEARCA, Los Baños, Philippines, in 2001, and a
second at the Post-Harvest Technology Institute, Ho
Chi Minh City (PHTI-HCMC), Vietnam, in April
2003. The courses stressed markets and supply-chain
development in the context of territorial (micro-
regional) processes and priorities. Each course com-
prised modules on:
• Asian context — macro policies and trends in rural
development and the agri-food sector
• local participation
• methods for designing and implementing rural
agro-enterprise projects
• learning from experiences
• project design, including field work.
Figure 2. Steps in the supply-chain analysis method.
Prioritise the
production chain
Identify market
contacts
Identify and
convene actors
Map the farm to
market chain
Analyse business
organisations
Evaluate the
business
development
services system
Analyse critical
points
Market chain
diagnosis
Negotiate and design
the integrated agro-
enterprise project
Map the farm-to-
market change
Analyse business
organisations
Evaluate the
business
development
services system
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Participants in the first course (13 from 3 coun-
tries) were mainly from academic or research institu-
tions, while those in the second course (25 from 4
countries) were principally from rural development
agencies in both the NGO and public sectors (provin-
cial level). Course evaluations have proved very pos-
itive, and a further Southeast Asian regional course is
planned for 2004, perhaps in Indonesia. PHTI-
Vietnam is planning to adapt course materials for a
Vietnamese national course, also in 2004. A loose
network of course participants exists, and the new
CIAT project in Vietnam will serve to strengthen this
further, especially in Vietnam and Laos.
Vietnam starch cluster project
A national study of the small-scale root-crop starch
industry in 1998 (Goletti et al. 2001) identified the
potential of rural industrialisation to generate income
and reduce poverty. Since then, an more detailed
study has been undertaken of the cluster of root-crop
processing enterprises in Dong Lieu commune, some
20 km from Hanoi. This has since developed into a
more development-oriented project to improve the
performance of the supply chain (or system of enter-
prises), supported by Urban Harvest (formerly
SIUPA; the Strategic Initiative on Peri-Urban and
Urban Agriculture of the Consultative Group for
International Agricultural Research — CGIAR).
The area is traditionally agricultural but has, since
the late 1960s, specialised in household-level root-
crop (cassava and canna) processing, due to its prox-
imity to Hanoi and access to its growing markets.
Since then, processing capacity has increased 3–10
times, an average of 600% increase over 15–25 years.
The average amount of cassava processed increased
from 0.05 t/household (hh)/day in 1978 to 3 t/hh/day
in 2001, while the average amount of canna proc-
essed has increased from 0.04 t/hh/day in the 1960s
to 9 t/hh/day. Thus, the volume of roots handled by
each trader has increased by 200–300% over recent
times. Of the 2193 households in the commune, 1410
households (64%) are directly involved in root-crop
processing, while others supply raw materials, trade
end products, use processing by-products, or provide
a wide range of support services. On average, pig
raising using the residue from cassava processing as
a major feed ingredient is a common supplemental
livelihood activity in root-crop processing house-
holds (1409, or 64% of households raise pigs). Only
4% of households obtain a livelihood mainly from
crop production. In the 2000–2001 processing season
(approximately September to April), the commune
processed 680 t of cassava roots and 314 t of canna
roots daily.
As the starch processing developed, a starch-based
cluster of enterprises emerged in support or in asso-
ciation with starch processing (Table 1). The ever-
increasing enterprises are packed in the small village
area with little space to operate and no space to
expand. The major constraints facing the starch proc-
essors are not the technologies, as they are developed
appropriately, but the limited space and the associ-
ated constraints to production.
Consequently, the women often queue for hours
(some claim 3–4 hours) to obtain roots before
pushing/pulling the heavy cartload back home,
which, for some, can be a fairly long journey,
depending on location. Thus, much time and labour is
wasted on root procurement. Moreover, due to
limited space for drying, many processors push cart-
loads of starch products to the fields and spread them
Table 1. Frequency of different household enterprises
in Dong Lieu, Vietnam (total number of
households surveyed =2193).
Household activity No. of households
Cassava starch processing
Canna starch processing
Cassava starch filtering
Cassava root grating (service)
Canna waste drying for sale
Canna waste filtering
Maltose production
Canna noodle production
Sugar processing
Rice noodle production
Candy production
Tofu production
Processing solid waste trade
Cassava/canna root trade
Rice production for maltose
Agricultural labour for hire
Industrial labour for hire
Green bean processing
Mushroom production
Pig raising
Alcohol production
Tile cutting
Drying cassava waste (fuel)
Other (including services)
Total number of activities
630
141
311
59
209
32
146
65
2
86
32
8
11
33
3
201
91
15
12
1409
21
2
432
847
4798
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out to dry in the morning and collect them in the after-
noon. Again, depending on the location of the house
in relation to the field, this can also be a time-con-
suming activity. The limited space also contributes to
low starch quality, as there is not enough space to set
up various settling tanks to produce high-quality
starch. The starch quality is further adversely
affected by drying on the very dusty or muddy road-
side. Thus, the limited space has resulted in serious
wasted labour and low starch quality.
In addition to the adverse effects it has on produc-
tion, the confined space has caused another serious
environmental pollution as starch processing gener-
ates a large amount of wastewater and solid matter.
Dong Lieu generated almost 1.45 million m
3
of
wastewater during the processing season of 1999–
2000, and estimated 51,750 t of solid wastes.
During a stakeholders’ meeting with the commune
leaders and processors, limited space, wasted labour,
and environmental pollution were clearly recognised
by the participants as the major constraints to their
enterprise development. During the meeting, no pro-
posals emerged for viable solutions. The constraints
were evident, but solutions were elusive.
Subsequently, a trip to Dong Nai Province in
southern Vietnam to visit some medium-size proces-
sors was organised for Dong Lieu to help generate
relevant ideas for overcoming the constraints. The
visiting team (comprising processors, an equipment
maker and a local government representative) was
most impressed with the continuous filtering tank
system, which accounted for the high quality of the
starch, and the way in which the wastes were proc-
essed or disposed. Based on this observation, the
commune brainstormed the idea of designing a
processing zone in Dong Lieu that creates a space to
accommodate the continuous filtering tank system
and a better organised processing layout. The solu-
tion came from the commune itself when they
observed another production system and compared it
with the constraints they face. Concrete steps to
implementing the solution may be learned in another
visit to a processing zone of the similar nature,
planned for late 2003.
Small-scale agro-enterprise development in
the uplands of Lao PDR and Vietnam
There are continuing high levels of poverty (40–
50%) in the upland areas of both Lao PDR and
Vietnam. While poverty alleviation is a major aim of
rural development programs, market limitations
remain a major impediment to success in develop-
ment. Agro-enterprise development can contribute to
poverty alleviation through creating more diverse
income sources by providing improved access to
markets, improving product quality, adding value to
raw products through intermediate processing, and in
providing service industries. The Small-scale
Agroenterprise Development in the Uplands project
proposes to develop approaches to agro-enterprise
development at the district and community levels that
are appropriate to the economic, cultural and political
setting in Lao PDR and Vietnam. The goal is “to
develop sustainable agroenterprise initiatives with
upland rural communities that generate income and
employment opportunities through diversifying and
adding value to local natural resources”.
Lao PDR
In Lao PDR, the project is initiating work in the
poorest districts of the relatively isolated Xieng
Khouang Province. Contacts with the local provin-
cial government have confirmed that community
development should be a major concern of the
project, in addition to the development of specific
supply chains based on identified market opportuni-
ties.
The province is changing rapidly — new roads to
both Vientiane and to the Vietnamese frontier are
now open, electricity in urban centres is now much
more reliable (power cuts were common) and flights
have been increased to bring greater numbers of
international tourists to the area.
Although the project is still in the initial phase of
working-group formation, some market opportuni-
ties are already appearing, based on the improved
market access that recent infrastructure develop-
ments have brought. These include potential in local
and national markets to obtain higher prices for new
varieties of fruit (plums, nectarines) and prospects for
higher prices for local asparagus, if selection and
packaging can be improved. In international markets,
the region is already exporting a specialty rice (gluti-
nous rice) to Vietnam, and a local mushroom is being
air freighted via Taiwan to J apanese supermarkets.
These and other options will be used as a basis for
participatory market-opportunity identification as the
project progresses.
Vietnam
Understanding the potential role of private enter-
prises in the economic development of the country,
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the Vietnamese government has recently introduced
many policies with regard to small-enterprise estab-
lishment, operations, and tax burdens to favour the
development of small and medium enterprises, in
both agricultural and non-agricultural sectors. Thus,
the current environment is very favourable for the
project to introduce, test, and adapt CIAT’s experi-
ence and approach in agro-enterprise development to
Vietnam.
The CIAT approach will eventually be tested in the
upland districts of three provinces in Vietnam —
Tuyen Quang, Thue Thien Hue, and Dak Lak. As in
Laos, the project is still in its initial stages. Previous
experiences of working in these areas have helped
identify some opportunities among the current prod-
ucts and potential projects. In Yen Son District of
Tuyen Quang, there are opportunities to improve pro-
duction of tea, coffee, various fruit trees, and live-
stock, such as pig, fish, and meat cattle. The potential
markets for Tuyen Quang include non-timber forest
products (NTFPs), which are yet to be identified,
private nurseries, or perhaps organic tea and gourmet
coffee. Nam Dong District of Thue Thien Hue cur-
rently produces NTFPs (rattan, bamboo), fruit trees,
pepper, fish, and rubber, but pigs, chickens, and veg-
etables also have potential to contribute income if
properly developed. Coffee, NTFPs (rattan, bamboo,
medicinal plants), timber, maize, rice, pepper in Dak
R’Lap District of Dak Lak can be improved to
increase their market opportunity, while fruit trees
and livestock also should not be overlooked as poten-
tial enterprises.
The complete supply chain of current enterprises
will be evaluated from production to market to
examine breakdowns or bottlenecks in the chain that
cause low profitability of the enterprises. Once a bot-
tleneck has been identified, strategies can be devel-
oped to modify or eliminate it, or to enhance
performance so that obstacles can be removed. For
example, if product quality is identified as a major
constraint, further investigation into all areas of the
crop — variety, agronomic practice, field manage-
ment, harvesting and handling, and storage — will be
necessary to understand the root of the problem.
Once that is understood, uncomplicated and short-
term on-farm or farmer participatory trials can be
conducted to seek solutions. If transportation or
volume of produce to meet purchaser requirements
are identified as a major constraint, investigation into
group marketing, various transportation pros and
cons, alternative means of transport, and negotiation
with buyers on sharing the burden will need to be
considered. Each step of the supply chain will have
several aspects that can be considered for improving
the function of the whole chain. Through this
process, the working groups will learn to analyse the
weaknesses of the supply chain and ways to find
solutions to overcome them. This skill, once learned,
can be applied to analyse the supply chain of each of
the income-generating activities.
Going beyond the current products to explore
uncharted markets involves risk, time, and possible
cash investment. For cash-strapped and risk-averse
farmers, such an endeavour must proceed with
caution and comprehensive understanding of market
demand and requirements. Both the supply and
demand sides must be considered. For example, in
order to consider gourmet coffee or organic tea as
potential enterprises for Yen Son District of Tuyen
Quang Province, the working group must have the
knowledge of markets — where the market is and
how to connect to it directly or indirectly, quality
requirements, quantity required, frequency of
delivery, and price stability, as well as production
knowledge in order to meet the quality, quantity, and
seasonal demand with a profit, while withstanding
the occasional risk caused by market fluctuation.
Such endeavours take time to develop, but the poten-
tial benefits of developing new agro-enterprises to
meet new market challenges could be enormous and
should not be overlooked.
The strategy of the project is to focus on the
improvement of the supply chain of current enter-
prises that show strong demand growth for the short
run, while beginning to assess new market opportu-
nities and assist the working groups in developing the
supply chain to meet the market demand in the long
run. An important output of the project is that the
working group will learn to assess the weaknesses
and find solutions for the current supply chains, and
assess the potential and find entry-ways into the
potential supply chains. The principles of assessing
the supply chains are the same, but the different
starting points require different methods in these
assessments.
Conclusions
The agri-food sector is changing fast in Asia.
Managed supply chains are expanding, and will soon
take a major share of processed-food and fresh-
produce markets in many countries in the region. Can
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smallholder producers bridge the gap that currently
exists between the traditional and the more coordi-
nated, efficient supply chains? Can they participate
equitably in such chains?
CIAT believes that opportunities for this do exist,
but that success requires a pro-active R&D effort that
links supply-chain and local-development processes,
combined with conducive local and national policies
that support entrepreneurial endeavours in rural
areas. CIAT’s Rural Agroenterprise Development
Project, with its national and regional partners, is a
contribution to this end.
References
Goletti, F., Rich, K. and Wheatley, C. 2001. The cassava
starch industry in Vietnam: can small firms survive and
prosper? International Food and Agribusiness
Management Review, 2(3/4), 345–357.
Lundy, M., Ostertag, C.F. and Best, R. 2002. Value adding,
agroenterprise and poverty reduction: a territorial
approach for rural business development. In: Proceedings
of the First Henry A. Wallace CATIE/USDA Inter-
American Scientific Conferences Series on Globalization
of Agricultural Research, 25–27 February, Turrialba,
Costa Rica. Tropical Agriculture Research and Higher
Education Center – United States Department of
Agriculture (CATIE–USDA).
Ostertag, C.F. 1999. Manual for market opportunity
identification with small farmers. Hillsides ecosystem
training manual No. 7. Cali, Colombia, Centro
Internacional de Agricultura Tropical (CIAT;
International Centre for Tropical Agriculture).
Peters, D., Wheatley, C., Prain, G., Slaats, J . and Best, R.
2002. Improving agroenterprise clusters: root crop
processing and piglet production clusters in peri-urban
Hanoi. Presented at the Symposium on Local Agrifood
Systems: products, enterprises and the local dynamics,
16–18 October 2002. Montpellier, France, Centre de
Coopération Internationale en Recherche Agronomique
pour le Developpement (CIRAD), 21 p.
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173
The Supply Chains of Melons in Western China
Sherrie Wei,* Zhang Yanrong
†
and Niu Gang
§
Abstract
Melons are regarded as a delicacy among the Chinese consumers. They are well known for their good flavour,
sweetness and crispness. Melons are grown in the arid, remote areas of China, including Xinjiang, Gansu and
Mongolia. The major markets for melons, however, are located hundreds of kilometres away, or even over
1000 km away. This study illustrates the supply of melons in western China at each of the supply levels:
production, harvest, grading, purchasing, wholesale and retail, and the transport logistics. It highlights some
of the issues that are obstacles to the effective supply of melons to other regions. This includes small-scale
production, postharvest losses, large distances between growing areas and end markets, transaction-based
relationships between growers and traders, and little information flow from end markets to farmers and
collectors.
To address these issues in the Chinese context, this study proposes to focus on the following to improve the
supply chain: formalising the existing relationships among farmers with a view to sharing experiences and
exchanging information; carrying out projects to identify and involve appropriate extension officers; and
improving technological knowledge through the participation of in research and development (R&D) projects.
Melons have traditionally been regarded as a deli-
cacy among the Chinese consumers. They are well
known for their good flavour and sweetness. They
are grown in the irrigated arid remote areas of Xin-
jiang and Gansu provinces in western China and,
more recently, have been introduced to Mongolia,
Shandong (where they are grown in greenhouses)
and some dry areas in southern provinces, to capture
off-season premium prices. Among all the melons,
Hami melons have been the best known for centu-
ries — ever since the Hami king brought them from
thousands of kilometres away as a special offering
to a Chinese emperor.
Most Hami melons are grown in Xinjiang Province,
but more recently are also grown in Mongolia and
some southern provinces. Gansu Province is rather
well known for honeydew melons, including Huang-
hemi melons (literally Yellow River melons) — a
variety developed two decades ago by a research team
in Gansu. Over 85% of the melons from western China
are transported over thousands of kilometres to inter-
state markets. While melons were once regarded as
fruits exclusive to the imperial family, they now suffer
from downward price pressures. Industry-level prob-
lems include technical issues of pests and diseases,
lack of cold-chain storage, packaging and supply-
chain relationships. The issues are recognised by all
stakeholders in the industry and the government.
However, there have been few systematic actions to
address these problems.
This study looked at each level of the melon supply
chains in western China, including supply-chain
functions, transport logistics and relationships. Some
issues that are obstacles to effective supply chains are
discussed, such as small-scale production, long-dis-
* School of Natural and Rural Systems Management,
University of Queensland, St Lucia, Queensland 4072,
Australia. Email: <[email protected]>.
†
Department of Agricultural Economics, Gansu
Agricultural University, People’s Republic of China.
Email: <[email protected]>.
§
Department of Agricultural Economics, Xinjiang
Agricultural University, People’s Republic of China.
Email: <[email protected]>.
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174
tance transport, and transaction-based relationships
between chain partners. The discussion is based on
interviews with farmers, collectors, wholesalers and
extension officers in Gansu and Xinjiang provinces.
Melon Supply Chains in Western
China
The partners in the melon supply chains include
farm-input suppliers, farmers, collectors, whole-
salers and retailers. The bulk of the melons sold at
interstate markets pass through all levels in the chain.
For the local market, melons may go straight to
wholesaler, retailers or directly to consumers.
Suppliers of farm inputs and services
These suppliers include seed companies, chemical
suppliers and county-level extension service stations.
Many of the suppliers, especially seed companies,
are state owned or with state shares. There are
increasingly more private businesses selling seeds.
However, farmers have had bad experiences with
them in regard to quality standards and authenticity
of the claimed varieties. Under the recent ‘one
dragon’ policy of agro-industrialisation, some farm-
input corporations now work closely with farmers or
farmer groups to integrate production and distribu-
tion functions (Wei and Zhang, these proceedings).
This has not yet occurred in the melon industry, but
the potential exists for input suppliers to work more
closely with farmers.
Farmers
Farmers in Gansu and Xinjiang have very different
scales of production. In Xinjiang, many melon
farmers rent large blocks of land from the govern-
ment’s ‘military settlement farms’: normally 50–100
Mu, up to a few hundred Mu (15 Mu =1 ha or 1 Mu
=67 m
2
). Military farms were unique in Xinjiang.
They were established by massive migration of sol-
diers to the areas soon after the liberation in 1949.
The soldiers played the dual roles of maintaining sta-
bility and farming the vast tracts of undeveloped land
in Xinjiang. Now that the soldiers are passing away,
the land is rented to younger members of the soldiers’
families. In the past, military settlement farms gave
orders to the tenants as to what to plant and bought
back the produce for distribution. They had their own
technical teams to assist farmers in preharvest prac-
tices. Recently, the government quit its distribution
role and farmers are now responsible for their own
losses and profits. Farmers have much autonomy in
making planting decisions. In addition to military
farms, some melons are produced by small farm
households. In Gansu, farm size is much smaller —
about 10 Mu (0.67 ha) for an average household, and
farmers are used to making their own planting deci-
sions.
Melon farmers in both Gansu and Xinjiang have
modest infrastructure for growing melons. Many of
them use fertilisers and plastic mulch but not herbi-
cides or pesticides, as their disease problems do not
often show up at the farm-gate stage. Disease prob-
lems are most serious for Hami melons. To address
the problems, some Xinjiang farmers are now only
renting land that has not been planted with melon in
the past few years. Some also use sheep manure
rather than fertilisers as they see its benefits in
reducing disease problems and improving quality
and shelf life.
Besides growing and harvesting, farmers may
grade, package and transport melons to collection
points in the village. Harvesting is done manually by
collecting melons in hessian bags. Grading and pack-
aging are mostly based on instructions from collec-
tors or wholesalers. Standards vary between
wholesalers, and are not written. Common indicators
are size and blemishes and judgments are made by
visual observations. There are two types of pack-
aging: large, netted nylon bags of 20 kg capacity for
the local market; and cartons of 10–15 kg capacity for
interstate markets.
Collectors
In Xinjiang, collectors (known as Ma Zai) merely
play the role of go-between. They bring wholesalers
from interstate to farms to inspect the fruit and collect
fees. They are not involved in the actual business. In
Gansu, collectors buy melons from farmers and sell
to interstate wholesalers. They are often farmers
themselves, who have a bit more capital and have
sources of information and contacts with whole-
salers. There are generally a few collectors in each
village. They build their own simple, undercover
stands by the roadside near the production areas
through which wholesalers and trucks can pass.
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Wholesalers
Wholesalers are normally from other provinces
and operate as merchants rather than agents. They
travel around the country to obtain melon supply in
different seasons. Wholesalers perform a critical
function in the chain by linking local production to
interstate markets. They have the potential to become
supply-chain managers, as they are the only channel
partners that know both production (through collec-
tors) and markets. However, this has not occurred for
various reasons. Given that individuals are not able to
get loans from banks, wholesalers cannot operate on
a large scale. Two to three of them work as a team on
a small amount of capital. One of them travels to the
production area to buy the fruit and the other(s) sells
the fruit at the central markets in other provinces.
They only do one deal a year, at most twice, for each
of the production areas in Gansu, Xinjiang, Mongolia
etc. The scale of each deal is one or two truckloads,
about 10 or 20 t, but often stretches to a limit of 14 or
28 t. Because wholesalers go to each production area
only once a year, it is unlikely that farmers get any
feedback from them about the current season.
Wholesalers are the link in the supply chain who
that have the whole picture of melon production,
transport and marketing. They have years of experi-
ence in the marketing of melons in their region. How-
ever, they may not purchase melons in any particular
year if they do not expect it to be profitable. Before
travelling to Gansu, wholesalers first contact collec-
tors by phone on supply and price.
Local business people from the production area are
hesitant to enter the wholesale business due to lack of
an interstate network, and lack of understanding of
the end markets. In addition, melons are shipped with
no refrigeration and these people would be under
pressure to find an outlet in cities in which they have
no contacts.
Retailers
Retailers are located thousands of kilometres away
from the production areas. Wholesalers leave the
scene completely once they sell the fruit to the
retailers. There is little feedback of information
between wholesalers and retailers unless serious
problems occur.
The whole supply chain from farmers to retailers is
transaction-based and payment is always made in
cash, on the spot. This is not surprising, given few
institutional bases for supply-chain coordination,
including an absence of consolidation at all levels of
the supply chains, an ineffective contract-implemen-
tation system and lack of cultural underpinning for
inter-organisational collaboration (Wei 2003).
It was estimated that in the Gansu melon value
chain, retailers have the largest share (41%), fol-
lowed by wholesalers (28%), farmers (23%) and,
lastly, collectors (8%) (Zhang and Wei, these pro-
ceedings). One complaint from farmers was that they
paid over 7% of their cost of production in various
taxes.
Characteristics of Melon Supply
Chains in Western China
The melon supply chains as described above have
several characteristics that make supply-chain man-
agement difficult to implement, as discussed below.
Undifferentiated product
The industry competes on price and has turned an
exclusive product into a commodity product. Given
that interstate, urban consumers are able to pay a
premium price for quality, there is an opportunity for
product differentiation and a branding strategy.
While Hami melons have been introduced to other
provinces, consumers still perceive Hami melons
from Xinjiang as the best. Hami melons from other
provinces are often sold with the false claim of
‘Product of Xinjiang’ on the box.
A vast market
China has a vast production area and a vast market
with many segments. Both top and poor quality prod-
ucts find their way to consumers. While China is
opening up its doors to overseas commodities, local
produce still has a large share of the market. Some of
the reasons why the domestic market has not become
more integrated include the huge distances between
production and consumption areas, poor road infra-
structure, and imperfect information flow.
No horizontal integration at each level of the
supply chain
Consolidation of supply-chain levels has been one
driver for supply-chain management in the food and
fibre industries in developed countries. In China,
businesses are not consolidated at any level of the
melon supply chains. There are myriads of unorgan-
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ised producers, collectors, wholesalers and retailers.
Wholesalers operate on low capital costs and can
enter and exit the industry easily. The prosperity or
downturn of the melon industry will thus not affect
the wholesalers in a significant way.
Transaction-based supply chains
Competition has forced business operators with
limited capital to enter into short-term businesses for
immediate benefits. Melon supply chains are charac-
teristically loose, fragmented and unstable over time.
They involve a series of decentralised, dyadic inter-
actions, with no purposeful intention to deliver the
best products to the end consumers. As no channel
manager exists, the chain partners do not see the pos-
sibility of coordinating the marketing functions
among all chain actors.
Low bargaining power by farmers
For several reasons, melon farmers do not have
equal bargaining power over collectors or whole-
salers. One of the main limitations is the absence of
cool-chain storage, which forces farmers to sell their
perishable products at the earliest opportunity after
harvest. During the one-month peak season, there is
much competition for price within the same melon-
growing village, rather than the farmers cooperating
to achieve any collective power in determining the
price paid for their melons.
Farmers performing only the basic function
of production
Unlike farmers in developed countries who clean,
grade and pack their own fruit, farmers in China only
perform the production function. They grade and
pack only when this is requested by wholesalers.
Farmers can sell only in their own neigbourhood or to
organisations with which they have contacts.
Declining quality
There is a temptation to harvest melons prema-
turely to capture early-season premium prices. This
often occurs at the request of wholesalers, as the best
prices may be obtained by being first on the market.
Declining fruit quality has resulted in poor returns for
the industry. The concept of a consumer focus
remains only a concept and has not been translated
into action. At this stage, the whole chains are not
capable of being coordinated to best serve the market.
Declining fruit quality needs to be addressed as
melons face competition from a range of other
summer fruits, such as stone fruits, mangoes etc.
Improving the Melon Supply Chains
in China
Improved disease control practices and
product differentiation
Diseases are a serious threat to Hami melons in
Xinjiang. To reduce losses from disease, wholesalers
often instruct farmers to harvest melons prematurely.
Consequently, poor-quality melons in the market
have affected the industry as a whole. Improved
disease control technologies, such as enhancing the
self-defence mechanisms of plants, are available
through research organisations. The challenge is to
speed up the adoption process through an effective
extension system. Product differentiation can follow
if the quality of fruit is improved. The success of the
strategy also relies on state power to prosecute those
who use misleading branding. As this is not going to
occur quickly, one way to identify quality product is
through reputation from defined supply chains.
Consolidation at the farmer level
At all levels of the melon supply chains in China,
there is no horizontal integration. One strategy to
improve this is to start at the farmer level. Farmers in
the same village know each other quite well. Such
‘natural–social constituents’ (Murdoch 2000) can be
harnessed to get farmers to work together — firstly
on production and postharvest areas, and later on
group marketing. This concept is consistent with the
government policy of getting farmers into groups.
However, the approach needs to emphasise self-
managed groups, not government-directed groups. It
is a critical success factor to identify and involve
motivated extension officers. Consolidation at the
farmer level will allow better collaboration between
farmers and wholesalers and an opportunity for
farmer groups to link with supermarkets directly.
Farmers to perform more functions in the
supply chain
For farmers to improve their share of the value
chain, they need to perform more functions, both
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technical and business ones, in the supply of products
to consumers. Potential technical functions at the
farm level include washing, dipping and packaging.
In terms of business functions, once farmer groups
are developed, they may take over the function cur-
rently fulfilled by collectors. Whether farmers can
perform these potential functions in the supply chain
depends to a large extent on whether self-managed
groups can be developed.
China is a large recipient of international aid pro-
grams. A postharvest and economic program for the
melon industry is currently funded for by the Aus-
tralian Centre for International Agricultural
Research. Technologies for disease control are being
developed to suit local agronomic conditions. The
long-term effort to improve the ‘soft infrastructure’
will include training on extension techniques, infor-
mation provision, credit system and other business
services (Morgan 1997).
The government will need to play a facilitative role
in the whole process. There have been complaints
that various farm taxes add to the burden of produc-
tion costs. With the increasing tax base from the
urban population, the government needs to consider
an alternative way of obtaining revenue. At the ‘play
of the game’ level (Williamson 2000), the govern-
ment needs to improve the effectiveness of imple-
menting contract laws and accreditation systems
(Wei and Zhang, these proceedings). This will assist
industries to restore business order and improve
supply-chain management.
References
Morgan, K. 1997. The regional animateur: taking stock of
the Welsh Development Agency. Regional and Federal
Studies, 17, 70–94.
Murdoch, J . 2000. Networks — a new paradigm of rural
development? J ournal of Rural Studies, 16, 407–419.
Wei, S. 2003. Supply chain management and one dragon
approach: institutional basis for agro-industrialisation
China. Paper presented at the 21
st
ASEAN/3
rd
APEC
Postharvest Seminar, 20–22 August, Bali, Indonesia.
Williamson, O. 2000. The new institutional economics:
taking stock, looking ahead. J ournal of Economic
Literature, 38, 595–613.
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178
Development in Agribusiness Chains and
Challenges for Postharvest Technology:
Experiences from The Netherlands
George Beers*
Abstract
The definition of quality in fresh produce has gone well beyond classical physiological concepts, and the food
system is now confronted with the situation that the consumer is defining quality. Product quality will be
determined by a broad set of attributes. Not only are there more parameters, but also the values of these
parameters will vary for different consumers, purposes, times and places. Led by this new consumer-driven
paradigm, this contribution identifies some implications for the treatment of fresh produce.
Society is ‘individualising’; people are more and more following their own lines of life. There are many
attributes that can differentiate products; some of them are appreciated by only a (small) part of the consumer
market. The food system is challenged to look for opportunities to make money out of this urge for
differentiation; product differentiation is a strategy for many companies. So product differentiation will lead
to differentiation in postharvest treatment.
Another aspect is the dynamics of the scope of the firms involved in food chains. Companies have developed
around so-called asset specificity; equipment, knowledge and capabilities to do things they are good enough
to make money with. If products and product requirements are changing, it might happen that the capabilities
of the businesses in the supply chain change more drastically. Many examples can be observed of new
(sometimes unusual) companies entering the supply chain. An issue in this that it might be interesting to look
at from a postharvest technology point of view, is that the flow of fresh produce has to be integrated in a system
with substantial differences from other product flows. Also, new types of companies, so called ‘trusted third
parties’, emerge and take responsibility for food safety and other quality attributes.
There are many opportunities for reducing quality loss in the last stage of the chain — the consumers.
‘Consumer equipment’, in the kitchen or during transportation, is evolving rapidly. More dedicated equipment
and ICT-driven opportunities will create new challenges for the postharvest community.
Shifting from supply to consumer-driven food production, some interesting contributions from postharvest
technology are expected. These can be considered to be challenges to exploit the postharvest knowledge and
expertise in the context of the consumer-driven paradigm.
* Wageningen University and Research Centre, The
Netherlands.
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Linking Farmers with Markets: the Case of Cocoa
G.I. Johnson,* Arief Iswanto,
†
J. Ravusiro,
§
P.J. Keane,
¶
N. Hollywood,**
S.V. Lambert,
††
and D.I. Guest
§§
Abstract
‘Supply-chain management’ means very little to most smallholders — they are concerned with managing their
farms, saving sufficient for their own needs and selling any surplus for the best price they can get. Their contact
with ‘markets’ is often limited to dealing with a produce collector, or to sales at the local ‘fresh market’.
Limited contact with markets probably means that growers have little awareness of product suitability, quality
or choice of crop. While crop choice is often dictated by what other local growers find profitable, crops in
demand can quickly become ‘surplus to requirements’. In the case of cocoa, however, global demand is strong
at present, and growers in Asia can earn good incomes from the crop. Cocoa is a crop of the developing world,
while chocolate is largely consumed in the developed world. In Indonesia, a large smallholder cocoa industry
has developed in Sulawesi over the past 20 years, while in Papua New Guinea (PNG) there has also been a
major shift from plantation to smallholder production. Cocoa has been a good source of income to smallholder
farmers for meeting financial commitments such as school fees in these countries, but this may not be assured
in the longer term. As communities continue to develop, greater focus on ‘linking farmers with markets’ might
be the key to sustainable income generation from cocoa. This paper describes some characteristics of the cocoa
industries in Indonesia and PNG, discusses the key issues for sustainability of their industries, and describes
research and development initiatives that aim to improve smallholder incomes.
Cocoa fortunes Indonesia is currently the third-
largest producer of cocoa with about 20% of global
production (Table 1), mainly of bulk cocoa based on
Forastero hybrids. Papua New Guinea (PNG) pro-
duces only 2% of the world crop, but supplies a niche
market of ‘fine’ cocoa based on Trinitario × Amazo-
nian hybrids. Global demand for cocoa is strong, and
supply projections suggest potential shortfalls in
supply. As a consequence, interest in overcoming
deficiencies in supply has become stronger amongst
chocolate manufacturers and government agencies in
developed countries (such as USA), where local
farms produce milk and sugar, which are also used in
chocolate manufacture. While global demand for
cocoa is strong, threats such as the potential for
market oversupply by emerging future producers
such as Vietnam, and a decline in demand due to the
use of non-cocoa fats in chocolate manufacture,
heighten the need for producing countries to have
greater market focus in planning research and devel-
opment (R&D).
* ACIAR, GPO Box 1571, Canberra, Australian Capital
Territory 2601, Australia.
†
Research Institute for Coffee and Cocoa, Jalan PB.
Sudirman 90, Jember 68118, Indonesia.
§
Cocoa and Coconut Institute, PO Box 1846, 10 Rabaul,
East New Britain, Papua New Guinea.
¶
Department of Botany, LaTrobe University, Bundoora,
Victoria 3083, Australia.
** Centre for Food Technology, Department of Primary
Industries, GPO Box 46, Brisbane, Queensland 4001,
Australia.
††
Masterfoods Australia, PO Box 397, Wyong, New
South Wales 2259, Australia.
§§
Department of Botany, University of Melbourne,
Parkville, Victoria 3052, Australia. (Present address:
Department of Botany, University of Sydney, Sydney,
New South Wales 2006, Australia.)
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Cocoa in Indonesia
In Sulawesi, an industry involving more than
300,000 smallholders has developed since the 1980s.
Key drivers in the development of the industry have
been the improvement of land access, the settling of
transmigrants and the experience of returnees from
Malaysian cocoa plantations bringing farming
knowledge and seed. The Sulawesi industry supplies
‘bulk cocoa’ used for cocoa butter. Annual produc-
tion os over 300,000 tonnes, 90% of this by small-
holders. Smallholder yields average 800–1000 kg/ha,
as compared with 1800 kg/ha on plantations, but
smallholder input costs are lower (Bedford et al.
2002).
The main factors affecting productivity include:
• weather extremes
• pest (particularly the cocoa pod-borer moth (CPB),
Conopomorpha cramerella) and disease losses
• labour shortages
• restricted access to finance and high interest rates
(Bedford et al. 2002).
Industry characteristics
• Labour requirements in Indonesia are higher than
those of the West African producers. Labour is
needed throughout the year during establishment,
but the requirement falls to 80–90 days/per year/ha
in established but non-bearing plantings, and to 30
days/ha when trees are bearing (although the last-
mentioned input may not be sufficient for optimal
maintenance). As a consequence, a family of 2–4
can care for a 2–4 ha farm.
• Rainfall patterns allow harvesting throughout the
year, so labour requirements for harvesting are
higher than in the West African industry.
• Producers can be owner–farmers, sharecroppers or
farm managers.
• There are few co-operatives or farmer groups.
• Most producers sell semi-dry beans of 15–20%
moisture to village collectors.
• The industry has a fairly efficient marketing
system, fostered by the marketing policies of the
Indonesian Government, but there are few
incentives to improve quality. Industry middlemen
have limited knowledge of handling, quality and
storage.
• Indonesian cocoa sells for a lower average price
than cocoa from Ghana and Côte d’Ivoire (which
produce ‘fine’ cocoa), but Sulawesi cocoa farmers
earns a higher percentage (70% +) of ‘free-on-
board’ (FOB) prices.
• Recent trends in the industry include the growth of
primary processing in producing countries, e.g. the
PT Effem (Masterfoods) processing factory in
Macassar, Sulawesi, and multinationals now
dominate the trade (declining from 60 national
traders in 1998 to 2 in 2000, with 11 international
trading companies).
• As a ‘bulk’ cocoa supplier, the provenance of
cocoa at grower level is less important, and
processors can address the quality issue of low or
no fermentation, but the real quality problem is the
physical quality of cocoa, specially the percentage
waste (placenta and flat beans, small beans and
clumps due to CPB infestation, and contaminant
residues may also become a problem) (Bedford et
al 2002).
Although processors can address minor quality
defects through blending and processing technology,
there is the risk that the mean quality can become too
low, for example when CPB damage becomes exces-
sive.
Table 1. Cocoa bean production (Mt) in the Americas, Africa, Indonesia, Malaysia and Papua New Guinea,
1996– 2003. Source: FAO STAT (2004).
Country/region Year
1996 1997 1998 1999 2000 2001 2002 2003
Africa 2,144,525 1,940,505 2,169,731 2,136,463 2,344,348 2,048,042 1,891,396 1,892,396
Americas 571,117 575,282 540,750 474,320 435,270 456,566 561,659 471,726
Indonesia 350,800 329,700 430,800 442,700 465,700 380,900 450,000 450,000
Malaysia 120,071 106,027 90,183 83,700 70,200 58,000 47,661 47,661
Papua New Guinea 36,000 40,000 29,800 35,600 46,800 38,800 45,000 42,000
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In summary, there is little traceability of product
(cf. horticultural produce), grower–trader relations
are often short-term, quality and reliability of volume
have not been high enough to favour long term links,
and chain members may be tempted to add foreign
matter to boost weight. While the quality of bulk
cocoa is important, managing it is complex and the
Indonesian value chain for cocoa is less suited to the
introduction of ‘quality improvements’ than are
those for the horticultural industries (Bedford et al.
2002).
Critical issues for industry improvement in
Indonesia
• Product supply needs to be more reliable (in
quality and quantity).
– Losses due to pests and disease need to be
reduced.
– Cocoa butter levels in cocoa beans need to be
improved.
• Any new inputs for crop improvement must not be
too labour intensive, as labour is already in short
supply.
• Strategies for improving grower returns through
improved production and quality are needed.
Sulawesi farmers already have the highest
percentage of world cocoa price and the cocoa
pipeline is very efficient with very low margins for
the intermediary collectors/traders.
• In dealing with these issues, chocolate
manufacturers are important drivers.
Some 85% of the cocoa from Sulawesi, worth
US$140 million in 2000, goes to the USA, but the
CPD has destroyed 40% of recent crops and reduces
quality in the remainder.
Research and development
The Indonesian Government has placed high pri-
ority on extension and implementation of R&D in the
last few years, while devolving more responsibility to
the provincial level. The Balai Pengkajan Teknologi
Pertanian (BPTP) centres have the charter of
extending and developing all forms of agricultural
technology in regional areas. Cocoa, after rice and
other subsistence food crops, is the most important
crop in Sulawesi and has underpinned a large part of
the recent economic development. In tandem with
BPTP, the Dinas Perkebunans provide the provincial
extension service for small-scale plantations. While
cocoa R&D is centred at the Indonesian Cocoa and
Coffee Research Institute (ICCRI) in J ember, Indo-
nesia, investment in infrastructure and resources in
Sulawesi has been strengthened (for example, the
BPTP facility in Kendari). This investment is com-
plemented by the following suite of international
development initiatives which seek to overcome
major industry constraints.
ACDI/VOCA SUCCESS Alliance project:
1
(USAID funded)
This initiative focuses on integrated farmer
training, information exchange and applied research
on pest control (regular harvests etc.) in the Sulawesi
cocoa industry. Between 2000 and 2002, more than
10% of Sulawesi cocoa farmers were trained, crop
losses for trained farmers dropped by 30%, and
farmer incomes rose by more than US$500 p.a.
In a second stage of the SUCCESS Alliance there
is a new focus on quality, farmer organisation and
leadership. Under the Alliance, PT Effem (Master-
foods) Sulawesi started to buy small quantities of
cocoa directly from smallholders, and private sector
partners have agreed to buy cocoa worth more than
US$10 million p.a.
The project has a spillover activity in the Philip-
pines and is also planning work in Vietnam. In Indo-
nesia, challenges for the Alliance include:
• accessing locally proven germplasm and
technologies
– there are good opportunities for synergy with
ACIAR initiatives (see below)
• assuring some carryover of experience when the
Alliance ends. Options include:
– maintenance of links with processors
– continuing to build local extension and
information dissemination capacity
– fostering farmer organisations.
1
ACDI/VOCA was formed in 1997 by the merger of
Agricultural Cooperative Development International
(ACDI) and Volunteers in Overseas Cooperative
Assistance (VOCA). The merger blended ACDI’s
systemic, long-term approach to development and
VOCA’s people-to-people volunteer activities. ACDI
(first known as the International Cooperative
Development Association) was formed in 1963 by major
US cooperatives and farm credit banks to assist
cooperatives in developing countries. ACDI eventually
grew into an international technical and management
assistance organisation with rural finance, natural
resource management and agribusiness capabilities
<http://www.acdivoca.org/acdivoca/acdiweb2.nsf/
whoweare/history?opendocument >.
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Pest Reduction Integrated Management (PRIMA)
The main aim of the PRIMA project (under Neth-
erlands Government funding) is to assist a group of
900 Sulawesi farmers on a 1000 ha area to improve
their production and quality of cocoa by using an
integrated management approach. Development of a
quality cocoa pipeline, with training of farmers and
traders on grading and cocoa quality, is also a very
important part of this project. The most efficient
methods for biological control of CPB are also being
tested. One component of this approach is the reha-
bilitation of plantations by side grafting with CPB-
resistant cocoa clones, aiming at improved produc-
tion and quality. The project is not undertaking
primary collection of putative resistant material —
this is being undertaken in a parallel ACIAR project,
and some of the most promising locally selected
clones from the ACIAR trial will be re-tested in the
field trial in PRIMA project area in Noling, near
Palopo, Sulawesi. In this way, the superior agro-
nomic characteristics and pest and disease resistance
of clones will be confirmed and budwood multiplied.
Budwood from the ACIAR selected clonal materials
will then be made available for the farmers trained on
integrated management in the PRIMA project.
ACIAR support
ACIAR project PHT/2000/102, ‘Selection for
improved quality and resistance to Phytophthora pod
rot, cocoa pod borer and vascular-streak dieback in
cocoa in Indonesia’, in Sulawesi began 2000, after
the start of ACDI–VOCA SUCCESS Alliance
project and before the start of the PRIMA project.
The project focuses on evaluation of germplasm with
putative pest or disease resistance or improved
quality, collected from across Indonesia by Dinas
Perkebunan personnel (Iswanto et al. 2003). The
project has stronger links with Indonesian agencies
than do the ACDI–VOCA and PRIMA initiatives and
emphasises:
• evaluation of local selections with resistance to
pod borer, disease (Phytophthora pod rot and
canker caused by Phytophthora palmivora and
vascular streak dieback (VSD) caused by
Oncobasidium theobromae), and higher cocoa
butter and bean size
• farmer participatory side-grafting of bearing trees
with grower/adviser selected superior material
• improvement of Phytophthora pod rot and VSD
control.
The project is linked to and complements the other
initiatives.
Potential impacts of the ACIAR project include:
• risk reduction if lines with resistance to one or
more pests are identified
• lines may give more cocoa butter, less shell
• growers will be able to move to improved cultivars
through side grafting
• there is likely to be an interest from manufacturers
to source cocoa from improved clones.
Summary and conclusions
The Sulawesi cocoa supply chain is very efficient,
with farmers receiving probably a larger share of the
selling price than any other cocoa farmers around the
world. There are few intermediary collectors and
trader intermediaries, and they make relatively low
profits. Nevertheless, quality (as percentage waste,
flat and small beans, and the lower fat percentage in
such beans, which are a result of the CPB infestation)
is critical. Manufacturers can play a key role in over-
coming these problems. Probably the best solution
would be to introduce differential pricing. Differen-
tial pricing would encourage farmers to produce
better-quality cocoa. This way, farmers could
increase their incomes and manufacturers would
obtain more cocoa of the preferred quality standard.
The other element of quality improvement and
income generation is to reduce losses through
improved, pest-and-disease-resistant planting mate-
rials (as is being investigated in the ACIAR project),
and training of farmers in integrated pest manage-
ment (as in the SUCCESS Alliance and PRIMA
projects).
The Indonesian cocoa industry and the R&D pro-
grams that support it have many of the elements crit-
ical to sustainability: a crop with a well-identified
market, and strategies to reduce losses and improve
productivity. The challenges will be to foster wide
adoption of improved cultivars, and to encourage
adherence to control measures recommended for pod
borer and diseases. Given the labour shortages, and
the costs and extension challenges associated with
encouraging farmers to use other control methods,
resistance is a good option for sustainable crop
improvement, with the larger market for ‘bulk’ cocoa
remaining as a better option than ‘fine’ cocoa. For
industry improvements to be sustainable, links
between farmers and manufacturers that enable ade-
quate income improvements to cover increased costs
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of management, will be critical. The strong commit-
ment by some manufacturers to participatory R&D
offers hope that this will happen.
Cocoa in Papua New Guinea
Papua New Guinea (PNG) supplies just 2% of the
world market, a tenth of that of Indonesian produc-
tion. However, the 35,000 tonnes produced each year
(mostly from East New Britain) is acidic, ‘fine’
cocoa, with most (80%) now coming from small-
holder production. In contrast to Sulawesi, where
under-fermented beans are sold for processing as
bulk cocoa, PNG cocoa is fermented and dried
locally. Papua New Guinea cocoa beans are recog-
nised worldwide for the quality attributes that reflect
their Trinitario origin.
2
However, they also have a
reputation for some undesirable characteristics, such
as excessive acidity, high shell content and smoky
flavour (especially in smallholder produce), the latter
a result of smoke contamination during drying or
storage In addition, the introduction of hybrids of
inferior flavour led, in recent years, to a decline in the
premium paid for PNG cocoa, with PNG’s 75% ‘Fine
or Flavour’ rating being reduced to 25%. Other
dimensions of the industry include the following:
• yield averages are increasing (in East New Britain)
from 300 kg/ha in 1989 to 620 kg/ha in 1999
• industry growth has been hampered by
– the decline in the value of local currency
– the civil unrest in Bougainville, one of the main
production areas,
– problems with weather, pests and diseases
–volcanic eruptions
• Productivity has also been affected by the
inefficiency of smallholder production and low
levels of inputs.
PNG contrasts with Indonesia
• ‘Fine’ versus ‘bulk’ cocoa
• Diseases are the more serious problem in PNG
versus the pod borer in Indonesia (CPB is not yet a
problem in PNG)
• as a subsistence crop, cocoa will provide some
income even when neglected
• traditional land rights in PNG affect access
• lower literacy levels affect information access,
extension and financial management
• high transport costs cut into profits
• civil unrest and natural disasters have had more
adverse impacts
• less experience in repayment of microfinance
affects credit availability to smallholders.
Nevertheless, PNG receives prices above world
averages for its cocoa and, as in Indonesia, manufac-
turers have a strong interest in fostering improvement
of the PNG industry: improvement of cocoa quality
and ensuring that smallholder production is sustain-
able are key focuses of R&D.
Research and development
The PNG Government also places high priority on
fostering improvement and expansion of the cocoa
industry. Research and development is undertaken by
the PNG Cocoa and Coconut Institute, formed in
2003 by the amalgamation of Cocoa and Coconut
Research Institute and the Cocoa and Coconut Exten-
sion Agency (CCEA). Cocoa and Coconut Institute
cocoa research is centred on East New Britain.
AusAID Cocoa Improvement Project 1992–1996
To re-establish and improve the quality character-
istics of PNG cocoa beans, the PNG Cocoa and
Coconut Research Institute (CCRI) started a R&D
project in 1992, supported by the Australian Agency
for International Development (AusAID) (the Cocoa
Quality Improvement Project). The project investi-
gated several aspects of fermentation and quality
improvement:
• screening of germplasm for cocoa quality traits to
improve the genetic base for quality cocoa
production in PNG
• development of fermentation and drying methods
to enable smallholders to increase their income
through the sale of fermented, dried beans rather
then wet beans.
• a review of the regulations for fermentaries and
drying facilities in order to provide advice to the
Cocoa Board of PNG on changes needed to enable
smallholders to undertake these processes.
More recently, AusAID, in partnership with the
United Nations Development Program (UNDP), has
provided further support for the PNG cocoa industry
2
The original material, from early last century was
Trinitario. Since the early 1980s and now, material
distributed by CCRI has been Trinitario × Amazonian
hybrids. There have been claims that this has diluted the
Trinitario attributes. However, PNG cocoa is still sought
by manufactures for its’ flavour attributes.
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under initiatives for the rehabilitation of cocoa on
Bougainville.
ACIAR Project PHT/1995/136 ‘Cocoa fermentation,
drying and genotype × product quality assessment
The ACIAR project
3
was initiated in 1998 as a
follow-on to the AusAID-funded activities at the
Cocoa and Coconut Research Institute (CCRI). In
collaboration with the Queensland Department of
Primary Industries and the University of New South
Wales, its objective was to complete assessment of an
integrated approach to quality improvement
involving changes to fermentation, drying and selec-
tion of cocoa varieties with superior flavour.
ACIAR later extended the project to (a) finalise
evaluation of fermentaries and dryers, and to develop
and implement technology transfer strategies, partic-
ularly in relation to the re-establishment of the
industry on Bougainville, and (b) finalise participa-
tion in the International Cocoa Confectioners’
Organisation (ICCO) collaborative project to estab-
lish the benchmark physical, chemical and orga-
noleptic parameters that differentiate between fine
and bulk cocoa. Papua New Guinea cocoa was com-
pared with the industry bulk standard (West African)
and with cocoa produced by other partners (Trinidad
and Tobago, Ecuador and Venezuela).
The project has investigated the following key ele-
ments of quality improvement and industry develop-
ment:
• fermentation process and time (smaller volumes of
beans, shorter times) (Hollywood 1998)
• cocoa drying (A-framed solar collectors)
(Hollywood et al. 1997)
• varieties with better ‘PNG fine’ flavour
• revision of cocoa industry regulations
• industry extension and uptake
• support for the Bougainville industry through
testing of methodologies, particularly related to
drying
• ‘PNG’ chocolate options
• benchmarking of PNG cocoa in an ICCO
collaboration
• income generation for smallholders.
Table 1 summarises achievements to date and the
factors that remain to be dealt with in order to realise
the benefits of the current investment.
What are the key messages from the PNG
research?
Smallholder issues
• Fermentation. Fermentation methods for small
quantities of cocoa (down to 25 kg) have been
developed. This means that virtually any size
producer could ferment their harvest and produce a
good quality cocoa.
• Solar drying. The original dryers distributed
during the AusAID program had limited success
due to severe maintenance problems. Most of the
maintenance problems have now been solved and
there is a need to ensure recommendations
regarding construction are adhered to. Farmers
also need to be encouraged to take greater
ownership for acquisition and maintenance of
drying units.
• In provinces or districts with similar rainfall to
East New Britain Province, stand-alone solar
dryers are an option, provided the maintenance
recommendations are adhered to.
• For wetter provinces, combination solar/kiln
dryers have been developed and test units
distributed on Buka Island and Bougainville.
These have proven a popular development with the
local population. However, their long-term value
will depend upon maintenance by users.
Quality issues
• The Cocoa Quality Laboratory of CCRI has
developed good capabilities for quality assessment
and sample throughput.
• Recommendations regarding fermentation
procedures to improve quality attributes have been
developed; e.g. by reducing fermentation times
from 7 to 5 days, shell content is reduced by 2%,
acidity of the cocoa is lower and flavour attributes
improved (enabling distinctive ‘PNG chocolate’ to
be made).
• With PNG export cocoa, successful participation
in the ICCO project could enhance PNG’s
reputation as a producer of fine-flavour cocoas.
Provided support from CCRI is ongoing, further
improvements in fermentation and drying
technologies and selection for flavour attributes in
plant breeding could be expected. 3
Funded under the ACIAR-AusAID Record of
Understanding for PNG.
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Table 1. Cocoa quality improvement in PNG: issues, achievements and future needs.
Element of quality
improvement
Key achievements What needs to be done now?
Fermentation process
and time
Smallholder technologies
developed: for shorter
fermentation times and smaller
volumes of beans
Procedures for small-scale fermentation and the amended
regulations need to be approved by the PNG Cocoa Board, and
follow-up extension activities undertaken.
Cocoa drying Small-scale, solar-drying
technologies have proven
useful for East New Britain
Recommendations regarding their construction, use and
maintenance, and amendments to regulations need to be
approved by the Cocoa Board and follow-up extension
activities undertaken.
Options for wetter areas require more work.
Varieties with better
‘PNG fine’ flavour
Large range of germplasm
screened, and testing for quality
incorporated into routine
breeding.
New release lines shown to
have good ‘PNG fine’ flavour.
Training of CCRI cocoa quality
laboratory staff in cocoa quality
assessment. Training for
chemist in taste panel
procedures.
CCRI should continue screening of breeding lines for quality
traits.
Resources and experience in taste panel evaluation should be
established and maintained. This will reduce need for taste
evaluation by manufacturers.
Cocoa industry
regulations
Revisions to industry
regulations drafted and
presented to the Cocoa Board.
Board needs to formally consider and approve the revised
regulations before cocoa produced with smallholder
fermentation and drying technologies can be sold.
Industry extension and
uptake
Training manual drafted.
Extension personnel trained.
Manual needs to be updated to include recommendations for
smaller fermentations, down to 25 kg, and the latest
developments in solar-dryer construction.
Need to increase commitment to extension and involve other
groups (training institutions, NGOs) in training and
implementation of the technology.
Bougainville industry
rehabilitation
Support for United Nations
Development program/AusAID
installations
The PNG Cocoa Board needs to approve modified
specifications on dryer size in cocoa regulations.
Consideration should be given to distributing combination
solar/kiln dryers (as a method of saving of firewood) and/or
purely solar alternatives for drying in suitable weather
conditions.
PNG and donor agencies need to review future needs/
sustainability of industry on Bougainville.
‘PNG’ chocolate Distinctive flavour of ‘PNG’
chocolate demonstrated through
collaboration with Masterfoods
Australia.
An economic analysis should be undertaken of opportunities
which could include: local marketing of products made from
cocoa nibs, and links with a specialist manufacturer who might
want to market ‘PNG fine’ chocolate to international markets.
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ICCO ‘Fine/Flavour
Project’. Partner
countries and
commercial users of
PNG cocoa are
involved in
‘benchmarking’ fine/
flavour criterion.
b
Some progress has been made
in ‘bench-marking’ PNG
standard fine cocoa against
other producers.
Ongoing support is needed for CCI participation in the current
project. Future directions/needs will depend on progress made
in current ICCO project.
Income generation for
smallholders
This project has developed
affordable options for
smallholders to produce higher
quality cocoa and potentially
earn more income.
In 2003–2005, a new ACIAR
project will provide additional
resources and effort in this area.
The Cocoa Board has to approve revised regulations before
farmers can use project-developed technologies to produce and
market cocoa.
International
collaboration
Partnership initiated in ICCO
project
a
International cocoa conference
presentations made
CCCRI staff participated in an
ACIAR–Indonesia cocoa
workshop in 2001, and
discussions were held between
CCRI and the Indonesian
Cocoa and Coffee Research
Institute (ICCRI) about
fostering collaboration.
Collaboration in the current ICCO project could foster future
links and funds.
The profile of CCI in international cocoa R&D should be
maintained.
Links with Indonesia and other ASEAN cocoa producers
(including Vietnam) should be fostered both for research gains
(e.g in developing strategies for exotic pests such as cocoa
pod-borer) and to enable the PNG industry to have a better
understanding of future competition.
CCRI should continue to foster good links with manufacturers.
Table 1. (Cont’d) Cocoa quality improvement in PNG: issues, achievements and future needs.
Element of quality
improvement
Key achievements What needs to be done now?
Extension liaison
• This is the most critical and challenging issue to
handle at the present time (resources, farmer
linkages and security). There is a major need for a
concerted effort for the recently merged CCRI and
Cocoa and Coconut Extension Agency (CCEA),
and the Cocoa Board, to deliver research outcomes
to the field and foster adoption by farmers.
Adoption of recommended procedures country-
wide would automatically deliver an improvement
in quality attributes of PNG cocoa (and thus
reputation and income). The challenge will be in
getting this message across.
Future ACIAR support
In parallel with the ACIAR support for research on
cocoa fermentation, drying and genotype evaluation,
another ACIAR project in PNG has promoted
options for income generation in the smallholder oil
palm sector of PNG, including the increased partici-
pation of women in the industry through the ‘Mama
Lus Frut’ card scheme. In recognition of the oil palm
project achievements and of the opportunities for
cocoa industry improvement described here, a new
project funded by ACIAR (ASEM/2002/014) will
focus on improving productivity and the participa-
tion of young people and women in the Papua New
Guinea cocoa, coconut and oil palm industries. Part-
ners in the project are Curtin University, CCRI/
CCEA and the PNG Oil Palm Research Association.
The new project will capitalise on the oil-palm
project interventions that led to significant increases
in smallholder productivity. The new project aims to
replicate such achievements in the PNG smallholder
cocoa and coconut sectors. Researchers will also
conduct an in-depth evaluation of a promising new
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payment system (also arising from the earlier ACIAR
project) for oil-palm smallholders at Hoskins, West
New Britain, and seek to further adapt it for other
smallholder oil-palm regions and for the smallholder
cocoa sector in PNG. The project will promote the
sharing of knowledge and expertise between the key
smallholder extension agencies and research organi-
sations in the three industries.
For the farmers of PNG to be better linked to mar-
kets, the most important issue is to enable them to
ferment small quantities of beans harvested from
hybrids that produce cocoa of superior flavour. There
must also be a continuing effort to refine postharvest
procedures suitable for farmer use and which would
enable them to match manufacturers needs more
closely and deliver superior product to traders, with a
price premium paid for beans of superior quality. In
this way, smallholders in remote locations would
have the chance to improve their incomes while
enhancing the quality and reliability of PNG cocoa.
One option to consider is that proposed by local
industry leaders in Bougainville — the concept of
‘cocoa traders’ as middlemen between growers and
export companies. Traders would have their own
transport and travel to villages both close to and
distant from export outlets. This would, in theory, do
away with problems farmers have in transport of crop
to buying points, and the traders would also act as
quality assessors, as they would wish to establish a
good reputation for the product they handle, with the
exporters. Under such a system, traders could also
provide advice at the village/smallholder level, about
such matters as what needs to be done to correct
quality problems encountered (i.e. they would act as
extension people). Such an approach might also be
suitable for other provinces and ensure that the PNG
Cocoa Board developed policies that were in tune
with industry needs.
In PNG cocoa, smoke contamination of cocoa is
another problem that farmers should seek to solve
through better dryer management. The ACIAR/
AusAID collaborations have demonstrated a suitable
option for regions such as East New Britain, but other
options (such as combination dryers) are needed for
areas that experience annual rainfalls above 2500
mm. Critically, Cocoa Board approval is also needed
for the smallholder dryers. In managing smoke con-
tamination, it also needs to be determined if dried
beans are being further contaminated by cook-fires
during household storage.
References
Bedford, A., Blowfield, M., Burnett, D. and Greenhalgh, P.
2002. Value chains: lessons from the Kenya tea and
Indonesia cocoa sectors. In: Focus 3, summary and report,
Natural Resources Institute and the Resource Centre for
the Social Dimensions of Business Practice, International
Business Leaders Forum, London, UK.
Iswanto Arief, Guest, D., Keane, P., Lambert, S. and
McMahon, P. 2003. Selection for disease and pest
resistance in cocoa in Sulawesi. In: 14th International
Cocoa Research Conference (COPAD), October 2003,
Ghana, Abstracts of posters, No. 124E, 194.
Hollywood, N. 1998. The effect of fermentation time and
washing of cocoa prior to drying on cocoa quality in
Papua New Guinea. Cocoa Growers’ Bulletin, No. 51.
Hollywood, N., Brown, S. and Toreu, B. 1997. A design for
improved efficiency in solar drying of cocoa. Cocoa
Growers’ Bulletin, No. 50.
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The Benefits of Supply-Chain Practice in
Developing Countries – Conclusions from
an International Workshop
Chris Wheatley,* Elizabeth J. Woods
†
and Setyadjit
§
Abstract
Interest in supply-chain management (SCM) in developed countries has grown as consumers demand product
quality and integrity that can be achieved only by integrated management from farm to retail shelf. Effective
relationships between members of a supply chain have been shown to contribute to improving its efficiency
and innovativeness, and enhance its competitiveness. As food security is achieved in developing countries,
farmers are seeking to generate income by sale of a more diverse range of products. This trend, combined with
increasing urbanisation, population growth, rising standards of living and gradual changes to traditional
markets for foodstuffs, has created interest in application of the concept of SCM to market situations in
developing countries.
An international workshop (Bali, August 2003) attended by personnel from Asia–Pacific countries associated
with projects that had a supply chain dimension reviewed the theory of SCM as it relates to developing countries,
and the approaches that are being used to work with local supply-chain members on improving their products
and service to meet the demands of markets. A key question considered by workshop participants was the
distribution of the benefits which arise from SCM approaches, and the extent to which small farmers and traders
share in these benefits. This paper reports on the key conclusions of the international workshop.
Supply-chain management (SCM) is ‘the manage-
ment of the entire set of production, distribution, and
marketing processes by which a consumer is supplied
with a desired product’ (E. Woods <www.lfwm.net>;
see also Woods (2004)). Interest in better management
of supply chains in developed countries has expanded
in line with increased consumer demand for quality,
convenience, novelty and other non-food attributes in
the food products they buy, together with an increased
concern over food-product integrity and safety. Satis-
fying these consumer demands can be achieved only
by integrated management of the supply chain from
farm to retail shelf. Many food-industry experiences
demonstrate that effective, cooperative relationships
between members of a supply chain can contribute to
improving the efficiency of the chain, enhancing both
innovation and competitiveness.
An international workshop on this topic was
sponsored by ACIAR and the ATSE Crawford Fund
(19–22 August 2003, Bali, Indonesia). The work-
shop reviewed the theory of SCM as it relates to
developing countries, and the approaches that are
being used to work with local supply-chain
members on improving their products and service to
* Braun Wheatley Partners, PO Box 462, Nelson, New
Zealand.
†
University of Queensland Gatton, Gatton, Queensland
4343, Australia. Current address: Executive Director,
Research and Development Policy, Department of
Primary Industries, Meiers Road, Indooroopilly,
Queensland 4067, Australia.
Email: <[email protected]>.
§
Indonesian Agricultural Postharvest Technology
Research Institute, J alan Ragunan 29A, Pasar Minggu,
J akarta, Indonesia.
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meet markets demands. The 39 workshop partici-
pants included staff from current supply-chain
projects in Australia, China, Ghana, Indonesia,
Laos, Papua New Guinea, the Philippines, Thailand
and Vietnam.
Supply chains in developing countries are typi-
cally long and fragmented, involving multiple small-
holder producers delivering produce to collectors.
Product then moves to traders and wholesalers and
possibly several layers of retail distribution. Primary
and secondary food processing may also occur, often
at a small to medium enterprise scale. These chains
are characterised by multiple product handling steps,
poor information flows and a predominance of spot
transactions over longer-term buyer– seller relation-
ships.
As basic agricultural commodity prices continue
their worldwide decline, and food security is largely
achieved in most developing countries, farmers in
Southeast Asia are increasingly concerned to
improve their livelihoods through income derived
from the sale of a more diverse range of high or
added-value produce and products. This has pro-
duced a strong trend towards a more market-oriented
agriculture, even at smallholder level in remote areas.
Alongside this, population and incomes are rising,
the region is becoming more urbanised, and food
habits and markets are changing accordingly. The
result of this is an increasing dualism in the agri-food
sector. Shorter, more efficient, coordinated supply
chains are growing, especially those associated with
higher-value commodities and large-scale retail
outlets (supermarkets and hypermarkets). Mean-
while, traditional supply chains continue to handle
bulk commodities and basic food products for most
of the population.
Given the current trend towards more managed
supply chains in Southeast Asia, the workshop was
organised to undertake a review of theory and current
practice, to provide participants with a greater under-
standing of the potential benefits of the SCM
approach, to enhance the capability of supply chains
in the Southeast Asian region to supply produce to
higher-value markets (e.g. supermarkets and the hos-
pitality trade), to identify constraints to improving
supply chains in the region (for better targeted
research and development (R&D) activities), and to
understand the implications of the rapid growth of the
SCM approach for governments, the agri-food
industry and rural communities.
Learnings from the Workshop
The potential benefits and implications of supply-
chain management for smallholders
Experience with the development of more efficient
and managed supply chains in Southeast Asia and
elsewhere is that the number of suppliers tends to fall
over time, as the nature of the relationship between
producers and retailers deepens. Working with mul-
tiple smallholder producers entails additional trans-
action costs for SCM at retail level. Opportunities for
smallholders to participate (and benefit) from such
high-value chains are therefore uncertain. Mecha-
nisms that reduce the transaction costs associated
with small-scale production are needed, and this may
well require significant R&D assistance.
One option to improve prospects for small farmers
to participate and benefit from these chains is to form
producer groups or associations. These may enable
smallholders to work together to obtain the product
volumes and economies of scale needed, continuity of
supply over time, and increased market power. Pro-
ducers need assistance to make the transition from a
production to a market-orientation, to obtain and use
information on consumer demand, to access and adopt
better production and postharvest technology, and to
incorporate quality and safety management systems.
Experience in the projects represented at the work-
shop indicates that existing supply-chain actors
provide many services in addition to their principal
marketing function (e.g. traders may provide
informal market information, credit and technical
assistance services). These services are also provided
in a manner that is compatible with local cultures and
values, something that may not be the case for exter-
nally driven SCM approaches. Another option for the
development of efficient supply chains that include
the small-farm sector is to build on existing supply
chains, specifically incorporating a role for some
actors (e.g. traders) to provide these and other serv-
ices (e.g. organisation of produce supply volumes
over time) in a culturally appropriate manner, so that
transaction costs are reduced without the need for the
creation of formal farmer organisations.
Enhanced capability for supplying produce to the
higher priced supermarket and hospitality trades,
by increasing product quality and supply
efficiency
Timely, reliable information about consumer
requirements is required if farmers are to become
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more market-oriented, and to ‘produce what they can
sell’, rather than trying to ‘sell what they produce’.
Workshop participants identified two types of market
information:
• information on long-term consumer trends,
influencing decisions on what to produce
• information on current market prices, important
for decisions on when to sell.
Producers currently have poor access to both types
of information, and may have basic misconceptions
about consumer preferences. Examples of this were
clear from the workshop cases presented (e.g. for
potatoes in northern Vietnam and vegetables in
Mindanao). Often this is to the result of poor commu-
nication between producers and traders.
Potential does exist to build on existing supply
chains, e.g. for high-quality, local variety bananas to
supermarkets in Indonesia, where adoption of SCM
practices could be beneficial. This would require
implementation, through the chain, of quality-assur-
ance practices and standards, with culturally appro-
priate incentives in place for producers, and
communication strategies to reach them. It also
requires organisation to obtain required volumes
over time from many small producers, and increased
professionalism at producer and trader levels to get
the product right; capacity building is therefore an
essential component of any SCM program.
An additional barrier remains in many areas; the
existing transport, storage and communications
infrastructure is inadequate to ensure efficient access
to the market. This has implications for national and
local governments.
The development of enhanced and efficient supply
chains for high-quality produce in domestic markets
will help chain actors prepare for their eventual par-
ticipation in export markets.
Better identification of the real constraints pre-
venting improvement in the targeted industries,
so that research and development activities can be
implemented more effectively
There are few documented experiences of the
SCM approach in the developing world, and espe-
cially for national markets in Southeast Asia. Partic-
ipants felt that, based on these experiences, we still
have only a preliminary understanding of the SCM
approach in these situations. There is a real need to
investigate, document and systematise cases, in order
to be able to demonstrate actual and potential benefits
to rural producers.
There is plenty of relevant technology on produc-
tion and postharvest handling available, but it is not
‘organised’ or readily available to supply-chain
actors, resulting in missed opportunities and in
wasted R&D effort that duplicates existing knowl-
edge. Better organisation of, and access to, informa-
tion on existing postharvest technologies would
permit much greater efficiency through identification
of knowledge gaps and better prioritisation of future
R&D activities.
Workshop participants also acknowledged that we
still lack a good understanding of the constraints
(infrastructure, capital and policy) to adopting
market-oriented approaches that farmers face in spe-
cific contexts. These range from illegal taxes to lack
of tools to monitor quality at the farmer level.
Understanding the implications for governments,
the agri-food industry and rural communities
Rural communities will benefit from adopting a
market orientation only if smallholder producers in
that community are able to gain from participating in
higher-value chains. In this context, proactive facili-
tation is required to ensure that smallholders do
indeed benefit from improved SCM. Some of the
projects represented at the workshop were able to
demonstrate effective facilitation of the supply chain
improvement process by local and national govern-
ment. Other actors (e.g. non-government organisa-
tions (NGOs)) can also undertake this role. Ensuring
that smallholders can access higher-value markets
will often require different levels of government
working together with NGOs, the private sector, and
academics to deliver training and facilitate integrated
efforts.
It is important that the process of improving supply
chains is carried out in a manner that is compatible
with, and takes advantage of, the existing local
culture and social structures. Opportunities should be
sought to build on existing social capital (e.g. through
engaging women and village leaders) and trying to
work with the high levels of trust that already existing
in some chains. This will facilitate the development
of sustainable and efficient supply chains (by using
social capital to minimise the transaction costs
inherent in incorporating smallholder producers) and
reduce any social impact of market-induced changes
in these communities.
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Priorities for Future Action:
What Next?
During the workshop, group discussions took place
to identify major issues where future R&D activity
should be concentrated. These were subsequently
synthesised and organised around three levels of
intervention:
• macro level – policies and regulations
• meso/institutional level – R&D and capacity building
• micro level – local chain development and infra-
structure provision.
This synthesis was presented to the 21
st
ASEAN/
3
rd
APEC Post-Harvest Technology Seminar, which
immediately followed the SCM workshop in Bali.
This section of the paper summarises the synthesis of
the SCM workshop outcomes at these three levels.
Policies and regulations
While the group discussions identified several spe-
cific policy areas where government action is needed,
they also highlighted some deficiencies in the current
policy-making process itself. The potential benefits
that flow from including smallholder producers in
high-quality supply chains, and the negative implica-
tions for equitable economic and social development
if they are not included, are often poorly communi-
cated to governments and policy makers. This may
mean that the concerns and needs of rural communi-
ties and smallholder farmers are not adequately taken
into account in the formulation of policies that affect
these rural people, with implications for the success
of poverty-alleviation initiatives in the medium to
long term. It is vital that governments recognise the
importance of creating an environment where small-
holders can also benefit, in an equitable manner, from
their active participation in higher-value supply
chains.The institutions involved in SCM projects and
initiatives in Southeast Asia have a responsibility to
provide information and advice to national govern-
ments (and appropriate regional bodies) in fulfilling
this policy-development function.
Specific areas where government policy interven-
tions are needed if smallholders are to maximise their
potential to be involved in, and to benefit from,
higher value supply chains, are as follows:
• Suitable legal systems must be established and
enforced. This will include creating a legal
framework for contracts agreed between parties in
supply chains, and ensuring that the capacity and
ability to enforce these contracts exists.
• Improving the availability of capital for business
infrastructure investments (e.g. storage and
distribution facilities) and access to credit for all
actors in supply chains.
• Providing the public infrastructure that is a
precondition for rural communities to gain access
to markets and for business to prosper. This
includes roads, harbours, law and order, and
political stability.
• Provision of market information and support for
training in business management and marketing
for small and medium enterprises.
• Ensuring smooth operation of the markets within
which supply chains function, through appropriate
competition policies, regulatory frameworks for
businesses and markets, and regulations and
standards for food quality and safety.
Research and development
Workshop participants identified R&D activities
in four distinct areas: markets, supply-chain develop-
ment, postharvest technology and food quality/
safety. In all cases, this is action-oriented (i.e.
involves working with chain participants, govern-
ment agencies and other stakeholders in a range of
situations) and is thus highly collaborative. Many of
the topics are framed as ‘how’ questions, the answers
often involving the development of methods to help
chain actors, and especially smallholders, to make
better decisions as they enter supply chains and then
participate in their subsequent development.
Markets – Key questions in this area include the fol-
lowing:
• How can timely market information be made
available to farmers so they can decide who to sell
to in ‘spot transactions—, and reduce the
information imbalances often present in farmer–
trader negotiations? Many projects attempt to
provide market information to rural communities,
but transforming these into sustainable services
that continue after projects finish is more complex.
This implies creation of sufficient demand for the
service to support the cost of its provision, unless
long-term public sector subsidies are available.
• Understanding the long-term trends in consumer
markets can help farmers and other chain members
decide what to produce. How can this type of
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
192
longer-term demand forecasting be made
accessible to chain actors, including farmers?
• Once a chain is operating, how can the chain
members explore new options and identify market
segments?
Supply-chain development – The key issue here is
how to ensure that smallholder farmers can be
included in the development of higher-value and
more-coordinated supply chains. As mentioned ear-
lier, mechanisms are needed to reduce the additional
transaction costs that are involved in working with
many smallholders, rather than one or few major sup-
pliers.
One option is to encourage the formation of farmer
groups, so that from the perspective of a major retail
chain, for example, the farmer group acts as a single
supplier. In Southeast Asia, this approach has had
mixed success to date, with such farmer groups often
requiring extensive support for their formation
(reducing prospects for replication), and lacking sus-
tainability once such support is removed. Practical
methods for forming and strengthening such farmer
groups need to be developed. Group formation should
be focused on a commercial opportunity (rather than
being an goal in itself) and on following the process
through to delivering business success. The process
must be replicable and not too expensive.
Another option is to include traders in supply
chains, specifically for their ability to organise small-
holder farmers in a sustainable, low-cost and culturally
appropriate manner. This implies building on existing
arrangements to include technical assistance to pro-
ducers in critical areas, such a quality assurance and
related production practices. There has been very little
documented experience of working with traders and
smallholders in this way, and methods for accom-
plishing this— across the range of cultural situations
found in Southeast Asia—are urgently needed.
For both these options, it is essential to communi-
cate the incentives and rewards of participation in
these new supply chains to farmers and rural commu-
nities in a culturally appropriate way, and to improve
the business skills of these rural actors. Methods to
achieve this are needed; they could involve training,
facilitation and working with existing traders as pro-
viders of these services.
Once these supply chains are operating, their
future development and competitiveness is related to
several other key issues that were identified at the
workshop, and which require further research. These
include how to Trust and credibility must be built
between the different stakeholders in the chain. This
type of social capital can reduce transaction costs
(e.g. the need for formal contracts) between actors in
the chain. Mechanisms that chain actors and facilita-
tors can use to build trust in these situations may be
culturally driven.
Benefit distribution along the chain is a key issue.
Experience from the developed world suggests that
benefits may accrue disproportionately to actors with
most power in the chain (usually retailers). Mecha-
nisms to ensure that smallholders receive an equi-
table return from their participation in these high-
value chains are needed. These could include farmer
organisation, to increase market power, and/or the
adoption of ethical trading standards through the
chain.
Small farmers are often at a disadvantage to other
chain actors, for example as regards access to credit
(where they may lack collateral) and to legal services
(e.g. for contract enforcement). How to resolve these
imbalances, through, for example, novel credit
arrangements, needs investigation.
Finally, a supply chain is necessarily focused on
one commodity, product and market. Enhancing the
performance of one chain may have implications for
others, and for the wider society and natural environ-
ment. For example, increasing production of one
commodity as demand within a supply chain
expands, could greatly affect land-use patterns and
livelihood strategies in a rural community, affecting
(positively and/or negatively) both environmental
and social sustainability. It is important that these
wider implications of supply-chain development are
captured in the decision-making processes of the dif-
ferent actors involved in the chain. Mechanisms to
facilitate this need to be developed.
Postharvest technology – Workshop participants
were more concerned with accessing existing post-
harvest technologies than with the development of
new technology. This requires better organisation of
existing information, and enhanced access to this
information at the level of rural communities and the
agencies that provide technological support services.
Short-term technological priorities for small farmers
were identified as:
• cold-chain development
• shelf-life improvement
• quality assurance.
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
193
Food quality and safety – Existing knowledge about
food quality and safety issues is not extending down
the chain to farmers, or to consumers. Mechanisms to
ensure that farmers are aware of the issues, and the
steps they need to take to overcome any problems,
are needed. Direct involvement of other chain actors
— traders and retailers — in communicating and
addressing these issues (and implementing appro-
priate assurance systems) is probably essential.
Capacity building
Training topics that the workshop identified
included:
• increasing the market orientation of chain
members
• building the business skills of chain members
• enhancing chain members’ awareness of food
safety issues and measures to deal with them.
If smallholder producers across Southeast Asia are
to benefit from their involvement in supply chains,
this implies a massive effort. Strategies at national
(and perhaps regional) level for developing and
delivering this training need to be defined, including
who should be responsible for delivery, and who
exactly should be trained. As agriculture becomes
increasingly market-oriented, it is clear that training
smallholder farmers (and their organisations) in these
areas is essential, but how this should be accom-
plished when support services are weak, especially in
more remote areas, is not clear. The strategy should
meet the need to strengthen rural support service
institutions capable of providing this type of training.
Building supply chains at the local level
In order to maximise the prospects for small
farmers to benefit from their involvement in higher-
value supply chains, it is important that lessons are
learned from supply chains that are now being devel-
oped. The key process at local level will be action
learning; that is, learning by doing. It is likely to
involve processes such as benchmarking, best prac-
tice, and case-study analysis across of range of
supply chains in different countries (in order to
provide culturally acceptable solutions), types of
products and market situations, aiming to improve
the efficiency of individual chains, and the benefits
they provide to all actors. The results of such a cross-
case analysis should translate into improved per-
formance and a greater scale of benefits to all partic-
ipants from these chains.
The question of entry points for small farmers and
how to build on existing products and chains to
access higher quality and new markets is also likely
to be informed by case analysis.
Practical, local-level pilot activities will also help
to identify appropriate and high priority roles for
government, NGOs, producer organisations, and the
private sector, in supporting chains. One positive
feature of the current environment is that decentrali-
sation policies in many countries have created an
opportunity for local (provincial or district level) ini-
tiatives. This creates scope for piloting a range of
innovative solutions, including local policies.
Infrastructure provision
Infrastructure constitutes a major barrier to small
farmers participating in high-value chains. Ensuring
adequate storage, handling and transport facilities
will be critical to chain competitiveness, as will
ensuring that the chains have access to that infra-
structure. Decentralisation can also be important, so
that the provision of basic infrastructure investment
can be addressed through appropriate local policies,
as well as at a national level.
Conclusions
Workshop participants concluded that SCM is
becoming increasingly important in developing
countries because:
• the supermarket sector is already well established
(in major urban centres) and shows high levels of
capital investment and market share growth
• traditional food products in domestic markets will
face increasing competition from imports
• consumers across the region, and international
retailers, share a desire to ensure that all products
(in both traditional and more-managed supply
chains) move towards global standards of food
safety and health.
The growth of managed, high-value supply chains
has profound implications for smallholder producers
across the developing world. One key issue identified
and considered by workshop participants was that of
the distribution of benefits that arise from enhanced
SCM, and the extent to which rural communities,
smallholder farmers and traders across Southeast
Asia can share in these benefits. Several key areas
were identified where action is required in order to
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Agriproduct supply-chain management in developing countries
edited by G.I. Johnson and P.J. Hofman
ACIAR Proceedings No. 119e
(printed version published in 2004)
194
maximise the potential of small farmers to participate
in, and benefit from, such supply chains.
It is important that action, based on these ideas and
issues, is indeed taken. Governments need to be
informed of the implications of these changes for the
small-farm sector of their economies. Agencies
working in the rural development and agricultural
sectors need to incorporate these major agri-food
sector developments into their strategies. Retail
chains need to become more aware of the wider
social and environmental consequences of a SCM
approach that tends to place most emphasis on eco-
nomic efficiency. The people, communities, enter-
prises and other actors involved in producing,
processing, and marketing food products need to
learn to take a more market-oriented approach, some-
thing that (for many) requires a new set of skills,
including how to work together in different ways.
There is much we still need to learn about this
process. Supply-chain management in developing
countries crosses many disciplinary boundaries.
Research institutions and donor agencies will need to
adjust to these realities and ensure that they are
addressed in a coherent and holistic manner. It is also
essential that research be action oriented, involving
the various supply-chain actors themselves. This will
help to ensure that efficient, competitive supply
chains can make a significant and positive contribu-
tion to the development of prosperous and sustain-
able rural communities in Southeast Asia.
Reference
Woods, E. 2004. Supply-chain management: understanding
the concept and its implications in developing countries.
In: J ohnson, G.I. and Hofman, P.J ., ed., Agriproduct
supply-chain management in developing countries.
Proceedings of a workshop held in Bali, Indonesia, 19–22
August 2003. ACIAR Proceedings No. 119, 18–26.
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