Professor Nick Vink, head of the department of agricultural economics at Stellenbosch University, says three global trends will determine the future of agriculture, and of transformation in the sector – increasing integration of the food and fuel economies, the supermarket revolution and the livestock revolution.
Three global trends in agriculture affect what we should be doing about transformation in the sector. These are the increasing integration of the food and fuel economies, the supermarket revolution and the livestock revolution.
Integration of the food and fuel economies
Agriculture and oil are closely bound through the inputs agriculture uses, such as fertilisers, transport and power generation, an increasingly sophisticated supply chain linking the farm with the retail sector, and value-adding processes. Biofuel is another big issue. We don’t know exactly what this is doing to the correlation coefficients of the food and fuel economies, but it is quite surprising how closely together they run. This integration has implications for agriculture going forward.
The supermarket revolution
The supermarket revolution is a relatively new phenomenon in the developing world and is spreading rapidly. The first wave started in early 1990s, and affected much of South America, East Asia (outside China) and Africa. During this phase, supermarkets’ average share of retail sales grew from about 10% in 1990 to 50% to 60% by the mid-2000s. The second wave started in the mid-to-late 1990s and affected Mexico, Central America and much of Southeast Asia. Supermarkets’ share of retail sales grew from 5% to 10% to 30% to 50% by the mid-2000s. The third wave, in the late 1990s and early 2000s occurred in China, India, Vietnam and South Africa. Supermarkets’ share of retail sales reached about 2% to 20% by the mid-2000s, growing at 30% to 50% a year.
There are four clear characteristics of the supermarket revolution. Supermarkets start by targeting the rich and middle class, but soon spread to poorer customers and areas, and then different supermarket chains begin to target different income groups. The second characteristic is a differential spread across the developing world. Third, supermarkets are initially more successful in sales of high-valued, dry, packaged and processed foods, and less so in staples such as bulk grain. Their share in processed and packaged goods is initially higher than in fresh goods. In the US, supermarkets control 80% to 90% of food retail. They’ve come to dominate the “food from home” market (ie: food that’s prepared in the home) but aren’t that prevalent in the “food away from home” market (eg: restaurants, takeaways and canteen food).
The fourth characteristic is that multinational chains have largely spearheaded the revolution. American retailer Walmart first went into richer Latin countries and then spilled over the border into Mexico. It cut its teeth serving the lower-end markets in the US, unlike, for example, Woolworths in South Africa which started at the other end of the spectrum. In South Africa, the interesting factor is the dominance of South African supermarkets, and Shoprite Checkers in particular. The supermarket revolution has several causes. Increased urbanisation, rising incomes and women’s participation in the labour force have increased demand for convenience foods, and led to a more diverse diet.
Trade liberalisation has resulted in the spread of refrigerators and cars which has changed shopping habits – consumers are buying processed foods less frequently and in larger quantities. More liberal rules for foreign direct investment are another driver. Lastly, competition drives change in logistical systems and gives supermarkets a competitive advantage. The supermarket revolution has numerous upstream impacts on farmers. Supermarkets’ logistical systems determine the terms of purchase, such as volumes, price, quality, safety standards, packaging, timing of delivery and, increasingly, environmental and ethical concerns.
Supermarkets’ procurement systems are changing. Some buy directly from farmers or agribusinesses, others via wholesalers. Increasingly, they’re shifting from traditional wholesalers to specialised or dedicated ones. Shoprite, for example, conducts virtually all its purchasing from regional in-house wholesalers.
Farm suppliers to supermarket distribution centres have to deliver their produce in the form and at the time required by the supermarket (washed, packaged, bar-coded, labelled, etc). This requires substantial investment in packaging, compliance certificates such as EurepGAP, and transport infrastructure. Given the higher transaction costs of dealing with small farms, supermarket procurement officers project a growing role for large agribusiness and larger farms, and stagnant or declining shares for traditional wholesale and fresh produce markets as well as small farms.
South African supermarkets don’t want to interact with small farmers, so these farmers can compete only by becoming larger, by coordinating their supply, or by focusing away from supermarkets. Despite these barriers to entry, the benefits are large and pose a big incentive for any farmer to get into supermarket supply chains, where farmers tend to earn 20% to 50% more. Supermarkets are the fastest growing segment of the retail market. Farmworkers also gain as the farmer is often obliged to meet some social obligations when in a supermarket supply chain.
One must never forget that the “food from home” market is only part of the retail market. Small farmers can always focus on “away from home” supply chains where there isn’t such a bias against them.
The livestock revolution
In 2000, Chris Delgado, who at the time was a senior researcher at the International Food Policy Research Institute in Washington, and who is now with the World Bank, referred to the livestock revolution when he said, “A revolution is taking place in global agriculture that has profound implications for our health, our livelihoods and environment. Population growth, urbanisation, and income growth in developing countries are fuelling a massive global increase in demand for food of animal origin. The resulting demand comes from changes in the diet of billions of people and could provide income growth opportunities for many rural people.”
Consumption and trade in livestock products, mainly chicken, dairy products and pork, are increasing faster than other farm products. It’s driven by urbanisation and increased income per capita, especially for women. It’s most noticeable in Asia, but also in Latin America and South Africa. This increase in consumption of livestock products is occurring in spite of tariffs on livestock products that are generally higher than on other agricultural products, in both developed and developing countries.
The result of increased consumption is an increased trade in animal feeds and their components, which is environmentally and financially inefficient. Again we see the correlation between the food and fuel economies. We are transporting large quantities of animal feeds around the world, simply because livestock products are so heavily protected in domestic economies.
The liberalisation of world trade will affect livestock industries more severely than others. This is a failure of the World Trade Organisation’s Doha round. South Africa’s fastest growing import over the last 20 years is animal feed. A result of this change in eating habits is that the scale of livestock operations is increasing in Asian countries, where the small farmer model did actually form the beginning of the agrarian revolution. They quickly realised agricultural development was needed. If small farmers were more efficient than big farmers, the farms would have stayed small. But farms are getting bigger and scale economies are starting to kick in. So what can be done about global pressures in SA, which really favour large-scale farming? The first step is to stop romanticising the commercial farming sector in SA. We know the production of agricultural goods is skewed. Agricultural censuses over the years have shown how the sector has changed. In 2000/01, SA had 10 585 farmers with a turnover of more than R1 million, who were producing 75% of SA’s gross farm income. In the 2004/05, 7 687 farmers with turnover in excess of R2 million were producing 76% of gross farming income, and in 2005/06, 5 693 farmers with turnover above R3 million were producing 69% of gross farming income.
The needs of these commercial farmers differ from those of farmers who occupy land in communal farming areas, and there must be programmes targeted at their needs. They are after all responsible for most of South Africa’s agricultural production. We also need to stop romanticising small-scale farming. Small-scale farming in South Africa is not the same as small-scale farming in water-rich Asia. There’s no evidence even in Asia that small-scale production can be scaled up to feed a rapidly urbanising population. There’s lots of evidence that where agriculture has taken off, for example in Thailand, Argentina, Brazil and China, the farms are getting larger.
US agricultural economist Terry Row said that “policies that virtually keep most small farmers … at a subsistence level forever may not be viewed as development policy. They’re a welfare policy, and should most likely be a policy supporting transition.” In other words, small farming is a good basis from which to start, but will not survive as it can’t feed growing urban populations. – Robyn Joubert
Contact the Stellenbosch University Department of Agricultural Economics on (021) 808 4758. |fw