Dear Friends and Colleagues
Tackling Imbalances in Agricultural Supply Chains
Over recent decades, supply chains sourcing agricultural products have become more global and tightly coordinated. Ten brands account for 15% of world food sales. The Fair Trade movement has conducted a study to explore and analyze the impacts of widespread and growing power concentration in agricultural chains. It has found that abuses of buyer power have led to structural unfair trading practices at all levels of the chain in retail as well as producing countries, with small-scale producers adversely affected. These developments are also associated with growing environmental burdens that undermine sustainable food production.
The UN Special Rapporteur on the right to food (2008-2014), Olivier de Schutter, in his Foreword in the report of the study highlights that the “modernization” of global supply chains has increased power imbalances in the food chain at the expense of small-scale producers of raw materials. He points out that the only way the latter can compete in the global market is by self-exploitation through accepting low wages and being dependent on the big buyers.
de Schutter charts the way forward as a combination of “breaking down business” (via competition law) and the emergence of a “countervailing power” of improved farmers cooperatives to improve their bargaining power and allow them to invest in collective goods. Concrete proposals from the report include supporting farmers’ and workers’ organizations; enhancing transparency of the costs in agricultural chains; building stricter enforcement mechanisms to stop unfair trading practices; and promoting Fair Trade principles and practices in agricultural chains.
The Foreword and Executive Summary of the report are reproduced below.
With best wishes
Who’s Got the Power? Tackling Imbalances in Agricultural Supply Chains
A study about Power Concentration and Unfair Trading Practices in Agricultural Supply Chains
Commissioned by Fair Trade Advocacy Office, PFCE (la Plate-Forme pour le Commerce ษquitable), Traidcraft, and Fairtrade Deutschland. In partnership with World Fair Trade Organization and Fairtrade International.
By Olivier De Schutter, Former United Nations Special Rapporteur on the Right to Food (2008-2014)
The shifts in power in the agrifood sector have now become too significant, and their impacts too considerable, to be ignored. As this study illustrates, commodity buyers are larger and more concentrated than previously. They seek to respond to the requirements of their food industry clients by increasing vertical coordination, thus tightening their control over suppliers. The processing industry also is rapidly consolidating. After an initial period during the 1980s and early 1990s during which the parastatal large-scale processors were dismantled, this sector has been increasingly globalized and dominated by large transnational corporations. Global retailers and fast food chains, finally, are expanding. They now reach also to China, India, Russia, Vietnam, and increasingly Southern and Eastern Africa. The major retail chains are also diversifying from processed foods to semi-processed foods and, increasingly, fresh produce.
The process of concentration is self-reinforcing. Large retailers tend to prefer to source from large wholesalers and large processing firms: by sourcing from larger wholesalers and processors, retailers reduce transaction costs and have access to a diversity of product types in a "one- stop shop"; the invoicing system is formalized, allowing the retailers to discharge their accounting obligations for value-added tax accounting and product liability; and the packaging and branding of products is superior to that which smaller processors or wholesalers would be able to achieve. This leads to what some authors have called a "mutually reinforcing dual consolidation”: the more large retailers dominate consumers' markets, the more large commodity buyers tend to dominate the upstream markets.
Moreover, this process leads to a race towards the bottom: to lower wages for farmworkers, and to lower remuneration for independent agricultural producers that supply the raw materials. Large buyers can obtain from the sellers a number of concessions that reflect their dominant buyer power, such as discounts from the market price that reflect the savings made by the seller due to increased production, or the passing on to the seller certain costs associated with functions normally carried out by the buyer, such as grading of the livestock or stocking of shelves. This not only makes it more attractive for the retailers to source from these dominant buyers, since they may benefit from this superior buyer power that such larger suppliers have. It also further strengthens the position of the dominant buyers, who can acquire a competitive advantage over less dominant buyers in the downstream markets, leading to the acquisition by the larger agribusiness firms of dominance on both the buying and selling markets.
Due to these self-reinforcing mechanisms in which buyer power grows by the very fact of being exercised, the expansion of global supply chains results in an increased concentration in the food production and distribution chains. As part of the process of vertical integration that characterizes the agrifood sector as a whole, both wholesalers and retailers seek to secure stability of supply by long-term arrangements with producers in the form of 'contract farming', or by techniques such as preferred supplier lists; procurement is increasingly centralized, as the area from which companies source expands from the national to the regional and global networks; and more trade occurs intra-firm, with Cargill in Argentina selling soy to Cargill in Europe for example, rather than inter-firm or inter-country.
The report prepared by BASIC provides a detailed review of these developments, distinguishing between the different forms that increased concentration is taking in agricultural supply chains. But it is the consequences of this so-called "modernization" of global supply chains that matters. The ascendancy of what Philip McMichael calls a corporate food regime -- the growth of "food empires", to borrow the expression of Jan Douwe van der Ploeg -- increases the power imbalances in the food chain at the expense, potentially, of the least organized and most dependent segments: the small-scale producers of raw materials.
As a narrow set of large firms increasingly act as gate-keepers to the high-value markets of rich countries, small-scale farmers find it increasingly difficult to join these supply chains, and the gap is growing between large and small producers in a context in which both categories of producers compete for access to resources, to credit and influence, and to political influence. Larger producers have easier access to capital and thus to non-land farm assets such as storage, greenhouses, or irrigation systems. They can more easily comply with the volumes and standards requirements that the agrifood companies -- the commodity buyers, the processors, and the retailers, depending on which sources directly from the producer of raw materials -- seek to impose. Small farmers can only compensate for these disadvantages by their lower labor costs, or because they are a less risky sourcing option to the buyers, since the larger farmers have more market options and thus can be less reliable. The disturbing consequence is that small farmers pay a high entry fee into global supply chains: because of these structural obstacles they face, they can only compete by a form of self-exploitation for instance by agreeing to low wages for those (often family members) working on the farm, and to be locked into a situation of high dependency towards the buyer.
None of this is inevitable. For many years, particularly since the publication by John K. Galbraith of American Capitalism, his 1952 best-selling book in which he documented the rise of large-scale agrifood corporations, the field was divided. Some called for "breaking down big business" by relying on competition law. Others followed Galbraith's call for the emergence of a "countervailing power" by an improved organisation of individual farmers into cooperatives, both to improve their bargaining power and to allow them to invest in collective goods -- from storage facilities to small-scale processing plants -- to allow them to capture a larger proportion of the value. The two strategies, it has now become clear, can and must be combined: competition law is important to protect from the abuse of buyer power, but it is limited in what it can achieve, and it is not a substitute for organizing farmers better, and for improving the organization of markets in order to ensure that they are more inclusive and socially equitable.
Power in food chains has long constituted a taboo. Indeed, the need to improve the governance of food systems in order to avoid instances of excessive domination by a small number of major agrifood companies is hardly ever referred to in international summits that seek to provide answers to the challenges of hunger and malnutrition. This report fills a gap. It sets out a comprehensive set of recommendations that, if implemented, would bring trade as usual closer to fair trade. I welcome this important contribution to a debate that is long overdue.
Over recent decades, the growth of supermarket chains, the increase in the number of processed food products they sell and the consolidation of retail, processing, logistics’ chains and other related industries (seeds and chemicals), have led to the emergence of new procurement practices.
Supply chains sourcing agricultural products have become more global and tightly coordinated. Lead buyer requirements and standards have led to the restructuring of the chains, favouring medium-size and large producers and exporters that can more easily meet their demands . The focus has switched from what the supplier can offer to what the buyer requires. Farmers no longer produce first and then look for a market. Instead, those who control supply chains decide what they believe the consumer needs, and then design the supply chains required to deliver those products. The benefits that accrue to actors of global supply chains are skewed in favour of the lead firms in the chain. Value is increasingly allocated not primarily to those who supply a physical product but to those who can bring to bear the information needed to make the global food chain work successfully .
Although the chain as a whole is quite profitable, the terms of trade for smaller producers have declined, in the Global South as well as in Europe; the gap between producer prices and retail prices has grown; workers’ conditions have degraded; and smaller-scale farmers are finding themselves increasingly excluded from higher value markets. These trends are accelerating transformations in rural societies and the way rural people are making a living: restructuring of agrifood and land markets, rural exodus, labour shortages . These developments are also associated with growing environmental burdens that undermine the sustainability of food production in many regions, because of land and water scarcity and climate-change yield losses .
In this context, the Fair Trade movement has commissioned this study to explore and analyse the issue of power concentration in agricultural chains: What is the relationship between buyer power and unfair trading practices (UTPs)? What are the impacts on small farmers, workers and the environment? How can legal systems regulate buyer power effectively?
This report shows that:
- The concentration of power in agricultural chains is not accidental, but widespread among input suppliers, traders, branded manufacturers and retailers;
- The power gained by large buyers drives four recurrent governance patterns in agricultural chains – vertical integration (hierarchy model), captive set-ups, relational networks and modular chains – through which buyers are able to control suppliers up to the production stage, far removed from the model of perfectly competitive markets;
- Abuses of buyer power lead to unfair trading practices, not only at the retail level but also in producing countries and at all levels of agricultural chains;
- The combination of power concentration in agricultural chains with the liberalisation and financialisation of world markets increases price pressure and volatility, and the shift towards more intensified and mechanised farming systems. This in turn significantly impacts small farmers and workers in many products and regions leading to unsustainable livelihoods, child labour, precarious employment and environmental degradation;
- European competition policy is not in a position to address the issues related to buyer power, and the existing legal tools to address unfair trading practices are very fragmented and not specifically designed to tackle this problem;
- In order to address abuses of buyer power and to ensure the sustainability of agricultural chains, EU competition policy should consider consumer welfare far beyond the sole issue of purchasing power and link it more closely to farmers’ and workers’ welfare;
- Concrete proposals that can achieve this in practice include: - Fostering a better balance of power by supporting farmers’ and workers’ organisations; - Enhancing transparency of the costs in agricultural chains; - Renewing the European Competition Policy, reasserting the principle of neutrality and addressing structural and behavioural issues; - Building stricter enforcement mechanisms to stop unfair trading practices; - Promoting Fair Trade principles and practices in agricultural chains.
Center on Globalisation, Governance & Competitiveness, Duke University,
Skills for upgrading: Workforce Development and Global Value Chains
in Developing Countries, November 2011