Directorate for Food, Agriculture, and Fisheries 1 ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT ORGANISATION DE COOPÉRATION ET DE DEVELOPMENT ÉCONOMIQUES Private Standards schemes and Developing Country Market Access: Findings from 4 case studies Linda Fulponi* Joint UNCTAD/WTO Informal Information Session on Private Standards June 25, 2007 Geneva * OECD, Paris, does not necessarily reflect the opinion of OECD or its member states

Directorate for Food, Agriculture, and Fisheries 2 Main themes Evolving Economic Environment Rise of private voluntary standards Implications for exports of developing countries Small producer challenge

Directorate for Food, Agriculture, and Fisheries 3 Evolving economic environment-1 Increased consumer demands: quality, safety and process attributes Increased competition for market shares –Reputation firm levelkey to keeping and acquiring customers –Quality and price competition-quality and safety are necessary and low prices to consumers Increased concentration in agro-food sector-retailers and processors –Growing concentration in retail sector gives them power to negotiate conditions of sale with producers/importers. Buying in large quantities implies they become important to the producers sellers also. Global sourcing and selling –Increased information asymmetry –Increased risk as buyers know less about producers and how goods are produced and can not easily check on these because of distancew

Directorate for Food, Agriculture, and Fisheries 4 Evolving economic environment-2 Commercial requirements: –Quality, volumes, reliability as well as supply logistics conformity –Retailers in North countries must be assured of delivery of quality products on a regular basis in order to maintain availabilities to customers – These commercial requirementsare as important as quality New requirements on product and process attributes due to : –Regulatory measures: increasing stringency in national food safety laws and testing requirements for market entry--lower MRLs and new ones added to the list –Legal Liability framework-in EU firms are responsible for what they sell and the larger the firm the more they are expected to control for any possible risk. This is their incentive to have a paper trail on their purchases which can demonstrate that they have undertaken necessary precautions to ensure safe food –Reputation risks ; Any food safety scare occurring at a major retailer will be picked up by the mass media and this can have damaging effects on reputation, thus the objective is to limit any risk to reputation

Directorate for Food, Agriculture, and Fisheries 5 Private Voluntary Standards: governing global supply chains Provides for increased control/monitoring of food safety, quality and process attributes Reduces information asymmetry and transactions costs- –Certification of production procedures informs the buyer of processes and technologies utilised –Certification of production procedures reduces costs of buyers inspecting and monitoring production and harvest. –Shifts quality and coordination costs up the chain- as certification on production procedures and food safety testing begins at the farm level it is the farmers and exporters who have to supply the certificates and thus they bear the costs. In developing countries this may mean flying in auditors or sending samples to 3 rd countries for testing which can increase certification costs substantially. OECD Final report on private voluntary standards and the shaping of the agro- food system –

Directorate for Food, Agriculture, and Fisheries 6 Challenges of evolving global supply chains Increasing breadth and depth of private standards –Increasing breadth and depth of standards Private standards are covering a wider set of attributes in addition to food safety and quality Private standards require more precise documentation on specific food safety requirements Tracking and tracing of food products is increasing in importance and along with these increased information technology requirements Increasing importance of commercial requirements Rising minimum standards: quality, regulatory and private sector –Racheting up of the window of opportunity makes market entry and success more difficult –This means it is more difficult for new firms/country to reach North markets because the upgrading distance --to reach the minimum private standard and public standard- - keeps moving up. Advanced developing countries who already meet the standard need only make marginal changes but the least developed may have too far to go to meet it.

Directorate for Food, Agriculture, and Fisheries 7 OECD study: Impacts of PVS on developing country access to Global Supply Chains Case study approach : Peru, Ghana, South Africa and Chile Common questionnaires to exporters and producers Fruit and vegetable sectors exporting with private standards:

Directorate for Food, Agriculture, and Fisheries 8 Product coverage for case studies ChileSouth AfricaPeruGhana Table grapesTable GrapesAsparagusPineapple ApplesApples & Pears Mango CherriesCitrusPapaya Avocadoes

Directorate for Food, Agriculture, and Fisheries 9 Main PVS schemes applied Farm level PVSChileSouth Africa Peru Mango Peru Asparagus Ghana EurepGap100% 100% Promango 100%-EU Eurep Gap SQF1000 some8% Prosafe some Gap-USA 100%-US ChileGap 75% Other schemes: -Natures choice Some

Directorate for Food, Agriculture, and Fisheries 1010 Main findings Domestic infrastructure and services key to enabling integration to global supply chains –Lack of adequate telecommunications, roads, port and airport facilities as well as services such as laboratories, presence of certification agencies and auditors have a negative impact on export opportunities. Associative initiatives essential to success: where producer and exporter associations are strong and include a wide number of participants they can benefit from sharing information, knowledge and costs of market search, varietal development and marketing Private-Public sector cooperation improves export market outcomes –The public sector initial seed money and assistance in organization and set-up of the associations is important –Cooperation between the two in development of new varieties and technical assistance as well as in marketing is fundamental; Small firms face internal firm constraints-lack of technical and managerial skills as well as financial and human capital. –They also face the same set of external constraints where infrastructure and services are lacking

Directorate for Food, Agriculture, and Fisheries 1 Main findings-Private standards and costs of compliance Increased costs of production but –Increased efficiencies in input use and better management –Most respondents pleased with physical outcomes-increased farmer and worker safety, efficient production, improved quality Increased transactions costs for exporters and decreased for buyers –Small scale growers increase costs of technical and managerial assistance for exporters. –No added remuneration for following a private standard Duplication in attributes due to multiple standards requirements –Need to have mutual recognition among attributes certified in a standard –This reduces multiple certifications

Directorate for Food, Agriculture, and Fisheries 1212 Costs of Compliance: upgrading and recurrent costs Investment costs : function of the firm/farms initial set-up –How far from the requirement? The further the farm is from meeting the require the more costly to upgrade, this is most important for small scale growers from least developed economies Recurrent costs: audits, certification and maintenance –Lack of certification bodies in the country and lack of testing facilities can substantially increase cost of compliance –These costs can determine whether the farm is a economically viable –Aid can help, but may not be long term OECD findings: costs vary substantially across countries and firms/farms –Good estimates were lacking –Definitions vary across studies/countries

Directorate for Food, Agriculture, and Fisheries 1313 Examples of costs of compliance: preliminary ChileSouth Africa PeruGhana Recurrent costs:% of sales <1% ~4%4-15% of Farm gate price < 3% Investment to Upgrade 22000$ to $ farm size NA $/8ha. Holding to $ / 720 ha farm

Directorate for Food, Agriculture, and Fisheries 1414 What was learned from high performers: Chile and South Africa Good infrastructure and availability of services necessary from technical and economic perspective Accumulated social, physical and financial capital –South Africa has been exporting to Europe for 100+years –Chile has 20 years+ of experience Significant role of associations-producer/exporter Cooperation between state and private sector –Marketing : ChileGap, Capescan, Fedefrutta, –Information : offices in import markets Chile and South Africa have government information offices in capitals such as Brussels or the USA –Research and Development :University and specialized centres

Directorate for Food, Agriculture, and Fisheries 1515 Peru- asparagus success story Number one fresh asparagus exporter Business opportunity in a portfolio management optic –Investor based activity a way to diversify investment and thus substantial sums of money used to create the industry –No small farmers minimum income 80000$ Associative efforts to overcome infrastructure failings : government initial seed money and leader –Aereo Frio, IPEH –Aereo Frio is Latin Americas largest airport cold storage facility –Peruvian Asparagus technical standard developed by the producer associations with initial help from government and built upon Codex requirements Record keeping at plot level an added valuedifficult and costly but necessary to market objective –The objective is to supply markets with what the market says it wants or needs

Directorate for Food, Agriculture, and Fisheries 1616 Chile and small holder experiences What is small and viable? Which products? –More than 8 hectares for temperate fruits –3-4 hectares for : other fruits berries, avocadoes, nuts, honey INDAP story: with 3000 producers, 500 certified –Assistance for these to integrate to Global value chains but not very successful –Without continual supervision and assistance: Record keeping and chemical application –Reversion to old habits + low education –Uncertain outcome once programme terminates

Directorate for Food, Agriculture, and Fisheries 1717 South Africa and new comer--small holder experience Farms not viable with less than 8 hectares New comers face similar difficulties due to lack of resources---Black new farmers –Lack management and agronomic skills, Unable to meet record keeping constraints –Rely on government and donor assistance –Lack long term capital sources –Cannot compete with those already in the system

Directorate for Food, Agriculture, and Fisheries 1818 Peru-Mango from local to global markets Small producer, traditional local product –Local market is the main outlet for proudction Exporters organized small producers because of needed volumes s –Low literacy/education- recording keeping difficult –Lack market orientation –Lack associative incentives: low participation in producer associations –Float in and out of export market: Producers often decide to break their contract if prices are higher on local markets which is large Certification problematic because the set of independent producers not stable –Shipments often contain both certified and non-certified mangoes so farmers do not perceive the certification/standards process and outcome to be stringent or a necessity –Do not see benefits in price but only in costs-since prices do not increase What long run solution? –Joint certificates? New forms of cooperatives– new generation cooperatives –Focus on local markets

Directorate for Food, Agriculture, and Fisheries 1919 Ghana: can producers meet the challenge? Lack of basic infrastructure and institutional support –Poor roads, lack of cold storage at airport, poor telecommunications, unstable energy supplies, no MRL testing facilities, few laboratories, no certification bodies Little or no R&D for commerical varietal development Limited associative support –Low participation in associations –Little promotion of associations by public authorities Sector incapacity to organize and enter into market vision- linked to lack of associative efforts Low literacy, low skills, low market orientation, Unwilling investment by producers: – variable quality means low price and payment system slow Reliance on donors

Directorate for Food, Agriculture, and Fisheries 2020 Small producers and global supply chains Exporters key link in: –Organizing and managing production, testing and certification procedures High exporter transactions costs for small producer management: effort, time and money. Constraints of small producers: internal –Low literacy and numeracy, low agronomic knowledge, poor hygiene cultural habits, little or no capital, lack market mindset

Directorate for Food, Agriculture, and Fisheries 2121 Impacts of Rising Private Standards on Agro-food system Likely to restrict the set of potential suppliers to by increasing entry costs of standards compliance Market access available to those producers who can meet standards and supply logistics. Increased divergence across countries/ producers or both?

Directorate for Food, Agriculture, and Fisheries 2 What strategy? ( from the Chilean experience) Upgrade infrastructure and services to meet market demands Foster greater associative initiatives Increased south – south trade and lower south- south barriers Select product strategy: identify market and products Select a market strategy Select potentially successful market participants