The Double-Revolution in Food Supply Chains in the Asia/Pacific

Implications for Food Security and Donor/Government Strategies

• Thomas Reardon, MSU

1. Asia/Pacific Food Debate: Focus vsRealities

a) Debate is focused on trade: but 95% of Asian Food Economy is domestic market

… at most 5% are imports or exportsb) Debate is focused on government marketing interventions: but 95-99% is private sector (traditional & modern)… only about 1-5% is direct government involvementc) Debate is focused on grain – but grain is about 25% of Asia’s food; the other 75% is milk, meat/fish, oil, pulses, produce

d) Debate is focused on rural – but 50-75% of Asia’s food market is urbane) Debate is focused “upstream”, on the farm: but 50-70% of the food price is formed after the farmgate in the supply chain… “downstream” (retail)… “midstream” (wholesale/logistics and processing) These off-farm segments have been relatively neglected in the food security debate

e) The debate is dominated by the the conventional view of food supply chains as traditional, stagnant, sleepy……. But we find the downstream and midstream segments are transforming very fast in DOUBLE REVOLUTION:Modernization: “Supermarket Revolution” + modern large processors + modern wholesale/logistics firms Transformation – a Quiet revolution - in traditional supply chains… not just in “high value agriculture” (non-staples) … but also in rice & other staple foodsI show that transformation by off-farm segment of the

supply chain: downstream, midstream And its implications for farmers and for food security &

development assistance in Asia/Pacific

2. “Downstream” in the supply chain: Supermarket Revolution

a) The “Supermarket Revolution” has swept developing countries in the past 2 decades

… take-off and rapid spread in three wavesFirst wave: South America, East Asia outside

China, South AfricaSecond wave: Mexico/Central America, Southeast

AsiaThird wave: China, India, Vietnam, emerging in

Eastern/Southern Africa

Asian experience: 3-5x faster than GDPG Growth

Waves of modern retail diffusion: noting when main “take-off” started

2001-2009: annual modern retail sales growth rate

2000-2008: annual GDP growth rate

1st Wave (early 1990s)

South Korea 10.3% 4.5%Taiwan 12.0% na2nd Wave (mid-90s)

Indonesia 19.1% 5.2%Malaysia 17.2% 5.5%Philippines 17.3% 5.1%Thailand 16.0% 5.2%3rd Wave (late 90s/early 2000s)

China 27.5% 10.4%India 49.9% 7.5%Vietnam 45.4% 7.7%

b) Supermarkets Spreading in “waves” over countries in Asia

c) Gradual concentration

… & multinationalization

…global multinational firms (like Metro, Carrefour, Tesco, Walmart)

… plus rapid emergence of regional multinationals like Dairy Farm International (HK based)

d) Spreading in waves from the rich to the middle class… into the food markets of the poore) Spreading in waves from big cities to secondary cities … to rural towns/villages… even to rural supermarket chains in China and India … China: private and state enterprise retail chains selling consumer durables, fertilizer/pesticides, processed food; India: “rural business hubs” (rural supermarkets that are also “rural services platforms” for farm inputs, credit, medical services, specialized extension)

f) Spreading in waves over product categories:

… processed foods and rice,

… to semi-processed foods: meat, dairy.

… to (recently) fresh fruits and vegetables

… but faster/earlier than in Latin America, Europe, and US

… in the US it took 40 years before supermarkets sold any fresh fruits and vegetables…

g) Recent surveys’ evidence in China in 5 biggest cities; modern retail sells:… 79% of processed foods… 50% of rice (our recent survey in Beijing)… 60% of dairy… 46% of meat… 37% of fruit…22% of vegetables Compare with Hong Kong in 2006: … nearly all of rice (was only in small rice shops in 1980s)… 59% of fruit… 52% of meat… 55% of vegetables (leap from mid 1990s, was 10-20%)

2. “Midstream” in the supply chain: Processing & Wholesale/Logistics

Midstream segments “co-evolving” with supermarkets: mutual re-enforcement

2.1. Rapid change in food processing sector:

… rapid overall expansion

… plant scale increase

… technology change: capital/labor ratio increase (India example)

… processing (continued)

… emerging concentration (half of rice in China via large mills)… multinationalization (global firms plus rise of regional multinationals like CP of Thailand, or Singapore’s Wilmar with huge investment in oil/rice in China)… rapid increase in branding/packaging: rice example: emerging in India/Bangladesh, already dominant in China cities

2. “Midstream” in the supply chain: Processing & Wholesale/Logistics

2.2. Rapid change in wholesale/logistics:

a) rapid overall expansion: wholesale markets in China & India grew to 4000-5000 by 2000s from only 100’s in 1960s

b) capital/labor ratio increase in wholesale: trucks, warehouses, cold storages

c) Sector still fragmented - but with emergingconcentration:

… rise of modern logistics firms

… massive new investment in private logistics (along with public investment)

… rise of specialized modern wholesalers (such as Bimandiri on Java) that act as dedicated procurement agents for supermarket chains

… but also shortening of traditional supply chains: … mounting evidence of reduction of village trader role … and rise of direct purchase from farmers by wholesale market traders & mills (vegetables/Shandong, rice/Heilongjiang, tomato/Indonesia, rice and potato/India)

d) Vertical integration:

… sprayer-traders in mango sector in Indonesia, Philippines

… wholesale markets in China (Inner Mongolia Wholesale Market)

e) Multinationalization/regional integration of wholesale/logistics

… “follow sourcing”: multinational logistics firms “following” retail chains and large processors to Asia (to “fast track” supply chain development)

… regional multinational wholesalers (setting up across countries to coordinate trade)

… sourcing hubs (of retail chains) (with inter-Asian trade within procurement networks)

… Export/import network among wholesale markets in Asia

hypothesis: trend toward “wholesale/logistics market” integration in Asia/Pacific region

Hypothesis: Intra-region trade – and competition – will come in 2 decades to eclipse food trade (except for soy) with rest of world

3. Procurement System Modernization

a) re-organizing: distribution centers + national/regional sourcing networks

b) standardizing: private standards

c) dis-intermediating and re-intermediating:

… direct procurement/contracts

… use modern wholesalers

China examples: 10 leading supermarket chains in Beijing source rice mainly direct from big mills

Metro example: Star Farms direct procurement

b) Procurement modernization:

… Uneven diffusion

… fastest in processed,

… second in semi-processed,

… just starting or not yet started in fresh produce (especially use of specialized wholesalers acting as selection/contracting agents)

… follows the “waves” described earlier

4. Impacts on Supply Chain

a) Most of the impact is “downstream on midstream”:

… supermarkets on traditional retailers… supermarkets on processors… supermarkets & processors on wholesale 85% of what supermarkets sell is processed or semi-processed (mirrors food consumption composition in Asia)… most procurement system modernization has occurred in processed/semi-processed product procurement

b) Transformation of segments: coevolution, symbiosis like “snowball rolling”

supermarkets tend to source from large processors, less from SMEs (Beijing chain’s suppliers: 1000 to 200)

… effect on SMEs also by new food safety laws/China

Logistics companies investment helps large retail and processing to develop

Processors & supermarkets source direct from each other and farmers and reduce role of small wholesaler

Modernize supply chains downstream & midstream

… reducing transaction costs, integrating markets

c) Food industry transformation affects farmers,emerging findings:

… IMPORTANT: Despite the conventional view that rural Asia/Pacific is homogenous, tiny farms, traditional context: reality is sharp inequality in farm sizes and non-land asset distribution

… and there are 2 rural Asias: dynamic/commercializing zones and hinterland areas

Small farmers tend to excluded where there is mix of medium and small farms (much of Asia)

Or where there are only small farms, those poor in non-land assets are excluded… except (RARELY) where they are in effective coops

But supply chain modernization (direct purchase, contract farming) found to raise farm incomes, decrease income variation/risk, but require investments of farmers

(and broad food industry transformation) on consumers’ food

security: Emerging Evidence & Hypotheses

a) Reduced Cost (Delhi example)b) Increased Safety: Ability to monitor, keep cold

chainc) Reduced Volatility: market integration/distribution networks/logistics by modern food industry - can – reduce price volatilityd) Increased availability: increase profitability to farmer to increase productivity & quality investments

Donor and Government Development assistance implications

a) Invest midstream

b) Invest upstream in farm and ag support services

c) Build Institutions and public support systems

d) Differentiate strategy for two zones/groups

e) Use jujitsu/jieli-dali on the food market transformation!

… examples of Corfo/Chile, China’s 2x100 Program, and ACIAR innovations in supply chains