Appendix

Diagram 1.

### Author details

there are a host of systemic challenges resulting in a broad-based resistance from multiple

Being unable to take part in these value chains, ranging from missing access to input products, micro-loans, micro-insurance, education and market, means an exclusion from revenue potential resulting in a general struggle for economic survival. Nevertheless, as we have argued in our literature review, there is a residing entrepreneurial nature within South Africa's SHF that

On the other hand, we have risk averse VCPs avoiding SHF because of high perceived risk or failures made through own experience. Nonetheless, most VCPs remain very interested to increase engagement with SHF in future, if a new system reduced the risk. We have shown how government could reduce the most important risks and limitations, which in order of importance are: cooperative leadership (90%), education (88%), logistics (85%), access to market (82%), funding (81%), and food safety compliance (75%); all of which were perceived by the interviewees as more important than legislation, regulatory requirements and land ownership. As economic viability is more important than land ownership, which is not a guarantee for proper land custodianship and profitability, government should rather focus funding and the establishment of cooperative leadership in conjunction with existing commercial farmers that assists with access to markets, logistics, plus education through field extension on how to practice low external input farming methods that reduce risk and the need for credit and imported input products, while increasing food resilience in rural areas and economic viability

industries, particularly within the SA value chain to engage with SHFs.

offers a great potential that could be leveraged.

of SHF.

Appendix

174 Agricultural Value Chain

Diagram 1.

Wolfgang Johann von Loeper<sup>1</sup> \*, Scott Drimie<sup>1</sup> and James Blignaut1,2

\*Address all correspondence to: wolfgang@mysmart.farm


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**Chapter 10**

**Provisional chapter**

**Integration of Small Farmers into Value Chains:**

**Evidence from Eastern Europe and Central Asia**

**Integration of Small Farmers into Value Chains:** 

DOI: 10.5772/intechopen.73191

The economic breakdown of the early transition process weighed heavily on food supply relationships in the Eastern European and Central Asian (EECA) countries. Small and medium-sized farm suppliers and processors suffered from lack of necessary production inputs whereas processors and retailers faced problems of insufficient quantity and quality of supplies. At the same time, changes in consumer demand as well as the accompanying entry of foreign investors in the retail and processing sectors necessitated significant and lengthy reforms and adjustments in the structure of food commodity chains to overcome these problems. Based on an extensive literature overview and a synthesis of five case studies conducted upon the assignment of Food and Agriculture Organization (FAO) of the United Nations, the current chapter demonstrates how small and mediumsized food processors manage to install effective procurement systems in weak institutional environments of EECA. The chapter also identifies the factors that drive small farmer-processor business linkages and their integration into national and international

value chains in order to develop options for support and assistance.

**Keywords:** Eastern Europe and Central Asia, farm assistance, food chain, processors,

The whole food chain in Eastern Europe and Central Asia (EECA)—from farm suppliers to retailers—has suffered a dramatic breakdown of economic relationships at the beginning of the transition process. Disruptions of supply and inferior-quality food products have become a commonplace. At the same time, changes in consumer demand as well as the accompanying entry of foreign investors, primarily retailers and processors, necessitated significant reforms and adjustments in the structure of food commodity chains to overcome these problems.

**Evidence from Eastern Europe and Central Asia**

© 2016 The Author(s). Licensee InTech. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution,

© 2018 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use,

distribution, and reproduction in any medium, provided the original work is properly cited.

and reproduction in any medium, provided the original work is properly cited.

Jon H. Hanf and Taras Gagalyuk

Jon H. Hanf and Taras Gagalyuk

http://dx.doi.org/10.5772/intechopen.73191

smallholders, vertical coordination

**Abstract**

**1. Introduction**

Additional information is available at the end of the chapter

Additional information is available at the end of the chapter


**Provisional chapter**

### **Integration of Small Farmers into Value Chains: Evidence from Eastern Europe and Central Asia Evidence from Eastern Europe and Central Asia**

**Integration of Small Farmers into Value Chains:** 

DOI: 10.5772/intechopen.73191

Jon H. Hanf and Taras Gagalyuk Jon H. Hanf and Taras Gagalyuk Additional information is available at the end of the chapter

Additional information is available at the end of the chapter

http://dx.doi.org/10.5772/intechopen.73191

#### **Abstract**

[65] Mahlogedi L, Thindisa V. Participation by Smallholder Farming Entrepreneurs in Agro-

[66] Jayne TS, Yamano T, Weber MT, Tschirley D, Benfica R, Chapoto A, et al. Smallholder income and land distribution in Africa: Implications for poverty reduction strategies. Food Policy [Internet]. 2003 Jun [Cited 2014 May 10];28(3):253-275. Available from:

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able Productive Resource Base—Deliverable 4 Field Report. Pretoria; 2015

Processing Activities in South Africa. Johannesburg; 2014

180 Agricultural Value Chain

http://linkinghub.elsevier.com/retrieve/pii/S0306919203000460

The economic breakdown of the early transition process weighed heavily on food supply relationships in the Eastern European and Central Asian (EECA) countries. Small and medium-sized farm suppliers and processors suffered from lack of necessary production inputs whereas processors and retailers faced problems of insufficient quantity and quality of supplies. At the same time, changes in consumer demand as well as the accompanying entry of foreign investors in the retail and processing sectors necessitated significant and lengthy reforms and adjustments in the structure of food commodity chains to overcome these problems. Based on an extensive literature overview and a synthesis of five case studies conducted upon the assignment of Food and Agriculture Organization (FAO) of the United Nations, the current chapter demonstrates how small and mediumsized food processors manage to install effective procurement systems in weak institutional environments of EECA. The chapter also identifies the factors that drive small farmer-processor business linkages and their integration into national and international value chains in order to develop options for support and assistance.

**Keywords:** Eastern Europe and Central Asia, farm assistance, food chain, processors, smallholders, vertical coordination

### **1. Introduction**

The whole food chain in Eastern Europe and Central Asia (EECA)—from farm suppliers to retailers—has suffered a dramatic breakdown of economic relationships at the beginning of the transition process. Disruptions of supply and inferior-quality food products have become a commonplace. At the same time, changes in consumer demand as well as the accompanying entry of foreign investors, primarily retailers and processors, necessitated significant reforms and adjustments in the structure of food commodity chains to overcome these problems.

Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. © 2018 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

© 2016 The Author(s). Licensee InTech. This chapter is distributed under the terms of the Creative Commons

Altogether these factors required considerable effort on the part of policymakers to structure food commodity chains and food supply of higher quality and safety. Given that such changes are normally accompanied by a lengthy process of institutional adjustments, an increased degree of privately driven vertical coordination between transaction partners along the supply chain became a widespread means to overcome problems of insufficient supply and minor quality [1]. The newly established procurement systems demand that suppliers are able to guarantee both disruption-free product flows and delivery of products of a certain quality. Thus, domestic producers must keep up with quantity and quality expectations.

**2. Integration of small farmers into food value chains in transition** 

and processors have called for groundbreaking reforms of food chains.

the German Metro Group is the second largest retailer in Russia and Ukraine.

retailers aim to source up to 90% of their supplies from local producers [3, 4].

proliferate as the share of modern retailers is growing [16].

Foreign retailers and investors 'export' their business models. In the process of internationalization they are taking their own business models into the new markets [13–15]. Thus, modern management concepts and requirements toward business partners are exported. In the retail sector, this results in the following changes. The centralized, large and modern distribution centers and external specialized logistic firms substitute for traditional, local, store-bystore procurement. Furthermore, modern retailers set their own private standards of food quality and safety that are often much higher than those of national governments [12]. Some informed commentators suggest that these private standardization initiatives will further

Profound structural change is expected in the agri-food sector due to foreign investment. Within new procurement systems, suppliers have to guarantee both timeliness and quality of delivered products. This leads to improvement of operations among domestic suppliers as they face fierce competition on the part of importers [17]. However, in the long run, foreign

The observed process of synchronization of successive stages in the marketing channel from producers to consumers generally refers to vertical coordination. It does not include transactions

The transition process has caused a decline of agricultural output and decapitalization of the agricultural production system in Central and Eastern Europe [10]. As a result, the food and agricultural commodity value chains have undergone a tremendous change in the last decades [11]. The breakdown of the interactions among food chain participants—from farmers to retailers—resulted in supply disruptions of supply and deterioration of the quality of food products. Concurrently, changing consumer demands and the entry of foreign retailers

Integration of Small Farmers into Value Chains: Evidence from Eastern Europe and Central Asia

http://dx.doi.org/10.5772/intechopen.73191

183

Transformation of the retail sector from state-run shops and open bazaars to "more modern", large format retailers was stipulated by significant inflows of foreign investments. Their rapid development notwithstanding, the new retail formats have been expanding differently in different transition countries. This gradual expansion is often referred to as the "retail waves" concept [12]. In this context, the "first wave" countries' supermarket sector grew from about 5% in the mid-1990s to 50% by the mid-2000s. These shares of modern retail formats are observable in Hungary, Poland and the Czech Republic. "Second wave" countries such as Bulgaria and Croatia are characterized by a 20–30% share of supermarkets and similar retail formats. "Third wave" countries, in turn, are those whose supermarket sector did not exceed 5% of total retail turnover in the mid-2000s, for example, Russia and Ukraine. Regardless of the market shares of modern retailers, existing evidence suggests that foreign companies are among the leaders in the retail sector of all Central and East-European countries. For example,

**countries**

**2.1. Means of integration**

Many studies show that retailers, processors as well as governments would prefer growth in farm size due to different reasons [2–5]. Nevertheless, retailers and processors are still compelled to collaborate with small farmers as these farmers are essential for ensuring the required quantities in some transition countries, particularly in labor intensive sectors. It is, however, a widespread phenomenon that small farmers are the most vulnerable type of agricultural producers. In the situation when existing institutional structures are either incomplete (i.e. containing gaps that hinder all producer types equally) or captured (i.e. asymmetrically favoring some producer types over others)—and both problems are still present in EECA today—small farmers face an everyday threat of being excluded from respective value chains [6–8].

The purpose of this study is to demonstrate how (mainly small and medium-sized) food processors manage to install effective procurement systems in weak institutional environments of EECA by establishing linkages with local farmers and integrating them into national as well as international value chains. The paper also identifies the factors that drive small farmer-processor business linkages in order to develop policy and support options that can contribute to strengthening of group-based producer-processor linkages.

Our analysis involves a review of available and accessible sources related to smallholderbuyer business models for inclusion of small farmers into markets. In addition, the findings of five country reports by Food and Agriculture Organization (FAO) of the United Nations based on the case studies from Azerbaijan, Kyrgyzstan, Serbia, Turkey and Ukraine on processor-driven integration of small farmers into value chains are synthesized.1

The chapter is structured as follows. The subsequent section provides a literature review on the integration of small farmers into value chains. In this context, foreign investments have been reported as very important aspects. Therefore, they deserve a separate sub-section. Another sub-section is dedicated to cooperatives as they are considered a traditional instrument for the integration of farmers into value chains. The further section summarizes positive experiences of the case studies from five EECA countries. Conclusions on how to foster processor-driven integration of small farmers into value chains are provided at the end of the paper.

<sup>1</sup> One of the authors of the current paper participated in the mentioned FAO project and the chapter is based on the respective FAO Report titled "Processor-driven integration of small farmers into value chains in Eastern Europe and Central Asia (EECA)" [9].

### **2. Integration of small farmers into food value chains in transition countries**

### **2.1. Means of integration**

Altogether these factors required considerable effort on the part of policymakers to structure food commodity chains and food supply of higher quality and safety. Given that such changes are normally accompanied by a lengthy process of institutional adjustments, an increased degree of privately driven vertical coordination between transaction partners along the supply chain became a widespread means to overcome problems of insufficient supply and minor quality [1]. The newly established procurement systems demand that suppliers are able to guarantee both disruption-free product flows and delivery of products of a certain quality.

Many studies show that retailers, processors as well as governments would prefer growth in farm size due to different reasons [2–5]. Nevertheless, retailers and processors are still compelled to collaborate with small farmers as these farmers are essential for ensuring the required quantities in some transition countries, particularly in labor intensive sectors. It is, however, a widespread phenomenon that small farmers are the most vulnerable type of agricultural producers. In the situation when existing institutional structures are either incomplete (i.e. containing gaps that hinder all producer types equally) or captured (i.e. asymmetrically favoring some producer types over others)—and both problems are still present in EECA today—small farmers face an everyday threat of being excluded from respective value

The purpose of this study is to demonstrate how (mainly small and medium-sized) food processors manage to install effective procurement systems in weak institutional environments of EECA by establishing linkages with local farmers and integrating them into national as well as international value chains. The paper also identifies the factors that drive small farmer-processor business linkages in order to develop policy and support options that can

Our analysis involves a review of available and accessible sources related to smallholderbuyer business models for inclusion of small farmers into markets. In addition, the findings of five country reports by Food and Agriculture Organization (FAO) of the United Nations based on the case studies from Azerbaijan, Kyrgyzstan, Serbia, Turkey and Ukraine on pro-

The chapter is structured as follows. The subsequent section provides a literature review on the integration of small farmers into value chains. In this context, foreign investments have been reported as very important aspects. Therefore, they deserve a separate sub-section. Another sub-section is dedicated to cooperatives as they are considered a traditional instrument for the integration of farmers into value chains. The further section summarizes positive experiences of the case studies from five EECA countries. Conclusions on how to foster processor-driven integration of small farmers into value chains are provided at the end of the

One of the authors of the current paper participated in the mentioned FAO project and the chapter is based on the respective FAO Report titled "Processor-driven integration of small farmers into value chains in Eastern Europe and

contribute to strengthening of group-based producer-processor linkages.

cessor-driven integration of small farmers into value chains are synthesized.1

Thus, domestic producers must keep up with quantity and quality expectations.

chains [6–8].

182 Agricultural Value Chain

paper.

Central Asia (EECA)" [9].

1

The transition process has caused a decline of agricultural output and decapitalization of the agricultural production system in Central and Eastern Europe [10]. As a result, the food and agricultural commodity value chains have undergone a tremendous change in the last decades [11]. The breakdown of the interactions among food chain participants—from farmers to retailers—resulted in supply disruptions of supply and deterioration of the quality of food products. Concurrently, changing consumer demands and the entry of foreign retailers and processors have called for groundbreaking reforms of food chains.

Transformation of the retail sector from state-run shops and open bazaars to "more modern", large format retailers was stipulated by significant inflows of foreign investments. Their rapid development notwithstanding, the new retail formats have been expanding differently in different transition countries. This gradual expansion is often referred to as the "retail waves" concept [12]. In this context, the "first wave" countries' supermarket sector grew from about 5% in the mid-1990s to 50% by the mid-2000s. These shares of modern retail formats are observable in Hungary, Poland and the Czech Republic. "Second wave" countries such as Bulgaria and Croatia are characterized by a 20–30% share of supermarkets and similar retail formats. "Third wave" countries, in turn, are those whose supermarket sector did not exceed 5% of total retail turnover in the mid-2000s, for example, Russia and Ukraine. Regardless of the market shares of modern retailers, existing evidence suggests that foreign companies are among the leaders in the retail sector of all Central and East-European countries. For example, the German Metro Group is the second largest retailer in Russia and Ukraine.

Foreign retailers and investors 'export' their business models. In the process of internationalization they are taking their own business models into the new markets [13–15]. Thus, modern management concepts and requirements toward business partners are exported. In the retail sector, this results in the following changes. The centralized, large and modern distribution centers and external specialized logistic firms substitute for traditional, local, store-bystore procurement. Furthermore, modern retailers set their own private standards of food quality and safety that are often much higher than those of national governments [12]. Some informed commentators suggest that these private standardization initiatives will further proliferate as the share of modern retailers is growing [16].

Profound structural change is expected in the agri-food sector due to foreign investment. Within new procurement systems, suppliers have to guarantee both timeliness and quality of delivered products. This leads to improvement of operations among domestic suppliers as they face fierce competition on the part of importers [17]. However, in the long run, foreign retailers aim to source up to 90% of their supplies from local producers [3, 4].

The observed process of synchronization of successive stages in the marketing channel from producers to consumers generally refers to vertical coordination. It does not include transactions on spot markets, where the commodity exchange is based on a price agreement only. It includes both vertical integration and productive partnerships (contracting) [18]. Assumingly, the higher the priority to secure quality and/or quantity of raw materials, the stronger the shift from spot market transactions toward advanced vertical coordination mechanisms.

of vertical coordination with the wide use of production contracts. However, the use of marketing contracts is more reasonable if the higher quality products become standardized. The application of production contracts will then mainly pertain to consumer segments character-

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In practical terms, contracts that are used in EECA include farm management assistance, extension services, quality controls, farm input assistance programs, trade credit and even bank loan guarantees [1]. Thus, evidence suggests that the key actors (retailers and processors) find themselves constrained not by their own capital capacity but by that of other participants along the chains on which they depend for critical inputs. For the most part, this takes place because traditional lending institutions such as commercial banks do not give credit to enhance the interfirm product flow. In fact, this has been found to cause frequent contract breaches in EECA as farmers were not able to access basic production factors to fulfill

In addition, contract enforcement may be an important problem since public enforcement institutions are weak. Informal enforcement mechanisms such as social pressure, unacceptance of distrust, etc.) are also missing due to poor social capital. Therefore, farm assistance

Thus, the search for quality is a key engine of vertical coordination, but what happens when the desired quality level is reached? Quality is becoming less of a driver while the need to enhance efficiency arises as the main motivation for vertical coordination. For example, in supply chains that bear high costs, retailers and processors work closely with their suppliers to reduce costs. Quality remains a key driver only when a higher than average quality is explicitly demanded by the customers or when it can be used for differentiation from

Foreign direct investment (FDI) became an increasingly important element in global economic development and integration during the 1990s [28]. Ahrend names two general factors that make companies open subsidiaries abroad [29]. On the one hand, companies strive to sell more goods and services that they produce in their home countries. On the other hand, they want to launch production in a foreign country that would further enable sales to local and export markets. In essence, agri-food companies internationalize because of the same general

Literature on the influence of FDI on transition economies mentions several positive effects of FDI. A number of authors agree that FDI facilitate economic growth and reduce poverty [32–34]. Several studies offer empirical evidence of the importance of FDI flows for economic growth in developing countries [35, 36]. Other advantages of FDI include technology transfer

In the EECA countries, FDI induced the following major shifts in procurement systems: (1) procurement systems became largely centralized and based on large and modern distribution centers instead of local store-by-store procurement; (2) procurement became regionalized across

and technical innovation as well as enterprise restructuring [32, 37].

programs must be accompanied by appropriate governance mechanisms.

ized by differentiated demands.

a contract [25].

competitors.

reasons [30, 31].

**2.2. The role of foreign direct investments**

Vertical coordination, introduced by modern procurement systems, favors (in theory) large scale farming. There are two reasons for this perspective to prevail. First, the complexity of the system is reduced and, thus, transaction costs are lower if there are a small number of large suppliers. Second, larger farms are less costly than smaller farms with regard to assistance provision.

However, small farmers are essential for ensuring the required supply quantities in most EECA countries. Therefore, retailers and processors are (still) compelled to include small farmers in supply chains and provide assistance to them based on the establishment of productive partnerships. Particularly in labor intensive sectors, small-scale farming has important cost advantages.

As generally regarded, productive partnerships among firms are supposed to be based on common goals, shared knowledge and pooled resources that altogether lead to better supply chain performance. The design of such relationships may vary from loose agreements to longterm and trust-based contracts [19].

The key for productive partnerships is contracting. In the context of agri-food supply chains, the main motivations of farmers to engage into contracting are the following: (1) income stability (to reduce risk compared to other ways of selling on traditional marketing channels); (2) improved efficiency (management decisions are transferred to the farmers); (3) market security (entering the contract provides a certain security in that the product will be sold if it meets with the requirements); (4) access to capital (contractor often provides inputs for farmers, which reduces the usage of credits) [20]. Food processors enter into contracts because they obtain control over input supply. Further, processors use contracts in order to achieve uniformity and predictability to suit consumers while they also benefit from lower costs in processing, packing and grading [21–23].

In general, one can distinguish between two types of contracts: marketing and production contracts. Marketing contracts address the issue of supply disruptions by private contractual initiatives [24, 25] whereas production contracts address quality concerns [26]. Additionally, these contracts are different with regard to the degree of control allocated and risk transferred across stages. In producer contracts, the contractor engages in the producer's decisions to a much higher extent than in the marketing contracts. This engagement can even expand toward ownership of critical production inputs whereas the role of marketing contracts is essentially in providing a market for the producer's goods [27].

Empirical evidence indicates that both types of contracts persist in EECA countries and their use is contingent upon the degree of market development. The less a market and its institutional environment are developed, the less likely it is that a complex system of vertical coordination will emerge and, this, marketing contracts will dominate. A more developed market, characterized by greater demand for higher quality products, entails a higher degree of vertical coordination with the wide use of production contracts. However, the use of marketing contracts is more reasonable if the higher quality products become standardized. The application of production contracts will then mainly pertain to consumer segments characterized by differentiated demands.

In practical terms, contracts that are used in EECA include farm management assistance, extension services, quality controls, farm input assistance programs, trade credit and even bank loan guarantees [1]. Thus, evidence suggests that the key actors (retailers and processors) find themselves constrained not by their own capital capacity but by that of other participants along the chains on which they depend for critical inputs. For the most part, this takes place because traditional lending institutions such as commercial banks do not give credit to enhance the interfirm product flow. In fact, this has been found to cause frequent contract breaches in EECA as farmers were not able to access basic production factors to fulfill a contract [25].

In addition, contract enforcement may be an important problem since public enforcement institutions are weak. Informal enforcement mechanisms such as social pressure, unacceptance of distrust, etc.) are also missing due to poor social capital. Therefore, farm assistance programs must be accompanied by appropriate governance mechanisms.

Thus, the search for quality is a key engine of vertical coordination, but what happens when the desired quality level is reached? Quality is becoming less of a driver while the need to enhance efficiency arises as the main motivation for vertical coordination. For example, in supply chains that bear high costs, retailers and processors work closely with their suppliers to reduce costs. Quality remains a key driver only when a higher than average quality is explicitly demanded by the customers or when it can be used for differentiation from competitors.

### **2.2. The role of foreign direct investments**

on spot markets, where the commodity exchange is based on a price agreement only. It includes both vertical integration and productive partnerships (contracting) [18]. Assumingly, the higher the priority to secure quality and/or quantity of raw materials, the stronger the shift

Vertical coordination, introduced by modern procurement systems, favors (in theory) large scale farming. There are two reasons for this perspective to prevail. First, the complexity of the system is reduced and, thus, transaction costs are lower if there are a small number of large suppliers. Second, larger farms are less costly than smaller farms with regard to assis-

However, small farmers are essential for ensuring the required supply quantities in most EECA countries. Therefore, retailers and processors are (still) compelled to include small farmers in supply chains and provide assistance to them based on the establishment of productive partnerships. Particularly in labor intensive sectors, small-scale farming has impor-

As generally regarded, productive partnerships among firms are supposed to be based on common goals, shared knowledge and pooled resources that altogether lead to better supply chain performance. The design of such relationships may vary from loose agreements to long-

The key for productive partnerships is contracting. In the context of agri-food supply chains, the main motivations of farmers to engage into contracting are the following: (1) income stability (to reduce risk compared to other ways of selling on traditional marketing channels); (2) improved efficiency (management decisions are transferred to the farmers); (3) market security (entering the contract provides a certain security in that the product will be sold if it meets with the requirements); (4) access to capital (contractor often provides inputs for farmers, which reduces the usage of credits) [20]. Food processors enter into contracts because they obtain control over input supply. Further, processors use contracts in order to achieve uniformity and predictability to suit consumers while they also benefit from lower costs in

In general, one can distinguish between two types of contracts: marketing and production contracts. Marketing contracts address the issue of supply disruptions by private contractual initiatives [24, 25] whereas production contracts address quality concerns [26]. Additionally, these contracts are different with regard to the degree of control allocated and risk transferred across stages. In producer contracts, the contractor engages in the producer's decisions to a much higher extent than in the marketing contracts. This engagement can even expand toward ownership of critical production inputs whereas the role of marketing contracts is

Empirical evidence indicates that both types of contracts persist in EECA countries and their use is contingent upon the degree of market development. The less a market and its institutional environment are developed, the less likely it is that a complex system of vertical coordination will emerge and, this, marketing contracts will dominate. A more developed market, characterized by greater demand for higher quality products, entails a higher degree

from spot market transactions toward advanced vertical coordination mechanisms.

tance provision.

184 Agricultural Value Chain

tant cost advantages.

term and trust-based contracts [19].

processing, packing and grading [21–23].

essentially in providing a market for the producer's goods [27].

Foreign direct investment (FDI) became an increasingly important element in global economic development and integration during the 1990s [28]. Ahrend names two general factors that make companies open subsidiaries abroad [29]. On the one hand, companies strive to sell more goods and services that they produce in their home countries. On the other hand, they want to launch production in a foreign country that would further enable sales to local and export markets. In essence, agri-food companies internationalize because of the same general reasons [30, 31].

Literature on the influence of FDI on transition economies mentions several positive effects of FDI. A number of authors agree that FDI facilitate economic growth and reduce poverty [32–34]. Several studies offer empirical evidence of the importance of FDI flows for economic growth in developing countries [35, 36]. Other advantages of FDI include technology transfer and technical innovation as well as enterprise restructuring [32, 37].

In the EECA countries, FDI induced the following major shifts in procurement systems: (1) procurement systems became largely centralized and based on large and modern distribution centers instead of local store-by-store procurement; (2) procurement became regionalized across borders; (3) traditional brokers were replaced by specialized wholesalers; (4) the logistics market became dominated by global firms; (5) retailers established preferred supplier systems; and (6) private quality standards were introduced [12]. Altogether these changes marked a growing role of vertical coordination in agri-food chains of EECA countries [2]. Studies from Bulgaria, Moldova and Slovakia show that, due to stricter and higher quality norms, more vertical coordination is taking place [38, 26]. In the Russian food sector, the foreign-owned food processors have managed to become the major competitors of the domestic ones, in particular in the dairy sector.

They do not have access to finance, they experience difficulties to buy (high) standard quality inputs, and lack technical and managerial capacity. Thus, more and more contract schemes (marketing and/or production contracts) and outgrower schemes have been established often accompanied with the provision of quality inputs, new technologies, credit and extension services to the farmers [10]. The current section provides further evidence of privately driven vertical coordination derived from the FAO reports on case studies from five EECA coun-

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These general findings have been observed in the reports of all five countries. Disruptions of the agri-food value chains resulted in a dualistic structure of agricultural production. One the one hand, there are large corporate farm businesses such as agroholdings or state enterprises while, on the other hand, there are smallholders that account for considerable share of agricultural production in a number of sub-sectors. For example, in Ukraine, fully vertically integrated enterprises that are often referred to as agroholdings have rapidly developed whereas the labor intensive sub-sectors such as horticulture are marked by domination of small farms

According to all country reports, the role of agricultural sector in overall gross domestic product (GDP) is diminishing. This fact notwithstanding, agriculture is still among major employers and, thus, is closely intertwined with rural development. In particular, all reports emphasize the importance of small-scale farms and households not only for own consumption but also for market supplies and employment of family members. At the same time, income disparity between urban and rural areas becomes larger in favor of the former. Particularly for young people, urban areas are more promising with regard to their future careers. Consequently,

This outmigration affects negatively the market size for direct sales as the main marketing channel of smallholders. Moreover, as exemplified by the Serbian case, modern retailers take over the shares of smallholders by offering more fresh products, in particular fruit and vegetables. Retailers are also able to offer these products for a reasonable price and standardized quality, thus engaging into stiff competition against directly marketing farmers and house-

Opposite to the negative effect of migration on the direct marketing of farm products, indirect marketing channels rather profit from this development. Moving to urban areas people have to buy processed food and have to buy in retail outlets. Therefore, the importance of indirect marketing channels is already high and will grow in the future despite growing competition

Smallholders in EECA face two main obstacles to integration into value chains. On the one hand, they do not have sufficient volumes of production. On the other, they often lack the required quality. In order to combat the first obstacle, the solution would be to pool quantities.

outmigration from rural areas is a common phenomenon in all countries.

holds. As a result, the attractiveness of direct marketing is shrinking.

tries—Azerbaijan, Kyrgyzstan, Serbia, Ukraine and Turkey.

**3.1. Marketing channels of small farmers and households**

and rural households in production [47].

from large retailers.

**3.2. Obstacles to integration into value chains**

#### **2.3. Cooperatives as a means to integrate smallholders**

The quest for quality, that requires tight coordination of interdependent activities in value chains, calls for particular attention toward the role of cooperatives [39, 40]. Bijman and Muradian mention that international donors and NGOs have (re)discovered the importance of cooperatives for rural development in general and for strengthening smallholders' access to markets in particular [39].

Because small-size producers are the backbone of agriculture in Central and East-European countries, their resources as well as output toned to be pooled to achieve the demanded quantity of supplies. Horizontal cooperation among smallholders, thus, gains in importance [41]. However, cooperatives face hard times in transition countries. In the Soviet era, farmers have been 'forced' to join collective farms. Thus, today, collective action still has a bad reputation as it is associated with loss of private ownership and freedom [42]. Furthermore, during Soviet times, collective farms and processing enterprises have proven to be very inefficient and subject to soft budget constraints. An additional problem with cooperatives is that there is often a lack of trust and social capital among farmers and villagers so that collective action is hindered already at the initial stage. Thus, Gardner and Lerman conclude that the evidence for cooperatives in agricultural production is still unfavorable [43].

However, for marketing and supply cooperatives, they observe a more promising situation. One reason for this is that new forms of cooperatives have been recently established [44]. A good example is a Hungarian Morakert cooperative where product quality and professional marketing are the first priority. Today Morakert's sales to retailers account for about 90% of its domestic turnover. Morakert's success is based on four key factors. First, filter rules are applied to membership. Second, quality and quantity of products are strictly coordinated. Third, trust is an inevitable aspect of communication between members and management. Fourth, private contract enforcement is established [45]. Morakert's procurement system is centralized, maintained in one place and supported by a common IT system [46]. An own brand serves as another marketing and coordination mechanism at Morakert. This example demonstrates how some problems of post-socialist economies can be overcome.

### **3. Peculiarities of smallholder integration in value chains**

The above presented literature review shows that particularly small farms and households face serious production constraints caused by factor market imperfections in EECA countries. They do not have access to finance, they experience difficulties to buy (high) standard quality inputs, and lack technical and managerial capacity. Thus, more and more contract schemes (marketing and/or production contracts) and outgrower schemes have been established often accompanied with the provision of quality inputs, new technologies, credit and extension services to the farmers [10]. The current section provides further evidence of privately driven vertical coordination derived from the FAO reports on case studies from five EECA countries—Azerbaijan, Kyrgyzstan, Serbia, Ukraine and Turkey.

### **3.1. Marketing channels of small farmers and households**

borders; (3) traditional brokers were replaced by specialized wholesalers; (4) the logistics market became dominated by global firms; (5) retailers established preferred supplier systems; and (6) private quality standards were introduced [12]. Altogether these changes marked a growing role of vertical coordination in agri-food chains of EECA countries [2]. Studies from Bulgaria, Moldova and Slovakia show that, due to stricter and higher quality norms, more vertical coordination is taking place [38, 26]. In the Russian food sector, the foreign-owned food processors have managed to become the major competitors of the domestic ones, in particular in the dairy sector.

The quest for quality, that requires tight coordination of interdependent activities in value chains, calls for particular attention toward the role of cooperatives [39, 40]. Bijman and Muradian mention that international donors and NGOs have (re)discovered the importance of cooperatives for rural development in general and for strengthening smallholders' access

Because small-size producers are the backbone of agriculture in Central and East-European countries, their resources as well as output toned to be pooled to achieve the demanded quantity of supplies. Horizontal cooperation among smallholders, thus, gains in importance [41]. However, cooperatives face hard times in transition countries. In the Soviet era, farmers have been 'forced' to join collective farms. Thus, today, collective action still has a bad reputation as it is associated with loss of private ownership and freedom [42]. Furthermore, during Soviet times, collective farms and processing enterprises have proven to be very inefficient and subject to soft budget constraints. An additional problem with cooperatives is that there is often a lack of trust and social capital among farmers and villagers so that collective action is hindered already at the initial stage. Thus, Gardner and Lerman conclude that the evidence

However, for marketing and supply cooperatives, they observe a more promising situation. One reason for this is that new forms of cooperatives have been recently established [44]. A good example is a Hungarian Morakert cooperative where product quality and professional marketing are the first priority. Today Morakert's sales to retailers account for about 90% of its domestic turnover. Morakert's success is based on four key factors. First, filter rules are applied to membership. Second, quality and quantity of products are strictly coordinated. Third, trust is an inevitable aspect of communication between members and management. Fourth, private contract enforcement is established [45]. Morakert's procurement system is centralized, maintained in one place and supported by a common IT system [46]. An own brand serves as another marketing and coordination mechanism at Morakert. This example

The above presented literature review shows that particularly small farms and households face serious production constraints caused by factor market imperfections in EECA countries.

demonstrates how some problems of post-socialist economies can be overcome.

**3. Peculiarities of smallholder integration in value chains**

**2.3. Cooperatives as a means to integrate smallholders**

for cooperatives in agricultural production is still unfavorable [43].

to markets in particular [39].

186 Agricultural Value Chain

These general findings have been observed in the reports of all five countries. Disruptions of the agri-food value chains resulted in a dualistic structure of agricultural production. One the one hand, there are large corporate farm businesses such as agroholdings or state enterprises while, on the other hand, there are smallholders that account for considerable share of agricultural production in a number of sub-sectors. For example, in Ukraine, fully vertically integrated enterprises that are often referred to as agroholdings have rapidly developed whereas the labor intensive sub-sectors such as horticulture are marked by domination of small farms and rural households in production [47].

According to all country reports, the role of agricultural sector in overall gross domestic product (GDP) is diminishing. This fact notwithstanding, agriculture is still among major employers and, thus, is closely intertwined with rural development. In particular, all reports emphasize the importance of small-scale farms and households not only for own consumption but also for market supplies and employment of family members. At the same time, income disparity between urban and rural areas becomes larger in favor of the former. Particularly for young people, urban areas are more promising with regard to their future careers. Consequently, outmigration from rural areas is a common phenomenon in all countries.

This outmigration affects negatively the market size for direct sales as the main marketing channel of smallholders. Moreover, as exemplified by the Serbian case, modern retailers take over the shares of smallholders by offering more fresh products, in particular fruit and vegetables. Retailers are also able to offer these products for a reasonable price and standardized quality, thus engaging into stiff competition against directly marketing farmers and households. As a result, the attractiveness of direct marketing is shrinking.

Opposite to the negative effect of migration on the direct marketing of farm products, indirect marketing channels rather profit from this development. Moving to urban areas people have to buy processed food and have to buy in retail outlets. Therefore, the importance of indirect marketing channels is already high and will grow in the future despite growing competition from large retailers.

#### **3.2. Obstacles to integration into value chains**

Smallholders in EECA face two main obstacles to integration into value chains. On the one hand, they do not have sufficient volumes of production. On the other, they often lack the required quality. In order to combat the first obstacle, the solution would be to pool quantities. A classical way would be the establishment of cooperatives. However, the reports have been very clear mentioning that cooperatives are not successfully operating. The reasons include negative reputation due to the historical background of cooperatives, operational inefficiencies and top-down implementation of the cooperative ideas, as well as taxation and administrative disadvantages. Another way would be the horizontal informal collaboration among smallholders. However, all studies report of a low level of trust and social capital among rural population. For example, the Ukrainian case study on Navigator-Agro demonstrated that there was a complete absence of trust from small and medium farmers in the idea of collaboration. Moreover, the level of trust between each other was very limited among rural inhabitants. A third way, as exemplified by the Turkish case, would be to sell the products through middlemen but low prices make sales at the spot market more profitable.

For example, food security is among major priorities of the government in Azerbaijan where the related reforms have been conducive to the development of vertically integrated holdings. The Serbian and Turkish cases are marked by limited and lagged access of small farmers and processors to the information on relevant policy programs. In addition, the application for state support programs is often too complicated, thus constraining small producers or even precluding them from necessary support due to limited human and time resources. In all five countries, positive exceptions are the policies regarding storage facilities. Since small farmers and households face difficulties to store their harvest—particularly in the case of perishable products—policies are setting incentives to enlarge storage capacities. For example, in Azerbaijan, 28 cold storage facilities (and 17 cereal storage facilities) have been constructed with the help of the government in different regions of the country. A similar example can be found in the wine sector of Azerbaijan; a GIZ (Deutsche Gesellschaft für Internationale Zusammenarbeit) study has shown that particularly the rural infrastructure has to be developed in order to enhance the competitiveness of the sector and the inclusion of small wine

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The report on Kyrgyzstan demonstrated explicitly that even if successful cooperation is established, the optimal mode of transactions is also contingent upon the institutional setting. About 75% of farmland in Kyrgyzstan is under operations of small producers who face both production and marketing problems. The main issue is the lack of a stable buyer of the products. International technical assistance projects were temporarily helpful in achieving tighter cooperation between farmers and processors but the latter have reported that dishonest behavior of small farmers made such cooperation unsustainable. Despite advanced payments, fertilizer and seeds received from processors, farmers did not fulfill their commitments after harvesting. Instead, they sold their products at the fresh markets where prices were higher. Therefore, almost all processors prefer to operate through intermediaries or procurers that collect produce from the small-scale farmers and sell in bulk to the enterprises. Intermediaries and farmers predominantly collaborate based on short-term oral arrangements without signing any contracts. Given such circumstances, it is also no wonder that the relations between processors and farmers have worsened over time and spot market transactions have become the best choice. To this effect, a shift of export policy from unprocessed to processed foods made spot market transactions more favorable, thus decreasing the extent of vertical coordination in the sector. However, in the long run, most processors would like to work with cooperatives and larger suppliers rather than dealing with small-scale farmers. In addition to institutional settings and opportunistic behavior, other obstacles have to be overcome to establish tight vertical linkages in supply chains. Low social capital and lack of trust are particularly constraining. As the case study on the Ukrainian Shyroke marketing group exemplified, processors had to provide some kind of collateral to suppliers prior to the start of cooperation in order to convince the smallholders of the reliability of intentions. A well-known game-theoretic procedure named hostage exchange is the case in point here [49]. Overall, it is evident that SME processors in all analyzed countries have to cope with very intense competition and a number of other problems, thus facing the need for clear corporate and marketing strategies. At the same time, as the report on Kyrgyzstan exemplifies, many

growers [48].

Regarding the second obstacle—the quality issue—literature provides reach evidence that quality can be improved based on vertical coordination. However, the literature most often refers to the examples of foreign investors who have leapfrogged quality by collaborating with large corporate farms. Modern and particularly foreign-owned retail chains prefer buying the needed larger volumes from a limited number of suppliers, thus favoring mainly corporate farm businesses. The reports demonstrate that larger processors also favor larger suppliers.

The concentration ratio and market power of modern retail chains and processors are increasing in EECA. Overall, this development favors large suppliers, especially branded manufacturers that invest in the achievement of appropriate quality levels for their branded products. The reports also reveal that imports are playing an important role in satisfying the demand for 'higher' quality products. However, interestingly, imports are also a major driving force of the competition in the low price segment. For example, Chinese tomato paste imports are replacing local Kyrgyz products. The Ukrainian report shows that domestic processors have lost 10% of domestic market owing to stiff competition with foreign companies. Another threat for Ukrainian producers resides in poor quality of local products.

Another issue in is high competition from imports due to membership of all scrutinized countries to the World Trade Organization (WTO). For example, Turkish pasta producers often substitute cheaper imported wheat for locally produced one. To this end, it is often easier to source from one large supplier from abroad than from a multiplicity of small local producers.

In Ukraine, concentration is taking place not only on the retail and processor levels but also on the farm level. Furthermore, due to large volumes of imported raw and processed products (e.g. dairy products, fruits and pork meat), there is a high competition. The willingness to invest into the development of cooperation with small producers is rather low for private companies. Smallholders have a limited access to state support, investments and credit resources. The result is that they experience a lack of qualitative seeds, fertilizer and mechanical appliances. Additionally, they have a lack of reliable information about markets.

Noteworthy, agricultural policies also contribute to dualistic production structures as well as to the development of large scale farming businesses. Driven by considerations of food security and food safety, most of the programs promote large scale farming and processing. For example, food security is among major priorities of the government in Azerbaijan where the related reforms have been conducive to the development of vertically integrated holdings. The Serbian and Turkish cases are marked by limited and lagged access of small farmers and processors to the information on relevant policy programs. In addition, the application for state support programs is often too complicated, thus constraining small producers or even precluding them from necessary support due to limited human and time resources. In all five countries, positive exceptions are the policies regarding storage facilities. Since small farmers and households face difficulties to store their harvest—particularly in the case of perishable products—policies are setting incentives to enlarge storage capacities. For example, in Azerbaijan, 28 cold storage facilities (and 17 cereal storage facilities) have been constructed with the help of the government in different regions of the country. A similar example can be found in the wine sector of Azerbaijan; a GIZ (Deutsche Gesellschaft für Internationale Zusammenarbeit) study has shown that particularly the rural infrastructure has to be developed in order to enhance the competitiveness of the sector and the inclusion of small wine growers [48].

A classical way would be the establishment of cooperatives. However, the reports have been very clear mentioning that cooperatives are not successfully operating. The reasons include negative reputation due to the historical background of cooperatives, operational inefficiencies and top-down implementation of the cooperative ideas, as well as taxation and administrative disadvantages. Another way would be the horizontal informal collaboration among smallholders. However, all studies report of a low level of trust and social capital among rural population. For example, the Ukrainian case study on Navigator-Agro demonstrated that there was a complete absence of trust from small and medium farmers in the idea of collaboration. Moreover, the level of trust between each other was very limited among rural inhabitants. A third way, as exemplified by the Turkish case, would be to sell the products through

Regarding the second obstacle—the quality issue—literature provides reach evidence that quality can be improved based on vertical coordination. However, the literature most often refers to the examples of foreign investors who have leapfrogged quality by collaborating with large corporate farms. Modern and particularly foreign-owned retail chains prefer buying the needed larger volumes from a limited number of suppliers, thus favoring mainly corporate farm businesses. The reports demonstrate that larger processors also favor larger

The concentration ratio and market power of modern retail chains and processors are increasing in EECA. Overall, this development favors large suppliers, especially branded manufacturers that invest in the achievement of appropriate quality levels for their branded products. The reports also reveal that imports are playing an important role in satisfying the demand for 'higher' quality products. However, interestingly, imports are also a major driving force of the competition in the low price segment. For example, Chinese tomato paste imports are replacing local Kyrgyz products. The Ukrainian report shows that domestic processors have lost 10% of domestic market owing to stiff competition with foreign companies. Another

Another issue in is high competition from imports due to membership of all scrutinized countries to the World Trade Organization (WTO). For example, Turkish pasta producers often substitute cheaper imported wheat for locally produced one. To this end, it is often easier to source from one large supplier from abroad than from a multiplicity of small local producers. In Ukraine, concentration is taking place not only on the retail and processor levels but also on the farm level. Furthermore, due to large volumes of imported raw and processed products (e.g. dairy products, fruits and pork meat), there is a high competition. The willingness to invest into the development of cooperation with small producers is rather low for private companies. Smallholders have a limited access to state support, investments and credit resources. The result is that they experience a lack of qualitative seeds, fertilizer and mechani-

cal appliances. Additionally, they have a lack of reliable information about markets.

Noteworthy, agricultural policies also contribute to dualistic production structures as well as to the development of large scale farming businesses. Driven by considerations of food security and food safety, most of the programs promote large scale farming and processing.

middlemen but low prices make sales at the spot market more profitable.

threat for Ukrainian producers resides in poor quality of local products.

suppliers.

188 Agricultural Value Chain

The report on Kyrgyzstan demonstrated explicitly that even if successful cooperation is established, the optimal mode of transactions is also contingent upon the institutional setting. About 75% of farmland in Kyrgyzstan is under operations of small producers who face both production and marketing problems. The main issue is the lack of a stable buyer of the products. International technical assistance projects were temporarily helpful in achieving tighter cooperation between farmers and processors but the latter have reported that dishonest behavior of small farmers made such cooperation unsustainable. Despite advanced payments, fertilizer and seeds received from processors, farmers did not fulfill their commitments after harvesting. Instead, they sold their products at the fresh markets where prices were higher. Therefore, almost all processors prefer to operate through intermediaries or procurers that collect produce from the small-scale farmers and sell in bulk to the enterprises. Intermediaries and farmers predominantly collaborate based on short-term oral arrangements without signing any contracts. Given such circumstances, it is also no wonder that the relations between processors and farmers have worsened over time and spot market transactions have become the best choice. To this effect, a shift of export policy from unprocessed to processed foods made spot market transactions more favorable, thus decreasing the extent of vertical coordination in the sector. However, in the long run, most processors would like to work with cooperatives and larger suppliers rather than dealing with small-scale farmers.

In addition to institutional settings and opportunistic behavior, other obstacles have to be overcome to establish tight vertical linkages in supply chains. Low social capital and lack of trust are particularly constraining. As the case study on the Ukrainian Shyroke marketing group exemplified, processors had to provide some kind of collateral to suppliers prior to the start of cooperation in order to convince the smallholders of the reliability of intentions. A well-known game-theoretic procedure named hostage exchange is the case in point here [49].

Overall, it is evident that SME processors in all analyzed countries have to cope with very intense competition and a number of other problems, thus facing the need for clear corporate and marketing strategies. At the same time, as the report on Kyrgyzstan exemplifies, many SMEs still do not dispose of such strategies. A survey revealed that only a minor share of enterprises has strategic development plans. The managers of most companies neither participate in management trainings nor invest in capacity building of their staff. Even more threatening is the absence of customer orientation among SME processors in almost all analyzed countries.

and households, are the key to success. Moreover, processors should be the initiators of such cooperation. The reviewed case studies demonstrate that long-term and trustful vertical relationships indeed exist but the smallholders are often regarded as difficult partners that tend to behave very opportunistically as they always have the choice to consume their products

Integration of Small Farmers into Value Chains: Evidence from Eastern Europe and Central Asia

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Processors use outgrower schemes particularly for upgrading of the delivered quality. They provide needed inputs (e.g. high quality seeds, irrigation equipment or pigs of a special breed) and provide training opportunities (e.g. setting up a demonstration farm) and extension services. In addition, as mentioned in several reports, processors may even offer advanced financing of farm inputs. Yet, where possible, misbehavior of farmers has to be precluded through contracting and sanctions, as successfully demonstrated by the Agroplast

Two general strategies are observed with regard to the establishment of well-functioning vertical linkages. The first one is to be fully oriented to small and medium-sized family farms and invest time and money in this type of cooperation. The second approach is to be partially vertically integrated—buying or building own farms and cooperating with small farms at the

Good examples of these two strategies are found in the dairy sector of Serbia. One is the dairy company Sirela while the other is the dairy company Lazar. The Serbian dairy market is subject to the increasing market power of retail chains. In response to this development, Sirela and Lazar have decided to run their own retail networks. Yet, this is the only similarity between two companies as their sourcing strategies are totally different. Lazar has successfully vertically integrated a dairy farm of 500 milk cows. At the same time, Sirela has established cooperation with a number of small farms, not least because of unfortunate own experience of full vertical integration with primary production in the past. Sirela offers secured sales market, stable payments, improved access to subsidies, extension services, free usage of milk coolers

Further examples of successful cooperation between SME processors and small family farms are found in fruits and vegetable as well as in grain sectors. SMEs are often oriented toward the domestic market but some are strongly involved in exports, as it is the case with Zdravo Organic and Vitamin in Serbia. The main benefit for SME food processors from cooperation with small farmers lies in secured input markets. In turn, processors provide farms with inputs such as seeds, fertilizer, chemicals, irrigation equipment and advance payments.

The Ukrainian case studies have also exemplified how mutually beneficial cooperation between processors and small farms can be established. Rural population in Ukraine is characterized by low levels of social capital and general cooperativeness—a factor that substantially hampers any collaborative effort on the part of processors or wholesalers. However, this obstacle can be overcome through the use of leadership mechanisms. Processors have

within a household instead of selling to the market.

cooperative that produces tomato paste in Kyrgyzstan.

**3.4. Positive experiences of tight vertical linkages**

same time.

and ad hoc support to farmers.

Additionally, extension service is provided.

### **3.3. Processors as drivers of integration**

As shown above, smallholder agricultural producers are offered to cooperate in EECA countries at a much smaller scale than in the developed countries. However, the situation can be changed if one considers the possible role of small and medium-sized processors. They are themselves not very attractive business partners for large corporate farms and, thus, they are more open to work together with small farms and households. The positive examples presented in the country reports highlighted that SME processors even stimulate horizontal collaboration among the farmers within informal groups. Thus, cooperation with small and medium-sized processors is a promising way to integrate smallholders into value chains.

Close relationships between processors and smallholders are of advantage for both sides. Processors receive security regarding the quality and the volume of their raw input supply. Small farmers and households see the main advantage in having a reliable and secure opportunity to sell their products. In this context, all reports suggest that smallholders value unanimously fair price as an important aspect of cooperation but not as important as a secure market access. Hence, vertical coordination can be regarded as a success factor for the development of sustainable value chains.

The case studies mention a number of successful examples of value chains that practice customer orientation, have a clear strategy, and perform well. It is clear that successful SME processors do not try to compete with national or global cost leaders as they cannot reach the needed economies of scale and scope, thus rendering a cost leadership strategy impossible. The successful examples are working with a mix of niche and differentiation strategies, offering (superior) quality in well-known traditional products. As in the case of the Serbian Zdravo Organic, production-related aspects are used for differentiation. First attempts to create 'real' brands are also made, targeting local, national and export markets. Importantly, customer orientation is often not limited to end consumer orientation; it may include wholesalers, retailers or exporters and is often driven by relations with importers (e.g. Schwabe company), investors from other sectors (e.g. Zdravo Organic), foreign investors and donors.

As the retail market is increasingly competitive, SME processors are slowly excluded from this channel. One way of responding to this development is demonstrated by Sirela, a Serbian dairy company that started to vertically integrate by building an own retail network. Today, Sirela is selling its entire production through some 40 own shops whereas other food processors have imitated this strategy and are investing in own retail outlets.

Regardless of their strategic orientations, the SME processors have to keep up with the market requirements toward steady volumes and high quality of products. In this context, wellfunctioning linkages between the SME processors and their suppliers, that is, small farms and households, are the key to success. Moreover, processors should be the initiators of such cooperation. The reviewed case studies demonstrate that long-term and trustful vertical relationships indeed exist but the smallholders are often regarded as difficult partners that tend to behave very opportunistically as they always have the choice to consume their products within a household instead of selling to the market.

Processors use outgrower schemes particularly for upgrading of the delivered quality. They provide needed inputs (e.g. high quality seeds, irrigation equipment or pigs of a special breed) and provide training opportunities (e.g. setting up a demonstration farm) and extension services. In addition, as mentioned in several reports, processors may even offer advanced financing of farm inputs. Yet, where possible, misbehavior of farmers has to be precluded through contracting and sanctions, as successfully demonstrated by the Agroplast cooperative that produces tomato paste in Kyrgyzstan.

### **3.4. Positive experiences of tight vertical linkages**

SMEs still do not dispose of such strategies. A survey revealed that only a minor share of enterprises has strategic development plans. The managers of most companies neither participate in management trainings nor invest in capacity building of their staff. Even more threatening is the absence of customer orientation among SME processors in almost all ana-

As shown above, smallholder agricultural producers are offered to cooperate in EECA countries at a much smaller scale than in the developed countries. However, the situation can be changed if one considers the possible role of small and medium-sized processors. They are themselves not very attractive business partners for large corporate farms and, thus, they are more open to work together with small farms and households. The positive examples presented in the country reports highlighted that SME processors even stimulate horizontal collaboration among the farmers within informal groups. Thus, cooperation with small and medium-sized processors is a promising way to integrate smallholders into value chains.

Close relationships between processors and smallholders are of advantage for both sides. Processors receive security regarding the quality and the volume of their raw input supply. Small farmers and households see the main advantage in having a reliable and secure opportunity to sell their products. In this context, all reports suggest that smallholders value unanimously fair price as an important aspect of cooperation but not as important as a secure market access. Hence, vertical coordination can be regarded as a success factor for the devel-

The case studies mention a number of successful examples of value chains that practice customer orientation, have a clear strategy, and perform well. It is clear that successful SME processors do not try to compete with national or global cost leaders as they cannot reach the needed economies of scale and scope, thus rendering a cost leadership strategy impossible. The successful examples are working with a mix of niche and differentiation strategies, offering (superior) quality in well-known traditional products. As in the case of the Serbian Zdravo Organic, production-related aspects are used for differentiation. First attempts to create 'real' brands are also made, targeting local, national and export markets. Importantly, customer orientation is often not limited to end consumer orientation; it may include wholesalers, retailers or exporters and is often driven by relations with importers (e.g. Schwabe company), investors from other sectors (e.g. Zdravo Organic), foreign investors and donors. As the retail market is increasingly competitive, SME processors are slowly excluded from this channel. One way of responding to this development is demonstrated by Sirela, a Serbian dairy company that started to vertically integrate by building an own retail network. Today, Sirela is selling its entire production through some 40 own shops whereas other food proces-

Regardless of their strategic orientations, the SME processors have to keep up with the market requirements toward steady volumes and high quality of products. In this context, wellfunctioning linkages between the SME processors and their suppliers, that is, small farms

sors have imitated this strategy and are investing in own retail outlets.

lyzed countries.

190 Agricultural Value Chain

**3.3. Processors as drivers of integration**

opment of sustainable value chains.

Two general strategies are observed with regard to the establishment of well-functioning vertical linkages. The first one is to be fully oriented to small and medium-sized family farms and invest time and money in this type of cooperation. The second approach is to be partially vertically integrated—buying or building own farms and cooperating with small farms at the same time.

Good examples of these two strategies are found in the dairy sector of Serbia. One is the dairy company Sirela while the other is the dairy company Lazar. The Serbian dairy market is subject to the increasing market power of retail chains. In response to this development, Sirela and Lazar have decided to run their own retail networks. Yet, this is the only similarity between two companies as their sourcing strategies are totally different. Lazar has successfully vertically integrated a dairy farm of 500 milk cows. At the same time, Sirela has established cooperation with a number of small farms, not least because of unfortunate own experience of full vertical integration with primary production in the past. Sirela offers secured sales market, stable payments, improved access to subsidies, extension services, free usage of milk coolers and ad hoc support to farmers.

Further examples of successful cooperation between SME processors and small family farms are found in fruits and vegetable as well as in grain sectors. SMEs are often oriented toward the domestic market but some are strongly involved in exports, as it is the case with Zdravo Organic and Vitamin in Serbia. The main benefit for SME food processors from cooperation with small farmers lies in secured input markets. In turn, processors provide farms with inputs such as seeds, fertilizer, chemicals, irrigation equipment and advance payments. Additionally, extension service is provided.

The Ukrainian case studies have also exemplified how mutually beneficial cooperation between processors and small farms can be established. Rural population in Ukraine is characterized by low levels of social capital and general cooperativeness—a factor that substantially hampers any collaborative effort on the part of processors or wholesalers. However, this obstacle can be overcome through the use of leadership mechanisms. Processors have initiated the establishment of groups of farmers led by formal and informal rural community leaders, thus raising the overall level of trust in these groups. Furthermore, processors provide financial support to such groups at the beginning of cooperation. This also increases the level of farmers' trust toward a processor. For example, the Navigator-Agro company invested in construction of a small logistic center in one of the villages.

**4. Conclusions**

enabling environment for SMEs.

Our literature review and synthesis of five country reports generally demonstrate that smallscale producers are still an inevitable part of agricultural value chains in transition economies, in particular with regard to production of perishable and labor intensive products. The marketing channels for products of small-scale producers are diverse and include direct sales to the rural population, processing industry, wholesale, food retail and even exports. At the same time, own consumption is also quite important, especially when market prices are low. Nevertheless, the future of small farmers depends on the development of the processing industry in general and SME processors in particular. Hence, policy should aim to create an

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Another important goal of the smallholder inclusion in value chains should be the achievement of customer orientation by them. On the one hand, all country reports show that competition is growing because domestic markets face inflows of imported products. On the other hand, the reviewed country studies demonstrate that concentration processes are taking place at the downstream stages of the value chain. To deal with these two trends successfully, small producers have to conform to the requirements of their commercial customers as well as end consumers. The five reports clearly indicate that a cost leadership strategy cannot be the appropriate strategy for SMEs. First, cost leadership requires large quantities to produce on efficient scale level. Hence, on the national level, large domestic processors are better suited to implement this strategy. Second, in the context of WTO, cheaper imports enhance competition. The same is true for exports. Thus, small producers have to use a differentiation strategy to be successful in the long run. Potential differentiation instruments include higher quality, quality certi-

In the context of vertical coordination, the reported case studies have pointed out a number of success factors. First, farm assistance in the form of input provision from processors to farmers is crucial. For instance, processing company Vitamin has introduced a contract farming scheme for the production of pepper seeds. This scheme is scaled-up through subsequent distribution of seeds to a larger group of farmers which grow the peppers. Seed distribution is followed by provision of other inputs and assets such as fertilizer and irrigation equipment. Processors provide their suppliers with animal breeds (Ukraine) and milk cooling tanks (Serbia). In addition to input provision, clear production instructions are shared with the suppliers while the production process is strictly monitored by the processors. If farmers do not

Second, apart from input supplies, downstream partners provide financial assistance to farmers. This assistance includes financing of different types such as loans, advanced payments, promissory notes, etc. In one case, investments in a small logistic center were made before the actual collaboration started. In some countries, subsidies are paid to smallholders only if a

Third, extension services are provided. Processors authorize own employees and assign external experts, build demo farms and cooperate with local universities as well as international

fication, branding, production of traditional or local specialties, etc.

comply with these instructions, they are penalized.

processor applies for them in favor of the smallholders.

donor and technical assistance organizations to train the farmers.

The Ukrainian example of the Kolos company demonstrated that cooperation between smallholders and an agroholding is also possible. Kolos, a meat-processing company from Chernivtsi, together with the Kamyanets-Podilsky University developed a breeding and reproduction system for a Dutch breed of pigs and then distributed it among smallholders. The main aim of this activity was to enlarge the supply base and thus make full use of own production facilities by Kolos. This farm assistance program included on-site demonstrations and teaching of suppliers at an experimental farm as well as introduction of a quality monitoring system at the rural household level. The package of additional services delivered to farmers included provision of piglets, fodder, veterinary service and finance.. As the processor's initial investment in trustful cooperation, farmers have also been allowed to keep one or two pigs for own consumption. Nevertheless, there were a few cases when farmers tried to cheat by increasing the weight of supplied pigs using methods that were not specified before. These incidents showed that contracts have to include penalties in order to prevent opportunistic behavior and discontent of the honest supplier.

The Kyrgyz report presents two successful cases of processor-driven integration of smallholders. The Agroplast cooperative provides farmers with seeds and fertilizer helping to increase the quality and yield of the products. Additionally, once in a year, training to farmers is provided. At the beginning of a year, the cooperative invites all farmers to plan production volumes and to determine the needs of farmers in agricultural inputs (seeds, fertilizers, etc.). Furthermore, Agroplast provides prepayment schemes. Both sides (farmers and Agroplast) understand their relationship as trustful but both sides also acknowledge that only one mistake (fraud, dishonesty, etc.) can turn the established trust into the opposite.

Apart from giving promises and fulfilling them, another driver of successful cooperation has been the creation of informal supplier groups. Agroplast has initiated several groups of farmers, each of which is led by a respectful person. This person also plays the role of a communicator between Agroplast and the farmers. These group leaders maintain information exchange, coordinate logistics and delivery schedules. Group leaders also act as warrantors if a group member needs some financial assistance from Agroplast.

The second case study was conducted in Galanfarm, a firm that exports valerian to a German pharmaceutical company. In order to produce high quality valerian, Galanfarm invited small farmers to attend a Farmer Field School established and supported by a German donor in cooperation with a local consulting agency. Besides an intensive training on all important production steps, farmers got an opportunity to organize themselves into informal groups and select group leaders. Similar to the Agroplast case, today these group leaders serve as information brokers between Galanfarm and the farmers, schedule the delivery volumes and timing as well as coordinate the quality of supplied raw materials. Overall, this case features the important role international donors can play in the development of procurement systems and integrating smallholders into them.

### **4. Conclusions**

initiated the establishment of groups of farmers led by formal and informal rural community leaders, thus raising the overall level of trust in these groups. Furthermore, processors provide financial support to such groups at the beginning of cooperation. This also increases the level of farmers' trust toward a processor. For example, the Navigator-Agro company

The Ukrainian example of the Kolos company demonstrated that cooperation between smallholders and an agroholding is also possible. Kolos, a meat-processing company from Chernivtsi, together with the Kamyanets-Podilsky University developed a breeding and reproduction system for a Dutch breed of pigs and then distributed it among smallholders. The main aim of this activity was to enlarge the supply base and thus make full use of own production facilities by Kolos. This farm assistance program included on-site demonstrations and teaching of suppliers at an experimental farm as well as introduction of a quality monitoring system at the rural household level. The package of additional services delivered to farmers included provision of piglets, fodder, veterinary service and finance.. As the processor's initial investment in trustful cooperation, farmers have also been allowed to keep one or two pigs for own consumption. Nevertheless, there were a few cases when farmers tried to cheat by increasing the weight of supplied pigs using methods that were not specified before. These incidents showed that contracts have to include penalties in order to prevent opportu-

The Kyrgyz report presents two successful cases of processor-driven integration of smallholders. The Agroplast cooperative provides farmers with seeds and fertilizer helping to increase the quality and yield of the products. Additionally, once in a year, training to farmers is provided. At the beginning of a year, the cooperative invites all farmers to plan production volumes and to determine the needs of farmers in agricultural inputs (seeds, fertilizers, etc.). Furthermore, Agroplast provides prepayment schemes. Both sides (farmers and Agroplast) understand their relationship as trustful but both sides also acknowledge that only one mis-

Apart from giving promises and fulfilling them, another driver of successful cooperation has been the creation of informal supplier groups. Agroplast has initiated several groups of farmers, each of which is led by a respectful person. This person also plays the role of a communicator between Agroplast and the farmers. These group leaders maintain information exchange, coordinate logistics and delivery schedules. Group leaders also act as warrantors if

The second case study was conducted in Galanfarm, a firm that exports valerian to a German pharmaceutical company. In order to produce high quality valerian, Galanfarm invited small farmers to attend a Farmer Field School established and supported by a German donor in cooperation with a local consulting agency. Besides an intensive training on all important production steps, farmers got an opportunity to organize themselves into informal groups and select group leaders. Similar to the Agroplast case, today these group leaders serve as information brokers between Galanfarm and the farmers, schedule the delivery volumes and timing as well as coordinate the quality of supplied raw materials. Overall, this case features the important role international donors can play in the development of procurement systems

take (fraud, dishonesty, etc.) can turn the established trust into the opposite.

a group member needs some financial assistance from Agroplast.

and integrating smallholders into them.

invested in construction of a small logistic center in one of the villages.

192 Agricultural Value Chain

nistic behavior and discontent of the honest supplier.

Our literature review and synthesis of five country reports generally demonstrate that smallscale producers are still an inevitable part of agricultural value chains in transition economies, in particular with regard to production of perishable and labor intensive products. The marketing channels for products of small-scale producers are diverse and include direct sales to the rural population, processing industry, wholesale, food retail and even exports. At the same time, own consumption is also quite important, especially when market prices are low. Nevertheless, the future of small farmers depends on the development of the processing industry in general and SME processors in particular. Hence, policy should aim to create an enabling environment for SMEs.

Another important goal of the smallholder inclusion in value chains should be the achievement of customer orientation by them. On the one hand, all country reports show that competition is growing because domestic markets face inflows of imported products. On the other hand, the reviewed country studies demonstrate that concentration processes are taking place at the downstream stages of the value chain. To deal with these two trends successfully, small producers have to conform to the requirements of their commercial customers as well as end consumers.

The five reports clearly indicate that a cost leadership strategy cannot be the appropriate strategy for SMEs. First, cost leadership requires large quantities to produce on efficient scale level. Hence, on the national level, large domestic processors are better suited to implement this strategy. Second, in the context of WTO, cheaper imports enhance competition. The same is true for exports. Thus, small producers have to use a differentiation strategy to be successful in the long run. Potential differentiation instruments include higher quality, quality certification, branding, production of traditional or local specialties, etc.

In the context of vertical coordination, the reported case studies have pointed out a number of success factors. First, farm assistance in the form of input provision from processors to farmers is crucial. For instance, processing company Vitamin has introduced a contract farming scheme for the production of pepper seeds. This scheme is scaled-up through subsequent distribution of seeds to a larger group of farmers which grow the peppers. Seed distribution is followed by provision of other inputs and assets such as fertilizer and irrigation equipment. Processors provide their suppliers with animal breeds (Ukraine) and milk cooling tanks (Serbia). In addition to input provision, clear production instructions are shared with the suppliers while the production process is strictly monitored by the processors. If farmers do not comply with these instructions, they are penalized.

Second, apart from input supplies, downstream partners provide financial assistance to farmers. This assistance includes financing of different types such as loans, advanced payments, promissory notes, etc. In one case, investments in a small logistic center were made before the actual collaboration started. In some countries, subsidies are paid to smallholders only if a processor applies for them in favor of the smallholders.

Third, extension services are provided. Processors authorize own employees and assign external experts, build demo farms and cooperate with local universities as well as international donor and technical assistance organizations to train the farmers.

Fourth, collective action and trust are promoted through creation of formal and informal groups of farmers. Being trained within such groups, farmers additionally become confident in value chain partners, perform social control over each other, produce the required quantity and diversify production risk. For such groups of farmers, it is very important to elect group leaders from respectful persons. These group leaders serve as a glue that holds all group members together and, thus, add voluntary, bottom-up features to this type of cooperation that was initially enhanced by "outside" processors. Hence, the aim and perceived benefits are shared by all group members. All reports show that processors are supporting the idea of replacing middlemen by a collective action, for example, the formation of formal groups of farmers. In contrast, cooperatives in their traditional sense are not spread in EECA countries because they are associated with collectivization and the socialist top-down approaches that have proven to be inefficient and corrupt. An alternative could be the establishment of cooperative structures based on the ideas of new generation cooperatives. Particularly, the usage of the word "cooperative" should be avoided.

[5] Hanf JH. Processor driven integration of small-scale farmers into value chains in Eastern Europe and Central Asia. In: Tanic S, editor. Enhancing Efficiency and Inclusiveness of Agri-Food Chains in Eastern Europe and Central Asia. Budapest: FAO Regional Office

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[10] Dries L, Germenji E, Noev N, Swinnen JFM. Farmers, vertical coordination, and the restructuring of dairy supply chains in central and Eastern Europe. World Development.

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All in all, the most important aspect for the integration of smallholders into value chains is the generation of sustainable benefits for the smallholders. In this context, it is crucial to demonstrate the value of stable and secure marketing channels characterized by fair payments.

### **Author details**

Jon H. Hanf1 \* and Taras Gagalyuk<sup>2</sup>


### **References**


[5] Hanf JH. Processor driven integration of small-scale farmers into value chains in Eastern Europe and Central Asia. In: Tanic S, editor. Enhancing Efficiency and Inclusiveness of Agri-Food Chains in Eastern Europe and Central Asia. Budapest: FAO Regional Office for Europe and Central Asia; 2015. pp. 13-36

Fourth, collective action and trust are promoted through creation of formal and informal groups of farmers. Being trained within such groups, farmers additionally become confident in value chain partners, perform social control over each other, produce the required quantity and diversify production risk. For such groups of farmers, it is very important to elect group leaders from respectful persons. These group leaders serve as a glue that holds all group members together and, thus, add voluntary, bottom-up features to this type of cooperation that was initially enhanced by "outside" processors. Hence, the aim and perceived benefits are shared by all group members. All reports show that processors are supporting the idea of replacing middlemen by a collective action, for example, the formation of formal groups of farmers. In contrast, cooperatives in their traditional sense are not spread in EECA countries because they are associated with collectivization and the socialist top-down approaches that have proven to be inefficient and corrupt. An alternative could be the establishment of cooperative structures based on the ideas of new generation cooperatives. Particularly, the usage

All in all, the most important aspect for the integration of smallholders into value chains is the generation of sustainable benefits for the smallholders. In this context, it is crucial to demonstrate the value of stable and secure marketing channels characterized by fair payments.

2 Leibniz Institute of Agricultural Development in Transition Economies, Halle, Germany

[1] Swinnen JFM. When the Market Comes to You—Or Not; the Dynamics of Vertical Coordination in Agri-Food Chains in Transition. Final Report on Dynamics of Vertical Coordination in ECA Agri-Food Chains: Implications for Policy and Bank Operations.

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of the word "cooperative" should be avoided.

\* and Taras Gagalyuk<sup>2</sup>

1 Geisenheim University, Geisenheim, Germany

Washington, DC: The World Bank; 2005

Discussion Papers: Leuven; 2006

\*Address all correspondence to: jon.hanf@hs-gm.de

**Author details**

194 Agricultural Value Chain

Jon H. Hanf1

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[23] Tsoulouhas T, Vukina T. Integrator contracts with many agents and bankruptcy.

[24] Dries L, Swinnen JFM. Globalisation, quality management and vertical coordination in food chains of transition countries. In: Proceedings of the 92nd EAAE seminar on Quality Management and Quality Assurance in Food Chains; 2-4 March; Göttingen [25] Gow HR, Swinnen JFM. Up- and downstream restructuring, foreign direct investment, and hold-up problems in agricultural transition. European Review of Agricultural Eco-

[26] Gorton M, White J, Chernyshova S, Skripnik A, Vinichenko T, Dumitrasco M, Soltan G. The reconfiguration of post-soviet food industries: Evidence from Ukraine and Moldova.

[27] Martinez SW, Reed A. Vertical Coordination by Food Firms Rising Along with Contract Production, Report AIB-720. Washington, DC: Economic Research Service/USDA; 1996

[28] UNCTAD. World Investment Report 1999-2003. Geneva: United Nations Conference on

[29] Ahrend R. Foreign Direct Investment into Russia—Pain without Gain? A Survey of Foreign Direct Investors. Russian-European Center for Economic Policy; 2000

[30] Stange H. Die Internationalisierung landwirtschaftlicher Unternehmen [PhD thesis].

[31] Pall Z, Hanf JH.A multi-perspective analysis of food retail internationalization—Insights from foreign retailers on the development of the Hungarian and eastern European markets. Management & Marketing Challenges for the Knowledge Society. 2014;**8**(4):593-606

[32] Barrell R, Holland D. Foreign direct investment and Enterprise restructuring in Central

[33] Bevan AA, Estrin S. The determinants of foreign direct investment into European transi-

[34] Broadman HG, Recanatini F. Where Has All the Foreign Investment Gone in Russia?

tion economies. Journal of Comparative Economics. 2004;**32**:775-787

Economy Division, Economic Research Service; 1996

duction. Review of Agricultural Economics. 2003;**25**(2):332-350

American Journal of Agricultural Economics. 1999;**81**:61-74

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Washington DC: The World Bank; 2001

tural Marketing Recource Center: Ames, IA; 2002

World Bank; 2005

196 Agricultural Value Chain

nomics. 1998;**25**:331-350

Halle: IAMO; 2010


**Chapter 11**

**Provisional chapter**

**Economic Synergies from Tighter Agri-Business and**

In addition to government royalties, Australia's coal seam gas (CSG) development has been beneficial in terms of facilitating regional economic development and growth, expansion of remote populations and facilities, increased employment opportunities and improved regional infrastructure, mainly in regional Queensland. There is substantial revenue potential for the Australian economy from the export of the resource to international energy markets. Many current CSG operations in Australia are located in prime agricultural-cattle grazing regions. Failure to identify potential coexistence opportunities between agribusiness promoting industries (API's) and the CSG industry could limit the agriculture value chain and consequently restrict Australia's food security and agricultural export potential. The economic benefits of the CSG industry combined with the importance of a sustained agricultural industry lay the foundation for investigating coexistence opportunities between these industries. Emphasis has been placed on potential synergies exhibited by the CSG industry (namely from CSG by-products) and the local

**Keywords:** coal bed methane, coal seam gas, cattle value chain, agricultural value chain,

Growing concern of climate change has increased environmental awareness and driven a global initiative for nations to lower their carbon footprint by implementing strategies to reduce greenhouse gas emissions [1–3] as highlighted by the Paris Climate Change Conference and the resulting COP21 agreement. As Australia aims to contribute towards global energy policy measures of transitioning to a lower carbon economy, growing interest has emerged in the development of CSG and other unconventional sources of natural gas [4]. Australia has an

**Economic Synergies from Tighter Agri-Business and** 

DOI: 10.5772/intechopen.73195

© 2016 The Author(s). Licensee InTech. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution,

© 2018 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use,

distribution, and reproduction in any medium, provided the original work is properly cited.

and reproduction in any medium, provided the original work is properly cited.

**Coal Seam Gas Integration**

**Coal Seam Gas Integration**

http://dx.doi.org/10.5772/intechopen.73195

**Abstract**

**1. Introduction**

Syeda U. Mehreen and Jim R. Underschultz

Additional information is available at the end of the chapter

Syeda U. Mehreen and Jim R. Underschultz

Additional information is available at the end of the chapter

agricultural industry which is typically dominated by API's.

energy-food nexus, gas & agricultural coexistence, agribusiness

**Provisional chapter**

### **Economic Synergies from Tighter Agri-Business and Coal Seam Gas Integration Coal Seam Gas Integration**

**Economic Synergies from Tighter Agri-Business and** 

DOI: 10.5772/intechopen.73195

Syeda U. Mehreen and Jim R. Underschultz Syeda U. Mehreen and Jim R. Underschultz Additional information is available at the end of the chapter

Additional information is available at the end of the chapter

http://dx.doi.org/10.5772/intechopen.73195

#### **Abstract**

In addition to government royalties, Australia's coal seam gas (CSG) development has been beneficial in terms of facilitating regional economic development and growth, expansion of remote populations and facilities, increased employment opportunities and improved regional infrastructure, mainly in regional Queensland. There is substantial revenue potential for the Australian economy from the export of the resource to international energy markets. Many current CSG operations in Australia are located in prime agricultural-cattle grazing regions. Failure to identify potential coexistence opportunities between agribusiness promoting industries (API's) and the CSG industry could limit the agriculture value chain and consequently restrict Australia's food security and agricultural export potential. The economic benefits of the CSG industry combined with the importance of a sustained agricultural industry lay the foundation for investigating coexistence opportunities between these industries. Emphasis has been placed on potential synergies exhibited by the CSG industry (namely from CSG by-products) and the local agricultural industry which is typically dominated by API's.

**Keywords:** coal bed methane, coal seam gas, cattle value chain, agricultural value chain, energy-food nexus, gas & agricultural coexistence, agribusiness

### **1. Introduction**

Growing concern of climate change has increased environmental awareness and driven a global initiative for nations to lower their carbon footprint by implementing strategies to reduce greenhouse gas emissions [1–3] as highlighted by the Paris Climate Change Conference and the resulting COP21 agreement. As Australia aims to contribute towards global energy policy measures of transitioning to a lower carbon economy, growing interest has emerged in the development of CSG and other unconventional sources of natural gas [4]. Australia has an

Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. © 2018 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

© 2016 The Author(s). Licensee InTech. This chapter is distributed under the terms of the Creative Commons

abundant supply of CSG resources estimated to be around 168,600 Petajoules (PJ) in 2012 [5], with potentially rich CSG areas, yet to be explored [6]. With growing demand for low-cost gas production, Queensland is playing a key role in Australia's CSG exports with the construction of three CSG to liquefied natural gas (LNG) facilities (each with two LNG trains), worth approximately ~ \$USD60 billion [7–9] of infrastructure investment.

**2. CSG background**

**2.2. CSG extraction**

**2.1. Natural gas from unconventional reservoirs**

The composition of the extracted gas from both conventional and unconventional reservoirs is mostly methane [4, 14]; however, the source rock strata and the extraction techniques dictate the classification of the natural gas [8, 15]. **Table 1** provides a summary of the main differences between natural gas sources. In the case of conventional gas, the natural gas migrates through buoyancy and natural pressure gradients within permeable strata (porous sandstone, siltstone or carbonate geological formations) to a point where it becomes trapped and therefore may not even require pumping to collect at the surface [15]. However, for unconventional natural gas (such as CSG), low permeability strata hold gas in place via capillarity or adsorption rather than buoyancy effects [14]. In Australia, the CSG industry is the most developed

Economic Synergies from Tighter Agri-Business and Coal Seam Gas Integration

http://dx.doi.org/10.5772/intechopen.73195

201

Coal seam gas (CSG) is an unconventionally sourced natural gas which usually contains approximately 95 + % methane, and is found adsorbed within the underground coal seams [4, 5, 8]. Coal is a carbonaceous or carbon-based sedimentary rock that formed from terrestrial organic matter such as trees, which decayed and compressed over many millions of years [16, 17]. Due to ongoing high pressure and temperature-associated compaction processes from the deposition of overlaying strata, the coal was naturally buried to varying depths depending on the extent of forces experienced by the associated geology [8, 16, 18]. This coal formation process is known as coalification [4, 19]. Depending on the geological history, the coal is classified into different ranks which are defined as the extent or level of coal maturation [8, 20, 21]. Low coal ranks are typically located close to the surface and are relatively 'younger' compared to higher coal ranks which have been buried deeper over longer time periods [8, 22]. With coalification associated processes, there could be thermogenic methane produced as a result of chemical reactions within the decaying organic matter and once generated, it becomes adsorbed into the matrix of the coal [23, 24]. Additionally, biogenic methane can also be produced from microbial activity, typically at temperatures less than 70° Celsius and at shallow depths. Biogenic methane can also be adsorbed into the coal matrix [25, 26]. Apart from methane, additional gases such as nitrogen and carbon dioxide also have the potential to migrate through the coal strata and consequently get adsorbed into the coal matrix in varying amounts [8, 27]. Geological investigation techniques and organic geochemistry analysis can reveal the

The geological structure of coal is characterised as a coal matrix (containing micropores), which is surrounded by a network of water-filled cleats or fractures [20]. Over time as the CSG resource is formed, it is adsorbed within the coal matrix and is typically found adjacent to the water-filled cleat structure [18, 20]. If the pressure in this coal-cleat system is decreased by drilling wells and producing water from the cleats, then the methane gas loses its adsorptive affinity with the coal structure and consequently de-sorbs and migrates with the water through the coal structure and is collected at the surface through production wells, as a gaswater mixture [8, 28, 29]. The CSG resource is then piped to a processing facility where it

out of the remaining gas types sourced from unconventional reservoirs [5].

most likely source and process from which the gas originated [20, 23].

Despite the direct economic potential of providing CSG-sourced energy to domestic and international markets and the relatively lower emissions of gas fired power over coal there has been some public concern associated with the expansion and development of Australia's CSG industry. These concerns are typically related to environmental issues (sustainable management of the typically large volumes of saline-rich CSG associated water (CSGAW) that is produced as a by-product of CSG extraction) and land-use conflicts amidst already existent agricultural operations [4]. Due to the total dissolved solids (TDS) content of the CSGAW, it requires desalination and amendment to some degree before use in most surface applications. Recognising various industries or entities that can beneficially use CSG by-products will help alleviate the concern associated with the large brackish-water flows [4]. It is crucial to have carefully planned water management policies to strategically manage the volumes of water generated from the CSG industry and thereby maintain a sustainable balance [10, 11]. Careful evaluation of the beneficial use of the CSG-associated by-products can promote co-existence of other complementary industries that could provide sources of additional revenue for the CSG industry [5, 6] and expanded or new agribusiness opportunities. Potential end uses of the CSGAW that have been studied in this article include, irrigation, watering of livestock, abattoir/meat processing industry, leather industry/tanneries, discharge to surface waters, aquifer recharge, artificial lake or constructed wetlands for recreation and ecosystem diversity, coal mine water, cooling tower water, saline inland aquaculture, water storage to combat rural fires, and growth medium for cultivating microalgae for the biofuel industry [12, 13].

Characteristically, the location of Australia's CSG industry is within regions of high resource (CSG) potential but minimal urbanised development. These areas are often dominated by intensive farming and agricultural-rich lands (livestock and irrigation properties). Therefore, it would be mutually beneficial to maximise coexistence opportunities between the CSG industry and agribusiness, by promoting complementary industries which already dominate the agriculture-based rural economies. The notion of coexistence in this article can be defined as the synchronistic functioning of the CSG industry with the local API typically in close proximity to CSG operations. API's have been defined as industries or local business that promote or assist in the sustainability or development of the native agriculture based supply chain. Due to the rural nature of many of the CSG developments and their proximity to agricultural lands, identifying regional synergies is beneficial in terms of facilitating economic development and growth that leverages the local workforce capabilities and expertise. Furthermore, it is critical to coordinate and network with the local landowners and agricultural community to facilitate the effective establishment and efficient integration of the CSG industry with existing agribusinesses. This chapter investigates the coexistence potential between the already present agricultural industry, CSG industry and API's, by exploring the possibility for the beneficial use of by-product CSGAW and services by a variety of industries. A coexistence model is presented, which may be applied for agribusiness in already existent CSG-rich regions or new CSG extraction and processing sites being planned in agriculture-based areas; all this, so the nexus between food and energy can still occur.

### **2. CSG background**

abundant supply of CSG resources estimated to be around 168,600 Petajoules (PJ) in 2012 [5], with potentially rich CSG areas, yet to be explored [6]. With growing demand for low-cost gas production, Queensland is playing a key role in Australia's CSG exports with the construction of three CSG to liquefied natural gas (LNG) facilities (each with two LNG trains), worth

Despite the direct economic potential of providing CSG-sourced energy to domestic and international markets and the relatively lower emissions of gas fired power over coal there has been some public concern associated with the expansion and development of Australia's CSG industry. These concerns are typically related to environmental issues (sustainable management of the typically large volumes of saline-rich CSG associated water (CSGAW) that is produced as a by-product of CSG extraction) and land-use conflicts amidst already existent agricultural operations [4]. Due to the total dissolved solids (TDS) content of the CSGAW, it requires desalination and amendment to some degree before use in most surface applications. Recognising various industries or entities that can beneficially use CSG by-products will help alleviate the concern associated with the large brackish-water flows [4]. It is crucial to have carefully planned water management policies to strategically manage the volumes of water generated from the CSG industry and thereby maintain a sustainable balance [10, 11]. Careful evaluation of the beneficial use of the CSG-associated by-products can promote co-existence of other complementary industries that could provide sources of additional revenue for the CSG industry [5, 6] and expanded or new agribusiness opportunities. Potential end uses of the CSGAW that have been studied in this article include, irrigation, watering of livestock, abattoir/meat processing industry, leather industry/tanneries, discharge to surface waters, aquifer recharge, artificial lake or constructed wetlands for recreation and ecosystem diversity, coal mine water, cooling tower water, saline inland aquaculture, water storage to combat rural

fires, and growth medium for cultivating microalgae for the biofuel industry [12, 13].

all this, so the nexus between food and energy can still occur.

Characteristically, the location of Australia's CSG industry is within regions of high resource (CSG) potential but minimal urbanised development. These areas are often dominated by intensive farming and agricultural-rich lands (livestock and irrigation properties). Therefore, it would be mutually beneficial to maximise coexistence opportunities between the CSG industry and agribusiness, by promoting complementary industries which already dominate the agriculture-based rural economies. The notion of coexistence in this article can be defined as the synchronistic functioning of the CSG industry with the local API typically in close proximity to CSG operations. API's have been defined as industries or local business that promote or assist in the sustainability or development of the native agriculture based supply chain. Due to the rural nature of many of the CSG developments and their proximity to agricultural lands, identifying regional synergies is beneficial in terms of facilitating economic development and growth that leverages the local workforce capabilities and expertise. Furthermore, it is critical to coordinate and network with the local landowners and agricultural community to facilitate the effective establishment and efficient integration of the CSG industry with existing agribusinesses. This chapter investigates the coexistence potential between the already present agricultural industry, CSG industry and API's, by exploring the possibility for the beneficial use of by-product CSGAW and services by a variety of industries. A coexistence model is presented, which may be applied for agribusiness in already existent CSG-rich regions or new CSG extraction and processing sites being planned in agriculture-based areas;

approximately ~ \$USD60 billion [7–9] of infrastructure investment.

200 Agricultural Value Chain

### **2.1. Natural gas from unconventional reservoirs**

The composition of the extracted gas from both conventional and unconventional reservoirs is mostly methane [4, 14]; however, the source rock strata and the extraction techniques dictate the classification of the natural gas [8, 15]. **Table 1** provides a summary of the main differences between natural gas sources. In the case of conventional gas, the natural gas migrates through buoyancy and natural pressure gradients within permeable strata (porous sandstone, siltstone or carbonate geological formations) to a point where it becomes trapped and therefore may not even require pumping to collect at the surface [15]. However, for unconventional natural gas (such as CSG), low permeability strata hold gas in place via capillarity or adsorption rather than buoyancy effects [14]. In Australia, the CSG industry is the most developed out of the remaining gas types sourced from unconventional reservoirs [5].

### **2.2. CSG extraction**

Coal seam gas (CSG) is an unconventionally sourced natural gas which usually contains approximately 95 + % methane, and is found adsorbed within the underground coal seams [4, 5, 8]. Coal is a carbonaceous or carbon-based sedimentary rock that formed from terrestrial organic matter such as trees, which decayed and compressed over many millions of years [16, 17]. Due to ongoing high pressure and temperature-associated compaction processes from the deposition of overlaying strata, the coal was naturally buried to varying depths depending on the extent of forces experienced by the associated geology [8, 16, 18]. This coal formation process is known as coalification [4, 19]. Depending on the geological history, the coal is classified into different ranks which are defined as the extent or level of coal maturation [8, 20, 21]. Low coal ranks are typically located close to the surface and are relatively 'younger' compared to higher coal ranks which have been buried deeper over longer time periods [8, 22]. With coalification associated processes, there could be thermogenic methane produced as a result of chemical reactions within the decaying organic matter and once generated, it becomes adsorbed into the matrix of the coal [23, 24]. Additionally, biogenic methane can also be produced from microbial activity, typically at temperatures less than 70° Celsius and at shallow depths. Biogenic methane can also be adsorbed into the coal matrix [25, 26]. Apart from methane, additional gases such as nitrogen and carbon dioxide also have the potential to migrate through the coal strata and consequently get adsorbed into the coal matrix in varying amounts [8, 27]. Geological investigation techniques and organic geochemistry analysis can reveal the most likely source and process from which the gas originated [20, 23].

The geological structure of coal is characterised as a coal matrix (containing micropores), which is surrounded by a network of water-filled cleats or fractures [20]. Over time as the CSG resource is formed, it is adsorbed within the coal matrix and is typically found adjacent to the water-filled cleat structure [18, 20]. If the pressure in this coal-cleat system is decreased by drilling wells and producing water from the cleats, then the methane gas loses its adsorptive affinity with the coal structure and consequently de-sorbs and migrates with the water through the coal structure and is collected at the surface through production wells, as a gaswater mixture [8, 28, 29]. The CSG resource is then piped to a processing facility where it


**Table 1.** Some key differences between natural gas sources (adapted from [8]). undergoes dehydration and compression. The gas is then transported via pipeline network to power stations for electricity generation [30]. Since the completion of the offshore LNG facili

Generated in large volumes during the CSG extraction process, the CSGAW is regarded as one of the major by-products of the CSG production process, the other being salt (which is dissolved in the associated water) [32]. **Figure 1** is a schematic representation of a generic CSG production curve for gas and CSGAW. Actual production curves are highly variable across a particular asset or between sedimentary basins. For example, the average CSG well in the Surat Basin in Queensland produces between 1 and 2 million standard cubic feet per day (MMscf/d)

production across all of Queensland's CSG wells over time is plotted in **Figure 2** and ranges between about 60 and 120 ML/PJ. Initially, when the CSG production wells are depressurized,

towards the end of the life of the CSG production well, when it can be decommissioned [34].

CSG water chemistry is influenced by the geochemistry of the originating coal seams from which the water was removed from, as well as extent of interactions with other subsur

4,

9]. The historical ratio of water production to gas

5]. As time progress, these significant water volumes

8, 32, 33]. Typically, the flow of CSG then gradually falls

Economic Synergies from Tighter Agri-Business and Coal Seam Gas Integration

http://dx.doi.org/10.5772/intechopen.73195

8, 34]. CSGAW has been typically characterised with high levels

ties, Queensland has been exporting liquefied CSG to international gas markets [31].

**2.3. CSG water production**

of gas but the best wells exceed 20 MMscf/d [

**Figure 1.** Typical CSG well production stages (modified from [14]).

large volumes of CSGAW are produced [

decline, with increasing CSG flows [

*2.3.1. Water quality*

face groundwater flows [


203


undergoes dehydration and compression. The gas is then transported via pipeline network to power stations for electricity generation [30]. Since the completion of the offshore LNG facilities, Queensland has been exporting liquefied CSG to international gas markets [31].

### **2.3. CSG water production**

Generated in large volumes during the CSG extraction process, the CSGAW is regarded as one of the major by-products of the CSG production process, the other being salt (which is dissolved in the associated water) [32]. **Figure 1** is a schematic representation of a generic CSG production curve for gas and CSGAW. Actual production curves are highly variable across a particular asset or between sedimentary basins. For example, the average CSG well in the Surat Basin in Queensland produces between 1 and 2 million standard cubic feet per day (MMscf/d) of gas but the best wells exceed 20 MMscf/d [9]. The historical ratio of water production to gas production across all of Queensland's CSG wells over time is plotted in **Figure 2** and ranges between about 60 and 120 ML/PJ. Initially, when the CSG production wells are depressurized, large volumes of CSGAW are produced [4, 5]. As time progress, these significant water volumes decline, with increasing CSG flows [8, 32, 33]. Typically, the flow of CSG then gradually falls towards the end of the life of the CSG production well, when it can be decommissioned [34].

#### *2.3.1. Water quality*

**Attributes** Hydrocarbon

•

Mainly methane (impurities ethane, propane,

• purity)

Mainly methane (usually 95 + %

butane, condensate)

•

May also be co-located

with oil

Typical host rock

•

Underground reservoir

• TP: 1–10 mD

Coal seams the coal matrix

• TP:10−3–10−9 mD

Shale rock (more impermeable than coal)

•

Varied rock locations (gas migrates

into low permeability limestone &

sandstone or siltstone reservoirs

TP: 10−3–1 mD

in sandstone, siltstone, or

carbonate rock

TP: ≥ 1 mD

> Typical depth

Extraction

•

Vertical/directionally

•

Desorbed by depressurization of

•

Shale is highly impermeable and requires

• drilled wells

Vertical, horizontal or directionally

hydraulic fracturing

• required

•

May need well acidizing to stimulate

gas production from low permeability

wells

Large scale hydraulic fracturing

• wells

Horizontally drilled

coal seam by water removal

drilled wells

•

Gas transport due to

• drilled wells

Vertical, horizontal or directionally

natural pressure and

buoyancy

Significant resource

• (federal)

WA, SA, QLD & offshore

•

QLD, NSW

•

SA, NT, QLD & WA

•

WA, SA, VIC

location

Significant

•

WA, SA & offshore

•

QLD, NSW

• SA

—

(federal)

production location

**Table 1.**

Some key differences between natural gas sources (adapted from [8]).

•

In Australia around 30–50% of wells

will require stimulation in the form

of hydraulic fracturing

•

1000–6000

m

•

200–1000

m

•

1000–2000

m

•

>1000

m

permeability (TP)

composition

**Natural gas from** 

**Natural gas from unconventional reservoirs**

**conventional reservoirs**

**CSG**

**Shale gas**

•

Mainly methane but can

•

Mainly methane

202 Agricultural Value Chain

have condensate

**Tight gas**

CSG water chemistry is influenced by the geochemistry of the originating coal seams from which the water was removed from, as well as extent of interactions with other subsurface groundwater flows [8, 34]. CSGAW has been typically characterised with high levels

**Figure 1.** Typical CSG well production stages (modified from [14]).

levels fall characteristically between 3000 and 15,000 milligrams per litre (mg/L); CSGAW is typically classified as 'brackish water' as it has total dissolved solids (TDS) ranging between 1200 and 7000 mg/L [6, 37]. Adequate water treatment and careful management practices are

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205

The direct application of untreated CSGAWA is limited as its quality is often less than the required water quality of many end users [4, 40]. As previously mentioned, CSGAW contains levels of salt and other trace elements that may need to be removed before it is suitable for use. Therefore, most water treatment technologies rely on desalination methods such as reverse osmosis (RO) that then generate a highly concentrated saline effluent waste stream (brine) and a treated CSG water (permeate) stream [5, 6, 41, 42]. Many of the CSGAW treatment technologies are based on the idea of increasing the water recovery rate and consequently minimising the volume of brine [6, 38]. Furthermore, the viability of treatment processes is also largely determined by the cost factor associated with capital and operating expenditure [5]. For the RO plant to run efficiently there may be pre- and post- treatment required of the CSGAW. The major stages of CSGAW treatment include feed collection ponds (water collected to homogenise feedstock), ultra-filtration (removal of particulate matter), ion exchange (IX) (reduction of water hardness ions, Ca2+ and Mg2+) and RO (desalination) units [6]. Chemical amendments and conditioning with dosing additives is further applied to ensure the treated CSGAW is suitable for the end user [5]. As an example, **Figure 3** represents the overall CSGAW treatment process that is employed at the Kenya Water Treatment Plant oper-

critical to prevent harmful effects on the environment and end user [38].

*2.3.2. CSG water treatment methods and brine management options*

ated by QGC Pty. Ltd. and managed by SunWater [43].

**Figure 3.** CSGAW processing scheme at Kenya Water Treatment Plant (modified from [39]).

**Figure 2.** Queensland CSG production presented as Megalitre (ML) of produced water per Petajoule (PJ) of gas.

of dissolved solids & salts, oil based compounds (if thermogenic) and metals [3, 32, 35]. Chemicals used on the CSG operator's sites during well construction, drilling, stimulation and maintenance activities [8] may also be present in the chemical profile of the CSGAW. The characteristic quality of CSGAW is outlined in **Table 2**. CSGAW extracted from the Surat Basin has been typically characterised as being alkaline in nature, with high levels of sodium, bicarbonate and chloride content [36]. Water is classified as 'brackish water' when the TDS


**Table 2.** Surat Basin CSGAW quality & acceptable livestock watering limits ([13, 36, 39]).

levels fall characteristically between 3000 and 15,000 milligrams per litre (mg/L); CSGAW is typically classified as 'brackish water' as it has total dissolved solids (TDS) ranging between 1200 and 7000 mg/L [6, 37]. Adequate water treatment and careful management practices are critical to prevent harmful effects on the environment and end user [38].

### *2.3.2. CSG water treatment methods and brine management options*

**Figure 2.** Queensland CSG production presented as Megalitre (ML) of produced water per Petajoule (PJ) of gas.

**Water quality parameter Unit Range Acceptable livestock watering limits**

) mg/L 580–2060 None prescribed

pH — 8–9 None prescribed Total dissolved solids (TDS) mg/L 1200–7000 **Table 6**; **Table 7** Sodium adsorption ratio (SAR) — 107–116 None prescribed

Sodium mg/L 300–3461 None prescribed Magnesium mg/L 4–13 None prescribed Silica mg/L 19–51 None prescribed Sulphate mg/L 5–10 None prescribed Chloride mg/L 550–2092 None prescribed Potassium mg/L 20–78 None prescribed Calcium mg/L 2.3–24 None prescribed Manganese mg/L 0.07–0.10 None prescribed Iron mg/L 0.07–4.50 None prescribed

**Table 2.** Surat Basin CSGAW quality & acceptable livestock watering limits ([13, 36, 39]).

Fluoride mg/L 0.77–4.5 2–4

Bicarbonate (as CaCO<sup>3</sup>

204 Agricultural Value Chain

of dissolved solids & salts, oil based compounds (if thermogenic) and metals [3, 32, 35]. Chemicals used on the CSG operator's sites during well construction, drilling, stimulation and maintenance activities [8] may also be present in the chemical profile of the CSGAW. The characteristic quality of CSGAW is outlined in **Table 2**. CSGAW extracted from the Surat Basin has been typically characterised as being alkaline in nature, with high levels of sodium, bicarbonate and chloride content [36]. Water is classified as 'brackish water' when the TDS

The direct application of untreated CSGAWA is limited as its quality is often less than the required water quality of many end users [4, 40]. As previously mentioned, CSGAW contains levels of salt and other trace elements that may need to be removed before it is suitable for use. Therefore, most water treatment technologies rely on desalination methods such as reverse osmosis (RO) that then generate a highly concentrated saline effluent waste stream (brine) and a treated CSG water (permeate) stream [5, 6, 41, 42]. Many of the CSGAW treatment technologies are based on the idea of increasing the water recovery rate and consequently minimising the volume of brine [6, 38]. Furthermore, the viability of treatment processes is also largely determined by the cost factor associated with capital and operating expenditure [5].

For the RO plant to run efficiently there may be pre- and post- treatment required of the CSGAW. The major stages of CSGAW treatment include feed collection ponds (water collected to homogenise feedstock), ultra-filtration (removal of particulate matter), ion exchange (IX) (reduction of water hardness ions, Ca2+ and Mg2+) and RO (desalination) units [6]. Chemical amendments and conditioning with dosing additives is further applied to ensure the treated CSGAW is suitable for the end user [5]. As an example, **Figure 3** represents the overall CSGAW treatment process that is employed at the Kenya Water Treatment Plant operated by QGC Pty. Ltd. and managed by SunWater [43].

**Figure 3.** CSGAW processing scheme at Kenya Water Treatment Plant (modified from [39]).

The saline waste effluent stream produced by the RO processing unit is typically further concentrated through the mechanical and thermal brine concentration units [6]. The brine concentration system is an integration of dehydration technology which includes, heat exchangers, falling film evaporation vessels, gas powered compressors, gas fired auxiliary heat chambers and de-aerators [44].

### *2.3.2.1. Brine management options*

Brine is regarded as the concentrated saline effluent that is generated as the waste output stream from RO water treatment or brine concentrators [5]. Managing brine in an efficient and environmentally acceptable manner is of utmost importance to the CSG industry. One possible brine management option is to inject the brine generated from CSGAW treatment into a 'geologically isolated' containment that is at an adequate distance from any groundwater source. An alternative option is to evaporate the saline effluent (brine) to a more concentrated smaller volume or to further evaporate the brine to generate a dry solidified salt, which can then be transported to a waste disposal facility (operated by CSG company or off-site).

Therefore, an underlying aspect of brine management is brine volume reduction, to ease downstream processing of the large volumes of brine that will be generated over the life of CSG development. Growing interest is arising in minimising brine volumes by concentrating the saline effluent generated from RO water treatment, to ultimately produce commodity crystallised salts of potential commercial value. 'Recoverable Salts' include sodium bicarbonate, sodium carbonate and sodium chloride [4].

### **3. CSG services and potential agribusiness promoting industries**

CSG developments primarily in Queensland's Surat and Bowen basins have introduced enhanced regional infrastructure to the remote landscape [45]. The presence of the CSG industry within a regional setting has introduced many new businesses that were not previously existent in the area. This has allowed for increased business activity and economic growth of the regional centres near the CSG industry [46]. Some of these enhanced community services facilitated by CSG developments are summarised in **Figure 4**.

Mehreen & Underschultz [39], have investigated and analysed several industries that could potentially use the CSG by-products using screening matrices. Those industries with a link or contribution to the agricultural value chain, are natural candidates for implementation in the present agriculturally-rich CSG development areas. The screening matrix criteria are presented in **Table 3**. A comprehensive literature review was conducted by Mehreen & Underschultz [39] to assist the screening matrix analysis, whereby each criterion was rated (1 = low, 2 = medium, 3 = high). The scores were then totalled for each industry. Upon careful consideration and assessment of the applicability of each industry as a beneficial user of the CSG by-products, the screening matrix analysis revealed that industries that were closely associated with or contributing to the agricultural value chain (typically API's) scored highly. These API's with high coexistence potential with the CSG industry are: meat processing, irrigation, tanneries and livestock watering. An excerpt of the literature review with specific reference to these high-scoring API'S is summarised in **Table 4**. The agricultural landscape surrounding CSG developments is typically dominated by cattle grazing properties which are notably sustained by the API's that have scored highly in the screening matrix results. Therefore, the authors have placed a greater emphasis on analysing the cattle industry-based agricultural value chain for promoting coexistence opportunities with the CSG industry.

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**Figure 4.** Effect of CSG industry driven facilities on regional infrastructure.

Aside from community services, the establishment of the CSG industry in Australia has introduced an array of CSG field supporting infrastructure including underground gas and water gathering networks, gas processing facilities, water treatment plants, transportation networks & telecommunication systems to the CSG producing regional centres of Australia [4], many of which are on agricultural-rich lands [33]. The agriculture industry is by far the most established industry across a large part of Australia's regional area where many of the CSG developments are also located. Such an area is the agriculture-rich heartland of the Surat Basin in southern Queensland which is dominated by irrigation and cattle grazing lands [33]. An example of a regional setting that has experienced resource expansion such as this, is the Western Downs region in Queensland, due to its location within the CSG producing Surat Basin.

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**Figure 4.** Effect of CSG industry driven facilities on regional infrastructure.

The saline waste effluent stream produced by the RO processing unit is typically further concentrated through the mechanical and thermal brine concentration units [6]. The brine concentration system is an integration of dehydration technology which includes, heat exchangers, falling film evaporation vessels, gas powered compressors, gas fired auxiliary heat chambers

Brine is regarded as the concentrated saline effluent that is generated as the waste output stream from RO water treatment or brine concentrators [5]. Managing brine in an efficient and environmentally acceptable manner is of utmost importance to the CSG industry. One possible brine management option is to inject the brine generated from CSGAW treatment into a 'geologically isolated' containment that is at an adequate distance from any groundwater source. An alternative option is to evaporate the saline effluent (brine) to a more concentrated smaller volume or to further evaporate the brine to generate a dry solidified salt, which can then be transported to a waste disposal facility (operated by CSG company

Therefore, an underlying aspect of brine management is brine volume reduction, to ease downstream processing of the large volumes of brine that will be generated over the life of CSG development. Growing interest is arising in minimising brine volumes by concentrating the saline effluent generated from RO water treatment, to ultimately produce commodity crystallised salts of potential commercial value. 'Recoverable Salts' include sodium bicarbonate,

CSG developments primarily in Queensland's Surat and Bowen basins have introduced enhanced regional infrastructure to the remote landscape [45]. The presence of the CSG industry within a regional setting has introduced many new businesses that were not previously existent in the area. This has allowed for increased business activity and economic growth of the regional centres near the CSG industry [46]. Some of these enhanced community services

Aside from community services, the establishment of the CSG industry in Australia has introduced an array of CSG field supporting infrastructure including underground gas and water gathering networks, gas processing facilities, water treatment plants, transportation networks & telecommunication systems to the CSG producing regional centres of Australia [4], many of which are on agricultural-rich lands [33]. The agriculture industry is by far the most established industry across a large part of Australia's regional area where many of the CSG developments are also located. Such an area is the agriculture-rich heartland of the Surat Basin in southern Queensland which is dominated by irrigation and cattle grazing lands [33]. An example of a regional setting that has experienced resource expansion such as this, is the Western Downs

**3. CSG services and potential agribusiness promoting industries**

region in Queensland, due to its location within the CSG producing Surat Basin.

facilitated by CSG developments are summarised in **Figure 4**.

and de-aerators [44].

206 Agricultural Value Chain

or off-site).

*2.3.2.1. Brine management options*

sodium carbonate and sodium chloride [4].

Mehreen & Underschultz [39], have investigated and analysed several industries that could potentially use the CSG by-products using screening matrices. Those industries with a link or contribution to the agricultural value chain, are natural candidates for implementation in the present agriculturally-rich CSG development areas. The screening matrix criteria are presented in **Table 3**. A comprehensive literature review was conducted by Mehreen & Underschultz [39] to assist the screening matrix analysis, whereby each criterion was rated (1 = low, 2 = medium, 3 = high). The scores were then totalled for each industry. Upon careful consideration and assessment of the applicability of each industry as a beneficial user of the CSG by-products, the screening matrix analysis revealed that industries that were closely associated with or contributing to the agricultural value chain (typically API's) scored highly. These API's with high coexistence potential with the CSG industry are: meat processing, irrigation, tanneries and livestock watering. An excerpt of the literature review with specific reference to these high-scoring API'S is summarised in **Table 4**. The agricultural landscape surrounding CSG developments is typically dominated by cattle grazing properties which are notably sustained by the API's that have scored highly in the screening matrix results. Therefore, the authors have placed a greater emphasis on analysing the cattle industry-based agricultural value chain for promoting coexistence opportunities with the CSG industry.


**3.1. Crop cultivation–irrigation**

**Table 3.** Screening matrix criteria ([39]).

for potential crop groups.

As Queensland's CSG operations are distributed across the agricultural landscape, the use of CSGAW for irrigation purposes, especially in its large production volumes is a practical option [48, 55]. A successful implementation of the CSGAW irrigation scheme is in the Australia Pacific LNG Project which is enabling the use of treated CSGAW for drip irrigation

Some extent of treatment or amendment of CSGAW is required prior to irrigation use [48]. Defective plant growth patterns have been exhibited by crops that have been experimentally irrigated with certain untreated CSGAW [4, 13]. The direct application of CSGAW for irrigation purposes is therefore impractical, in most cases as it quite often of a poorer quality than the present water source distributed for irrigation. The successful implementation of this water management option is highly dictated by the CSGAW quality parameters such as salinity and sodicity. As a basic minimum requirement, CSGAW must be treated for the removal of salt prior to use for irrigation purposes [48]. Irrigating low salt tolerant crops with raw CSGAW which is saline will cause crusting of soil structure, decreased water retention ability, and increased soil erosion from runoff, in turn defecting healthy crop growth [13]. Soil chemistry (salt levels, pH), climatic conditions, crop salt tolerance ranges, topography of land are also critical parameters that dictate the extent of water treatment required prior to irrigation use of CSGAW [4, 48]. **Table 5** outlines the salt tolerance ranges

projects involving a 300 hectares (ha) Pongamia plantation (bio-fuel crop) [80].

**Screening matrix criteria Description Question guide**

other industries alongside the CSG industry in the nearby regional area, there must be acceptance of receiving the CSG industry derived service from the regional community. Those options that are traditionally regarded as propagating community benefit from a social standpoint have been scored

workforce with skills that are already present in the CSG development area were considered as a great advantage, as it would promote the local employment sector without the need for upgrading skills or further training; consequently, these industries were scored

• Will there be social acceptance for this industry? Are there any social repercussions associated with

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• Is there a supportive workforce already present in the regional area of interest for colocation/coexis-

this industry?

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tence of this industry?

Social acceptance For there to be co-existence of

highly.

highly.

Supporting workforce Industries which require a


**Table 3.** Screening matrix criteria ([39]).

**Screening matrix criteria Description Question guide**

viability.

transportation.

derived service.

technical feasibility.

potential industries must directly inject benefit to the regional community near the CSG development. This benefit can be sourced from increased employment opportunities, increased social awareness of local businesses, and any facilitation of the regional community's wellbeing. Those industries that are regarded as having a justifiable negative impact from a social context have been considered as poor contributors to the advancement of the regional community.

should possess a high level of technological maturity for a high score in this criterion. Alternatively, industries with underlying technologies which are considered to be under research and development (R&D) phase were scored as having low

Technical feasibility The potential co-existent industry

Community benefit For a high score in this criterion,

Reliability There must be a consistent

Environmental impact from establishment of prescribed industry was considered as a vital criterion to assess its

The distance between the source of the CSG industry derived service and the end user for beneficial use was regarded as critical due to increased costs that may be associated with

uptake of the CSG industry derived service by the proposed option for beneficial use for there to be an ongoing and 'reliable' coexistence of all industries. A point to consider is that there should be an adequate production of the service to meet high level demands from the end user, or alternatively, there must be a sufficient demand from the end user industry for a reliable uptake of the CSG industry

• Is this option environmentally sustainable?/Does this option utilise a waste product of the CSG

• Can the end user be in close proximity to the source location of the CSG industry derived

• Will the end user regularly use the CSG industry

• Is the underlying technology mature and well known for the functioning/establishment of the

• Will the community benefit from this industry?

industry?

service?

derived service?

industry?

Environmental sustainability

208 Agricultural Value Chain

Location/Proximity (importance of location

#### **3.1. Crop cultivation–irrigation**

As Queensland's CSG operations are distributed across the agricultural landscape, the use of CSGAW for irrigation purposes, especially in its large production volumes is a practical option [48, 55]. A successful implementation of the CSGAW irrigation scheme is in the Australia Pacific LNG Project which is enabling the use of treated CSGAW for drip irrigation projects involving a 300 hectares (ha) Pongamia plantation (bio-fuel crop) [80].

Some extent of treatment or amendment of CSGAW is required prior to irrigation use [48]. Defective plant growth patterns have been exhibited by crops that have been experimentally irrigated with certain untreated CSGAW [4, 13]. The direct application of CSGAW for irrigation purposes is therefore impractical, in most cases as it quite often of a poorer quality than the present water source distributed for irrigation. The successful implementation of this water management option is highly dictated by the CSGAW quality parameters such as salinity and sodicity. As a basic minimum requirement, CSGAW must be treated for the removal of salt prior to use for irrigation purposes [48]. Irrigating low salt tolerant crops with raw CSGAW which is saline will cause crusting of soil structure, decreased water retention ability, and increased soil erosion from runoff, in turn defecting healthy crop growth [13]. Soil chemistry (salt levels, pH), climatic conditions, crop salt tolerance ranges, topography of land are also critical parameters that dictate the extent of water treatment required prior to irrigation use of CSGAW [4, 48]. **Table 5** outlines the salt tolerance ranges for potential crop groups.


irrigation extraction volume allocations should be implemented [4]. Providing CSG-sourced water for irrigation purposes would help in drought-proofing the land and improving land productivity (increased opportunity to harvest crop and livestock grazing yield), thereby boosting the economic potential for agribusiness and directly opening up potential invest-

1741–3120 High Tolerant crops Corn, Lucerne, sorghum, soy bean 3121–4860 Very high Highly tolerant crops Cotton, cereals (wheat), barley

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Land areas that are dominated by grazing activities and animal farming require feedlots facilities for providing fodder and water to animals, prior to slaughter. Such feedlot facilities require an adequate supply of water for animal consumption (livestock watering). Using CSGAW for the feedlots industry assists in providing water supply to drought affected areas which can allow the functioning of the livestock industry which will directly benefit the meat processing agriculture value chain to have a supply of livestock for slaughter. The tolerance range of livestock to the consumption of untreated CSGAW varies (**Tables 6** and **7**). Typically,

> **Loss of production and a decline in animal condition and health would be expected. Stock may tolerate these levels for short periods if introduced gradually**

**Animals may have initial reluctance to drink or there may be some scouring, but stock should adapt without loss of production**

Sheep on lush green feed may tolerate up to 13,000 mg/L TDS without loss of condition or production.

Beef cattle 0–4000 4000–5000 5000–10,000 Dairy cattle 0–2400 2400–4000 4000–7000 Sheep 0–4000 4000–10,000 10,000–13,000\* Horses 0–4000 4000–6000 6000–7000 Pigs 0–4000 4000–6000 6000–8000 Poultry 0–2000 2000–3000 3000–4000

**Table 6.** Livestock tolerance range for drinking water ([4, 39, 81]).

ment opportunities such as food-based tourism [52].

**Table 5.** Crop suitability based on irrigation water salinity ([13, 39]).

390–780 Low Reasonable sensitivity

**TDS (mg/L) Water salinity rank Crop suitability Potential crop** <390 Very low High sensitivity Flowers/fruits

780–1740 Medium Reasonable tolerance Clover

>4861 Extreme Usually too saline —

**3.2. Livestock watering**

\*

**Livestock Total dissolved solids (mg/L) No adverse effects on animals expected**

**Table 4.** Summary of literature for the beneficial use of CSGAW by high-scoring API's (modified from [39]).

While CSGAW that has been treated in accordance with the regulatory standards [13, 81] may be argued as being safe to use for irrigation purposes, there has been some research that suggests that from a long-term perspective, there may be cumulative concentration of salts over time, which can pose a threat to soil structure. The impact of CSGAW irrigation and its associated environmental sustainability should be considered on a case-by-case basis as each site differs in its soil and crop profile [48]. The average water usage per property and subsequently


**Table 5.** Crop suitability based on irrigation water salinity ([13, 39]).

irrigation extraction volume allocations should be implemented [4]. Providing CSG-sourced water for irrigation purposes would help in drought-proofing the land and improving land productivity (increased opportunity to harvest crop and livestock grazing yield), thereby boosting the economic potential for agribusiness and directly opening up potential investment opportunities such as food-based tourism [52].

#### **3.2. Livestock watering**

While CSGAW that has been treated in accordance with the regulatory standards [13, 81] may be argued as being safe to use for irrigation purposes, there has been some research that suggests that from a long-term perspective, there may be cumulative concentration of salts over time, which can pose a threat to soil structure. The impact of CSGAW irrigation and its associated environmental sustainability should be considered on a case-by-case basis as each site differs in its soil and crop profile [48]. The average water usage per property and subsequently

**Table 4.** Summary of literature for the beneficial use of CSGAW by high-scoring API's (modified from [39]).

**Beneficial use option/Industry Key criterion References** Irrigation Environmental sustainability [4, 13, 47–50]

210 Agricultural Value Chain

Livestock watering Environmental sustainability [4, 6, 54, 55]

Abattoir/Meat processing industry Environmental sustainability [60, 61]

Tannery/Leather Environmental sustainability [70–75]

Location/Proximity (importance of location) [4, 13] Reliability [4, 13, 51] Technical feasibility [13, 48, 52] Community benefit [4, 51, 52] Social acceptance [4, 51, 52] Supporting workforce [53]

Location/Proximity (importance of location) [13, 56] Reliability [6, 13, 57, 58] Technical feasibility [13, 59] Community benefit [13, 59] Social acceptance [6, 13]

Location/Proximity (importance of location) [13, 62–65] Reliability [60, 61, 63] Technical feasibility [60, 61, 66, 67]

Location/Proximity (importance of location) [13, 76, 77] Reliability [4, 73, 77–79] Technical feasibility [73, 76–79] Community benefit [73, 76–79] Social acceptance [76–78] Supporting workforce [53]

Community benefit [66] Social acceptance [67, 68] Supporting workforce [53, 69] Land areas that are dominated by grazing activities and animal farming require feedlots facilities for providing fodder and water to animals, prior to slaughter. Such feedlot facilities require an adequate supply of water for animal consumption (livestock watering). Using CSGAW for the feedlots industry assists in providing water supply to drought affected areas which can allow the functioning of the livestock industry which will directly benefit the meat processing agriculture value chain to have a supply of livestock for slaughter. The tolerance range of livestock to the consumption of untreated CSGAW varies (**Tables 6** and **7**). Typically,


\* Sheep on lush green feed may tolerate up to 13,000 mg/L TDS without loss of condition or production.

**Table 6.** Livestock tolerance range for drinking water ([4, 39, 81]).


particularly for antibacterial purposes, as well as for degreasing processes [85]. The tannery facility may be constructed at a proximal distance from the CSGAW distribution and abattoir sites, to optimise costs associated with the transportation of water and hides. The leather processing industry is a viable user of water, however flows (treated CSGAW and brine) will be directly related to the number of carcasses processed at the abattoir, which will in turn have consequences for the number of hides produced for leather manufacturing. Providing CSGAW and CSG industry-sourced brine to the leather processing industry has massive potential to inject new economic opportunities for the local economy and creates avenues for international export if produced on a large scale. Purposefully co-locating tannery facilities with CSGAW distribution sites, has the added advantage of processing recycled tannery effluent waste through the same water treatment site. This suggested industry would promote the agricultural value chain and provide a potential coexistence opportunity for both

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**4. Agribusiness promoting industries: Coexistence potential with** 

infrastructure growth, and enhanced utility infrastructure [33, 46, 86].

As the 'native' industry in CSG operating areas is the agricultural industry and associated agribusinesses, it is important to facilitate the growth and progress of those industries. The concept of a supply chain is services from one entity flow to another entity, through a medium that allows the flow of services to take place. In this way, services of one industry can pass their benefit to another industry, thereby contributing to a supply chain type model. Similarly, services provided by the CSG industry (such as by-product CSGAW) to local agribusinesses, can help to facilitate the agricultural value chain by enhancing food productivity, injecting investment opportunities, promoting agri-based tourism and trade prospects. Mehreen & Underschultz [39] propose an agri-based industrial coexistence model which promotes local synergies between the CSG industry and local agribusinesses. The model given in **Figure 5** schematically represents the potential synergies between entities involved in the cattle value chain and the CSG industry, specifically focussing on CSGAW (and brine in the case of leather processing). This co-location of agri-based industries around the CSG developments allows the growth of the agriculture value chain, increased employment opportunities, regional

The CSG water treatment and distribution facility can deliver CSGAW that has been amended (to the respective regulatory standards) for irrigation to nearby agricultural farms. Feedlot operations are provided with fodder or other feed crop that has been harvested by the agricultural farms in the area. These agricultural farms may even provide livestock (e.g. cattle) grazing lands. Untreated or amended CSGAW (treated in accordance with respective regulatory guidelines) (**Tables 6** and **7**) can be provided to feedlot operations for livestock consumption. The feedlots near abattoir / meat processing facility in the area, can provide livestock for slaughter. Treated CSGAW provided to the abattoir, can be utilised during sterilisation, evisceration, slaughtering and other meat processing stages. An anaerobic digester (AD) can treat the feedlot and abattoir effluent streams (high organic load dominated by biologically hazardous material) to produce biogas (methane) and highly concentrated nutrient load (potential

the CSG industry and an API.

**coal seam gas**

**Table 7.** Effect of TDS levels on livestock ([12, 39]).

the quality of CSGAW is regarded as being within the acceptable limits for livestock watering purposes [4]. There have been some cases where excess fluoride levels in the water (non-CSG sourced) supplied for livestock consumption have caused poor dental health (e.g. fluorosis) in the affected animals [13]. If raw/ untreated CSGAW is deemed unsuitable for direct livestock consumption, then low level CSGAW treatment must be implemented to eliminate the water from high TDS and fluoride levels, prior to livestock consumption [13].

#### **3.3. Meat processing**

There is a growing demand for high-quality meat produce both in the domestic Australian and international markets. This is representative of the economic revenue associated with meat production, where ~ \$USD 1.2 billion was generated from the sale of Australian meat products [82]. The Department of Agriculture, Fisheries & Forestry (DAFF) has reported that there is a lack of adequate meat slaughtering and processing sites in Queensland, Australia [83]. New slaughter and meat processing facilities must be constructed to meet the demand from international markets for Australia's high-quality meats. Constructing abattoir and meat processing facilities in grazing corridors would reduce the transportation costs associated with transferring livestock from grazing fields to slaughter houses and inject economic revenue to the agricultural value chain. Furthermore, this colocation would also reduce transportation costs associated with transferring treated CSGAW for use at the abattoir site. Approximately 44% of Australia's total cattle numbers are present in Queensland [84]. Abattoir facilities are heavy users of water particularly during slaughtering and downstream meat processing stages [61, 63]. An environmental concern by many already existent abattoirs is the typically high nutrient load of the effluent water, which cannot be directly used as fertiliser. In such cases, amended CSGAW can be mixed with the effluent stream as a diluting agent, making it viable as a nutrient rich fluid to be applied on crops. The economic potential of the meat processing industry from both a local and international standpoint is vital to the growth of Australia's agribusiness sector.

### **3.4. Tannery: Leather processing industry**

The waste brine generated from CSGAW treatment can be beneficially used in leather manufacturing processes. Saline rich feed water (e.g. brine) is required for curing the hides, particularly for antibacterial purposes, as well as for degreasing processes [85]. The tannery facility may be constructed at a proximal distance from the CSGAW distribution and abattoir sites, to optimise costs associated with the transportation of water and hides. The leather processing industry is a viable user of water, however flows (treated CSGAW and brine) will be directly related to the number of carcasses processed at the abattoir, which will in turn have consequences for the number of hides produced for leather manufacturing.

Providing CSGAW and CSG industry-sourced brine to the leather processing industry has massive potential to inject new economic opportunities for the local economy and creates avenues for international export if produced on a large scale. Purposefully co-locating tannery facilities with CSGAW distribution sites, has the added advantage of processing recycled tannery effluent waste through the same water treatment site. This suggested industry would promote the agricultural value chain and provide a potential coexistence opportunity for both the CSG industry and an API.

### **4. Agribusiness promoting industries: Coexistence potential with coal seam gas**

the quality of CSGAW is regarded as being within the acceptable limits for livestock watering purposes [4]. There have been some cases where excess fluoride levels in the water (non-CSG sourced) supplied for livestock consumption have caused poor dental health (e.g. fluorosis) in the affected animals [13]. If raw/ untreated CSGAW is deemed unsuitable for direct livestock consumption, then low level CSGAW treatment must be implemented to eliminate the water

1000–2999 • High satisfactory tolerance for all livestock with some cases of diarrhoea reported for livestock consuming the water source for the first time. 3000–4999 • Satisfactory for livestock with some diarrhoea reported for livestock consuming the

5000–6999 • Reasonably safe however should be avoided for pregnant and lactating animals 7000–10,000 • High risk to young offspring however older livestock may still consume the water

There is a growing demand for high-quality meat produce both in the domestic Australian and international markets. This is representative of the economic revenue associated with meat production, where ~ \$USD 1.2 billion was generated from the sale of Australian meat products [82]. The Department of Agriculture, Fisheries & Forestry (DAFF) has reported that there is a lack of adequate meat slaughtering and processing sites in Queensland, Australia [83]. New slaughter and meat processing facilities must be constructed to meet the demand from international markets for Australia's high-quality meats. Constructing abattoir and meat processing facilities in grazing corridors would reduce the transportation costs associated with transferring livestock from grazing fields to slaughter houses and inject economic revenue to the agricultural value chain. Furthermore, this colocation would also reduce transportation costs associated with transferring treated CSGAW for use at the abattoir site. Approximately 44% of Australia's total cattle numbers are present in Queensland [84]. Abattoir facilities are heavy users of water particularly during slaughtering and downstream meat processing stages [61, 63]. An environmental concern by many already existent abattoirs is the typically high nutrient load of the effluent water, which cannot be directly used as fertiliser. In such cases, amended CSGAW can be mixed with the effluent stream as a diluting agent, making it viable as a nutrient rich fluid to be applied on crops. The economic potential of the meat processing industry from both a local

and international standpoint is vital to the growth of Australia's agribusiness sector.

The waste brine generated from CSGAW treatment can be beneficially used in leather manufacturing processes. Saline rich feed water (e.g. brine) is required for curing the hides,

**3.4. Tannery: Leather processing industry**

from high TDS and fluoride levels, prior to livestock consumption [13].

water source for the first time.

**3.3. Meat processing**

**TDS (mg/L) Results**

212 Agricultural Value Chain

<1000 • Highly tolerable for all livestock

supply

>10,000 • Unsuitable for all livestock

**Table 7.** Effect of TDS levels on livestock ([12, 39]).

As the 'native' industry in CSG operating areas is the agricultural industry and associated agribusinesses, it is important to facilitate the growth and progress of those industries. The concept of a supply chain is services from one entity flow to another entity, through a medium that allows the flow of services to take place. In this way, services of one industry can pass their benefit to another industry, thereby contributing to a supply chain type model. Similarly, services provided by the CSG industry (such as by-product CSGAW) to local agribusinesses, can help to facilitate the agricultural value chain by enhancing food productivity, injecting investment opportunities, promoting agri-based tourism and trade prospects. Mehreen & Underschultz [39] propose an agri-based industrial coexistence model which promotes local synergies between the CSG industry and local agribusinesses. The model given in **Figure 5** schematically represents the potential synergies between entities involved in the cattle value chain and the CSG industry, specifically focussing on CSGAW (and brine in the case of leather processing). This co-location of agri-based industries around the CSG developments allows the growth of the agriculture value chain, increased employment opportunities, regional infrastructure growth, and enhanced utility infrastructure [33, 46, 86].

The CSG water treatment and distribution facility can deliver CSGAW that has been amended (to the respective regulatory standards) for irrigation to nearby agricultural farms. Feedlot operations are provided with fodder or other feed crop that has been harvested by the agricultural farms in the area. These agricultural farms may even provide livestock (e.g. cattle) grazing lands. Untreated or amended CSGAW (treated in accordance with respective regulatory guidelines) (**Tables 6** and **7**) can be provided to feedlot operations for livestock consumption. The feedlots near abattoir / meat processing facility in the area, can provide livestock for slaughter. Treated CSGAW provided to the abattoir, can be utilised during sterilisation, evisceration, slaughtering and other meat processing stages. An anaerobic digester (AD) can treat the feedlot and abattoir effluent streams (high organic load dominated by biologically hazardous material) to produce biogas (methane) and highly concentrated nutrient load (potential

• The water required for irrigation (4300 kL/day) is calculated for 40 ha of agricultural land

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• The average cattle numbers processed at the abattoir are at a rate of 1400 cattle per day [88] • The water consumption for processing one cattle hide in tannery operations is 702 litres

• Water consumption per cattle head at feedlot operations has been taken as 130 L/ cattle

• Typical water treatment installed capacity of 20,000 kL/day which is taken as being avail-

Upon calculation of the water consumption in the entities involved within the agri-based coexistence model, it was noted that the demand (8406 kL/day) is much lower than the average water supply capacity. As the local labour workforce has an agri-based skillset, there would not be a skill shortage for the API's involved in this model. In fact this would help retain the local agri-based workforce with more job options. The main concern associated with the sustainability of this coexistence model may be the extent of water supply in the future as the CSGAW production volumes eventually fall. One option would be to use present piping and well injection infrastructure built for recharging aquifers, to collect and re-harvest the CSGAW for a sustainable supply of water into the future, when the CSGAW production has

**Figure 6.** Typical water consumption by agri-business industries in comparison to coal seam gas water supply.

[87]

(L) [70]

head [88, 89]

reached its end of life period.

kL = kiloliters (modified from [39]).

able from the CSG water treatment facility [90]

**Figure 5.** Suggested agri-based industrial coexistence model based on cattle value chain CH<sup>4</sup> = methane (modified from [39]).

fertiliser). Prior to using the fertiliser on agricultural crops, this nutrient load from the AD must be diluted with treated CSGAW from the CSG water treatment facility. This fertiliser can be commercialised as a selling product or can be provided to agricultural farms and grazing areas to grow crops. The biogas produced from AD can be processed for abattoir's energy use (equipment) or provided to the CSG operator as a supplementary methane source. The CSG Water treatment facility can provide the saline-rich CSGAW for leather processing in the tannery facility and also provide local water treatment capacity for otherwise unusable wastewater from meat processing and tannery operations. Note that other local services (telecommunication and transportation infrastructure, and services in regional towns) that have developed as a result of CSG development will have longer term sustainability if they are also servicing an expanding co-located agribusiness chain.

The water requirements from each API in **Figure 5** were calculated and compared with the modelled volumes of treated CSGAW for distribution from the CSG water treatment sites. This is summarised in **Figure 6**. Some assumptions that were taken into consideration when calculating water consumption rates are as follows:


Upon calculation of the water consumption in the entities involved within the agri-based coexistence model, it was noted that the demand (8406 kL/day) is much lower than the average water supply capacity. As the local labour workforce has an agri-based skillset, there would not be a skill shortage for the API's involved in this model. In fact this would help retain the local agri-based workforce with more job options. The main concern associated with the sustainability of this coexistence model may be the extent of water supply in the future as the CSGAW production volumes eventually fall. One option would be to use present piping and well injection infrastructure built for recharging aquifers, to collect and re-harvest the CSGAW for a sustainable supply of water into the future, when the CSGAW production has reached its end of life period.

fertiliser). Prior to using the fertiliser on agricultural crops, this nutrient load from the AD must be diluted with treated CSGAW from the CSG water treatment facility. This fertiliser can be commercialised as a selling product or can be provided to agricultural farms and grazing areas to grow crops. The biogas produced from AD can be processed for abattoir's energy use (equipment) or provided to the CSG operator as a supplementary methane source. The CSG Water treatment facility can provide the saline-rich CSGAW for leather processing in the tannery facility and also provide local water treatment capacity for otherwise unusable wastewater from meat processing and tannery operations. Note that other local services (telecommunication and transportation infrastructure, and services in regional towns) that have developed as a result of CSG development will have longer term sustainability if they are also

**Figure 5.** Suggested agri-based industrial coexistence model based on cattle value chain CH<sup>4</sup> = methane (modified from

The water requirements from each API in **Figure 5** were calculated and compared with the modelled volumes of treated CSGAW for distribution from the CSG water treatment sites. This is summarised in **Figure 6**. Some assumptions that were taken into consideration when

servicing an expanding co-located agribusiness chain.

[39]).

214 Agricultural Value Chain

calculating water consumption rates are as follows:

**Figure 6.** Typical water consumption by agri-business industries in comparison to coal seam gas water supply. kL = kiloliters (modified from [39]).

From an economic and community perspective, there is great value in promoting coexistence of agri-based industries alongside the CSG industry. However, the progress of amalgamating agricultural industries with the CSG industry has been slow [9]. There is cumulative effect of coexisting CSG developments in close proximity to agricultural developments that are complicated by community attitudes, local industries, environmental assets, and regulations [91, 92].

and state government is mandatory. Adequate planning must be implemented to remove such risks. The colocation reduces transportation costs dramatically due to the centralised location

Economic Synergies from Tighter Agri-Business and Coal Seam Gas Integration

http://dx.doi.org/10.5772/intechopen.73195

217

If agri-based industries are dependent on water, such a setup proposed in the agribusiness coexistence model in this paper, would mean that those industries will be heavily reliant on the CSG industry for providing water for their beneficial use. Due to the long period entailing the business case, it may be difficult to attract investment. This is perhaps another reason that has hindered the amalgamation of the CSG industry colocation with the agricultural industry sooner than later. Therefore, it will be important to find innovative business models that can alleviate these business risks and allow investment in a co-existence model where different

Upon investigation, it was found that the agricultural industry can benefit from the by-products and services of the CSG industry, mainly because of its shared location with many CSG developments and for the fact that the current workforce in these rural areas are related to the skillset required by new API's; therefore, no significant skills upgrade would be needed. This study has analysed the potential of CSGAW supply for the suggested API's: irrigation (crop harvesting), livestock watering, meat processing and leather manufacturing. It is regarded that some form of water treatment is required prior to beneficial use by the API's. Utilising CSG by-product synergies (particularly CSGAW) with API's helps maintain the sustenance of local agri-based industries and strengthens the agricultural value chain in the agriculturally dominated rural landscape which is native to many areas surrounding CSG developments in Queensland. The agri-based industrial coexistence model presented, allows for the API's to utilise the CSG industry's by-products for beneficial use and positively contribute to the sustainability and expansion of the agricultural value chain. It provides the potential as a 'drought buffer' for landowners, helps to maintain the local skills set and provides long-term jobs. Providing CSGAW for irrigating crops (for both human and livestock consumption) can be regarded as an initiator for expanding the meat processing and leather manufacturing industries; thereby enhancing land productivity and further strengthening the agricultural value chain. Furthermore, the colocation of API's in close proximity to the CSG water treatment facility would also ensure maximal use of a centralised utility & telecommunications infrastructure network. Re-harvesting CSGAW using the present infrastructure built for managed aquifer recharge, has been suggested as an option to ensure the reutilization of CSG-derived water for the API's, following the period of post-CSG production. Increased employment and export trade opportunities, sustainable crop harvesting, facilitating the operation of the local agricultural-based value chain, and generation of other industries (agri-tourism, biofuel generation, local meat and leather processing) are prospective opportunities associated with the agri-based coexistence model. The agri-based coexistence model integrates the agricultural value chain. In effect, it localises all the involved agri-sourced industries, thereby increasing connectivity of supply chain processing over short distances, greatly reducing transportation costs that would

of the water treatment facility in relation to all the agri-based industries involved.

industries can share infrastructure.

**5. Conclusion**

In regional CSG development, there is often concern for the preservation of environmental assets, particularly land and water as they provide economic value, ecological diversity, recreational value, and aesthetic value. As CSG developments are often located on prime agricultural land, land use conflict and stakeholder trust is a concern for gas operators [93]. A lack of trust in the CSG operator is quite often the most significant social issue which underpins many of the other concerns affecting the progress of promoting coexistence between agribased industries and CSG industry [91]. Land access agreements and their associated 'confidentiality clauses' can contribute to the distrust with CSG operators and regulatory bodies. Some government or CSG operator funded financial incentive is provided to landowners to promote greater cooperation [92]. Farmers with increased distrust in the CSG companies can have negative opinion of other farmers that have accepted monetary incentive. This can be viewed as having betrayed the 'rural fabric' that unites farmers and can create a local divide within the farming community. These social issues must also be addressed in order to better promote the coexistence value of the agribusinesses alongside the CSG industry. Strategic governance by federal and state governments to ensure trust with the local landowners must take effect to bridge the gap between agri-based industries and the CSG industry.

Analysing the effect of the CSG industry from a social perspective is quite often not as 'tangible' as analysing economic growth or environmental impact [92]. Perhaps this is attributed to the ability to better quantify economic and environmental impacts rather than social indicators which tend to be more of a qualitative nature. Therefore, conceptualising the potential impact on the social fabric underpinning the regional communities in the heart of CSG development regions can be difficult and may pose a barrier to better understand the effect of the CSG industry on the community from a social perspective. This further complicates analysis of the coexistence potential between the CSG industry and agri-based industries. It is therefore important to consider the cumulative impact of CSG development rather than the isolated impact.

When there are industries that are sharing infrastructure, there is an increased risk to the normal business case. For industries to coexist and gain mutual benefit, requires mutual trust. When the business risk is too high to share infrastructure between industries, it makes coexistence difficult. In this case, one company owns the infrastructure (e.g. CSG industry owned water treatment facilities) and another entity such as a new meat processing plant could benefit from utilising that business service. If access to water treatment is a critical component of the business case for the meat processing plant, but not in its control, this could pose an unacceptable risk to the establishment of the meat processing plant. For example agricultural wastes are characterised as having a high organic load, particularly in animal-based agri-based industries [61, 63]. Combining waste streams from such industries, and processing the produced wastewater through the CSG water treatment facility may increase the risk to the business model, and may pose as an unnecessary complication for the CSG operator. There must be corporative legislations that will be designed to remove the business risk; the support of the federal and state government is mandatory. Adequate planning must be implemented to remove such risks. The colocation reduces transportation costs dramatically due to the centralised location of the water treatment facility in relation to all the agri-based industries involved.

If agri-based industries are dependent on water, such a setup proposed in the agribusiness coexistence model in this paper, would mean that those industries will be heavily reliant on the CSG industry for providing water for their beneficial use. Due to the long period entailing the business case, it may be difficult to attract investment. This is perhaps another reason that has hindered the amalgamation of the CSG industry colocation with the agricultural industry sooner than later. Therefore, it will be important to find innovative business models that can alleviate these business risks and allow investment in a co-existence model where different industries can share infrastructure.

### **5. Conclusion**

From an economic and community perspective, there is great value in promoting coexistence of agri-based industries alongside the CSG industry. However, the progress of amalgamating agricultural industries with the CSG industry has been slow [9]. There is cumulative effect of coexisting CSG developments in close proximity to agricultural developments that are complicated by community attitudes, local industries, environmental assets, and regulations [91, 92]. In regional CSG development, there is often concern for the preservation of environmental assets, particularly land and water as they provide economic value, ecological diversity, recreational value, and aesthetic value. As CSG developments are often located on prime agricultural land, land use conflict and stakeholder trust is a concern for gas operators [93]. A lack of trust in the CSG operator is quite often the most significant social issue which underpins many of the other concerns affecting the progress of promoting coexistence between agribased industries and CSG industry [91]. Land access agreements and their associated 'confidentiality clauses' can contribute to the distrust with CSG operators and regulatory bodies. Some government or CSG operator funded financial incentive is provided to landowners to promote greater cooperation [92]. Farmers with increased distrust in the CSG companies can have negative opinion of other farmers that have accepted monetary incentive. This can be viewed as having betrayed the 'rural fabric' that unites farmers and can create a local divide within the farming community. These social issues must also be addressed in order to better promote the coexistence value of the agribusinesses alongside the CSG industry. Strategic governance by federal and state governments to ensure trust with the local landowners must

216 Agricultural Value Chain

take effect to bridge the gap between agri-based industries and the CSG industry.

Analysing the effect of the CSG industry from a social perspective is quite often not as 'tangible' as analysing economic growth or environmental impact [92]. Perhaps this is attributed to the ability to better quantify economic and environmental impacts rather than social indicators which tend to be more of a qualitative nature. Therefore, conceptualising the potential impact on the social fabric underpinning the regional communities in the heart of CSG development regions can be difficult and may pose a barrier to better understand the effect of the CSG industry on the community from a social perspective. This further complicates analysis of the coexistence potential between the CSG industry and agri-based industries. It is therefore important to consider the cumulative impact of CSG development rather than the isolated impact.

When there are industries that are sharing infrastructure, there is an increased risk to the normal business case. For industries to coexist and gain mutual benefit, requires mutual trust. When the business risk is too high to share infrastructure between industries, it makes coexistence difficult. In this case, one company owns the infrastructure (e.g. CSG industry owned water treatment facilities) and another entity such as a new meat processing plant could benefit from utilising that business service. If access to water treatment is a critical component of the business case for the meat processing plant, but not in its control, this could pose an unacceptable risk to the establishment of the meat processing plant. For example agricultural wastes are characterised as having a high organic load, particularly in animal-based agri-based industries [61, 63]. Combining waste streams from such industries, and processing the produced wastewater through the CSG water treatment facility may increase the risk to the business model, and may pose as an unnecessary complication for the CSG operator. There must be corporative legislations that will be designed to remove the business risk; the support of the federal Upon investigation, it was found that the agricultural industry can benefit from the by-products and services of the CSG industry, mainly because of its shared location with many CSG developments and for the fact that the current workforce in these rural areas are related to the skillset required by new API's; therefore, no significant skills upgrade would be needed. This study has analysed the potential of CSGAW supply for the suggested API's: irrigation (crop harvesting), livestock watering, meat processing and leather manufacturing. It is regarded that some form of water treatment is required prior to beneficial use by the API's. Utilising CSG by-product synergies (particularly CSGAW) with API's helps maintain the sustenance of local agri-based industries and strengthens the agricultural value chain in the agriculturally dominated rural landscape which is native to many areas surrounding CSG developments in Queensland. The agri-based industrial coexistence model presented, allows for the API's to utilise the CSG industry's by-products for beneficial use and positively contribute to the sustainability and expansion of the agricultural value chain. It provides the potential as a 'drought buffer' for landowners, helps to maintain the local skills set and provides long-term jobs. Providing CSGAW for irrigating crops (for both human and livestock consumption) can be regarded as an initiator for expanding the meat processing and leather manufacturing industries; thereby enhancing land productivity and further strengthening the agricultural value chain. Furthermore, the colocation of API's in close proximity to the CSG water treatment facility would also ensure maximal use of a centralised utility & telecommunications infrastructure network. Re-harvesting CSGAW using the present infrastructure built for managed aquifer recharge, has been suggested as an option to ensure the reutilization of CSG-derived water for the API's, following the period of post-CSG production. Increased employment and export trade opportunities, sustainable crop harvesting, facilitating the operation of the local agricultural-based value chain, and generation of other industries (agri-tourism, biofuel generation, local meat and leather processing) are prospective opportunities associated with the agri-based coexistence model. The agri-based coexistence model integrates the agricultural value chain. In effect, it localises all the involved agri-sourced industries, thereby increasing connectivity of supply chain processing over short distances, greatly reducing transportation costs that would otherwise be associated with transferring 'raw' products to additional locations for further downstream processing. Conventionally, the agricultural industry and the production of agribased products are sourced from rural regions and regional towns, which are connected by highways. This creates a dispersed value chain. By implementing a more localised network of entities involved in the agricultural value chain (through the agribusiness coexistence model), the demand cycle for agri-based products can be better controlled due to the centralised nature of the system. On a local scale, the agribusiness coexistence model allows local consumers to purchase fresh 'home-grown' produce (better availability due to irrigation water supply), which further supports local farmers to maintain the 'locally-grown' initiative. Such policy adoption associated with the agribusiness coexistence model can also have a global impact, with the export of high-quality meats, and other agri-based food products to international consumers, injecting investment for Australia's economic prospects and further strengthening the agricultural value chain. The suggested agri-based coexistence model has shown the potential of concurrently developing CSG operations with agriculture-based industries, whereby the energy-food nexus can be maintained. Moreover, careful coordination and continuous engagement with the local industry is required for successful 'API-CSG' coexistence to occur.

[5] Hamawand I, Yusaf T, Hamawand SG. Coal seam gas and associated water: A review

Economic Synergies from Tighter Agri-Business and Coal Seam Gas Integration

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### **Author details**

Syeda U. Mehreen<sup>1</sup> \* and Jim R. Underschultz2

\*Address all correspondence to: s.mehreen@uq.edu.au

1 School of Mechanical and Mining Engineering, Advanced Engineering Building, The University of Queensland, Brisbane, Australia

2 Centre for Coal Seam Gas, The University of Queensland, Brisbane, Australia

### **References**


otherwise be associated with transferring 'raw' products to additional locations for further downstream processing. Conventionally, the agricultural industry and the production of agribased products are sourced from rural regions and regional towns, which are connected by highways. This creates a dispersed value chain. By implementing a more localised network of entities involved in the agricultural value chain (through the agribusiness coexistence model), the demand cycle for agri-based products can be better controlled due to the centralised nature of the system. On a local scale, the agribusiness coexistence model allows local consumers to purchase fresh 'home-grown' produce (better availability due to irrigation water supply), which further supports local farmers to maintain the 'locally-grown' initiative. Such policy adoption associated with the agribusiness coexistence model can also have a global impact, with the export of high-quality meats, and other agri-based food products to international consumers, injecting investment for Australia's economic prospects and further strengthening the agricultural value chain. The suggested agri-based coexistence model has shown the potential of concurrently developing CSG operations with agriculture-based industries, whereby the energy-food nexus can be maintained. Moreover, careful coordination and continuous engage-

ment with the local industry is required for successful 'API-CSG' coexistence to occur.

1 School of Mechanical and Mining Engineering, Advanced Engineering Building, The

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**Chapter 12**

**Provisional chapter**

**Collaboration in Agri-Value Chains: Building Supplier**

This research employed an explanatory case study to compare supplier production capabilities for enhancing productivity gains between Uganda commercial forestry and sugarcane sector value chains. Key study results indicated that only 18% of the sugarcane farmers achieved the desired industry productivity output of at least 100 t/ha from their fields, with majority (82%) of the cane growers producing below expected industry productivity output. In the forestry sector, 41.3% of the farmers achieved the desired industry performance targets, with 58.7% of the growers performing below expected performance targets. The major buyers' supplier development behaviour as seen in the diffusion of knowledge, skills and appropriate technology along vertical and horizontal collaborative value chain relationships, explains this paradox. Millers in the sugarcane sector used contractors to diffuse knowledge and skills, which weakened the supplier production capabilities. In the forestry sector, with the support of development partner agencies, productivity was higher due to effective diffusion of knowledge, skills and appropriate technology to primary producers. This finding strongly points to the need to implement deliberate supplier development strategies by the development partner agencies and governments, if productivity gains are to be improved within the agri-business

**Collaboration in Agri-Value Chains: Building Supplier** 

DOI: 10.5772/intechopen.70132

© 2016 The Author(s). Licensee InTech. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution,

© 2018 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use,

distribution, and reproduction in any medium, provided the original work is properly cited.

and reproduction in any medium, provided the original work is properly cited.

The globalization of economic activities requires an understanding of the dispersed value creation activities that capture processes across space and time, which in turn precipitate interest

**Keywords:** global value chains, productivity, supplier production capabilities, investment

asset specificity, transactional costs and opportunistic behaviors

**Production Capabilities for Productivity Gains**

**Production Capabilities for Productivity Gains**

Michael Mugabira and Richard Chivaka

value chains in developing countries.

Michael Mugabira and Richard Chivaka

http://dx.doi.org/10.5772/intechopen.70132

**Abstract**

**1. Introduction**

Additional information is available at the end of the chapter

Additional information is available at the end of the chapter


**Provisional chapter**

### **Collaboration in Agri-Value Chains: Building Supplier Production Capabilities for Productivity Gains Production Capabilities for Productivity Gains**

**Collaboration in Agri-Value Chains: Building Supplier** 

DOI: 10.5772/intechopen.70132

Michael Mugabira and Richard Chivaka Michael Mugabira and Richard Chivaka Additional information is available at the end of the chapter

Additional information is available at the end of the chapter

http://dx.doi.org/10.5772/intechopen.70132

#### **Abstract**

[81] ANZECC (Australian and New Zealand Environment and Conservation Council). Australian and New Zealand guidelines for fresh and marine water quality. Vol 1 The

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[83] Gleeson T, Martin P, Mifsud C. Northern Australian Beef Industry: Assessment of Risks and Opportunities: Australian Bureau of Agricultural and Resource Economics and

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[86] Letts L. Coal seam gas production–friend or foe of Queensland's water resources?

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[88] Johns M. Water Collection and Data Analysis. Report prepared for Meat & Livestock

[89] Bonner S, Davis R, Gernjak W, O'Keefe M, Poad G, Scobie M, et al. Treatment Technologies for Feedlot Effluent Reuse. Report prepared for Meat & Livestock Australia. North

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[91] Gillespie N, Bond CJ, Downs V, Staggs J. Stakeholder trust in the Queensland CSG

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guidelines (chapters 1-7). 2000

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Sciences (ABARES); 2012

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industry. The APPEA Journal. 2016;**56**(1):239-246

lative impacts of mining and agriculture. 2013

Australia. North Sydney, Australia; 2011

Environmental and Planning Law Journal. 2012;**29**(2):101-112

This research employed an explanatory case study to compare supplier production capabilities for enhancing productivity gains between Uganda commercial forestry and sugarcane sector value chains. Key study results indicated that only 18% of the sugarcane farmers achieved the desired industry productivity output of at least 100 t/ha from their fields, with majority (82%) of the cane growers producing below expected industry productivity output. In the forestry sector, 41.3% of the farmers achieved the desired industry performance targets, with 58.7% of the growers performing below expected performance targets. The major buyers' supplier development behaviour as seen in the diffusion of knowledge, skills and appropriate technology along vertical and horizontal collaborative value chain relationships, explains this paradox. Millers in the sugarcane sector used contractors to diffuse knowledge and skills, which weakened the supplier production capabilities. In the forestry sector, with the support of development partner agencies, productivity was higher due to effective diffusion of knowledge, skills and appropriate technology to primary producers. This finding strongly points to the need to implement deliberate supplier development strategies by the development partner agencies and governments, if productivity gains are to be improved within the agri-business value chains in developing countries.

**Keywords:** global value chains, productivity, supplier production capabilities, investment asset specificity, transactional costs and opportunistic behaviors

### **1. Introduction**

The globalization of economic activities requires an understanding of the dispersed value creation activities that capture processes across space and time, which in turn precipitate interest

Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. © 2018 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

© 2016 The Author(s). Licensee InTech. This chapter is distributed under the terms of the Creative Commons

in global value chains (GVCs). Participation in global value chain is therefore seen as imperative for firm survival and sustainability. This has placed GVC participation on a high-level policy agenda by development partners as a prescription template for agribusiness productivity growth and competitiveness of developing countries, especially sub-Saharan Africa. Development organizations are investing in organization competencies to participate in GVC.<sup>1</sup> The World Trade Organization articulates the importance of GVC participations as follows:

that the level of strength of collaborative relationships in both vertical and horizontal linkages

Collaboration in Agri-Value Chains: Building Supplier Production Capabilities for Productivity Gains

http://dx.doi.org/10.5772/intechopen.70132

227

According to Navdi and Halder [8], the cluster theoretical approach assists in assessing the gains of clustering (i.e., grouping similar objects) as a result of joint action, while the VC approach explores vertical linkages between firms and external actors. Although both approaches offer complementary synergies to each other, they do not elaborate on the measures applicable in assessing the strength of the interfirm relationships [2, 9]. This missing link is filled by the transaction cost economic approach [4], which analyzes investment transactional costs involved in interfirm relationships. Williamson [4] identified the transactional costs in the form of specific investment asset specificity, uncertainty, frequency of transactions, and opportunism. In this study, we contend that building supplier production capabilities involves undertaking investment asset specificity in terms of provision of inputs, knowledge, and skills transferred to primary producers with a purpose of building production capabilities for productivity gains. It also involves transactional costs related to searching, monitoring, and enforcement of contracts by either party, costs considered as eroding profit margins. More investments in building mutual trust relationships are crucial in order to minimize opportunism. This study adopted these measures in assessing the strength of collaborative

vertical and horizontal linkages for the building of supplier production capabilities.

sector in Uganda. The following research questions guided the inquiry:

ences between commercial sugarcane and forestry sector value chains?

emerging GVC theory [2] and hence suitability of case study [10].

The purpose of this research was to contribute to the understanding of the link between the supplier/growers' production capabilities and productivity growth in the GVC of sugarcane and forestry sectors and as such offer some key insights into the emerging GVC theory. This was achieved by investigating the strength of value chain practices within both vertical and horizontal linkages between growers and buyers/millers and among growers. Therefore, this study undertook a comparative assessment of supplier production capabilities for achieving desired industry productivity gains in the commercial sugarcane sector relative to the forestry

**1.** How does investment asset specificity in vertical and horizontal linkages explain performance differences between commercial sugarcane and forestry sector value chains?

**2.** How does coordination of transactional costs in vertical and horizontal linkages explain performance differences between commercial sugarcane and forestry sector value chains?

**3.** How do actors' behaviors in vertical and horizontal linkages explain performance differ-

This research employed a case study approach as the major research strategy, with a survey complementing the results of the case study. The purpose of this research was to contribute to

is the source for productivity gains.

**2. Methodology**

"Any discussion today of international trade and investment policy that fails to acknowledge the centrality of global value chains (GVCs) would be considered outmoded and of questionable relevance" [1].

Despite the interest in GVC participation, intense debate still lingers over root causes of why some countries are advancing in the global marketplace, while others are failing to do so [2]. Supply chain production capabilities to drive productivity gains for growth have been highlighted by the value chain (VC) fraternity researchers as an area of interest to investigate this phenomenon. In Adam Smith's classical work, entitled *The Wealth of Nations* [3], Adam contended that productivity gains are vital to the economy, and it is the true measure of a nations growth, as more (higher output) is being accomplished with less (minimum inputs). Capital and labor are both scarce resources, so maximizing their impact is a core concern of modern business. Productivity gains have been identified to emanate from technological advancements such as information and communication technologies, supply chain and logistics improvements, and improved skill levels within the workforce.

This study investigated the presence of productivity gains among primary producers, that is, the supply workforce (farmers or primary commodity producers) capabilities in Uganda's agribusiness value chains. The level of available supply production capabilities determines the choice of the governance structure to coordinate interfirm relationships, which can be done either through spot markets (arm's length transactions and/or cash transactions with immediate delivery) or hierarchies (production of goods and services by single integrated firm) [4]. Ref. [2] GVC framework, considered to be an extension of Williamson's transaction cost economics (TCE) theory, offers intermediary networks or quasi-hierarchies [5] for interfirm relationship coordination and production organization in the form of modular, relational, and captive value chains. The existence of the various networks for the organization of production and coordination of interfirm relationships implies the existence of both vertical and horizontal linkage mechanisms.

Porter [6] argued that the existence of comparative advantage, economies of scale, and excessive vertical integration are no longer sources of competitiveness and innovation. He contended that close linkages between buyers, suppliers, and other institutions are now the source for firm, industry, and sector competitiveness, as reflected in productivity [7]. This statement affirms

<sup>1</sup> For example, World Bank (WB), African Development Bank (AfDB), United States Agency for International Development (USAID), Department for International Development (DFID), International Development Research Centre (IDRC), Trust Africa, European Union, and African Union

that the level of strength of collaborative relationships in both vertical and horizontal linkages is the source for productivity gains.

According to Navdi and Halder [8], the cluster theoretical approach assists in assessing the gains of clustering (i.e., grouping similar objects) as a result of joint action, while the VC approach explores vertical linkages between firms and external actors. Although both approaches offer complementary synergies to each other, they do not elaborate on the measures applicable in assessing the strength of the interfirm relationships [2, 9]. This missing link is filled by the transaction cost economic approach [4], which analyzes investment transactional costs involved in interfirm relationships. Williamson [4] identified the transactional costs in the form of specific investment asset specificity, uncertainty, frequency of transactions, and opportunism. In this study, we contend that building supplier production capabilities involves undertaking investment asset specificity in terms of provision of inputs, knowledge, and skills transferred to primary producers with a purpose of building production capabilities for productivity gains. It also involves transactional costs related to searching, monitoring, and enforcement of contracts by either party, costs considered as eroding profit margins. More investments in building mutual trust relationships are crucial in order to minimize opportunism. This study adopted these measures in assessing the strength of collaborative vertical and horizontal linkages for the building of supplier production capabilities.

The purpose of this research was to contribute to the understanding of the link between the supplier/growers' production capabilities and productivity growth in the GVC of sugarcane and forestry sectors and as such offer some key insights into the emerging GVC theory. This was achieved by investigating the strength of value chain practices within both vertical and horizontal linkages between growers and buyers/millers and among growers. Therefore, this study undertook a comparative assessment of supplier production capabilities for achieving desired industry productivity gains in the commercial sugarcane sector relative to the forestry sector in Uganda. The following research questions guided the inquiry:


### **2. Methodology**

in global value chains (GVCs). Participation in global value chain is therefore seen as imperative for firm survival and sustainability. This has placed GVC participation on a high-level policy agenda by development partners as a prescription template for agribusiness productivity growth and competitiveness of developing countries, especially sub-Saharan Africa. Development organizations are investing in organization competencies to participate in GVC.<sup>1</sup> The World Trade Organization articulates the importance of GVC participations as follows:

"Any discussion today of international trade and investment policy that fails to acknowledge the centrality of global value chains (GVCs) would be considered outmoded and of question-

Despite the interest in GVC participation, intense debate still lingers over root causes of why some countries are advancing in the global marketplace, while others are failing to do so [2]. Supply chain production capabilities to drive productivity gains for growth have been highlighted by the value chain (VC) fraternity researchers as an area of interest to investigate this phenomenon. In Adam Smith's classical work, entitled *The Wealth of Nations* [3], Adam contended that productivity gains are vital to the economy, and it is the true measure of a nations growth, as more (higher output) is being accomplished with less (minimum inputs). Capital and labor are both scarce resources, so maximizing their impact is a core concern of modern business. Productivity gains have been identified to emanate from technological advancements such as information and communication technologies, supply chain and logis-

This study investigated the presence of productivity gains among primary producers, that is, the supply workforce (farmers or primary commodity producers) capabilities in Uganda's agribusiness value chains. The level of available supply production capabilities determines the choice of the governance structure to coordinate interfirm relationships, which can be done either through spot markets (arm's length transactions and/or cash transactions with immediate delivery) or hierarchies (production of goods and services by single integrated firm) [4]. Ref. [2] GVC framework, considered to be an extension of Williamson's transaction cost economics (TCE) theory, offers intermediary networks or quasi-hierarchies [5] for interfirm relationship coordination and production organization in the form of modular, relational, and captive value chains. The existence of the various networks for the organization of production and coordination of interfirm relationships implies the existence of both vertical

Porter [6] argued that the existence of comparative advantage, economies of scale, and excessive vertical integration are no longer sources of competitiveness and innovation. He contended that close linkages between buyers, suppliers, and other institutions are now the source for firm, industry, and sector competitiveness, as reflected in productivity [7]. This statement affirms

For example, World Bank (WB), African Development Bank (AfDB), United States Agency for International Development (USAID), Department for International Development (DFID), International Development Research Centre (IDRC),

tics improvements, and improved skill levels within the workforce.

and horizontal linkage mechanisms.

Trust Africa, European Union, and African Union

1

able relevance" [1].

226 Agricultural Value Chain

This research employed a case study approach as the major research strategy, with a survey complementing the results of the case study. The purpose of this research was to contribute to emerging GVC theory [2] and hence suitability of case study [10].

Field-based and multiple data collection methods (questionnaire survey, interviews, archives, and observations) were used to gather empirical data to address the research questions and for triangulation of results [10–14].

Industry-specific information sources such as Uganda Sugar Cane Technologist Association (USCTA), Uganda Sugar Manufacturers Association (USMA), and Sawlog Production Grant Scheme (SPGS) project provided expected industry productivity baselines [15–17]. The total number of registered producers was 389 of which 298 where functional as per SPGS performance report 2012/2013. Kinyara Sugar Works Limited provided growers productivity data for the years 2010/2011 to 2012/2013 financial years. The total number of out-growers in Kinyara Sugarcane Cluster was approx. 6000, of which 105 were registered and approximately 77 commercial producers were considered functional. The total number of anticipated respondents participating in the study was 100 (survey tool) and 20 (qualitative tool or interviews), from both forestry and sugarcane value chains. The response rate was 46 to the questionnaires and 9 to the interviews in forestry industry and 32 to the questionnaires and 10 to the interviews, respectively. The overall response rate was 81%. The sample size of 97 was generally found appropriate for studies of this nature, in line with [10] recommendation of cases between 4 and 10 as appropriate.

The cases involved in the entire value chain as the principal unit of analysis are explored and analyzed at three sublevels: micro (primary producers/growers' enterprises), meso (industry experts, miller's representatives, and association executives in the value chain), and macro (assessment of national policies and regulations). Principal component analysis was run for purposes of grouping items. Empirical data was analyzed using within case analysis that enabled intimate familiarity with each case as stand-alone entity and cross-case pattern analysis that enabled constant comparison of theory and data—iterating toward a fit between theory and data. **Figure 1** represents a summary of the methodology procedure.

### **2.1. Measures of productivity gains**

Adam Smith [3] in his book of the wealth of nations identified three productivity measures, namely, farm output, manufactured goods, and labor to produce goods. This study was interested in productivity gains in agribusiness and therefore considered farm output as the leading measure for farm enterprise productivity. The study adopted country-specific industry reports published by the Uganda Sugar Manufacturers Association (USMA) which consider farm output of 100 tons/ha as the baseline productivity measure of sugarcane maturity of 18–20 months [17]. The forestry sector productivity reports were obtained from the Sawlog Production Grant Scheme, assessing performance of growers and providing indicative desired contract performance measures of 90% in agronomical practices.

arrangements among firms that involve interdependence, trust, and resource pooling in order

Collaboration in Agri-Value Chains: Building Supplier Production Capabilities for Productivity Gains

http://dx.doi.org/10.5772/intechopen.70132

229

The transactional cost approach provides measures for assessing the strength of the market coordination mechanisms [4]. The measures include investment asset specificity costs (such as knowledge, skills, and physical production inputs), coordination transaction costs (timely payments, information search, contract monitoring, and enforcement), frequency of the transactions, and quality of relationships, that is, mutually beneficial or exploitative relationships. This study adopted these measures except frequency of transactions in assessing the strength of vertical and horizontal collaboration in building supplier production capabilities in the value chains.

**Research question 1**: How does investment asset specificity in vertical and horizontal linkages explain performance differences between commercial sugarcane and forestry sector value

to achieve joint action or jointly accomplish common goals.

**3. Results and discussion**

**Figure 1.** Research methodology flow chart.

chains?

### **2.2. Measures of strength in vertical and horizontal collaboration for building supplier production capabilities**

In the context of value chain discipline, vertical linkages represent conduits for the transfer of learning, skills, information, technical, financial, and business services from one firm to another along the value chain. On the other hand, horizontal linkages represent longer-term cooperative Collaboration in Agri-Value Chains: Building Supplier Production Capabilities for Productivity Gains http://dx.doi.org/10.5772/intechopen.70132 229


**Figure 1.** Research methodology flow chart.

Field-based and multiple data collection methods (questionnaire survey, interviews, archives, and observations) were used to gather empirical data to address the research questions and

Industry-specific information sources such as Uganda Sugar Cane Technologist Association (USCTA), Uganda Sugar Manufacturers Association (USMA), and Sawlog Production Grant Scheme (SPGS) project provided expected industry productivity baselines [15–17]. The total number of registered producers was 389 of which 298 where functional as per SPGS performance report 2012/2013. Kinyara Sugar Works Limited provided growers productivity data for the years 2010/2011 to 2012/2013 financial years. The total number of out-growers in Kinyara Sugarcane Cluster was approx. 6000, of which 105 were registered and approximately 77 commercial producers were considered functional. The total number of anticipated respondents participating in the study was 100 (survey tool) and 20 (qualitative tool or interviews), from both forestry and sugarcane value chains. The response rate was 46 to the questionnaires and 9 to the interviews in forestry industry and 32 to the questionnaires and 10 to the interviews, respectively. The overall response rate was 81%. The sample size of 97 was generally found appropriate for studies of this nature, in line with [10] recommendation of

The cases involved in the entire value chain as the principal unit of analysis are explored and analyzed at three sublevels: micro (primary producers/growers' enterprises), meso (industry experts, miller's representatives, and association executives in the value chain), and macro (assessment of national policies and regulations). Principal component analysis was run for purposes of grouping items. Empirical data was analyzed using within case analysis that enabled intimate familiarity with each case as stand-alone entity and cross-case pattern analysis that enabled constant comparison of theory and data—iterating toward a fit between

Adam Smith [3] in his book of the wealth of nations identified three productivity measures, namely, farm output, manufactured goods, and labor to produce goods. This study was interested in productivity gains in agribusiness and therefore considered farm output as the leading measure for farm enterprise productivity. The study adopted country-specific industry reports published by the Uganda Sugar Manufacturers Association (USMA) which consider farm output of 100 tons/ha as the baseline productivity measure of sugarcane maturity of 18–20 months [17]. The forestry sector productivity reports were obtained from the Sawlog Production Grant Scheme, assessing performance of growers and providing indicative

**2.2. Measures of strength in vertical and horizontal collaboration for building supplier** 

In the context of value chain discipline, vertical linkages represent conduits for the transfer of learning, skills, information, technical, financial, and business services from one firm to another along the value chain. On the other hand, horizontal linkages represent longer-term cooperative

theory and data. **Figure 1** represents a summary of the methodology procedure.

desired contract performance measures of 90% in agronomical practices.

for triangulation of results [10–14].

228 Agricultural Value Chain

cases between 4 and 10 as appropriate.

**2.1. Measures of productivity gains**

**production capabilities**

arrangements among firms that involve interdependence, trust, and resource pooling in order to achieve joint action or jointly accomplish common goals.

The transactional cost approach provides measures for assessing the strength of the market coordination mechanisms [4]. The measures include investment asset specificity costs (such as knowledge, skills, and physical production inputs), coordination transaction costs (timely payments, information search, contract monitoring, and enforcement), frequency of the transactions, and quality of relationships, that is, mutually beneficial or exploitative relationships. This study adopted these measures except frequency of transactions in assessing the strength of vertical and horizontal collaboration in building supplier production capabilities in the value chains.

### **3. Results and discussion**

**Research question 1**: How does investment asset specificity in vertical and horizontal linkages explain performance differences between commercial sugarcane and forestry sector value chains?

The findings of the study suggested strong collaborative vertical linkages for building supplier production capabilities, as can be attested with the two-sample t-test. A comparison of the mean value for asset specificity in vertical relationships revealed that there was a significant difference in the mean rating by sector (forestry-sugarcane), Pr (T < t) = 0.0002. This means that there was a stronger collaborative relationship between millers and producers for inputs support, knowledge, and skills transfer in the sugarcane sector compared to the forestry sector. However, a nuanced view by qualitative data revealed that transfer of knowledge, skills, and inputs support was through contractors and not directly to primary sugarcane producers as evidenced by the quotations below:

This finding is also corroborated by both foreign and local tours (see **Figures 2** and **3**) organized by SPGS—a development support agency in conjunction with UTGA—the National Farmers Association, whose aim is to equip forestry growers with technical knowledge for

Collaboration in Agri-Value Chains: Building Supplier Production Capabilities for Productivity Gains

http://dx.doi.org/10.5772/intechopen.70132

231

The findings render support for strong horizontal collaborative relationships for building production capabilities. Findings also complemented with the evidenced adduced in the quo-

*"Growers have acquired technical competency in plantation establishment, maintenance such as thinning, pruning, marking and harvesting….Good relationships exist, especially those under UTGA. When we call cluster meetings, we see the will to share, cooperate, and avail their plantations for study"* 

**Figure 2.** Ugandan forestry commercial farmers learning and nurturing of quality tree seedlings. Source: Primary field

**Figure 3.** Ugandan forestry commercial farmers on networking and information sharing testing the strength of the pole required by the market. Source: Primary field data courtesy of UTGA/SPGS local study tour New Forestry Company

building production capabilities.

(Association General Manager, UTGA/Forestry)*.*

data courtesy of SPGS study tour Mondi nursery facility (South Africa).

Ltd—pole treatment plant in Uganda.

tation below:

*"Planning is one of the biggest problems. The basic thing which a farmer gives is land… since farmers get inputs and using contractors for land preparation, harvesting and transporting, this creates sluggishness. i.e. some farmers think cane is for Kinyara, but now we are telling them to take it as a business so that they can plan, and save. Further, many farmers have no records…we hope that if farmers take up operations, they will develop capacity and protect their investments"* (Out-Grower Manager, Sugar Mill)*.*

The out-grower manager's statement was also validated by a primary sugarcane producer as stated below:

*"Under the previous miller, harvesting, loading and transporting were done by the farmers' company – which was the business arm of the association. When current management came on board, this was abolished and they preferred to use contractors. With the previous miller knowledge was gained; we used to have courses in Kampala which was helpful, however, with the current miller not much has been gained"* (Respondent Sugar)*.*

Therefore, the qualitative findings above suggest weaker collaborative relationships for building production capabilities between millers and growers in the sugarcane sector. Further, the quotation below corroborated the quantitative findings of weak collaborative relationships for building production capabilities between millers and growers in the forestry sector.

*"No miller is supporting growers, Nile Ply just buys from growers but without supporting them"*  (Program Manager, SPGS/Forestry)*.*

On the other hand, the forestry sector had strong collaborative horizontal linkages existing with respect to investment asset specificity. A comparison of the mean value for asset investment specificity in horizontal relationships revealed that there was a significant difference in the mean rating by sector (forestry-sugarcane), Pr (T > t) = 0.0023. This means that there was a stronger collaborative relationship among producers and/or producer support agencies for inputs support, knowledge, and skills transfer in the forestry sector than the sugarcane sector. The above quantitative data finding was supported by qualitative data findings below:

*"SPGS support has enabled at least 30% to improve production planning skills…. The change is more than significant. availability of forest valuation guidelines also gives growers basics on what price they cannot go below (reserve price) during negotiations in order to realize a return on their investments"*  (Program Manager—SPGS/Forestry)*.*

The quote above suggests that transfer of knowledge, skills, and inputs support occurred directly to forestry producers from development agencies. This was evidenced by the t-test results that showed very strong significant differences (forestry-sugarcane), Pr (T > t) = 0.0000, regarding access to both technical and financial support from farmers' development agencies. This finding is also corroborated by both foreign and local tours (see **Figures 2** and **3**) organized by SPGS—a development support agency in conjunction with UTGA—the National Farmers Association, whose aim is to equip forestry growers with technical knowledge for building production capabilities.

The findings of the study suggested strong collaborative vertical linkages for building supplier production capabilities, as can be attested with the two-sample t-test. A comparison of the mean value for asset specificity in vertical relationships revealed that there was a significant difference in the mean rating by sector (forestry-sugarcane), Pr (T < t) = 0.0002. This means that there was a stronger collaborative relationship between millers and producers for inputs support, knowledge, and skills transfer in the sugarcane sector compared to the forestry sector. However, a nuanced view by qualitative data revealed that transfer of knowledge, skills, and inputs support was through contractors and not directly to primary sugar-

*"Planning is one of the biggest problems. The basic thing which a farmer gives is land… since farmers get inputs and using contractors for land preparation, harvesting and transporting, this creates sluggishness. i.e. some farmers think cane is for Kinyara, but now we are telling them to take it as a business so that they can plan, and save. Further, many farmers have no records…we hope that if farmers take up operations, they will develop capacity and protect their investments"* (Out-Grower Manager, Sugar Mill)*.*

The out-grower manager's statement was also validated by a primary sugarcane producer as

*"Under the previous miller, harvesting, loading and transporting were done by the farmers' company – which was the business arm of the association. When current management came on board, this was abolished and they preferred to use contractors. With the previous miller knowledge was gained; we used to have courses in Kampala which was helpful, however, with the current miller not much has been* 

Therefore, the qualitative findings above suggest weaker collaborative relationships for building production capabilities between millers and growers in the sugarcane sector. Further, the quotation below corroborated the quantitative findings of weak collaborative relationships for building production capabilities between millers and growers in the forestry sector.

*"No miller is supporting growers, Nile Ply just buys from growers but without supporting them"* 

On the other hand, the forestry sector had strong collaborative horizontal linkages existing with respect to investment asset specificity. A comparison of the mean value for asset investment specificity in horizontal relationships revealed that there was a significant difference in the mean rating by sector (forestry-sugarcane), Pr (T > t) = 0.0023. This means that there was a stronger collaborative relationship among producers and/or producer support agencies for inputs support, knowledge, and skills transfer in the forestry sector than the sugarcane sector. The above quantitative data finding was supported by qualitative data findings below:

*"SPGS support has enabled at least 30% to improve production planning skills…. The change is more than significant. availability of forest valuation guidelines also gives growers basics on what price they cannot go below (reserve price) during negotiations in order to realize a return on their investments"* 

The quote above suggests that transfer of knowledge, skills, and inputs support occurred directly to forestry producers from development agencies. This was evidenced by the t-test results that showed very strong significant differences (forestry-sugarcane), Pr (T > t) = 0.0000, regarding access to both technical and financial support from farmers' development agencies.

cane producers as evidenced by the quotations below:

stated below:

230 Agricultural Value Chain

*gained"* (Respondent Sugar)*.*

(Program Manager, SPGS/Forestry)*.*

(Program Manager—SPGS/Forestry)*.*

The findings render support for strong horizontal collaborative relationships for building production capabilities. Findings also complemented with the evidenced adduced in the quotation below:

*"Growers have acquired technical competency in plantation establishment, maintenance such as thinning, pruning, marking and harvesting….Good relationships exist, especially those under UTGA. When we call cluster meetings, we see the will to share, cooperate, and avail their plantations for study"*  (Association General Manager, UTGA/Forestry)*.*

**Figure 2.** Ugandan forestry commercial farmers learning and nurturing of quality tree seedlings. Source: Primary field data courtesy of SPGS study tour Mondi nursery facility (South Africa).

**Figure 3.** Ugandan forestry commercial farmers on networking and information sharing testing the strength of the pole required by the market. Source: Primary field data courtesy of UTGA/SPGS local study tour New Forestry Company Ltd—pole treatment plant in Uganda.

The statement by one of the growers below did not discount the above statements:

*"Yes, knowledge through newsletters, client meetings… You access information on prices, even if someone (buyer/miller) comes with a monopoly, but he realises that you are able to chip in from an informed position"* (Respondent, Forestry)*.*

Further, the proponents of the cluster theoretical framework argue that diffusion of production capabilities is not only limited to GVC participants, but there is also knowledge and skills "spillover" in a geographical area and/or localities of business operations [8, 21–26]. They argued that impact of knowledge and skills "spillover" accounts for the rise of entrepreneurship in various forms such as functional upgrading, new entrants in the existing clusters and value chains, and the start of new parallel competitive value chains. This entrepreneurial potential can be said to be available especially in Uganda's commercial forestry value chain sector, only if other agro-commodities can have a ready market for commercial production. The findings above explained the investment asset specificity in vertical and horizontal linkages for interfirm relationships. However, as firms engage in the exchange process, they may be vulnerable to coordination transactional costs and opportunism by either party involved in the execution of the contracts. The next section presents and discusses comparative results with respect to vulnerability to transactional costs in both vertical and horizontal collaborative relationships for building production capabilities in order to achieve productivity gains. **Research question 2**: How does coordination of transactional costs in vertical and horizontal linkages explain performance differences between commercial sugarcane and forestry sector

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A comparison of the mean value for transactional costs in vertical relationships shows that there was a moderate difference in the mean rating by sector (forestry-sugarcane), Pr (T < t) = 0.0266. This means that transactional costs such as delayed payments from millers to producers and information search for production costs were perceived to have been more of a challenge in the sugarcane sector than the forestry sector. This finding was supported by qualitative data suggesting weaker collaborative relationships between millers and growers

*"Enough money and/or cyclic revenue is needed to run the business but KSL has a tendency of late payments going between 60–90 days. The delayed payment causes unnecessary interest accruals resulting* 

"Initially we used to give cash advances to purchase plantations, and provided transport. However, the system was abused whereby some suppliers diverted the funds into other businesses… currently, we pay them within five working days after delivery to enhance their cash flow and introduced suppliers to Eco-bank for loan access. Right now the suppliers are self-

*"The main challenge is the continuous reshuffle of ministers; before a minister gets acquainted with the industry another one is appointed. Even now the permanent secretaries are being transferred. At one time we broke down the costs to Minister Mukwaya. The minister requested the miller to give her the breakdown, but the miller refused. Recently, another meeting was organised with the Ministry of Trade, Industry and Cooperatives (MTIC) involving both out-growers and millers. The out-growers gave their cost breakdown of approx. 60 percent but the miller declined to give a cost breakdown"* (Respondent,

The quotations above revealed that cost of searching for production costs of the value chain did not only impact upon transactional costs but also the reluctance by millers to reveal their

value chains?

in the sugarcane sector, as per quotations below:

*into marginal profits"* (Respondent, Sugarcane Sector)*.*

sufficient, they can support themselves" *(*Plant Manager, Forestry Mill).

Association Executive Member and Opinion Leader (Sugar))*.*

production costs suggested possibility of opportunistic behaviors.

However, with respect to sugarcane sector, qualitative data further supported quantitative data that there were no gains in building production capabilities from horizontal collaborative linkages as evidenced with the quotation below:

"Percentage wise in knowledge and skills transfer is still low, … the previous association (KSGL) incurred liabilities, hence farmers lost the trust but now picking up slowly" (Association Chairman, Sugarcane Sector).

Our observations on the question about the influence of investment asset specificity in vertical and horizontal linkages on performance differences between commercial sugarcane and forestry sector value chains is as follows. The sugarcane sector exhibited high investment asset specificity in vertical linkages between primary producers and millers. This was evidenced by quantitative data which suggested strong collaborative vertical linkages for building supplier production capabilities. However, a nuanced view of the qualitative data pointed to the existence of production capabilities in the vertical linkages but residing in the use of contractors rather than the cane growers themselves. This finding was supported by a study of small-scale growers in the South African sugar industry that arrived at similar results [18]. Therefore, this finding suggested that growers were heavily dependent on the millers and contractors employed by the millers to offer services to the contracted growers. It was this level of high dependency of growers upon millers that could offer plausible explanations for failure to develop production capabilities among most growers in the Ugandan sugarcane sector.

On the other hand, quantitative data revealed a stronger collaborative relationship among producers and/or producer support agencies for availing inputs, knowledge, and skills transfer in the forestry sector than the sugarcane sector. This finding was corroborated by qualitative data and validated by observatory field data, which confirmed that the transfer of knowledge, skills, and inputs support occurred directly to forestry primary producers. This was done by development partner agencies through provision of both technical and financial support accompanied with foreign and local exposure learning platforms (see **Figures 2** and **3**), with a purpose of building production capabilities for achieving productivity gains. This finding supports the GVC literature, as argued by GVC proponents such as [19, 20] that a combination of technical and investment support in highly governed chains explains how relatively underdeveloped regions become major export producers in a short period of time. They cited the example of the Brazilian shoe industry in the 1970s and the Vietnamese garment industry in the late 1990s. Made a similar observation in his study of the textile and garment supply chain in South Africa [14]. He found out that companies that had closer collaboration in training and assistance attained a higher diffusion of skills in a shorter time to achieve supply chain efficiency levels required to compete effectively. This scenario can be described as a true reflection of Uganda's evolving commercial forestry sector, which enjoys support from development agencies and producer associations that links both primary producers and millers.

Further, the proponents of the cluster theoretical framework argue that diffusion of production capabilities is not only limited to GVC participants, but there is also knowledge and skills "spillover" in a geographical area and/or localities of business operations [8, 21–26]. They argued that impact of knowledge and skills "spillover" accounts for the rise of entrepreneurship in various forms such as functional upgrading, new entrants in the existing clusters and value chains, and the start of new parallel competitive value chains. This entrepreneurial potential can be said to be available especially in Uganda's commercial forestry value chain sector, only if other agro-commodities can have a ready market for commercial production.

The statement by one of the growers below did not discount the above statements:

*position"* (Respondent, Forestry)*.*

232 Agricultural Value Chain

(Association Chairman, Sugarcane Sector).

both primary producers and millers.

tive linkages as evidenced with the quotation below:

*"Yes, knowledge through newsletters, client meetings… You access information on prices, even if someone (buyer/miller) comes with a monopoly, but he realises that you are able to chip in from an informed* 

However, with respect to sugarcane sector, qualitative data further supported quantitative data that there were no gains in building production capabilities from horizontal collabora-

"Percentage wise in knowledge and skills transfer is still low, … the previous association (KSGL) incurred liabilities, hence farmers lost the trust but now picking up slowly"

Our observations on the question about the influence of investment asset specificity in vertical and horizontal linkages on performance differences between commercial sugarcane and forestry sector value chains is as follows. The sugarcane sector exhibited high investment asset specificity in vertical linkages between primary producers and millers. This was evidenced by quantitative data which suggested strong collaborative vertical linkages for building supplier production capabilities. However, a nuanced view of the qualitative data pointed to the existence of production capabilities in the vertical linkages but residing in the use of contractors rather than the cane growers themselves. This finding was supported by a study of small-scale growers in the South African sugar industry that arrived at similar results [18]. Therefore, this finding suggested that growers were heavily dependent on the millers and contractors employed by the millers to offer services to the contracted growers. It was this level of high dependency of growers upon millers that could offer plausible explanations for failure to develop production capabilities among most growers in the Ugandan sugarcane sector.

On the other hand, quantitative data revealed a stronger collaborative relationship among producers and/or producer support agencies for availing inputs, knowledge, and skills transfer in the forestry sector than the sugarcane sector. This finding was corroborated by qualitative data and validated by observatory field data, which confirmed that the transfer of knowledge, skills, and inputs support occurred directly to forestry primary producers. This was done by development partner agencies through provision of both technical and financial support accompanied with foreign and local exposure learning platforms (see **Figures 2** and **3**), with a purpose of building production capabilities for achieving productivity gains. This finding supports the GVC literature, as argued by GVC proponents such as [19, 20] that a combination of technical and investment support in highly governed chains explains how relatively underdeveloped regions become major export producers in a short period of time. They cited the example of the Brazilian shoe industry in the 1970s and the Vietnamese garment industry in the late 1990s. Made a similar observation in his study of the textile and garment supply chain in South Africa [14]. He found out that companies that had closer collaboration in training and assistance attained a higher diffusion of skills in a shorter time to achieve supply chain efficiency levels required to compete effectively. This scenario can be described as a true reflection of Uganda's evolving commercial forestry sector, which enjoys support from development agencies and producer associations that links The findings above explained the investment asset specificity in vertical and horizontal linkages for interfirm relationships. However, as firms engage in the exchange process, they may be vulnerable to coordination transactional costs and opportunism by either party involved in the execution of the contracts. The next section presents and discusses comparative results with respect to vulnerability to transactional costs in both vertical and horizontal collaborative relationships for building production capabilities in order to achieve productivity gains.

**Research question 2**: How does coordination of transactional costs in vertical and horizontal linkages explain performance differences between commercial sugarcane and forestry sector value chains?

A comparison of the mean value for transactional costs in vertical relationships shows that there was a moderate difference in the mean rating by sector (forestry-sugarcane), Pr (T < t) = 0.0266. This means that transactional costs such as delayed payments from millers to producers and information search for production costs were perceived to have been more of a challenge in the sugarcane sector than the forestry sector. This finding was supported by qualitative data suggesting weaker collaborative relationships between millers and growers in the sugarcane sector, as per quotations below:

*"Enough money and/or cyclic revenue is needed to run the business but KSL has a tendency of late payments going between 60–90 days. The delayed payment causes unnecessary interest accruals resulting into marginal profits"* (Respondent, Sugarcane Sector)*.*

"Initially we used to give cash advances to purchase plantations, and provided transport. However, the system was abused whereby some suppliers diverted the funds into other businesses… currently, we pay them within five working days after delivery to enhance their cash flow and introduced suppliers to Eco-bank for loan access. Right now the suppliers are selfsufficient, they can support themselves" *(*Plant Manager, Forestry Mill).

*"The main challenge is the continuous reshuffle of ministers; before a minister gets acquainted with the industry another one is appointed. Even now the permanent secretaries are being transferred. At one time we broke down the costs to Minister Mukwaya. The minister requested the miller to give her the breakdown, but the miller refused. Recently, another meeting was organised with the Ministry of Trade, Industry and Cooperatives (MTIC) involving both out-growers and millers. The out-growers gave their cost breakdown of approx. 60 percent but the miller declined to give a cost breakdown"* (Respondent, Association Executive Member and Opinion Leader (Sugar))*.*

The quotations above revealed that cost of searching for production costs of the value chain did not only impact upon transactional costs but also the reluctance by millers to reveal their production costs suggested possibility of opportunistic behaviors.

Our observations therefore are that some level of vulnerability to transactional costs between millers and growers in the sugarcane sector exits, compared to the forestry sector. However, similar results were obtained in the horizontal relationships in the forestry sector in comparison to the sugarcane sector. Using two-sample t-test, a comparison of the mean value for transactional costs in horizontal relationships shows that there was a slight difference in the mean rating by sector (forestry-sugarcane), Pr (T > t) = 0.0548. This means that there was suggestive evidence of minimum occurrence of transactional costs among producers in the forestry sector than the sugarcane sector. This quantitative finding was validated by the qualitative data finding below, which suggested occurrence of transactional costs as a result of replacing labor force taken by another grower without the consent of the labor force owner:

This above quotation was supported by the miller's representative quotation below suggest-

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*"Small farmers are mainly the problem because at times they sell the fertilisers, but with commercial* 

Generally, the finding of suspicious opportunistic behaviors between growers and millers validates the existence of weak collaborative relationships for building supplier production capabilities. On the other hand, a comparison of the mean value for opportunism in the horizontal relationships shows that there was no significant difference in the mean rating by sector (forestry-sugarcane), Pr (T > t) = 0.1380. This meant that manifestations of opportunistic behaviors

Therefore, in answering the question on how actors' behaviors in vertical and horizontal linkages explain performance differences between commercial sugarcane and forestry sector value chains, we observed the following. Quantitative data revealed suggestive evidence of opportunistic behaviors causing mistrust between millers and producers in the sugarcane sector than the forestry sector. This finding was validated by qualitative data that suggested the source of mistrust being due to lack of transparency of the miller's weighbridge and possibility of diverting inputs by growers to other farm activities rather than sugarcane growing. The above findings show that vertical collaborative relationships between primary producers and millers in the sugarcane industry value chains were characterized by suspicion, thus affecting mutual trust as compared to the forestry sector value chain. This finding is in agreement with similar studies, which found out that mutually benefiting relationships develop trust [14, 28], while exploitative relationships exhibit low levels of trust and tend to be characterized by tensions that affect productivity gains in the value chains [29–31]. This was found to be true in Uganda's sugarcane sector value chain. In such circumstances, the GVC theoretical framework recognizes that reshaping of the value chain governance structures lowers opportunistic behaviors accounting for vulnerability to transactional costs [2, 32]. Our finding on this question also points to the potential to increase participation market powers by the Uganda's sugarcane primary producers through shifting away from a captive value chain governance structure characterized by high levels of dependency, to either a modular or rela-

ing some level of opportunistic behaviors along the sugarcane value chain.

*farmers, this is not quite rampart"* (Agricultural Engineering Manager, Sugar Mill)*.*

were not quite rampart among producers in both the forestry and sugarcane sectors.

tional value chain governance structures, characterized by less dependency.

**4. Conclusion**

On the other hand, findings of the study revealed that manifestations of opportunistic behaviors were not quite rampart in the horizontal relationships among primary producers in both the forestry and sugarcane sectors. This finding indicates that there are opportunities for primary producers especially in the sugarcane sector for joint action investment strategies in order to minimize opportunistic behaviors causing transactional costs in vertical linkages.

The key findings of the study revealed that (1) the sugarcane sector exhibited high investment asset specificity in vertical linkages between primary producers and millers compared to the

*"I think we trust each other because we have same common ground. I have not seen many conflicts in client meetings, except one time a farmer accused his neighbors of stealing his workers."* (Respondent, Forestry)*.*

Therefore, on the question of the impact on performance differences between commercial sugarcane and forestry sector value chains regarding coordination of transaction costs within vertical and horizontal linkages, we concluded as follows. Moderate transactional costs such as information search costs and delayed payments from millers to producers were more of a challenge in the sugarcane sector than the forestry sector. This finding supported existence of weaker collaborative relationships between millers and growers for building production capabilities in the sugarcane sector. In the forestry sector, quantitative data revealed evidence of minimum occurrence of transactional costs among producers compared to the sugarcane sector. This quantitative finding was corroborated by the qualitative data finding which suggested occurrence of transactional costs as a result of replacing labor force taken by another grower without the consent of the labor force owner.

The above findings demonstrate that both vertical and horizontal collaborative relationships between primary producers and millers and among primary producers in the sugarcane and forestry industry value chains were vulnerable to some levels of transactional costs. Evidence of transactional costs suggests existence of opportunistic behaviors [4, 27]. Opportunistic behaviors were investigated by this study in the next question below.

**Research question 3**: How do actors' behaviors in vertical and horizontal linkages explain performance differences between commercial sugarcane and forestry sector value chains?

Vulnerability to transactional costs is mainly attributed to opportunistic behaviors. A comparison of the mean opportunism in vertical relationships revealed that there was a slight difference in the mean rating by sector (forestry-sugarcane), Pr (T < t) = 0.0712. This means that there was suggestive evidence of opportunism causing mistrust between millers and producers in the sugarcane sector than the forestry sector. This finding was validated by qualitative data findings below:

*"Fairly good trust… however there is lack of transparency on the weigh bridge"* (Association Chairman, Sugarcane Sector)*.*

This above quotation was supported by the miller's representative quotation below suggesting some level of opportunistic behaviors along the sugarcane value chain.

*"Small farmers are mainly the problem because at times they sell the fertilisers, but with commercial farmers, this is not quite rampart"* (Agricultural Engineering Manager, Sugar Mill)*.*

Generally, the finding of suspicious opportunistic behaviors between growers and millers validates the existence of weak collaborative relationships for building supplier production capabilities. On the other hand, a comparison of the mean value for opportunism in the horizontal relationships shows that there was no significant difference in the mean rating by sector (forestry-sugarcane), Pr (T > t) = 0.1380. This meant that manifestations of opportunistic behaviors were not quite rampart among producers in both the forestry and sugarcane sectors.

Therefore, in answering the question on how actors' behaviors in vertical and horizontal linkages explain performance differences between commercial sugarcane and forestry sector value chains, we observed the following. Quantitative data revealed suggestive evidence of opportunistic behaviors causing mistrust between millers and producers in the sugarcane sector than the forestry sector. This finding was validated by qualitative data that suggested the source of mistrust being due to lack of transparency of the miller's weighbridge and possibility of diverting inputs by growers to other farm activities rather than sugarcane growing.

The above findings show that vertical collaborative relationships between primary producers and millers in the sugarcane industry value chains were characterized by suspicion, thus affecting mutual trust as compared to the forestry sector value chain. This finding is in agreement with similar studies, which found out that mutually benefiting relationships develop trust [14, 28], while exploitative relationships exhibit low levels of trust and tend to be characterized by tensions that affect productivity gains in the value chains [29–31]. This was found to be true in Uganda's sugarcane sector value chain. In such circumstances, the GVC theoretical framework recognizes that reshaping of the value chain governance structures lowers opportunistic behaviors accounting for vulnerability to transactional costs [2, 32]. Our finding on this question also points to the potential to increase participation market powers by the Uganda's sugarcane primary producers through shifting away from a captive value chain governance structure characterized by high levels of dependency, to either a modular or relational value chain governance structures, characterized by less dependency.

On the other hand, findings of the study revealed that manifestations of opportunistic behaviors were not quite rampart in the horizontal relationships among primary producers in both the forestry and sugarcane sectors. This finding indicates that there are opportunities for primary producers especially in the sugarcane sector for joint action investment strategies in order to minimize opportunistic behaviors causing transactional costs in vertical linkages.

### **4. Conclusion**

Our observations therefore are that some level of vulnerability to transactional costs between millers and growers in the sugarcane sector exits, compared to the forestry sector. However, similar results were obtained in the horizontal relationships in the forestry sector in comparison to the sugarcane sector. Using two-sample t-test, a comparison of the mean value for transactional costs in horizontal relationships shows that there was a slight difference in the mean rating by sector (forestry-sugarcane), Pr (T > t) = 0.0548. This means that there was suggestive evidence of minimum occurrence of transactional costs among producers in the forestry sector than the sugarcane sector. This quantitative finding was validated by the qualitative data finding below, which suggested occurrence of transactional costs as a result of replacing labor force taken by another grower without the consent of the labor force

*"I think we trust each other because we have same common ground. I have not seen many conflicts in client meetings, except one time a farmer accused his neighbors of stealing his workers."* (Respondent,

Therefore, on the question of the impact on performance differences between commercial sugarcane and forestry sector value chains regarding coordination of transaction costs within vertical and horizontal linkages, we concluded as follows. Moderate transactional costs such as information search costs and delayed payments from millers to producers were more of a challenge in the sugarcane sector than the forestry sector. This finding supported existence of weaker collaborative relationships between millers and growers for building production capabilities in the sugarcane sector. In the forestry sector, quantitative data revealed evidence of minimum occurrence of transactional costs among producers compared to the sugarcane sector. This quantitative finding was corroborated by the qualitative data finding which suggested occurrence of transactional costs as a result of replacing labor force taken by another

The above findings demonstrate that both vertical and horizontal collaborative relationships between primary producers and millers and among primary producers in the sugarcane and forestry industry value chains were vulnerable to some levels of transactional costs. Evidence of transactional costs suggests existence of opportunistic behaviors [4, 27]. Opportunistic

**Research question 3**: How do actors' behaviors in vertical and horizontal linkages explain performance differences between commercial sugarcane and forestry sector value chains?

Vulnerability to transactional costs is mainly attributed to opportunistic behaviors. A comparison of the mean opportunism in vertical relationships revealed that there was a slight difference in the mean rating by sector (forestry-sugarcane), Pr (T < t) = 0.0712. This means that there was suggestive evidence of opportunism causing mistrust between millers and producers in the sugarcane sector than the forestry sector. This finding was validated by qualitative

*"Fairly good trust… however there is lack of transparency on the weigh bridge"* (Association Chair-

owner:

234 Agricultural Value Chain

Forestry)*.*

data findings below:

man, Sugarcane Sector)*.*

grower without the consent of the labor force owner.

behaviors were investigated by this study in the next question below.

The key findings of the study revealed that (1) the sugarcane sector exhibited high investment asset specificity in vertical linkages between primary producers and millers compared to the forestry sector. This finding suggested strong collaborative vertical linkages for building supplier production capabilities to enhance productivity gains. However, a nuanced view of the qualitative data pointed to the existence of production capabilities in the vertical linkages but residing in the use of contractors rather than the cane growers themselves. On the other hand, stronger collaborative relationship existed among producers and/or producer support agencies for availing inputs, knowledge, and skills transfer in the forestry sector than the sugarcane sector. This finding was corroborated by qualitative data and validated by observatory field data confirming building of production capabilities among forestry primary producers for productivity gains. (2) Findings of this study revealed that control of the diffusion of knowledge and skills transfer not directly to primary producers, but through the use of contractors, was a strategy that enabled the miller(s) to continuously earn higher rents by offering low commodity prices, inputs, and services at high prices to the sugarcane primary producers through maintenance of weak supplier production capabilities. (3) Opportunistic behaviors accounted for the prevalence of suggestive evidence of transactional costs between miller(s) and growers in the sugarcane sector compared to the forestry sector. The above key findings also offered plausible explanations for the observed performance differences in achieving industry productivity benchmarks between sugarcane and forestry sector primary producers. Study results indicated that only 18% of the farmers achieved the desired industry productivity output of at least 100 t/ha from their cane fields, implying that majority (82%) of the cane growers were producing below expected industry productivity output. This was in contrast to the forestry sector whose study results indicated that 41.3% of the farmers achieved the desired industry performance targets, suggesting that only 58.7% of the growers performed below expected performance targets.

**1.** Policy program interventions need to be designed in a way that knowledge and skills will be made available to the primary producers. This will enable them to strengthen their production capabilities for effective participation and upgrading in the GVCs in developing economies.

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**2.** Policy programs should be supported by the formation of robust primary growers' associations and/or cooperatives that provide a platform for joint action to effectively partici-

Appreciation to the European Union, the Government of Norway and the Government of Uganda for the technical and financial support to Sawlog Production Grant Scheme (SPGS) and Uganda Timber Growers Association (UTGA) under the SPGS II Grant FED/2012/296- 198. Management of Kinyara Sugar Works Limited provided the necessary information and accessibility to research participants. This paper is part of a PhD Program at the Graduate

Graduate School of Business-University of Cape Town, Portswood Road, Green Point, Cape

[1] WTO. Global Value Chains in a Changing World. Geneva, Switzerland: WTO Secretariat;

[2] Gereffi G, Humphrey J, Sturgeon T. The governance of global value chains. Review of

[3] Smith A. An Inquiry into the Nature and Causes of the Wealth of Nations. 1776. Available: www./biblio.org/ml/libri/s/SmithA\_WealthNations\_pdf [Accessed: 24-02-2016]

[4] Williamson EO. Markets and Hierarchies: Analysis and Antitrust Implications. New

[5] Humphrey J and Schmitz H. Governance and Upgrading: Linking Industrial Cluster. And Global Value Chain Research. IDS Working Paper 120; 2000. https://www.ids.ac.uk/

[6] Porter EM. Clusters and the new economics of competition. Harvard Business Review.

pate in GVCs.

**Author details**

Town, South Africa

**References**

2013

York: Free Press; 1975

files/Wp120.pdf

1998;**76**(6):77-90

**Acknowledgements**

School of Business, University of Cape Town.

Michael Mugabira\* and Richard Chivaka

\*Address all correspondence to: mmugabira@gmail.com

International Political Economy. 2005;**12**(1):78-104

### **5. Theoretical and policy contributions**

Theoretically, this study has brought into insight new research frontiers. The dominant theoretical argument within the GVC discipline is that while highly governed structures contribute to fast acquisition of production capabilities, they can also create barriers for functional upgrading and/or investments in forward linkages [19, 33]. This is because the lead firms protect their core capabilities such as acquisition of design and marketing capabilities from competition, in order to sustain earning higher rents. The findings in our study added another perspective by showing that the lead firms created barriers in backward linkages by controlling the diffusion of knowledge and skills transfer not directly to primary producers, but through the use of contractors. This strategy enabled the miller(s) to continuously earn higher rents by offering low commodity prices, inputs, and services at high prices to the primary producers through maintenance of weak supplier production capabilities. Therefore, this finding can be classified as a major contribution to the emerging GVC theoretical framework [2], with respect to lead firms' control of the diffusion knowledge and skills for building supply production capabilities in backward linkages, with intent for sustained earning of strategic rents.

This study provides insights to government and development partners' policy regarding development of supplier production capabilities for productivity growth in the context of GVCs as follows:


### **Acknowledgements**

forestry sector. This finding suggested strong collaborative vertical linkages for building supplier production capabilities to enhance productivity gains. However, a nuanced view of the qualitative data pointed to the existence of production capabilities in the vertical linkages but residing in the use of contractors rather than the cane growers themselves. On the other hand, stronger collaborative relationship existed among producers and/or producer support agencies for availing inputs, knowledge, and skills transfer in the forestry sector than the sugarcane sector. This finding was corroborated by qualitative data and validated by observatory field data confirming building of production capabilities among forestry primary producers for productivity gains. (2) Findings of this study revealed that control of the diffusion of knowledge and skills transfer not directly to primary producers, but through the use of contractors, was a strategy that enabled the miller(s) to continuously earn higher rents by offering low commodity prices, inputs, and services at high prices to the sugarcane primary producers through maintenance of weak supplier production capabilities. (3) Opportunistic behaviors accounted for the prevalence of suggestive evidence of transactional costs between miller(s) and growers in the sugarcane sector compared to the forestry sector. The above key findings also offered plausible explanations for the observed performance differences in achieving industry productivity benchmarks between sugarcane and forestry sector primary producers. Study results indicated that only 18% of the farmers achieved the desired industry productivity output of at least 100 t/ha from their cane fields, implying that majority (82%) of the cane growers were producing below expected industry productivity output. This was in contrast to the forestry sector whose study results indicated that 41.3% of the farmers achieved the desired industry performance targets, suggesting that only 58.7% of the growers performed

Theoretically, this study has brought into insight new research frontiers. The dominant theoretical argument within the GVC discipline is that while highly governed structures contribute to fast acquisition of production capabilities, they can also create barriers for functional upgrading and/or investments in forward linkages [19, 33]. This is because the lead firms protect their core capabilities such as acquisition of design and marketing capabilities from competition, in order to sustain earning higher rents. The findings in our study added another perspective by showing that the lead firms created barriers in backward linkages by controlling the diffusion of knowledge and skills transfer not directly to primary producers, but through the use of contractors. This strategy enabled the miller(s) to continuously earn higher rents by offering low commodity prices, inputs, and services at high prices to the primary producers through maintenance of weak supplier production capabilities. Therefore, this finding can be classified as a major contribution to the emerging GVC theoretical framework [2], with respect to lead firms' control of the diffusion knowledge and skills for building supply production capabilities in backward linkages, with intent for sustained earning of

This study provides insights to government and development partners' policy regarding development of supplier production capabilities for productivity growth in the context of

below expected performance targets.

236 Agricultural Value Chain

strategic rents.

GVCs as follows:

**5. Theoretical and policy contributions**

Appreciation to the European Union, the Government of Norway and the Government of Uganda for the technical and financial support to Sawlog Production Grant Scheme (SPGS) and Uganda Timber Growers Association (UTGA) under the SPGS II Grant FED/2012/296- 198. Management of Kinyara Sugar Works Limited provided the necessary information and accessibility to research participants. This paper is part of a PhD Program at the Graduate School of Business, University of Cape Town.

### **Author details**

Michael Mugabira\* and Richard Chivaka

\*Address all correspondence to: mmugabira@gmail.com

Graduate School of Business-University of Cape Town, Portswood Road, Green Point, Cape Town, South Africa

### **References**


[7] Porter EM. Clusters and Economic Policy: Aligning Public Policy with the New Economics of Competition. Institute for Strategy and Competitiveness, Harvard Business School; 2009. Available: http://www.hbs.edu/faculty/PublicationFiles/Clusters\_and\_Economic\_ Policy\_White\_Paper\_8e844243-aa23-449d-a7c1-5ef76. [Accessed: 30-07-2016]

[22] WB. Growing Africa: Unlocking the Potential of Agri-Business. Washington, DC: The

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239

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[24] Aznar-Sánchez AJ, Galdeano-Gómez E. Territory, cluster and competitiveness of the intensive horticulture in Almería (Spain). The Open Geography Journal. 2011;**4**:103-114

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[26] Meyer-Stemer J, Maggi C, Seibel S. Upgrading in the tile industry of Italy, Spain and Brazil: Insights from cluster and value chain analysis. In Hubert S, editor. Local Enterprises in the Global Economy: Issues of Governance and Upgrading. Cheltenham:

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[30] Brown O, Sander C. Supermarket Buying Power: Global Supply Chains and Smallholder Farmers. International Institute for Sustainable Development. 2007. Available: http://www. iisd.org/sites/default/files/publications/tkn\_supermarket.pdf. [Accessed: 07-01-2013] [31] Tijaja JP. Exogenous factors and domestic agency in value chain dynamics: Lessons from

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**Chapter 13**

**Provisional chapter**

**A Review of Supply Chain Prices Analyses with**

**A Review of Supply Chain Prices Analyses with** 

DOI: 10.5772/intechopen.69451

Prices at different levels of the supply chain are linked through long-run relationships and tend to differ by the marketing costs. However, several aspects intervene in making price dynamics along the supply chain quite complicated and erratic. In particular, several issues on how marketing margins evolve over time and across commodities, as well as how prices are transmitted along the supply chain are still debated. The implications for the understanding of the economy, the management of the firms, and the regulations of the markets are important and pushed scholars to dedicate particular attention to these topics. In particular, how prices evolve in the supply chain of perishable products is an intriguing challenge that has stimulated a hot debate. We review the literature on price analyses, marketing margins, and vertical price transmission with particular emphasis on perishable products (fruits and vegetables) in order to conclude on the open issues

**Keywords:** agricultural product, marketing margins, price transmission, supply chain

The interest on prices dynamics in perishable markets and the number of studies focused on these topics have rapidly increased during last decades [1–7]: the implications for agricultural markets, for entrepreneurial strategies, and for producer and consumer welfare are relevant

The main (and simple) framework to analyze price dynamics is the well-known Law of One Price (LOP) which states that prices in separated markets tend to differ by no more than

> © 2016 The Author(s). Licensee InTech. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution,

© 2018 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use,

distribution, and reproduction in any medium, provided the original work is properly cited.

and reproduction in any medium, provided the original work is properly cited.

**Emphasis on Perishable Markets**

**Emphasis on Perishable Markets**

Additional information is available at the end of the chapter

Additional information is available at the end of the chapter

http://dx.doi.org/10.5772/intechopen.69451

worth further investigation.

and worth for a deep investigation.

Fabio Gaetano Santeramo and

Leonardo Di Gioia

**Abstract**

**1. Introduction**

Fabio Gaetano Santeramo and Leonardo Di Gioia

**Provisional chapter**

## **A Review of Supply Chain Prices Analyses with Emphasis on Perishable Markets Emphasis on Perishable Markets**

**A Review of Supply Chain Prices Analyses with** 

DOI: 10.5772/intechopen.69451

Fabio Gaetano Santeramo and Leonardo Di Gioia Leonardo Di Gioia

Additional information is available at the end of the chapter Additional information is available at the end of the chapter

http://dx.doi.org/10.5772/intechopen.69451

Fabio Gaetano Santeramo and

#### **Abstract**

Prices at different levels of the supply chain are linked through long-run relationships and tend to differ by the marketing costs. However, several aspects intervene in making price dynamics along the supply chain quite complicated and erratic. In particular, several issues on how marketing margins evolve over time and across commodities, as well as how prices are transmitted along the supply chain are still debated. The implications for the understanding of the economy, the management of the firms, and the regulations of the markets are important and pushed scholars to dedicate particular attention to these topics. In particular, how prices evolve in the supply chain of perishable products is an intriguing challenge that has stimulated a hot debate. We review the literature on price analyses, marketing margins, and vertical price transmission with particular emphasis on perishable products (fruits and vegetables) in order to conclude on the open issues worth further investigation.

**Keywords:** agricultural product, marketing margins, price transmission, supply chain

### **1. Introduction**

The interest on prices dynamics in perishable markets and the number of studies focused on these topics have rapidly increased during last decades [1–7]: the implications for agricultural markets, for entrepreneurial strategies, and for producer and consumer welfare are relevant and worth for a deep investigation.

The main (and simple) framework to analyze price dynamics is the well-known Law of One Price (LOP) which states that prices in separated markets tend to differ by no more than

#### © 2016 The Author(s). Licensee InTech. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. © 2018 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

shipping costs incurred in moving a good from one market to the other. A formal definition is provided by Stiglitz [8] who stated "there is a uniform price in the market and price differences are quickly eliminated by arbitrage [opportunities]". If price spreads exceed transaction costs—regardless the trade direction—arbitrageurs' activity will reduce the spread letting prices move toward the equilibrium condition.<sup>1</sup> Similarly, prices along the supply chain are linked by long-run relationships and tend to differ by the marketing costs, that is, the costs to market the good. In other terms, prices at retail level differ from prices at farm level by the additional costs necessary to market the good. While it is so simple to be described, it is very complex in reality. Market movements, entrepreneurial strategies, physical constraints and biological dynamics make price dynamics erratic. Studying how prices evolve along the supply chain, across different levels, is an intriguing challenge. Not surprisingly, the interest in understanding these aspects has rapidly increased during the last decades. It is important to distinguish two aspects of interest: the evolution of marketing margins and the vertical transmission of prices. With marketing margins, we refer to the spread between prices observed at different stage of the supply chain, while the concept of vertical price transmission regards price dynamics and the transmission of shocks along the supply chain.

Wohlgenant [14] provides a complete survey on theoretical and empirical issues in marketing margins analysis underlying some of the questions of interest for researchers and policymakers (e.g., are margins too large/small compared to farm and retail prices? Why they differ among products/space/time? How quickly are price shocks transmitted along the supply

A Review of Supply Chain Prices Analyses with Emphasis on Perishable Markets

http://dx.doi.org/10.5772/intechopen.69451

243

The basic model to analyze marketing margins is a two-market static model subject to demand and supply shifters (i.e., exogenous variables capable of increasing or decreasing the whole market demand, or market supply). It is generally used for comparative statistics [15, 16] as it allows to conclude on margins dynamics under different economic assumptions (e.g., fixed and variable input proportions, markup pricing, etc.). However, Gardner [15, p. 406] pointed that "*no simple markup pricing rule can depict the relation between the farm and retail prices*," and

Wohlgenant [14] revises the possible factors affecting marketing margins: an extensive literature has focused on the role of market power in order to provide theoretical [12, 17–20]

and empirical evidences [21–22]; other factors that affect farm and retail prices spread are price risks [12, 13], technical and structural changes [23, 24], product quality and seasonality [25, 26]. Wohlgenant' survey concludes that the approaches to model marketing margins are still inappropriate since they ignore significant economic aspects (namely the input substitutability between farm input and other inputs in producing retail products), and more research is needed either to understand the role of the mentioned factors on marketing margins as well as the role of actual trends in agricultural sector (e.g., increasing vertical integration and coordination, growing expenses in advertisements, introduction of new food safety regula-

Traub and Jayne [27] investigated how price (de)regulation influenced the size of the marketing margins of maize ion South Africa. They found that deregulation leads to an increase in marketing margins of 20%: the authors admit their results are not supported by the literature and may prove to be disruptive of existing evidence. More recently, Dawe and Maltsoglou [28] investigated how price increases affect the welfare impacts, and what is the influence of marketing costs (i.e., the costs to market the goods). They show the importance of assuming a correct functional form for marketing costs and found that in a vast majority of cases, it is safer to assume

Meyer and Cramon-Taubadel [29] present the state of the art of the literature on asymmetric price transmission discussing on the theories and empirical aspects. The adjustment to price shocks along the supply chain, from producer to wholesale and retail levels, and vice-versa, is an important aspect of the functioning of supply chains. Asymmetries in vertical price transmission may be due to several aspect of the market structure. For instance, imperfect price transmission may be caused by market power that induces oligopolistic behavior. The consequences of vertical price transmission are worth investigation: in fact, the asymmetry and the

chain? What are the determinants of margins movements? etc.).

generally, the empirical approaches lack of theoretical foundations.

that marketing costs are fixed, rather than proportional.

**3. On vertical price transmission**

tions, etc.).

The present chapter reviews the literature on price analyses, with particular focus on studies on perishable food markets (fruits and vegetables). We review studies on marketing margins and studies on vertical price transmission and conclude by deepening on some of the main issues related to marketing margins and vertical price transmission in perishable goods markets.

The reminder of the chapter is as follows: the section two focuses on aspects of marketing margins; the subsequent section focuses on vertical price transmission; section four is devoted to the analyses of marketing margins and vertical price transmission in perishable markets; we conclude with comments and reflections for future studies.

### **2. On marketing margins**

The terms marketing margin refer to the difference between the retail price, paid by consumers for a finished product, and the farm price of raw products. For instance, assuming raw tomatoes are sold at 1.5 €, the marketing margin for processed tomatoes, say sold at 2 €, would be the difference of the two prices (in our example the marketing margins equals 0.5 €). Clearly the importance of analyzing marketing margins relies on the possibilities to analyze how market equilibria evolve at different stages of the supply chain.

Myers et al. [10] review a century of research on marketing margins, starting from the seminal analyses of Waugh [11] based on descriptive statistics aimed at assessing the size of marketing margins, and concluding with the description of Schroeter and Azzam [12] and Holt [13] on the impact of risk on marketing margins.

<sup>1</sup> A recent review on these issues is provided by Santeramo and Di Gioia [9].

Wohlgenant [14] provides a complete survey on theoretical and empirical issues in marketing margins analysis underlying some of the questions of interest for researchers and policymakers (e.g., are margins too large/small compared to farm and retail prices? Why they differ among products/space/time? How quickly are price shocks transmitted along the supply chain? What are the determinants of margins movements? etc.).

The basic model to analyze marketing margins is a two-market static model subject to demand and supply shifters (i.e., exogenous variables capable of increasing or decreasing the whole market demand, or market supply). It is generally used for comparative statistics [15, 16] as it allows to conclude on margins dynamics under different economic assumptions (e.g., fixed and variable input proportions, markup pricing, etc.). However, Gardner [15, p. 406] pointed that "*no simple markup pricing rule can depict the relation between the farm and retail prices*," and generally, the empirical approaches lack of theoretical foundations.

Wohlgenant [14] revises the possible factors affecting marketing margins: an extensive literature has focused on the role of market power in order to provide theoretical [12, 17–20]

and empirical evidences [21–22]; other factors that affect farm and retail prices spread are price risks [12, 13], technical and structural changes [23, 24], product quality and seasonality [25, 26]. Wohlgenant' survey concludes that the approaches to model marketing margins are still inappropriate since they ignore significant economic aspects (namely the input substitutability between farm input and other inputs in producing retail products), and more research is needed either to understand the role of the mentioned factors on marketing margins as well as the role of actual trends in agricultural sector (e.g., increasing vertical integration and coordination, growing expenses in advertisements, introduction of new food safety regulations, etc.).

Traub and Jayne [27] investigated how price (de)regulation influenced the size of the marketing margins of maize ion South Africa. They found that deregulation leads to an increase in marketing margins of 20%: the authors admit their results are not supported by the literature and may prove to be disruptive of existing evidence. More recently, Dawe and Maltsoglou [28] investigated how price increases affect the welfare impacts, and what is the influence of marketing costs (i.e., the costs to market the goods). They show the importance of assuming a correct functional form for marketing costs and found that in a vast majority of cases, it is safer to assume that marketing costs are fixed, rather than proportional.

### **3. On vertical price transmission**

shipping costs incurred in moving a good from one market to the other. A formal definition is provided by Stiglitz [8] who stated "there is a uniform price in the market and price differences are quickly eliminated by arbitrage [opportunities]". If price spreads exceed transaction costs—regardless the trade direction—arbitrageurs' activity will reduce the spread

chain are linked by long-run relationships and tend to differ by the marketing costs, that is, the costs to market the good. In other terms, prices at retail level differ from prices at farm level by the additional costs necessary to market the good. While it is so simple to be described, it is very complex in reality. Market movements, entrepreneurial strategies, physical constraints and biological dynamics make price dynamics erratic. Studying how prices evolve along the supply chain, across different levels, is an intriguing challenge. Not surprisingly, the interest in understanding these aspects has rapidly increased during the last decades. It is important to distinguish two aspects of interest: the evolution of marketing margins and the vertical transmission of prices. With marketing margins, we refer to the spread between prices observed at different stage of the supply chain, while the concept of vertical price transmission regards price dynamics and the transmission of shocks along the

The present chapter reviews the literature on price analyses, with particular focus on studies on perishable food markets (fruits and vegetables). We review studies on marketing margins and studies on vertical price transmission and conclude by deepening on some of the main issues related to marketing margins and vertical price transmission in perishable goods

The reminder of the chapter is as follows: the section two focuses on aspects of marketing margins; the subsequent section focuses on vertical price transmission; section four is devoted to the analyses of marketing margins and vertical price transmission in perishable markets;

The terms marketing margin refer to the difference between the retail price, paid by consumers for a finished product, and the farm price of raw products. For instance, assuming raw tomatoes are sold at 1.5 €, the marketing margin for processed tomatoes, say sold at 2 €, would be the difference of the two prices (in our example the marketing margins equals 0.5 €). Clearly the importance of analyzing marketing margins relies on the possibilities to analyze

Myers et al. [10] review a century of research on marketing margins, starting from the seminal analyses of Waugh [11] based on descriptive statistics aimed at assessing the size of marketing margins, and concluding with the description of Schroeter and Azzam [12] and Holt [13] on

Similarly, prices along the supply

letting prices move toward the equilibrium condition.<sup>1</sup>

we conclude with comments and reflections for future studies.

how market equilibria evolve at different stages of the supply chain.

A recent review on these issues is provided by Santeramo and Di Gioia [9].

supply chain.

242 Agricultural Value Chain

markets.

1

**2. On marketing margins**

the impact of risk on marketing margins.

Meyer and Cramon-Taubadel [29] present the state of the art of the literature on asymmetric price transmission discussing on the theories and empirical aspects. The adjustment to price shocks along the supply chain, from producer to wholesale and retail levels, and vice-versa, is an important aspect of the functioning of supply chains. Asymmetries in vertical price transmission may be due to several aspect of the market structure. For instance, imperfect price transmission may be caused by market power that induces oligopolistic behavior. The consequences of vertical price transmission are worth investigation: in fact, the asymmetry and the speed of price transmission from farm level to final consumers result in positive or negative welfare effects for economic agents.

firms will adjust the quantity produced and increase inventory rather than decrease output prices, increasing prices during periods of high demand. In summary, also for adjustments costs, the conclusions are ambiguous and sometimes contradictory, with some authors pro-

A Review of Supply Chain Prices Analyses with Emphasis on Perishable Markets

http://dx.doi.org/10.5772/intechopen.69451

245

Another aspect that merit attention is the potential impact of government interventions, in terms of producer subsidies. Gardner [15] concludes on their role in influencing the asymmetries in farm-to-retail price dynamics, and evidence on such a mechanism is provided in the diary sector [6, 46]. Bailey and Brorsen [31] conclude on the role of asymmetric information in determining APT and point out that asymmetries in price series data can result from a distorted price reporting process. Kinnucan and Forker [6] and Cramon-Taubadel [47] consider APT in the framework of the Gardner's marketing margin model: the price spread between farm and retail levels is due to demand changes at retail-level as well as to changes in supply at farm level. Assuming perfect competition and constant returns to scale, the model suggests that changes in demand at retail level may have a large influence on marketing margins with respect to changes in supply at farm level. Kinnucan and Forker [6] argue that the marketing margins induced by these shifts tend to provoke asymmetric price transmission; conversely, Cramon-Taubadel [47]

concludes that positive or negative APT arises depending on the predominant shift.

In conclusion, although many studies found imperfect price transmission along the supply chain, there is not a clear consensus but rather a variety of evidences depending on commodities, countries and data under analysis. It seems evident that more research relationships among prices along the supply chain and the underlying behavior of agents are needed: Although a large number of studies have investigated the phenomenon of price transmission in agricultural markets, it is still not possible to draw strong conclusions to support policy decisions. Meyer and Cramon-Taubadel [29] are skeptical on the actual results provided by the literature unable to explain the economical relevance of evidence of imperfect price transmission. They suggest that it would be premature to draw far-reaching conclusions for theory and policy on the basis of work to date: their critic pertains either the commonly adopted tests to measure the transmission, still not fully reliable and precise in the statistical sense, and the

More recently, there is been a renewed turmoil in the literature that leads to an increasing number of studies on vertical price transmission. First, Frey and Manera [48] reviewed the literature on econometric models of asymmetric price transmission, concluding that asymmetries are likely to occur in a wide range of markets. The authors deepen on the sets of models adopted to study asymmetries: autoregressive distributed lags, partial adjustments, error correction models, and vector autoregressive models. Clearly, more recent models are not surveyed in the mentioned study. For instance, Brummer et al. [49] adopt a Markov switching vector error correction model to investigate asymmetries in the wheat market. Hassouneh et al. [50] adopt a STAR model (smoothing transition autoregressive model) to conclude on

Several other papers have instigated price dynamics along the supply chain: Acosta and Valdes [51] and Antonioli and Santeramo [52] explore price dynamics in diary markets; Santeramo and Cramon-Taubadel [53] focus on perishable food products; Tifaoui and Cramon-Taubadel

viding arguments for positive, and others for negative APT.

theories capable to explain asymmetric price transmission.

vertical price transmission in the poultry sector.

The literature on vertical price transmission is focused on four fundamental topics [30]: the magnitude of how price shocks are vertically transmitted along the supply chain; the speed of transmission of such shocks; the symmetric or asymmetric nature of price transmission; the direction of price transmission in terms of whether shocks are transmitted upwards or downwards.

According to Meyer and Cramon-Taubadel [29], there are two main causes of asymmetries in vertical price transmission: imperfect competition (i.e., market power) and adjustment costs. Moreover, asymmetries in price transmission seem to be related to political interventions, asymmetric information and inventory management.

Bailey and Brorsen [31] argue that no *a priori* explanations arising from the degree of market power may help predicting the positive or negative nature of asymmetries in price transmission: several authors [32–36] conclude that market power may induce asymmetric transmission, with positive asymmetric price transmission being induced by monopolistic behavior (i.e., increases in input prices tend to squeeze marketing margins; moreover, decreases in output prices are likely to be transmitted faster and/or more completely than increases in output prices). Lately, McCorriston et al. and Lloyd et al. [37–39] develop a framework to show how market power may lead to imperfect price transmission. Indeed, also in oligopoly, both positive and negative asymmetric price transmission may occur. Summing up, the literature still lacks of a solid link between market power and asymmetry in price transmission [29].

Another major explanation for asymmetric price transmission (APT) is provided by asymmetric adjustment costs2 arising when firms change the quantities and/or prices of inputs and/or outputs. Bailey and Brorsen [31] conclude that positive asymmetric price transmission may be induced by the easiness for firms facing output reduction to disemploy inputs rather than to augment production by recruiting new inputs. Differently, Ward [40] concludes that negative asymmetric price transmission is likely to occur in markets of perishable products: retailers tend to hesitate to raise prices as they fear potential reductions in sales due to wastes for spoilage. Heien [41] raises arguments against Ward's conclusions: he argues that changing prices is less problematic when dealing with perishable products rather when dealing with storable products in that the price adaptation for products with long shelf-life requires high time costs and losses of goodwill. Finally, Peltzman [42] finds no evidence of a relationship between menu costs and APT, which might rather depend by the presence of high menu costs supported in fragmented supply chains. The strategic management of inventories may help to adapt production to exogenous shocks: as a result, the managerial strategies on inventories have been mentioned as possible cause of asymmetric price transmission. Balke et al. [43] argue that accounting methods such as first-in-first-out may lead to asymmetric price transmission. Blinder [44] and Reagan and Weitzman [45] argue that inventory management leads to positive APT. In particular, Reagan and Weitzman suggest that in periods of low demand

<sup>2</sup> The adjustment costs are defined as costs associated with changing retail prices and subsequently adapting retail logistics, wholesale costs and sales (e.g., advertisement and relabeling costs, storage and volume discounts).

firms will adjust the quantity produced and increase inventory rather than decrease output prices, increasing prices during periods of high demand. In summary, also for adjustments costs, the conclusions are ambiguous and sometimes contradictory, with some authors providing arguments for positive, and others for negative APT.

speed of price transmission from farm level to final consumers result in positive or negative

The literature on vertical price transmission is focused on four fundamental topics [30]: the magnitude of how price shocks are vertically transmitted along the supply chain; the speed of transmission of such shocks; the symmetric or asymmetric nature of price transmission; the direction of price transmission in terms of whether shocks are transmitted upwards or

According to Meyer and Cramon-Taubadel [29], there are two main causes of asymmetries in vertical price transmission: imperfect competition (i.e., market power) and adjustment costs. Moreover, asymmetries in price transmission seem to be related to political interventions,

Bailey and Brorsen [31] argue that no *a priori* explanations arising from the degree of market power may help predicting the positive or negative nature of asymmetries in price transmission: several authors [32–36] conclude that market power may induce asymmetric transmission, with positive asymmetric price transmission being induced by monopolistic behavior (i.e., increases in input prices tend to squeeze marketing margins; moreover, decreases in output prices are likely to be transmitted faster and/or more completely than increases in output prices). Lately, McCorriston et al. and Lloyd et al. [37–39] develop a framework to show how market power may lead to imperfect price transmission. Indeed, also in oligopoly, both positive and negative asymmetric price transmission may occur. Summing up, the literature still lacks of a solid link between market power and asymmetry in price transmission [29].

Another major explanation for asymmetric price transmission (APT) is provided by asym-

and/or outputs. Bailey and Brorsen [31] conclude that positive asymmetric price transmission may be induced by the easiness for firms facing output reduction to disemploy inputs rather than to augment production by recruiting new inputs. Differently, Ward [40] concludes that negative asymmetric price transmission is likely to occur in markets of perishable products: retailers tend to hesitate to raise prices as they fear potential reductions in sales due to wastes for spoilage. Heien [41] raises arguments against Ward's conclusions: he argues that changing prices is less problematic when dealing with perishable products rather when dealing with storable products in that the price adaptation for products with long shelf-life requires high time costs and losses of goodwill. Finally, Peltzman [42] finds no evidence of a relationship between menu costs and APT, which might rather depend by the presence of high menu costs supported in fragmented supply chains. The strategic management of inventories may help to adapt production to exogenous shocks: as a result, the managerial strategies on inventories have been mentioned as possible cause of asymmetric price transmission. Balke et al. [43] argue that accounting methods such as first-in-first-out may lead to asymmetric price transmission. Blinder [44] and Reagan and Weitzman [45] argue that inventory management leads to positive APT. In particular, Reagan and Weitzman suggest that in periods of low demand

The adjustment costs are defined as costs associated with changing retail prices and subsequently adapting retail logis-

tics, wholesale costs and sales (e.g., advertisement and relabeling costs, storage and volume discounts).

arising when firms change the quantities and/or prices of inputs

welfare effects for economic agents.

asymmetric information and inventory management.

downwards.

244 Agricultural Value Chain

metric adjustment costs2

2

Another aspect that merit attention is the potential impact of government interventions, in terms of producer subsidies. Gardner [15] concludes on their role in influencing the asymmetries in farm-to-retail price dynamics, and evidence on such a mechanism is provided in the diary sector [6, 46]. Bailey and Brorsen [31] conclude on the role of asymmetric information in determining APT and point out that asymmetries in price series data can result from a distorted price reporting process. Kinnucan and Forker [6] and Cramon-Taubadel [47] consider APT in the framework of the Gardner's marketing margin model: the price spread between farm and retail levels is due to demand changes at retail-level as well as to changes in supply at farm level. Assuming perfect competition and constant returns to scale, the model suggests that changes in demand at retail level may have a large influence on marketing margins with respect to changes in supply at farm level. Kinnucan and Forker [6] argue that the marketing margins induced by these shifts tend to provoke asymmetric price transmission; conversely, Cramon-Taubadel [47] concludes that positive or negative APT arises depending on the predominant shift.

In conclusion, although many studies found imperfect price transmission along the supply chain, there is not a clear consensus but rather a variety of evidences depending on commodities, countries and data under analysis. It seems evident that more research relationships among prices along the supply chain and the underlying behavior of agents are needed: Although a large number of studies have investigated the phenomenon of price transmission in agricultural markets, it is still not possible to draw strong conclusions to support policy decisions. Meyer and Cramon-Taubadel [29] are skeptical on the actual results provided by the literature unable to explain the economical relevance of evidence of imperfect price transmission. They suggest that it would be premature to draw far-reaching conclusions for theory and policy on the basis of work to date: their critic pertains either the commonly adopted tests to measure the transmission, still not fully reliable and precise in the statistical sense, and the theories capable to explain asymmetric price transmission.

More recently, there is been a renewed turmoil in the literature that leads to an increasing number of studies on vertical price transmission. First, Frey and Manera [48] reviewed the literature on econometric models of asymmetric price transmission, concluding that asymmetries are likely to occur in a wide range of markets. The authors deepen on the sets of models adopted to study asymmetries: autoregressive distributed lags, partial adjustments, error correction models, and vector autoregressive models. Clearly, more recent models are not surveyed in the mentioned study. For instance, Brummer et al. [49] adopt a Markov switching vector error correction model to investigate asymmetries in the wheat market. Hassouneh et al. [50] adopt a STAR model (smoothing transition autoregressive model) to conclude on vertical price transmission in the poultry sector.

Several other papers have instigated price dynamics along the supply chain: Acosta and Valdes [51] and Antonioli and Santeramo [52] explore price dynamics in diary markets; Santeramo and Cramon-Taubadel [53] focus on perishable food products; Tifaoui and Cramon-Taubadel [54] investigate the dynamics in butter market. The list may be long and never exhaustive as more and more papers are published every year. A recent survey that is worth reading has been recently published by Swinnen and Vandeplas [55]: they deepen on conceptual issues in price transmission analyses of agricultural supply chains.

**Author Journal Year Product Frequency Resultsa**

Bernard and Willett Applied Economics Letters 1998 Broiler Weekly Symmetry

Hassan and Simioni Économie Rurale 2004 Chicory Weekly Symmetry

Hassan and Simioni Économie Rurale 2004 Tomatoes Weekly Negative asymmetry

Kuiper and Lansink Agri Business 2013 Broiler Monthly Positive asymmetry

Pick et al. Agri Business 1990 Lemons Weekly Positive asymmetry<sup>c</sup>

Powers Agri Business 1995 Lettuce Weekly Positive asymmetry Schertz Willet et al. Agri Business 1997 Apples Monthly Positive asymmetry

Bakucs et al. Studies in Agricultural

Bernard and Willett Journal of Agricultural and

Brooker et al. Journal of Food Distribution Research

Girapunthong et al. Journal of Food Distribution Research

Heien American Journal of

Applied Economics

Agricultural Economics

Economics

Aguiar and Santana Agribusiness 2002 Tomatoes Monthly Positive asymmetry

Onions " Symmetry

http://dx.doi.org/10.5772/intechopen.69451

247

Carrots " Symmetry Parsley " Symmetry

Peppers " Symmetry

1996 Broiler Monthly Negative asymmetry

1997 Peppers Weekly Positive asymmetry

2003 Tomatoes Monthly Asymmetryb

Tomatoes " Symmetry

1980 Potatoes Monthly Positive asymmetry

Apples " Symmetry

Lettuce " Symmetry Tomatoes " Symmetry

Apples Monthly Symmetry Carrots " Symmetry Potatoes " Symmetry

Oranges " Negative asymmetry

Oranges " Positive asymmetry<sup>c</sup>

Tomatoes " Positive asymmetry

Broiler Monthly Positive asymmetry

Chicory " Negative asymmetry

2007 Potatoes Monthly Symmetry

A Review of Supply Chain Prices Analyses with Emphasis on Perishable Markets

### **4. A focus on perishable markets**

Marketing margins and vertical price transmission in fresh produce markets have been objects of studies due to the relevant policy implications deriving from such analyses (e.g., the assessment of the efficiency of the produce marketing system and/or of the functioning of markets both vertically and spatially separated), but nowadays, the literature still lacks of economic explanations for the peculiar results found for perishable products [56]. The present section briefly reviews the findings of recent studies.

Wohlgenant [14] estimated an econometric model to assess marketing margins dynamics in eight commodities sectors detecting symmetric dynamics, compatible with a competitive behavior, in all but fresh fruits sector, for which he found evidence of constant return to scale but not for competitive behavior. These findings have important implications for supply chain. In particular, the evidence of constant return to scale for perishable products (e.g., fruits) suggests that competitive behavior is impeded by perishability. In other terms, the fear of losing products due to waste for spoilage prevents the adoption of competitive pricing strategies along the supply chain.

As regard price transmission,<sup>3</sup> Ward [40] seminal work on vertical price transmission in perishable goods markets determined the supply chain ring primarily responsible for establishing price and also tested for pricing asymmetries. He found that the pricing point for fresh produce existed at the wholesale market level (price transmission runs from wholesale markets to retail and producer levels) and that price decreases were more likely to be fully passed on to the retail and producer level sectors than were price increases. As above mentioned, he argued that retailers selling perishable goods might be reluctant to raise prices in line with an increase in farm-level prices given the risk that they will be left with unsold spoiled product. Heien [41] raises different arguments and concludes that changing prices is less problematic when dealing with perishable products. Although the mentioned papers are dated, not many theoretical advances have been made, nor the controversial theories abovementioned have been clarified.

Girapunthong et al. [57] applied Ward's pricing asymmetry model to fresh tomatoes data: he found the prices at producer level influence price at wholesale and retail levels; he also argues that increases in producer prices have a major impact on wholesale prices than decreases in producer prices. The controversy results might be explained by the structural changes occurred in the market for fresh tomatoes, that is, by changes in the entire structure of the market (e.g., changes in amount of contracts, concentration of retailers and suppliers, etc.).

<sup>3</sup> A detailed review of major findings is provided in **Table 1**.


[54] investigate the dynamics in butter market. The list may be long and never exhaustive as more and more papers are published every year. A recent survey that is worth reading has been recently published by Swinnen and Vandeplas [55]: they deepen on conceptual issues in

Marketing margins and vertical price transmission in fresh produce markets have been objects of studies due to the relevant policy implications deriving from such analyses (e.g., the assessment of the efficiency of the produce marketing system and/or of the functioning of markets both vertically and spatially separated), but nowadays, the literature still lacks of economic explanations for the peculiar results found for perishable products [56]. The present section

Wohlgenant [14] estimated an econometric model to assess marketing margins dynamics in eight commodities sectors detecting symmetric dynamics, compatible with a competitive behavior, in all but fresh fruits sector, for which he found evidence of constant return to scale but not for competitive behavior. These findings have important implications for supply chain. In particular, the evidence of constant return to scale for perishable products (e.g., fruits) suggests that competitive behavior is impeded by perishability. In other terms, the fear of losing products due to waste for spoilage prevents the adoption of competitive pricing

able goods markets determined the supply chain ring primarily responsible for establishing price and also tested for pricing asymmetries. He found that the pricing point for fresh produce existed at the wholesale market level (price transmission runs from wholesale markets to retail and producer levels) and that price decreases were more likely to be fully passed on to the retail and producer level sectors than were price increases. As above mentioned, he argued that retailers selling perishable goods might be reluctant to raise prices in line with an increase in farm-level prices given the risk that they will be left with unsold spoiled product. Heien [41] raises different arguments and concludes that changing prices is less problematic when dealing with perishable products. Although the mentioned papers are dated, not many theoretical advances have been made, nor the controversial theories abovementioned have been clarified. Girapunthong et al. [57] applied Ward's pricing asymmetry model to fresh tomatoes data: he found the prices at producer level influence price at wholesale and retail levels; he also argues that increases in producer prices have a major impact on wholesale prices than decreases in producer prices. The controversy results might be explained by the structural changes occurred in the market for fresh tomatoes, that is, by changes in the entire structure of the market (e.g., changes in amount of contracts, concentration of retailers and suppliers, etc.).

Ward [40] seminal work on vertical price transmission in perish-

price transmission analyses of agricultural supply chains.

**4. A focus on perishable markets**

246 Agricultural Value Chain

briefly reviews the findings of recent studies.

A detailed review of major findings is provided in **Table 1**.

strategies along the supply chain.

As regard price transmission,<sup>3</sup>

3


**5. Conclusions**

The interest on prices dynamics in perishable markets has rapidly increased during last decades due to the implications that studies on these topics may have on the understanding of agricultural markets and of entrepreneurial strategies. Prices along the supply chain are linked by long-run relationships and tend to differ by the marketing costs. Despite the simplicity of this statement, market movements, entrepreneurial strategies, physical constraints and biological dynamics make price dynamics along the supply chain quite complicate. An aspect of particular interest is the perishability of the products in that it may influence sellers'

A Review of Supply Chain Prices Analyses with Emphasis on Perishable Markets

http://dx.doi.org/10.5772/intechopen.69451

249

We reviewed the literature on perishable food markets, and, in particular, we deepened on research undertaken to understand how marketing margins evolve and how vertical price

Based on our review, we try to conclude on lessons for the values chain. First, marketing margins are an important indicator of how welfare effects are distributed along the value chain. Their dynamics are also a good indicator of the functioning of the supply chain. By reviewing dated and recent studies, we conclude that price spreads along the supply chain are largely influenced by the perishability of the products, characteristics that must be taken into account in analytical analyses. In particular, there is a consensus that marketing margins of perishable products evolve and react differently to price shocks with respect to the marketing margins observed along the supply chains on storable produce. In particular, the wastes due to spoilage and the difficulty of managing inventories complicated reduce the incentive for strategical behavior. In addition, along the supply chain of perishable products, price rises are slowly transmitted and not transmitted to distant markets. To the extent that managers and policymakers intend to forecast price dynamics along the supply chain, and react in a strategic way, it is clear that their horizon should not be long: the dynamics affecting supply chains of perishable products in distant markets are not influential and should not be considered with much care. Differently, the degree of perishability and the logistic plays a significant role in determining how prices evolve along the value chain. The literature falls short on several practical aspects that deserve further attention. For instance, it is still under-investigated if and how reducing spoilage influence price dynamics along the supply chain. Put differently, is it the loss for spoilage that influences price dynamics, or is it the risk of wastes that induce economic agents to behave differently? Moreover, how market concentration at different stage interacts with the perishability has not been investigated. We acknowledge that is not an easy task: to the extent that no solid frameworks exist to study market power, nor spoilage due to perishability, understanding how the two phenomena interact is a very challenging task. Yet, the impossibility to disentangle the effects raises doubts on any conclusions may be provided by the literature on price dynamics in perishable markets. Theoretical studies are in limited number [60]: a large effort in this direction is required. Lastly, further aspects that merit attention are the potential impacts that price regulation has on transversal price dynamics (i.e., horizontal and vertical price dynamics). Few studies have

strategies, consumers' perceptions, and thus policymakers' attention to a market.

transmission works, especially in perishable goods markets.

analyzed these issues [61–63], and further investigation is needed.

a Results on symmetry, positive and negative asymmetry depend on time frequency.

b Positive asymmetry among wholesaler and retailer prices; negative asymmetry among wholesaler and producer prices. c However, over time price changes appear to be symmetric.

**Table 1.** –Major findings in applied analyses of vertical price transmission in perishable markets.

Sexton et al. [58] completed a study to analyze grocery retailer behavior concluded that there is considerable independence in retailers in setting prices for produce commodities and that higher volumes led to larger margins. Similarly, Girapunthong et al. [57] found that the retail price is more likely to change after increases in producer prices than after decreases in producer prices. According to Sexton et al. [58], retailers have been more aggressive in using their market power to influence prices paid to producers for product (e.g., higher volumes of product in the market are used to bid down producer prices without equal declines in retail prices, widening the farm-to-retail margin), and many shippers tried to counter the market power exercised by large retailers consolidating their businesses with firms located in several areas of production.

Recently, Santeramo and Cramon-Taubadel [53] show that vertical price transmission is symmetric for products not affected by large losses for spoilage and tends to be asymmetric for very perishable products. Their results are in line with numerous studies [40, 42, 46] and in contrast with the results presented by Kim and Ward [59]. In addition, Santeramo [7] concludes that, in markets of perishable products, price rises tend to be slowly transmitted and do not influence distant markets; on the contrary, shocks originated by price decreases spread across markets. The results are in line with Ward [40] who has demonstrated that the high perishability, and the inability to delay sales through temporary storage implies that decreases in wholesale prices have a larger effect on retail prices than increases.

### **5. Conclusions**

Sexton et al. [58] completed a study to analyze grocery retailer behavior concluded that there is considerable independence in retailers in setting prices for produce commodities and that higher volumes led to larger margins. Similarly, Girapunthong et al. [57] found that the retail price is more likely to change after increases in producer prices than after decreases in producer prices. According to Sexton et al. [58], retailers have been more aggressive in using their market power to influence prices paid to producers for product (e.g., higher volumes of product in the market are used to bid down producer prices without equal declines in retail prices, widening the farm-to-retail margin), and many shippers tried to counter the market power exercised by large retailers consolidating their businesses with firms located in several

Positive asymmetry among wholesaler and retailer prices; negative asymmetry among wholesaler and producer prices.

Worth Economic Research Service 1999 Carrots Monthly Positive asymmetry

**Author Journal Year Product Frequency Resultsa**

1982 Carrots Monthly Symmetry

Celery " Negative asymmetry Cabbage " Negative asymmetry

Peppers " Negative asymmetry Potatoes " Negative asymmetry Tomatoes " Negative asymmetry

Tomatoes " Positive asymmetry

Cucumbers " Symmetry

Celery " Symmetry Lettuce " Symmetry Onions " Symmetry Potatoes " Symmetry

Ward American Journal of

248 Agricultural Value Chain

Agricultural Economics

Results on symmetry, positive and negative asymmetry depend on time frequency.

**Table 1.** –Major findings in applied analyses of vertical price transmission in perishable markets.

However, over time price changes appear to be symmetric.

Recently, Santeramo and Cramon-Taubadel [53] show that vertical price transmission is symmetric for products not affected by large losses for spoilage and tends to be asymmetric for very perishable products. Their results are in line with numerous studies [40, 42, 46] and in contrast with the results presented by Kim and Ward [59]. In addition, Santeramo [7] concludes that, in markets of perishable products, price rises tend to be slowly transmitted and do not influence distant markets; on the contrary, shocks originated by price decreases spread across markets. The results are in line with Ward [40] who has demonstrated that the high perishability, and the inability to delay sales through temporary storage implies that

decreases in wholesale prices have a larger effect on retail prices than increases.

areas of production.

a

b

c

The interest on prices dynamics in perishable markets has rapidly increased during last decades due to the implications that studies on these topics may have on the understanding of agricultural markets and of entrepreneurial strategies. Prices along the supply chain are linked by long-run relationships and tend to differ by the marketing costs. Despite the simplicity of this statement, market movements, entrepreneurial strategies, physical constraints and biological dynamics make price dynamics along the supply chain quite complicate. An aspect of particular interest is the perishability of the products in that it may influence sellers' strategies, consumers' perceptions, and thus policymakers' attention to a market.

We reviewed the literature on perishable food markets, and, in particular, we deepened on research undertaken to understand how marketing margins evolve and how vertical price transmission works, especially in perishable goods markets.

Based on our review, we try to conclude on lessons for the values chain. First, marketing margins are an important indicator of how welfare effects are distributed along the value chain. Their dynamics are also a good indicator of the functioning of the supply chain. By reviewing dated and recent studies, we conclude that price spreads along the supply chain are largely influenced by the perishability of the products, characteristics that must be taken into account in analytical analyses. In particular, there is a consensus that marketing margins of perishable products evolve and react differently to price shocks with respect to the marketing margins observed along the supply chains on storable produce. In particular, the wastes due to spoilage and the difficulty of managing inventories complicated reduce the incentive for strategical behavior. In addition, along the supply chain of perishable products, price rises are slowly transmitted and not transmitted to distant markets. To the extent that managers and policymakers intend to forecast price dynamics along the supply chain, and react in a strategic way, it is clear that their horizon should not be long: the dynamics affecting supply chains of perishable products in distant markets are not influential and should not be considered with much care. Differently, the degree of perishability and the logistic plays a significant role in determining how prices evolve along the value chain.

The literature falls short on several practical aspects that deserve further attention. For instance, it is still under-investigated if and how reducing spoilage influence price dynamics along the supply chain. Put differently, is it the loss for spoilage that influences price dynamics, or is it the risk of wastes that induce economic agents to behave differently? Moreover, how market concentration at different stage interacts with the perishability has not been investigated. We acknowledge that is not an easy task: to the extent that no solid frameworks exist to study market power, nor spoilage due to perishability, understanding how the two phenomena interact is a very challenging task. Yet, the impossibility to disentangle the effects raises doubts on any conclusions may be provided by the literature on price dynamics in perishable markets. Theoretical studies are in limited number [60]: a large effort in this direction is required.

Lastly, further aspects that merit attention are the potential impacts that price regulation has on transversal price dynamics (i.e., horizontal and vertical price dynamics). Few studies have analyzed these issues [61–63], and further investigation is needed.

A good note should close the present chapter: Although large gaps impede strong conclusions on how price evolves along the value chain of perishable products, the increasing availability of high frequency data (weekly and daily) should encourage researchers to deepen on the unresolved issues. Research on price dynamics in perishable markets is likely to become very relevant in the next future.

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### **Author details**

Fabio Gaetano Santeramo\* and Leonardo Di Gioia

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University of Foggia, Foggia, Italy

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A good note should close the present chapter: Although large gaps impede strong conclusions on how price evolves along the value chain of perishable products, the increasing availability of high frequency data (weekly and daily) should encourage researchers to deepen on the unresolved issues. Research on price dynamics in perishable markets is likely to become

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**Section 5**

**AVC and Gender Equality**


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254 Agricultural Value Chain

Agricultural Economists. February 17-18, 2011

**Chapter 14**

**Provisional chapter**

**Gendered Dimensions of Key Value Chains in**

**Gendered Dimensions of Key Value Chains in** 

DOI: 10.5772/intechopen.69827

The Morocco Green Plan (MGP) has delivered significant economic benefits to small farm households. A concentration on improving efficiency and profitability within value chains for key local commodities has, through the creation of women's cooperatives, also led to positive outcomes in female empowerment. Through qualitative and participatory research methods, our analysis of gendered aspects of value chains for argan, rose, cactus, and saffron in southwestern Morocco suggests that economic empowerment, fostered through existing women's cooperatives, is fragile and subject to significant threats. In large part, this is the result of a state-driven approach that has not effectively considered the inequities inherent within value chains for key local commodities; and the meshing of existing social and cultural norms with the tenets of a national drive toward 'modernization' of the agricultural sector. We suggest that the MGP is gender blind in this respect. Couching value chain enhancement initiatives within an innovation systems framework, as opposed to a state-centric process, is more likely to achieve well-being within rural communities, together with sustainable (social and economic) returns within pro-poor value chains.

**Keywords:** Morocco Green Plan, agricultural innovation, gender, agricultural cooperatives,

Agriculture in Morocco is a significant source of income for 40% of its population and provides stability for many farm households that are vulnerable to the vagaries of weather and desertification [1]. In 2008, the government launched *Plan Maroc Vert* (Morocco Green Plan (MGP)), an ambitious national initiative that seeks to shift agricultural policies away from a historical concentration on protection and toward more market-oriented principles. Pillar I of the plan aims to enhance value-added, productivity and better access to export markets

> © 2016 The Author(s). Licensee InTech. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution,

© 2018 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use,

distribution, and reproduction in any medium, provided the original work is properly cited.

and reproduction in any medium, provided the original work is properly cited.

**Southwestern Morocco**

**Southwestern Morocco**

http://dx.doi.org/10.5772/intechopen.69827

argan, cactus, rose, saffron

**1. Introduction**

**Abstract**

Shinan N. Kassam, Patricia Biermayr-Jenzano,

Shinan N. Kassam, Patricia Biermayr-Jenzano,

Additional information is available at the end of the chapter

Additional information is available at the end of the chapter

Boubaker Dhehibi and Aden Aw-Hassan

Boubaker Dhehibi and Aden Aw-Hassan

**Provisional chapter**

### **Gendered Dimensions of Key Value Chains in Southwestern Morocco Gendered Dimensions of Key Value Chains in Southwestern Morocco**

DOI: 10.5772/intechopen.69827

Shinan N. Kassam, Patricia Biermayr-Jenzano, Boubaker Dhehibi and Aden Aw-Hassan Shinan N. Kassam, Patricia Biermayr-Jenzano, Boubaker Dhehibi and Aden Aw-Hassan

Additional information is available at the end of the chapter Additional information is available at the end of the chapter

http://dx.doi.org/10.5772/intechopen.69827

#### **Abstract**

The Morocco Green Plan (MGP) has delivered significant economic benefits to small farm households. A concentration on improving efficiency and profitability within value chains for key local commodities has, through the creation of women's cooperatives, also led to positive outcomes in female empowerment. Through qualitative and participatory research methods, our analysis of gendered aspects of value chains for argan, rose, cactus, and saffron in southwestern Morocco suggests that economic empowerment, fostered through existing women's cooperatives, is fragile and subject to significant threats. In large part, this is the result of a state-driven approach that has not effectively considered the inequities inherent within value chains for key local commodities; and the meshing of existing social and cultural norms with the tenets of a national drive toward 'modernization' of the agricultural sector. We suggest that the MGP is gender blind in this respect. Couching value chain enhancement initiatives within an innovation systems framework, as opposed to a state-centric process, is more likely to achieve well-being within rural communities, together with sustainable (social and economic) returns within pro-poor value chains.

**Keywords:** Morocco Green Plan, agricultural innovation, gender, agricultural cooperatives, argan, cactus, rose, saffron

### **1. Introduction**

Agriculture in Morocco is a significant source of income for 40% of its population and provides stability for many farm households that are vulnerable to the vagaries of weather and desertification [1]. In 2008, the government launched *Plan Maroc Vert* (Morocco Green Plan (MGP)), an ambitious national initiative that seeks to shift agricultural policies away from a historical concentration on protection and toward more market-oriented principles. Pillar I of the plan aims to enhance value-added, productivity and better access to export markets

© 2016 The Author(s). Licensee InTech. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. © 2018 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

for high-value commodities through aggressive investments targeted at 'modernizing' the commercial agricultural sector. Pillar II prioritizes the need for public support in reaching out to small rural farm households within marginalized areas, an area of significant importance since the 'Arab Spring' uprisings of 2011. With socioeconomic underpinnings, this second pillar seeks to foster both quality as well as stability in the supply of local commodities produced by resource poor farm households, through the creation of production cooperatives, within a federated model of cooperative organization.

While much has been written on botanical and other scientific and technical aspects of these local products [7–12], little attention has been given (at least in the English literature) to an analysis of policy, market and social challenges faced by small producers, and opportunities for addressing these challenges. What does exist [13–15] is restricted to argan and with significant contribution to a contemporary understanding of historical challenges that continue to persist today. Perhaps more surprisingly it is a lack of research and attention to gendered issues for these commodities, where female hands play a significant role in securing economic returns.

Gendered Dimensions of Key Value Chains in Southwestern Morocco

http://dx.doi.org/10.5772/intechopen.69827

259

Utilizing qualitative and participatory action research methodologies, this study sheds light on the nature of gender-based participation within the four local commodities identified, and particularly with respect to trade-offs in time and income allocation, as well as issues related to household power dynamics. These trade-offs arise in several different areas, such as on those related to health, education, opportunities for farm and off-farm income sources, and sometimes more conspicuously in terms of inequitable gender-based access to resources and economic opportunities for gainful employment. An exploration into issues of empowerment and meaning further highlights significant risk for sustainability in economic empowerment and well-being. Readers interested in more detailed analyses and description of methods, as well as a list of interviewed respondents, are directed to the working paper from which this chapter has been generated [16]. Our key argument is that the Morocco Green Plan is essentially gender blind, and greater attention will be required in terms of addressing issues related to gender equality in access to economic opportunity, if this state-led process is to achieve its desired aims and objectives.

*Plan Maroc Vert* (Morocco Green Plan) is built on two pillars with four stated objectives:

*Pillar I:* One aim, within the early days of the initiation of the plan was to generate 7 billion Euros of investment, 75% of which was expected to be generated from private investment across 961 projects identified for implementation. A considerable number of these projects were targeted at value-added initiatives within irrigated production areas with high agricultural production potential and underpinned by a desire to 'modernize' the agricultural sector. *Pillar II:* In addition to the activities under pillar I, an additional 545 projects were targeted for remote areas, particularly within marginalized rural areas where poverty continues to persist. These initiatives seek to uncover avenues for intensification, diversification, and specialization in agricultural production and processing activities through directed social and economic organization (production cooperatives and a federated model of cooperative organization).

**2. Morocco Green Plan**

(i) Reduced poverty within rural areas

(iii) Natural resource sustainability

(ii) Improved measures for achieving national food security

(iv) Improved and equitable access to national and international markets.

Significant investments have been made for improving livelihoods of the rural poor. These include: (i) the formation of producer cooperatives (women only, men only, mixed); (ii) state subsidies in the provision of equipment for processing and packaging, funding for infrastructure development—largely in the form of warehouses for the sorting and staging of products for export; (iii) sponsorship of exhibitions and fairs to promote local products internationally; (iv) gratis provision of primary inputs to cooperative members; and (v) identification of geographical indication markers to protect proprietary rights on cultural heritage, with attached economic benefits. Yet, despite all the fanfare within national and international media outlets, a claim that rural farm households do not receive fair value from the sale of highly valued products within both international and local markets continue to persist [2, 3]. Participatory workshops facilitated by the authors initially revealed a widely held notion within southern Morocco that the blame for inequitable returns is to be laid on the marketing agents, who capitalize on (female) illiteracy, inefficient production practices, and a lack of institutionalized credit within rural areas. Our findings paint a different picture, and one that diverges from received conventional wisdom. We argue that a lack of coordination in public services, coupled with prevailing cultural norms, policy, and environmental constraints block the ability for private and public initiatives, that are aimed at enhancing efficiencies within key (pro-poor) value chains, to improve sustainable (long term) rural livelihoods.

This chapter aims to provide a better understanding of production and marketing systems for four local products within southwestern Morocco (argan, cactus, saffron, rose), and with specific attention paid to challenges faced in gender equity within each value chain. Specific to the region, and to certain villages, all four possess characteristics of high demand and value in both domestic and international markets. Produced on the periphery of traditional export crops on irrigated lands (tomatoes, citrus fruits, and berries), these four products are of significant economic importance to rural communities and continue to gain international recognition. Of significant cultural heritage to the Amazigh tribes of Morocco, and long considered to be only of importance to Berbers and their goat herds, argan gained international notoriety in the late 1980s when scientific curiosity confirmed several positive aspects in relation to its use for both health and beauty [4]. The production of saffron within the villages of Taliouine and Taznakht in southern Morocco, places Morocco fourth in global production of this delicate commodity that requires skilled female hands to ensure quality [5]. Roses in Kalaa M'Gouna village yield highly valued rose oil, and provides Morocco with an element of prestige as one of the largest producers of rose oil—historically third after Bulgaria and Turkey [6]. Lastly, prickly pear cactus in the southern province of Sidi Ifni commands a national following, with premium prices in wholesale and retail markets within Morocco, and a potentially lucrative international market for both fresh fruit and cosmetic oil.

While much has been written on botanical and other scientific and technical aspects of these local products [7–12], little attention has been given (at least in the English literature) to an analysis of policy, market and social challenges faced by small producers, and opportunities for addressing these challenges. What does exist [13–15] is restricted to argan and with significant contribution to a contemporary understanding of historical challenges that continue to persist today. Perhaps more surprisingly it is a lack of research and attention to gendered issues for these commodities, where female hands play a significant role in securing economic returns.

Utilizing qualitative and participatory action research methodologies, this study sheds light on the nature of gender-based participation within the four local commodities identified, and particularly with respect to trade-offs in time and income allocation, as well as issues related to household power dynamics. These trade-offs arise in several different areas, such as on those related to health, education, opportunities for farm and off-farm income sources, and sometimes more conspicuously in terms of inequitable gender-based access to resources and economic opportunities for gainful employment. An exploration into issues of empowerment and meaning further highlights significant risk for sustainability in economic empowerment and well-being. Readers interested in more detailed analyses and description of methods, as well as a list of interviewed respondents, are directed to the working paper from which this chapter has been generated [16]. Our key argument is that the Morocco Green Plan is essentially gender blind, and greater attention will be required in terms of addressing issues related to gender equality in access to economic opportunity, if this state-led process is to achieve its desired aims and objectives.

### **2. Morocco Green Plan**

for high-value commodities through aggressive investments targeted at 'modernizing' the commercial agricultural sector. Pillar II prioritizes the need for public support in reaching out to small rural farm households within marginalized areas, an area of significant importance since the 'Arab Spring' uprisings of 2011. With socioeconomic underpinnings, this second pillar seeks to foster both quality as well as stability in the supply of local commodities produced by resource poor farm households, through the creation of production cooperatives, within a

Significant investments have been made for improving livelihoods of the rural poor. These include: (i) the formation of producer cooperatives (women only, men only, mixed); (ii) state subsidies in the provision of equipment for processing and packaging, funding for infrastructure development—largely in the form of warehouses for the sorting and staging of products for export; (iii) sponsorship of exhibitions and fairs to promote local products internationally; (iv) gratis provision of primary inputs to cooperative members; and (v) identification of geographical indication markers to protect proprietary rights on cultural heritage, with attached economic benefits. Yet, despite all the fanfare within national and international media outlets, a claim that rural farm households do not receive fair value from the sale of highly valued products within both international and local markets continue to persist [2, 3]. Participatory workshops facilitated by the authors initially revealed a widely held notion within southern Morocco that the blame for inequitable returns is to be laid on the marketing agents, who capitalize on (female) illiteracy, inefficient production practices, and a lack of institutionalized credit within rural areas. Our findings paint a different picture, and one that diverges from received conventional wisdom. We argue that a lack of coordination in public services, coupled with prevailing cultural norms, policy, and environmental constraints block the ability for private and public initiatives, that are aimed at enhancing efficiencies within key (pro-poor) value

This chapter aims to provide a better understanding of production and marketing systems for four local products within southwestern Morocco (argan, cactus, saffron, rose), and with specific attention paid to challenges faced in gender equity within each value chain. Specific to the region, and to certain villages, all four possess characteristics of high demand and value in both domestic and international markets. Produced on the periphery of traditional export crops on irrigated lands (tomatoes, citrus fruits, and berries), these four products are of significant economic importance to rural communities and continue to gain international recognition. Of significant cultural heritage to the Amazigh tribes of Morocco, and long considered to be only of importance to Berbers and their goat herds, argan gained international notoriety in the late 1980s when scientific curiosity confirmed several positive aspects in relation to its use for both health and beauty [4]. The production of saffron within the villages of Taliouine and Taznakht in southern Morocco, places Morocco fourth in global production of this delicate commodity that requires skilled female hands to ensure quality [5]. Roses in Kalaa M'Gouna village yield highly valued rose oil, and provides Morocco with an element of prestige as one of the largest producers of rose oil—historically third after Bulgaria and Turkey [6]. Lastly, prickly pear cactus in the southern province of Sidi Ifni commands a national following, with premium prices in wholesale and retail markets within Morocco, and a potentially lucrative

federated model of cooperative organization.

258 Agricultural Value Chain

chains, to improve sustainable (long term) rural livelihoods.

international market for both fresh fruit and cosmetic oil.

*Plan Maroc Vert* (Morocco Green Plan) is built on two pillars with four stated objectives:


*Pillar I:* One aim, within the early days of the initiation of the plan was to generate 7 billion Euros of investment, 75% of which was expected to be generated from private investment across 961 projects identified for implementation. A considerable number of these projects were targeted at value-added initiatives within irrigated production areas with high agricultural production potential and underpinned by a desire to 'modernize' the agricultural sector.

*Pillar II:* In addition to the activities under pillar I, an additional 545 projects were targeted for remote areas, particularly within marginalized rural areas where poverty continues to persist. These initiatives seek to uncover avenues for intensification, diversification, and specialization in agricultural production and processing activities through directed social and economic organization (production cooperatives and a federated model of cooperative organization).

Taken together, these two pillars are underpinned by a stated desire to address socioeconomic disparities between "modern" and "traditional" agricultural sub-sectors, through improvements in productivity (primary and processed), and with enhanced access to commercial markets.

argan oil exports have been difficult to obtain and in part due to the lack of a specific tariff

Gendered Dimensions of Key Value Chains in Southwestern Morocco

http://dx.doi.org/10.5772/intechopen.69827

261

Media and marketing campaigns continue to profess the benefits of high-valued export markets for argan, and largely in terms of enhanced livelihoods for rural Amazigh women. A growing tourist economy in the region has also sprung up, and daily tours to women cooperatives producing argan oil are a favorite outing for visitors interested in viewing women huddled together in a room cracking argan nuts and producing argan oil. Professing health and cosmetic virtues, genuine cooperatives, as well as those masquerading to be a cooperative, vie for the business of tourists, whereas marketing agents from overseas engage with federated cooperatives and unions of cooperatives for a stable supply of argan oil for export. More inclined tourists part with their money at a multitude of spas offering relaxing massage treatments with argan oil, some with the conviction that they are improving livelihoods for

Not everyone is, however, convinced of these win-win claims, both domestically and internationally. Lybbert [19], for instance, argues that the argan 'boom' has led to disproportionate benefits for rural households and no appreciable impact on forest health. Well-off households invest in increased goat herds, as well as more aggressive harvesting techniques (harvesting with sticks to knock down fruit). It is argued that these have had significant impacts on degradation, productivity of argan trees, and therefore on incomes from argan oil production [19]. For most rural households in areas adjacent to the forest, key sources of household income are remittances, as well as male-earned income through daily labor employment and sale of argan oil. With rising prices for argan oil, the contribution of argan to household income continues to rise and, at the time of study, was estimated to be on the order of 50%. Field visits and discussions with farmers indicate that prices for argan oil in local markets have risen from approximately 30 dirhams per liter in 2000 to over 150 dirhams in 2014 and as high as 180 dirhams in 2013. Discussions with several cooperative managers indicate that bulk exports of argan oil were within the range of 250 dirhams per liter. Yet, individual (and cooperative) women producers claim that they receive little of this significant margin between the local market price and the export price. One question, therefore, is whether there is any benefit to cooperative production and marketing of argan oil, in terms of exerting greater

**Figure 1** depicts the argan value chain for private and cooperative producers. One key distinguishing feature of the argan production system is that it has historically been within the domain of women and continues to remain so today. Except for helping to transport the harvest from forest to home, and in marketing argan oil in local markets, men have not been involved in the processing of argan for oil and its joint products. From harvesting semi-dried fruit to peeling, cracking the inner nut to obtain the kernel and hand grinding, one woman will expend close to 3 days of labor in order to obtain 1 L of oil and associated joint products (flesh and paste for animal fodder, shells for sale as heating fuel to bakeries and communal baths). On average, and valued at local market prices, this was equivalent to 80 dirhams (US\$10) per day, which was on par with the official minimum agricultural wage rate in rural

code, despite indication of growing exports and demand internationally.

poor Berber women and the natural argan forest.

negotiation power within the value chain.

areas of 75 dirhams per day in 2014.

### **3. Case studies: argan, rose, cactus, and saffron value chains**

#### **3.1. Argan: a story of women versus machine**

Endemic to Morocco's public forests in southwestern Morocco, argan maintains historical, cultural, and economic importance. For centuries, the argan tree has been associated with the Amazigh (Berber) tribes who have relied on its oil, and associated joint products, for culinary, cosmetic, and health purposes; feed and fodder for small ruminants; and as a source of heating material [17]. But the argan tree is now under threat, with implications for Amazigh tradition and customs. Oral discussions with officials and industry representatives indicate (without the support of publicly available data) that natural argan forests have shrunk from an estimated 1.4 million hectares at the turn of the century to an estimated 800,000 hectares today. While traditional systems of usufruct rights for harvesting argan fruit continue to exist, access to these forests is banned by the Ministry of Forestry for 3 months of the year, so as to mitigate the impact of grazing over the fruit-bearing season. Yet, despite oversight by the Ministry, grazing and illicit felling of argan trees for charcoal production are reported to be on the rise by local communities. Incidence of social tension between local residents and camel herders from the disputed Western Sahara, who graze in the argan forests, was mentioned during a number of discussions with community elders and with indication of a rising trend in violence.

One fundamental issue related to access rights and a cause for tension with nomadic camel and goat herders is the nature of ownership and usage rights for argan trees. Under existing legislation, historical rights to harvest argan trees have been maintained and passed down by inheritance. Within villages, communities and tribes, specific argan trees are held by households on the basis of cultural norms, and common knowledge exists on rights to the fruit from these trees. Yet, the trees themselves belong to the state as national heritage, even if they exist on private property; the incentive to plant argan trees on private property, therefore, is mitigated, as is any desire to maintain trees in public forests through pruning, management or general care *in situ*. Taken together, extended drought, excessive grazing, illegal felling, and issues of ownership have been blamed for the reduction in argan forest areas; yet, many also argue that an increasing price for argan oil has also led to an effective mopping up of argan fruit and seed from the forest floor, thereby leading to reduced natural regeneration.

Annual production of argan (fruit) and oil is neither accurately collected nor officially reported, but estimates in the late 1980s were on the order of 4000 tonnes of argan oil produced annually [18]. Argan oil is sold locally as a traditional source of edible oil and internationally as high-valued inputs into cosmetics, skin care products, and shampoos. The latter has taken on increasing importance since the 1980s, at which time scientific curiosity and evidence-based research revealed several positive cosmetic and health virtues of argan [4]. Exact figures on argan oil exports have been difficult to obtain and in part due to the lack of a specific tariff code, despite indication of growing exports and demand internationally.

Taken together, these two pillars are underpinned by a stated desire to address socioeconomic disparities between "modern" and "traditional" agricultural sub-sectors, through improvements in productivity (primary and processed), and with enhanced access to commercial markets.

Endemic to Morocco's public forests in southwestern Morocco, argan maintains historical, cultural, and economic importance. For centuries, the argan tree has been associated with the Amazigh (Berber) tribes who have relied on its oil, and associated joint products, for culinary, cosmetic, and health purposes; feed and fodder for small ruminants; and as a source of heating material [17]. But the argan tree is now under threat, with implications for Amazigh tradition and customs. Oral discussions with officials and industry representatives indicate (without the support of publicly available data) that natural argan forests have shrunk from an estimated 1.4 million hectares at the turn of the century to an estimated 800,000 hectares today. While traditional systems of usufruct rights for harvesting argan fruit continue to exist, access to these forests is banned by the Ministry of Forestry for 3 months of the year, so as to mitigate the impact of grazing over the fruit-bearing season. Yet, despite oversight by the Ministry, grazing and illicit felling of argan trees for charcoal production are reported to be on the rise by local communities. Incidence of social tension between local residents and camel herders from the disputed Western Sahara, who graze in the argan forests, was mentioned during a number of discussions with community elders and with indication of a rising trend

One fundamental issue related to access rights and a cause for tension with nomadic camel and goat herders is the nature of ownership and usage rights for argan trees. Under existing legislation, historical rights to harvest argan trees have been maintained and passed down by inheritance. Within villages, communities and tribes, specific argan trees are held by households on the basis of cultural norms, and common knowledge exists on rights to the fruit from these trees. Yet, the trees themselves belong to the state as national heritage, even if they exist on private property; the incentive to plant argan trees on private property, therefore, is mitigated, as is any desire to maintain trees in public forests through pruning, management or general care *in situ*. Taken together, extended drought, excessive grazing, illegal felling, and issues of ownership have been blamed for the reduction in argan forest areas; yet, many also argue that an increasing price for argan oil has also led to an effective mopping up of argan

fruit and seed from the forest floor, thereby leading to reduced natural regeneration.

Annual production of argan (fruit) and oil is neither accurately collected nor officially reported, but estimates in the late 1980s were on the order of 4000 tonnes of argan oil produced annually [18]. Argan oil is sold locally as a traditional source of edible oil and internationally as high-valued inputs into cosmetics, skin care products, and shampoos. The latter has taken on increasing importance since the 1980s, at which time scientific curiosity and evidence-based research revealed several positive cosmetic and health virtues of argan [4]. Exact figures on

**3. Case studies: argan, rose, cactus, and saffron value chains**

**3.1. Argan: a story of women versus machine**

in violence.

260 Agricultural Value Chain

Media and marketing campaigns continue to profess the benefits of high-valued export markets for argan, and largely in terms of enhanced livelihoods for rural Amazigh women. A growing tourist economy in the region has also sprung up, and daily tours to women cooperatives producing argan oil are a favorite outing for visitors interested in viewing women huddled together in a room cracking argan nuts and producing argan oil. Professing health and cosmetic virtues, genuine cooperatives, as well as those masquerading to be a cooperative, vie for the business of tourists, whereas marketing agents from overseas engage with federated cooperatives and unions of cooperatives for a stable supply of argan oil for export. More inclined tourists part with their money at a multitude of spas offering relaxing massage treatments with argan oil, some with the conviction that they are improving livelihoods for poor Berber women and the natural argan forest.

Not everyone is, however, convinced of these win-win claims, both domestically and internationally. Lybbert [19], for instance, argues that the argan 'boom' has led to disproportionate benefits for rural households and no appreciable impact on forest health. Well-off households invest in increased goat herds, as well as more aggressive harvesting techniques (harvesting with sticks to knock down fruit). It is argued that these have had significant impacts on degradation, productivity of argan trees, and therefore on incomes from argan oil production [19].

For most rural households in areas adjacent to the forest, key sources of household income are remittances, as well as male-earned income through daily labor employment and sale of argan oil. With rising prices for argan oil, the contribution of argan to household income continues to rise and, at the time of study, was estimated to be on the order of 50%. Field visits and discussions with farmers indicate that prices for argan oil in local markets have risen from approximately 30 dirhams per liter in 2000 to over 150 dirhams in 2014 and as high as 180 dirhams in 2013. Discussions with several cooperative managers indicate that bulk exports of argan oil were within the range of 250 dirhams per liter. Yet, individual (and cooperative) women producers claim that they receive little of this significant margin between the local market price and the export price. One question, therefore, is whether there is any benefit to cooperative production and marketing of argan oil, in terms of exerting greater negotiation power within the value chain.

**Figure 1** depicts the argan value chain for private and cooperative producers. One key distinguishing feature of the argan production system is that it has historically been within the domain of women and continues to remain so today. Except for helping to transport the harvest from forest to home, and in marketing argan oil in local markets, men have not been involved in the processing of argan for oil and its joint products. From harvesting semi-dried fruit to peeling, cracking the inner nut to obtain the kernel and hand grinding, one woman will expend close to 3 days of labor in order to obtain 1 L of oil and associated joint products (flesh and paste for animal fodder, shells for sale as heating fuel to bakeries and communal baths). On average, and valued at local market prices, this was equivalent to 80 dirhams (US\$10) per day, which was on par with the official minimum agricultural wage rate in rural areas of 75 dirhams per day in 2014.

cleaning, and cracking of the outer nut. Piece rate wages were set at 40 dirhams per kg of kernel extracted from the nuts. Based on a norm that each 16 kg of fruit yields 1 kg of kernel, and that one woman in 1 day is able to extract 1 kg of kernels, the average woman member earns 85 dirhams per day of work within the cooperative. This was not significantly different from home-based

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Home-based production is constrained by the number of trees with harvesting rights and by available female labor. For those households with excess female labor in their household, purchasing argan fruit in the local market, over and above the endowment of fruit harvested at the household level, requires a source of cash. Membership in a cooperative does not necessarily help to relieve the constraint of working capital but does help in reducing transaction costs in securing available supply and through pooling of argan fruit between members.

**a.** The sale of argan fruit to the cooperative (either fully or more than what is processed at

**b.** Purchase of argan fruit from non-members, when hours of manual (collective) labor devoted by women members to the cooperative is more than collective argan fruit brought

Given the nature of poverty and cash constraints, women insist on payment for fruit supplied (at time of delivery) and wages for manual labor after a reasonable period. Both require working capital for the cooperative, and given the lack of access to institutionalized credit within rural communities, it is a necessity for the cooperative to either generate profits or to charge initial membership fees in order to acquire this capital. With relatively similar returns between household production of argan oil and returns to labor at the cooperative, why would women choose to pay fees to join (or maintain) the cooperative? One answer is the benefit of access to a variety of social services provided by the cooperative (child minding, adult literacy lessons, small loans, and ability to socialize). Yet, not all cooperatives provide this service. A more plausible explanation lies in the observation that the production cooperative provides an ability to secure steady wage income over an extended period, with generation of total wage income which far exceeds that from the production of argan oil at home. An added incentive is the ability to retain the value of their labor, away from discretionary use by their husbands or male elders, and for utilization within the household on matters of priority to their needs and the needs of their family. Whether this is a form of empowerment remains moot in so far

as it involves trade-offs within the household and between household members.

In taking a more conservative view, mechanical technology for cracking the argan nut has not been developed as of yet. The only available method for obtaining the inner kernel, used for extracting argan oil, is still based on a traditional method of hand and sharpened stone. Women have proprietary rights to this critical production function, based on historical cultural norms related to division of labor, and more specifically to an activity without which the entire value chain for argan oil breaks down. Yet, this advantage is also a potential source of weakness. Cash strapped and resource poor, households relying on argan as a significant

Access to a larger pool of argan fruit can come about through the following:

production when considering transportation costs.

home) by women cooperative members.

in by individual members.

**Figure 1.** Argan value chain.

While remuneration for labor was at the rate of the official minimum wage, stability in total income generation from argan oil production is a more important issue for the household, not women alone, and this depends on the number of argan trees for which the household possesses rights to harvest. Inherited over generations by male members of the household, usage rights are only acquired by women in the case of no male siblings or on the demise of a spouse. Within the household, therefore, historical norms exist over ownership of income from argan oil sales in local markets, with men taking charge of selling in local markets, retaining the income from sale, and disbursing to household members based on mutual understanding of roles and responsibilities. How many argan trees the household has rights over, and the productivity of those trees in the public forest will, therefore, determine total household income from argan. The lower the number of these rights, the greater the burden is on male members of the household to generate income for household maintenance. A relevant line of enquiry therefore is whether cooperative production and marketing of argan can provide higher incomes, relative to home-based production, and whether this income stream is of a duration which is longer than seasonal home-based production.

At the Taroudent woman's cooperative in Essaouria province, members were paid 45 dirhams for 16 kg of argan fruit brought to the cooperative and placed into the collective pool for peeling, cleaning, and cracking of the outer nut. Piece rate wages were set at 40 dirhams per kg of kernel extracted from the nuts. Based on a norm that each 16 kg of fruit yields 1 kg of kernel, and that one woman in 1 day is able to extract 1 kg of kernels, the average woman member earns 85 dirhams per day of work within the cooperative. This was not significantly different from home-based production when considering transportation costs.

Home-based production is constrained by the number of trees with harvesting rights and by available female labor. For those households with excess female labor in their household, purchasing argan fruit in the local market, over and above the endowment of fruit harvested at the household level, requires a source of cash. Membership in a cooperative does not necessarily help to relieve the constraint of working capital but does help in reducing transaction costs in securing available supply and through pooling of argan fruit between members. Access to a larger pool of argan fruit can come about through the following:


Given the nature of poverty and cash constraints, women insist on payment for fruit supplied (at time of delivery) and wages for manual labor after a reasonable period. Both require working capital for the cooperative, and given the lack of access to institutionalized credit within rural communities, it is a necessity for the cooperative to either generate profits or to charge initial membership fees in order to acquire this capital. With relatively similar returns between household production of argan oil and returns to labor at the cooperative, why would women choose to pay fees to join (or maintain) the cooperative? One answer is the benefit of access to a variety of social services provided by the cooperative (child minding, adult literacy lessons, small loans, and ability to socialize). Yet, not all cooperatives provide this service. A more plausible explanation lies in the observation that the production cooperative provides an ability to secure steady wage income over an extended period, with generation of total wage income which far exceeds that from the production of argan oil at home. An added incentive is the ability to retain the value of their labor, away from discretionary use by their husbands or male elders, and for utilization within the household on matters of priority to their needs and the needs of their family. Whether this is a form of empowerment remains moot in so far as it involves trade-offs within the household and between household members.

While remuneration for labor was at the rate of the official minimum wage, stability in total income generation from argan oil production is a more important issue for the household, not women alone, and this depends on the number of argan trees for which the household possesses rights to harvest. Inherited over generations by male members of the household, usage rights are only acquired by women in the case of no male siblings or on the demise of a spouse. Within the household, therefore, historical norms exist over ownership of income from argan oil sales in local markets, with men taking charge of selling in local markets, retaining the income from sale, and disbursing to household members based on mutual understanding of roles and responsibilities. How many argan trees the household has rights over, and the productivity of those trees in the public forest will, therefore, determine total household income from argan. The lower the number of these rights, the greater the burden is on male members of the household to generate income for household maintenance. A relevant line of enquiry therefore is whether cooperative production and marketing of argan can provide higher incomes, relative to home-based production, and whether this income stream is of a duration

At the Taroudent woman's cooperative in Essaouria province, members were paid 45 dirhams for 16 kg of argan fruit brought to the cooperative and placed into the collective pool for peeling,

which is longer than seasonal home-based production.

**Figure 1.** Argan value chain.

262 Agricultural Value Chain

In taking a more conservative view, mechanical technology for cracking the argan nut has not been developed as of yet. The only available method for obtaining the inner kernel, used for extracting argan oil, is still based on a traditional method of hand and sharpened stone. Women have proprietary rights to this critical production function, based on historical cultural norms related to division of labor, and more specifically to an activity without which the entire value chain for argan oil breaks down. Yet, this advantage is also a potential source of weakness. Cash strapped and resource poor, households relying on argan as a significant source of livelihood need to provide services in order to receive cash, and require immediate cash for services provided. Combined, this results in a situation where women are compelled to work long hours at cooperatives, and at institutions masquerading as cooperatives, for piece rate wages that are on par with the mandated minimum wage. Development of a mechanical cracker will surely put an end to stability in wages from labor currently expended by women in the cracking of nuts, and one of the underlying reasons and benefits for why women currently choose to join a cooperative structure.

Pruning, maintenance, and picking have traditionally been undertaken by females in the household, but within the ambit of their main duties in supporting agricultural production of other crops, together with male household members. Women invited to a workshop in the village to discuss challenges and constraints in the production of roses indicated that approximately 10% of their time is spent on roses, mostly during the harvest months of April and

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Farm households producing roses have several options for marketing (see **Figure 2**): (i) sale of fresh petals to intermediaries or directly to industrial units, (ii) sale of dried petals to intermediaries for onward sale into national wholesale markets, or (iii) to the cooperative within which they retain membership. In the case of the latter, 10 producer cooperatives now exist, of which 7 are male only and 3 women only. All cooperatives produce the same products rose water and dried flower petals—with gendered division in roles conditioned by history,

Dried rose petals and rose water have long been associated with this village, but commercialization of rose petals was only realized in the 1940s when, under French occupation, perfumeries from France encouraged greater cultivation and technical assistance in the cultivation of roses for utilization in the production of oil. Of the two large private industrial units within proximity to the village center, one remains from the French colonial era whereas the other to an investment arm of the ruling Monarch. As detailed by several farmers, and privately by one public extension officer, collusion between the two industrial units is argued to be one of the reasons for low prices paid to growers. Given technical parameters for optimal timing between

May, and with a contribution to household income not exceeding 20%.

culture, and a reaction to current policy.

**Figure 2.** Rose value chain.

With this knowledge, one needs to question a state-sponsored drive for facilitating greater numbers of women's cooperatives under the Morocco Green Plan. It would seem timely for efforts to be concentrated on finding avenues for how rural households can retain control over the argan nut, and to negotiate fair value for either the raw kernel or the oil that accrues from the kernel. Given a need for immediate cash, collective storage units and single selling desks at the community, village, or district level are unlikely to meet with much success unless (i) farmers are paid on delivery and (ii) there is an underlying system for ensuring no leakage, in order to maintain bargaining power with processors and marketing intermediaries. Given the nature of the product, limited options for alternative income sources at the household level, land tenure and property rights issues, the government may need to consider fixing a reasonable minimum price for argan kernel at a rate that (i) fairly remunerates rural households but (ii) still provides an incentive for processors (cooperative or private) to earn a margin on processing and marketing of argan oil.

This potential solution comes at a price. Fixing a minimum price on argan kernel at rates that provide fair remuneration may lead to more aggressive harvesting techniques and potentially negative consequences for forest conservation [19]. Concomitant with any potential consideration of fixing a minimum price on argan nuts, therefore, is the need to consider communitybased management of the argan forest. Minimum pricing and forest management must go hand in hand, and without this combined set, options for households to retain income from argan, and for women to continue a cultural tradition of processing argan, are limited in the face of machinery which will ultimately replace hand and stone. The danger here is that without some form of security on the proprietary nature of processing, whether manual or mechanized, the potential for shipping nuts for processing outside of Morocco becomes very real in the face of future innovation.

The story of argan would seem to be one of a race against time and between woman and the machine.

### **3.2. Rose: a scent of hope**

Rose production in Morocco has historical linkages to French occupation and largely confined to the village of Kalaa M'Gouna in Ouarzazate province. Areas under production and quantities produced have been difficult to assess, but estimates are on the order of 3200 linear km (2 m wide) and production between 2500 and 4000 tons annually [12]. Variation in production is largely due to risks of both frost and sustained drought, but also the nature of the production system itself. Grown in hedge rows and as land boundaries, roses are complementary to principle agricultural production produced on the farm, primarily cereals and summer vegetables, and from which they receive cross fertilization and much of their water requirements.

Pruning, maintenance, and picking have traditionally been undertaken by females in the household, but within the ambit of their main duties in supporting agricultural production of other crops, together with male household members. Women invited to a workshop in the village to discuss challenges and constraints in the production of roses indicated that approximately 10% of their time is spent on roses, mostly during the harvest months of April and May, and with a contribution to household income not exceeding 20%.

Farm households producing roses have several options for marketing (see **Figure 2**): (i) sale of fresh petals to intermediaries or directly to industrial units, (ii) sale of dried petals to intermediaries for onward sale into national wholesale markets, or (iii) to the cooperative within which they retain membership. In the case of the latter, 10 producer cooperatives now exist, of which 7 are male only and 3 women only. All cooperatives produce the same products rose water and dried flower petals—with gendered division in roles conditioned by history, culture, and a reaction to current policy.

Dried rose petals and rose water have long been associated with this village, but commercialization of rose petals was only realized in the 1940s when, under French occupation, perfumeries from France encouraged greater cultivation and technical assistance in the cultivation of roses for utilization in the production of oil. Of the two large private industrial units within proximity to the village center, one remains from the French colonial era whereas the other to an investment arm of the ruling Monarch. As detailed by several farmers, and privately by one public extension officer, collusion between the two industrial units is argued to be one of the reasons for low prices paid to growers. Given technical parameters for optimal timing between

**Figure 2.** Rose value chain.

source of livelihood need to provide services in order to receive cash, and require immediate cash for services provided. Combined, this results in a situation where women are compelled to work long hours at cooperatives, and at institutions masquerading as cooperatives, for piece rate wages that are on par with the mandated minimum wage. Development of a mechanical cracker will surely put an end to stability in wages from labor currently expended by women in the cracking of nuts, and one of the underlying reasons and benefits for why

With this knowledge, one needs to question a state-sponsored drive for facilitating greater numbers of women's cooperatives under the Morocco Green Plan. It would seem timely for efforts to be concentrated on finding avenues for how rural households can retain control over the argan nut, and to negotiate fair value for either the raw kernel or the oil that accrues from the kernel. Given a need for immediate cash, collective storage units and single selling desks at the community, village, or district level are unlikely to meet with much success unless (i) farmers are paid on delivery and (ii) there is an underlying system for ensuring no leakage, in order to maintain bargaining power with processors and marketing intermediaries. Given the nature of the product, limited options for alternative income sources at the household level, land tenure and property rights issues, the government may need to consider fixing a reasonable minimum price for argan kernel at a rate that (i) fairly remunerates rural households but (ii) still provides an incentive for processors (cooperative or private) to earn a margin on

This potential solution comes at a price. Fixing a minimum price on argan kernel at rates that provide fair remuneration may lead to more aggressive harvesting techniques and potentially negative consequences for forest conservation [19]. Concomitant with any potential consideration of fixing a minimum price on argan nuts, therefore, is the need to consider communitybased management of the argan forest. Minimum pricing and forest management must go hand in hand, and without this combined set, options for households to retain income from argan, and for women to continue a cultural tradition of processing argan, are limited in the face of machinery which will ultimately replace hand and stone. The danger here is that without some form of security on the proprietary nature of processing, whether manual or mechanized, the potential for shipping nuts for processing outside of Morocco becomes very

The story of argan would seem to be one of a race against time and between woman and the

Rose production in Morocco has historical linkages to French occupation and largely confined to the village of Kalaa M'Gouna in Ouarzazate province. Areas under production and quantities produced have been difficult to assess, but estimates are on the order of 3200 linear km (2 m wide) and production between 2500 and 4000 tons annually [12]. Variation in production is largely due to risks of both frost and sustained drought, but also the nature of the production system itself. Grown in hedge rows and as land boundaries, roses are complementary to principle agricultural production produced on the farm, primarily cereals and summer vegetables, and from which

they receive cross fertilization and much of their water requirements.

women currently choose to join a cooperative structure.

processing and marketing of argan oil.

real in the face of future innovation.

**3.2. Rose: a scent of hope**

machine.

264 Agricultural Value Chain

harvesting and processing of oil (approximately 4 h), farmers are limited in their ability to ship fresh petals to other factories outside of their village or internationally. Perishability, therefore, plays a key role in the ability to collude on prices, as picking occurs at 7 a.m. and delivery to the factory by 10 a.m. in order to be accepted for purchase. Advances in laboratory testing are equally important, therefore, in the ability for firms to collude as approximate time of picking can be verified on delivery.

Returning to the calculation on potential income from the sale of fresh and dried roses, a focus on expanding marketing and sale of dried roses is clearly in the interest of farmers given (i) greater choice in markets, (ii) an ability to diminish the constraint of perishability and more importantly, (iii) removing surplus of fresh petals from the local market in order to influence a higher price paid by industrial processors. While rose water production from fresh petals, at the cooperative level, offers an interesting option for diversification, relatively small scales of production, high equipment costs, and competition from synthetic imports (rose essence) limits the ability for take-off and impact for rural livelihoods. Equally important is a move toward organic certification, particularly for products that are within the wider rubric of 'cosmetic' products. But are farmers within Kalaa M'Gouna able to respond to this niche? Planted as hedges around small-scale production areas of cereals and vegetables, cross contamination of fertilizers and pesticides is impossible to avoid within the current production paradigm

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Is there a possibility to expand areas of production under rose, and with new paradigms of production that have sound environmental underpinnings, but still commercial in nature? Farmers responded positively to this possibility, but noted a fundamental constraint in access to productive land that has been in reserve since French colonization and allocated to senior military officials under favorable lease. Inability to access previous tribal lands that were nationalized at independence is also a source of concern and limits potential for rural households to engage in more commercialized rose farming systems. Farmers also mentioned that in an environment where there is excess supply of fresh rose petals in the local market, with no options for exporting fresh petals outside of the village, commercialized production by farmers will only lead to further downward pressure on fresh petal prices. While relevant and correct, the fact that a recent private entrant into the industrialized sector has initiated production of rose oil, with purchase of fresh rose petals from the village, suggests that there is scope for industrial expansion of rose oil, and therefore a larger market for the sale of fresh

That the new entrant has not engaged in collusion on prices with existing industrial units is a positive development, but there is one looming risk. Farmers and extension agents state that the new industrial unit has also initiated production of roses on a commercial scale within the village and to supply its own plant. Scale of operation will determine whether this commercial production of roses displaces any current supply from small households to the other two industrial units, and what impact this will have upon producer prices for fresh rose petals. On a positive note, larger scale of production may result in wage opportunities for picking, rates for which will depend upon availability of specialized female labor in season and at critical

So, we return to the question of whether small-scale farmers should be concentrating on expanding cooperative production of rose water or concentrating on dried roses. Market studies are clearly needed to answer this question, but cursory analysis presented herein suggests that the government should revisit the premise for promoting producer cooperatives, particularly for women, without a clear understanding of available markets for the product under transformation, the specific nature of the product itself, and constraints of expanding

practiced, and therefore, the ability to fill this niche is limited.

rose petals.

periods.

With collusion claimed to exist since the 1970s, farmers interviewed detailed how an insurrection in 1990 led to the uprooting of a significant number of rose bushes as a symbol defiance against state control. Sustained bouts of drought and reduction in supply forced firms to raise prices for fresh petals over subsequent years, but the nature of political interference in the setting of prices and control over the industry has not been minimized. Unlike workshops held in other villages for saffron, argan, and cactus, the Ministry of Interior appointed a senior security officer to attend our discussions with farmers, most likely to observe the nature of discussions. Convinced that the workshop was not a threat to the state, or a cause for future civil disobedience, the officer left on the basis of a request and receipt of a letter from the national research institute (INRA), co-hosts of the workshop, and which stated objectives of the workshop. Indeed, many farmers invited to the workshop did not attend, and on follow up, indicated that they were fearful of repercussions from discussions related to pricing and setting of prices for fresh rose petals.

The political nature of rose production systems, and currently limited contribution to household income, raises interesting questions of why rose has been included within the Morocco Green Plan. With the highest estimated production of fresh roses at 4000 tons annually, and a price of 13 dirhams per kg for fresh rose petals, small farm households within the village stand on a potential income gain of 52 million dirhams (approximately US\$6.5 million) annually. This estimated income gain is based on potential market supply, given that only 30% of production is currently sold in fresh form to industrial plants engaged in the production of oil, 3% to cooperatives engaged in the processing of rose water, and the remainder (67%) sold in dry form. With a conversion ratio of 4:1 of fresh to dried, and a (high) price of 100 dirhams per kg for dried roses, estimated potential income for farm households from dried rose marketing was 6.7 million dirhams (approximately US\$850,000) and 17.2 million dirhams (approximately US\$2.1 million) from fresh rose sales to industrial units and cooperatives.

In light of these figures, and given Morocco's ranking as third largest producer of rose oil [6], a concentration on roses under the Morocco Green Plan is valid. Yet, the formation of cooperatives under Pillar II of the plan and poverty alleviation through production cooperatives is somewhat difficult to understand for the rose sector. On the basis of focus group discussions, there is a generally held notion that (i) it is easier to obtain grants and subsidies for women cooperatives, (ii) for the purpose of marketing dried roses and rose water, the characteristic of the product, and the target consumer, lends itself to better sales if marketed by women, and (iii) applications for the start-up of cooperatives by the youth (males in particular) are sometimes viewed as threatening to local security services and face long delays. Women appear to be less threatening as an organized group of producers relative to males and specifically young males.

Returning to the calculation on potential income from the sale of fresh and dried roses, a focus on expanding marketing and sale of dried roses is clearly in the interest of farmers given (i) greater choice in markets, (ii) an ability to diminish the constraint of perishability and more importantly, (iii) removing surplus of fresh petals from the local market in order to influence a higher price paid by industrial processors. While rose water production from fresh petals, at the cooperative level, offers an interesting option for diversification, relatively small scales of production, high equipment costs, and competition from synthetic imports (rose essence) limits the ability for take-off and impact for rural livelihoods. Equally important is a move toward organic certification, particularly for products that are within the wider rubric of 'cosmetic' products. But are farmers within Kalaa M'Gouna able to respond to this niche? Planted as hedges around small-scale production areas of cereals and vegetables, cross contamination of fertilizers and pesticides is impossible to avoid within the current production paradigm practiced, and therefore, the ability to fill this niche is limited.

harvesting and processing of oil (approximately 4 h), farmers are limited in their ability to ship fresh petals to other factories outside of their village or internationally. Perishability, therefore, plays a key role in the ability to collude on prices, as picking occurs at 7 a.m. and delivery to the factory by 10 a.m. in order to be accepted for purchase. Advances in laboratory testing are equally important, therefore, in the ability for firms to collude as approximate time of picking

With collusion claimed to exist since the 1970s, farmers interviewed detailed how an insurrection in 1990 led to the uprooting of a significant number of rose bushes as a symbol defiance against state control. Sustained bouts of drought and reduction in supply forced firms to raise prices for fresh petals over subsequent years, but the nature of political interference in the setting of prices and control over the industry has not been minimized. Unlike workshops held in other villages for saffron, argan, and cactus, the Ministry of Interior appointed a senior security officer to attend our discussions with farmers, most likely to observe the nature of discussions. Convinced that the workshop was not a threat to the state, or a cause for future civil disobedience, the officer left on the basis of a request and receipt of a letter from the national research institute (INRA), co-hosts of the workshop, and which stated objectives of the workshop. Indeed, many farmers invited to the workshop did not attend, and on follow up, indicated that they were fearful of repercussions from discussions related to pricing and

The political nature of rose production systems, and currently limited contribution to household income, raises interesting questions of why rose has been included within the Morocco Green Plan. With the highest estimated production of fresh roses at 4000 tons annually, and a price of 13 dirhams per kg for fresh rose petals, small farm households within the village stand on a potential income gain of 52 million dirhams (approximately US\$6.5 million) annually. This estimated income gain is based on potential market supply, given that only 30% of production is currently sold in fresh form to industrial plants engaged in the production of oil, 3% to cooperatives engaged in the processing of rose water, and the remainder (67%) sold in dry form. With a conversion ratio of 4:1 of fresh to dried, and a (high) price of 100 dirhams per kg for dried roses, estimated potential income for farm households from dried rose marketing was 6.7 million dirhams (approximately US\$850,000) and 17.2 million dirhams (approximately US\$2.1 million) from fresh rose sales to industrial units and cooperatives.

In light of these figures, and given Morocco's ranking as third largest producer of rose oil [6], a concentration on roses under the Morocco Green Plan is valid. Yet, the formation of cooperatives under Pillar II of the plan and poverty alleviation through production cooperatives is somewhat difficult to understand for the rose sector. On the basis of focus group discussions, there is a generally held notion that (i) it is easier to obtain grants and subsidies for women cooperatives, (ii) for the purpose of marketing dried roses and rose water, the characteristic of the product, and the target consumer, lends itself to better sales if marketed by women, and (iii) applications for the start-up of cooperatives by the youth (males in particular) are sometimes viewed as threatening to local security services and face long delays. Women appear to be less threatening as an organized group of producers relative to males and specifically

can be verified on delivery.

266 Agricultural Value Chain

setting of prices for fresh rose petals.

young males.

Is there a possibility to expand areas of production under rose, and with new paradigms of production that have sound environmental underpinnings, but still commercial in nature? Farmers responded positively to this possibility, but noted a fundamental constraint in access to productive land that has been in reserve since French colonization and allocated to senior military officials under favorable lease. Inability to access previous tribal lands that were nationalized at independence is also a source of concern and limits potential for rural households to engage in more commercialized rose farming systems. Farmers also mentioned that in an environment where there is excess supply of fresh rose petals in the local market, with no options for exporting fresh petals outside of the village, commercialized production by farmers will only lead to further downward pressure on fresh petal prices. While relevant and correct, the fact that a recent private entrant into the industrialized sector has initiated production of rose oil, with purchase of fresh rose petals from the village, suggests that there is scope for industrial expansion of rose oil, and therefore a larger market for the sale of fresh rose petals.

That the new entrant has not engaged in collusion on prices with existing industrial units is a positive development, but there is one looming risk. Farmers and extension agents state that the new industrial unit has also initiated production of roses on a commercial scale within the village and to supply its own plant. Scale of operation will determine whether this commercial production of roses displaces any current supply from small households to the other two industrial units, and what impact this will have upon producer prices for fresh rose petals. On a positive note, larger scale of production may result in wage opportunities for picking, rates for which will depend upon availability of specialized female labor in season and at critical periods.

So, we return to the question of whether small-scale farmers should be concentrating on expanding cooperative production of rose water or concentrating on dried roses. Market studies are clearly needed to answer this question, but cursory analysis presented herein suggests that the government should revisit the premise for promoting producer cooperatives, particularly for women, without a clear understanding of available markets for the product under transformation, the specific nature of the product itself, and constraints of expanding production of primary inputs for supply to the cooperative. Moreover, if the government is indeed interfering in the setting of prices, through collusion between Monarch investment units and private industrial units, the premise of Pillar II of the Morocco Green Plan is seriously undermined for the rose sector.

Given issues of perishability and need to immediately ship to market at harvest, fresh fruit cooperatives, outside of larger urban markets, are unlikely to succeed, unless they add further value to the product. In attempting to mitigate this constraint, the current cooperative structures in cactus are comprised of (i) male cooperatives, which are merely organizational structures for maintaining collection centers/staging areas which organize collective member fruit for shipment to federated cooperative structures (GIE) and onwards for export, (ii) women cooperatives that

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**Figure 3** illustrates the value chain for cactus fruit in the Sidi Ifni province. Exports of fresh fruit through the GIE have been limited and undertaken from a recently built factory provided under the Green Plan. At a cost of 12 million dirhams (approximately US\$1.5 million) a visit to the factory reveals lavish office spaces, packaging equipment, cooling facilities and all necessary warehouse equipment, but no revolving working capital for salaries, purchase of packaging material, and most importantly payment for fresh fruit supplied by farmers within the region. A one-time grant for testing the operation, with a shipment to Eastern Canada earlier this year resulted in complete loss on arrival and due to a lack of appropriate cooling

This initial export experience has highlighted fundamental issues of limited coordination between various public and private actors, and a potential weakness of the Green Plan. A lot of effort has seemingly been placed on infrastructure development and outputs rather than outcomes and investments in approaches that are sustainable, replicable and with measurable impact on small farming households—the intended beneficiaries of pillar II of the Green Plan. In the case of limited numbers of women cactus cooperatives, subsidized equipment for extracting cactus oil, renovation of buildings and small equipment for manual processing of cactus (pickled cactus ears, dried fruit, etc.) are being undertaken by the Morocco Green Plan as well as other international partners such as the United Nations Development Programme (UNDP).

**Processed Products**

**Waste & rejects**

**P**

**Processed Products**

extract cactus oil and prepare a variety of dried and processed cactus products.

and packing measures on departure from Morocco.

**P E S**

**Private Land**

**Figure 3.** Cactus value chain.

**Fresh fruit**

**Rainfed**

Small rose farmers in the rural village of Kalaa M'Gouna continue to rely on remittance incomes, limited production of cereals, and on a hope that roses will one day pave the path out of poverty.

### **3.3. Cactus: waiting for a ride**

Cactus production in southwestern Morocco is predominantly undertaken within the province of Sidi Ifni on: (i) small-scale private land, (ii) marginal public land, and (iii) on hills of marginal quality land. With an average of 126 mm of precipitation, cropping options are limited, and proximity to the ocean provides an ambient environment for cactus to prosper. Yet, untimely precipitation or poor distribution of precipitation is a significant risk to producers. In 2013, farmers and industry representative interviews suggest that poor and uneven rainfall was the cause of loss for 80% of harvestable yields, well above the typically high loss of 40–50% in an average year. Discussions with farmers and public extension agents indicate that the severity of loss is related to an inability for producers to ship to market in a timely manner, and largely due to a lack of transportation and marketing intermediaries at critical points of the season. While markets in Agadir-Inezgane and farther north place a premium on cactus from Sidi Ifni, market intermediaries choose their routes based upon profitability and time of transport. Tomatoes, citrus, and berries produced in areas of proximity to Agadir are naturally more lucrative and, therefore, number of vehicles and middlemen travelling to the southern region of Sidi Ifni during vegetable and citrus harvesting seasons are argued to be in limited supply.

With claims of limited transportation options and cactus rotting in the field at such high rates, one is perplexed by recent initiatives under the Morocco Green Plan to subsidize the planting of cactus shrubs at a cost of 4000 (approximately US\$500) dirhams per hectare. One explanation offered by officers at the Ministry of Agriculture is that the Morocco Green Plan has set a target of reducing the area under rainfed cereal plantation, and given limited options for replacement in an area with limited precipitation, cactus is a natural choice. In addition, the plan also sets targets for limiting desertification and replanting of public forest lands, an equally compelling reason for pushing cactus plantation into areas of marginal land productivity.

Discussions with farmers indicate that an average household is likely to earn 25,000 dirhams per year from the sale of cactus, which is lower than the minimum agricultural wage rate. Given that there are limited alternative cropping options for most small rural households in the area, men have traditionally engaged in apiculture, whereas women devote their labor to harvesting and basic maintenance of cactus plantations. Considered a lazy man's' crop, rainfed production requires little maintenance and no material inputs in the production of cactus fruit. All sales of fresh fruit from the farm gate are therefore combined returns to female labor (including management) and returns to male contribution in their traditional role of marketing.

Given issues of perishability and need to immediately ship to market at harvest, fresh fruit cooperatives, outside of larger urban markets, are unlikely to succeed, unless they add further value to the product. In attempting to mitigate this constraint, the current cooperative structures in cactus are comprised of (i) male cooperatives, which are merely organizational structures for maintaining collection centers/staging areas which organize collective member fruit for shipment to federated cooperative structures (GIE) and onwards for export, (ii) women cooperatives that extract cactus oil and prepare a variety of dried and processed cactus products.

**Figure 3** illustrates the value chain for cactus fruit in the Sidi Ifni province. Exports of fresh fruit through the GIE have been limited and undertaken from a recently built factory provided under the Green Plan. At a cost of 12 million dirhams (approximately US\$1.5 million) a visit to the factory reveals lavish office spaces, packaging equipment, cooling facilities and all necessary warehouse equipment, but no revolving working capital for salaries, purchase of packaging material, and most importantly payment for fresh fruit supplied by farmers within the region. A one-time grant for testing the operation, with a shipment to Eastern Canada earlier this year resulted in complete loss on arrival and due to a lack of appropriate cooling and packing measures on departure from Morocco.

This initial export experience has highlighted fundamental issues of limited coordination between various public and private actors, and a potential weakness of the Green Plan. A lot of effort has seemingly been placed on infrastructure development and outputs rather than outcomes and investments in approaches that are sustainable, replicable and with measurable impact on small farming households—the intended beneficiaries of pillar II of the Green Plan. In the case of limited numbers of women cactus cooperatives, subsidized equipment for extracting cactus oil, renovation of buildings and small equipment for manual processing of cactus (pickled cactus ears, dried fruit, etc.) are being undertaken by the Morocco Green Plan as well as other international partners such as the United Nations Development Programme (UNDP).

**Figure 3.** Cactus value chain.

production of primary inputs for supply to the cooperative. Moreover, if the government is indeed interfering in the setting of prices, through collusion between Monarch investment units and private industrial units, the premise of Pillar II of the Morocco Green Plan is seri-

Small rose farmers in the rural village of Kalaa M'Gouna continue to rely on remittance incomes, limited production of cereals, and on a hope that roses will one day pave the path

Cactus production in southwestern Morocco is predominantly undertaken within the province of Sidi Ifni on: (i) small-scale private land, (ii) marginal public land, and (iii) on hills of marginal quality land. With an average of 126 mm of precipitation, cropping options are limited, and proximity to the ocean provides an ambient environment for cactus to prosper. Yet, untimely precipitation or poor distribution of precipitation is a significant risk to producers. In 2013, farmers and industry representative interviews suggest that poor and uneven rainfall was the cause of loss for 80% of harvestable yields, well above the typically high loss of 40–50% in an average year. Discussions with farmers and public extension agents indicate that the severity of loss is related to an inability for producers to ship to market in a timely manner, and largely due to a lack of transportation and marketing intermediaries at critical points of the season. While markets in Agadir-Inezgane and farther north place a premium on cactus from Sidi Ifni, market intermediaries choose their routes based upon profitability and time of transport. Tomatoes, citrus, and berries produced in areas of proximity to Agadir are naturally more lucrative and, therefore, number of vehicles and middlemen travelling to the southern region of Sidi Ifni during vegetable and citrus harvesting seasons are argued to

With claims of limited transportation options and cactus rotting in the field at such high rates, one is perplexed by recent initiatives under the Morocco Green Plan to subsidize the planting of cactus shrubs at a cost of 4000 (approximately US\$500) dirhams per hectare. One explanation offered by officers at the Ministry of Agriculture is that the Morocco Green Plan has set a target of reducing the area under rainfed cereal plantation, and given limited options for replacement in an area with limited precipitation, cactus is a natural choice. In addition, the plan also sets targets for limiting desertification and replanting of public forest lands, an equally compelling reason for pushing cactus plantation into areas of marginal land

Discussions with farmers indicate that an average household is likely to earn 25,000 dirhams per year from the sale of cactus, which is lower than the minimum agricultural wage rate. Given that there are limited alternative cropping options for most small rural households in the area, men have traditionally engaged in apiculture, whereas women devote their labor to harvesting and basic maintenance of cactus plantations. Considered a lazy man's' crop, rainfed production requires little maintenance and no material inputs in the production of cactus fruit. All sales of fresh fruit from the farm gate are therefore combined returns to female labor (including management) and returns to male contribution in their traditional role of marketing.

ously undermined for the rose sector.

**3.3. Cactus: waiting for a ride**

out of poverty.

268 Agricultural Value Chain

be in limited supply.

productivity.

On the positive side, a stable market for cactus oil has the potential to mop up significant amounts of cactus fruit that lays rotting in the fields, only a portion of which is fed to the limited number of livestock within the immediate area. With 30 kg of fresh fruit required to obtain 1 kg of seed, and between 20 and 60 kg of seed to produce 1 L of oil, each liter of cactus oil has the potential to remove between 600 and 1800 kg of fresh fruit from the field. At current retail prices of close to US\$500 per liter, a stable market for cactus oil has the potential for a win-win solution if there is limited variation in the range of seeds needed to produce oil. At the high end of 1800 kg, the product is unprofitable. The fundamental problem with variation in seed quality for oil production lies in rainfed production of cactus. Effective productivity and product for processing requires commercial production of cactus, with provision of drip irrigation and application of judicious amounts of management and technical inputs. Commercial trials in this regard have been initiated by private entrepreneurs in Sidi Ifni and with plantings to bear fruit this year. Whether or not this production is tied to a specific industrial unit for production of processed cactus products is unclear. What the investment does suggest is that there are perceptions of profit to be made in cactus, but whether or not this results in trickle down benefits to small household producers is less clear. While market development for processed cactus products, particularly oil, will have spill over benefits to the local community in terms of wage labor, it is unlikely to have an impact upon the volume of sales for fresh and ripened cactus at the farm gate for small producers. This is largely due to variation in quality of seed for processing and due to climatic variation and the need for standardized commercial production, which has now been undertaken.

Cactus production in Sidi Ifni is predominantly under the domain of women who harvest, sort and prepare cactus for sale at the farm gate. Unable to take the ride to market, in order to sell their fruit during periods of excess supply, women have been relegated into the passenger

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With a relatively small population of 12,000, the village of Taliouine sits on the road between the commercial center of Agadir and the rose-producing village of Kalaa M'Gouna. With over 2000 families involved in the production of this crop, the importance of saffron to stability in livelihoods, and to the economy of the village is significant. Male and female roles in the production of this highly prized commodity internationally are delineated along lines of comparative advantage. The application of brute strength is provided by men in the preparation of fields for planting and water, while women engage in early morning picking of flowers,

Labor shortages, particularly for skilled female labor, are implicit in norms related to payment for picking, with one-fifth of the output payable in a year when labor is abundant, and up to one-half when skilled female labor is in short supply. Focus group discussions with women suggest that a historical culture of self-help (*Tiwizi*), where women collectively harvested and assisted each other in the plucking of stamens has eroded over time. This is largely due to emigration of male household members, leaving behind a greater burden of household duties for women; as well as general societal shift toward individuality. Interestingly, male cooperative members suggested that women cooperatives for saffron were an avenue through which to revive a historical custom of Tiwizi, a claim dismissed by female cooperative members in a separate discussion. Women suggested that a primary reason for women cooperatives to form was to obtain free saffron bulbs, provided by the public extension services, and as a programme aimed at fostering expansion of saffron production under the Morocco Green Plan. While interesting, only 2 of the 36 existing cooperatives in the village are women only, and of the remaining 34, only 2 are mixed cooperatives. In the case of the latter, women belonging to this cooperative were widows or women whose husbands were away from the village for income-generating opportunities. A heavy concentration of male only cooperatives is clear indication of the strong role that males play in the marketing of saffron and in decisions

With up to 50% of land planted under saffron for an average household (ranging from ½ ha to 1 ha), the decision of land allocation is based on labor and water constraints. Given small parcels of land and limited family labor, households interviewed indicated that saffron will always remain a family-based activity for the household and not a commercial activity. In large part, this also reflects the role of saffron in smoothing out income during the months of November to January, when there is limited income from agricultural activities. A claim that saffron has never been immensely profitable to the farm household is plausible, given an understanding of income streams over the year and current challenges of credit within the sector. Traditionally, and even contemporarily, saffron continues to be used as a form of currency within the village, in barter trade, as well as in setting up accounts with shopkeepers

seat and are in transit awaiting a ride to ship their cactus products to market.

and a delicate procedure of plucking stamens from the flower.

**3.4. Saffron: all we need is cash**

related to the planting of saffron.

For small producers of fresh cactus fruit, the only significant opportunity lies in sales of fresh fruit to national and international markets. The argument that middlemen do not purchase cactus in high volumes during the tomato and citrus seasons is somewhat weak. Based on discussions with wholesalers and street cart vendors in the urban center of Agadir, a more likely explanation is an economic one, and that related to the protection of marketing margins through not flooding local wholesale markets. A dedicated study is required to study this conjecture, but one underlying question is why cactus farmers do not collectively hire trucks and ship their cactus to market, in the absence of the middle-men. Access to credit is brought up frequently in this regard, but is also a weak argument given that sales of cactus in wholesale markets are paid in cash on delivery. With perseverance, a more plausible explanation of cactus under the domain of women in the household, and men tending to their bees in the hills and valleys was uncovered. Without significant male support, women are reluctant to engage in the marketing of cactus given cultural norms and particularly so if this requires their accompanying the shipment to Agadir in order to secure the sale.

This social (and perhaps) cultural constraint brings back into play the export-oriented factory built under the aegis of the Green Plan, and an opportunity for this facility to play a critical role in providing significant income to the region. Why there has been limited movement in supplying necessary skill and working capital to leverage investments already undertaken is a source of confusion to many within the cactus sector. What is clear is that there is a lack of coordination within the implementation of the Morocco Green Plan, and specifically between a number of governmental agencies with mandates to provide (sometimes competing) support services.

Cactus production in Sidi Ifni is predominantly under the domain of women who harvest, sort and prepare cactus for sale at the farm gate. Unable to take the ride to market, in order to sell their fruit during periods of excess supply, women have been relegated into the passenger seat and are in transit awaiting a ride to ship their cactus products to market.

### **3.4. Saffron: all we need is cash**

On the positive side, a stable market for cactus oil has the potential to mop up significant amounts of cactus fruit that lays rotting in the fields, only a portion of which is fed to the limited number of livestock within the immediate area. With 30 kg of fresh fruit required to obtain 1 kg of seed, and between 20 and 60 kg of seed to produce 1 L of oil, each liter of cactus oil has the potential to remove between 600 and 1800 kg of fresh fruit from the field. At current retail prices of close to US\$500 per liter, a stable market for cactus oil has the potential for a win-win solution if there is limited variation in the range of seeds needed to produce oil. At the high end of 1800 kg, the product is unprofitable. The fundamental problem with variation in seed quality for oil production lies in rainfed production of cactus. Effective productivity and product for processing requires commercial production of cactus, with provision of drip irrigation and application of judicious amounts of management and technical inputs. Commercial trials in this regard have been initiated by private entrepreneurs in Sidi Ifni and with plantings to bear fruit this year. Whether or not this production is tied to a specific industrial unit for production of processed cactus products is unclear. What the investment does suggest is that there are perceptions of profit to be made in cactus, but whether or not this results in trickle down benefits to small household producers is less clear. While market development for processed cactus products, particularly oil, will have spill over benefits to the local community in terms of wage labor, it is unlikely to have an impact upon the volume of sales for fresh and ripened cactus at the farm gate for small producers. This is largely due to variation in quality of seed for processing and due to climatic variation and the need for standardized commercial

For small producers of fresh cactus fruit, the only significant opportunity lies in sales of fresh fruit to national and international markets. The argument that middlemen do not purchase cactus in high volumes during the tomato and citrus seasons is somewhat weak. Based on discussions with wholesalers and street cart vendors in the urban center of Agadir, a more likely explanation is an economic one, and that related to the protection of marketing margins through not flooding local wholesale markets. A dedicated study is required to study this conjecture, but one underlying question is why cactus farmers do not collectively hire trucks and ship their cactus to market, in the absence of the middle-men. Access to credit is brought up frequently in this regard, but is also a weak argument given that sales of cactus in wholesale markets are paid in cash on delivery. With perseverance, a more plausible explanation of cactus under the domain of women in the household, and men tending to their bees in the hills and valleys was uncovered. Without significant male support, women are reluctant to engage in the marketing of cactus given cultural norms and particularly so if this requires their accompany-

This social (and perhaps) cultural constraint brings back into play the export-oriented factory built under the aegis of the Green Plan, and an opportunity for this facility to play a critical role in providing significant income to the region. Why there has been limited movement in supplying necessary skill and working capital to leverage investments already undertaken is a source of confusion to many within the cactus sector. What is clear is that there is a lack of coordination within the implementation of the Morocco Green Plan, and specifically between a number of governmental agencies with mandates to provide (sometimes competing) sup-

production, which has now been undertaken.

ing the shipment to Agadir in order to secure the sale.

port services.

270 Agricultural Value Chain

With a relatively small population of 12,000, the village of Taliouine sits on the road between the commercial center of Agadir and the rose-producing village of Kalaa M'Gouna. With over 2000 families involved in the production of this crop, the importance of saffron to stability in livelihoods, and to the economy of the village is significant. Male and female roles in the production of this highly prized commodity internationally are delineated along lines of comparative advantage. The application of brute strength is provided by men in the preparation of fields for planting and water, while women engage in early morning picking of flowers, and a delicate procedure of plucking stamens from the flower.

Labor shortages, particularly for skilled female labor, are implicit in norms related to payment for picking, with one-fifth of the output payable in a year when labor is abundant, and up to one-half when skilled female labor is in short supply. Focus group discussions with women suggest that a historical culture of self-help (*Tiwizi*), where women collectively harvested and assisted each other in the plucking of stamens has eroded over time. This is largely due to emigration of male household members, leaving behind a greater burden of household duties for women; as well as general societal shift toward individuality. Interestingly, male cooperative members suggested that women cooperatives for saffron were an avenue through which to revive a historical custom of Tiwizi, a claim dismissed by female cooperative members in a separate discussion. Women suggested that a primary reason for women cooperatives to form was to obtain free saffron bulbs, provided by the public extension services, and as a programme aimed at fostering expansion of saffron production under the Morocco Green Plan. While interesting, only 2 of the 36 existing cooperatives in the village are women only, and of the remaining 34, only 2 are mixed cooperatives. In the case of the latter, women belonging to this cooperative were widows or women whose husbands were away from the village for income-generating opportunities. A heavy concentration of male only cooperatives is clear indication of the strong role that males play in the marketing of saffron and in decisions related to the planting of saffron.

With up to 50% of land planted under saffron for an average household (ranging from ½ ha to 1 ha), the decision of land allocation is based on labor and water constraints. Given small parcels of land and limited family labor, households interviewed indicated that saffron will always remain a family-based activity for the household and not a commercial activity. In large part, this also reflects the role of saffron in smoothing out income during the months of November to January, when there is limited income from agricultural activities. A claim that saffron has never been immensely profitable to the farm household is plausible, given an understanding of income streams over the year and current challenges of credit within the sector. Traditionally, and even contemporarily, saffron continues to be used as a form of currency within the village, in barter trade, as well as in setting up accounts with shopkeepers for payment by saffron at the time of harvest. This continued reliance on saffron as currency in hard times raises a larger issue of market power and lack of ability for farmers to negotiate better prices.

to the GIE on consignment. With 300 kg of storage capacity and an average market price of 13 dirhams per gram, the GIE would require 4 million dirhams of revolving credit (approximately \$US500, 000). Management of the GIE suggest that while high, it is possible to obtain credit from formal banking institutions, but a requirement for personal guarantees from the directors of the GIE, as well as collateral for securing the loan mitigate this potential. A lack of coordination and missing links within the implementation of the Morocco Green Plan comes up again very strongly. One (male) farmer within a focus group discussion asked the question of why the government engages in the supply of free saffron bulbs to farmers, but does not buy the saffron from farmers at reasonable prices. The GIE is asking a question of why the Morocco Green Plan has implemented a model that it does not want to fund in order to get it

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Amid all of this confusion, traders and market intermediaries buy saffron from the local market at prices close to the cost of production and sell onwards to national markets or international buyers at a margin of more than 10 dirhams per gram. With estimated production of over 3000 kg per year in Taliouine, possession of cash translates into market power, and at present, power does not lie in the hands of the cooperative or the farm household due to a

Given our focus on the gendered implications of pillar II of the Morocco Green Plan, our unit of analysis has been the agricultural cooperative. Cooperative production, processing, and marketing are being promoted, given conventional wisdom that small farmers are disorganized in production and marketing and, therefore, subject to opportunistic behavior of marketing agents—both Moroccan and international. Focus group discussions and key informant interviews indicate a farmer-centric view that disorganization at the landscape level reflects a lack of coordination between government agencies, where roles and responsibilities of public bodies are either not clearly defined or overlapping. Traditional transfer of technology models within the system of public extension continue to persist, with little (ostensible) movement toward more participatory approaches for innovation that embody joint learning and action-oriented research. Subsidies on primary inputs (seed, fertilizer, fuel) and public investment in infrastructure (equipment and buildings) for agricultural cooperatives are provided without matching investments in the provision of technical training, for knowledge on effective practices related to storage and transportation of perishable commodities to national and international markets, as well as in the provision of knowledge on effective management practices. In those limited instances where technical assistance is provided and gratefully acknowledged by producers, there are claims of interference by the Ministry of Interior in price fixing (such as for rose petals). This, in collaboration with parastatal processing plants, such that the focus for many small farmers is on quantity and not necessarily quality. We are unable to validate the claims of price fixing, though anecdotal evidence does point to the same. If found to be true, the Green Plan objective of enhancing access to national and international markets is severely undermined.

Our findings also reveal that constraints on land, labor, and equitable access to working capital, exacerbated by the impact of sustained drought on productivity potential, are crosscutting for

off the ground.

lack of cash.

**4. Reflections**

The role of cooperative formation and social organization under the Morocco Green Plan was aimed at improving farm margins and access to markets for local products, with saffron identified as one key product. Yet, exports through cooperatives remain limited, with most sales of saffron still destined for local and national markets. In limited cases, and with the support of internationally sponsored NGOs, one male cooperative has been successful in the supply of saffron to Italy on renewable yearly contracts. Others have informal contacts with overseas buyers who place orders sporadically, with prepayment through the post office and shipment through courier. In general, cooperatives rely on tourist flows, sales at exhibitions and fairs, and to middlemen who onward sell into national markets.

**Figure 4** illustrates the value chain for saffron in Taliouine village. One interesting point to note is the sale of saffron to the GIE (groupement d'intérêt économique). As a second level cooperative promoted by the Morocco Green Plan, its objective is to act as a single selling desk for cooperatives, in order to negotiate better prices and to promote exports. While interesting in theory, a significant challenge in access to working capital renders the GIE as an organization of little value in practice.

Due to cash constraints, the GIE is unable to pay saffron farmers on delivery. As in the case of argan, poverty and a need for cash mitigates the ability for poor households to sell saffron

**Figure 4.** Saffron value chain.

to the GIE on consignment. With 300 kg of storage capacity and an average market price of 13 dirhams per gram, the GIE would require 4 million dirhams of revolving credit (approximately \$US500, 000). Management of the GIE suggest that while high, it is possible to obtain credit from formal banking institutions, but a requirement for personal guarantees from the directors of the GIE, as well as collateral for securing the loan mitigate this potential. A lack of coordination and missing links within the implementation of the Morocco Green Plan comes up again very strongly. One (male) farmer within a focus group discussion asked the question of why the government engages in the supply of free saffron bulbs to farmers, but does not buy the saffron from farmers at reasonable prices. The GIE is asking a question of why the Morocco Green Plan has implemented a model that it does not want to fund in order to get it off the ground.

Amid all of this confusion, traders and market intermediaries buy saffron from the local market at prices close to the cost of production and sell onwards to national markets or international buyers at a margin of more than 10 dirhams per gram. With estimated production of over 3000 kg per year in Taliouine, possession of cash translates into market power, and at present, power does not lie in the hands of the cooperative or the farm household due to a lack of cash.

### **4. Reflections**

**Producer Cooperative** **EXPORT**

**INTERNATIONAL FAIRS**

**GIE DARSAFFRAN**

> **LOCAL MARKETS**

**MIDDLEMEN**

**NATIONAL MARKETS**

**TOURISTS**

**BOUTIQUES SUPERMARKETS**

**Producer Cooperative**

and to middlemen who onward sell into national markets.

for payment by saffron at the time of harvest. This continued reliance on saffron as currency in hard times raises a larger issue of market power and lack of ability for farmers to negotiate

The role of cooperative formation and social organization under the Morocco Green Plan was aimed at improving farm margins and access to markets for local products, with saffron identified as one key product. Yet, exports through cooperatives remain limited, with most sales of saffron still destined for local and national markets. In limited cases, and with the support of internationally sponsored NGOs, one male cooperative has been successful in the supply of saffron to Italy on renewable yearly contracts. Others have informal contacts with overseas buyers who place orders sporadically, with prepayment through the post office and shipment through courier. In general, cooperatives rely on tourist flows, sales at exhibitions and fairs,

**Figure 4** illustrates the value chain for saffron in Taliouine village. One interesting point to note is the sale of saffron to the GIE (groupement d'intérêt économique). As a second level cooperative promoted by the Morocco Green Plan, its objective is to act as a single selling desk for cooperatives, in order to negotiate better prices and to promote exports. While interesting in theory, a significant challenge in access to working capital renders the GIE as an organiza-

Due to cash constraints, the GIE is unable to pay saffron farmers on delivery. As in the case of argan, poverty and a need for cash mitigates the ability for poor households to sell saffron

**PRIVATE HOUSEHOLD PLOTS**

tion of little value in practice.

better prices.

272 Agricultural Value Chain

**Figure 4.** Saffron value chain.

Given our focus on the gendered implications of pillar II of the Morocco Green Plan, our unit of analysis has been the agricultural cooperative. Cooperative production, processing, and marketing are being promoted, given conventional wisdom that small farmers are disorganized in production and marketing and, therefore, subject to opportunistic behavior of marketing agents—both Moroccan and international. Focus group discussions and key informant interviews indicate a farmer-centric view that disorganization at the landscape level reflects a lack of coordination between government agencies, where roles and responsibilities of public bodies are either not clearly defined or overlapping. Traditional transfer of technology models within the system of public extension continue to persist, with little (ostensible) movement toward more participatory approaches for innovation that embody joint learning and action-oriented research. Subsidies on primary inputs (seed, fertilizer, fuel) and public investment in infrastructure (equipment and buildings) for agricultural cooperatives are provided without matching investments in the provision of technical training, for knowledge on effective practices related to storage and transportation of perishable commodities to national and international markets, as well as in the provision of knowledge on effective management practices. In those limited instances where technical assistance is provided and gratefully acknowledged by producers, there are claims of interference by the Ministry of Interior in price fixing (such as for rose petals). This, in collaboration with parastatal processing plants, such that the focus for many small farmers is on quantity and not necessarily quality. We are unable to validate the claims of price fixing, though anecdotal evidence does point to the same. If found to be true, the Green Plan objective of enhancing access to national and international markets is severely undermined.

Our findings also reveal that constraints on land, labor, and equitable access to working capital, exacerbated by the impact of sustained drought on productivity potential, are crosscutting for all four value chains studied. While these issues can be addressed over-time through appropriate sectoral and cross-sectoral interventions, it is the risk of elite takeover within cooperative structures that presents a danger for further entrenchment of rural poverty. More effective organization of production for the commodities studied, each with its own unique specificity of production and demand, may ironically lend itself to invited commercialization and thereby capture of cooperative production units—away from cooperative decision making by its members and toward private vested interests. How commercialization can be managed, without exclusion of the marginalized (particularly women) will depend on how the government eventually comes to terms with many difficult issues:

profitable and equitable interventions within value chains, is a potentially disempowered daughter, who may be deprived from sustained educational activity, and equally impor-

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**3.** Within our focus group discussions (male, female, mixed groups), there was consensus that the household, as a unit, was much better off economically since the proliferation of production cooperatives. Males clearly acknowledged changes to social and cultural norms related to the participation of women in nontraditional economic activities. Females felt more independence and a sense of empowerment given greater respected accorded by males within their household, and within their communities more generally. When asked if this is a fundamental change in societal norms, and based on self-realization, there was much concern related to long-term embedded change. Males appeared to be content with the realization that increased earnings through economic engagement of female members within the household is an increase in their own (gendered) disposable income. Increased female earnings translate into reduced burden for males to cover household expenses, inclusive of child rearing, educational and medical expenses. With the risk of potential unraveling of economic opportunities, for example within the argan sector, will restructured social and cultural norms for female economic engagement persist, or will they revert to

**4.** The current system of implementing the Green Plan, through paternalistic and subsidized initiatives, invites market intermediaries to utilize inequities and marginalization as entry points for exertion of market power. Within the prevailing literature on agricultural innovation, we find an overwhelming focus on value chain development approaches. While improvements in marketing margins, through more effective linkages between producers and other actors within the value chain is valid, there is limited attention paid to the tradeoffs that occur at the household and community level through innovation. These trade-offs arise in several different areas, such as on those related to health and nutrition, education, opportunities for farm and off-farm income sources and sometimes more conspicuously in terms of inequitable gender-based access to resources and economic opportunities for gainful employment. A focus on innovation systems adds value to initiatives focused on improving efficiencies within value chains by adding an element related to a better understanding of how change occurs, and how to facilitate more mutually beneficial and sustainable social and economic interactions between stakeholders. Innovation systems are inherently social systems, as they comprise a set of actors who are bound by a common goal for seeking avenues to mitigate existing challenges and constraints which are of mutual concern. These systems naturally exist, but require facilitation and coordination if they are to achieve effectiveness in terms of enhancing efficiency, equity, and equality in opportunity to access resources (inclusive of knowledge resources). Project-based initiatives undertaken through donor-funded initiatives are unlikely to succeed in terms of institutionalizing effective process for innovation, within and between value chains, and through linkages with wider area development approaches. This is largely due to current geopolitical concerns which are likely to limit the number and breadth of organizations licensed to undertake

tant, the ability to learn through play.

historical constraints?


profitable and equitable interventions within value chains, is a potentially disempowered daughter, who may be deprived from sustained educational activity, and equally important, the ability to learn through play.

all four value chains studied. While these issues can be addressed over-time through appropriate sectoral and cross-sectoral interventions, it is the risk of elite takeover within cooperative structures that presents a danger for further entrenchment of rural poverty. More effective organization of production for the commodities studied, each with its own unique specificity of production and demand, may ironically lend itself to invited commercialization and thereby capture of cooperative production units—away from cooperative decision making by its members and toward private vested interests. How commercialization can be managed, without exclusion of the marginalized (particularly women) will depend on how the government even-

**1.** One premise of the Green Plan is a desire to move away from a history of paternalism through the subsidization of agricultural production and state-led directives for cooperative production. Relaxing the boundaries around which civil society organizations are permitted to operate would be in keeping with the tenets of the plan; yet recent geopolitical events within the region ("Arab Spring") may be of significant worry for national security systems. How civil society organizations in rural areas (cooperatives, community-based organizations, non-governmental organizations, self-help groups, etc.) achieve greater independence in terms of organizational structures and economic independence over time remains an open question. Within the current environment of regional insurrection and instability, it is quite possible for paternalism to be strengthened as a counter measure to potential

**2.** In arguing for greater independence of civil society organizations to operate, for the enhancement of well-being within rural communities, there is a clear need for the state to tie the Green Plan with a wider process for area development—not simply agricultural development. While value chain initiatives, undertaken on a commodity basis, are necessary and important in terms of improving livelihoods, trade-offs between economic empowerment and well-being are likely to lead to potential disempowerment of marginalized members of society. Our analysis reveals that many of the women within the cooperatives visited work significantly long hours (often 12 or more hours in a day), with limited opportunities for institutionalized child care. While reports exist of increasing enrolment of girls into high school [19], given improved economic circumstances, our analysis indicates that rural families may have no choice but to keep their daughters at home. Despite subsidies on school fees and options for boarding, our discussions revealed that in many cases, school enrolment in peri-urban areas is not sustained given high transportation costs for children to return home for the weekend or for national holidays. Family dynamics and livelihood structures have ostensibly changed with the proliferation of production cooperatives. Young mothers are more than likely to have their adolescent children accompany them to the cooperative. Some cooperatives provide child minding and educational services, but most are basic in terms of infrastructure and their ability to provide social services. With larger families, the burden of child care often, therefore, befalls on older siblings—sisters. One trade-off from an economically empowered mother, through more

tually comes to terms with many difficult issues:

insurrection.

274 Agricultural Value Chain


such activities as well as time-bound project timelines which are of short duration. International and national research agencies are likely to be better placed to facilitate innovation systems that embody the notion of inclusiveness and equity. Whether they are ready to take on this responsibility remains moot, particularly in terms of raising potentially sensitive issues related to (social) policy reform and empowerment of rural communities.

Funding for this research was provided by the International Development Research Centre (Ottawa, Canada) as well as the CGIAR research programme: Policies, Institutions and

1 International Centre for Agricultural Research in the Dry Areas (ICARDA), Cairo, Egypt

3 International Centre for Agricultural Research in the Dry Areas (ICARDA), Amman, Jordan

[1] Badraoui M, Dahan R. The Green Morocco Plan in relation to food security and climate change in dry areas. In: Proceedings of the International Conference on Food Security and Climate Change in Dry Areas; 1-4 February; Amman, Jordan. ICARDA; 2010

[2] Kassam S. Reaching out to poor and marginalized communities, learning alliances for out-scaling value chain innovations in the MENA region. Workshop Report. Part 1, June

[3] Kassam S. Reaching out to poor and marginalized communities, learning alliances for outscaling value chain innovations in the MENA region. Workshop Report. Part 2, September

[4] Farines M, Charrouf Z, Soulier J. The sterols of Argania spinosa seed oil. Phytochemistry.

[5] Crocusbank Project [Internet]. 2013. Available from: http://www.crocusbank.org/Index18En.

[6] Kovacheva N, Rusanov K, Atanassov I. Industrial cultivation of oil bearing rose and rose oil production in Bulgaria during the 21st century: Directions and challenges.

[7] Prendergast HDV, Walker CC. The argan: Multipurpose tree of Morocco. Curtis's Botanical

[8] El Aich N, El Assouli N, Fathi A, Morand-Fehr P, Bourbouze A. Ingestive behavior of goats grazing in the Southwestern Argan (Argania spinosa) forest of Morocco. Small

Biotechnology & Biotechnological Equipment. 2010;**24**(2):1793-1798

, Boubaker Dhehibi<sup>3</sup>

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and Aden Aw-Hassan<sup>3</sup>

Markets led by the International Food Policy Research Institute (IFPRI).

\*, Patricia Biermayr-Jenzano2

\*Address all correspondence to: s.kassam@cgiar.org

2 Georgetown University, Washington, USA

3-4. Agadir, Morocco: ICARDA; 2013

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1981;**20**:2038-2039

**Author details**

Shinan N. Kassam<sup>1</sup>

**References**

### **5. Future directions for research**

Findings from this study point to several areas that require further investigation:


### **Acknowledgements**

The authors are deeply grateful to the Institut National de la Recherche Agronomique (INRA) in Agadir for access to the field and for very valuable technical discussions. We are particularly grateful to Abdelaziz Mimouni, Fouad El Ame, Zakia Bouzoubaa, and Youssef Karra from INRA. Appreciation is also accorded to Mohamed El Otmani, Abdelhamid El Mousadik, Aissam El Finti, and Zoubida Charrouf for providing us with clarity on contextual social systems with the rural areas of southern Morocco. Space prevents us from mentioning others who were equally important facilitating our study. They are listed within the acknowledgment section of the working paper from which this chapter has been written [16].

Funding for this research was provided by the International Development Research Centre (Ottawa, Canada) as well as the CGIAR research programme: Policies, Institutions and Markets led by the International Food Policy Research Institute (IFPRI).

### **Author details**

such activities as well as time-bound project timelines which are of short duration. International and national research agencies are likely to be better placed to facilitate innovation systems that embody the notion of inclusiveness and equity. Whether they are ready to take on this responsibility remains moot, particularly in terms of raising potentially sensitive issues related to (social) policy reform and empowerment of rural communities.

Findings from this study point to several areas that require further investigation:

**1.** What are the drivers for institutional change within the rural areas of Morocco, and more generally within the wider Middle East-North Africa region? This requires a better understanding of institutional capacities within rural areas, particularly in terms of gender-sensitive development, and toward the uncovering of avenues for how public-private partnerships can best be fostered within a contemporary environment of regional instability (economic,

**2.** How competitive are the producer cooperatives set up under the Morocco Green Plan and are they able to stand on their feet without significant state support (subsidies)? In addition to economic analyses, there is a need for better understanding of the long-term risks to empowerment and intra-household dynamics which may affect long-term cooperative

**3.** How have female cooperative members invested their increased income sources? How much of this has been directed to consumption within the household, to investment in productive capital assets (eg., livestock), and how much is being directed to innovation (technologies, techniques, vocational education, and training)? An answer to this question may assist in shedding light on those impacts from cooperative formation and participation that may not have been contemplated within the original conceptualization of the Morocco Green Plan and into areas that deserve greater attention in terms of enhancing equity in access to private

The authors are deeply grateful to the Institut National de la Recherche Agronomique (INRA) in Agadir for access to the field and for very valuable technical discussions. We are particularly grateful to Abdelaziz Mimouni, Fouad El Ame, Zakia Bouzoubaa, and Youssef Karra from INRA. Appreciation is also accorded to Mohamed El Otmani, Abdelhamid El Mousadik, Aissam El Finti, and Zoubida Charrouf for providing us with clarity on contextual social systems with the rural areas of southern Morocco. Space prevents us from mentioning others who were equally important facilitating our study. They are listed within the acknowledg-

ment section of the working paper from which this chapter has been written [16].

and public goods and services (including rural advisory services)

**5. Future directions for research**

political) and conflict.

**Acknowledgements**

survival.

276 Agricultural Value Chain

Shinan N. Kassam<sup>1</sup> \*, Patricia Biermayr-Jenzano2 , Boubaker Dhehibi<sup>3</sup> and Aden Aw-Hassan<sup>3</sup>


2 Georgetown University, Washington, USA

3 International Centre for Agricultural Research in the Dry Areas (ICARDA), Amman, Jordan

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