Agriproduct Supply-Chain Management in Developing Countries

ACRC084.book Page 1 Monday, October 18, 2004 2:35 PM

Agriproduct Supply-Chain Management in

Developing Countries

Proceedings of a workshop held in Bali, Indonesia,19–22 August 2003

Editors: G.I. Johnson and P.J. Hofman

Australian Centre for International Agricultural ResearchCanberra 2004

Agriproduct supply-chain management in developing countriesedited by G.I. Johnson and P.J. Hofman

ACIAR Proceedings No. 119e(printed version published in 2004)


The Australian Centre for International Agricultural Research (ACIAR) was establishedin June 1982 by an Act of the Australian Parliament. Its mandate is to help identify agri-cultural problems in developing countries and to commission collaborative researchbetween Australia and developing country researchers in fields where Australia has aspecial research competence.

Where trade names are used this constitutes neither endorsement of nor discriminationagainst any product by the Centre.

ACIAR PROCEEDINGS

This series of publications includes the full proceedings of researchworkshops or symposia organised or supported by ACIAR. Numbers in thisseries are distributed internationally to selected individuals and scientificinstitutions.

© Australian Centre for International Agricultural Research, GPO Box 1571,Canberra, ACT 2601.

Johnson, G.I. and Hofman, P.J., ed. 2004. Agriproduct supply-chain management indeveloping countries. Proceedings of a workshop held in Bali, Indonesia, 19–22August 2003. ACIAR Proceedings No. 119, 194p.

ISBN 1 86320 479 2 (print)1 86320 480 6 (electronic)

Cover design: Design One Solutions.

Technical editing and typesetting: Clarus Design Pty Ltd

Printing: Pirion Printing




Foreword

A major theme of many ACIAR projects is ‘linking farmers with markets’. In a complex,global market, price and supply fluctuations for rural produce affect resource and infra-structure planning and access to credit, at both farm and national levels. Production sur-pluses may not translate into higher incomes. The efficiency of enterprises is affected bythe choice of commodity, product end-use or market, as well as sourcing of inputs such asfertilisers, seed, pesticides and technology.

Rural communities and governments must become more ‘market smart’. They need toforecast, interpret and respond to supply signals from domestic and global markets, and tocapitalise on consumer preferences for perceived nutritional benefits, novelty and conven-ience. They must balance sustainable resource use and demands for quality with the chal-lenges of higher food safety standards and long and complex supply chains.

Progressing beyond self-sufficiency, whether at the farm or national level, requires thecapacity for reliable production and profitable marketing of products sought by con-sumers. The challenge is to provide rural communities with the capability and resource-fulness for social adjustment and improvement of enterprise profitability during theirintegration into the global community. The need is especially acute for small, remote andresource-poor communities because of their small production bases and greater vulnera-bility to natural disasters, new pests, political instability and other ‘shocks’. Developedcountries must be proactive in enabling remote communities in developing countries toobtain a fair share of global prosperity.

ACIAR considers that, in the face of globalisation, rural community progress and resil-ience will depend increasingly on their understanding of and access to markets, the flex-ibility and strength of their financial base, and the quality, efficiency and versatility oftheir production, processing, distribution and marketing systems.

ACIAR will support research that enables improvements in product integrity, processingand storage, and quality assurance and supply-chain management.

The papers in this proceedings were presented at a workshop in Bali in August 2003. Manyof them report on work carried out in ACIAR projects. More information is availablethrough ACIAR’s Linking Farmers With Markets, electronic newsletter (www.lfwm.net).

Peter CoreDirectorAustralian Centre for International Agricultural Research



3

http://www.lfwm.net

http://www.lfwm.net





Contents

Foreword 3Opening Address 7

Ahmad DimyatiPreamble 11Supply-chain Management: Understanding the Concept and Its Implications in

Developing Countries 18Elizabeth J. Woods

Incorporating Measures of Satisfaction, Trust and Power-dependence into an Analysis of Agribusiness Supply Chains 27Peter J. Batt

Banana Supply Chains in Indonesia and Australia: Effects of Culture on Supply Chains 44Shinta Singgih and Elizabeth J. Woods

Supply-chain Management and the ‘One Dragon’ Approach: Institutional Bases for Agro-industrialisation in China 53Sherrie Wei and Zhang Yanrong

Analysis of the Constraints to Banana Industry Development in Indonesia Using the Supply Chain Concept 59Setyadjit, Ahmad Dimyati, Erna Maria Lokollo, Sri Kuntarsih, Rofik Sinung Basuki, Ahmad Hidayat, P.J. Hofman, S.N. Ledger and E.J. Woods

Improving the Marketing System for Fresh Produce from the Highlands of Papua New Guinea 69John Spriggs, Barbara Chambers, Carole Kayrooz, Ernest Natera, Norah Omot and Margaret Vatnabar

Developing Systems to Maintain Quality through the Supply Chain: Getting the Product Right for the Customer [Abstract only] 76George Beers

Consumer Sovereignty: Exploring Consumer Needs 77Peter J. Batt

Aflatoxin in Indonesian Peanuts: How Can the Contamination within the Food Chain Be Managed? 88Okky Setyawati Dharmaputra, Agustina A. Rahmianna, Nageswara Rao Rachaputi, Graeme C. Wright and Greg Mills

Improved Marketing of Mandarins for East Nusa Tenggara in Indonesia 98Sherrie Wei, Damianus Adar, Elizabeth J. Woods and Herman Suheri

Getting Farmers to Work Together: the Experiences of Mango Growers in the Mekong Delta Region of Vietnam 107Nguyen Minh Chau, Sherrie Wei, Vo The Truyen, Marlo Rankin and Iean Russell

Fruit and Vegetable Production in Vietnam and the Role of Traders in Marketing [Abstract only] 112Tran Cong Thang



5


Who Benefits from Enhanced Management of Agri-Food Supply Chains? 113Chris Wheatley and Dai Peters

Farmers’ Misconceptions about Quality and Customers’ Preferences: Contributing Inefficiencies to the Vegetable Supply Chain in Southern Mindanao 124Sylvia Concepcion, Marilou Montiflor, L.T. Hualda, L.R. Migalbin, L.N. Digal, E.T. Rasco, N.M. Manalili, M.J. McGregor, P.J. Batt, R. Murray-Prior and F.M. Rola-Rubzen

The Melon Value Chain in Gansu Province, Western China: Benefits to Growers from Improved Disease-Control Practices 133Zhang Yanrong and Sherrie Wei

Improving Indonesian Vegetable Supply Chains 139Wendy Morgan, Syukur Iwantoro and Ibu Alifah Sri Lestari

Indonesia’s Strategic Agricultural Commodities in Meeting the WTO Agreement 142Rina Oktaviani

Market Access and Job Creation: a Supply Chain Action Agenda (the Case of the Philippine Fruit Export Winners) [Abstract only] 152Nerlita M. Manalili

Public Policy Issues in Supply-Chain Management 153Donna Brennan

Supply-chain Management and Agro-Enterprise Development: CIAT’s Approach in Southeast Asia 164Christopher Wheatley, Rupert Best, Dai Peters and John Connell

The Supply Chains of Melons in Western China 173Sherrie Wei, Zhang Yanrong and Niu Gang

Development in Agribusiness Chains and Challenges for Postharvest Technology: Experiences from The Netherlands [Abstract only] 178George Beers

Linking Farmers with Markets: the Case of Cocoa 179G.I. Johnson, Arief Iswanto, J. Ragisvaru, P.J. Keane, N. Hollywood, S.V. Lambertand D.I. Guest

The Benefits of Supply-Chain Practice in Developing Countries – Conclusions from an International Workshop 188Chris Wheatley, Elizabeth J. Woods and Setyadjit



6

000. PrefaceDimyati.fm Page 7 Tuesday, October 19, 2004 11:52 AM

Opening Address

Supply-Chain Management in Indonesia: Prospects for Methodological Adjustment

and Practical Applications

Ahmad DimyatiSecretary,

Indonesian Agency for Agricultural Research and Development (IAARD)

Background

The Ministry of Agriculture of the Republic of Indonesia has defined two coreprograms of national agricultural development, namely improving food security andenhancing the development of competitive, sustainable, people-centred anddecentralised agribusinesses. The two core programs require better understanding andimplementation of a systems approach in identifying, analysing and improvingproblematic situations in agricultural development. Therefore, the application of thesupply-chain management (SCM) concept in agribusiness is quite in line with thecurrent needs of the agriculture sector’s decision-makers and practitioners.

Supply-chain management has been widely used in the manufacturing industry. Its usein agribusiness has been initiated in a study entitled ‘Market-based analysis ofconstraints for the development of banana industry in Indonesia and Australia’. Thestudy was carried out by the Indonesian Center for Horticulture Research andDevelopment (ICHORD) in collaboration with Queensland Department of PrimaryIndustries (QDPI), with joint funding of the Government of Indonesia and theAustralian Centre for International Agricultural Research (ACIAR).

The introduction of the SCM concept within ICHORD programs coincided with theintroduction of another systems approach method, named ‘soft systems methodology’(SSM) developed by Peter Checkland of the University of Edinburgh, Scotland. Ourresearch team tried to combine and integrate the two methods in analysing andimproving the problematic situations pertaining to the development of horticulture inIndonesia.



7


Lessons Learned

The six principles of successful SCM were used to measure the performance of bananaproduction and marketing systems in several locations in the provinces of Banten, WestJava, and Jakarta. The six principles are: (1) understanding and meeting customers’ andconsumers’ needs; (2) getting the products right; (3) creating and sharing values; (4)logistics and distribution; (5) information and communication; and (6) effectiverelationships among supply-chain members.

The results of the study will be reported in detail in later sessions of this workshop.However, it is necessary to underline several lessons learned from this study. Afterdiscussing various problems and constraints in the banana industry, new ideas to improveresearch and development programs in horticulture were revealed. On-farm orientedresearch, which has dominated research programs for years, was supplanted by market-oriented research programs, such as consumer preferences, components and determiningfactors of fruit quality, and packaging, storage and processing. New ideas for on-farmresearch also emerged, such as selection of better varieties and planting material, andcultural practices related to fruit qualities.

Our short experience in applying the supply-chain concept also revealed that, betweendifferent chains, variation is possible in the emphasis on different principles in achievingsuccess. One supply chain may emphasise the creation and sharing of new values toimprove income and welfare of the members, while another SC may emphasise theimportance of open and fair information flow and efficient communication.

The success of applying the supply chain concept and improvement of SCM dependslargely on effective contributions by various members of an interdisciplinary, or even across-functional, team. No single scientific discipline or professional field can claim allthe credit for success. Researchers in various disciplines, extension workers, practitionersand policy makers should collaborate in analysing the problems, formulating theimproved schemes and designing the actions needed to implement them.

Since SCM is a holistic approach with human-activity systems, similar to soft systemsmethodology (SSM), we found it possible to integrate SCM with SSM. Such integrationpermits:

1. mapping the situation of SCM in a richer picture according to SSM, to make it richerand more dynamic than the linear flow charts usually used in SCM

2. use of interactive and iterative multilateral dialogues among supply chain members

3. characterisation of the chain, using SWOT (strengths, weaknesses, opportunities,threats) analysis and root definition of the systems

4. mapping of narrative areas for improvement of SCM in the conceptual models used inSSM



8


5. formulation of follow-up actions based on SWOT analysis can be furtherelaborated using the SSM approach to define actions and changes that are logicallydesirable as well as culturally and politically feasible.

Both SSM and SCM require an interactive and iterative egalitarian dialogue that suitsWestern culture. Their application in the Indonesian cultural setting will needadjustment of the style of dialogue. One of the drawbacks of the two methods lies in thenature of decision-making process in the supply-chain systems. Supply-chainimprovement requires the decision of various ‘equally authorised’ partners. Hence, theprocess is owned by these various partners. Multiple ownership of the processes andthe diversity of stakeholders, make the processes of improvement slow andcomplicated.

Both SCM and SSM have good prospects for wider application in agribusinessdevelopment. Among the areas that will benefit from the use of the two methodologiesare:

• analysis of constraints to agribusiness development made by various centralDirectorates within and outside the Ministry of Agriculture

• assessment of location-specific and commodity-specific agribusiness models ascomponents of action research conducted by 26 provincial Assessment Institutesfor Agricultural Technology

• commodity-based ‘Action Programs’ conducted jointly by the Indonesian Agencyfor Agricultural Research and Development (AARD) and Directorate General ofHorticulture Production Development

• integration of the two methodologies in the education and training curricula relatedto the agribusiness development.

Since we are still in the early learning stage, we are expecting the workshop to makea large contribution to the enhancement of SCM application in Indonesia, particularlywithin AARD. Among possible contributions are:

• exchange of lessons learned in diverse social and economic conditions

• improvement and enrichment of the concept

• refinement of the procedures

• suggested adjustments for varied cultural situations and commodities

• strategy and tactics for wider application.

Finally, I wish you all productive deliberations and an enjoyable stay in this country.Thank you.



9





Preamble

An adequate and stable supply of agricultural com-modities is the keystone of food security and eco-nomic development. Globalisation and tradeliberalisation can help communities to improve ruralincomes, but these benefits may be compromised byinadequacies in infrastructure or governance, by dif-ficulties in controlling postharvest deterioration or byan inability to produce competitive products.

ACIAR considers that, in the face of globalisation,the progress and resilience of rural communities willdepend increasingly on their understanding of andaccess to markets, the flexibility and strength of theirfinancial base, and the quality, efficiency and versa-tility of their production, processing, distribution andmarketing systems. Rural communities and govern-ments must become more ‘market smart’. They mustbalance sustainable resource use with the challengesof quality requirements, higher food-safety standardsand long and complex supply chains.

At the international workshop at which the papersin these proceedings were presented, experts outlinedthe theory, methods and approaches of supply-chainmanagement (SCM), and practitioners discussedtheir practical experience in SCM. The workshopthen considered how SCM can best be used in devel-oping countries to optimise benefit flows.

The main focus of ACIAR support for supply-chain projects has been to consider whether evalu-ating an industry using the supply chain as a founda-tion (that is, looking at all aspects from farm to plate)would better indicate the areas that need to be tar-geted to improve industry efficiency and profita-bility, for the individual members of the supply chainand the chain as a whole. An important priority of theACIAR projects (listed later in this preamble) hasbeen to identify whether and how changes in SCMcan ensure that the benefits extend to farmers.

This workshop provided a forum for discussinghow SCM can assist in developing appropriatesystems from farm to plate, to the mutual benefit ofall involved, and what implications there are for

Agriproduct supply-chain manaedited by G.I. Johns

ACIAR Proceed(printed version p

11

governments and communities. In addition, itsought to assess whether this approach can assist inidentifying the most important constraints to theseimprovements. These constraints would then be theareas that R&D providers and policy makers couldfocus on in order to assist industry development.

Workshop ObjectivesThe workshop sought to achieve:• a greater understanding of the potential benefits

and application of the SCM approach to increasingreturns to smallholders

• an enhanced capability for supplying produce tothe higher-returns supermarket and hospitalitytrades, by increasing product quality and supplyefficiency

• a better identification of the real constraints toimprovements in the targeted industries, so thatR&D activities can be implemented moreeffectively

• an understanding of the implications of increasingmarket sophistication for governments, industriesand communities

• publication, in the ACIAR Proceedings series, ofthe papers presented. The papers in this volumecover the theory of supply chain R&D and practicalexperiences in application of the supply-chainapproach in developed and developing countries.

Participating ProjectsThe projects described on the following pages pro-vided the support for many of the papers presented atthe workshop. The information was collated byACIAR, using the best information available at thetime of preparation, for use as a resource in the work-shop. Further information on the projects can beobtained from the contact person listed in the projectsummary.

gement in developing countrieson and P.J. Hofmanings No. 119e

ublished in 2004)


ACIAR Project PHT/1997/161 — Market based analysis of constraints to banana industry development in Indonesia and Australia. Active to 31/12/2003.

This small project developed a participatoryprocess to identify the major constraints to the com-petitive performance of a horticultural industry inIndonesia and Australia to:• assist in industry development• more effectively direct R&D to priority areas with

the greatest potential for improving producerprofitability. The project tested the feasibility of using the con-

cepts of product market performance and supply-chain management both as drivers of industry devel-opment and to guide the contribution of R&D toindustry development. Commissioned organisation: Queensland Depart-ment of Primary Industries, Brisbane (P.J. Hofman,Email: <[email protected]>). Collabo-rators: Central Research Institute for Horticulture,Indonesia; University of Queensland, Australia;Indonesian Agricultural Postharvest TechnologyResearch Institute (Indonesia); Directorate of FruitPlantation (Indonesia); Central Research Institute forSocio Economic Development (Indonesia); Directo-rate of Marketing of Horticulture (Indonesia);Central Research Institute for Vegetables (Indo-nesia).

The market for seed potatoes, fresh potatoes and processed potato products in Vietnam (AusAID CARD and other funds)

Funded initially under the CARD project, thisproject sought to identify the principal source of seed,the costs of seed, the various criteria farmers used intheir decision to purchase seed and the extent to whichthe seed available met the farmers’ expectations.

Based on the performance of seed imported fromWestern Australia, it was readily apparent thatimproved seed had a significant positive impact onyield, lifting the average yield of 12 tonnes perhectare to more than 30 tonnes per hectare. Sincemost of the potato crops in the Red River Delta areharvested within an eight-week period, concern wereexpressed as to what impact the improved produc-tivity would have on prices in the fresh market.Various exploratory studies were then undertaken toexamine the downstream implications on the whole-sale market. Discussions focused on current whole-sale prices, the seasonality of demand, competitors

Agriproduct supply-chain managedited by G.I. Johnso

ACIAR Proceed(printed version pu

12

(in China and Da Lat, Vietnam), tuber quality andsize, postharvest storage and the extent to which thepotatoes available in the Red River Delta met themarket intermediaries’ needs. Various discussionswere also undertaken with small-scale potato proces-sors and the food service sector.

In presenting the results to a potato industry work-shop in November 2001, the German technical assist-ance agency Deutsche Gesellschaft für TechnischeZusammenarbeit (GTZ) advised that it was about toembark upon a more extensive investigation of theentire supply chain, including consumers. As a result,the two research programs were combined. It wasproposed to interview consumers in both northernVietnam (the Red River Delta) and southern Vietnam(the Mekong River Delta) and to undertake an anal-ysis of both the domestic market and export marketfor potatoes cultivated in the Red River Delta. Infor-mation was sought on consumers’ attitudes towardsfresh potatoes, substitute crops (taro, sweet potatoand radish), the frequency of consumption, how theproduct was used, how much consumers paid to pur-chase potatoes, consumer preferences, and thedemand for both processed potato products and pota-toes that were consumed away from home (restau-rants). Various demographic variables were alsocollected to evaluate such measures as the incomeelasticity of demand.

A comprehensive analysis of the supply chain forpotatoes in both the Red River Delta and MekongRiver Delta was undertaken. Both quantitative andqualitative interviews were conducted with farmers,traders, wholesalers and retailers, and various foodservice outlets. Information was collected on theprices paid to purchase potatoes, the various activitiesundertaken, the costs of performing those activities,and the prices at which the potatoes were sold. Infor-mation was sought on how prices varied over the year,between the different grades, the different suppliers(China and Da Lat), and the extent to which the qualityof the potatoes sold met the buyers’ needs. The finalaspect of the research included a number of relationaldimensions (trust, satisfaction, commitment, power-dependence and relationship-specific investments) toexplore to what extent market intermediaries were sat-isfied with the exchange relationship.Commissioned Organisation: Agriculture WesternAustralia (Peter Batt, Email: <[email protected]>).Collaborating Organisations: Food Crops ResearchInstitute Vietnam; Curtin University of Technology;GTZ.

ement in developing countriesn and P.J. Hofmanings No. 119eblished in 2004)


ACIAR Project PHT/1998/140 — Postharvest handling and disease control in melons in China and Australia. Active 1/1/2002 to 31/12/2004.

ACIAR funded an earlier small project, ‘Posthar-vest handling and disease control in melons’, whichaffirmed the priorities for melon industry develop-ment in western China and the scope for improve-ments in disease control and supply-chaintechnologies. This project follows on from thatresearch. It is aiming to improve postharvest diseasecontrol and market quality of melons and othercucurbits, and improve returns to growers in Chinaand Australia. Project activities include the strategicapplication of preharvest treatments to boost naturaldefence mechanisms in melons, and postharvesttreatments to control disease and maintain quality.Researchers are also developing and testing interven-tions that improve supply-chain management,analyse the economic benefits associated with usingmodern postharvest technologies and transport sys-tems, and identify the most practical options toimprove profitability for farmers. Commissioned Organisation: University ofSydney, Australia (Dr Robyn McConchie, Email:<[email protected]>). Collabo-rating Institutions: Gansu Agricultural University,China; China Agricultural University, China; SydneyPostharvest Laboratory, Australia; Xinjiang Depart-ment of Agriculture, China; University of Queens-land, Australia; Xinjiang Agricultural University,China.

ACIAR project ASEM/2001/037 — Improving the marketing system for fresh produce of the highlands of PNG. Active 01/01/2003–31/12/2005.

The Papua New Guinea (PNG) Highlands regionrepresents a unique environment in which highquality temperate-zone horticultural produce isgrown year-round. The region has the potential tomeet produce needs of populous coastal cities ofPNG as well as to supply offshore markets. The maindrawback to fulfilling this potential is an inadequatemarketing system, and marketing improvementshave been given a high priority in the PNG Govern-ment’s National Food Security Policy, 2000–2010.Project researchers will map the marketing systemand its institutional environment (governmental andinfrastructural), identify the constraints and capaci-ties for change, and evaluate the potential forimprovement. They will facilitate a process ofchange, focusing on two particular supply chains —



13

a land/sea chain (bulky, less-perishable produce) anda land/air chain (highly perishable, high-value pro-duce). Commissioned Organisation: University of Can-berra, Australia (Dr John Spriggs, Email:<[email protected]>). Collabo-rating Institutions: National Agricultural ResearchInstitute, Papua New Guinea; Fresh Produce Devel-opment Corporation, Papua New Guinea.

ACIAR Project ASEM/2000/101 — Improving the efficiency of the agribusiness supply chain and quality management for small agricultural producers in Mindanao. Active 01/01/2001–31/12/2003.

This project examined the factors affecting the per-formance of the agribusiness supply chain forselected fresh vegetables produced by smallholdersin Mindanao, Philippines, with particular emphasison the potential for farmer cooperatives to performthe agribusiness functions and deliver greater bene-fits to the farmer. The project involved rapidappraisal and case study methods to assess the per-formance of the current marketing arrangements andsought to identify impediments to the functioning ofthe supply chain. The researchers aimed to determinewhether there is adequate information flow betweenmarket intermediaries and farmers, to reflect themarket requirements for quality management.Training programs, workshops and seminars withfarmer groups and institutional participants aimed tofacilitate the adoption of quality managementsystems and improve the success rates among agri-cultural cooperative groups.Commissioned Organisation: Curtin University ofTechnology, Australia (Dr Murray McGregor,Email: <[email protected]>). Projectwebsite: <http://www.curtin.edu.au/curtin/muresk/aciarmindanao/>. Collaborating Institutions: Uni-versity of the Philippines, Mindanao, Philippines.

ACIAR Project PHT/1997/017 — Reducing aflatoxin in peanuts using agronomic management and bio-control strategies in Indonesia and Australia. Collaborating Countries: Indonesia and Australia.

Several ACIAR bilateral projects have investi-gated aspects of aflatoxin assessment and significantprogress is finally being made in developing inte-grated control strategies. This project builds on thisand other work on drought tolerance (a trait that wasfound to reduce contamination risk). Advances in



agronomic management of aflatoxin since the earlierprojects means that reduction of aflatoxin contamina-tion risk in peanuts, including the use of drought-resistant peanut cultivars, is now feasible. Thisproject will determine the extent and relative impor-tance of pre- and postharvest aflatoxin contaminationin peanuts, and develop biocontrol, management andcrop/fungus modelling strategies to minimise theimpact of aflatoxins in both Indonesian and Aus-tralian cropping systems. Scientists will evaluate anumber of crop management and varietal methods tocontrol ‘on-farm’ aflatoxin contamination. As well, asimulation modelling approach — integrating theinteraction between crop, soil, environment andAspergillus flavus (the fungus producing the afla-toxin) — will enable assessment of the probability ofaflatoxin formation at various stages during growth,harvest and storage of peanuts. Commissioned Organisation: Queensland Depart-ment of Primary Industries, Australia (Dr GraemeWright, Email: <[email protected]>).Collaborating Institutions: Research Institute forLegumes and Tuber Crops, Indonesia; AssessmentInstitute for Agricultural Technology, Indonesia;Gadjah Mada University, Indonesia; University ofSydney, Australia; SEAMEO Regional Centre forTropical Biology, Indonesia.

ACIAR Project ASEM/1999/013 — Improved marketing of mandarins in East Nusa Tenggara in Indonesia and northern Queensland. Completed project.

Regional horticultural farmers in East Nusa Teng-gara (NTT) and northern Queensland operate on asmall scale and lack a systematic marketing strategyfor their products, which are often of poor and incon-sistent quality. The Indonesian farmers have addi-tional problems associated with poor infrastructureand lack of investment. The project focused on small-holder mandarin farmers in NTT and northernQueensland. The aim was to assist farmers toimprove quantity and quality of fruit production,define specific market requirements and improvemarketing strategies. The findings of the project werealso applicable to East Timor. Commissioned Organisation: The University ofQueensland (Dr Sherrie Wei, Email:<[email protected]>). Collaborating Insti-tutions: Universitas Nusa Tendara; QueenslandDepartment of Primary industries; Metaram Univer-sity, Lombok.



14

Improving the performance of the fruit industry in Tien Giang and Tra Vinh Provinces. AusAID CARD (Capacity-Building for Agriculture and Rural Development) Project for Vietnam. July 2001–July 2003.

This project focused on the mango industry in theMekong Delta area of Vietnam and aimed to:• enhance the capacity of agribusiness marketing of

the Southern Fruit Research Institute (SOFRI),provincial agricultural services, selected farmerassociations and farmers

• strengthen the capacity of farmer associations inservice delivery, quality assurance managementand group marketing

• upgrade the capacity of SOFRI and provincialagricultural services in fruit tree propagation,production and protection, including expandedcapacity for certifying planting material to meetmarket demand. Four farmer groups were established and they

worked with Australian partners (including mangofarmers from Queensland) to develop a trial of QAstandards for the 2003 season and other group func-tions. Commissioned Organisation: University of Queens-land (Sherrie Wei, Email: <[email protected]>). Collaborators: Southern Fruit Research Institute,Vietnam; Curtin University of Technology; QueenslandFruit and Vegetable Growers; Cantho University.

Victorian Government and Australian Department of Agriculture, Forestry and Fisheries (AFFA) Project VG MIS: Indonesian vegetable supply chains: case studies. Active to 30/09/2003.

This one-year project used a case study approachto introduce farmers, packing house staff and con-sumers (via retailers) to the concepts of food safetyand meeting customers’ expectations. The projectwas proposed as a five-year project and wasextremely ambitious. Activities undertaken toachieve this included:• selection of supply chains and personnel in five

locations to participate in case studies after lengthydiscussions with senior MOA staff in Jakarta andprovinces

• a training-of-trainers (TOT) workshop for 10MOA staff at CSA, Jakarta on food safety forpacking houses, including packing-house HACCPanalysis, development of a packing-house HACCPmanual, and accreditation preparation



• TOT for selected MOA staff and experiencedfarmers at five locations, on integrated pestmanagement (IPM) and farmer field school (FFS)methodology

• FFS for farmers in each supply chain (425 farmerscurrently in FFS)

• packing-house food safety awareness for thecommunity at each supply chain’s location

• packing-house food safety training and HACCPanalysis for manager, staff and farmers supplyingpacking houses at five locations

• training in product handling and storage for retailfresh-produce buyers, managers and senior storestaff of one of the supply chains.It is too early to evaluate the impact of the project,

but change has occurred at farmer, packing-houseand retail sectors of the case study supply chainsCommissioned Organisation: Victorian Depart-ment of Primary Industries (Dr Wendy Morgan,Email: <[email protected]. gov.au>). Col-laborators: Indonesian MOA’s Centre for Standard-isation and Accreditation (Mr Syukur Iwantoro),FIELD Indonesia (Ibu Alifah Sri Lestari), MOA &Dinas staff in five provinces: East Java, SouthSulawesi, Bali, South Sumatra and West Java.

Rural Agroenterprise Development Project: International Center for Tropical Agriculture (CIAT). Active. http://www.ciat.cgiar.org/agroempresas/ingles/projectdescript.htm

This global project is promoting rural businessdevelopment and encouraging improved businessand market orientation in small rural producers’organisations and support service organisations.Small-scale farmers and entrepreneurs facenumerous barriers that prevent them from taking fulladvantage of marketing opportunities. Usually, eco-nomic models and policies do not favour them; theyhave little business experience, and lack informationon technologies, markets, and prices; and receivelittle support in terms of training, advisory services,and credit. The mission of the project is to promotethe linkage of small farmers with growth markets,and motivate the adoption of conservation practicesthrough the development of methodologies, tools,information, and models of institutional organisationfor establishing and strengthening rural agro-enter-prises and their complementary support services.

Currently, the project works with five modules thatintegrate the essential elements for developing ruralagro-enterprises: marketing, postharvest technology,



15

business organisation, integrated agro-enterpriseprojects (organised around commodity chains) andlocal support systems, and training and strategicplanning. The project’s direct clients are civil societyNGOs and CBOs (community based organisations),public sector development agencies and institutionsinvolved in building human capital. The project hasdeveloped a methodological framework based on a‘territorial approach to rural business development’,which consists of four phases:1. formation of a work team interest group) and

development of a common vision 2. identification of market opportunities 3. design of integrated agroenterprise projects (i.e.

oriented towards improving the commoditychain)

4. proposal for strengthening the local supportsystem.

This methodology is implemented in referencesites in collaboration with public and private-sectordevelopment agencies. The project is decentralised,having regional coordinators in Africa, Asia, CentralAmerica, and the Andean region of northern SouthAmerica.

In Asia, the project has previously undertakenresearch in Vietnam on clusters of root crop starch-processing enterprises (understanding and enhancinglocal innovation systems) and has conducted tworegional agroenterprise development training courseswith SEARCA and UPWARD (Los Baños 2001 andHo Chi Minh City 2003).

A new SDC-funded agro-enterprise developmentproject for Laos and Vietnam started in 2003. TheSDC project goal is ‘to develop sustainable agroen-terprise initiatives with upland rural communitiesthat generate income and employment opportunitiesthrough diversifying and adding value to localnatural resources’. The objectives embody theprocess that will be followed in facilitating agro-enterprise development, ensuring its sustainability,and setting the context for extension of theapproaches developed, viz:i. identify and evaluate market opportunities for

agroenterprise development through local stake-holder interest groups

ii. design and facilitate the implementation ofagroenterprise initiatives with supply-chainactors

iii. establish a strategy and local capacity forpromoting agroenterprises and strengtheninglocal business support services



iv. institutionalise the agroenterprise developmentprocess at district, provincial and national levels.

Project Agency: International Center for TropicalAgriculture (CIAT) (Project Manager Dr Rupert Best,Email: <[email protected]>; Asian Regional Coordi-nator: Dr Dai Peters, Email: <[email protected]>;Consultant: Dr Chris Wheatley; Email:<[email protected]>. Collaborating Agencies:Various national and regional partners.

IFPRI — The development of postharvest activities and agroindustry as a strategy to improve rural livelihoods. Project completed.<www.beaf.de/dnload/IFPRI_Katalog.pdf>

This project aimed to develop recommendationsfor the continued expansion and development of thefruit and vegetable sector in Vietnam. Outputs soughtwere:• preliminary assessment of postharvest constraints

and selection of product groups for in-depth study• identification and characterisation of household and

community management of postharvest operationsand agrofood-based rural industrialisation

• identification and characterisation of marketstructure, marketing, and processing enterprisesinvolved in postharvest operations and agrofood-based rural industrialisation

• identification and characterisation of institutionalmechanisms involved in lowering the transactioncosts and increase the access of rural households toinformation, markets, and assets

• empirical analysis of economic behaviour,adoption of technology and institutionalmechanisms

• analysis of impact of alternative policies andstrategies at the rural household level, at themarket level, and at the institutional level

• intensive dissemination of results in the countryand internationally.

Project Partners: Vietnam Ministry of Agricultureand Rural Development (MARD); InternationalFood Policy Research Institute (IFPRI), NicolasMinot; Email: <[email protected]>; InternationalAgrifood Consulting Company.

ACIAR Project ADP/2000/100 – Contract farming, smallholders, and rural development in East Java, Bali and Lombok. Active 01/01/2001–30/06/2003.

This research aimed to examine contract farmingarrangements between smallholders and agribusinessfirms in Indonesia. Contract farming helps to over-



16

come problems of imperfect markets in developingcountries, and has been successfully adopted in LatinAmerica. The agribusiness firms ensure a guaranteedsource of supply and reduce transactions costs, whilethe farmers are given access to input supplies (such ascredit, information on new technologies) and guaran-teed prices. However, there are concerns that smallfarmers may not appropriate much of the benefitfrom these arrangements, and this project collectedbaseline information on the use of contract farming inIndonesia, with particular emphasis on opportunitiesfor smallholders in East Java, Bali and Lombok. Theresults from the study should also have relevance toagribusiness firms and government decision-makersat both local and national levels. Commissioned Organisation: University of NewEngland, Australia (Dr Phillip Simmons; Email:<[email protected]>). Collaborating Insti-tutions: Balai Pengkajian Teknologi Pertanian,Indonesia; Bogor Agricultural University, Indonesia;Brawijaya University, Indonesia; Udayana Univer-sity, Indonesia.

Technical assistance on market promotion and development of the Philippine fruit export winners

This proposed project would aim to foster thedevelopment of a thriving Philippine fruit exportindustry that will help create jobs and improve thelives of the people through a two-pronged approachof formulating the needed strategies and corre-sponding actions that will enable the country to gainmarket access in developed countries and to improvefurther product quality and competitiveness of itsexport winners. The specific objectives are:• To promote agricultural winners, specifically

tropical fruits, in key international marketsthrough: – the conduct of marketing activities that promote

Philippine fruits and negotiate tariffs on importsand

– the identification and evaluation of legal andtechnological barriers to agricultural trade intarget markets.

• To ensure adoption of continuing product andproduct quality improvement in the fruit exportindustry through:– the conduct of industry assessment focusing on

product and product flow (supply chain), toidentify areas for quality and efficiencyimprovement and



– the establishment of an institutional mechanismthat will convene the stakeholders as well asfacilitate the interface between export industryleaders and government agencies.

• To formulate policy recommendations in line withthe strategies identified.

Proponent: SEAMEO Regional Center for GraduateStudy and Research in Agriculture (SEARCA)

ACIAR Project ADP/2001/066 – Strengthening agricultural market information activities in Vietnam. Active 01/01/2003–30/06/2005

Vietnam faces many challenges in the area of agri-cultural marketing but lacks experience and capacityin market-based research. This project will develop aframework to analyse agricultural marketing issues.Researchers will describe (and quantify) the currentmarketing channels for pigs, vegetables and cannedfruit in Vietnam, and identify the role of the publicand private sectors in marketing these products. Theywill also compare the experiences of public andprivate agricultural marketing services in China,Thailand and Australia with the situation in Vietnam.The researchers will work with the InformationCentre for Agriculture and Rural Development(ICARD) – the market research and market informa-tion unit of Vietnam’s Ministry of Agriculture andRural Development — to determine how the Centrecan provide ongoing market information services tothese and other industries.Commissioned Organisation: University of WesternAustralia, Australia: (Associate Professor MichaelBurton; Email: <[email protected]>). Col-laborating Institutions: Ministry of Agriculture andRural Development, Vietnam; Department of Agricul-ture, Western Australia, Australia



17

Other initiatives

PHT/1996/004 – Monitoring mycotoxins and pesticides in grain and food production systems for risk management in Vietnam and Australia

PHT/2000/102 – Selection for improved quality and resistance to Phytophthora pod rot, cocoa pod borer and vascular-streak dieback in cocoa in Indonesia

Australia–Indonesia Working Group on Agriculture and Food Cooperation (WGAFC) <www.affa.gov.au/exportgrowth>.

The Working Group on Agriculture and Food Co-operation (WGAFC) was established by the Aus-tralia–Indonesia Ministerial Forum in November1992 to identify opportunities for greater cooperationin agriculture and food between both countries and tofacilitate trade and investment. This mechanism hasprovided a valuable opportunity for developing link-ages between high-level government officials andprivate sector interests of both countries. Most of thecooperative activities of the WGAFC are undertakenby its four task forces: Meat, Dairy and Livestock;Horticulture; Food Processing, Storage, Transportand Distribution; and Agribusiness Support Systems,although activity is not necessarily limited to thesesectors. The task forces comprise mainly industryrepresentatives but are co-chaired and facilitated byAustralian and Indonesian government representa-tives. Several commercial joint venture opportunitiesand areas for collaborative training and research wereidentified at its July 2003 meeting.



Supply-Chain Management: Understanding the Concept and Its Implications in Developing

Countries

Elizabeth J. Woods*

Abstract

During the 1990s, academic and commercial interest in supply-chain management (SCM) in agribusiness rosein Europe and the USA. The driving forces included the trend towards consolidation of organisations (at farminput, farms, processor and supermarket levels), along with government deregulation of agribusiness markets.Interest was also rising in quality-management systems and food safety, and competition in markets wasincreasing, associated with global trade in agribusiness products. SCM as a field of study draws contributionsfrom several disciplines including transaction-cost economics, relationship marketing, agency theory andsystems studies. This paper analyses the role of SCM in the context of concepts of operational effectivenessand strategy put forward by M. Porter in 1996.

SCM implies managing the relationships between the businesses responsible for the efficient production andsupply of agribusiness products from farm level to consumers, to reliably meet consumers’ requirements in termsof quantity, quality and price. In practice, this often includes the management of both horizontal and verticalalliances. Meeting customers’ requirements involves integrated management of the transactions and relationshipsbetween firms as well as processes within firms. Managing these relationships provides an opportunity for overtlynegotiating the shares between chain members of the value produced within the chain. More importantly, jointplanning of collaborative strategies is possible, to grow the shared value. The latter contrasts with the usualconflict between agribusiness suppliers and buyers about their relative shares of the value generated.

Traditional supply chains in developing countries typically involve many players, and are tightly linked withlong-standing social structures. As developing countries enter into World Trade Organization arrangements theiragricultural industries will be subject to increasing competition in their domestic markets, and have greaterincentives to meet global standards in export markets. SCM provides one approach to planning the improvementsneeded in the management of their agricultural production and marketing systems to meet future challenges.

During the 1990s, academic and commercial interestin supply-chain management (SCM) in agribusinessrose in Europe and the USA. The concept and its

* School of Natural and Rural Systems Management,University of Queensland Gatton, Gatton Queensland4343, Australia. Current address: Executive Director, Research andDevelopment Policy, Department of Primary Industries,Meiers Road, Indooroopilly, Queensland 4067,Australia. Email: <[email protected]>.



1

application have become one of the key areas ofresearch and commercial focus in agribusiness forthe past decade. Interest has spread in the past fiveyears to include not only SCM in agribusiness prac-tice in Western countries, but also the potential andimplications of the concept in developing countries.

This paper outlines the background to risinginterest in the concept of SCM. It presents workingdefinitions of the concept, and describes the theoret-ical contributions that have guided the development


ublished in 2004)

8


of the concept and the field of study. The paperpresents arguments which show that SCM in its prac-tical application straddles the concepts of operationaleffectiveness and of strategy, both of which are crit-ical to business success.

SCM provides a useful framework for analysingthe relationships between businesses engaged in bothvertical and horizontal alliances as a means to pur-suing consumer responsiveness, and is concernedwith the development and nature of relationshipsbetween businesses in the supply chain. This includesthe contribution to the development of value by thechain and the way in which value is shared betweenthe chain partners. The role of new technologies inenabling SCM is also noted.

Finally, the potential application and value of theconcept in planning, developing and managing agri-business in developing countries are explored.

BackgroundSeveral changes in the operating environment of thefood and agribusiness sectors contributed to risinginterest in SCM, but it can be argued that the heart ofthe development was growing intensity in the com-petition for consumer expenditure. In line with otherretail developments, greater differentiation of foodproducts, improvements in product quality, and theability to transport products in cost-effective waysprovided consumers with a greatly increased array ofproducts from which to choose. At the consumerlevel, the driving forces changing agribusinessincluded increasing consumer sensitivity to quality,safety, health and nutritional aspects of food prod-ucts, and consumer interest in place of origin andmeans of production, including non-food values suchas environmental sustainability and animal welfare.Consumers responded by exercising their ability tochoose, and by this means, began to exert greaterpower than previously over the food production andmarketing systems. In turn, it became clear to foodsuppliers that market success depended on respon-siveness to consumer demands.

A term coined to describe this reorientation—chain reversal or consumer-driven chains—empha-sises that the rise of consumer power spelt the end tothe prevailing assumption at farm and agribusinesslevel that the job was simply to supply a productwithout concern about the consumers’ requirementsor the existence of a market for the product. Tradi-tional agricultural and food businesses that had



19

focused strongly on price were not equipped torespond to a widening range of consumer demands.Individually, they lacked the means to deliver effec-tive consumer response. Each represented only partof the processes involved in production of an agribus-iness product and its subsequent transport,processing and retailing to the consumer. SCM pro-vided a means to conceptualise management of thechanges required in the system to efficiently respondto consumer needs, based on integration and co-ordi-nation of the efforts of all the business units involvedin the production and delivery processes.

Changes in the macro environment were occurringparallel to the changes at consumer level. Theseincluded a trend towards consolidation of organisa-tions (at farm input, farm, processor and supermarketlevels), principally to drive down the costs of produc-tion through economies of scale, but also to gainmarket share and competitive strength in an increas-ingly global market place. Preparing for global tradealso led to deregulation of agribusiness markets bygovernment withdrawal from marketing in severalcountries. This created the opportunity to rethink thebusiness strategy, and create new supply-chain rela-tionships.

Australia’s recent deregulation of the dairy industryis an excellent example of change in a domestic marketresponding to the requirements for international trade,as mediated through the World Trade Organization(WTO). The deregulation process resulted in the com-mercial renegotiation of supply-chain relationshipsthat had previously been subject to heavy governmentintervention and regulation. Consolidation followingderegulation has provided one approach to the newcompetition between supply chains for market shareand scale, and to generating efficiencies which couldsupport greater investment in differentiation, brandsand marketing of products, than had been possiblewithin regulated markets.

Underpinning Theories

Supply-chain management simply refers to the man-agement of the entire set of production, distribution,and marketing processes by which a consumer is sup-plied with a desired product. Folkerts and Koehorst(1998, p.385) define a supply chain as:

…a set of interdependent companies that work closelytogether to manage the flow of goods and services alongthe value-added chain of agricultural and food products,



in order to realize superior customer value at the lowestpossible costs.

Some authors prefer the term demand chain asmore clearly focusing on the consumer’s require-ments. The related term, value chain, highlights thecontribution of functional parts of the chain (eitherwithin an enterprise or across a supply chain) to thedevelopment of customer value across the chain.While consumers do determine the market size andpreference, they do not play an active role in the man-agement of the chain. Implementing practicalimprovements to allow the chain to be more compet-itive and more responsive, requires active manage-ment initiated by one or more members of the supplychain, and supports the focus on supply-chain man-agement as a basis for moving actively towardsdelivery of improved chain performance. In otherwords, all products reach consumers through asupply chain but not all chains have sufficient com-mitment and interaction to consistently improve effi-ciency, customer value and competitiveness throughintegrated management.

It is important to note that, in developed countries,SCM implies a focus on agribusiness units and busi-ness-to-business relationships. This differs from theindustry or commodity focus traditionally adopted inagronomic research or in agricultural economicsanalyses of business improvement. It also differsfrom the community and participatory models thatcommonly form the basis of regional economicdevelopment and natural resource managementstudies. This focus on business units tends to lead tomost SCM work being with larger industry players,and in markets where products are valuable and dif-ferentiated, rather than in commodity markets.

SCM as a field of study draws on several disci-plines. These are summarised briefly below, with ref-erence to literature through which the topics can bemore fully explored. • Transaction-cost economics analyses the costs

associated with the exchange of goods and services(Hobbs 1996). This includes the costs of acquiringinformation, costs associated with negotiating andenforcing contracts, definitions of property rights,and the monitoring and changing of institutionalarrangements which define the processes by whichbusiness transactions occur between companies.Transaction-cost economics emphasises assetspecificity. The underlying assumption is that themore specific an asset is, the greater the incentiveto develop long-term cooperation and



20

relationships which will enable the asset to make along-term contribution to profitability.

• Agency theory involves defining the mostappropriate forms of contract to protect therelationships between chain members (Eisenhardt1989). The aim is to produce a contract oragreement which achieves a balance in relation toinformation asymmetry between chain members,uncertainty of outcomes, and the different levels ofrisk aversion held by chain members,

The agency theory approach is complementaryto transaction-cost economics; together they focuson improving the economic efficiency of doingbusiness between firms.

• Power and power relationships betweenbusinesses within a supply chain, and between thechain members and the government, have beenstudied by political scientists (French and Raven1959). Boehlje et al. (1998) argue that the power ofone business over another is dependent on theeconomic structure of the relationships. Power isrelated to dependency, and dependency is relatedto the availability of alternatives. The morealternatives a firm has, the less dependent it will beand the smaller the chance that it will be undulyaffected by the power (real or perceived) ofanother firm.

The consolidation of agribusiness firms overthe last two decades has much to do withattempting to gain real or perceived market power.At the upstream end, the small and fragmentedbusinesses of smallholders have very little indi-vidual power, which may provide them with astrong incentive to work together.

• Relationship marketing refers to the move awayfrom adversarial buyer–seller relationships tocooperative and collaborative marketingstrategies, to deal with increasingly fiercecompetition (Gronroos 1994; Morgan and Hunt1994). Relationship marketing recognises theimportance of commitment and trust in business-to-business relationships, and that suchrelationships are dynamic and can develop onlyover time.

• Network theory recognises the reality that if A doesbusiness with B who then does business with C, Acan affect C’s business performance despite thefact that they never do business together. Thestrategic networks concept emphasises that firmscan gain stronger competitive positions by



working cooperatively than they can by operatingindividually (Easton 1992), and that networks withlong-term supply-chain relations featuring trustand knowledge sharing are well positioned todeliver lower business costs than firms relyingsolely on spot transactions. As well as emphasisingthe importance of skills in managing relationships,the concept of networks emphasises thedevelopment by each firm of capabilities that areunique and hard to copy, thus ensuring that thefirm will continue to be in demand as a chainpartner able to fulfil specific functions.

• Production/operations management and logisticsemphasise operational efficiency throughminimising inventory and just-in-time supply.They have contributed to SCM as a managementapproach for planning gains through operationalefficiencies. Some authors (Westgren (1998), forexample) view the disciplines of operationsmanagement and logistics as the initial source ofSCM studies.

SCM is a holistic approach that moves past thelevel of the individual manager or business toaddress all the processes from the initial assemblyof raw materials to the final retail processes thatprovide the customer with access to the product.In that sense, it is a systems approach (Beers et al.1999). It represents a significant step forwardfrom analysis at the level of an individual farm oragribusiness in isolation from its wider context. Itcould be viewed as a parallel to the step betweencrop or animal husbandry research and the studyof farming systems, where the latter has greaterpotential to optimise both production outcomesand protection of natural resources (at the systemlevel).

SCM: for Operational Effectiveness or Strategy?

Porter is recognised as a leading figure in the study ofstrategic management in the late part of the twentiethcentury. In his seminal paper ‘What is strategy’(Porter 1996), he draws the distinction between thepursuit of operational effectiveness and the develop-ment of strategy. He argues that, by their nature,many popular management tools of the last 20years—including benchmarking, best practice, andquality systems—are designed to match competitorsin operational effectiveness. Along with the trend to



21

greater outsourcing (which can lead to competingfirms sourcing key inputs from the same supplier)these approaches contribute to greater uniformitybetween industry competitors and reduced consumerchoice.

Given the diversity of consumer interests and thedesire of consumers to choose products that matchtheir needs, perceptions and values, strategies whichresult in a move towards greater industry uniformityare unlikely to lead a business to a successful marketposition. Hence, operational effectiveness is a neces-sary but not sufficient condition for improving busi-ness performance. Many aspects of SCM (improvedlogistics, shared information systems and betterinformation flows, reduced transaction costs, preser-vation of product quality, standards and integritythroughout the chain) are, at their heart, efforts toimprove the operational effectiveness of a chain.Adopting these approaches is important in matchingcompetitors and increasingly they are a necessarycondition for access to certain markets (export mar-kets, supplying to supermarkets). However theseapproaches will not guarantee a sustainable compet-itive advantage.

By comparison, Porter argues that the crux ofstrategy is doing something different that is hard forcompetitors to match. Critical to developing sustain-able competitive advantage is recognising thatchoices need to be made, since doing more of onething will necessitate doing less or none of another(termed trade-offs). The more that activities or func-tions within a firm or a supply chain can be made self-reinforcing (to deepen the strategic position), or themore they depend on human capabilities and rela-tionships, the more likely it is that the strategy willlead to sustainable competitive advantage, becausethese approaches are intrinsically hard to copy.

SCM provides opportunities to develop strategiesthat meet these criteria. Potential strategies include: • reducing market risks by working towards

interdependency (where business activities areinterdependent to the point that the costs ofswitching to a new supplier or customer aresufficiently high to inhibit the development of newrelationships)

• cooperating to learn how to create value togetherand then collaborating to consistently utilise thenew value as a source of competitive advantage(Collins et al. 2002)



• using the established relationship as a platform tobuild additional product lines or new markets; thatis, to innovate together.

Porter’s concept of strategy has relevance in the dis-cussion of SCM as a useful management concept. Thekey to development of chain relationships is commit-ment to longer-lasting relationships instead of spottransactions (which may offer short-term advantagesin certain parts of the price cycle). Chain relationshipsare built on the relationships developed at a range oflevels between two firms (typically between seniormanagers, distribution/receivals, sales/accounts, sales/production). Developing relationships requires signif-icant effort, and the maintenance of the relationships isan ongoing commitment. As the investment in a rela-tionship grows, so the cost grows to duplicate a similarrelationship. Hence, the cost of leaving a relationshipincreases over time, leading to interdependency. It is inthe interests of a chain member to proactively workwith its chain partners to ensure their mutual ongoingviability, because the alternative (creating new rela-tionships) is too costly.

Application and Implications of Supply-Chain Management

Recent studies of supply chains in Australia identi-fied six key principles of successful SCM (AFFA etal. 2002). These are:• a focus on customers and consumers• the chain creates and shares value with all its

members• making sure the product fits the customers’

specifications• effective logistics and distribution• an information and communication strategy that

includes all chain members• effective relationships that give leverage and

shared ownership.The discussion in this section on the application

and implications of SCM will be structured aroundthese six features.

Since the driving force behind the developinginterest in SCM was the need for new strategies toachieve sustainable advantage in increasingly com-petitive agribusiness markets, a critical factor tosuccess is how effectively the chain addresses cus-tomers’ wants and needs. The value built by a chain(which can then sustain the future operations of the



22

chain members) depends on coordinated responsive-ness to customers’ requirements.

In principle, SCM can shift the traditional conflictbetween supply-chain partners about their relativeshares of benefits to a focus on increasing the totalvalue available to be shared. This should be attrac-tive, because potentially there are better gains for allin this approach. In practice, all levels of the chainmust derive value from the chain and from potentialimprovements, to ensure all chain members agree toproposed change.

Implementation of SCM in Western countries hasemphasised participatory and/or facilitated processesthat build relationships and increase understandingand trust between chain members in the process ofdeveloping shared plans and identifying opportuni-ties for long-term collaboration. A skilled outsidermay facilitate such processes. In practice, there isalso a need for ‘chain champions’. These aremembers (or a member) of the chain with a vision ofthe opportunities that could arise from closer collab-oration and with the energy to organise and driveprocesses of relationship building and collaboration.In new agro-industry development, building a supplychain has been demonstrated to be just as critical tothe success of the industry as establishing adequateagronomic and pest-management practices.

As noted earlier, SCM provides a framework forthe analysis and recognition of power in supply chainrelationships and for the discussion of how to sharethe value generated by the chain. Achieving moreefficient SCM often requires horizontal collaborationat levels in the chain where there are multiple smallplayers. This reduces the transaction costs betweenthe vertical levels in the chain and may reduce powerimbalances that occur in interactions between largepowerful players (such as supermarkets) and smallindividual growers.

Closer relationships and better understanding ofthe chain and customer value may provide opportu-nities for farmers to extend their operations along thechain. For example, additional grading that improvesproduct shelf life and reduces wastage (and the asso-ciated labour costs for retailers to ‘pick over’ shelves)represents extra value added by the farmer and maybe recognised with higher payment by retailers,offset by their savings in labour costs. Similarly, afarmer who develops the capacity to pack into con-sumer-friendly trays is helping the retailer to manageproduct safety and reduce the risk of in-store contam-ination of the product. If the farmer’s packs also carry



a bar code, the costs of weighing product at the checkout and of training retail staff to identify freshproduce can also be saved.

SCM enables the development of quality systemsand product-integrity systems throughout the chain.When they focus on the features that customersvalue, such systems are the tools by which transac-tions costs may be decreased and operational effec-tiveness increased. Similarly, SCM allows forsophisticated management of logistics includingoptimisation problems and through chain inventorycontrol. There are opportunities to minimise waste(shrinkage) along the chain, which is often a majorcost in marketing fresh food items.

Working in the supply chain context may offer par-ticipants new insights into the relative importance ofalternative products and markets. In the absence of anattempt to achieve integrated management, mostsupply chain members will have regular contact andcommunication with only their immediate supplierand immediate buyer.

SCM may lead to detailed descriptions, andmapping of flows of product, information, andrevenue throughout the chain. It also provides anopportunity to examine activities undertaken and serv-ices performed at each level in the supply chain, ena-bling all the participants in SCM to gain a broaderunderstanding of the way in which customer value isdeveloped in the chain, and the possibilities to developnew value or develop value more effectively. SCM canprovide similar insights to scientists whose usual focusis on technical issues at a particular level in the chain,and to economists who routinely analyse the industryat one level in the chain (e.g. production economics atfarm level), but not the business or business-to-busi-ness interactions. Government policy makers havealso utilised SCM to identify factors that may inhibitchain development and performance, and to conceptu-alise policy measures that might assist businesses toovercome barriers and achieve more competitiveexport performance (see, for example, Gifford et al.(1998)). The Australian Government has initiated aresearch, training and industry program in SCM inresponse to its realisation that despite growing exportopportunities in Asia, Australia’s market share forboth commodity and processed food products wasdeclining in these markets.1

The nature of chain relationships is informed bysubstantial business and management literature onstrategic alliances, and by an increasing literature on



23

SCM in relation to agribusiness. Relationship issuesto be considered may include: • agreeing to share long-term development goals

and seasonal business planning • developing relationships between operational staff

within the businesses on issues such as, forexample, timing, amount, ripeness andtemperature of deliveries

• developing shared quality and safety standards andagreeing how and when they will be measured andmonitored

• linking information systems to track product flowsand standards. In SCM the focus is usually on long-standing rela-

tionships based on informal or trust arrangementsrather than ownership or contract relationships. Theformer are valued because they allow flexibility andthey constantly reinforce how each partner willbenefit from collaborating to ensure a successful andcompetitive chain.

Rising interest in SCM has been strongly sup-ported by the capabilities of new technologies. In par-ticular the application of information systems canimprove information flows and, with the addition ofe-commerce facilities, can facilitate revenue flows.Satellite positioning system technologies are anexample of technology can be used to monitorproduct flows. Conversely, well-developed SCM iscontributing to the management of other frontiertechnologies. SCM enables management of supplychains where the products have embedded intellec-tual property (e.g. unique germplasm), through itspotential to tightly control product flows and main-tain clearly differentiated lines of product withunique and valuable characteristics.

SCM: What Value in Developing Country Agribusiness?

Finally, in this section the potential application andvalue of the SCM concept in planning, developingand managing agribusiness in developing countries isexplored.

Farmers in the developing world face a similarcost–price squeeze to that affecting farmers in the

1 Publications arising from this program are listed on theAFFA website, <http://www.affa.gov.au/content/output.cfm?ObjectID=D2C48F86-BA1A-11A1-A2200060B0A01607>.


http://www.affa.gov.au/content/output.cfm?ObjectID=D2C48F86-BA1A-11A1-A2200060B0A01607

http://www.affa.gov.au/content/output.cfm?ObjectID=D2C48F86-BA1A-11A1-A2200060B0A01607


developed world. The need to feed rapidly growingpopulations tends to result in policies to keep foodprices low, making innovation and investment unat-tractive even if the capital and management capacityneeded are available.

However, there are opportunities for developingcountry farmers in the expanding total populationand increasing urban populations, and hence agrowing consuming class. At least in the short term,this group can be expected to spend more on higherquality and more varied produce than do people atlower income levels. Projections on future trends(Coates et al. 1997) suggest that, in terms of volume,most of the growth in demand for food will bemiddle-class consumption in the large countries ofthe developing world including China, India, Indo-nesia and large countries in South America (termedWorld 2 in their scenario). Much of this demand willbe met domestically (by World 2 countries) butagainst competition from exporting countries. Theprimary basis of competition will be price but thepresence of exporting competitors will also mean thegradual adoption of ‘world’ quality standards. Thisrepresents an incentive for better SCM in developingcountries.

This effect is enhanced by the increasing implica-tions of the WTO for developing countries. The pri-ority to increase the competitiveness of domesticagriculture and agribusiness is demonstrated by thefollowing extract from a publication of the Indone-sian Ministry of Agriculture (MOA 2001):

…liberalisation of international trade that has been hap-pening or is still in the process of being established is achallenge facing agribusiness development. WTO/GATT commitments to reduce or eliminate variousforms of protection, tariff or non-tariff, mean opportu-nities as well as challenges. For nations with the abilityto improve their competitive strength, the opportunity isopen to increase domestic and international marketshare. Conversely, for nations with no capacity to



24

improve their competitive strength, it means adverseeffects, the challenge to recede and step down. For thisreason, there is no option for Indonesia but to acceleratestrengthening competitive capacity.

In helping developing country farmers take advan-tage of the growth opportunity to supply the con-suming classes, the aim should be to build thecapacity of domestic producers to match the productsthat exporting countries will be aiming to put intoAsian markets. SCM provides one conceptualapproach to meet this need. To not assist developingcountry farmers to participate would see them cut outof the major growth sector in food markets in theworld. Their displaced product would depressdomestic prices for lower class consumption andfurther exaggerate the cost–price squeeze.

Many authors, including Heilbron and Larkin(1995), have commented on the developing dualismin food markets in Asia. Traditional markets continueto provide for the bulk of the population throughdelivery to wet markets and subsequent distributionby a variety of small retailers. These chains are char-acterised by multiple levels, fragmentation, highlyvariable standards, and poor infrastructure and logis-tical support. In parallel, large Western style retailersare providing global standard goods and services tothe elite and middle classes in major cities. Theseretail developments were begun by Japanese retailersin the 1980s and followed in the 1990s by Westernfood retailers. The Asian economic crisis providedmany of these Western companies with opportunitiesto rapidly expand their foothold at low prices (DFAT2002).

Supermarkets are most profitable when they arelocated in areas of high rate of population growth ofpeople with consumer incomes, high-income growthrates, and low supermarket penetration. This is theprecise description of the long-term trends in much ofAsia. SCM practices for this sector might be expected

Table 1. Projected population growth to 2025 (in billions).

1994 2025

Total worldWorld 1: the affluent, advanced nations, e.g. Europe, the USA and JapanWorld 2: middle countries with needs and resources in balance, e.g. China, India, Indonesia, large countries in South AmericaWorld 3: the destitute countries, e.g. sub-Saharan Africa

5.61.0

3.51.1

8.41.3

5.12.0

Data sourced from Coates et al. (1997).



to be similar to Western supply chains at the down-stream end. At the upstream end, consolidation couldbe expected, relative to traditional supply chains, toachieve reliable supply and consistent quality. Inter-national retailers will also seek to provide food safetyand health standards similar to their operations in theWest. The risk of a major accident is serious for aglobal retailer, both in terms of their internationalreputation and because their pockets are perceived tobe very deep in relation to compensation and penaltypayments.

Studies of the traditional supply channels in devel-oping countries often focus on issues of lack of powerof farmers, linked to the lack of timely informationflows. The traders or merchants are usually identifiedas powerful and able to extract value at the expense offarmers who are cash and information poor. How-ever, there are alternative views. Kono and Goto(2002) in a study of marketing channel developmentin the banana industry in Indonesia, conclude that allparties—growers, collectors and traders—must con-tribute to developing pluralistic and reliable mar-keting channels. Woods et al. (2000) noted aworkshop situation in which a trader motivatedfarmers to strive for good products, being competi-tive and becoming a champion. Hence, traders havebeen observed to play a mixed role—of channel man-ager, information supplier, co-investor and extensionofficer—suggesting a mutual benefit rather than awin–lose relationship may exist with smallholders, atleast in some circumstances.

In situations where trust already exists, the mostprofitable application of SCM may be to improveoperational effectiveness. Options for improvementsmight include training to increase the skills andcapacities of chain members so that they are moreable to adapt to change, improved infrastructure andlogistics, and better information flows, especially inrelation to markets and consumer preferences.Improvements that took traditional supply chains inthese directions might provide a step towards the pos-sibility of these chains developing export capabili-ties.

Trienekens and Beulens (2003) present a researchagenda on innovation through food supply chains andnetworks in developing countries. Based on casestudies that investigate supply chains involvingupstream production in developing countries forexport, or for Western style retailing in developingcountries, they identify the following three key ques-tions:



25

• Do innovations at the consumer end induceinnovations at the upstream (farmer) end of supplychains in developing countries?

• Are there any system effects, for example, oneconomic development, sustainable developmentand standards, of innovations at the consumer endof the chain?

• Which institutional arrangements within chainsand networks are best able to survive in developingcountries and why?Similar questions need to be asked about the poten-

tial impacts of improving traditional supply chains indeveloping countries. Questions for a researchagenda might include:• Can improved management of traditional supply

chains improve the quality of life of smallholders?• Can improved management in traditional supply

chains improve the supply and quality of food forincreasing numbers of urban residents indeveloping countries?

• Which institutional arrangements are best able todeliver benefits, and how can these benefits beshared to encourage further improvements?

ReferencesAFFA (Department of Agriculture, Forestry and Fisheries

Australia), University of Queensland, and National FoodIndustry Strategy 2002. Forming and managing supplychains in agribusiness: learning from others. Canberra,AFFA, CD–ROM.

Beers, G., Beulens, A. and van Dalen, J. 1999. Chain scienceas an emerging discipline. In: Proceedings of the ThirdInternational Conference on Chain Management inAgribusiness and the Food Industry, WageningenAgricultural University, The Netherlands.

Boehlje, M., Schrader, L. H. and Akridge, J. 1998.Observations on formation of food supply chains. InProceedings of the Third International Conference onChain Management in Agribusiness and the FoodIndustry, Wageningen Agricultural University, TheNetherlands, 393–403.

Coates, J.F., Mahaffie, J.B. and Hines, A. 1997. 2025:scenarios of U.S. and global society reshaped by scienceand technology. Greensboro, NC, Oakhill Press, 516p.

Collins, R., Dunne, T. and O’Keeffe, M. 2002. The ‘locus’of value: a hallmark of chains that learn. Supply ChainManagement, 7(5), 318–321.

DFAT (Department of Foreign Affairs and Trade) 2002.Subsistence to supermarket II: agrifood globalisation andAsia. Vol. II, Changing agrifood distribution in Asia.Canberra, Australia, DFAT, 316p.



Easton, G. 1992. Industrial networks: a review. In: Axelson,B. and Easton, G., ed., Industrial networks: a new view ofreality. London and New York, Routledge, 3–27.

Eisenhardt, K.M. 1989. Agency theory: an assessment andreview. Academy of Management Review, 14, 57–74.

Folkerts, H. and Koehorst, H. 1998. Challenges ininternational food supply chains: vertical co-ordination inthe European agribusiness and food industries. BritishFood Journal, 100, 385–388.

French, J.R.P. and Raven, B. 1959. The bases of social power.In: Cartwright, D., ed., Studies in social power. Michigan,Michigan Institute for Social Research, 150–167.

Gifford, D., Hall, L. and Ryan, W. 1998. Chains of success:case studies on international and Australian foodbusinesses cooperating to compete in the global market.Canberra, Australian Government Publishing Service.

Gronroos, C. 1994. From marketing mix to relationshipmarketing: towards a paradigm shift in marketing.Management Decision, 32, 4–20

Heilbron, S. and Larkin, J.T. 1995. Corporate strategies andstructure: penetrating Asian markets. Canberra, RuralIndustries Research and Development Corporation,Research Paper 95–7.

Hobbs, J.E. 1996. A transaction cost approach to supply chainmanagement. Supply Chain Management 1(2),15–27.



26

Kono, Y. and Goto, J. 2002. Marketing channeldevelopment. In: Goto, J. and Mayrowani, H., ed.,Potentials and constraints of banana based farmingsystems: a case of an upland village in West Java.Tsukuba, Japan, JIRCAS Working Report No. 29, 41–46.

MOA (Ministry of Agriculture) 2001. Agribusiness systemdevelopment as prime mover of the national economy(1st ed.). Jakarta, Government of Indonesia, 80 p.

Morgan, R.M. and Hunt, S.D. 1994. The commitment–trusttheory of relationship marketing. Journal of Marketing,58, 20–38.

Porter, M. 1996. What is strategy? Harvard BusinessReview 74(6), 61–78.

Trienekens, J. and Beulens, A. 2003. Innovation through(international) food supply chain development. A researchagenda. In: 13th Annual World Food & AgribusinessSymposium, Cancun, Mexico, 21–24 June 2003. <http://www.ifama.org/conferences/2003Conference/papers/trienekens.pdf> , 12p.

Westgren, R.E. 1998. Innovation and future directions ofsupply chain management in US agrifood. CanadianJournal of Agricultural Economics, 46, 519–524.

Woods, E.J., Wei, S., Singgih, S. and Adar, D. 2000. Supplychain management as beyond operational efficiency.Acta Horticulturae, 575, 425–431.



Incorporating Measures of Satisfaction, Trust and Power-dependence into an Analysis

of Agribusiness Supply Chains

Peter J. Batt*

Abstract

Using transaction cost analysis, gap analysis and the key dimensions of long-term buyer–seller relationships(satisfaction, trust and power-dependence), it is possible to demonstrate that the supply chain for potatoescultivated in the Red River Delta (Vietnam) is surprisingly efficient. While the price paid to the farmers isultimately determined by supply and demand, the price that farmers receive from traders and collector agentsis influenced by tuber quality and the costs of transportation. Contrary to expectations, farmers are generallysatisfied with the exchange and display considerable trust in their preferred trading partner. Farmers areseldom dependent upon their preferred trading partner and indicate that numerous alternative traders areavailable to purchase the potatoes they have harvested. While the traders similarly enjoy a strong positiverelationship both with farmers and collector agents and their downstream customers, wholesalers report thatthey are much less satisfied in their exchange relationship with both traders and retailers. Wholesalers are moredependent upon their upstream and downstream trading partners and more dissatisfied and less trusting ofexchange partners.

In most developing countries, the agricultural mar-keting system is characterised by a highly atomisticproduction side (where there are many small widelydispersed farmers growing perishable crops) and anoligopolistic marketing system (where there areonly a few traders) (Mendoza and Rosegrant 1995).Marketing costs are high because of an inefficienttransport system, inadequate cool-storage capacity,and significant variations in product form, varietyand quality (Harris-White 1995). The supply chainitself is often long and protracted, involving a largenumber of market intermediaries (Lele 1981). Fur-thermore, information and locational factors poten-tially limit the number of intermediaries available to

* Agribusiness Marketing, Curtin University ofTechnology, GPO Box U1987, Perth, Western Australia6845, Australia. Email: <[email protected]>.



2

transact with primary producers (Pomeroy andTrinidad 1995). In other instances, various creditarrangements may lock farmers into long-term busi-ness-to-business relationships where the farmer is,to varying degrees, more or less dependent upon themarket intermediary (Mendoza and Rosegrant1995).

There is also a growing recognition that economicexchange is embedded within various overarchingsocial institutions including locality, class, ethnicity,religion, gender and age (Zucker 1986; Fukuyama1995; Harris-White 1997). The importance of trustand social capital as a means of reducing risk andfacilitating exchange is being increasingly recog-nised when producers and market intermediarieshave limited access to the legal system as a means forredress (Mendoza and Rosegrant 1995; Fafchamps1996; Humphrey and Schmitz 1998).


ublished in 2004)

7


Using three alternative methods of evaluation, thispaper seeks to examine the efficiency of the mar-keting system for fresh potatoes in the Red RiverDelta (Vietnam). It is proposed that before any inter-vention is contemplated, the supply chain must beexamined to identify the marketing marginsextracted by the various market intermediaries, theextent to which suppliers are able to fulfil the needsof their downstream customers, the constraints thatadversely impact upon the suppliers’ ability to meetcustomers’ needs, and the nature of the long-termrelationships that exist between suppliers and theircustomers.

Analysing Performance in Marketing Channels

Developed primarily by Williamson (1979, 1985),transaction cost theory assumes that various costs areassociated with an exchange. These costs are com-prised of the costs of obtaining and processing infor-mation, negotiating contracts, monitoring agents andenforcing contracts. These costs may become signif-icant in the presence of information asymmetry,uncertainty and transaction-specific investments.

Although there are several different approaches formeasuring transaction costs, the market is said to beefficient if the price consumers ultimately pay ade-quately reflects storage costs, transportation costsand differences in price due to product form (Harris-White 1995). Since price data are usually the mostreadily available and most reliable source of marketinformation in developing countries (Goletti andChristina-Tsigas 1995), the performance of thesupply chain is most often evaluated using price mar-gins. However, a large marketing margin may resultin little or no profit for an actor and may even resultin a trading loss, depending on the buying and sellingprices and the costs of marketing (Mendoza 1995).Marketing margins will also fluctuate according tothe perishability of the product, the number of actorsinvolved in the exchange, the marketing services pro-vided, and the risk and uncertainty borne by eachactor (Pomeroy and Trinidad 1995).

Industrial purchasing theory suggests that cus-tomers will seek to purchase goods from those sup-pliers who are best able to deliver the desiredquantity, within predetermined quality specifica-tions, on time, at an agreed price (Monzcka et al.1998). In describing quality, Gronroos (1990) finds it



28

necessary to differentiate between technical qualityand functional quality. Technical quality describesthe customer’s specifications. This is a physicaldescription of the product in terms of its size; shape;colour; freedom from pests and diseases; purity (interms of its freedom from chemical contaminants,pathogenic organisms and genetically modifiedplants); maturity or freshness; and the manner inwhich the product is packed. Functional qualitydescribes the way a supplier goes about deliveringthe product to the customer. While this fundamen-tally means being able to deliver the product whenthe customer wants it — by implication, it involvesmany inter-related activities such as productionscheduling, storage and warehousing, logistics,ordering and invoicing. Since most market interme-diaries purchase products in the expectation that theywill be able to sell them on, the timely and efficientreceipt of goods is critical to the success of mostdownstream manufacturing and retail operations.

More recently, Parasuraman (1998) has introduceda third dimension called service quality. Servicequality describes the extra things a supplier is willingto do to retain the customer’s business. While theexact meaning of the term ‘service’ varies with thenature of the product and the requirements of thebuying organisation, service may include such varia-bles as providing technical assistance, innovativesuggestions, credit arrangements, support for specialneeds, or providing advance notice of impendingprice changes or shortages in supply (Hutt and Speh1995).

In measuring the extent to which suppliers are ableto meet the needs of their customers, Parasuraman etal. (1985) proposed the concept of a service gap. Theservice gap is a measure of how well the service leveldelivered by a supplier matches a customer’s expec-tations. An integral part of this analysis is concernedwith the identification of the constraints that preventthe supplier from fulfilling the customer’s needs. It isonly after these constraints have been identified thatthe supplier can improve their performance.

The Emergence of Relationship Marketing

Traditionally, in order to cut costs, customers havegone out of their way to identify the cheapest supplier(Monczka et al. 1998). The traditional approach topurchasing required the buyer to take three or more



bids, then to play one supplier off against anotheruntil they got the lowest price. Since this approachrelied primarily upon the use of short-term contracts,it led to what can best be described as an adversarialrelationship. Both customers and suppliers sought toextract as much as they could from the transaction,knowing that at any time, if either party found a betterdeal, the contract would be cancelled. However, suchshort-term opportunism stifles innovation and pro-vides few incentives to invest in productivityimprovements or new technology.

Technology is the reason for interaction betweenfirms (Thomas and Ford 1995). Since technologymay substantially alter the value chain and the waythe value chains are linked, strong mutual interde-pendencies arise, so that the level of technology inone firm will influence the product and process tech-nologies of its partner. As a result, a firm’s uniquemarket position, power and competitive advantage iscreated through its interactions with suppliers, cus-tomers and other third parties.

Firms are establishing relationships with their sup-pliers because these enable them to be more efficientand to be more effective (Kalwani and Narayandas1995). By developing relationships with their sup-pliers, buyers and sellers can achieve cost savingsthrough: reduced search and evaluation costs;reduced transaction costs (Hakansson 1982); and thelearning effects and relationship-specific scale econ-omies (Gundlach et al. 1995). However, the primaryreason for establishing relationships with suppliers isthat customers realise that suppliers create value(Kalwani and Narayandas 1995). Developing long-term relationships can improve access to markets andreliable market information (Low 1996) and cus-tomers can anticipate improved access to a more reli-able supply of production inputs (Hakansson 1982),improved product quality and performance (Han etal. 1993), and a higher level of technical interactionin the form of information exchange, potentialproduct adaptations and technical assistance (Cun-ningham and Homse 1982).

Through becoming closer to customers and betterunderstanding and satisfying customers’ needs, sup-pliers can achieve greater customer loyalty andhigher repeat sales (Kalwani and Narayandas 1995).Relationship marketing provides a stronger, longer-term customer benefit that is more difficult for com-petitors to match and it becomes more difficult forcompetitors to enter the market (Hakansson 1982).Buyers become less sensitive to price competition



29

and suppliers may even benefit from higher prices(Kalwani and Narayandas 1995). Suppliers benefitfrom being able to better plan and forecast productionschedules (Lohtia and Krapfel 1994), coordinatedeliveries, and undertake joint promotions (Eastonand Araujo 1994). However, the greatest benefitarising from long-term relationships is the reductionin uncertainty (Arndt 1979; Hakansson 1982;Noordewier et al. 1990).

While much has been written about the develop-ment and maintenance of long-term buyer–sellerrelationships, the greatest support has emerged forthe key constructs of satisfaction and trust (Andersonand Narus 1990; Anderson and Weitz 1992; Morganand Hunt 1994). However, in context of the devel-oping countries, where farmers are often subject toexploitation by opportunistic traders, the power-dependence construct is expected to become quiteinfluential in governing the farmers’ relationshipswith preferred trading partners.

Satisfaction

Satisfaction lies at the very foundation of modernmarketing thought. Satisfaction is derived from theresult of a comparison between the preferred sup-plier’s performance and the customer’s expectations(Fornell 1992). Whenever performance exceedsexpectations, satisfaction will increase, but wheneverperformance falls below expectations, customers willbecome dissatisfied.

Since satisfaction is defined as a positive affectivestate resulting from an appraisal of all aspects of afirm’s working relationship with another (Frazier1983), Geyskens et al. (1999) propose that satisfac-tion should capture both the economic and socialaspects of the exchange. Economic satisfaction isdefined as the channel member’s positive affectiveresponse to the economic rewards that flow from therelationship with its partner. An economically satis-fied channel member considers the relationship asuccess when it is satisfied with the effectiveness andproductivity of the relationship with its partner andthe resulting financial outcomes. Social satisfactionis derived from the channel member’s positive affec-tive response to the non-economic aspects of the rela-tionship in that interactions with the exchangepartner are fulfilling, gratifying and easy. A channelmember satisfied with the social aspects of theexchange appreciates the contact with their exchangepartner and, on a personal level, likes working with



the preferred partner because they believe the partneris concerned, respectful and willing to exchangeideas.

Trust

For any particular potential exchange, trust will becritical if two situational factors are present — riskand incomplete buyer information (Hawes et al.1989). Since most sales transactions present somedegree of risk and uncertainty to the potential buyer,without some degree of trust, the perceived risk maybe too great for the transaction to occur. More specif-ically, trust becomes important whenever there is ahigh level of performance ambiguity, and poorproduct performance will have a significant, adverseimpact on the value derived by the buyer (Singh andSirdeshmukh 2000). In such circumstances, trust actsas an information resource that directly reduces theperceived threat of information asymmetry and per-formance ambiguity.

However, trust also relates to the focal firm’sintention to rely upon its exchange partner. Ganesan(1994) describes this component as benevolence,because it is based on the extent to which the focalfirm believes that its partner has intentions andmotives beneficial to it. A benevolent partner willsubordinate immediate self-interest for the long-termbenefit of both parties and will not take actions thatmay have a negative impact on the firm. Singh andSirdeshmukh (2000) describe trust as a belief that anexchange partner will act in a manner that is respon-sible, with integrity and without injury to the focalfirm.

In building trust, Sako (1992) finds it necessary todifferentiate between trust at three levels. Contrac-tual trust is an expectation that the exchange partnerwill abide by their written or oral contractual obliga-tions and act according to generally accepted busi-ness practice. Competence trust is derived from theassumption that the entrusted firm will carry out theactivities competently and reliably. Goodwill trustarises where both parties have developed mutualexpectations that the other will do more than what itis formally committed to perform. Here, the firm notonly expects the other not to act opportunistically, butthat it will, altruistically, go out of its way to help(McCutcheon and Stuart 2000).



30

Power-dependence

When the outcomes obtained from the relationshipare important or highly valued; when the outcomesfrom the relationship are better than the outcomesavailable from alternative suppliers; and when feweralternative sources of exchange are available to thefirm, dependence is said to increase (Heide and John1988).

Whenever a channel member controls resourcesthat another channel member needs, various powerrelations emerge that potentially enable the partycontrolling those resources to exert some influence orpower (Andaleeb 1996). With greater dependencecomes greater vulnerability, for the more powerfulexchange partner may be in a position to create morefavourable terms of trade for itself (Heide and John1988). Since this may include access to markets oraccess to capital, farmers are often more dependentupon their preferred trading partner(s).

Dependence is also increased when the outcomesavailable from the relationship are comparativelybetter than the outcomes available from alternativerelationships. Firms dealing with the best trader aremore dependent because the outcomes associatedfrom dealing with that trader are better than thoseavailable from alternative traders. In this context,dependence is a measure of the overall quality of theoutcomes available to the focal firm from the bestalternative exchange relationship (Anderson andNarus 1990).

In general, firms will seek to reduce their depend-ence on other firms and to increase the dependence ofother firms upon themselves (Lohtia and Krapfel1994). Firms may either seek to reduce and managedependence by purposely structuring their exchangerelationships with other firms (Heide 1994), or totransact with multiple entities (Ganesan 1994).Where there are many alternatives, the need tointeract is reduced, but as the number of alternativeexchange partners declines, the need to interact willincrease (Andaleeb 1996). Hence, when fewer alter-native sources of exchange are available to the focalfirm, or when replacing or substituting a currentexchange partner is difficult because there are fewerpotential alternatives, dependence will increase(Heide and John 1988; Frazier et al. 1989).



Background to the AnalysisPotatoes have been cultivated in Vietnam since 1890,when they were first introduced by the French colo-nialists. In 1980, Vietnam was the largest producer ofpotatoes in Southeast Asia, with more than 100,000hectares under cultivation (Schmiediche 1995).However, in the absence of a reliable supply of good-quality seed, productivity per hectare declined andthe area of potatoes cultivated subsequentlydecreased. Today, only some 35,000 hectares ofpotatoes are cultivated in Vietnam, primarily in theRed River Delta (Tung and Ho 1995).

Potatoes are the second most important crop in theRed River Delta and, understandably, are a prioritycrop for development by the Vietnamese Government.Potato is an alternative food crop to rice — capable offeeding an expanding population and providing both avaluable source of nutrition and a valuable source ofincome for many impoverished rural families.

The majority of potato farmers in the Red RiverDelta are very small family enterprises, cultivatingfewer than 0.15 ha of potatoes. Most farmers plantpotatoes in either October or November and harvesttheir crops in January. With such a short croppingseason, inclement overcast weather during most ofthe growing season, poor quality seed, soil compac-tion, and the inappropriate use of chemicals and fer-tilisers, the average yield in the Red River Delta isjust 16.7 t/ha (Batt 2002).

For most potato farmers in the Red River Delta,collector agents and traders provide the major mech-anism for the disposal of the potato crop. However,traders purchase only the large and extra-largetubers — farmers generally retain some proportionof the medium-size tubers for seed, and the smalltubers are primarily used for stock feed. Not unex-pectedly, the price that farmers receive for the pota-toes they have harvested is dependent upon supplyand demand and tuber size. As potatoes provide themajority of on-farm income for most farm house-holds in the Red River Delta, any reduction in theprices received will have a significant adverseimpact on the household. With 88% of potatofarmers earning less than USD67/month (Batt2002), most farm households in the Red River Deltaare severely cash constrained.

The function of the various traders is to collect thepotatoes from the farmer’s property and to transportand deliver the tubers to wholesalers in the majormetropolitan centres throughout Vietnam. The



31

majority of traders are also small enterprises, withmost purchasing fewer than 1500 kg of vegetablesper week. However, during the potato season, there isa marked increase in the quantity of product pur-chased, with most traders handling more than 10 t ofpotatoes per week (Batt 2002).

In some potato-growing districts, collector agentsprovide an intermediary function. It is the function ofthe collector agent to aggregate potatoes from anumber of small growers, to pay the growers, and tostore the potatoes until the traders come to collectthem. Quite clearly, by aggregating the tubers in oneplace, the traders do not have to travel to as manyfarms to fill their truck. In most cases, the collectoragents are potato growers themselves.

In comparison to the traders, the wholesale enter-prises are significantly larger, with most handling inexcess of 5000 kg of fresh vegetables per week.Wholesalers deal with traders and collector agentsrather than farmers, as traders and collector agentsare more able to provide tubers of the desired varietyin the required quantity and desired size. Traders andcollector agents offer a more competitive price andare able to deliver the potatoes when the wholesalersrequire them (Batt 2002).

Wholesalers operate in the supply chain as marketintermediaries, but unlike traders and collectoragents, whose function it is to source potatoes frommany small farmers and to aggregate these into largerquantities, wholesalers break the consignment downinto quantities sufficient to meet the needs of retailcustomers and the food service sector.

Excluding sales to the food service sector andprocessing industries, retailers provide the final linkwith household buyers in the supply chain for freshpotatoes. However, the scale of retail operations hasbeen found to vary enormously between the rural andmetropolitan areas and between and within the majormetropolitan cities. Businesses range in size fromthose selling fewer than 500 kg of fresh vegetablesper week, to those selling in excess of 5000 kg/week.The price at which retailers both buy and sell potatoesalso differs markedly between and within the regions,depending upon the source of supply, supply anddemand (Batt 2002).

Data Collection and AnalysisIn analysing the supply chain for fresh potatoes in theRed River Delta, detailed interviews were conductedwith 60 potato farmers using a structured question-



naire. Information was sought on the cultivation andpostharvest practices adopted by the farmer and theaverage price farmers received for the potatoes theysold by month, tuber size and variety. Farmers werethen asked what criteria they believed a market inter-mediary would use in choosing to purchase potatoesfrom them. The questionnaire was based on theindustrial purchasing literature, and farmersresponded to 15 statements about the quality of theiroffer on an importance scale of 1 (not at all impor-tant) to 6 (very important). Farmers then rated theirability to meet these same criteria on a scale of 1 (notat all well) to 6 (very well). Farmers were then askedto indicate why they perceived they were unable tomeet the market intermediary’s needs and the variousconstraints that prevented them from improving theiroffer quality.

In the final section of the questionnaire, farmerswere asked to describe the nature of their relationshipwith their preferred trading partner and to respond to24 prepared statements. The various statements,developed from the literature on buyer–seller rela-tionships, were divided into three groups (satisfac-tion, trust and power-dependence). Farmers wereasked to respond on a six-point scale where 1 was ‘Idisagree a lot’ and 6 was ‘I agree a lot’. Twentypotato farmers were interviewed from each of thethree major potato-producing provinces in the RedRiver Delta (Hai Duong, Thai Binh and Bac Giang).Enumerators were instructed to interview fourfarmers from a minimum of five districts and to inter-view no more than two farmers from any one village.Interviews were conducted by research staff from theFood Crops Research Institute, Gia Loc.

At the conclusion of the interview, farmers wereasked to identify the trader with whom they most fre-quently interacted. Based on the number of namesreceived, ten traders in each province were randomlyselected for interview. Traders were asked to indicatethe average quantity of potatoes purchased and fromwhom they purchased those potatoes. Informationwas sought on the prices paid to purchase potatoes bymonth, tuber size and variety. Traders were thenasked to indicate whether they graded the potatoes orstored the potatoes before resale and the prices atwhich those potatoes were sold to market intermedi-aries. Traders then described the various criteria theyused in choosing to purchase potatoes from a farmeror collector agent. Traders then responded to thesame 15 questions about the quality they expectedfrom suppliers and the extent to which their current



32

suppliers were able to meet their needs. Traders werethen asked to describe the nature of their relationshipwith the farmers and collector agents from whomthey most often purchased potatoes and the nature oftheir relationship with the market intermediaries towhom they most frequently sold potatoes.

At the conclusion of the interview, traders identi-fied the potato wholesaler with whom they most fre-quently interacted. From the names received, tenwholesalers were randomly selected for interview inHanoi. Information was sought on the average quan-tity of potatoes purchased and from whom they pur-chased those potatoes. Information was sought on theprices paid to purchase potatoes by month, tuber sizeand variety. Wholesalers were then asked to indicatewhether they graded the potatoes or stored the pota-toes before resale and the prices at which those pota-toes were sold. Wholesalers then described thevarious criteria they used in choosing to purchasepotatoes from a potential supplier and the extent towhich current suppliers were able to meet the samecriteria. Wholesalers then described the nature oftheir relationship with the various traders and col-lector agents from whom they most often purchasedpotatoes and the nature of their relationship with theretailers to whom they most often sold potatoes.

Finally, 25 random interviews with retailers wereundertaken: ten in Hanoi and five in each of threeprovincial centres. Information was sought on theaverage quantity of potatoes purchased and fromwhom they purchased those potatoes. Informationwas sought on the prices paid to purchase potatoes bymonth, tuber size and variety. Retailers were thenasked to indicate whether they graded the potatoes orstored the potatoes before resale and the prices atwhich those potatoes were sold. Retailers were alsoasked to describe the various criteria they used inchoosing to purchase potatoes from a supplier and toindicate the extent to which current suppliers wereable to meet these same criteria. Retailers were thenasked to describe the nature of their relationship withthe supplier from whom they most often purchasedpotatoes.

Data were entered into the SPSS program (Version10.0) for analysis. Although the mean ratings acrossthe supply chain were analysed using one-way anal-ysis of variance (ANOVA), the sample sizes weregenerally too small to enable any meaningful statis-tics to be calculated. Hence, the majority of the anal-ysis undertaken is descriptive.



Examining the Price Margins in the Supply Chain

Since few farmers and market intermediaries main-tain any written records of the prices at which theybuy and sell potatoes, some errors in reporting areinevitable. Furthermore, since there is a degree ofconfidentiality associated with the reporting ofmarket prices, respondents may deliberately chooseto overvalue the prices at which they have purchasedpotatoes and to undervalue the prices at which theyhave been sold to reduce their perceived profitmargin.

Farmers in Hai Duong indicated that they soldpotatoes to traders for an average price ofVND1385/kg (USD0.092/kg). Traders indicatedthat they purchased potatoes from farmers for anaverage price of VND1470/kg and sold those pota-toes to both wholesalers in Hanoi and retailers inHai Duong for an average price of VND1770/kg. InHai Duong, retailers indicated that they purchasedpotatoes from traders for VND1795/kg and thensold those potatoes for an average price ofVND2150/kg. However, in Hanoi, wholesalers soldthese potatoes for an average price of VND2180/kgto retailers who sold the potatoes for an averageretail price of VND2920/kg (Table 1).

In Bac Giang, there was a difference of VND200between the reported price at which farmers soldpotatoes and traders purchased potatoes. No doubtthis was the result of intervention in the market bycollector agents. Collector agents are responsible forsourcing the potatoes from many small farmers andarranging for the transportation of those potatoes tosome central collection point. Farmers are paid incash for their potatoes when the collector agent takespossession of the product. The potatoes are thengraded and stored for between 5–7 days until thetrader comes to pick them up. Depending upon thelevel of service provided by the collector agent,



33

traders appear willing to pay an additional VND50–200/kg (Batt 2002). While there was a difference of VND145/kg betweenthe price at which traders indicated they sold thepotatoes and retailers purchased the potatoes, thiswas attributed to sampling error, for the retail marginwas reported to be VND385/kg; a figure that wasconsistent with other estimates.

In Thai Binh, it is apparent that farmers grosslyover-reported the prices at which they sold potatoes,for both the traders’ margin and the retail marginwere consistent with the other two potato-growingdistricts. This was supported by anecdotal evidenceand various unstructured interviews with growersundertaken during the preliminary phase of thisresearch project. Furthermore, and similar to BacGiang, the majority of potato farmers transacted withcollector agents rather than traders.

An examination of the marketing margins along thesupply chain reveals that the marketing marginincreased as the product moved closer to the con-sumer. Traders were able to extract an average mar-keting margin of VND260/kg, or 19%. In the ruralareas, retailers extracted an average marketing marginof VND410/kg (or 25%). However, in Hanoi, whole-salers were able to extract a marketing margin in theregion of VND395/kg (or 22%), and retailers wereable to extract a marketing margin of VND615/kg (or27%). However, the marketing margin that marketintermediaries were able to extract was not consistentover the season. At both the beginning (December)and the end (February) of the harvest season, the mar-keting margins declined. Conversely, in January,during the peak harvest period, the marketing marginsfor all market intermediaries increased. Such pricingbehaviour has been reported by Batt and Parining(2000) who accredited the reduced marketing marginduring times of reduced supply to the increased com-petition between traders to secure the farmers’ pro-duce. At the consumer level, research undertaken by

Table 1. Prices (VND/kg) along the supply chain for potatoes produced in the Red River Delta of Vietnam.

Location Farmer Trader Wholesaler Retailer

Sell Buy Sell Buy Sell Buy Sell

Hai DuongThai BinhBac GiangHanoi

138514201170

147012801370

177014501680

1785 2180

1795146515352305

2150195019202920



Batt (2002) reveals that the consumers in the ruralareas seldom purchase potatoes for more thanVND2200/kg and in Hanoi, consumers are unlikely topurchase potatoes at prices exceeding VND3500/kg.

While traders may be able to extract an averagemarketing margin of VND260/kg, the traders mustnot only grade and store the tubers they have pur-chased, but also pay for the costs of transporting thetubers from the farm to the various wholesale andretail markets. Although most of the potatoes pur-chased by the traders had been graded by farmers andcollector agents (59%), a significant proportion werepurchased ungraded. Furthermore, over 54% oftraders indicated that they regraded the potatoes theyhad purchased before resale. Although the costs ofgrading ranged from VND10–50/kg, the market waswilling to pay a significant price premium for largertubers.

At the farm level, farmers received an averageprice of VND1385/kg for the large tubers (5–8 tubersper kg). For the extra-large tubers (3–4/kg), farmersreceived a price premium of VND185/kg and for themedium-size tubers (9–15/kg), the price was reducedby some VND180/kg. For the small tubers (morethan 16 tubers per kg), farmers received onlyVND500/kg — hence, most farmers retained thesmall tubers for feeding livestock. As the productmoved through the supply chain, not only did theprice premium increase for the larger tubers but thedisincentive for smaller tubers became more pro-nounced (Table 2).

Despite the differences in price, 74% of whole-salers and 70% or retailers reported that they did notregrade the potatoes they had purchased beforeresale. Presumably, having purchased the tubersfrom traders and collector agents, wholesalers andretailers had no recourse; what they could not sell,they would either have to eat themselves or incur theloss. No doubt, in the absence of any enforceablequality standards, wholesalers and retailers sought toreduce the perceived risk by transacting with repu-table traders and collector agents.



34

While the majority of traders (70%) stored pota-toes for 5–7 days, no doubt as an integral part of theprocess of consolidation, the majority of wholesalers(63%) indicated that they did not store potatoes. Con-versely, some 57% of retailers indicated that theystored potatoes for up to one month. Presumably suchstorage practices were undertaken to accommodatethe abrupt reduction in the supply of potatoes in Feb-ruary–March. Storage losses generally ranged from1–5% and, quite surprisingly, were not related to thestorage duration. This would suggest that the storagelosses incurred were the result of either damaged ordiseased tubers being placed in storage, rather thanany contamination occurring during the storageperiod.

Transportation costs consumed a significant pro-portion of the traders’ marketing margin. Of the threeareas studied, Hai Duong was the closest to Hanoi.Hence, traders were able to pay a significantly higherprice and to transact directly with the farmers. Sinceboth Bac Giang and Thai Binh were located at agreater distance, farmers were paid lower prices toaccommodate the higher transportation costs. Whileit is unclear whether prices in Hanoi are set at thewholesale level or the retail level, traders apparentlywork backwards, subtracting the costs of transportand the profit margin they seek to arrive at a pricethey are prepared to pay the farmers and collectoragents.

On the other hand, since most wholesalers neitherregrade nor store the potatoes they have purchased, amuch greater proportion of the marketing margin willbe profit. However, given the significant price disin-centive for small tubers, should wholesalers inadvert-ently purchase a large quantity of small to medium-size tubers, they may be exposed to a potentialtrading loss. Being the last market intermediary in thechain, the retailer has no recourse. Having purchasedthe potatoes, they must sell them, lose them to infec-tion by disease, or consume them themselves.

Table 2. Prices differentials at which tubers are purchased by tuber size (VND/kg).

Tuber size Farmerssell

Tradersbuy

Wholesalersbuy

Retailersbuy

Extra largeLarge Medium

+1851385–180

+1701595–170

+2402180–480

+4502550–885



Gap Analysis

Traders want to buy potatoes that are free of chemicalresidues, free of pests, diseases and physical injury, ofthe desired size (large), and which provide an accept-able shelf life. In order to meet the needs of their down-stream customers, traders need to buy sufficientquantities of potatoes at a competitive price and to beable to pick them up when required (Table 3).

Regrettably, while a very simple methodologicalerror resulted in the enumerators failing to collectdata from the wholesalers, retailers’ expectationswere not greatly dissimilar to those of the traders.However, retailers did place greater emphasis on theability of suppliers to meet their immediate needs.Since retailers purchased in much smaller quantities,being able to secure sufficient quantities of potatoeswas much less important. Similarly, since most pur-chased from market intermediaries rather thandirectly from farmers, geographical proximity totheir source was much less important. However,retailers placed more importance on purchasing aconsistent, well-graded line of potatoes. Variety wasof little importance to retailers, presumably becausemost of their customers did not differentiate betweenvarieties. While the market preferred large, evenlyshaped tubers, the principal criteria consumers usedin their decision to purchase were skin colour and

Table 3. Mean rating for what market intermediariesdesire from upstream suppliers (where 1 =‘not at all important’ and 6 = veryimportant).

Factor Traders Retailers

Free from chemical residuesFree from pests and diseaseDesired size Long shelf lifeSufficient quantityMeet immediate needsGood reputationCompetitively pricedDeliver when requiredFree from physical injuryDesired varietyProximity (close) Well gradedAppropriately packedSupply a wide range of fresh vegetables

5.745.705.525.525.455.395.395.355.305.274.874.484.263.483.39

5.215.375.425.374.685.475.425.264.745.423.793.325.053.003.06



35

flesh colour. Over many years, consumers hadlearned to associate yellow skin and yellow fleshwith potatoes that tasted good and cooked well.

Traders indicated that the collector agents weregenerally better able to meet their perceived needsthan farmers. As the principal function of the col-lector agents is to aggregate the potatoes from manysmall farmers and to grade those potatoes before col-lection, such is not unexpected. However, since eventhis most fundamental task requires some effort, col-lector agents will only undertake these activities ifthey are adequately rewarded. As a result, tradersreport that it is more expensive to purchase potatoesfrom collector agents (Table 4).

Farmers were generally perceived as being unableto deliver sufficient quantities of potatoes that werefree of pests and diseases, physical injury, of thedesired size and to deliver tubers of the desired shelflife. Although the traders placed little importance onpacking, most reported that the manner in whichfarmers packed potatoes was significantly belowtheir expectations.

Even although collector agents regraded the pota-toes before resale, shelf life and freedom from phys-ical injury remained a problem for the traders. Sincethe majority of potatoes in the Red River Delta areharvested before they are mature (Batt 2002), the skinis unlikely to have hardened sufficiently. As a result,the tubers are more susceptible to damage, dehydra-tion and decay. The high incidence of physicaldamage is no doubt related to harvesting practices.

Although no data were collected that quantified thewholesalers’ expectations, it was apparent that mostwholesalers were dissatisfied with both the technicalquality and the functional quality of the product theyreceived from traders and collector agents. Whole-salers reported that the tubers they received wereoften too small and excessively damaged by bothpests and disease and physical injury. As a result, theshelf life of the product was generally too short. Sup-pliers were often unable to meet the wholesalers’immediate needs and variations in product quality atthe farm level made it difficult for traders and col-lector agents to provide potatoes of consistentquality. While the inability to meet wholesalers’immediate needs was no doubt the result of geo-graphical distance — since both the traders and col-lector agents operated in the rural areas — mostwholesalers reported that the prices that traders andcollector agents expected for the potatoes they soldwere too expensive (Table 5).



Conversely, for the majority of retailers, supplierseither met or exceeded their expectations. Althoughproblems were reported in the same key areas —tuber size, freedom from physical injury, shelf lifeand price — it was only the inability of suppliers toprovide tubers that were substantially free from pestsand diseases that proved to be significantly different.

The high price of potatoes was recognised as amajor constraint by two of the three market intermedi-aries (Table 6). Traders indicated that it was too expen-



36

sive to purchase potatoes from both farmers andcollector agents; retailers indicated that it was tooexpensive to purchase potatoes from wholesalers.Since wholesalers did not indicate that it was tooexpensive to buy potatoes from traders, this wouldimply that wholesalers, being in perhaps the mostpowerful position in the market, were able to extractthe margin they desired irrespective of the purchaseprice and to pass these higher costs onto the metropol-itan retailers who had no alternative source of supply.

Table 4. The extent to which farmers (F) and collector agents (CA) meet traders’ needs.

Factor Trader wants

Trader gets Probability (p = 0.05)

F CA F CA

Free from chemical residuesFree from pests and diseaseDesired sizeLong shelf lifeSufficient quantityMeet immediate needsGood reputationCompetitively pricedDeliver when requiredFree from physical injuryDesired varietyProximity (close)Well gradedAppropriately packedSupply a wide range of fresh vegetables

5.745.705.525.525.455.395.395.355.305.274.874.484.263.483.39

5.304.874.744.704.434.914.915.044.914.134.915.044.142.173.43

5.555.055.324.915.274.865.144.915.644.865.054.774.913.452.85

0.0660.0340.0050.0130.0210.0770.1640.2590.0250.0050.8030.1630.7510.0010.877

0.0560.0610.5450.0150.4800.0300.2840.1070.0960.0160.4360.5210.3130.9100.438

Table 5. The extent to which upstream suppliers meet wholesalers’ (W) and retailers’ (R) needs.

Factor Want Get Probability (p = 0.05)

W R W R

Meet immediate needsGood reputationDesired sizeFree from physical injuryFree from pests and diseaseLong shelf lifeCompetitively pricedFree from chemical residuesWell gradedDeliver when requiredSufficient quantityDesired varietyProximity (close)Supply a wide range of fresh vegetablesAppropriately packed

5.475.425.425.425.375.375.265.215.054.744.683.793.323.063.00

4.704.404.804.404.503.804.803.705.005.005.303.803.402.603.80

5.635.265.265.004.685.165.115.325.055.585.534.164.053.223.37

0.4200.5780.6250.1190.0150.4290.5060.6951.0000.0380.0610.3090.1050.7210.185



From the wholesalers’ perspective, the majorproblem they experienced with traders was thenarrow range of vegetables delivered. This wouldimply that wholesalers sought to buy more than justpotatoes from the traders, but since most tradersbought and sold potatoes only when potatoes wereavailable from the farmers, this would not seem pos-sible. Various other problems were experienced withthe quality of the tangible product, including inappro-priate varieties (to meet the customers’ intended use),tubers infected with disease and contaminated withchemical residues, small tuber size, and a high inci-dence of physical damage to tubers. Problems withthe functional quality included poor packing and aninability to deliver sufficient potatoes so that thewholesaler could satisfy their customers’ needs. Nodoubt, since the traders operated in the rural areas andpresumably, since wholesalers were not able toreadily communicate with their suppliers, excessivedistance was perceived to be a major impediment.

For the retailers, while wholesalers could generallysupply sufficient potatoes to meet their needs, whole-salers were unable to respond to their immediateneeds. Retailers also experienced more problemswith inconsistent tuber quality.

Comparing the various impediments that tradersexperienced with purchasing potatoes from farmersand collector agents provided some interestingresults. Traders deemed that it was more expensive topurchase potatoes directly from farmers. Presumablythis resulted from farmers demanding a high price,



37

yet they presented the trader with only small quanti-ties of largely ungraded tubers. Thus, the tradersexperienced more quality problems when transactingdirectly with farmers. However, when dealing withcollector agents, traders experienced more problemswith inappropriate varieties, small tuber size, phys-ical injury and tubers being infected with disease.The only plausible explanation for this would seem tobe derived from the ability of the trader, when pur-chasing directly from farmers, to select for himselfthose tubers he wants to buy and to reject others.Conversely, when purchasing from a collector agent,the trader must purchase the entire quantity. It wouldalso seem highly likely that, since collector agentsstore potatoes for 7–10 days, any problems regardingtuber decay would be more likely to show up after ashort period of storage rather than immediately afterharvest.

While traders indicated that they experienced moreproblems with poor packing when purchasingdirectly from farmers, farmers acknowledged thatpoor packing was one the major impediments thatprevented them from meeting the needs of theirdownstream customers (Table 7).

Poor grading, contamination by disease, a highincidence of physical injury, poor appearance andsmall tuber size were also perceived to be problem-atic. However, that variable which farmersbelieved most prevented them from meeting theneeds of downstream customers was the high pur-chase price.

Table 6. Why suppliers fail to meet downstream customers’ needs (%) (F = farmer, CA =collector agent, T = trader, W = wholesaler, R = retailer).

Factor T > F T > CA W > T R > W

High pricePoor gradingInappropriate varietiesNarrow range of vegetablesPoor qualitySmall tuber sizeNot free of physical injuryCannot meet immediate needsPoor packingNot free of diseasePoor storage capabilityPoor reputationNot free of chemical residuesCannot deliver required quantityExcessive distance

7521

418

1713

8

48

33

2424

29

51010

10105078

1010

2230

333056

501816161311111110

88



Farmers believed that the major factor contributingto their inability to meet customers’ perceived needswas insufficient capital (62%), which impactedadversely upon their ability to purchase good-qualityseed and to purchase sufficient quantities of inputs tomaximise productivity (Table 8).

Nevertheless, various other agronomic constraintsaffected the farmers’ ability to produce good-qualitypotatoes, including heavy rain and the cropping pres-sures under which farmers found themselves oper-ating, for many farmers reported that the compostapplied had not broken down completely. At somepoint in time, it must be recognised that the agro-eco-logical environment of the Red River Delta is farfrom optimal for the production of potatoes. How-ever, it is also readily apparent that not all farmerspossess the skills necessary to know how to improveproductivity. If such is true and farmers are operatingbelow their full potential, costs per unit output will beproportionately higher.

Lack of knowledge was also perceived to be amajor problem for the traders. While it is readilyapparent that farmers would benefit most byimproving their agronomic knowledge, traders may



38

not have the knowledge to differentiate between vari-eties, to identify infected tubers, to know how to storetubers or to understand the dynamics of the market.

Downstream Relationships in the Potato Supply Chain

Contrary to expectations, it is apparent that mostfarmers had a very positive relationship with theirpreferred trading partner. The majority of farmerswere very satisfied with their trading partner andmost farmers trusted their preferred trading partner.Farmers reported that their preferred trading partnerwas always honest and kept their promises. Sincetheir preferred trading partner seldom acted oppor-tunistically, farmers had confidence in their preferredtrading partner and generally believed the informa-tion provided. Most farmers maintained that they hada close personal friendship with their preferredtrading partner (Table 9).

It is also apparent that most farmers were able toact independently of their preferred trading partner.Most farmers indicated that they could readilychoose an alternative trading partner, although most

Table 7. Variables that prevent suppliers from meeting customers’ needs (%) (F = farmer, T =trader, W = wholesaler, R = retailer).

Factor F > T T > W W > R

Insufficient quantityInappropriate varietiesNot free of diseasesInsufficient rangeToo far from customerNot free of physical injurySmall tuber sizePrice too highPoor gradingTubers not packedPoor appearanceCannot source better quality

517

182

483320

8

29

38

25

32262121211616

Table 8. What prevents suppliers from better meeting customers’ needs (%).

Factor Farmer Trader Wholesaler

Lack of capitalInability to buy good-quality seedAgronomic issuesLack of knowledge Do not have the desired variety

62353212

29

428



wished to maintain their relationship with their pre-ferred trading partner because they made the bestoffer relative to the alternatives. Furthermore, mostfarmers indicated that their preferred trading partnerseldom had all the power in the relationship, nor didthey control all the information. Consequently, thepreferred trading partner was seldom able to coercethe farmer into making decisions that were not intheir best interests.

The traders’ relationship with their most preferredwholesale trading partner was also quite positive,with most traders indicating high levels of trust andsatisfaction in the exchange. However, it wasapparent that the traders were more dependent upontheir preferred wholesale trading partner, eventhough they did not necessarily provide the best offer.Traders perceived that their wholesale trading part-ners had more power and controlled more of theinformation, although they were less willing toprovide financial assistance or to share the risks.



39

Conversely, the majority of wholesalers indicatedvery low levels of both satisfaction and trust in theirrelationships with retail customers. Transactionsentailed a high degree of risk and there was a greaterpossibility of being exposed to opportunistic behav-iour and conflict in the relationship. There wasminimal cooperation between wholesalers andretailers and minimal trust. As a result, most whole-salers indicated that their retail trading partners had apoor reputation. Wholesalers were not only moredependent, but retailers also wielded more marketpower and controlled more of the information.

Upstream Relationships in the Potato Supply Chain

In reviewing their relationship with farmers and col-lector agents, the majority of traders also indicatedthat they experienced high levels of satisfaction and

Table 9. Mean ratings of relationship variables for downstream relationships between marketintermediaries (1 = ‘I disagree a lot’, 6 = ‘I agree a lot’; F = farmer, T = trader, W =wholesaler, R = retailer).

Factor F > T T > W W > R

SatisfactionTrading with preferred partner is less risky Good cooperation with preferred trading partnerExpect to continue to trade with partnerPreferred trading partner meets expectationsTreats me fairly and equitablyAdequately rewardedQuick to handle complaints Much conflict with preferred trading partner

5.825.645.615.555.495.445.222.09

5.835.704.405.435.775.574.102.47

4.203.704.643.104.104.303.102.90

TrustConfidence in preferred trading partnerAlways keeps promisesAlways honestGood reputation Trust preferred trading partnerBelieve information providedClose personal friendshipTrading partner always considers best interests

5.585.545.535.465.365.055.033.81

5.035.205.375.334.934.534.773.10

3.904.004.002.704.303.703.803.30

Power-dependence Free to choose another trading partner at any timeHas best offer relative to alternativesMust adhere to partner’s demands Trading partner has all the powerTrading partner controls all the informationTrading partner often acts opportunisticallyMore dependent on trading partner

5.715.312.782.282.212.152.07

4.904.572.372.832.402.032.37

2.904.303.784.303.003.224.50



trust with the exchange. Understandably, because thecollector agents accumulated potatoes from manysmall farmers, traders generally felt they could relymore upon the collector agents than they could uponindividual farmers. However, somewhat surpris-ingly, traders indicated that they were moredependent on farmers than they were upon their col-lector agents. Since the farmers could choose thetrader to whom they sold their potatoes, farmers gen-erally exercised more power and controlled moreinformation (Table 10).

Just as the wholesalers reported that their relation-ship with their downstream trading partners was notentirely satisfactory, the wholesalers indicated thatthey were equally dissatisfied in their relationshipwith the traders and collector agents. Wholesalersreported that traders seldom treated them fairly andequitably and on many occasions, failed to meet theirexpectations. Traders were slow to respond to the



40

wholesalers’ complaints and there was evidence ofonly moderate levels of cooperation in the exchange.Wholesalers also reported that despite the opportu-nity to choose from several alternative suppliers,traders and collector agents had more power and con-trolled more of the information. Nevertheless, whole-salers indicated that they were neither dependent nordid they have to adhere to the trader’s demands. Thiswas achieved because most wholesalers (68%) pur-chased potatoes from more than two traders and col-lector agents (Batt 2002).

No doubt because of the potential variation in thequantity and quality of the tubers delivered by tradersand collector agents, wholesalers demonstrated theleast amount of trust in their relationship with theirupstream suppliers. Wholesalers believed that tradersand collector agents were more dishonest and lesslikely to keep their promises. Wholesalers alsoseemed less willing to believe in the information pro-

Table 10. Mean scores on relationship variables for upstream relationships between marketintermediaries (1 = ‘I disagree a lot’, 6 = ‘I agree a lot’; F = farmer, T = trader, CA =collector agent, W = wholesaler, R = retailer).

Factor T > F T > CA W > T R > W

SatisfactionTrading with preferred partner is less risky Good cooperation with preferred trading partnerPreferred trading partner meets expectationsTreats me fairly and equitablyAdequately rewardedExpect to continue to trade with partnerQuick to handle complaints Much conflict with preferred trading partner

5.835.705.485.485.414.824.262.17

5.555.685.325.685.415.184.772.27

3.904.104.603.504.704.602.702.60

5.405.455.605.505.105.134.902.05

TrustTrust preferred trading partnerAlways honestGood reputation Always keeps promisesConfidence in preferred trading partnerClose personal friendshipBelieve information providedTrading partner always considers best interests

5.355.174.954.914.874.684.103.04

5.005.294.685.235.274.734.233.18

4.404.004.004.104.204.204.103.50

5.164.904.604.855.104.424.952.70

Power-dependenceFree to choose another trading partner at any timeHas best offer relative to alternativesTrading partner has all the powerTrading partner controls all the informationMust adhere to partner’s demands More dependent on trading partnerTrading partner often acts opportunistically

4.774.052.912.822.772.362.36

5.104.142.592.272.322.232.00

4.404.603.302.802.602.702.33

5.805.253.701.902.302.452.20



vided by traders and collector agents and perceivedthem to engage more frequently in opportunistictrading. Such would suggest that price was of consid-erable importance in the transaction. Wholesalersbelieved that if traders and collector agents couldobtain a higher price from an alternative customer,they would be more likely to abandon their relation-ship. In turn, traders and collector agents couldreadily blame their inability to deliver on the incon-sistent supply from farmers.

While the wholesalers were generally dissatisfiedin their relationship with their retail customers,retailers expressed quite high levels of satisfactionand trust in their relationship with the wholesalers.Indeed, most retailers intended to continue to tradewith their wholesale trading partner, even althoughthere were plenty of alternatives, noting that theircurrent wholesale supplier provided the best offerrelative to the alternatives. However, retailersexpressed some doubt as to whether wholesalersalways acted in their best interests.

Conclusions and ImplicationsWith the majority of the potatoes harvested in theRed River Delta being derived from some 235,000small farmers, there is considerable uncertainty withregard to both the quantity and quality of tubers avail-able. In the absence of any definitive quality stand-ards and in order to secure a more reliable supply ofpotatoes, each of the market intermediaries agreedthat transacting with their preferred trading partnerwas significantly less risky.

However, in a market where more than 85% of thecrop is harvested in just one month, the market willdemonstrate considerable price volatility. While along-term relationship may reduce some of theuncertainty associated with procuring a more reliablesupply of good-quality potatoes, the relationship isunable to provide any price certainty. As a result,each of the actors may abandon their relationshipfrom time to time to secure a better price. Within suchan environment, one would expect the various actorsto engage in opportunistic trading practices, yet —with the exception of the wholesalers, who reporteddissatisfaction with both their suppliers and their cus-tomers — there was little evidence of market exploi-tation.

While market intermediaries may find that theyhave occasionally paid too much to purchase pota-toes, they are in a position to respond to the market



41

and to modify their buying and selling practices inorder to reduce the extent of the loss. However, sincethe potatoes are often dug immaturely and have onlya limited shelf life, farmers must accept the pre-vailing market price at the time of harvest. Whilefarmers will ordinarily transact with those traderswho offer the best price, since the average farmer hasless than 1.5 t of potatoes at their disposal (Batt2002), there is some doubt as to what benefit thefarmer will derive from selling to an alternativetrader. Since most Vietnamese potato farmers are notconstrained by any pre-existing credit arrangementsthat might limit their ability to choose an alternativetrading partner, farmers choose to stay with their pre-ferred trading partner because they want to, notbecause they have to.

Within the supply chain itself, it is apparent thatthe market intermediaries have adopted a cost pluspricing approach. To the purchase price, the marketintermediaries add the various costs of grading,storage and transportation, plus their desired profitmargin. In a market where there are many smalltraders, wholesalers and retailers, few switching bar-riers and few barriers to entry and exit (with the pos-sible exception of the wholesalers), competitivemarket forces will prevent the market intermediariesat any one level in the supply chain from being able toextract an extraordinary price margin. Both Faf-champs (1996) and Lyon (2000) make similar con-clusions from their respective analyses of the freshvegetable industries in Ghana.

Nevertheless, it is at the wholesale level wheremost of the dissatisfaction arises in the supply chainand, no doubt, it is at this level that there are thegreatest barriers to entry. Perhaps much of the whole-saler’s relational dissatisfaction is derived from theirinability to exercise greater market power and toextract a greater economic rent. However, despitebeing the most concentrated sector, wholesalers exer-cise minimal control over the traders that supplythem. Unless the wholesalers have made some pre-existing arrangement to purchase all the potatoesfrom a particular trader, the trader will park theirtruck in a designated area in the wholesale marketand sell potatoes to whoever wants to buy them, pro-viding they buy no less than one sack (Batt 2002).While larger retailers can also buy directly from thetruck, many of these might be better described as sec-ondary wholesalers, for they will distribute the pota-toes to various retail markets throughout themetropolitan area. That then leaves the wholesalers



very much dependent upon their local customer base,who it seems may use that knowledge to their advan-tage.

In conclusion, it is apparent that the prices thatfarmers in the Red River Delta receive for the pota-toes they have grown is determined more by supplyand demand than by the exercise of any coercivepower by market intermediaries.

ReferencesAndaleeb, S.S. 1996. An experimental investigation of

satisfaction and commitment in marketing channels: therole of trust and dependence. Journal of Retailing, 72, 77–93.

Anderson, E. and Weitz, B.A. 1992. The use of pledges tobuild and sustain commitment in distribution channels.Journal of Marketing Research, 29, 18–34.

Anderson, J.C. and Narus, J.A. 1990. A model of distributorfirm and manufacturing firm working relationships.Journal of Marketing, 54(1), 42–58.

Arndt, J. 1979. Towards a concept of domesticated markets.Journal of Marketing, 43 (Fall), 69–75.

Batt, P.J. 2002. Report for Deutsche Gesellschaft fürTechnische Zusammenarbeit (GTZ) on the market forseed potatoes, fresh potatoes and processed potatoproducts in Vietnam. Hanoi, GTZ.

Batt, P.J. and Parining, N. 2000. Price–quality relationshipsin the fresh produce industry in Bali. International Foodand Agribusiness Management Review, 3(2), 177–187.

Cunningham, M.T. and Homse, E. 1982. An interactionapproach to marketing and purchasing strategy. In:Hakansson, H., ed., International marketing andpurchasing of industrial goods: an interaction approach.IMP Project Group. Chichester, John Wiley and Sons,323–328.

Easton, G. and Araujo, L. 1994. Market exchange, socialstructures and time. European Journal of Marketing,28(3), 72–84.

Fafchamps, M. 1996. The enforcement of commercialcontracts in Ghana. World Development, 24(3), 427–448.

Fornell, C. 1992. A national customer satisfactionbarometer: the Swedish experience. Journal ofMarketing, 55 (January), 1–21.

Frazier, G.L. 1983. Interorganisational exchange behaviourin marketing channels: a broadened perspective. Journalof Marketing, 47 (Fall), 68–78.

Frazier, G.L., Gill, J.D. and Kale, S.H. 1989. Dealerdependence levels and reciprocal actions in a channel ofdistribution in a developing country. Journal ofMarketing, 53 (January), 50–69.

Fukuyama, F. 1995. Trust: the social virtues and creation ofprosperity. London, Hamish Hamilton.



42

Ganesan, S. 1994. Determinants of long-term orientation inbuyer–seller relationships. Journal of Marketing, 58(April), 1–19.

Geyskens, I., Steenkamp, J.B. and Kumar, N. 1999. A meta-analysis of satisfaction in marketing channelrelationships. Journal of Marketing Research, 36 (May),223–238.

Goletti, F. and Christina-Tsigas, E. 1995. Analysing marketintegration. In: Scott, G.J., ed., Prices, products andpeople. Analysing agricultural markets in developingcountries. Boulder, Lynne Rienner, 325–342.

Gronroos, C. 1990. Service management and marketing:managing moments of truth in service competition.Lexington, Massachusetts, Lexington Books.

Gundlach, G.T., Achrol, R.S. and Mentzer, J.T. 1995. Thestructure of commitment in exchange. Journal ofMarketing, 59 (January), 78–92.

Hakansson, H. (ed.) 1982. International marketing andpurchasing of industrial goods: an interaction approach.IMP Project Group. Chichester, John Wiley and Sons.

Han, S.L., Wilson, D.T. and Dant, S.P. 1993. Buyer–supplier relationships today. Industrial MarketingManagement, 22, 331–338.

Harris-White, B. 1995. Efficiency and complexity:distributive margins and the profits of market enterprise.In: Scott, G.J., ed., Prices, products and people. analysingagricultural markets in developing countries. Boulder,Lynne Rienner, 301–324.

Harris-White, B. 1997. Staple food market efficiency indeveloping countries: introduction. Journal ofInternational Development, 9(1), 97–100.

Hawes, J.M., Mast, K.E. and Swan, J.E. 1989. Trust earningperceptions of sellers and buyers. Journal of PersonalSelling and Sales Management, 9 (Spring), 1–8.

Heide, J.B. 1994. Interorganisational governance inmarketing channels. Journal of Marketing, 58 (January),71–85.

Heide, J.B. and John, G. 1988. The role of dependencebalancing in safe-guarding transaction-specific assets inconventional channels. Journal of Marketing, 52(January), 20–35.

Humphrey, J. and Schmitz, H. 1998. Trust and interfirmrelations in developing and transition economies. Journalof Development Studies, 34(4), 32–49.

Hutt, M.D. and Speh, T.W. 1995. Business marketingmanagement: a strategic view of industrial andorganisational markets, fifth edition. Florida, DrydenPress.

Kalwani, M.U. and Narayandas, N. 1995. Long-termmanufacturer–supplier relationships: do they pay off forsupplier firms? Journal of Marketing, 59 (January), 1–16.

Lele, U. 1981. Cooperatives and the poor: a comparativeperspective, World Development, 9, 55–72.



Lohtia, R. and Krapfel, R.E. 1994. The impact oftransaction-specific investments on buyer–sellerrelationships. Journal of Business and IndustrialMarketing, 9(1), 6–16.

Low, B.K.H. 1996. Long-term relationship in industrialmarketing. Reality or rhetoric? Industrial MarketingManagement, 25, 23–35.

Lyon, F. 2000. Trust, networks and norms: the creation ofsocial capital in agricultural economies in Ghana. WorldDevelopment, 28(4), 663–681.

McCutcheon, D. and Stuart, F.I. 2000. Issues in the choice ofsupplier alliance partners. Journal of OperationsManagement, 18, 279–301.

Mendoza, G. 1995. A primer on marketing channels andmargins. In: Scott, G.J., ed., Prices, products and people:analysing agricultural markets in developing countries.Boulder, Lynne Rienner, 257–276.

Mendoza, M.S. and Rosegrant, M.W. 1995. Pricing conductof spatially differentiated markets. In: Scott, G.J., ed.,Prices, products and people: analysing agriculturalmarkets in developing countries. Boulder, LynneRienner, 343–360.

Monczka, R., Trent, R. and Handfield, R. 1998. Purchasingand supply chain management. USA, South-WesternCollege Publishing, 912 p.

Morgan, R.M. and Hunt, S.D. 1994. The commitment–trusttheory of relationship marketing. Journal of Marketing,58 (July), 20–38.

Noordewier, T.G., John, G. and Nevin, J.R. 1990.Performance outcomes of purchasing arrangements inindustrial buyer–vendor relationships, Journal ofMarketing, 54 (October), 80–93.

Parasuraman, A. 1998. Customer service in business-to-business markets: an agenda for research. Journal ofBusiness and Industrial Marketing, 13(4/5), 309–321.

Parasuraman, A., Zeithamal, V.A. and Berry, L.L. 1985. Aconceptual model of service quality and its implications



43

for future research, Journal of Marketing, 49 (Fall), 41–50.

Pomeroy, R.S. and Trinidad, A.C. 1995. Industrialorganisation and market analysis: fish marketing. In:Scott, G.J., ed., Prices, products and people: analysingagricultural markets in developing countries. Boulder,Lynne Rienner, 217–238.

Sako, M. 1992. Prices, quality and trust: interfirm relationsin Britain and Japan. Cambridge, Cambridge UniversityPress.

Schmiediche, P. 1995. The production of seed potatoes inSouth East Asia. In: Batt, P.J., ed., An emergingopportunity: the export of tropical seed potatoes to Asia.Proceedings of an industry workshop. Perth, WesternAustralia, Curtin University of Technology.

Singh, J. and Sirdeshmukh, D. 2000. Agency and trustmechanisms in consumer satisfaction and loyaltyjudgements. Journal of the Academy of MarketingScience, 28(1) 150–167.

Thomas, R. and Ford, D. 1995. Technology and networks.In: Möller, K. and Wilson, D., ed., Business marketing: aninteraction and network perspective. Boston, KluwerAcademic Publishers, 263–290.

Tung, P.X. and Ho, T.V. 1995. Potato production inVietnam. In: Batt, P.J., ed., An emerging opportunity; theexport of tropical seed potatoes to Asia. Proceedings of anindustry workshop. Perth, Western Australia, CurtinUniversity of Technology.

Williamson, O.E. 1979. Transaction cost economics: thegovernance of contractual relations. Journal of Law andEconomics, 22 (October), 233–262.

— 1985. The economic institutions of capitalism. NewYork, The Free Press.

Zucker, L.G. 1986. Production of trust: institutional sourcesof economic structure, 1840–1920. Research inOrganisational Behaviour, 8, 53–111.



Banana Supply Chains in Indonesia and Australia: Effects of Culture on Supply Chains

Shinta Singgih and Elizabeth J. Woods*,1

Abstract

Research on banana supply chains (BSCs) was conducted in 2001 and 2002 through two case studies, BSC1(Indonesia) and BSC2 (Australia). BSC1 supplied local banana varieties from small farmers in the BayahDistrict in Banten Province to traditional markets in Jakarta through the Jakarta central market. In BSC2,Cavendish bananas from growers in North Queensland were marketed through a wholesale agency in Sydneyto supermarkets and other high-quality retailers. This paper discusses the effects of culture on the operation ofboth chains. Data were derived from interviews with chain members and observation of their daily activities,and transcripts were categorised using qualitative software.

In both chains, strong and long-term relationships formed the basis of all chain activities, however the natureof relationships between the chain members differed significantly between those in BSC1 and BSC2,particularly at the upstream (farmer and village) levels. Culture affected the way in which members related andcommunicated their ideas to each other. Relationships in BSC1 villages were dominated by traditional valuesystems, social stratification and indebtedness that encouraged paternalistic approaches by the buyers towardthe sellers. Chain members’ relationships in BSC2 were more egalitarian and in some cases developed intostrong friendships. The culture, as expressed through the nature of these relationships, affected the pricingmechanisms and farmers’ bargaining inclination. Despite the differences, each chain performed relativelyeffectively, adapting to its needs within its cultural environment.

Supply-chain management (SCM) concepts origi-nated from the fields of production/operations man-agement and logistics (Westgren 1998), particularlyin the United States of America (USA) (Wilson1996). SCM drew from the lean managementapproach practised by the Japanese automotiveindustry in the 1970s and 1980s, including non-con-frontational ways of undertaking exchanges and just-

* School of Natural and Rural Systems Management, TheUniversity of Queensland, Gatton, Queensland 4343,Australia. Email: <[email protected]>;<[email protected]>.

1 Current address: Executive Director, Research andDevelopment Policy, Department of Primary Industries,Meiers Road, Indooroopilly, Queensland 4067,Australia. Email: <[email protected]>.



4

in-time distribution. The concepts can generally bedivided into two groups — traditional and the newconcepts of SCM. The traditional SCM conceptviews the supply chain as a means of obtaining thelowest possible initial purchase price while assuringsupply (Spekman et al. 1998). Hence, SCM is char-acterised by the presence of multiple partners whoare evaluated based on purchase price, arms-lengthbargaining, formal short-term contracts, and central-ised purchasing. In such situations, fierce horizontalcompetition among suppliers is encouraged becausethe prevalent assumption is that suppliers wouldbehave opportunistically once the buyers becomedependent on their products.

The new paradigm of SCM, on the other hand,emphasises the importance of good coordination ofall phases within the chain to transform raw materials


ublished in 2004)

4


into finished products or services and distribute themto the end consumers (Spekman et al. 1998; Dunne1999). This includes “designing, developing, opti-mizing and managing the internal and external com-ponents of the supply system …” (Spekman et al.1998, p. 54). Baatz (1995) goes even further toinclude recycling or re-use of the product, though thisinclusion is still relatively uncommon in SCM litera-ture. Viewed as a system, the chain should also bemanaged as a whole (Beers et al. 1999). Hence, inSCM, the competition is no longer between businessunits at the same level, but between chains operatingin the same or alternative industries.

The majority of SCM literature, including in theagri-food industry, focuses on the application andimplementation of SCM in developed countries. Thedifferences in the nature of agri-food industries indeveloped and developing countries mean that SCMconcepts derived from experiences in developedcountries cannot be easily applied in developingcountries without understanding the differences inthe nature of the industries in both types of countries,caused by factors such as culture, and the systemsand regulations in place. Many SCM authors, forexample, Wilson (1995) and Fearne (1998), believethat SCM is all about managing good relationshipsamong the chain members, with the financial gainsdistributed according to the distribution of valueadded. This paper focuses on the relationship natureof the supply chain and the effects of culture, ratherthan the issue of value-sharing within the chain.Understanding how culture might affect supplychains in particular countries is critical because of theeffects it might create in the logistic-relationshipsmanagement of supply chains. Culture here refers to“the context of symbols, norms, interpretationmodels and values shared by a social group. Valuesform the core of culture and concern what is good/bad, clean/dirty, normal/abnormal, logical/illogical,rational/ irrational, fair/unfair etc.” (Aquilon 1997, p.77). Two dimensions of culture described by Hof-stede (1993, 1997), power distance and individu-alism, will be used to describe the differences in theIndonesian and Australian culture that might affectthe management of the chains and relationshipsbetween their members.

In the following sections, the similarities in thebanana industries in Indonesia and Australia will bebriefly explained, followed by a description of theresearch methods used in the study. The two casestudies are then described, focusing particularly on



45

the logistic management occurring within each chain.The following sections describe the effects of cultureon banana supply chain logistic-relationships and thechain members’ bargaining inclination. Finally, abrief conclusion and implications of the study areprovided.

Banana Industries in Indonesia and Australia

Although each chain studied is unique and has itsown characteristics, both operate in the banana indus-tries within their respective countries, and share somesimilar features. At the production end, the industriesare made up of mainly small family farms, althoughlarge plantations also exist in each industry, particu-larly in Australia, where less than 5% of growersproduce 70% of Australian bananas. For many smallbanana farmers, growing bananas formed an impor-tant part of their income. Since bananas are grown asa monoculture in Australia, they were the mainsource of income for the farmers, while in Indonesiabananas are grown together with annual crops andcontributed to farmers’ regular income, although notnecessarily as their main source of income. Bananasare produced mainly to serve domestic consumptionin each country.

At the marketing end, the banana industries in bothcountries are part of the global fruit-marketingindustry. Imported fruit has been making its way toIndonesia, and applications have been made toimport bananas into Australia. In Indonesia,imported fruits can be found easily, not only in super-markets in the cities, but also in traditional markets inurban towns. These high-quality fruits are competi-tors to the local bananas. As markets become morecompetitive, small farmers can easily becomeuncompetitive. To be successful in this environment,good collaboration between all members of the chainis critical to ensure competitive quality, quantity, andprice of their product to meet the changing consumerpreferences.

The banana industries in both countries are charac-terised by informal, non-contractual relationships,with farmers being price-takers and exercising theleast power compared to other members of the chain.Those at the front-line interface with end consumersnormally benefit from the information to hand, andhence often exercise power over others and createdependency. The long and complex chains may also



discourage good communication and information-sharing among members of the chains. Mostmembers communicated only with those at the pre-vious and following level.

Research MethodsTwo banana supply chains (BSCs) were studied, onein Indonesia and the other in Australia. The IndonesianBSC (BSC1) involved farmers from three villages inthe Bayah District of Lebak Regency in the BantenProvince in West Java. The main fruit commodity inLebak Regency is banana, and it is one of the largestbanana production centres in West Java, together withSukabumi and Cianjur Regencies. The three villageswere selected on the recommendation of the BayahAgricultural office, banana production statistics, andaccess to study their systems. The Australian chain(BSC2) was selected based on its comparability withthe Indonesian banana industry through consisting ofsmall banana family-farms, its attempts to operatecompetitively and innovatively to survive in the



46

industry, its supply to supermarkets (the most commonretail outlet for Australians to buy bananas), and itswillingness to provide access to the researcher.

Data were collected in a series of interviews withchannel members and by observing them whileworking. Interviews and observation findings weretranscribed and analysed with the assistance of NUD-IST (Non-numerical Unstructured Data Indexing,Searching, and Theorizing) software, which wasuseful in allowing theory to emerge from the data(Richards and Richards 1991). A summary of find-ings was verified by the chain members for accuracy.

Description of BSC1 and BSC2As typically occurs in developing countries, BSC1was characterised by the existence of multi-layers atboth the upstream and downstream levels of thechain. BSC1 supplies local banana varieties fromthree villages, Cibareno, Cikatomas, and Cikamun-ding, to end consumers in Jakarta and neighbouringcities such as Depok and Bogor through the central

Farmers

Collectors

Village wholesalers

Agents at the central markets

Traditional markets

Snack vendors
Fruit and vegetable vendors
Small restaurants


Small markets

End consumers

Transporters

Transporters

Transporters

Flow ofinformation and

money

VIL

LAG

ES

CIT

IES

Figure 1. Logistic flows of banana supply chain 1 (BSC1), Indonesia.


market in Jakarta (PIKJ – Pasar Induk Kramat Jati orKramat Jati Central Market). The logistic flow withinBSC1 is shown in Figure 1. Bananas were commonlygrown in the villages with minimal input and atten-tion from farmers, on their rice banks or mixed withhardwood trees/annual crops.

In BSC1, farmers sold their bananas to theirregular buyers — either collectors or directly tovillage wholesalers — and only occasionally toothers. Two selling methods existed, weight-basedand tree-based. In the weight-based method, bananabunches were carried on foot to the buyers’ ware-houses to be weighed and priced according to one ofthe buyers’ standard four price groups. In the tree-based method, collectors actively searched aroundthe villages for young or mature bunches to be boughton the tree. While a fixed-price system ruled almostall transactions in the weight-based method, bar-gaining governed the transactions in the tree-basedmethod. Competition among wholesalers ensuredrelatively fair prices to suppliers. Banana ripeningwas conducted using traditional methods, such assmoking (burning dried coconut leaves) or carbide, atthe village wholesaler level. Bananas’ movementwithin BSC1 was always accompanied by a changeof banana ownership at each chain level, apart from atthe central market, where the banana agents operatedon a 10% commission basis. No formal gradingstandards existed within BSC1; bananas were gradedsomewhat differently at each level using subjectiveassessment of parameters such as bunch weight,maturity, finger length, and cosmetic appearance.

A banana wholesale agent in Sydney was the focalpoint that linked growers in North Queensland withbuyers in Sydney (BSC2). The predominantly Caven-dish bananas were sold to major supermarket chains,both high-quality and price-sensitive independentretailers, and other wholesalers. The bananas weresourced from specialised growers who produced high-, good- and average-quality bananas. Supply fromsmall-scale, average-quality growers was discour-aged. Growers typically consistently supplied to twoor three agents to spread their risks and obtain marketinformation from different cities. Growers were paidon each consignment, several weeks after delivery tothe agent, who worked on a commission basis.Growers graded unripened bananas by removingdefective fingers that fell outside the product specifi-cation, and categorised the hands or clusters based onthe finger length. They trusted the agent to decidewhich customers their bananas should supply, based



47

on assessment of the quality and consistency of theripe fruit. The characteristics of each chain are summa-rised in Table 1.

Effects of Culture on Logistic Relationships

In both chains, most chain members had known theirbuyers/sellers for a relatively long time. In fact, strongand long-term relationships formed the basis of allactivities in the chains. However, the nature of rela-tionships between the chain members differed signifi-cantly between those in BSC1 and BSC2, particularlyat the upstream (farmer/village) levels. Cultureaffected the way members related and communicatedtheir ideas to each other. In turn, this affected thepricing mechanisms and farmers’ bargaining inclina-tion. This paper focuses only at the effects of cultureon chain members’ relationships and pricing mecha-nisms at the upstream end of both BSCs. The effects ofculture on the logistic relationships of chain membersin this paper are viewed using Hofstede’s power dis-tance and individualism dimensions (1993, 1997).

Power distance dimension

Power distance index (PDI) is a measure of the ine-quality among people that is considered normal in acountry, from the perspective of the least powerfulpartners in the relationship. Using a scale of 11 (smallpower distance) to 104 (large power distance), lesspowerful members of a group in a country with a lowPDI accept that power is distributed relatively equally,which encourages interdependence. On the otherhand, high PDI refers to cases where the less powerfulmembers of a group depend emotionally on the morepowerful members. The PDI of Indonesia is 78, whileAustralia’s is 36. If these scores are indicative of howpeople from both countries perceive equality amongthemselves, it might explain some of the attributes ofchain members’ relationships within each chain.

In high-PDI societies, inequality is considered asthe basis of societal order (Hofstede 2001). Peoplewith social status, prestige, wealth, or simply greaterage, may be treated with a mixture of respect and fearin these societies. In BSC1, social stratificationexisted in the villages. Wholesaling is quite arespected occupation, which positioned the whole-salers relatively high in the village societies. Whole-salers earned villagers’ respect because of theirbusiness success, wealth, or simply their personality.



For example, the inequalities among BSC1’sfarmers, collectors, and village wholesalers wereapparent through the differences in materialistic pos-sessions among them — wholesalers commonlylived in relatively large houses equipped with a tele-vision and antenna to receive TV channels fromJakarta, something that many small farmers in BSC1could only dream of owning.

Koentjaraningrat (1967) argued that Sundanese vil-lages, such as those in this study, tended to have socialstratification based on occupations and positionswithin the village. Thomas (1975), who studied vil-lagers’ perceptions of social stratification in three vil-lages in West Java in 1965, also found occupation to beone of the most significant determinants of social pres-tige and power in village society. As a result, supplier–buyer relationships are often characterised by pater-nalistic attitudes by the buyers, which make smallfarmers reluctant to bargain in a straightforwardmanner. Similar, status-based relationships were alsofound among the Madaymen farmers and middlemen(Russel 1987). That these relationships have continuedto exist from the 1960s to 2002 in Sundanese villagessuggests they are rooted in stable social values.

Suppliers’ indebtedness toward their buyers,which stemmed from the buyers’ role in guaranteeinga market for their bananas and the credit provisiongiven to suppliers whenever they needed extra cash,contributed to the inequality between suppliers andbuyers in BSC1 villages. Buyers offered loansbecause they predicted that the future benefit ofhaving the farmers’ voluntary commitment to sellonly to them exceeded their current costs. However,unlike in Thomas’ 1975 study of Sundanese villages,where credit often caused conflicts because of thehigh interest rates charged, credit in the villagesstudied here was given without interest and withoutan enforced repayment schedule. For many, thefeeling of indebtedness reduced their propensity tobargain with the wholesalers. But for some (particu-larly farmers who owed only a little money to theirbuyers), it had less impact on their propensity to bar-gain. They did not consider their financial ties abarrier to bargaining or even to selling their bananasto others if the buyers failed to meet the prices theydemanded. Some farmers who used to be collectorsand were still paid slightly higher than other farmersalso felt indebted toward their wholesalers, whichdecreased their inclination to bargain.

As depicted by its relatively low PDI, relationshipsbetween people in Australia tended to be based on



48

egalitarian principles. Such perception of equalityamong people (such as the farmers and the agent inBSC2) in a country with low PDI was also associatedwith more modern agricultural practices, more socialmobility, and better education (Hofstede 1997). InBSC2, communication between two parties could beconducted in a relaxed atmosphere where neither ofthem dominated the interactions. Conversation topicsbetween BSC2 farmers and the agent covered notonly bananas but also other interests such as sport orsharing of jokes. BSC2 farmers saw themselves asequal to the agent in social status, which allowedfriendships to develop from the trading relationships.The four farmers interviewed have supplied the agentfor a long period of time and have turned their tradingrelationships into friendship, although the distancebetween their places of work meant face-to-facemeetings could only be conducted occasionally,when the agent conducted his annual visit to produc-tion centres in North Queensland. One of the farmerswas already the agent’s friend before also becominghis supplier.

Jap et al. 1999 assert that friendliness in buyer–seller relationships encourages them to share openlyand collaboratively and this provides a basis forincreased trust, which has to be continually workedout between them. Batt (2003) concluded thatgrowers must have a certain minimum level of trustin an agent before considering him/her as a potentialexchange partner. Compared to other horticulturalindustries, trust is an even more critical issue in therelationships between farmers and their agents in thebanana industry in Australia (and also in the mangoand avocado industries), because of the agent’simportant role in ripening the fruits before selling.Quality-conscious independent retailers interviewedclaimed that banana condition (ripeness) was thesingle most important criterion in banana sellingthem. It was the agent’s responsibility to ensure thatthe bananas were handled and ripened properly toachieve the ripening stage desired by customers. Thismeant that the agent must be capable of selling theright fruit to the right customers at the right price, andalso of transforming the unripe bananas into ripeones. On the other hand, the agents depended on thefarmers to supply them with good-quality bananasthat were sought by their customers. This encouragedinterdependency between both the farmers and theagent, and increased the importance of trust in theirrelationships, since each party had little or no controlover the way the other did their job.



Tab

le 1

. C

hara

cter

istic

s of t

he b

anan

a su

pply

cha

ins s

tudi

ed in

Indo

nesi

a (B

SC1)

and

Aus

tralia

(BSC

2).

Cha

ract

eris

tics

BSC

1B

SC2

Dis

tanc

e be

twee

n pr

oduc

tion

area

and

mar

kets

Leng

th o

f cha

in

Mar

ketin

g

Selli

ng u

nits

App

roxi

mat

ely

130

kmTh

ree

leve

ls a

t the

ups

tream

and

at l

east

thre

e le

vels

at t

he

dow

nstre

amSe

lling

exc

lusi

vely

to a

sing

le b

uyer

regu

larly

in th

e vi

llage

s (on

ly o

ccas

iona

l shi

ft to

oth

er b

uyer

s)U

pstre

am: b

unch

Dow

nstre

am: b

unch

, han

d, fi

nger

App

roxi

mat

ely

2600

km

One

leve

l at t

he u

pstre

am a

nd th

ree

leve

ls a

t the

do

wns

tream

Selli

ng to

mul

tiple

buy

ers r

egul

arly

Car

ton

Key

func

tions

Prod

uctio

nR

ipen

ing

Gra

ding

Ass

embl

y D

istri

butio

nR

etai

ling

Farm

ers

Vill

age

who

lesa

lers

, ret

aile

rsC

olle

ctor

s, vi

llage

who

lesa

lers

, age

nt, t

rade

rsC

olle

ctor

s, vi

llage

who

lesa

lers

, age

ntA

gent

, mid

dle-

size

trad

ers

Ret

aile

rs (s

mal

l tra

ders

/ven

dors

)

Farm

ers

Age

nt, m

ajor

cha

inFa

rmer

s, ag

ent

Age

nt, m

ajor

cha

in’s

dis

tribu

tion

cent

reA

gent

, maj

or c

hain

’s d

istri

butio

n ce

ntre

Ret

aile

rs

Kno

wle

dge

of o

ther

cha

in m

embe

rs

Com

mun

icat

ion

Cre

dit t

ies

Pric

e m

echa

nism

s

Ups

tream

mem

bers

do

not k

now

dow

nstre

am m

embe

rs a

nd

vice

ver

sa (a

part

from

vill

age

who

lesa

lers

and

age

nts i

n th

e ci

ty)

Face

-to-f

ace

betw

een

mem

bers

at t

wo

conn

ectin

g le

vels

Ups

tream

: buy

ers l

end

mon

ey to

supp

liers

Dow

nstre

am: c

redi

t pay

men

t fro

m re

gula

r cus

tom

ers t

o ag

ent

Ups

tream

: mos

tly fi

xed

pric

e in

wei

ght-b

ased

tran

sact

ions

; ba

rgai

ning

in tr

ee-b

ased

tran

sact

ions

Dow

nstre

am: b

arga

inin

g

Ups

tream

mem

bers

kno

w th

e ag

ent a

nd so

me

of th

e re

taile

rs

Mos

tly b

y ph

one

betw

een

farm

ers a

nd a

gent

; far

mer

s oc

casi

onal

ly v

isit

the

who

lesa

le m

arke

ts a

nd so

me

reta

ilers

; fa

ce-to

-fac

e an

d ph

one

betw

een

agen

t and

buy

ers

Cre

dit p

aym

ent f

rom

age

nt to

farm

ers (

cons

ignm

ent

syst

em)

Age

nt p

ays f

arm

ers b

ased

on

barg

aini

ng re

sults

bet

wee

n hi

m a

nd b

uyer

s (fa

rmer

s as p

rice-

take

rs)



49


Individualism dimension

Hofstede’s individualism dimension refers to thedegree to which people in a country prefer to act asindividuals rather than as members of a group (Hof-stede 1997). Indonesia scored 14 here, while Aus-tralia scored 90, within a 0 to 100 range. What thesenumbers tell is that Indonesians tend to be loyal totheir groups, while Australians tend to be more indi-vidualistic. Loyalty to the group also means sharingresources. This is well expressed through the peasantsolidarity existing in BSC1 villages, which focuseson the wellbeing of everybody in the group, ratherthan the individual.

As most chain members in the villages had beenliving in the same village all their lives, they kneweach other relatively well. Like many other peasantsocieties in Indonesia, they valued high solidarityamong themselves and emphasised the sharing ofresources, mutual help, and the right to subsistencefor everybody (Alexander 1987). Peasant solidaritystems from the gotong royong community spirit longexisting in many villages in Indonesia (Koentjaranin-grat 1967). Self-sacrifice for the common benefit ishighly appreciated, while individualism is highly dis-approved of. Cooperation was the basis of socialinteractions among villagers, with implications forthe way bananas were traded in the villages. The twomost common features of peasant solidarity shownamong BSC1 members in the villages were the rightto subsistence and trust.

Many in the villages believed that everybodyshould be given a chance to earn money for their fam-ilies. The common manifestation of this belief wasfarmers’ acceptance of the practice by village whole-salers of paying collectors a slightly higher price forbananas compared to the prices given to farmers whosupplied directly to the same wholesalers. Whole-salers who tried to take over other wholesalers’ col-lectors by offering them higher prices were regardedas greedy by villagers and were considered disre-spectful of the other wholesalers’ right to earnmoney. In the spirit of respecting his former col-lector’s right to earn money, a wealthy farmer refusedto supply directly to a wholesaler (hence disregardinga chance to earn more money for himself); rather, thefarmer preferred to share the increased prices offeredto him by suggesting the wholesaler buy his bananasthrough the collector.

Such values in village life encouraged people totrust each other. When selecting buyers for their



50

bananas, many farmers considered mainly the dis-tance between their field and the buyers’ warehouses,rather than whether or not the buyer was a trust-worthy person. By default, farmers believed that asfellow villagers, the buyers would respect their rightto earn money and act in the best interest, price-wise,of both parties most of the time. In a system wheremost transactions were not recorded formally (apartfrom those by village wholesalers who dealt withlarge quantities of bananas), trust acted as an assur-ance that the trading relationships were intended tobring profit for both parties.

Consequently, many farmers believed the act ofbargaining risked being interpreted as lacking trust inthe wholesaler’s judgement. Bargaining could alsobe interpreted as a direct confrontation with thebuyers, which was usually avoided in a society thatrespected harmonious relationships. Suppliers(farmers and collectors) tended to believe that mostof the time they would receive fair prices accordingto market prices in the city and they could acceptoccasional delays in receiving price increases. Sostrong was the trust that many suppliers did not feel itnecessary to search for updated market information.They also believed that forcing wholesalers to buybananas beyond their prices might cause losses forthe wholesalers, which in the long term would disad-vantage the suppliers themselves. Hence, suppliersmight prefer to trust the wholesalers’ judgement onappropriate prices and risk the amount of profit theycould get in the short term in favour of long-term sus-tainable relationships. After all, bananas were seen asa means of providing security and stable income formost people in the villages.

In line with Australians’ tendency to be individu-alistic, a farmer in BSC2 would rate his businesswellbeing as a higher priority than the whole chain’ssuccess. Farmers’ attempts to bargain with theiragents over prices were not considered as a confron-tation but as an honest expression of disappointmentin the agent’s failure to satisfy their expectation, andas such, did not necessarily affect the relationshipsnegatively. Each stated openly what they expected ofthe other to progress their business. However,because of the nature of the industry, wherein trustdeveloped slowly over time, costs of switchingbetween agents were high; it was in the best interestof both parties to maintain a good relationshipbetween them. As transactions were repeated, trustalso increased, resulting in decreased need to bargainand increased need to maintain the relationship (cal-



culated trust). BSC2 farmers managed their risks byconsistently supplying a certain amount or per-centage of their bananas to several agents regardlessof their daily price differences. Any extra bananasthey produced would, however, always be sold to theagent who gave them better prices in the previousweek. This practice is also common among other hor-ticultural producers in Australia (Batt 2003). Goodrelationships with each agent were particularly crit-ical to ensure a market for farmers’ bananas in timesof over-supply, which usually coincide with thesummer fruit season. Farmers who pursued a spot-transaction approach might find difficulties mar-keting their bananas during those times.

In contrast to the high switching cost in BSC2, theswitching cost in BSC1 was low. In BSC1 villages,trust was considered to be pre-existing in any farmer–buyer relationship due to the collectivist nature of therelationships within the village community. Thistrust, combined with the low production costs and theguaranteed market for bananas, resulted in farmers’confidence in their capacity for one-off selling or ifnecessary, shifting permanently to another buyer.However in practice, farmers did not switch easily orsupply more than one buyer consistently. The latterwas due mostly to farmers’ small production scale.Even large-scale village wholesalers only suppliedregularly to a single agent in the city. The loyaltyethos embedded in a collectivist society as in Indo-nesia meant that anybody who consistently suppliedmore than one buyer would be labelled as disloyaland their relationships would tend not to last. Fortu-nately, because of the competition for banana supply,reliance on a single buyer would not necessarilydecrease a supplier’s bargaining power, but wouldincrease the risk should the buyer’s business col-lapse.

Supply-chain literature suggests that high ease ofswitching between buyers is not consistent withattaining chain integration and interdependency.However, in practice, chain members in the villageshave established supply-chain values through theirsocio-cultural value systems. Pre-existing trust andrespect for each other’s right to earn money has inte-grated the chain, particularly at the village levels, ashas the provision through the chain relationships ofan informal system of micro-credit. In this sense,traders are established in the role of chain champions.



51

ImplicationsThe creation of Western-style supply chains in Indo-nesia to secure supply to large supermarkets maychallenge the established socio-cultural norms. Afocus exclusively on superior, standardised qualitywould represent a shift away from the current situa-tion where all bananas find a market. Such a shiftwould potentially divert income flows which cur-rently seek to ensure that all farmers and collectorsare able to earn income (effectively an informalwelfare system). Losing their access to informalcredit and to cash payments (through moving todelayed payments which are the norm from super-markets) would also be difficult for many small-holders to sustain.

In the Australian case study, established culturalvalues and risk-management strategies were shownto favour multiple simultaneous supply-chain rela-tionships by banana farmers. By contrast, Indonesianbanana farmers already operate within supply chainswith a high degree of trust and stability. Under-standing how these current Indonesian supply chainsoperate and the culture and the deep-rooted valueswhich underpin them, should assist both academicsand practitioners to adapt Western supply-chainpractices associated with the growing supermarketsector in Indonesia. The opportunity is to designsupply-chain practices which better fit with the soci-etal needs as well as meeting the needs of super-market owners and their customers.

ReferencesAlexander, J. 1987. Trade, traders, and trading in Rural Java.

Singapore, Oxford University Press.Aquilon, M. 1997. Cultural dimensions in logistics

management: a case study from the European automotiveindustry. Supply Chain Management, 2(2), 76–87.

Baatz, E.B. 1995. CIO 100 — best practices: the chain gang.CIO, 8(19), 46–52.

Batt, P.J. 2003. Building trust between growers and marketagents. Supply Chain Management, 8(1), 65–78.

Beers, G., Beulens, A. and van Dalen, J. 1999. Chain scienceas an emerging discipline. Paper presented to ThirdInternational Conference in Chain Management inAgribusiness and the Food Industry, Wageningen, theNetherlands.

Dunne, A.J. 1999. Marketing agricultural products: anAustralian perspective, first edition. Melbourne, OxfordUniversity Press.



Fearne, A. 1998. Building effective partnerships in the meatsupply chain: lessons from the UK. Canadian Journal ofAgricultural Economics, 46, 491–518.

Hofstede, G. 1993. Cultural constraints in managementtheory. Academy of Management Executive, 7(1), 81–94.

— 1997. Cultures and organizations: software of the mind.New York, McGraw-Hill.

— 2001. Culture’s consequences: comparing values,behaviors, institutions, and organizations across nations,second edition. Thousand Oaks, Sage Publications.

Jap, S.D., Manolis, C. and Weitz, B.A. 1999. Relationshipquality and buyer–seller interactions in channels ofdistribution. Journal of Business Research, 46, 303–313.

Koentjaraningrat 1967. The village in Indonesia today. In:Koentjaraningrat, ed., Villages in Indonesia. Ithaca,Cornell University Press, 386–405.

Richards, T. and Richards, L. 1991. The NUDISTqualitative data analysis system. Qualitative Sociology,14, 307–324.



52

Russel, S.D. 1987. Middlemen and moneylending: relationsof exchange in a highland Philippine economy. Journal ofAnthropological Research, 43, 139–161.

Spekman, R.E., Kamauff, J.W. and Myhr, N. 1998. Anempirical investigation into supply chain management: aperspective on partnerships. Supply Chain Management,3(2), 53–67.

Thomas, M. 1975. Social strata in Indonesia: a study of WestJava villagers. Jakarta, CV Antarkarya.

Westgren, R.E. 1998. Innovation and future directions ofsupply chain management in US agri-food. CanadianJournal of Agricultural Economic, 46, 519–524.

Wilson, D.T. 1995. An integrated model of buyer–sellerrelationships. Journal of the Academy of MarketingScience, 23(4), 335–345.

Wilson, N. 1996. The supply chains of perishable productsin northern Europe. British Food Journal, 98(6), 9–15.



Supply-chain Management and the ‘One Dragon’ Approach: Institutional Bases for Agro-industrialisation in China

Sherrie Wei* and Zhang Yanrong†

Abstract

A supply-chain approach for food and fibre industries has been widely discussed and practised with well-known success stories, particularly in developed countries. Interest in supply-chain management (SCM)among developing countries has risen in recent years as they aim for international standards with a view toexporting their food and fibre products overseas.

Since the economic reform of the 1980s, the Chinese government and academics alike have promoted amethod of SCM for agro-industrialisation: vertical integration at the grower and wholesaler level. They havepopularised the phrase ‘one dragon of production and marketing’ — the head and body of the dragon areintegrated. This type of integration has been encouraged in two ways: one way is for large distributioncorporations to integrate back with contracted growers, or for the corporation to extend its supply-chainfunction to production. The second common method comes from government-assisted grower cooperativesthat extend their chain function from growing to marketing their products.

The first stage in developing a supply-chain methodology is to understand the network and the environmentof the supply chains involved. This study looked at the drivers of SCM in China and used the concepts of ‘newinstitutional economics’ to look at the social infrastructure for SCM in China. In 2000, O. Williamsondescribed four levels for the economics of institutions: embeddedness, institutional environment, governance,and resource allocation. We conclude that the conditions of social infrastructure necessary for SCM are yet tobe developed in China. It will only be possible to extend the ‘one dragon’ approach to SCM when theinstitutional environment is ready to support SCM requirements.

A supply-chain approach for food and fibre indus-tries has been widely discussed and practised, withwell-known success stories. Supply-chain manage-ment (SCM) simply refers to the management of theentire set of production, distribution and marketingprocesses by which a consumer is supplied with a

* Department of International Business Management,Chien Kuo Institute of Technology, Taiwan/School ofNatural and Rural Systems Management, University ofQueensland, St Lucia, Queensland 4072, Australia.Email: <[email protected]>.

† Department of Agricultural Economics, Gansu Agricultural University, People’s Republic of China.



5

desired product (Woods et al. 2002). Rather than atransactional or dyadic-based (one-to-one) orienta-tion, as traditionally used in conducting businesses,the focus of SCM is on more coordinated supplyamong agribusiness units for desirable products. Theapproach offers an opportunity for supply-chain part-ners to see where they fit into this bigger picture andhow they need to position themselves to take advan-tage of emerging trends and developments.

At this stage, the supply-chain approach has beensuccessfully applied in many industries in developedcountries, such the Netherlands, United Kingdom,the United States of America and Australia. Interest


ublished in 2004)

3


in SCM among developing countries has increased inrecent years as they aim to meet international stand-ards with a view to exporting their food and fibreproducts.

Harland et al. (1993) pointed out a decade ago thatthe first stage in developing a supply-chain method-ology is to understand the network and the environ-ment of the chain involved. It is relevant to examinethe drivers or antecedents of SCM and its institu-tional basis. Williamson’s (2000) concepts of ‘newinstitutional economics’ are particularly useful inlooking at the social infrastructure for SCM in China.Williamson described four levels for the economicsof institutions: embeddedness, institutional environ-ment, governance, and resource allocation.

From the current study, we believe that the socialinfrastructure for effective SCM is yet to be devel-oped in China. The Chinese government’s recent‘one dragon’ policy for agro-industrialisation is analternative to SCM that does not make as muchdemand on social infrastructure as the SCMapproach. However, the outcomes of the ‘onedragon’ policy have been mixed. Its experiences,both positive and negative, are relevant for policy-makers in other developing countries interested inagro-industrialisation. This study makes particularreference to the melon industry in western China as itis a well-known crop in western China and has thepotential to regain the fine reputation it had in thepast.

Institutional Basis for SCM in ChinaChina and drivers of SCM

Research has identified several drivers in theexternal environment of developed countries thatcontribute to a more consolidated approach betweenagribusiness units vertically involved in the samesupply chain. They include:• cost-price squeeze in the larger environment of

globalisation• increased demand for ‘traceability’ for food safety

and quality• increasingly specific demands by consumers for

certain attributes, such as ‘green’, or ethicallysound products.Since its accession to the World Trade Organiza-

tion (WTO), China has been under pressure to openup its agricultural markets, however this process ishappening very modestly. The drivers of SCM in



54

developed countries stated above are not imminent inChina as yet, despite warning and recurring com-ments in the media and from academics.

Cost-price squeezeChina possesses lower costs of production, such as

land and labour costs. Although more farm house-holds are now using chemicals and commercialseeds, many still use minimal farm inputs to save onproduction costs. The cost of food in China is gener-ally inexpensive. Local agricultural products of lowto mid-range value still have a substantial share in theChinese market.

TraceabilityIn China, any initiatives pertaining to food safety

issues are currently imposed by the governmentrather than demanded by communities. There is alack of effective consumer groups pressing for safefoods and this situation is not likely to change in thenear future.

‘Green’ and ethically sound productsThere is little awareness of ‘green’ (inflicting no or

minimal environmental damage) products amongChinese consumers even though some provincial andcity governments have the procedures for certifica-tion of such products. It is still difficult to gauge towhat extent consumers are willing to pay more forproducts that are produced using environmentallyfriendly practices. In China, there is currently no con-sideration given to the ethical issues implicit in pro-duction, such as worker exploitation, animal testingetc.

In developed countries, drivers for SCM haveforced small players out of business and consolidatedsupply-chain partners at each level. In China, there islittle consolidation at any level as yet. There is amyriad of small players at each level of the supplychain. For example, in the melon industry in GansuProvince, there are many small-farmer householdswith an average of 2/3 ha of honeydew melon perhousehold. At the wholesale level, hundreds oftraders travel to Gansu from other provinces duringthe peak season seeking melon supplies (Zhang andWei 2003).

A lack of institutional basis for SCM in China

Williamson (2000) described four levels in theeconomics of institutions. The higher level imposes



constraints on the level immediately below. They aresummarised as follows:• level 1, embeddedness — this consists of informal

institutions, customers, traditions, norms andreligion. It takes centuries to change in anysignificant way. It is spontaneous and often non-calculative and as such has no manifestation inteleology.

• level 2, institutional environment — this consistsof formal rules of the game; for example, contractlaws. It takes decades to change. The purpose ofthe rules is to get the institutional environmentright.

• level 3, governance —this is the play of the game.It takes several years to change with a view togetting the governance structure right.

• level 4, resource allocation — this relates tocontinuous, everyday transactions which result inprices and quantities. The teleology is to get themarginal conditions right.

SCM and the embeddedness in the Chinese society

In China, as in many other societies, informal rulesand values have a pervasive influence upon the long-run character of the economy. There are various ele-ments in Chinese society that impact on how busi-nesses are conducted. A few of these are highlightedbelow. Low social status for traders — traditionally, theChinese had a hierarchy for different professions: thegentry, the peasants, the labourers and lastly thetraders. There was a general low regard for traders orbusinesspeople as they were perceived to be makingprofits through tricky tactics. While today China isactively involved in world trade, this low regard forbusinesspeople is still entrenched in the culture. It issomewhat accepted even today that businesspeopleneed to have tricky strategies to outsmart their com-petitors. There is little room for righteousness in busi-ness, which the traditional Chinese cultureemphasised.

This perspective may not necessarily be the samein other developing countries. One study found thattraders in Indonesia were normally well respected byvillagers for several reasons, such as their ability toperform beyond the village level, their broaderknowledge of the industry, and their wealth (Wei etal. 2001). The Chinese situation is quite different. Inthe melon industry, for example, traders movearound the country for product supply in different



55

seasons of the year. Farmers are unlikely to respectthese wholesalers, as they do not know them well,and the traders seek to purchase their produce at thelowest possible price.

This prevailing attitude among the Chinese as con-tributed has contributed, to a certain extent, to the dif-ficulty of adopting a SCM approach to doingbusiness. In order to be prudent, business people gen-erally adopt a transactional-based and short-termdyadic relationship with their suppliers and cus-tomers.Homogeneity of ideas as the foundation for socialorder — traditional Chinese concepts of social orderwere based on homogeneity of ideas through a deepsocialisation process, rather than on a forced obedi-ence to laws (North 1978). Such ideas of Confu-cianism were deeply entrenched among the Chinesepeople, forming a society with homogeneous ideas toa considerable extent. Good government derivedfrom the people’s acquiescence to their roles insociety. Confucian scholar-officials known as man-darins ruled China in the name of the Emperor untilthe beginning of the twentieth century (Rajendra etal. 1995). Confucian teachings have had great influ-ence and control on the Chinese people, just as reli-gion has done.

The implication for China in business relationshipsis that the respect for law has not been nourished.Agribusiness issues affected include the implementa-tion of forward contracts, branding of products andquality standards, to just name a few.Collectivism, harmony and the disuse of conflict— as part of the influence of Confucianism, theChinese culture emphasised collectivism and har-mony. Empirical research in management areasshowed that the Chinese favoured harmony and com-promise approaches to conflict rather than a directgive-and-take collaboration (Kirkbride et al. 1991).Research also showed that task conflict or conflictmanagement over issues reinforces interdependencewhere people value each other’s abilities andresources. Interdependence facilitates communica-tion, exchanges and mutuality that in turn results incollaboration between negotiators (Lawler and Yoon1993). Parties who avoid conflict come to deny thatthey need to rely on others or to resolve conflict tomove forward in a mutually beneficial way. Conflictresolution may take the form of competition atanother level (Deutsch 1973).

The implication for SCM in China is that mutualityand give-and-take between business partners is diffi-



cult to develop. Supply-chain learning based oninformation exchange at all levels is difficult toachieve.Close ties between family and friends, but weaksocial ties — the Chinese show clearly differentialtreatment between people they do and do not knowwell. Largely due to this influence, family businessesare common among the Chinese, including those whohave been overseas for generations. The sociologicaltheory of weak ties suggests that people who are lesswell known to each other are more likely to divulgeneeded information. Many Chinese business ownersand farmers may acquire superfluous or uselessknowledge as they are securely linked to a fewsources of information.

In the melon industry in western China, farmersregularly send their produce every season to their rel-atives who work at government institutions or uni-versities to sell to colleagues. This also occurs in thebok choy industry where the expression ‘patrioticbok choy’ refers to the purchase of bok choy by theemployees of these organisations.

In the supply-chain context, close working rela-tionships with suppliers and customers who are notfriends or relatives can be difficult if partners cannotperceive the mutual benefits of divulging neededinformation. Insufficient attention to weak ties mayalso contribute to a general reluctance to coordinateacross organisational boundaries. Potential innova-tions involving more than one level in the supplychain can also be difficult to achieve.

SCM and the institutional environmentThe institutional environment refers to the formal

rules of the game that set the parameters for the play.The definition and enforcement of contract laws areimportant features. China has less than 100 years’experience of being a republic. It was a traumaticexperience to break away from its past and establisha new legal system. Moving from a centrally plannedeconomy to a market economy in the mid-1980s,China has even a shorter history of utilising marketmechanisms. Its legal system to define and arbitratedisputes is yet to be perfected. Practical details suchas what constitutes a contract, relationship parame-ters, cooperative laws, and sanctions for default arelargely left to the individual parties involved. Busi-ness relationships rely on goodwill, but this is notbacked-up by state laws.

In China, there have been incidences of strategicbehaviour of default by farmers when dealing with



56

agribusiness corporations in forward contracts. Indi-viduals and firms have been often able to get awaywith default without adequate sanction. Widespreadnegative experiences have discouraged the use of amore collaborative approach such as SCM in doingbusiness in China. As a consequence, business is con-ducted on-the-spot on a cash basis with little after-sale service or information feedback in the supplychain. This has increased both the risks and costs ofdoing business and reinforced a transactional-basedapproach to doing business in China.

SCM and governance structureThe governance structure is the play of the game.

Approaches to business relationships, such as SCM,may be described under this level. “Governance is aneffort to craft order, thereby to mitigate conflict andrealise mutual gains” (Williamson 2000).

As discussed above, cultural and institutional ele-ments essential for a supply-chain approach are notpresent in China. It is difficult for supply-chain part-ners to realise the benefits of mutuality, exchange andto learn to collaborate toward long-term goals. Thecurrent Chinese governance structure in businessalso lacks some drivers of SCM found in developedcountries. A successful chain often has an effective‘channel manager’ — a role often taken by supermar-kets in developed countries. While the supermarketsector is growing slowly China, it is yet to become adriver for SCM.

There is little horizontal integration at each supply-chain level to facilitate exchange and collaboration.The population of farmers numbers nearly one billionin China. In the melon industry, there is also a largenumber of small-scale wholesale businesses andnumerous retailers (Zhang and Wei, these proceed-ings).

SCM and resource allocationThis level refers to day-to-day transactions and

continuous adjustments to prices and output. In theChinese melon industry, there are no defined supplychains. Businesses are based on short-term profits.Competition is predominantly based on price andundifferentiated lower or mid-value products. The adhoc nature of business operations may protectsupply-chain partners from some unfavourablemarket forces in terms of entry and exit flexibility.Transactions may be efficient in terms of offeringlower prices, but not effective in terms of deliveringdesirable products to consumers.



The Chinese Approach of Vertical Coordination: the ‘One Dragon’

Policy

In the mid-1990s, as China experienced oversupplyof agricultural products, agribusiness marketing con-cepts received more attention. Both the governmentand academics promoted agro-industrialisationthrough vertical integration. The slogan ‘one dragonof production and distribution’ was soon popularised— the head and body of the dragon are integrated. Inpractice, this refers to the vertical integration of pro-duction and wholesale operations under a corporatestructure, thus saving the need for coordinationbetween farmers and wholesalers. Leading corpora-tions, or ‘dragon-head corporations’, are chargedwith the privilege and responsibility of ‘dragging’along the body and tail.

The ‘one dragon’ policy of integrating productionand wholesale distribution is a step forward from pre-vious agricultural policies that emphasised produc-tion alone. Earlier policies resulted in an oversupplyof low-value agricultural products. The ‘one dragon’policy is different from the previous ones in that theemphasis is on distribution as well as production ofmid- or higher value products. This policy of supply-chain integration has been pushed by administrativeintervention rather than pulled by agribusinessactors.

The ‘one dragon’ approach to agro-industrialisa-tion has been implemented in two major ways. Onecommon method has been for large distribution cor-porations to integrate back through supply contractswith farmers, or for corporations to extend theirsupply-chain function to production under a corpo-rate structure. An example of this is for leading cor-porations to provide improved varieties of seeds tofarmers or farmer groups and then buy their producefrom those farmers. Under this method, the focus ison integration at the upper end of the supply chain,rather than coordination of the chain as a whole. Theexpectation was that these leading corporationswould set an example that other corporations wouldfollow in other villages and hence lead to wide adop-tion on the path to agro-industrialisation. But theimplementation of ‘dragon-head’ corporations hashad mixed outcomes in efficiency and effectiveness.Many of the leading corporations were state-ownedenterprises or jointly owned, receiving subsidy andpreferential treatment. As a consequence, many of



57

them were not managed according to market princi-ples and modern management concepts. In otherinstances, farmers defaulted on their contracts forshort-term gains.

The second means of implementing the ‘onedragon’ approach is a more broad-based one ofsetting up state-directed farmer groups. These groupswere to extend their chain function from growing tomarketing their products by administrative interven-tion. For the marketing, the groups sent their productsto a consolidator, which could be a relevant localgovernment office or a state corporation. Theproduce was sold under the village name or brand.The emphasis was on developing products overwhich villages had a comparative advantage. It washoped that each village would best utilise its advan-tage under the slogan ‘one village one product’.

Directing farmers into groups was well justified. Itis believed that China, with a huge rural populationand proportionately inadequate farmland, is not fitfor large-scale farming. While some of the rural pop-ulation is moving to urban areas, this process isoccurring very slowly, as unemployment in urbanareas has been a serious issue. The problem of pro-viding work to a huge number of surplus rurallabourers will be the greatest obstacle for large-scaleagricultural production. The agricultural policy ofdirecting farmers into groups serves multiple pur-poses of production and marketing as well as ruraldevelopment. In practice, there are only a fewsuccess stories of state-directed farmer groups — forexample, one group in Shouguang County of Shan-dong Province has been able to supply vegetables tosupermarkets in Beijing. In some instances, failurehas been due to inadequate planning and monitoring,such as farmers packing inferior products which con-solidators are still obliged to accept as they have theresponsibility to take all supply from farmers.

Conclusion and Discussion

In the Chinese ‘one dragon’ of production and distri-bution approach to agro-industrialisation, the gov-ernment assumed a large role in the process. Thereare two related assumptions in the ‘one dragon’policy: the inability of supply-chain partners to coor-dinate the supply functions of production and distri-bution under market conditions; and the capacity ofthe government to plan and implement these func-tions effectively.



The heavy state role in agro-industrialisation isconsistent with the lack of ‘soft infrastructure’ forSCM, as discussed above. There is little expectation,under the current institutional bases in China, thatagribusiness actors in an increasingly decentralisedmarket system can coordinate their supply-chainactivities to deliver products that meet marketrequirements.

While product distribution was emphasised in the‘one dragon’ policy, it was implemented throughadministrative intervention. This required compre-hensive planning, based on predictions of marketforces, including supply, demand, consumer trends,and other market intelligence. Dragon-head corpora-tions and farmer groups were able to set up quicklythrough state directives. However, success storieswere isolated rather than widespread (Waldron et al.2003).

In light of Williamson’s (2000) four levels of insti-tutional bases discussed earlier, one recommendationcame through this study — that the government couldimprove the institutional infrastructure for agro-industrialisation if it works on the second level ofimproving the institutional environment, and facili-tates changes in governance structure (at the thirdlevel). At the institutional (second) level, thisincludes devising mechanisms for more effectiveimplementation of accreditation programs, qualityassurance standards (there are already hundreds ofthem) and contract laws. At the third level, horizontalintegration at the farmer level may be encouragedthrough establishing government-facilitated farmergroups. However, the emphasis needs to be on self-managed farmer groups with the government playingonly a facilitative role — it may be appropriate to useparticipatory techniques as have been used by non-governmental organisations (NGOs) and other aidprojects in China. Horizontal integration at the farmlevel is likely to bring about consolidation at thewholesale level over time by squeezing out uncom-mitted wholesalers. This will improve the likelihood



58

of exchanges and collaboration between farmergroups and wholesalers in China. This may be thefirst driver towards SCM in China.

ReferencesDeutsch, M. 1973. The resolution of conflict. New Haven,

Connecticut, Yale University Press.Harland, C., Williams, D. and Fitzgerald, L. 1993. Supply

chain methodology. Human Systems Management,12(1), 17–23.

Kirkbride, P.S., Tang, S.F.Y. and Westwood, R.I. 1991.Chinese conflict preferences and negotiating behaviour:cultural and psychological influences. OrganisationStudies, 12, 365–386.

Lawler, E.J. and Yoon, J. 1993. Power and the emergence ofcommitment behaviour in negotiated exchange.American Sociological Review, 61, 89–108.

North, R.C. 1978. The foreign relations of China. Belmont,California, Dickenson Publishing Company.

Rajendra, N., Rajendra, V. and Barwick, R. 1995.Introducing Asia, 2nd edition. Sydney, Longman.

Waldron, S.A., Brown, C.G. and Longworth, J.W. 2003.Transforming lives with livestock-based agribusiness. Apaper presented at the Australian Academy ofTechnological Sciences and Engineering (ATSE)Crawford Fund 2003 Annual Conference held inCanberra, Australia, 13 August.

Wei, S., Woods, E.J., Adar, D. and Singgih, S. 2001. WestTimor mandarin marketing case study — implications forsupply chain management in developing countries. In:O’Hare, T., Bagshaw, J., Li, W. and Johnson, G., ed.,Postharvest handling of fresh vegetables. ACIARProceedings No. 105. Canberra, Australian Centre forInternational Agricultural Research, 49–53.

Williamson, O. 2000. The new institutional economics:taking stock, looking ahead. Journal of EconomicLiterature, 38 (September), 595–613.

Woods, E.J., Wei, S., Adar, D. and Singgih, S. 2002. Supplychain management as beyond operational efficiency.Acta Horticulturae (Proceedings of the InternationalSymposium on Tropical and Subtropical Fruits), 2, 425–432.



Analysis of the Constraints to Banana Industry Development in Indonesia Using the

Supply Chain Concept

Setyadjit,* Ahmad Dimyati,† Erna Maria Lokollo,§ Sri Kuntarsih,¶ Rofik Sinung Basuki,** Ahmad Hidayat,†† P.J. Hofman,§§ S.N. Ledger¶¶

and E.J. Woods***

Abstract

Banana is the highest production fruit in Indonesia. The fruit is sold mostly on the domestic market. A supply-chain approach was used to analyse constraints to banana industry development in Indonesia, with a view todetermining research and development (R&D) priorities. Two supply chains were characterised throughparticipatory interviews and discussions involving the research team and the respective participants in thechains. The first supply chain was a traditional banana supply chain from the Cikalong subdistrict, Cianjurdistrict, West Java, supplying mainly the traditional markets in Bandung and Jakarta. The second supply chainwas that of ‘company X’ supplying bananas to supermarkets in the Jakarta, Bogor, Tangerang and Bekasimetro areas. The chain characteristics were mapped to describe the flow of product, funds and information.SWOT analysis was performed to identify areas for improvement in the chains. The suggested improvementswere compiled and classified under the six principles of supply-chain management (SCM): knowingcustomers and consumers; creating and sharing value; getting the product right; logistics and distribution;information and communication; and effective relationships. The research team and representatives of thesupply chain selected the five most-important issues for both supply chains. The results indicated that the most-important constraint in both supply chains was getting the product right. This indicates that the currentemphasis of research and development on improving on-farm production and postharvest practices shouldcontinue. However, there are other factors that need to be addressed, such as getting adequate supply of theright product, and making sure that improvements do not impair sociological and other aspects of the chain.

* Indonesian Ministry of Agriculture, Balitpasca, Jl.Ragunan 29a, Pasarminggu, Jakarta Selatan, DKIJakarta, Indonesia.

† Indonesian Ministry of Agriculture, PuslibangHortikultura, Jl. Ragunan 19, Pasarminggu, JakartaSelatan, DKI Jakarta, Indonesia.

§ Indonesian Ministry of Agriculture, Puslit SosialEkonomi, Pasarminggu, Jakarta Selatan, DKI Jakarta,Indonesia.

¶ DitTanaman Buah, Indonesian Ministry ofAgriculture, Pasarminggu, Jakarta Selatan, DKIJakarta, Indonesia.

** Indonesian Ministry of Agriculture, PuslibangHortikultura, Jl. Ragunan 19, Pasarminggu, JakartaSelatan, DKI Jakarta, Indonesia.



59

†† Dit Pengolahan dan Pemasaran, Jl. Harsono, Gd D, No.3, Pasarminggu, Jakarta Selatan, DKI Jakarta,Indonesia.

§§ Agency for Food and Fibre Sciences, Department ofPrimary Industries and Fisheries, Centre forSubtropical Fruits, Nambour, Queensland 4560,Australia.

¶¶ Agency for Food and Fibre Sciences, Department ofPrimary Industries and Fisheries, Indooroopilly,Queensland 4068, Australia.

*** School of Natural and Rural Systems Management,University of Queensland Gatton, Gatton, 4343,Australia. Current address: Executive Director,Research and Development Strategy, Department ofPrimary Industries and Fisheries, Meiers Road,Indooroopilly, Queensland 4067, Australia. Email: <[email protected]>.



Production of banana in Indonesia is the highest of allfruit crops. For example, banana production was4,384,384 t in 2002, compared with 1,402,906 t formango and 968,132 t for citrus (Badan Pusat Statistik2002). The main banana production areas are in Java,Sumatra, Celebes, Bali and, increasingly, Kali-mantan. In Java, production occurs in West, Centraland East Java. West Java includes the districts ofSumedang, Tasikmalaya, Lebak and Cianjur. CentralJava includes Cilacap, Grobogan, Brebes andKendal, and East Java includes Bojonegoro,Sumenep, Jember and Pasuruan.

The markets for banana are located in cities on theproducing islands, such as metropolitan Jakarta,Bandung, Semarang, Yogyakarta, Surabaya andMalang for Java. There are also holiday resort areaslike Bali and, potentially, neighbours like Singaporewhich is close to Sumatra. Distance from the pro-ducing areas to these markets can be short, such asfrom West Java to Jakarta or Bandung, or long, suchas from Sumatra to Java. There are two main types ofmarket: the traditional, long-established markets, andthe rapidly expanding supermarket businesses suchas Matahari, Carrefour, Goro, Hero and Kemchicks.

In Indonesia, there are two broad groups offarmers. The smallholder farmer has 0.5–5 ha ofbanana. These farmers often use low technology.They are the main clients for the technology pro-duced by the Indonesian Agency for AgricultureResearch and Development (IAARD), in close col-laboration with extension workers. The large-scalefarmers have more than 5 ha (in one case up to 2000ha). They often use more production and postharvesttechnology than the small farmers. In some instances,the technology is sourced through collaboration withlarger producers such as Chiquita and Del Monte.

JustificationThe Indonesian government is eager to improve thebanana industry and incomes to growers. In the past,emphasis has been mainly on improving productionpractices. However, with the growing supermarketsector, it is important to reassess the R&D effort toensure it is addressing the main areas that areaffecting the performance of the industry.

The focus of the Indonesian R&D effort is onsmaller growers and their supply chains. Thesechains involve a large number of members, with botheconomic and sociological characteristics. In devel-oped countries, the supply chain or value chain is



60

increasingly being analysed and treated as the wholeunit rather than as individual components, on thebasis that the chain is an interdependence of membersseeking to develop a competitive advantage for thewhole chain (Woods 1999; Anon. 2003). However,in developing countries the chains have rarely beenstudied as a whole unit, but rather as individual links.

MethodsThe method was developed by considering both theconcept of supply-chain management (SCM) and thenature of the banana industry in Indonesia (empiricalevidence). The supply chain concept itself is moreestablished in the manufacturing industry sector thanin agriculture. Therefore, to apply the SCM conceptto the banana industry, the concept needed someadjustment, so that it could be adopted in the circum-stances applying in Indonesia. Previous experienceand the results of the desk study confirmed that eval-uation of banana industry development required amore-comprehensive and systematic approach. Pre-vious banana-industry studies focused heavily on theproduction sector (agronomy, cultivation etc.), whileonly some touched briefly on socioeconomic aspects(marketing, socioeconomics characteristics of theproducers and consumers etc.).

Relatively little has been written about the processengendering chain management in Indonesian agri-culture, especially in banana growing, where overallproduction is scattered and involves very small-scalefarms.

At a first workshop, held at IAARD, Indonesia, theconcept of SCM and the empirical evidence cametogether, which ensured that the final methods usedwould be relevant to smallholders and would be par-ticipatory in nature. The workshop was attended byrepresentatives of key members of the Indonesiansupply chains (small growers, traders, traditionalmarkets, and supermarkets), as well as members ofboth the Indonesian and Australian project team. Atthe workshop, the research team strategically identi-fied case-study locations (Cikalong representingSC1, and company X representing SC2). During theworkshop, the team identified the relevant partnersfrom each of the supply chains and collected baselineinformation on the nature of banana supply chains inIndonesia. It also gathered data on the bananaindustry, including previous R&D activities.

As a result of workshop 1, the Indonesian teamdeveloped the framework for their study. The frame-



work was then refined during discussions with theAustralian project team to provide the final methodsused.

In the case studies, the Cikalong supply chain(SC1) was chosen because it is the major producer ofbanana to Jakarta, the chain has the potential toimprove, with benefits to the members, and becauseit is a good example of how the local government(‘Pemda through Otonomi Daerah’) has enthusiasmto take the initiative to create new value and greatercompetitiveness for the banana industry in its region.



61

Company X (SC2) was chosen because it is inno-vative and is a key driver in the chain to increase theflow of benefits to the members from any improve-ments made to the chain.

Information was gathered through individual dis-cussions with members of the supply chains, andthrough discussion groups with representatives ofseveral sectors of each chain.

At a second workshop, held at the Department ofPrimary Industries (DPI), Brisbane, Australia, theresults of the two case studies were presented and dis-

DESK STUDY– Field study

– Joint team meetings

WORKSHOP 1(IAARD)Indonesia

Discussion with the Australian team; methods

finalised

CASE STUDIES

WORKSHOP 2DPI, Queensland, Australia

Follow-up

Output

enib

Output– case study location– develop partnership– information system and database

n

(1) Supply chain, Cikalong(2) Supply chain, Company X(3) Other supply chains

Output

Figure 1. Outline of the methods used in the supply chain analyses.

ment in developing countries and P.J. Hofmangs No. 119elished in 2004)


cussed. The workshop was attended by the Indone-sian and Australian teams, as well as a traderrepresentative from Cibedug, Ciawi, Indonesia, andone representative of local government from theAgriculture Service of Cianjur District, Indonesia.The objectives of the second workshop were todevelop and test the SCM method for the bananaindustry. The six areas of SCM were used to developa list of potential improvements for both case studies(SC1 and SC2), and prioritise these improvements inrelation to their potential to improve the industry.

Results and DiscussionBackground data

Desk studyInformation regarding the general overview, statis-

tical data, and previous research results on breeding,crop management, crop protection, postharvest, andagri-economics were collected during the desk study.The results are briefly presented as follows:

Indonesian banana production is mainly by small-holders, with the average area of farmers’ plantationsless than 0.5 ha. Banana production was about4,384,384 t in 2002, about 68% of it from Java.Banana-production systems in Indonesia can be cat-egorised into backyard, mixed crop, commercialsmallholder and agribusiness enterprises.

Indonesia is part of the centre of origin of banana.There are more than 325 banana cultivars, with about14 cultivars being commercially grown. Amongthese are Ambon Putih, Ambon Lumut, Emas, RajaBulu, Raja Sere, Badak and Lampung (table bananas)and Tanduk, Uli, Nangka, Kepok, Siem and Kapas(plantain).

Although banana production has increased from1997 to 2002, the production area has declined from1997 to 1999. This has been caused by the outbreak ofseveral pests and diseases, especially in the main areasof banana production such as Central Java, East Java,Sumatra, and Sulawesi. The major banana diseases inIndonesia are Panama disease (Fusarium wilt disease),blood disease and moko disease (bacterial wilt disease).

Banana research has been receiving more attentionlately because of the increased domestic demand forgood-quality fruit.

Research in breedingVery little research in banana breeding has been

done in Indonesia. This is understandable, considering



62

the wide diversity of banana germplasm existing.Breeding has been done through hybridisation, soma-clonal mutation and selection. The Indonesian FruitResearch Institute (IFRURI) had established two cul-tivars, Ketan-01 and Raja Siem, which are tolerant tobacterial wilt. Two promising cultivars, i.e. Barifta 01(mutant from cv. Barangan which is productive anddwarf) and Sepatu Amora (tolerant to the vector ofbacterial wilt). The assessment of Fusarium resistancevia in vitro selection has also been done to findresistant cultivars to this disease.

Crop managementThe characteristics of banana production in Indo-

nesia are small-scale, minimum technological inputs,high variability of the cultivars, little capital, no irri-gation and planting material coming from suckers.

Crop protectionReported pests are leaf curler (Erionatha thax L.),

pseudo stem borer (Cosmopolities sordidud,Germar), stem borer (Odoiporus longicollis Oliv),thrips (Chaetanapothrips signipennis), scab moth(Nacoleia adasema), and nematodes such as Rhado-pholus similes Cobb, Pratylenchus spp., Helicotyle-chus multicinctus Cobb and Meloidogyne spp.

The main diseases are Fusarium wilt, bacterialwilt, leaf spot/black sigatoka and bunchy top. Theother diseases are anthracnose, Panama, Cordona androtten young fruit.

PostharvestIn developing postharvest technologies for Indo-

nesia, there are still some gaps for research such asthe characteristics of plantains, more appliedresearch on improvement of ripening, and diseaseresistance of the peel. Socioeconomic aspects havereceived little attention.

Agro-economyA study of agro-economics by Sudaryanto et al.

(1992) described the circumstances of the interna-tional and domestic markets in mainly Jakarta, andreported two different marketing channels forbananas coming from Lampung and from SouthSumatra. This study also investigated the marketingmargin in West Java and gave examples of the flowof bananas from the major producing centres in WestJava to a major consuming centre in Bandung.

Field studyBoth teams visited the Lampung banana-pro-

ducing centre to collect additional information. They



visited the regional agriculture authority, NusantaraTropical Fruits (NTF), a small farmer at PadangCermin, West Lampung, a banana crisp company,and a truck driver at Bakahueni port (connecting Javaand Sumatra). One aspect of improvement was morerapid movement of trucks through the port.

Workshop 1

Recommendations from the workshop were as fol-lows:

In developing the banana industry in Indonesia, abreadth of information is required, such as knowl-edge of banana production, including the agro-eco-logical zones (AEZ), farmer behaviour andorganisations in relation to improving knowledgeand practices, and research on production, posthar-vest and processing practices.

There were two types of farmer in Indonesia:large-scale farmers such as NTF, and small-scalefarmers. Large-scale farmers need little assistance,whereas the small farmer still requires assistance.Small-scale farmers had characteristics such as sub-sistence with little technological inputs, scatteredlocation, low productivity and low-quality product.The main pests and diseases are Fusarium and bacte-rial wilt, there are many varieties of bananas grown,and low adoption of research results.

Improvement of postharvest handling practicescannot be made without considering on-farm prac-tices. There are still research gaps. Banana-crispprocessors can produce high-quality product andestablish good markets even though the quality offresh produce remains low.

The percentage of the retail price received by thefarmer was considered to be low. Thus, increasingthe market or retail price in the market may notincrease the price to the farmer.

Cikalong, Cianjur was recommended as a locationfor a case study since Cianjur is a model for bananaagribusiness development and there are looselyorganised and structured grower groups ‘GapoktanSerba Pisang’.

Supply-chain case studies

Cikalong (Cianjur) supply chain (SC1)Product flow. Bananas are distributed from

farmers to consumers in wet markets and supermar-kets in the big cities through village collectors, largetraders or supermarket suppliers. Some farmers soldtheir best-quality product directly to street vendors.



63

The percentages of product sold to the wet markets,supermarkets and street vendors are ca. 95, 4 and 1%,respectively.

Cash flow. Village collectors were the primarybuyers of farmers’ product. They bought the productfrom farmers at harvest in cash, or made an advancepayment before harvest and the balance at harvest.Many village collectors received funds from largetraders in the consumer markets, but some used theirown capital.

Information flow. The main information shared byevery member of the chain was the quality requiredby customers and consumers, both wet market andsupermarket. The quality requirements were deter-mined by the variety and maturity. The highest priceswere for varieties Tanduk and Raja Sereh, followedby Raja Bulu, Ambon Lumut, Muli and Nangka inthat order. For all varieties, the more mature the har-vest, the higher the price.

Information about price was limited to the largetrader level. Collector–traders and farmers were pricetakers.

Although farmers knew that the price received forbananas was influenced by variety and maturity,most of them did not direct their production strategyto fulfil consumer demand because of the cashneeded and lack of security. Farmers preferred togrow the Muli and Nangka varieties because of theirearly maturity and high yield, so that they can get acash return quickly. Farmers were reluctant to delayharvesting to increase maturity because of the risk oftheft of the crop.

Activities to add value. Farmers often harvestedand sold their banana before they were mature. Col-lecting agencies and chain stores and wholesalers domost of the ripening, grading etc., but generally thecollectors do very little of this (only about 5%). Tworeasons why growers do not ripen their crop arebecause they get little increase in price for addingvalue, and ripening too early in the chain will result intransporting ripe fruit with greater risk of damage.Collectors were paid for the transportation costs fromthe farmers field to their base.

Services. Credit arrangements are the majorservice collectors provide to growers. Information isnot a major part of the services offered.

What determines price? Size, variety, maturity(usually based on how angular the shape is) and ripe-ness (if the fruit are starting to colour) are the maindeterminants of price, with variety and size being themost important.



Relationships. Very strong relationships existbetween the collecting agent at the subdistrict anddistrict level, and between the district collector andthe wholesaler. Several of the relationships are weak,but this does not always mean that they needimproving.

How value is created. Most of the value is addedfrom the collecting agency at district level andonwards. Most of the bananas stay on the bunch untilthey reach the wholesaler.

Key decision-makers. Wholesalers are the maindeterminers of price, with decreasing influence fromretailers, traders and, last of all, the growers. Growershave very little control over price.

SWOT analysis: CikalongStrengths. There is a strong capacity to expand the

supply chain, because there are many potentialplayers in the supply chain and there is the potentialto increase the number of players. There is also thecapacity to increase production. Farmers are familiarwith growing bananas, so they could increase pro-duction if they are rewarded for it. Local governmentis ready to support the expansion of banana produc-tion because banana is one of the top government pri-orities for further development. It is also the vision ofthe district government to expand banana productionin the district. There is an ‘association of bananafarmers’ in Cikalong, but this is not active at themoment. There are no such associations in other pro-duction regions.

Weaknesses. Poor cultivation techniques is a majorissue. Because of the lack of capital, the farmerswould need to combine resources to buy fertilisersand other inputs.

In 2001, a training program organised by the Agri-culture Service’s office instructed growers on thebenefits of fertilising, but the farmers said it would beof little benefit since the plants would not producegood yields. They would prefer to apply the fertiliserto the higher-value inter-cropped crops directly.

Opportunities. There is an opportunity to developlarger banana orchards to increase the production ofhigh-quality bananas for the supermarket trade, pos-sibly by establishing a larger management structurefor banana growers in the same area. This could be ona village basis or involve several villages. There issupport available from local government to assistwith this.

The potential market for processed banana couldbe expanded, including processing of other banana



64

varieties. At the moment, only one variety is proc-essed.

Threats. Among the threats are poor regulation torestrict the movement of diseased plants, competitionfrom banana imports, and the discriminatory policieson banana trade of European countries such as theapplication on higher import tariffs for non-EU coun-tries.

Company X supply chain (SC2)Product flows. Previously, bananas from Cikalong

and Lebak were delivered to the collectors inbunches. However, beginning in 2003 Company Xrequested some of the collectors to supply fruit inhands, so as to reduce fruit damage and allow betterpacking of bananas in the trucks and reduced wastageat the markets. Fruit from Cikalong and Lebak repre-sent about 70% of the fruit supplied to Company X,with the remainder coming from several growersfrom Cicurug. These growers have about 2–5 ha ofbanana, and Company X works closely with thesegrowers to produce high-quality fruit. On occasion,Company X obtains banana fruit from the wetmarkets when normal supplies are low.

Company X separates the fruit according to qualityat its main holding facility.

The fruit are delivered to the supermarkets ashands in plastic crates.

Some 55–60% of Company X fruit goes to aboutfive medium-size supermarkets. The company doesnot supply the larger supermarkets such as Hero andCarrefour because it does not have a large enoughsupply. Some 5–10% of its fruit go directly to streetvendors. Rejected fruit are sent to traders who supplyfruit stalls, and also to local wet markets.

The retail shelf space given to local banana is verysmall because of the low supply of good-quality fruit,even though there is sufficient consumer demand tojustify increasing the shelf space. Thus, there is alarge gap between supply and demand for good-quality local banana varieties. As a result, the super-markets give more shelf space to Cavendish andimported bananas.

Company X has started to process some of therejected bananas suitable for processing. The proc-essed product is sold directly to food stalls.

Cash flow. Company X usually pays cash directlyto the collectors on delivery of the banana. For thegrowers that deliver directly to Company X, becausethey are larger growers, payment is normally one daylater by bank transfer. One problem is that supermar-



kets promise a delay of 2 weeks between delivery andpayment, but this has sometimes blown out to 6weeks.

Prices paid by the supermarkets are set by negoti-ation between Company X and the supermarkets. It isnot a fixed price. However, there is a fixed price forits processed product.

Some of the supermarkets require a payment fromthe trader to secure shelf space. This is usually a one-off payment at the beginning. Every 3 months thesupermarkets asks the traders to join a discount (spe-cials) program. The supermarkets determine the priceof specials and the traders have to comply, sometimestaking a loss.

Services. Collectors collect fruit from the growersand deliver to Company X. Some of the collectors arestarting to de-hand. Sometimes the collectors actu-ally do the harvesting. Some growers harvest them-selves and deliver to the market directly.

Company X provides education to collectors andtraditional wet-market sellers on how to handlebanana to prevent damage, and also some training togrowers on how to grow well and how to the bananasfor quality (in Lebak only). Company X supplies pro-motional material to all of its outlets. It transports thefruit to the supermarkets, and collects fruit from itslarger growers and, occasionally, from the traditionalmarkets.

Company X does not consider that it is its respon-sibility to educate its supply chain members, but con-siders it to be the role of the provincial and districtpublic-sector staff.

Information flow. Company X considers itself asan ‘information resource’. Company X had verygood information flow to all supply chain memberssuch as collectors, traders at the wet markets, andtraders in Ciawi. Company X also collects informa-tion from supermarkets. However, the informationflow was strong only between Company X and thestreet vendors. Between the company and supermar-kets, traditional markets, and consumers of processedand fresh product information flow was quite good,while with traders it was marginal.

How effective are the information flows? Thecloser one gets to the growers the less effective is theinformation flow.

Having effective grower groups would make itmore worthwhile and efficient providing informationto these groups. Also, the grower groups could alsocreate a larger ‘production unit’, which couldimprove security and production practices.



65

How well does Company X know its customers?Company X knows its customers well, but it needs tomobilise its collectors to better educate the growers.The government will facilitate this mobilisation. Ifthe company knew its supermarket clients better itmight not have to pay the shelf fee and payment forfruit might become more rapid.

How effective are the relationships? Relationsbetween Company X and growers do not exist,except for the two larger growers that live near itsfacilities. These are the ones that provide good-quality fruit.

How right is the product? There are always qualityand quantity problems with respect to local varietiesfor the supermarkets. The supply of the lower-qualityfruit required for the wet markets is not a problembecause of its greater supply.

Some of the larger food caterers would also like toinclude bananas in their food packs for factoryworkers etc., but they often cannot get enough good-quality fruit. This may be a potential, new clientgroup.

Company X SWOTStrengths. Strengths are the education provided by

Company X to its supply chain members, good rela-tionships with supermarkets and collectors, reputa-tion for supplying good-quality fruit, short distanceto the markets, good leader to develop the chain,good knowledge of fruit-quality requirements, goodrelationships with government institutions, a goodmanagement team and good collectors.

Weaknesses. Every supermarket in Indonesia hasits own quality standards. There needs to be morestandardisation.

Opportunities. There are nevertheless opportuni-ties to provide better education to the supply chainmembers. It is not enough to just tell the farmers howto improve, there needs to be someone living in thevillages to continually assist the farmers. Company Xwould like to do this but it needs assistance to do sofrom government or non-government organisations.

Workshop 2

The second workshop was attended by the fullIndonesian and Australian team, including DrDimyati (Director, Centre Research for Horticulture)and Dr Winarno (Director, Fruit Production Directo-rate), Ms Mega (Agriculture Service, Cianjur Dis-trict), Udih Samanhudi (banana trader/supplierrepresentative for the wet market, Cibedug, Ciawi)



and Dr Greg Johnson (ACIAR) (see Ledger et al.2002). The objective was to develop and test theSCM method for analysing banana-industry develop-ment in Indonesia using the information collected inthe above activities, with a view to identifying andprioritising the medium and long-term R&D require-ments based on the market requirements and oppor-tunities of the banana industry as a wholeagribusiness unit.

The information gathered during the desk and fieldstudies was presented. During the ensuing discus-



66

sions, areas for improvement were listed and groupedunder the six principles of SCM: knowing customersand consumers; creating and sharing value; gettingthe product right; logistics and distribution; informa-tion and communication; and effective relationships.

Each workshop attendee then voted for what theyconsidered to be the five issues that would have thebiggest impact in improving the supply chain. Theresults are presented in Tables 1 and 2.

For the Cikalong supply chain, the issues thatreceived the highest votes were:

Table 1. Voting on steps to improve the Cikalong banana supply chain.

Improvement Number of persons who voted

Supply chain members

Indonesian team

Australianteam

Getting the product rightVillage local management – grower groups to increase security, supply and qualityImprove standardisation of productExpand area of production; existing banana growers and additional growersImprove growers knowledge and practices; cultivation techniques, immaturity, orchard managementImprove local varieties – breed new varietiesImprove postharvest handling • loading and unloading systems• collecting places (temperature, sun exposure)• handling of bunches.

3

1

2

2

7

1

1

5

72

1

2

6

Knowing customers and consumers Better information about consumersDevelop niche marketsDevelop new processing markets e.g. baby foods and chips Develop export markets e.g. to the Middle East and China etc.

1 3

23

1

1

Creating and sharing value Growers capture more value – de-hand – ripen 1 4

Logistics/distribution Agribusiness terminalImprove infrastructure – e.g. roads.Improve delivery system – reduce time lag

12 3

1

2

Information/communication Better information from wholesaler – market intelligence signalsBetter information to growers – standardsBetter information from grower up the chain

1 13

232

Effective relationshipsImprove wholesale × grower interaction. 1 3 1

OtherBetter regulation to protect Indonesia from imported fruit 1 3



1. village local management – grower groups whichcould increase security, supply and quality (17votes)

2. improvement of postharvest handling, loading andunloading systems, collecting places – temperature,sun exposure, and handling on bunches (13 votes)



67

3. all actors in the supply chain need to participate inknowing about and achieving the necessarystandards for the particular markets (10 votes). For Company X the issues that received the highest

votes were as follows:

Table 2. Voting on steps to improve the Company X banana supply chain.

Improvement Number of persons who voted

Supply chain member

Indonesian team

Australian team

Knowing customers and consumersA better understanding of what consumers wantEducate consumers to recognise and demand higher qualityIf growers knew the desired product and had the necessary technology and resources (Rp) they could decide whether to respondNeed to expand market for quality bananas (the market segment is so small it limits investment, despite the opportunity)

21

1

1

41

2

4

1

2

Creating and sharing valueNeed more Company Xs (innovative)Opportunity to increase supply to street vendors, traders, caterers (new customers)Need collectors to de-hand to increase supply (may be done by terminals)Indonesian banana supply chain needs to be competitive with imported bananas/other fruit 1

4

6

1

1

2

1

Getting the product rightIncrease all aspects to get high qualityAbility to ripen bananas more quickly and consistentlyImprove supply in low-supply months (5 months)All actors in the supply chain need to participate in knowing about and achieving the necessary standards for the particular markets.

121

1

1

2

5

311

4

Logistics and distributionImprove packaging of de-handed bananas to prevent damage during transport 2 2

Information and communicationNeed to educate/empower traders, and through them the growers, to increase high quality supplyIncrease information flow to small growers by forming grower groups for improve information flow and crop management 1

1

3

6

4

Effective relationshipsNote system dynamics – not just commercial opportunities 2 1

Potential improvements for those who support/facilitate chainsGovernment should facilitate easy access to financial institutions able to assistMany actors limited by lack of access to capital (Company X, collectors, growers)Better environment for new investments (incentives for new plantations from local government)

2

1

3

3

34



1. all actors in the supply chain need to participate inknowing about and achieving the necessarystandards for the particular markets (10 votes)

2. increase information flow to smallholder growersby forming grower groups to improve informationflow and crop management (8 votes)

3. government should facilitate easy access tofinancial institutions to assist.For both supply chains (Cikalong and Company

X), most of the issues receiving the highest votesrelated to ‘Getting the product right’, usingapproaches such as:1. formation of local grower groups improving post-

harvest handling (loading and unloading systems,collecting places, and handling of bunches)

2. active participation of all actors to agree on thenecessary standards for particular market segments. It was interesting to note similar voting patterns

between the Indonesian and Australian team members.

ConclusionsAnalysing the Indonesian banana industry using asupply-chain concept provided many insights in rela-tion to constraints to industry development. In addi-tion, the SCM concept represents a conceptualframework within which strategies could be devel-oped to analyse the competitiveness of the bananaindustry, and to identify and prioritise the R&D activ-ities required to improve the banana industry.

According to Indrajit and Djokopranoto (2002),there are several stages in the development of supplychains: 1. independence between among the members of

chains 2. integrated planning among several members of the

chain 3. integrated planning and monitoring 4. supply chain integration in planning, implemen-

tation and monitoring. On the basis of the information collected in this

study, the two supply chains examined were at stagetwo.

The methods used in this study could be improvedby getting more information and input from allmembers of the supply chains, and involve their rep-



68

resentatives in the decision process for identifyingthe main constraints. In the Indonesian context, thisinput may be better obtained by having one-on-onediscussions with members, or discussion groups withpeers. Discussions with several sectors of the chainmay result in reduced participation from thosesectors perceived to have less ‘power’ in the chain.

The concept developed in this study is beingapplied to other horticulture situations in Indonesia.The SCM concept is being combined with soft-systems methodology to analyse problems and solu-tions in the citrus and pepper industries in eight prov-inces, and the concepts are being presented anddiscussed in a number of different forums. Continualassessment and improvement of these methodswould be valuable.

AcknowledgmentsWe thank ACIAR, the Department of Primary Indus-tries and Fisheries (Queensland) and the Universityof Queensland for financial support.

ReferencesAnon. 2003. Value chains, what are they and how do you

identify them? <http://www.agrifood.info>.Badan Pusat Statistik 2002. Bulletin Perdagangan Luar

Negeri, Februari 2000. Indrajit, R.E. and Djokopranoto, R. 2002. Konsep

Manajemen Supply Chain, Cara Baru Memandang MataRantai Penyediaan Barang, Jakarta, GRASINDO, 264.

Ledger, S.N., Lindsay, S., Hofman, P.J., Woods, E.J. andSinggih, S. 2002. Company X supply chain workshop.23–24 July 2002. South Johnstone, Queensland,Australia. Centre for Wet Tropics Agriculture.

Tahlim Sudaryanto et al. 1992. Review on banana marketingin Indonesia.

Woods, E.J. 1999. Supply chains: what are they and why beinterested? ACIAR Postharvest Technology ProgramInternal Workshop No. 20, Canberra 1–2 December1999. View at <http://www.linkingfarmerswith-markets.net/index.php?p=3&id=3>.

Woods, E.J., Wei, S., Singgih, S., and Adar, D. 2000. Supplychain management as beyond operational efficiency.Acta Horticulturae, 575, 425–431



Improving the Marketing System for Fresh Produce from the Highlands of Papua New Guinea

John Spriggs,* Barbara Chambers,* Carole Kayrooz,* Ernest Natera,†Norah Omot§ and Margaret Vatnabar¶

Abstract

As the title suggests, the aim of this research project is “to improve the marketing system for fresh producefrom the PNG Highlands for the benefit of all stakeholders.” Note that the aim is not to do a study about theproblems of marketing fresh produce, but rather to bring about change that intentionally will improve themarketing system. As such, the methodology being used for this project does not follow the traditionalscientific research approach, but rather follows in the mould of critical action research. In this paper, weprovide an introduction to the problems of the marketing system for fresh produce in the Papua New Guinea(PNG) Highlands. This is followed by a discussion of the methodology used in the project, how the project hasunfolded during the first year (it is a 3-year project) and, finally, the conclusions are given.

Papua New Guinea (PNG) has been struggling inrecent years. If we look at the index of economicprosperity (Figure 1) we can see that the averageperson is not as well off today as they were a fewyears ago.

The International Monetary Fund (2003) recentlyblamed this on:• growing governance and law-and-order problems• a lack of new mineral exploration activities• deteriorating physical infrastructure in the rural

areas (that has inhibited agricultural production)• the Asian crisis (that has reduced export demand).

Given the prospect of further declines in themining sector, the National Government of PNG islooking to other forms of economic activity to helpreverse this downward trend in prosperity. Chief

* Institute for Regional Community Development,University of Canberra, Canberra, ACT 2600, Australia.Email: <[email protected]>.

† Fresh Produce Development Company, Goroka, PNG.§ National Agricultural Research Institute, Lae, PNG.¶ National Research Institute, Port Moresby, PNG.



6

among these is an export-oriented agricultural sector,of which fresh produce is an important part. Fol-lowing the above-mentioned International MonetaryFund report, it also recognises that a major difficultyin achieving this is the deterioration of physical infra-structure in rural areas.

The National Government’s strategy for the futureprosperity of PNG provides an important backdrop tothis project, but this project is more than just gener-ating increased gross domestic product (GDP) forPNG. It is about generating cash income for thepeople who most need it.

The PNG Highlands region is home to more thanhalf the total population of PNG. It is also a region inwhich rural poverty is widespread. Cash income isrequired by these rural families to provide for suchthings as education and health care. The productionand sale of fresh produce of the PNG Highlands rep-resents one of the few sources of cash income for avery large number of rural families. Moreover, theproduction and marketing of fresh produce is verymuch an activity in which rural women can and doplay an important role. This is significant because


ublished in 2004)

9


cash income in the hands of rural women is muchmore likely to be used on family needs than is thecase of cash income in the hands of rural men.

The fresh produce grown in the PNG Highlands isdominated by traditional foods like sweet potato andtaro. But increasingly, farmers are turning to Euro-pean-style vegetables, such as potatoes, cabbage, broc-coli, cauliflower, capsicum, spring onions, zucchini,carrots, tomatoes, and lettuce. The PNG Highlandsregion is unique in that it is one of the few places in theregion that has a temperate climate and where high-quality European-style vegetables can be grownorganically all year round. The region has the potentialto meet the needs not only of consumers in the High-land area but also of the coastal cities of PNG as wellas to supply offshore markets. According to prelimi-nary interviews with stakeholders in the fresh-produceindustry (both buyers and sellers), the main drawbackin fulfilling this potential is the marketing system.Many farmers told us that they know how to growfresh produce but they do not have the markets. Super-market managers in Port Moresby told us that theywould love to buy more fresh produce from the High-lands but they were unable to get a consistent supply ofgood-quality produce. A fairly general comment weheard was that the marketing system was fragmentedwith poor coordination and communication betweenthe different players in the marketing system.

Methodology

This is not the first project to examine the marketingsystem for fresh produce in the PNG Highlands.



70

1988

100

0

200

300

400

500

600

1990

Kin

a

1992 1994

There have been several such studies, including Scottand Atkinson (1989), Fresh Produce DevelopmentCompany (1997), Burden (1998) and Epstein (2000).These studies all end with recommendations forchange, but do not actually engage the changeprocess per se. Hence, their capacity to make a dif-ference is limited. Methodologically, they are exam-ples of positivistic science in which hypotheses aretested and conclusions drawn in a linear researchprocess. Positivistic science is a powerful approachwhen dealing with natural phenomena such as plantsand animals. However, most social scientists wouldregard this as inadequate when attempting to researchhuman social behaviour.

The present project is different in that engaging thechange process is an integral part of the project. Toachieve this, the project adopts the methodology ofaction research. Action research involves a cyclicprocess of:

In this approach, the research team generatesunderstandings of the marketing system (reflection/research) and, working with stakeholders in thesystem, facilitates change (planning and action). Inits facilitative role, the research team is cognisant thatthe process itself and any changes to emerge from theprocess are owned and directed by the stakeholders.

Action research has been widely used in the fieldsof social change and education (including agricul-tural ‘extension’). However, the use of action

Research Planning Action Reflection

1996 1998 2000 2002

Year

Figure 1. Economic prosperity in Papua New Guinea (real GDP percapita), 1990–2001.

ement in developingn and P.J. Hofmanings No. 119eblished in 2004)

countries


research in exploring and improving supply-chainrelationships is relatively new. We have used it inprevious research (Spriggs et al. 2002) and there issome work ongoing in the United Kingdom (e.g. atSheffield University).

During this 3-year project, we expect to passthrough two or three phases (action research cycles orspirals). During the first phase we expect to: • carry out a comprehensive situation analysis

(mapping) of the marketing system as it currentlyexists and examine potential areas forimprovement (this is the initial research elementof an action research cycle)

• facilitate a workshop comprising all thestakeholders in the marketing system for freshproduce — this workshop is carefully constructedto encourage collaborative discussion of problemsand strategies and ends with an action plan forchange (this involves the planning and start ofaction of an action research cycle)

• develop and work with a steering committee ofstakeholders to ensure that the action plansdetermined by the workshop participants arecarried out (this is the action element of the actionresearch cycle)

• hold a meeting of the research team with thesteering committee to reflect on the actions takenand to develop the next phase of research (this isthe reflection element of the action researchcycle).

Project Work to DateThe project began with a 2-week training program forthe for four PNG members of the research team. Thetraining program was conducted at the University ofCanberra and covered the topics of marketing,supply-chain management, action research andworkshop facilitation. The methodology of work-shop facilitation was used during the training courseto determine an action plan for the situation analysis(i.e. the mapping exercise which is the researchelement of the first phase of the action researchcycle). This action plan consisted of a number ofactivities including:• background data (history, types of fresh produce,

quantities, prices)• environment (economic, government, socio/

cultural, technological, natural)• process mapping (data loggers, process record)• profitability analysis (marketing costs)



71

• semi-structured interviews (all stakeholders)• consumer questionnaire (at supermarkets).

During the first year of the project, all of theseactivities were carried out except for the consumerquestionnaire. The other activities provided valuableinformation, which was provided to the variousstakeholder participants of the first workshop.1 Thefollowing is a brief overview of the findings of thatresearch.• Broadly, there are two types of marketing system

for fresh produce from the PNG Highlands: theopen market and direct marketing. The openmarket is often called the informal market.Farmers set up a stall with their produce andbuyers come around and purchase theirrequirements, but there is no long-termrelationship between buyer and seller. Directmarketing is where a final buyer (e.g. asupermarket) buys directly from a supplier withoutgoing through the open market. In the latter, thebuyer and seller build up a relationship, whichtends to lower transaction costs.

• The fresh-produce sector in PNG is currentlyrestricted to the domestic market; there are no fresh-produce exports. The present marketing system isfragmented, with poor communication andcoordination and little attention to quality control.Currently, the domestic marketing system is not insufficiently sound shape for PNG fresh produce tobe competitive in the very demanding exportmarket. From a business strategy perspective, itmakes sense to focus first on improving thedomestic direct-marketing system with a view tousing this improved system as a springboard to theexport market. The direct-marketing system has thepotential to become an appropriate model where thecritical characteristics of consistent quality andreliability of supply can be encouraged in a way notpossible with the open market. Within this direct-marketing system, sales to local supermarkets aremost important, as they are the most demandingbuyers of fresh produce.

• Special attention needs to be paid to the potentialimportance of women in the fresh-producemarketing system. They are heavily involved in

1 At the time of the Bali workshop, the workshop forstakeholders of the fresh produce marketing system wasonly in the planning stages. It has since been successfullyconcluded and is discussed briefly on page 73.



the production of fresh produce and are alsoimportantly involved in selling at the local openmarkets. However, concerns about their physicalsecurity and lack of facilities in the open marketsinhibit their greater participation. An earlierworkshop on Women’s Voices in the Food Chain(run by the National Agricultural ResearchInstitute) (NARI, undated) showed that womenwere experiencing significant problems at urbanand rural markets — lack of toilet facilities, norunning water, no shade from the hot sun etc. Italso revealed that women tend to be marginalisedin PNG society.

• The Fresh Produce Development Company(established by the National Government with theaim of assisting in the development of the fresh-produce industry) has begun working with growergroups to provide training in production andpostharvest management of the produce. It has alsoassisted them in finding buyers for their produce.

• The two main supply chains for moving freshproduce from the Highlands to Port Moresbysupermarkets has been by road/sea and by air.There is no road leading from the Highlands toPort Moresby. Thus, produce must either beairfreighted or transported by road to Lae on thenorth-eastern coast of PNG and then shipped byboat from Lae to Port Moresby. Airfreight is themore expensive (at about PGK2/kg), but may becost-effective for high-valued, highly perishablefresh produce. The flight time is less than 2 h.Road/sea transport is less expensive (at aboutPGK0.60/kg) and, if all goes well, takes aminimum of 3 days.



72

• The potential comparative advantage for theHighlands is in organically grown, temperate-climate fruits and vegetables. However, mosttemperate-climate vegetables are highlyperishable and the optimum temperature forstorage after harvest is between 0°C and 4°C. Thiscreates a problem, as refrigeration is expensive andonly professional marketers currently have thecapacity for this. There is a rough rule of thumbthat for every 10°C above the optimum, shelf lifedrops by a factor of two to three. For example, withbroccoli, the ideal storage temperature is 0°C andat this temperature, the shelf life is about 24 days.At 10°C, the shelf life drops to about 8 days, and at20°C, the shelf life is about 3 days. At 30°C, theshelf life is about 1 day.

• Currently, there is one significant professionalmarketer of fresh produce by road/sea and one byairfreight. They both use refrigerated transport tomaintain the quality of their produce. There arealso many growers and grower groups marketingtheir own produce to Port Moresby without thebenefit of refrigeration. They either take smallloads with them on the plane or they take produceby road to Lae (on unrefrigerated trucks) and thenput it on a container ship for the journey to PortMoresby. Figures 2 and 3 show the type ofunrefrigerated truck that is often used to transportproduce to Lae.

• In Figure 3, notice the sacks used to carry cabbagesand other produce. These provide no protection forthe produce and often require it to not only supportthe weight of the produce itself, but also the weightof those looking after it!

Figure 2. The type of unrefrigerated truck that isoften used to transport produce to Lae.

Figure 3. Interior of unrefrigerated truck, showingunprotected produce.



• Self-marketing is inefficient and often the produceis badly damaged by the time it reaches itsdestination. Figures 4 to 6 show the results oftemperature trials on unrefrigerated roadshipments of fresh produce by a self-marketerfrom Goroka (in the Highlands) to Lae.

• Notice that by the time they reached Lae, all threeloads had reached temperatures of around 30°C,which meant that the shelf life was certainly lessthan that required to make the journey to PortMoresby (at least 2 days). It seems clear that asuccessful, quality-based domestic marketingsystem cannot be based on a system involving self-marketers.

• Grower groups were asked why they were notalready using professional marketers in theHighlands. The most plausible answer was a lackof competition — even with all their quality lossesand high transaction costs, growers thought theycould do better marketing themselves. The insights gained from the mapping exercise

were fed into a workshop of stakeholders of the mar-keting system for fresh produce. This workshop hadnot taken place by the time of the Bali workshop.



73

Data loggerand produceplaced in boxand then put indepot

BoxPMwithcircdriv

32.0

30.0

28.0

26.0

24.0

22.0

20.0

18.0

16.0

14.0

12.0

Tem

pera

ture

(°C

)

7/9 06:00 12:00 18:00

Time (stS/N 224522

However, by the time of writing this revised paper,the stakeholder workshop had been held. We wouldlike to just offer a few comments on this workshop.• It was decided to hold a separate meeting of

women stakeholders in the marketing systembefore the stakeholder workshop. This wasintended to obtain their perspective on the issues aswell as their suggestions for strategies ofimprovement. This decision was taken because ofthe fear that the women might tend to bemarginalised in the larger workshop and theirconcerns not heard. It was expected there would be15 women participants at this meeting. In fact therewere 24. The meeting was facilitated by two of theauthors (Associate Professors Barbara Chambersand Carole Kayrooz).

• The workshop was limited to a cross-section ofstakeholders with a view that numbers would belimited to 30 participants. In fact, we had 36participants, including representatives of growergroups, wholesalers, transporters, supermarkets inLae and Port Moresby, national government (ledby the Secretary of Agriculture) and provincialgovernment (from the Highland provinces).

loaded ontoV on bottom poor airulation anden to Lae

PMVarrives inLae

Produceweighedandhandedover tobuyerProduce

unloaded andleft outside insun

7/10 00:00 06:00

arting 7/9/2003 06:00:07)

Figure 4. The results of temperature trials on unrefrigerated road shipments of fresh tomatoesfrom Goroka (in the Highlands) to Lae by a self-marketer (PMV = public motorvehicle).


Data logger andproduce placedin box and thenput in depot

Box loaded intoPMV on top withgood aircirculation anddriven to Lae

PMV arrives inLae

Produceweighed andhanded overto buyer

32.0

30.0

28.0

26.0

24.0

22.0

20.0

18.0

16.0

Tem

pera

ture

(°C

)

7/9 06:00 7/10 00:0012:00 18:00 06:00

Time (starting 7/9/2003 06:00:07)S/N 224719 Produceunloaded andleft outside insun


Figure 5. The results of temperature trials on unrefrigerated road shipments of fresh lettuce fromGoroka (in the Highlands) to Lae by a self-marketer (PMV = public motor vehicle).

Data logger andproduce placed inbox. Box leftoutside depot

Box loaded ontopassenger seat (besidedriver) of PMV, whichhad been sitting in sunall day with windowsclosed

Windows openedon PMV, otherproduce loadedand PMV drivento Lae

PMVarrives inLae

Produceweighed andhanded overto buyer

Produceunloaded

and leftoutsidein sun

32.0

30.0

28.0

26.0

24.0

22.0

20.0

18.0

16.0

Tem

pera

ture

(°C

)

36.0

34.0

7/9 05:59 23:5911:59 17:59 7/10 05:59

Time (starting 7/9/2003 06:00:07)S/N 224524

Figure 6. The results of temperature trials on unrefrigerated road shipments of fresh beans fromGoroka (in the Highlands) to Lae by a self-marketer (PMV = public motor vehicle).



74


• The workshop was professionally facilitated (byBarbara Chambers and Carole Kayrooz) usingrobust techniques intended to encouragecollaborative participation and decision-making.

• At the beginning of the workshop, one of theauthors (John Spriggs) presented a summary of thefindings from our mapping exercise and alsopresented a report on the women’s group meeting,prepared by the two facilitators. (Five of thewomen who were participants at the women’sgroup meeting were also participants at theworkshop.)

• Following this, John Spriggs proposed that the aimof the workshop should be “to improve themarketing system for fresh produce from the PNGHighlands for the benefit of all stakeholders” andproposed the following as our vision:– to recognise the important role of women in the

fresh-produce industry in the Highlands– to encourage a professionally managed mar-

keting system (to improve efficiency and effec-tiveness

– to ensure that a significant share of the benefitsfrom a professionally managed marketingsystem accrue to rural households in the High-lands

– to encourage government policy initiatives thatare supportive of these vision statements.

• Discussion ensued on the proposed aim and visionand these were accepted by consensus of theworkshop participants. The facilitators then led theworkshop participants through a process ofdiscussion of the issues, the development ofstrategies and an action plan.

• At the end of the workshop, the participants chosea steering committee (which John Spriggs wasasked to chair) to carry on the work to ensure thatthe action plan is put into effect.

ConclusionThis project differed from earlier studies of the mar-keting system for fresh produce of the PNG High-lands. Those earlier studies were more in the mouldof positivistic science, while this one is in the mouldof action research. We believe this approach is moreappropriate when dealing with issues concerned withsocioeconomic change. We (in the Institute forRegional Community Development, University ofCanberra) have previously used this approach suc-cessfully in Australian settings. However, this is our



75

first attempt to use it in a different and cross-culturalsetting. It may be noted that the PNG case studyinvolves a cross-cultural setting where growergroups involve PNG nationals, while other players inthe supply chain (wholesalers, transporters, super-markets) tend to come from a western cultural back-ground. Our experience to date suggests thisapproach is robust and effective in this different andcross-cultural setting.

AcknowledgmentsThe authors gratefully acknowledge the financial andother support provided to this project by the Aus-tralian Centre for International Agricultural Researchbased in Canberra, the Fresh Produce DevelopmentCompany based in Goroka, and the National Agricul-tural Research Institute based in Lae.

ReferencesBurden, J.N. 1998. Improvements in the storage and

transportation of fresh produce from the Highlands ofPapua New Guinea to Port Moresby. Report for the FreshProduce Development Company. Auckland, NewZealand, HortResearch.

Epstein, T.S. 2000. A review of STABEX Project 4.17.Papua New Guinea, Fresh Produce DevelopmentCompany.

Fresh Produce Development Company 1997. PNG markets:yesterday, today and tomorrow. Workshop report,Granville Hotel, Port Moresby.

International Monetary Fund 2003. Executive Board of theIMF 2003 Article IV Consultation with Papua NewGuinea, Public Information Notice No. 03/78, June.

NARI (National Agricultural Research Institute) undated.Women’s voices in the food chain: shouts and whispersfrom PNG women in the natural resource sectors. Projectdocument. Lae, Australian Contribution to the (PNG)National Agricultural Research System (ACNARS).

Scott, K.J. and Atkinson, G. 1989. Transport of vegetables inPapua New Guinea. ACIAR Technical Report No. 14.Canberra, Australian Centre for InternationalAgricultural Research, 26 p.

Spriggs, J., Chambers, B., Fromholtz, M. and Dunn, T.2002. Socioeconomic change in the Coleamballyirrigation area. Paper presented at the 46th annualconference of the Australian Agricultural and ResourceEconomics Society, 13–15 February.


Developing Systems to Maintain Quality through the Supply Chain: Getting the Product Right for the

Customer

George Beers*

Abstract

This contribution is about designing and building, in a business environment, supply chains that can delivertop-quality products. The concept of co-innovation is explained as a structure in which companies andknowledge institutes are joining forces to use and obtain the sorts of knowledge and expertise that are requiredto build high performance, competitive supply chains. Some of these large-scale, co-innovation programsfocusing on chains and networks have operated in The Netherlands for the past 8 years. Some characteristicsand experiences with these public–private partnership programs for agribusiness chain development will bediscussed.

An important part of the agribusiness chain program is the development of cross-border supply chains. Theprojects are developed for Dutch food companies that operate internationally and which are implementinglogistic and quality systems for agricultural products all over the world. Examples of the building of advancedlogistic systems, food safety and quality programs throughout the whole supply chain will be presented fromprojects in Thailand, Brazil and Ghana. Capabilities of all supply chain partners have to be matched with theadded value they have to deliver, and with an adequate participation in costs and benefits and governancestructures involved. The step from the current situation to a supply chain with high-quality, certified productsis usually too big and involves too many uncertainties. The projects therefore use growth strategies andevolutionary approaches. The realisation of a well-balanced partnership for the project (local–international andbusiness–academics) has proven to be an important factor in meeting the ambitions of the companies. The rolesof national and international government in this type of project will be discussed.


* Wageningen University and Research Centre, The Netherlands.



76


Consumer Sovereignty: Exploring Consumer Needs

Peter J. Batt*

Abstract

In the transitional economies, international aid agencies have traditionally focused on improving productivity.While the introduction of improved seed, agronomic practices and improved postharvest handling systemsmay indeed result in significant improvements in productivity per unit area, this is no guarantee that producerswill benefit financially. In a market where prices are determined primarily by supply and demand, any markedincrease in production may exert significant downward pressure on price. The extent to which this eventuateswill be determined by the perishability of the product, the availability of postharvest storage systems, theconsumer demand for the product, product quality, and the cost and availability of substitute products. Thispaper argues that even in the transitional economies, the adoption of the marketing concept is as equallyapplicable as it is in the industrialised nations, given the increasing globalisation of agribusiness food chains.

Most primary producers, especially those in the tran-sitional economies, are primarily concerned withseeking to improve productivity per unit area. Sincemany rely upon the sale of fresh produce as their solesource of income, improving productivity is the mostreadily available means of improving householdincome. As most farms are quite small, any increasein production at an individual farm level is unlikelyto have any significant impact on the market. How-ever, if, as a result of adopting some improved tech-nology, productivity increases across an entireindustry, producers may find to their dismay thatprices have declined. In an industry that still reliesprimarily on manual labour, there are few economiesof scale to be gained in the majority of the transitionaleconomies. While output prices may decline, thecosts of labour may even increase, thus eroding anyfinancial benefit the farmers might have otherwiseachieved.

However, of equal concern but so often ignored byfarmers, is the extent to which the product produced

* Horticulture, Curtin University of Technology, GPOBox U1987, Perth, Western Australia 6845, Australia.Email: <[email protected]>.



7

will satisfy buyers’ needs. Satisfying buyers’ needs isperhaps the most basic concept underlying modernmarketing thought. Most marketing textbooks indi-cate that the most successful firms are those mostable to determine the wants and needs of targetmarkets and to deliver the desired satisfaction moreeffectively and efficiently than competitors. Evenwithin the transitional economies, while it is oftenassumed that the market is driven primarily by price,not only are there significant variations in productquality, but significant variations in buyers’ propen-sity to pay.

To take advantage of these differences, farmersmust acknowledge that markets are not homoge-neous, but comprised of an indeterminate number ofsmaller sub-markets or segments. While buyersoccupying the same segment have similar needs,those buyers who occupy other segments may havequite different needs. At a consumer level, these seg-ments may be aggregated on the basis of differencesin demographic variables (age, income, occupation,education, race); geographical variables (place ofresidence); psychographic variables (values and life-styles); and behavioural variables (purchase occa-sion, benefits sought, usage rate, loyalty).


ublished in 2004)

7


However, few producers sell directly to con-sumers: most must transact with one or more marketintermediaries. Depending upon the role each inter-mediary plays in the marketing process, various cri-teria will be more or less important in the decision topurchase. While various collector agents and tradersendeavour to aggregate the product from a multitudeof small farmers, to grade and repack the produce andwhen necessary to store the produce, wholesalersusually disaggregate the consignment into smallerparcels to meet the needs of individual retailers, res-taurants and food service outlets. Even at this level,different buyers may express quite different needswith respect to the desired cooking characteristics,maturity, variety and size and even the source orplace of origin.

Using the results from a number of supply-chainstudies conducted in both Australia and variouscountries in Southeast Asia, this paper will explorethe various criteria used by consumers in selectingfresh fruits and vegetables from a retail store. Regret-tably, very little information is from the transitionaleconomies, thus preventing any meaningful compar-ison. The paper then continues to explore how actors’perceptions of consumers’ needs differ along thesupply chain. It is anticipated that those market inter-mediaries closest to the final purchaser are generallythe most able to accurately determine consumers’needs. Conversely, those closer to production aremore often embroiled in agronomic problems andissues relating to the orderly supply of consistent-quality produce to downstream customers.

A Review of Consumer SovereigntyThe concept of consumer sovereignty rests on thepremise that economic activities aim to satisfy con-sumers’ needs (Hansen and Schrader 1997). Needsarise primarily from an unfulfilled desire. Derivedprimarily from labour relations (motivation) theory,consumers have various needs that must be fulfilled.At the most basic level, there are the physiologicalneeds for food, clothing and a place to live. Oncethese needs have been fulfilled, safety and securityneeds become more important, leading in turntowards the various social needs for belonging andaffection and finally, individual needs for knowledgeand self-expression.

When a need is unsatisfied, a consumer may doone of two things: either look for an object to satisfythe need, or reduce their desires and satisfy them-



78

selves with what they already have. Assuming in thisinstance that the consumer is able to maximise utilityby making a decision to purchase, the product theconsumer ultimately buys will be influenced by theculture, individual personality and the consumer’sfinancial resources. Taking food as an example, tosatisfy hunger, whether the consumer chooses rice,pasta or potatoes will largely depend upon the societywithin which they have been raised. Nevertheless, asa society evolves, the wants of its members willexpand. As people are exposed to more objects thatarouse their interest and desire, producers try toprovide more products and services to satisfy thosewants. However, while it is most often assumed thatconsumers have identifiable needs and wants beforeconsumption, these needs and wants can be as mucha consequence of marketing and other supplier activ-ities as they are a property of the individual them-selves. Furthermore, many consumers do not knowwhat they want. Needs often emerge only when pro-voked by the product itself.

However, while most consumers have unlimitedwants, most are constrained by limited financialresources. Consumers therefore must make choicesand, according to the utility maximisation theory,they will choose those products that best satisfy theirneeds. This assumes that consumers are not only fullyinformed, but that they are both knowledgeable andinterested in the products on offer. However, inreality, most consumers are unable to accuratelyjudge quality, especially for intangible products suchas fresh fruits and vegetables. Since fresh produce isinherently variable, the various search attributescommonly used such as size, colour, variety, freedomfrom blemishes and even characteristics such asfreshness, may not necessarily result in a favourableconsumption experience. Furthermore, variousexternal marketing signals including price, promo-tion and the presence (or absence) of suitable alterna-tives may also impact upon the consumer’s decisionto purchase. For other consumers, the decision to pur-chase may be based on the reputation of the firm(brand) or convenience.

Nevertheless, in a competitive market and more sowithin a saturated market, since consumers are ableto choose between alternative suppliers’ offers, con-sumers wield the majority of power. It thus becomesthe responsibility of producers and various marketintermediaries to offer those goods and services thatwill best satisfy consumers’ needs to the extent that itis profitable to do so, or at least to match the compe-



tition. However, as consumers’ needs are continu-ously changing, producers may find they are moresuccessful if they have fewer competitors. Such willprovide the incentive to invest in the development ofinnovative products and new markets.

What Do Consumers Want?

Marketing theory suggests that consumers willfavour those products that offer the most quality, per-formance and features (Kotler et al. 1994). However,the products must not only be affordable, they mustalso be available.

Within Australia, numerous studies have beenundertaken to identify the various criteria that con-sumers use in their decision to purchase fresh fruits.Flanagan (1991) indicates that consumers generallyhave very positive attitudes towards fresh fruits. Theproducts are seen to provide a nutritionally valuable,convenient snack. However, most consumers regardfruits as discretionary items rather than essentialitems in the food budget. Whereas fresh vegetablesare considered staple foods, fresh fruits are luxuryitems.

One of the reasons Flanagan (1991) gives for theapparent paradox is the inability of consumers to self-select good-quality fruits. Many of the physicalattributes commonly used by consumers to choosefresh fruits are poor predictors of eating quality andthus many consumers are dissatisfied with the con-sumption experience. Variations in quality exist



79

between growers, between each piece of fruit, andbetween retail stores. Consequently, selecting fruitsbecomes a high-risk decision. These self-doubts willhave a negative influence on the quantities of freshfruits consumers buy. When disappointed with theeating quality of fresh fruits, consumers will eitherwithdraw from the market or purchase fruits insmaller quantities.

The Horticulture Research and Development Cor-poration (1990) identified a number of importantattributes that consumers used to select their fruitsincluding freshness, quality, firmness, colour,variety, price and size. Yuen et al. (1994) identifiedsize, colour, freedom from blemishes, crispness andtaste as being the most favoured variables. However,point-of-sale information such as brand name,variety, nutritional value and origin were alsohelpful. Surprisingly, less than 10% of respondentsappeared to be concerned with price.

Drawing upon the results of a number of under-graduate and postgraduate student projects con-ducted in Perth, Western Australia, it appears that themost important variables influencing the consumer’sdecision to purchase fresh fruits are freedom fromblemishes, firmness, colour, variety, price and size(Table 1).

In only one of the five cases (oranges) did priceappear as the most important variable, indicating thatthe quality of the fruit offered for sale was generallymore influential than price in the consumer’s deci-sion to purchase.

Table 1. Importance of the criteria used by consumers in their decision to purchase fresh fruits (% = proportion ofrespondents who indicated unaided that they used this criterion in their decision to buy fresh fruit; ‘rank’signifies the order of importance of the criteria as perceived by the respondents).

Criterion Apples 1 Apples 2 Bananas Oranges Mangoes

% Rank % Rank % Rank % Rank % Rank

Freedom from blemishesFirmnessColourVarietyPriceSizeAppearanceCrispnessTasteAroma

2720

2219132917

24

35

1

1217203119

1419

54

5214

3

34

32

128

1

2

34

1622

367

31

43

152

5651

2519

74

23

45

1

Sources: apples 1, Stewert-Dawkins (1995); apples 2, Sadler (1997); bananas, Daniel (2000); oranges, Hobley (2003); mangoes, Hickey (1998).



For exotic fruits such as mangoes, while they areexpensive (at least in Western Australia; WA), theyare not ordinarily considered unless the consumercan afford to purchase them. In this instance, pro-viding the fruit is in good condition, price becomesrelatively unimportant. However, as the quantity offruit available in the market increased and pricesdeclined, consumers were observed to purchase sig-nificantly greater numbers of fruit (since mangoesare generally sold by piece rather than by weight)(Hickey 1998)(Table 2).

The price elasticity of demand is expected to havesome influence on the consumer’s decision to pur-chase, especially when there are marked variations inthe retail price from week to week. However, mostconsumers are unlikely to sacrifice quality for price.Furthermore, there is evidence to suggest that a lowerprice for one commodity will result in a reduction inthe demand for one or more alternative fruits. Knownas the cross elasticity of demand (Cramer and Jensen1988), a reduction in the price of bananas (forexample) is likely to result in a reduction in the quan-tities of apples and oranges purchased. This occursbecause the consumer is generally purchasing eitherfor themselves or their family who, in any givenweek, will consume a fixed quantity of fruit. It is alsohighly likely that consumers will allocate a fixed pro-portion of household expenditure to the purchase offresh fruits. Since there is much variation in both fruitquality, prices and the availability of preferred varie-ties from week to week, consumers are thereforeexpected to allocate these funds to the various fruitsoffered for sale, depending upon quality, price andavailability in-store.



80

While ranked of only moderate importance, thesize of the fruits presented for sale is believed to bemore influential than the ranking suggests. The fruitsize sought is very much dependent upon the ultimateconsumer, culture and the financial position of thepurchase decision-maker. While there is some posi-tive relationship between fruit size and price (as sizeincreases, price increases), where the fruits arelargely consumed as snacks by children or placed inschool lunch boxes, there is an increasing demand forsmaller pieces of fruit that a child can eat. To theirdismay, most parents find that if the fruit is cut intosmaller pieces, the child refuses to eat it because ithas discoloured. However, when the fruit is pur-chased as a gift (especially among Asian cultures),large-sized fruit is preferred so that all members ofthe family may participate in its consumption. Yet inMalaysia, because of low household incomes, thedemand is for smaller fruits.

At least in Australia, this relationship betweenquality and price means that most small fruits are soldin pre-packed bags of between 1–2 kg, depending onthe product. However, there is a universal perceptionamong consumers in WA that pre-packed fruits aresecond-quality fruits. Within the pre-packed bags,consumers often find misshapen, blemished, poorlycoloured and damaged fruits. Hence, most consumersprefer to self-select fruits from the retail shelves.

While less research has been conducted on vege-table products, there is some evidence of the per-ceived relationship between quality and size. InVietnam, significant price premiums are paid in boththe wholesale and retail markets for larger tubers(Table 3).

Table 2. Price elasticity of demand for fresh mangoes in Perth, Western Australia.

Price per piece (AUD)

Number of pieces of fruit purchaseda

0 1 2–3 4–5 6–10 10+

0.501.001.502.002.503.003.504.004.50

2205499

147194232242242

2632435355451514

6

54759276441311

52

6168402213

82––

34352310

322––

853311

2–––––

a Numbers in the body of the table signify the numbers of people surveyed who purchased the given numbers of fruit pieces at the corresponding prices.

Source: Hickey (1998).



However, there is some anecdotal evidence tosuggest that consumers prefer to buy the large ratherthan the extra large tubers, because the extra largetubers are often hollow inside and some consumersperceive that they have been treated with growth-pro-moting chemicals. Similarly, among the food serviceindustries, the demand is for smaller tubers, presum-ably because they are less expensive to purchase.

Staying with the consumer market for potatoes inVietnam, in asking consumers what criteria they usedin their decision to purchase, 24% of consumersreported that freedom from chemical residues wasone of the most important criteria. However, in thereported studies on the fresh fruit industry in WA,freedom from chemical residues was seldom an issueunless consumers were prompted. As a latent vari-able, freedom from chemical residues will onlybecome an issue when visible residues are present onthe fruits, thus bringing it to the consumer’s attention,or when consumers specifically want organicallygrown produce.

Within most of the world’s industrialised econo-mies, there is an increasing desire to purchase freshproduce that is not only healthy and nutritious butalso beneficial for the environment and society atlarge. As consumers become more affluent and findthemselves able to make more choices, consumersalso become increasingly concerned about environ-mental and social issues. This is leading towards theconcept of ‘triple bottom line’ reporting, wherefinancial performance, concern for the environment,and social equity are given equal consideration (Spri-egel 2001). As a result, there is an increasing demandfor organic produce, although there is evidence toindicate that consumers in Australia are unlikely topay more than 10% extra (Batt and Giblett 1999).

However, more fundamental than this is the con-sumer demand for safe product. Following analarming increase in the incidence of food poisoning,most governments have responded by enacting a raftof legislation which requires retail buyers to take all



81

reasonable steps to ensure that the food they sell issafe (Wilson 1996). As a result, most major super-markets now require fresh produce to come from sup-pliers who have an appropriately accredited quality-management system. A genuine and visible quality-management program is a prerequisite for any freshproduce company who wishes to supply the super-markets (Fearne and Hughes 1999).

In Australia, most consumers show little concerntowards the possible presence of chemical residues,because most wash the fresh fruits and vegetablesthey have purchased before consumption (Batt andGiblett 1999). However, there is also an implicitassumption that under the various quality-manage-ment systems that most modern supermarketsoperate, and random in-store sampling of the produceby the Department of Health, that growers haveadhered to the prescribed withholding periods andapplied chemicals at the appropriate rates. Withinmany of the transitional economies, given the chem-icals currently available, the growers’ lack of knowl-edge and the high incidence of pests and disease,such assumptions are ill-founded. Anecdotal evi-dence from Kapatagan (a barangay on the slopes ofMt Apo in southern Mindanao, Philippines), suggeststhat farmers seldom eat the vegetables they havegrown because of the high quantities of chemicalsapplied.

In most industrialised countries, consumers areprotected under legislation that requires producersand manufacturers to not only ensure that the prod-ucts available for sale are not hazardous to health orlife, but that consumers also have the right to expectproducts to perform as promised and the right to beinformed. While potentially this means that con-sumers are entitled to return fruits to the store fromwhich they were purchased and to expect a refundwhen fruits fail to meet their expectations, very fewconsumers actually do. Largely because consumersare unable to accurately self-select fruits that not onlylook good but also eat well, many simply withdraw

Table 3. Price differentials at which tubers are purchased by tuber size (VND/kg).

Tuber size Farmerssell

Tradersbuy

Wholesalersbuy

Retailersbuy

Extra largeLarge Medium

+1851385–180

+1701595–170

+2402180–480

+4502550–885

Source: Batt (2002).



from the market or purchase significantly fewer fruits(Sadler 1997). Often, retailers do not even knowthere is a problem, for as long as the product con-tinues to look good and does not deteriorate on theshelf, there is no reason for them to suspect that thereis anything fundamentally wrong with the product.Poor eating quality is normally associated with thatfruits which have been harvested early (and oftenimmature) in order to capture high prices in thewholesale market and fruits (particularly apples) thathave been stored for extended periods of time.

While food manufacturers must provide informa-tion on the date of manufacture and advise consumerson the likely expiry date, producers of fresh produceare under no such obligation. Food manufacturersmust also provide consumers with information on thevarious ingredients, preservatives and processes usedand, increasingly, to provide information on thecountry of origin. With greater concentration andaggregation in the food-processing industries, manu-facturers are able to search the world to identify themost reliable supply of high-quality inputs for themost competitive price. Given that many of theseglobal suppliers are able to provide the product atprices substantially below the domestic costs of pro-duction, domestic growers often embark uponvarious promotional programs to differentiate theirproduct, appealing to the superior benefits of thelocal product (freshness). For example, Australianconsumers differentiate between imported and recon-stituted orange juice (from Brazil) and local product.In this regard, consumers must also be protected fromfraudulent, deceitful or deceptive information andadvertising.

One of the other foundations upon which modernconsumerism is built is competition. Consumersmust be given the right to choose, but equally impor-tant, is that consumers may not be discriminatedagainst on the basis of age, gender, race, religion orpolitical affiliation. Competition generally ensuresthat consumers have access to good-quality produceat a lower price. However, competition may alsoelevate some costs. Rising prices reflect improvedservices that consumers want such as more conven-ience, greater choice and larger stores. Furthermore,consumers not only want functional products butmany also seek psychological value. While manyargue that brands and the associated cost of pack-aging and promotion only add psychological value,brands give consumers greater confidence. Brands



82

imply a certain quality for which many consumersare willing to pay.

While the use of brands — particularly generic, in-store brands — is rapidly increasing in the retailsector (Fearne and Hughes 1999), branding freshproduce remains problematic. In Australia, mostgrowers are labelling apples, irrespective of thequality, resulting in mixed grades and no guarantee ofdelivering premium quality (Batt and Sadler 1999).However, other variables are involved. The productis perishable, thus irrespective of quality at the timeof branding, the product will deteriorate because ofinappropriate postharvest treatments or poor producthandling. With each grower having their own percep-tion of quality, fruits of vastly different quality stand-ards will emerge on the retail shelf, so even ifindividual growers do differentiate between grades,quality differences will be lost at the retail level.

While nutritionists recommend that we should eatseven serves of fresh fruits and vegetables per day(Moxon 1999), most Australians eat only 4.1 servesper day. Many fruits, including oranges, mangoesand pineapples, present a problem for consumers —fresh fruits are inconvenient, expensive and incon-sistent (Hughes 1999). Furthermore, with morewomen in the workforce, household incomes aresteadily increasing. With more personal disposableincome, consumers are not so much cash-constrainedas they are time-constrained. Hence, consumers areconstantly searching for new innovative productsolutions that will reduce the amount of time requiredto purchase, prepare, cook and consume their food.

What Do the Market Intermediaries Want?

For most retailers, fresh produce is regarded as thekey determinant in the consumer’s choice of storebecause it provides an attractive, fresh and colourfuldisplay and is a symbol of the pervading qualitystandards throughout the store (Retail Business1997). While shoppers accord great importance to thequality, price, range and availability of fresh produce(Hughes and Merton 1996), fresh produce also gen-erates some of the highest profit margins of anyproduct category in-store. However, while freshproduce is high profile, the products are highly per-ishable and very sensitive to mishandling anddamage at all levels of the supply chain (White2000).



Quality, price and the ability to deliver are gener-ally regarded as the most important criteria by whichorganisational buyers evaluate potential suppliers(Cunningham and White 1973; Lehmann andO’Shaughnessy 1974; Dempsey 1978; Wilson 1994).Where there is no difficulty in accurately specifyingthe exact nature of the product and there are severalreliable suppliers in the market, a buyer can simplychoose that supplier who offers the lowest price fromamong all those suppliers who fulfil the functionalrequirements (Hakansson et al. 1977). However,where a number of alternative suppliers haveequalled one another in terms of quality, delivery andprice, various attributes such as the supplier’s reputa-tion, financial position, communication and attitudetowards the buyer may become decisive (Dempsey1978).

Hutt and Speh (1995) suggest that when industrialbuyers purchase a product, they purchase not only apackage of benefits derived from the physicalproduct features, but also a bundle of servicesattached to the product. While the exact meaning ofthe term ‘service’ varies with the nature of theproduct and the requirements of the buying organisa-tion, service may encompass such things as just-in-time delivery, the provision of technical assistanceand support, innovations and adaptations, creditarrangements, support for special needs, or advancenotice of impending price changes or shortages indelivery. Leenders and Fearon (1993) suggest thatpreferred suppliers will endeavour to find new waysof developing products and services that will allowcustomers to perform their activities more economi-cally. A preferred supplier should react favourably tounforeseen needs such as suddenly accelerated ordecelerated volumes of business, changes in productor deliver specifications, service problems or anyother legitimate request. They will provide technicalsupport and other expertise when requested by cus-tomers or whenever the supplier believes it can assistthe purchaser to remain competitive.

However, while a great deal has been published onthe various criteria customers use in choosingbetween alternative suppliers, very few studies havesought to examine how members at different stagesin the distribution chain perceive the quality of theproducts offered. Fundamentally, it is assumed thatsupply chains operate to maximise consumer satis-faction. However, quality can be assessed in variousways according to various objective or subjective cri-teria. Since quality expectations may also be influ-



83

enced by the actual context in which the buyers andusers are embedded, their perceptions of productquality may vary. Furthermore, as product qualitymay change during the distribution process, qualityassessment becomes even more complicated.

How chain members perceive quality and thequality desired by downstream customers will influ-ence the quality they try to obtain. In other words, ifchain members perceive quality in different ways,they will pursue different quality standards (Kor-neliussen and Grønhaug 2003). To bring productsfrom a producer to consumers, a variety of activitieshave to be performed. Many of these activities areperformed in a sequence: for example, the growerproduces the product, hands it over to a trader whoorganises transportation to and makes contact with awholesaler and so on. Together, this can be consid-ered an activity chain where the various activities andtheir performance are interdependent. The value ofthese activities is heavily dependent on the extent towhich the product offered satisfies the requirement ofthe consumers. Thus, it is the concerted effort of allthe chain members (including the producer) thatmakes the complete set of activities valuable.

Nevertheless, the total value generated by thechain will ultimately depend upon the extent to whichit is able to deliver products and services desired byconsumers. The importance of a market or customerorientation as the basis for continuous creation ofsuperior value for customers is well known in mar-keting (Kohli and Jaworski 1990). According toNarver and Slater (1990), customer orientationincludes all the activities involved in acquiring infor-mation about buyers in the target market and dissem-inating it throughout the supply-chain participants.According to Day and Wensley (1988), being cus-tomer-oriented implies that a seller understands abuyer’s entire value chain. In order to be customer-oriented, an upstream supplier may need to be able toidentify each of the customers downstream in thechain as well as the end consumer and to understandwhat each of them wants. At present, there is littleempirical knowledge of what companies actuallyknow about the chains of which they form a part(Storer et al. 2003).

Drawing upon the results of a supply-chain studyin Vietnam (Batt 2002), while it is abundantly clearthat retailers have a good appreciation of the con-sumers’ needs, the other market intermediaries aresignificantly more detached (Table 4).



Farmers were found to undervalue the importanceof skin colour, tuber size and tuber shape. Con-versely, farmers overvalued the importance ofstorage characteristics and cooking characteristics.No doubt, the overvaluing of storage characteristicsis related to the various problems farmers experiencethemselves, for unlike the other intermediaries whogenerally hold the potatoes for only a few days,farmers must retain a proportion of their harvest forseven to eight months to provide seed for the nextcrop. Consumers, on the other hand, will generallyonly purchase sufficient potatoes to satisfy theirfamily’s need in the immediate future.

The high importance attributed to the cookingcharacteristics is no doubt related to the farmers ten-dency to either consume those potatoes that are dam-aged, poorly shaped or considered unfit for salethemselves, or to feed the tubers to livestock. Theimportance of potatoes as an alternative food crop inthe Red River Delta is widely acknowledged. Never-theless, it is interesting to note that both taste and thecooking characteristics of the tubers are deemed to beof little importance in the national potato-breedingprogram in Vietnam. Much greater attention has beendirected towards improving the productivity per unitarea, imparting greater resistance to various pests anddisease, and extending the length of the dormancyperiod (to overcome the problems associated with theneed to store seed for seven to eight months).

Both traders and wholesalers were found to signif-icantly undervalue the importance of presentingtubers for sale that were substantially free of pestsand disease and physical defects. While not onlyreducing the shelf life of the tubers, potatoes that



84

have been damaged by infection by pests and diseaseor physical injury are both cosmetically less attrac-tive and the cooking qualities and taste may beimpaired. Furthermore, while both traders andwholesalers undervalued freedom from physicaldefects, they overvalued the importance of tubershape. This can only mean that there is much varia-tion in the quality of the tubers delivered from thefarmers to the market intermediaries. In surveys oftraders and wholesalers, procuring sufficient quanti-ties of potatoes that were free of pests and disease andphysical damage were among the most frequentlycited impediments (Batt 2002).

Noting both the inability of the traders to providepotatoes that were less expensive and the pressureretailers put on wholesalers to procure a less-expen-sive source of potatoes, wholesalers overvalued theimportance of price to the consumers. Retailers indi-cated, however, that price was perceived to be of leastimportance to the consumer. Consumers purchasedpotatoes because they wanted to, not because theyhad to. While this would suggest that numerous alter-natives were available, Batt (2002) reports that formany consumers, potatoes are too expensive, hencethey are simply not considered in the consumer’sdecision to purchase. Nevertheless, as pricesdecreased, consumers were found to purchase greaterquantities of potatoes (Table 5).

While no meaningful relationship could be foundbetween income and either the frequency of purchaseor the quantity of fresh potatoes purchased, as house-hold income increased, consumers tended to eat morepotatoes away from home (in restaurants) and toconsume greater quantities of processed potato prod-

Table 4. Ranking of the importance of purchasing criteria for potatoes in the Red River Delta(Vietnam) (F = farmers, T = traders, W = wholesalers, R = retailers, C = consumers).

Criterion F T W R C

Flesh colourFreedom from pests and diseasesSkin colourFreedom from physical defectsTuber sizeTuber shapeTasteCooking characteristicsVarietyStorage characteristicsHigh price relative to other vegetables

21637985

104

11

25463178

1011

9

27493186

1011

5

12346758

119

10

123456789

1011

Source: Batt (2002).



ucts (crisps). Van der Zaag (1990) noted that ashousehold income increases, potatoes move from astaple food to a snack food.

In a study undertaken in Perth, WA, Sadler (1997)noted comparatively little difference in the pur-chasing criteria between wholesalers, retailers andconsumers for fresh apples (Table 6).

With the exception of the wholesalers, who under-valued the importance of price and overvalued theimportance of the grower, the selection criteria wereall accorded very similar rankings. Although yet to beverified, it is assumed that in a more developedeconomy, information between the market interme-diaries and consumers is more readily exchanged,especially where wholesalers are supplying the majorsupermarkets. Nevertheless, from the wholesaler’sperspective, since there is a significant variation inthe quality of the fruit presented for sale by alterna-tive growers, wholesalers will endeavour to tradewith those growers who provide the best-quality



85

fruits on a consistent and reliable basis. In business-to-business markets, price is generally of less impor-tance than quality (Wilson 1994).

AcknowledgmentsFor the data presented, I am indebted to the followingundergraduate and postgraduate students: WesleyDaniel, Pamela Hickey, Lynlee Hobley, Cara Sadlerand Simon Stewert-Dawkins.

ReferencesBatt, P.J. 2002. Report for Deutsche Gesellschaft für

Technische Zusammenarbeit (GTZ) on the market forseed potatoes, fresh potatoes and processed potatoproducts in Vietnam. Hanoi, GTZ.

Batt, P.J. and Giblett, M. 1999. Organic produce viability:a consumer perspective. Good Fruit and Vegetables,10(3), 57.

Table 5. Price elasticity of demand for potatoes in the Red River Delta, Vietnam.

Price (VND/kg) Quantity of tubers purchased (kg)a

0 0.5 1.0 1.5 2.0 2.5 3.0 >3.1

1000150020002500300035004000450050005500

373817417598

161202220220

76

263427473913––

204059686849164––

4122217231121––

7062533514111–––

133

105–––––

352014621––––

46392610631–––

a Numbers in the body of the table signify the numbers of people surveyed who purchased the given tuber quantities at the corresponding prices.

Table 6. Ranking of importance of purchasing criteria for apples in Perth, Western Australia.

Criterion Wholesalers Retailers Consumers

FirmnessFreedom from blemishesVarietyColourPriceSizeBrandGrower

21438675

12346587

12345678

Source: Sadler (1997).



Batt, P.J. and Sadler, C. 1999. Labels on apples; winners andlosers. In: Cadeaux, J. and Uncles, M., ed., Marketing inthe third millennium: proceedings of the Australia NewZealand Marketing Academy. Sydney, University ofNew South Wales [CD].

Cramer, G.L. and Jensen, C.W. 1988. Agriculturaleconomics and agribusiness, fourth edition. New York,John Wiley and Sons.

Cunningham, M.T. and White, J.G. 1973. The determinantsof choice of supplier. European Journal of Marketing, 7(Winter), 189–202.

Daniel, W. 2000. The consistency of selection criteriabetween market intermediaries and consumers.Unpublished Horticulture Project dissertation. Perth,Western Australia, Curtin University of Technology.

Day, G.S. and Wensley, R. 1988. Assessing advantage: aframework for diagnosing competitive superiority.Journal of Marketing, 52 (April), 1–20.

Dempsey, W.A. 1978. Vendor selection and the buyingprocess. Industrial Marketing Management, 7, 257–267.

Fearne, A. and Hughes, D. 1999. Success factors in the freshproduce supply chain: insights from the UK. SupplyChain Management, 4(3), 120–128.

Flanagan, F. 1991. Let’s get it right in the 90’s. In:Proceedings of the apple industry seminar, Mandurah,Department of Agriculture Western Australia.

Hakansson, H., Johanson, J. and Wootz, B. 1977. Influencetactics in buyer–seller processes. Industrial MarketingManagement, 5, 319–332.

Hansen, U. and Schrader, U. 1997. A modern model ofconsumption for a sustainable society. Journal ofConsumer Policy, 20, 443–468.

Hickey, P. 1998. The consumer demand for mangoes inWestern Australia. Unpublished Horticulture Honoursdissertation. Perth, Western Australia, Curtin Universityof Technology.

Hobley, L. 2003. The impact of a state grown campaign onconsumer purchase decisions for fresh citrus in-store.Unpublished Master of Rural Management thesis. Perth,Western Australia, Curtin University of Technology.

Horticulture Research and Development Corporation 1990.Consumer study of the fruit and vegetable market.Canberra, Australia, Horticulture Research andDevelopment Corporation.

Hughes, D. 1999. Marketing fruit in Europe. Good Fruit andVegetables, 10(4), 34–35.

Hughes, D. and Merton, I. 1996. Partnership in produce: theJ. Sainsbury approach to managing the fresh producesupply chain. Supply Chain Management, 1(2), 4–6.

Hutt, M.D. and Speh, T.W. 1995. Business marketingmanagement. A strategic view of industrial andorganisational markets, fifth edition. Florida, DrydenPress.



86

Kohli, A.K. and Jaworski, B.J. 1990. Market orientation: theconstruct, research propositions and managerialimplications. Journal of Marketing, 54(2), 1–18.

Korneliussen, T. and Grønhaug, K. 2003. Qualityperceptions in international distribution: an empiricalinvestigation in a complete distribution chain. SupplyChain Management, an International Journal (in press).

Kotler, P., Chandler, P.C., Brown, L. and Adam, S. 1994.Marketing: Australia and New Zealand, third edition.Australia, Prentice Hall.

Leenders, M.R. and Fearon, H.E. 1993. Purchasing andmaterials management, tenth edition. Homewood,Illinois, Irwin.

Lehmann, D.R. and O’Shaughnessy, J. 1974. Difference inattribute importance for different industrial products.Journal of Marketing, 38 (April), 36–42.

Moxon, J. 1999. What is the government doing to promotefresh produce? In: Proceedings of the Fresh 99 NationalConference and Exhibition. Sydney, Australian UnitedFresh/Australian Horticultural Corporation (AUF/AHC).

Narver, J.C. and Slater, S.F. 1990. The effect of a marketorientation on business profitability. Journal ofMarketing, 20(4), 20–36.

Retail Business 1997. Corporate intelligence, marketsurvey, fresh fruit and vegetables, part 1. Retail Business,No. 469, March.

Sadler, C. 1997. A study of the value of labels on apples inthe Western Australian fruit industry. UnpublishedHorticulture Honours dissertation. Perth, WesternAustralia, Curtin University of Technology.

Spriegel, G. 2001. Creating differentiation throughcorporate social responsibility. Proceedings of the IAMAWorld Food and Agribusiness Forum, Sydney, Australia.On the Internet: <http://ifama.org/conferences/2001Conference/forum.htm>.

Stewert-Dawkins, S. 1995. Marketing of produce by brandnames. Unpublished Horticulture Project dissertation.Perth, Western Australia, Curtin University ofTechnology.

Storer, C.E., Holmen, E. and Pedersen, A.-C. 2003.Exploration of customer horizons to measureunderstanding of net chains. Supply Chain Management:an International Journal, 8(5), 455–466.

van der Zaag, D.E. 1990. Recent trends in development,production and utilization of the potato crop in the world.Asian Potato Journal, 1(1), 1–11.

White, H.M.F. 2000. Buyer–seller relationships in the UKfresh produce industry. British Food Journal, 102(1), 6–17.

Wilson, E.J. 1994. The relative importance of supplierselection criteria: a review and update. InternationalJournal of Purchasing and Materials Management,Summer, 35–41.



Wilson, N. 1996. Supply chain management: a case study ofa dedicated supply chain for bananas in the UK grocerymarket. Supply Chain Management, 1(2), 28–35.



87

Yuen, C.M.C., Caffin, N., Hunter, K., Newton, W. andHayes, Y. 1994. Consumer and consumption patterns,purchasing habits and attitudes to fruit and vegetables.Food Australia, 46(10), 455–458.



Aflatoxin in Indonesian Peanuts: How Can the Contamination within the Food Chain

Be Managed?

Okky Setyawati Dharmaputra,* Agustina A. Rahmianna,† Nageswara Rao Rachaputi,§ Graeme C. Wright§ and Greg Mills§

Abstract

Among the various raw and processed peanuts collected from different points of the delivery chain (farmer,penebas, collector, processor and retailer) in Pati Regency, Central Java, the highest Aspergillus flavusinfection and aflatoxin contamination were found in raw kernels of peanuts collected from retailers intraditional markets.

Postharvest handling methods prior to peanuts being delivered to retailers and especially at the retailer levelin traditional markets severely impact on the level of aflatoxin contamination in the Indonesian food chain.

Some potential initiatives to minimise aflatoxin contamination, both at the pre and postharvest stages, arediscussed in this paper. Critical to the further development of this work is a concentrated effort to monitorpostharvest handling methods carried out by farmers, collectors and retailers in traditional markets and identifythe critical control points for potential changes needed in their procedures.

Aflatoxin is a human carcinogen that can contami-nate peanuts and hence is a major food-safetyproblem throughout the world. It is particularlysevere in developing countries such as Indonesia. Itoccurs when kernels become infected by Aspergillusflavus, A. parasiticus and A. nomius, under droughtstress before harvest, during the drying phase in thefield, or under unsuitable storage conditions.

Based on the report of the 23rd Session of the JointFood and Agriculture Organization of the UnitedNations/World Health Organization (FAO/WHO)



8

Food Standards Programme, held in Rome, Italy, 28June – 3 July 1999, the Codex Alimentarius Commis-sion adopted 15 parts per billion (ppb) as themaximum level of total aflatoxins in peanutsintended for further processing. In Australia, themaximum allowable limit of aflatoxin in peanut andpeanut products is 15 ppb (QDPI 2000).

As part of an ongoing Australian Centre for Inter-national Agricultural Research (ACIAR) project onmanagement of aflatoxin in Indonesia and Australia(PHT 97/017), a survey has been conducted to

* SEAMEO BIOTROP, Jl. Raya Tajur km. 6, PO Box 116,Bogor, Indonesia; and Faculty of Mathematics andNatural Sciences, Bogor Agricultural University, Jl. RayaPajajaran, Bogor, Indonesia. Email: <[email protected]>, <[email protected]>.

† Research Institute for Legumes and Tuber Crops(RILET), Jl. Raya Kendalpayak km 6, PO Box 66, Malang65101, Indonesia. Email: <[email protected]>.

§ Farming Systems Institute, Queensland Department ofPrimary Industries (QDPI), Kingaroy, PO Box 23,Queensland 4610, Australia. Email: <[email protected]>,<[email protected]>,<[email protected]>.


ublished in 2004)

8


monitor aflatoxin contamination in peanuts andassess the critical hazard points along the marketsupply chain in the Pati Regency in Central Java. Inthis regency, the peanut delivery chain can be classi-fied into five levels — farmer, penebas (one whobuys crops before harvest), collector, processor (fac-tory) and retailer.

Occasionally farmers may deliver the peanutsdirectly to a local market or collector who buys thepeanuts from the farmers before harvest. To prepareflour-coated kernels, processors also buy peanutkernels from other regencies or other countries(China, India and Vietnam).

This paper describes: • the results of interviews with farmers, penebas,

collector/traders and factories concerning pre andpostharvest handling of peanuts

• the results of a research project entitled‘Aspergillus flavus and aflatoxin in peanuts atvarious stages of the delivery chain in Patiregency, Central Java’

• what initiatives should be carried out to overcomethe aflatoxin problem in Indonesian peanuts.

MethodologyDuring the survey, interviews using questionnaireswith farmers, penebas, collectors and processors(factories) on pre and postharvest handling ofpeanuts were conducted, together with random sam-pling of various kinds of peanuts and peanut prod-ucts.

Interviews and sampling were carried out duringthe wet (January 2002) and dry (August 2002) sea-sons. The number of respondents at farmer, penebasand collector levels in each season was 48, 10 and 4,respectively. The number of samples of wet raw podsat farmer, penebas and collector levels were 48(derived from 48 farmers), 30 (derived from 10penebas) and 12 (derived from 4 collectors), respec-tively. The samples were obtained from the inter-viewed respondents. The number of interviewedfarmers, penebas and collectors were determined inproportion to the numbers of each group in the dis-tricts where peanut samples were collected. Thedetermination of the districts where peanut sampleswere collected was based on their high peanut pro-duction. This information was obtained from theIndonesian Government’s Regional Office of Agri-cultural Crop and Animal Husbandry in Pati. In eachdistrict, peanut samples were collected from peanut



89

farms or penebas located in the scattered areas. Thequestionnaires consisted of questions about pre andpostharvest handling of peanuts. Interviews wereconducted using the Indonesian language or dialect.

At the farmer level, each peanut sample derivedfrom a peanut farm. About 20 peanut plants wereselected randomly; they were than pulled out manu-ally to obtain about 2 kg of wet raw pod peanuts. Atthe penebas level, three samples (= three replicates)of wet raw pod peanuts (about 2 kg/sample) were col-lected randomly from each penebas; the peanuts hadbeen placed in woven polypropylene bags or theywere still in piles. At the collector level, threesamples (= three replicates) of wet raw pod peanuts(about 2 kg/sample) were collected randomly fromeach collector; the peanuts had been placed in wovenpolypropylene bags.

Results

Results of interviews regarding pre and postharvest handling of peanuts

Interviews with farmers Forty-eight farmers of Pati Regency were inter-

viewed either during the wet or dry seasons. Some ofthe farmers interviewed during the wet season werethe same individuals as interviewed during the dryseason. Most of the farmers (85% and 96% of therespondents interviewed during the wet and dry sea-sons, respectively) sold the peanuts to penebas beforeharvest, while 15% and 4% of the respondents,respectively, harvested the crop themselves. The har-vesting method was the same in either case — peanutplants were pulled out and stripped manually, and thepeanuts were not dried. In the latter case, farmers soldthe crop directly to the collectors. All respondents(100%) were unaware of the aflatoxin problem inpeanuts.

Interviews with penebasTen penebas of Pati Regency were interviewed

either during the wet or dry season. Some of thepenebas interviewed during the wet season were thesame individuals as interviewed during the dryseason. Harvesting was carried out by pulling thepeanut plants manually as well as by manual pod-stripping. Drying and storing of peanuts were notcarried out before sending them to collectors or fac-tories. All respondents (100%) were unaware of theaflatoxin problem in peanuts.



Interviews with collectorsFour collectors of Pati regency were interviewed

either during the wet or dry seasons. Of the respond-ents interviewed during the wet and dry seasons, 50%and 20%, respectively, stored peanut pods beforesending them to the factory. During the wet season,peanuts were stored in woven polypropylene bags forone night (25% of the respondents) or up to amaximum of 7 days (25% of the respondents).During the dry season, peanuts were stored byspreading them on a paved floor for 4–30 days.During both seasons, most peanut pods were sold tofactories in the form of ‘fresh’ raw peanuts. Allrespondents (100%) were unaware of the aflatoxinproblem in peanuts.

Interviews with factories (processors)The results of questionnaires were based on a visit

to the PT Garuda Food factory in Pati, Central Java(Dharmaputra and Maysra 2003). The processingsteps undertaken for different products are outlinedbelow.

Flour-coated peanut processing:• sorting — peanut kernels derived from collectors

are sorted according to kernel colour using‘sorteks’ (machines that sort on a visual basis)

• storage — raw peanut kernels are stored in a grainCooler Silo

• coating — peanuts are coated with a mixture ofsalt, tapioca flour, sugar and garlic (the garlic isimported from China) in a container made fromstainless steel, fitted with a rotation system

• frying — peanuts are fried in palm oil (1 t flour-coated peanuts takes 30 minutes to fry); the oil isused for 24 h and then discarded

• packing — peanuts are packed by weight, i.e. 20 g,100 g etc.

• product storage — flour-coated peanuts are storedin cardboard boxes on shelves; the maximumstorage period is 7 days before the peanuts aredistributed to retailers (supermarkets andtraditional markets)

• monitoring of aflatoxin contamination — this isundertaken every 3 months using the enzyme-linked immunosorbent assay (ELISA) method.

Roasted peanut processing — peanuts (in the form ofwet, raw pods) should be processed within 24 h ofharvest:• grading — this is conducted based on the soil

attached to the pods and pod colour



90

• pre-cleaning — wet, unshelled peanuts derivedfrom penebas in the Pati region are washedmanually using well water, while those derivedfrom collectors in other regions are washed in fourstages

• cooking — the peanuts are cooked using watermixed with salt

• drying — the peanuts are dried at ±80°C usingovens

• grading — peanuts are sorted both manually andmechanically into one of three grades– grade I, two seeds and mature– grade II, two seeds and mature–young, or three

seeds and mature– grade III, almost mature seeds

• storage — roasted peanuts are stored for amaximum of 7 days after processing, before theyare distributed to retailers (supermarkets andtraditional markets).

Results of sampling within the supply chain

Dharmaputra et al. (2003) reported moisture con-tents, the incidence of A. flavus, and aflatoxin B1 con-tamination of raw and processed peanut productscollected from different points of the delivery chainin the Pati Regency in Central Java during the wetand dry seasons in 2002.

Fresh pod samples were collected from farmers’fields (48 samples), penebas (30 samples) and collec-tors (12 samples). Nine samples of roasted kernelswere collected from peanut factories. Three samplesof raw and flour-coated kernels, and various roastedpod samples were collected from the markets in Pati,Bogor, Yogyakarta and Malang cities. In all, duringeach season, 135 samples of various kinds of peanutsand peanut products were collected for analysis(Table 1).

Moisture content, the percentage of peanut kernelsinfected by A. flavus, and aflatoxin B1 content weredetermined using the oven method, plating methodon Aspergillus flavus and parasiticus agar (AFPA)medium, and ELISA method, respectively.

Moisture contentThe results showed that moisture contents of

peanuts collected from farmers’ fields, penebas andcollectors were generally very high, i.e. 46.7–48.5%(wet season) and 40.1–47.5% (dry season), roastedpeanuts collected from factories or retailers were3.1–3.8% (wet season), and 2.1–2.9% (dry season),and flour-coated kernels collected from retailers



Tab

le 1

. L

ocat

ion

of s

ampl

ing,

type

and

num

ber o

f pea

nut s

ampl

es c

olle

cted

from

diff

eren

t sta

ges

of th

e de

liver

y ch

ain

durin

g th

e w

et (J

anua

ry 2

002)

and

dry

(Aug

ust 2

002)

seas

ons (

Dha

rmap

utra

et a

l. 20

03).

Stag

es o

f pea

nut

deliv

ery

chai

nTy

pe o

f pe

anut

sW

et se

ason

Dry

seas

on

Loca

tion

of p

eanu

t sam

plin

gTo

tal n

o.

ofsa

mpl

es

Loca

tion

of p

eanu

t sam

plin

gTo

tal n

o.

ofsa

mpl

esB

ogor

Pati

Yog

ya-

karta

Mal

ang

Bog

orPa

tiY

ogya

-ka

rtaM

alan

g

Farm

erPe

neba

sC

olle

ctor

Proc

esso

r (fa

ctor

y)

Wet

raw

pod

Wet

raw

pod

Wet

raw

pod

Roa

sted

pod

0 0 0 0

48 30 12 9

0 0 0 0

0 0 0 0

48 30 12 9

0 0 0 0

48 30 12 9

0 0 0 0

0 0 0 0

48 30 12 9

Ret

aile

rR

aw k

erne

lFl

our-

coat

ed

kern

elR

oast

ed p

od

3 3 3

3 3 3

3 3 3

3 3 3

12 12 12

3 3 3

3 3 3

3 3 3

3 3 3

12 12 12

Tota

l9

108

99

135

910

89

913

5



91


were 3.8% (wet season) and 2.9% (dry season). Rawkernel samples collected from retailers in traditionalmarkets were 8.4% and 7.0% during the wet and dryseasons, respectively. Mean moisture contents ofpeanut kernels derived from various kinds of peanutscollected from different points of the delivery chainduring the wet and dry seasons are presented inTables 2 and 3 and Figure 1.

Incidence of A. flavusPeanut samples from farmers’ fields, penebas and

collectors were generally significantly lower in A.flavus infection than those found among processorsand retailers, i.e. 17–25% (wet season) and 25–40%(dry season). During the wet season, A. flavus infec-tion in roasted peanut samples collected from proces-sors and retailers was 11% and 50%, respectively,while those collected during the dry season were 89%and 17%, respectively. Raw kernel samples collectedfrom retailers in traditional markets had 100% infec-tion with A. flavus during both seasons. The highestmean percentage of kernels infected by A. flavus ininfected samples in both seasons was found in rawkernels collected from retailers in traditional mar-kets, i.e. 53.1% (wet season) and 30.4% (dry season)(Tables 2 and 3). The mean percentage of peanutsamples infected with A. flavus from various types ofraw and processed peanuts collected from differentpoints of the delivery chain during the wet and dryseasons are presented in Tables 2 and 3 and Figure 2;



92

while those mean percentages of kernels infected byA. flavus in infected samples are presented in Tables2 and 3 and Figure 3.

Aflatoxin contaminationIn general, the aflatoxin B1 content of peanuts col-

lected from farmers’ fields, penebas, and collectorsand processed samples were low (less than 15 ppb).The highest aflatoxin B1 contents were found inpeanuts collected from retailers in the traditionalmarkets, with the range of 2–124 ppb and <4–342ppb during the wet and dry seasons, respectively(Table 4). The percentage of raw kernel samples con-taminated with aflatoxin B1 (exceeding 15 ppb) col-lected during the wet and dry seasons was 33% and25%, respectively (Table 4, Figures 4 and 5).

Discussion and Conclusions

Potentially there are some strategic areas whereefforts could be carried out to overcome the aflatoxinproblem in Indonesian peanuts. This is regardless ofwhether the problem is generated via pre and/or post-harvest handling practices, or from domestic versusimported production. The high incidence of A. flavusinfection immediately postharvest and the subse-quent high levels of contamination of all peanutsafter processing in local markets or retailing opera-tions suggest that much of the problem is of localIndonesian origin.

Figure 1. Mean moisture content of peanut kernels derived fromvarious types of peanuts collected from different pointsof the delivery chain during the wet and dry seasons(Dharmaputra et al. 2003).


Agriproduct supply-chain medited by G.I. Jo

ACIAR Pro(printed versi


Tab

le 3

. M

oist

ure

cont

ent,

Aspe

rgill

us fl

avus

infe

ctio

n, a

nd a

flato

xin

B1

cont

ent o

f pea

nut k

erne

ls d

eriv

ed fr

om v

ario

us ty

pes o

f pea

nuts

col

lect

ed fr

om d

iffer

ent

poin

ts o

f the

del

iver

y ch

ain

durin

g th

e dr

y se

ason

(Aug

ust 2

002)

(Dha

rmap

utra

et a

l. 20

03).

Cha

in le

vel

Type

of p

eanu

tsN

umbe

r of

sam

ples

Ran

ge (m

ean)

of

moi

stur

e co

nten

t (%

wet

bas

is)

Num

ber (

%) o

f sa

mpl

es in

fect

ed

with

A. f

lavu

s

Ran

ge o

f %

infe

ctio

n in

infe

cted

sa

mpl

es

Mea

n %

of

infe

cted

ker

nels

in

infe

cted

sam

-pl

es

Ran

ge o

f af

lato

xin

B1

cont

ent (

ppb)

Farm

erPe

neba

sC

olle

ctor

Proc

esso

r (fa

ctor

y)

Wet

raw

pod

Wet

raw

pod

Wet

raw

pod

Roa

sted

pod

48 30 12 9

38.0

4–62

.67

(47.

48)

40.1

4–52

.28

(45.

66)

15.2

3–50

.25

(40.

07)

1.40

–2.4

0 (2

.08)

17 (3

5.4)

12 (4

0.0)

3 (2

5.0)

8 (8

8.9)

1–5

1–4

Thre

e in

fect

ed sa

mpl

es

with

1%

of i

nfec

ted

kern

els,

resp

ectiv

ely

1–5

1.65

1.33

1.00

2.75

<3.6

–196

.5<3

.6–1

9.6

<3.6

–6.9

<3.6

Ret

aile

rR

aw k

erne

lsFl

our-

coat

ed k

erne

lR

oast

ed p

od

12 12 12

6.50

–9.4

1 (7

.01)

2.59

–3.2

3 (2

.89)

1.40

–2.9

6 (2

.30)

12 (1

00)

2 (1

6.7)

2 (1

6.7)

1–10

01–

61–

4

30.4

23.

502.

50

<3.6

–342

.1<3

.6–1

41.2

<3.6

–11.

4

Tab

le 2

. Moi

stur

e co

nten

t, As

perg

illus

flav

us in

fect

ion,

and

afla

toxi

n B

1 co

nten

t of p

eanu

t ker

nels

der

ived

from

var

ious

type

s of

pea

nuts

col

lect

ed fr

om d

iffer

ent

poin

ts o

f the

del

iver

y ch

ains

dur

ing

the

wet

seas

on (J

anua

ry 2

002)

(Dha

rmap

utra

et a

l. 20

03).

Cha

in le

vel

Type

of p

eanu

tsN

umbe

r of

sam

ples

Ran

ge (m

ean)

of m

oist

ure

cont

ent

(% w

et b

asis

)

Num

ber (

%)

of sa

mpl

e in

fect

ed

with

A. f

lavu

s

Ran

ge o

f %in

fect

ion

in in

fect

ed

sam

ples

Mea

n %

of

infe

cted

ker

nels

in

infe

cted

sam

ples

Ran

geof

afla

toxi

n B

1 co

nten

t (pp

b)

Farm

erPe

neba

sC

olle

ctor

Proc

esso

r (fa

ctor

y)

Wet

raw

pod

Wet

raw

pod

Wet

raw

pod

Roa

sted

pod

48 30 12 9

36.9

8–58

.63

(47.

27)

37.3

3–51

.89

(46.

69)

45.7

2–51

.78

(48.

50)

2.50

–3.5

6 (3

.06)

10 (2

0.8)

5 (1

6.7)

3 (2

5.0)

1 (1

1.1)

1–2

1–5

1–2

Onl

y on

e in

fect

ed

sam

ple

with

4%

of

infe

cted

ker

nels

1.10

2.00

1.33

Onl

y on

e in

fect

ed

sam

ple

with

4%

of

infe

ctio

n

<3.6

–9<3

.6–1

1.4

<3.6

–6.2

<3.6

Ret

aile

rR

aw k

erne

lsFl

our-

coat

ed

kern

els

Roa

sted

pod

12 12 12

6.71

–11.

56 (8

.43)

3.43

–4.0

8 (3

.79)

2.94

–4.8

4 (3

.75)

12 (1

00)

10 (8

3.3)

6 (5

0)

17–1

001–

33

1–7

53.0

88.

60

2.83

1.7–

124

<3.6

–5.7

<3.6

–4.5

anagement in developing countrieshnson and P.J. Hofmanceedings No. 119e

on published in 2004)

93


The results of the survey showed that the highestpercentages of samples infected by A. flavus andmean percentages of infected kernels in infectedsamples, and the highest aflatoxin B1 contaminationwere found in raw kernels collected from retailers intraditional markets in Pati, Bogor, Yogyakarta andMalang cities. The raw kernels may have beensourced from farmers or collectors in their respectiveregencies. There is, however, the possibility that con-



94

taminated raw kernels were imported from othercountries, such as China, India and Vietnam, and it isdifficult to determine the exact source. Despite thispossibility, it is clear that in Indonesia, both pre andpostharvest handling methods prior to peanuts beingdelivered to retailers (and especially at the retailerlevel in traditional markets) severely impact on thelevel of aflatoxin contamination in the Indonesianfood chains.

Figure 2. Mean percentage of peanut samples infected withAspergillus flavus. Samples were derived fromvarious types of peanuts collected from differentpoints of the delivery chain during the wet and dryseasons (Dharmaputra et al. 2003).

Figure 3. Mean percentage of kernels infected by Aspergillusflavus in infected samples. Samples were derivedfrom various types of peanuts collected from differentpoints of the delivery chain during the wet and dryseasons (Dharmaputra et al. 2003).

*

*



Tab

le 4

. Pe

rcen

tage

of

pean

ut s

ampl

es c

olle

cted

dur

ing

the

wet

(Ja

nuar

y 20

02)

and

dry

(Aug

ust 2

002)

sea

sons

, and

con

tam

inat

ed w

ith d

iffer

ent l

evel

s of

afla

toxi

n B

1 (D

harm

aput

ra e

t al.

2003

).

Pean

ut

deliv

ery

chai

nTy

pe o

f pe

anut

sW

et se

ason

Dry

seas

on

Num

ber o

f sa

mpl

esA

flato

xin

B1 c

onte

nt

(ran

ge in

ppb

)Pe

rcen

tage

(%)o

f pe

anut

sam

ples

co

ntam

inat

ed w

ith

afla

toxi

n B

1

Num

ber o

f sa

mpl

esA

flato

xin

B1 c

onte

nts

(ran

ge in

ppb

)Pe

rcen

tage

(%) o

f pe

anut

sam

ples

co

ntam

inat

ed w

ith

afla

toxi

n B

1

Farm

erW

et, r

aw p

od48

≤5>5

≤ 1

5>1

5 ≤

50>5

0 ≤

124

81.2

518

.75 0 0

48≤5

>5 ≤

15

>15 ≤

50>5

0 ≤

342

72.9

210

.42

12.5

04.

16

Pene

bas

Wet

, raw

pod

30≤5

>5 ≤

15

>15 ≤

50>5

0 ≤

124

86.6

713

.33 0 0

30≤5

>5 ≤

15

>15 ≤

50>5

0 ≤

342

70.0

023

.33

6.67 0

Col

lect

orW

et, r

aw p

od12

≤5>5

≤ 1

5>1

5 ≤

50>5

0 ≤

124

91.6

78.

33 0 0

12≤5

>5 ≤

15

>15 ≤

50>5

0 ≤

342

66.6

733

.33 0 0

Proc

esso

r(f

acto

ry)

Roa

sted

pod

9≤5

>5 ≤

15

>15 ≤

50>5

0 ≤

124

100 0 0 0

9≤5

>5 ≤

15

>15 ≤

50>5

0 ≤

342

100 0 0 0

Ret

aile

rR

aw k

erne

ls12

≤5>5

≤ 1

5>1

5 ≤

50>5

0 ≤

124

2541

.67

16.6

716

.67

12≤5

>5 ≤

15

>15 ≤

50>5

0 ≤

342

58.3

316

.67

8.33

16.6

7

Flou

r-co

ated

ke

rnel

s12

≤5>5

≤ 1

5>1

5 ≤

50>5

0 ≤

124

91.6

78.

33 0 0

12≤5

>5 ≤

15

>15 ≤

50>5

0 ≤

342

83.3

48.

33 08.

33

Roa

sted

pod

12≤5

>5 ≤

15

>15 ≤

50>5

0 ≤

124

100 0 0 0

12≤5

>5 ≤

15

>15 ≤

50>5

0 ≤

342

91.6

78.

33 0 0



95


Preharvest practices

Preharvest management plays an important role inreducing the risk of aflatoxin contamination in Indo-nesian peanuts. It is well known that although theaflatoxin-producing fungus, A. flavus, is widely dis-tributed in soils, it invades peanut pods/kernels onlywhen the shell is physically ruptured, either mechan-ically via splitting during severe end-of-seasondrought stress, or as a result of injury via soil-insectdamage. Even though the A. flavus fungus is presentin pods and kernels, aflatoxin contamination willonly occur under very special conditions of kernelmoisture content (below about 30%, Mehan et al.1986) and temperature. Cole et al. (1985) andSanders et al. (1985) reported that preharvest afla-



96

toxin contamination will only occur when pod-zonesoil temperatures are in the range of 25–32°C, withassociated drought conditions during the last 30–50days of the growing season.

To maintain healthy peanuts that can resist A.flavus infection and subsequent aflatoxin production,it is therefore important that a series of agronomicmanagement practices are implemented in farmers’fields, including the following:• Pods should be grown with adequate soil moisture

during the last 30 days of pod growth to avoid podsplitting arising from drought stress. Whereirrigation is available, watering should beundertaken every 10–15 days, depending on theevaporative demand.

Figure 5. Percentage of peanut samples contaminated with different levels ofaflatoxin B1 during the dry season 2002. Samples were derived fromvarious types of peanuts collected from different points of the deliverychain (Dharmaputra et al. 2003).

Figure 4. Percentage of peanut samples contaminated with different levels ofaflatoxin B1 during the wet season 2002. Samples were derived fromvarious types of peanuts collected from different points of the deliverychain (Dharmaputra et al. 2003).



• Pods should be free from mechanical injuryresulting from field implements such as weedingequipment. In Indonesia, this practice is relativelyrare, as farmers usually conduct weedingoperations around 20–40 days after sowing. Careshould be taken during the harvesting operation toprevent pod injury when plants are pulledmanually.

• Pods should be free of soil-pest infection, such aswhite grubs, in a range of peanut cropping systems.Some farmers broadcast the pesticide Carbofuranonto the soil and then apply irrigation water. Mostfarmers, however, tend to leave crops withoutdoing any pest management.

• Pods should be harvested at optimal maturity. Lateharvesting will result in higher susceptibility ofkernels and shells to fungal invasion (McDonaldand Harkness 1967). Under very hot and severeend-of-season drought conditions, it isrecommended that crops even be harvested 1–2weeks early to avoid crop water deficits and theassociated high risk of aflatoxin contamination(Nageswara Rao et al. 2002; Rahmianna et al.2003).

Postharvest practices

To overcome, or at least minimise, aflatoxin con-tamination in Indonesian peanuts, effort is warrantedin the following areas:• obtain more information on postharvest handling

of peanuts in other peanut-growing areas inIndonesia

• monitor postharvest handling methods carried outby farmers, collectors and retailers (especially intraditional markets)

• obtain more information on the supply chain forimported peanuts and ensure that regulators havethe knowledge and capacity to reduce theimportation of inferior-quality product

• monitor the quality of imported peanuts, especiallytheir aflatoxin content, in an effort to help definethe extent of the problem and contribution beingmade by domestic versus imported production

• identify the most effective means of informing thepostharvest-handling industry sectors aboutaflatoxin and its potential management

• develop information and training packages forprocessors and retailers to inform them about the



97

dangers of aflatoxin and the handling methods thatcan reduce the problem

• encourage collectors and processors to placeemphasis on improved production and handlingtechniques by farmers and penebas

• publicise to the wider community the potentialhealth problems associated with consuming poor-quality peanuts.

ReferencesCole, R.J., Sanders, T.H., Hill, R.A. and Blankenship, P.D.

1985. Mean geocarphosphere temperatures that inducepre-harvest aflatoxin contamination of peanut underdrought stress. Mycopathologia, 91, 41–46.

Dharmaputra, O.S and Maysra, E. 2003. Report of a visit toKacang Garuda Factory (PT. Garuda Food) in Pati,Central Java on 27 May 2003. Internal report. Bogor,Southeast Asian Regional Centre for TropicalAgriculture (SEAMEO BIOTROP).

Dharmaputra, O.S., Retnowati, I., Putri, A.S.R. andAmbarwati, S. 2003. Aspergillus flavus and aflatoxin inpeanuts at various stages of the delivery chain in Patiregency, Central Java. Paper presented at the 21st

ASEAN/3rd APEC Seminar on Post-harvest Technology,Nusa Dua, Bali, 23–26 August 2003.

McDonald, D. and Harkness, C. 1967. Aflatoxin ingroundnut crop at harvest in northern Nigeria. TropicalScience, IX(3), 148–161.

Mehan, V.K., McDonald, D., Ramakrishna, N. andWilliams, J.H. 1986. Effects of genotype and date ofharvest on infection of peanut seed by Aspergillus flavusand subsequent contamination with aflatoxin. PeanutScience, 13(2), 46–50.

Nageswara Rao Rachaputi, Wright, G.C. and Krosch, S.2002. Management practices to minimize pre-harvestaflatoxin contamination in Australian peanuts. AustralianJournal of Experimental Agriculture, 42, 595–605.

QDPI (Queensland Department of Primary Industries)2000. Aflatoxin in peanuts; tips to reduce the risk.Kingaroy, Crop Link, Queensland Department ofPrimary Industries (QDPI), Farming Systems Institute.

Rahmianna, A.A., Taufiq, A., Wright, G.C. and NageswaraRao C. Rachaputi 2003. Pre harvest managementpractices to minimize aflatoxin contamination in peanut(Arachis hypogaea L.) in Indonesia. Paper presented atthe 21st ASEAN/3rd APEC Seminar on Post-harvestTechnology, Nusa Dua, Bali, 23–26 August 2003.

Sanders, T.H., Cole, R.J., Blakenship, P.D. and Hill, R.A.1985. Relation of environmental stress duration toAspergillus flavus invasion and aflatoxin production inpre-harvest peanuts. Peanut Science, 12(2), 90–93.



Improved Marketing of Mandarins for East Nusa Tenggara in Indonesia

Sherrie Wei,* Damianus Adar,† Elizabeth J. Woods§ and Herman Suheri¶

Abstract

In the highland areas of West Timor, where the climate is relatively cool, the mandarin variety Keprok Soe iswidely grown in the districts of Timor Tengah Selatan (TTS) and Timor Tengah Utara (TTU) in NusaTenggara Timur (NTT) Province. Largely due to its economic value and popularity among local consumers,the Indonesian Government adopted some measures to promote Keprok Soe. Good grades of Keprok Soe fetcha premium price in direct competition to imported mandarins from various countries including China,Pakistan, Israel and Australia. Basically, there are two supply chains for mandarins grown in West Timor.About 90% of the mandarins are sold locally, with only 10% sold to other provinces. In general, there are threemethods by which farmers can sell their mandarins: forward-sale by tree, per tree sale at harvest and per kilosale after harvest. Farmers’ use of different selling methods is often related to the size of their mandarin farm,income, price of mandarins in that year, availability of family labour, farmers’ educational experiences, lengthof farming experience, and distance from the farm to the local market.

Established traders play a key role as channel managers in the supply chain, especially for the inter-islandsupply chain. Quite exceptionally, traders have motivated farmers to strive for good products, be competitiveand become ‘champions’. Hence, the traders have been observed to play a mixed role of channel manager,information supplier, co-investor and extension officer. These activities and alliances suggest that a reciprocalrather than a win–lose relationship exists.

Supply-chain constraints include production (cultural production, plant protection), poor infrastructure, andpostharvest losses (20%). Potential strategies for chain improvements include horizontal integration at thefarmer level, enhancement of the capacity of traders as supply-chain coordinators, and branding of KeprokSoe. In relation to improving the likelihood of implementing these strategies, this Australian Centre forInternational Agricultural Research (ACIAR) project conducted production and marketing workshops, andbroadcast information and knowledge by radio.

In the highland areas of West Timor, where theclimate is relatively cool, the mandarin varietyKeprok Soe is widely grown in the districts of TimorTengah Selatan (TTS) and Timor Tengah Utara



9

(TTU) in Nusa Tenggara Timur (NTT) Province.Keprok Soe was first planted in the 1970s, but com-mercialisation of the product started only in the1990s. In some of the villages of the two districts,

* School of Natural and Rural Systems Management,University of Queensland, St Lucia, Queensland 4072,Australia. Email: <[email protected]>.

† Faculty of Agriculture, University of Nusa Cendana, JI Adisupcitou, Kampus Baru Penfui, Kupang Timor, NTT, Indonesia. Email: <[email protected]>.

§ School of Natural and Rural Systems Management,University of Queensland, Gatton, Queensland 4345,Australia. Current address: Executive Director, Researchand Development Policy, Department of PrimaryIndustries, Meiers Road, Indooroopilly, Queensland4067, Australia. Email: <[email protected]>.

¶ Faculty of Agriculture, University of Mataram,Mataram–NTB, Indonesia.


ublished in 2004)

8


Keprok Soe (literally ‘mandarin from Soe’) consti-tutes the main source of income (70%) for subsist-ence farmers with farms less than one hectare.

In recent times, the price of Keprok Soe hassteadily risen. While part of this price rise has beendue to the influx of refugees from East Timor andAmbon and United Nations personnel, anotherimportant factor has been the increased appreciationand consumption of the locally grown fruit by localresidents since the 1990s.

In contrast to most other domestic mandarins inIndonesia, Keprok Soe has a mixed gold-and-greenskin colour, and is easy to peel, juicy and relativelysweet in taste. To encourage farmers in the region tofocus on this variety, and perhaps for administrativereasons, the government discourages the planting ofother varieties. Keprok Soe has not performed well intrials in other production areas (such as Java),meaning that the variety is exclusive to West Timor.Good grades of Keprok Soe fetch a premium price indirect competition to imported mandarins fromvarious countries, including China, Pakistan, Israeland Australia. Mandarins are in high demand in Indo-nesia and the supply of Keprok Soe is largelydemand-pull. Nevertheless, the presence of importedfruit indicates that the Keprok Soe chain is alreadycompeting with import chains to maintain its pricepremium.

Largely due to its economic value and popularityamong local consumers, the Indonesian governmentadopted some measures to promote Keprok Soe.They included providing free seedlings and discour-aging farmers from planting other varieties of man-darins. Some non-governmental organisation (NGO)projects in West Timor have also provided free seed-lings and irrigation assistance to expand the currentproduction of Keprok Soe. With a substantialincrease in production area, the outturn of KeprokSoe is expected to double in a couple of years. Hence,market competition will increase. Moreover, asKeprok Soe already competes with imported prod-ucts, the quality of competitors’ products can beexpected to improve.

According to a recent survey conducted in five vil-lages in TTS (Tobu, Netpala, Bijeli, Oelbubuk andFatumnasi), the average age of farmers growing man-darins in TTS was about 46 years (range 26–68 yearsold). The average experience in growing Keprok Soewas about 18 years (range 5–30 years). The averagenumber of trees owned by each farm household wasabout 90. The average production was 55 kg per tree,



99

with a maximum of 68 kg per tree. About 68% of theyield of Keprok Soe was sold to make a living, withthe rest used for social purposes, such as gifts forfriends and relatives, church ceremonies and ownconsumption. In the villages of Oelbubuk and Net-pala, 80% of total mandarin production was used tomake a living. The main reason why their crops couldmake a higher contribution to household income wasbecause these villages are closer to the subdistrictmarket and transportation is less of an issue com-pared to other villages (Leki and Wadu 2000).

Methods of Selling Keprok Soe

In general, there are three methods by which farmerscan sell their mandarins: forward-sale by tree, pertree sale at harvest and per kilo sale after harvest. Forthe last method, farmers are generally responsible fortaking the fruit to the venue of the trader or to localmarkets by themselves.

Forward-sale by tree

Sales using this method generally occur 2–3months before harvest, when farmers are in need ofcash. Around January, February or March, whenthere are mandarins on the trees, farmers go to a localtrader in their village and ask the trader to have a lookat the mandarins on their trees. After negotiation, andif a deal is made, the trader pays half of the price tothe farmer. The balance will be paid at the harvesttime. Traders can also pay by goods, such as food,clothes, radios, tape recorders etc. After half-payment by the trader, the crop is then owned by thetrader and the farmer is obligated to look after thetrees to prevent such things as stealing and attack bypests. Price per tree is generally very low. Forexample, the price per tree was about IDR40,000/treein Netpala village. In contrast, when farmers sellmandarins by weight, they can get over IDR200,000/tree at harvest time — five times more than fromforward-sale (Leki and Wadu 2000).

This method of sale is practised when farmers arein urgent need of cash for food, medical, or educa-tional expenses, or even for paying taxes. With moreinvolvement by NGOs in the form of training work-shops to assist in farm credits and to inform farmersabout the undesirable nature of forward-selling, thismethod of sale is decreasing over time. According toone survey in the two subdistricts of North Molo and



South Molo in TTS, 3% of farmers used this methodin 2000 (Leki and Wadu 2000).

Per tree sale at harvest

This method is used at harvest time — mandarinsare sold by the tree, and farmers are not involved inthe packaging, transport and sale of individual fruit.When mandarins are ready to harvest, farmers go totraders, or vice versa, and ask for the price per tree forthe mandarins. Traders may harvest in stages,depending on the ripeness of the fruit on the trees. Ingeneral, traders harvest twice. As in the forward-salesituation, traders own the crop after agreement andfarmers are obligated to look after the trees betweenthe first and final harvest. According to one survey inTTS (Leki and Wadu, 2000), the price is aboutIDR75,000/tree, but according to one farmer leader,the price could be about IDR150,000–200,000 inOelbubuk village. Farmers are generally content withthis price because it is close to what they can get ifthey sell by themselves, after taking into account allthe expenses, e.g. transport, packaging, renting a stalletc.

There are several reasons why farmers sell by pertree rather than by weight at harvest time:• there are no harvesting costs to farmers• farmers are saved the trouble of transportation,

grading and postharvest loss• farmers have little information about the price of

mandarins in town — selling by tree avoids therisk of receiving an unexpectedly low price

• farmers can sell in a larger volume by tree than byweight, hence saving labour costs.There are two other social reasons that farmers

choose this method of sale. Selling by the tree atharvest time is possible when the farmers and tradersinvolved have a long-standing, good relationship.The trader needs to trust that the farmer will lookafter the trees after the first harvest and that nostealing will occur. Farmers, of course, rely ontraders to give a fair offer. Financially better-offfarmers are more likely to use this method becausetaking mandarins to markets by themselves lowerstheir social status. Farmers with some prestige are notsupposed to be seen to toil themselves and to competewith less better-off farmers in making a living.

Per kilogram sale after harvest

In this method, farmers harvest their own fruit. Ifrequired, occasionally they also grade and package



10

the fruit. Farmers or their family members either taketheir mandarins to traders in the village or town, ordirectly to markets. In this method of sale, farmersassume several functions in the supply chain and arerewarded more in return.

Factors affecting farmers’ choice of selling method

Farmers’ use of different selling methods is oftenrelated to the size of their mandarin farm, income,price of mandarins or trees at the time, availability offamily labour, farmers’ educational experiences,length of farming experiences, and distance from thefarm to the local market (Leki and Wadu 2000).

Farmers with larger mandarin farms have lowercosts per tree and the differences between selling bythe tree and by weight are also greater. Hence,farmers with more mandarin trees tend to sell byweight. As stated before, farmers with higherincomes tend to sell their mandarins by the tree atharvest time. Higher prices during the seasonencourage farmers to sell by weight, as reflected inthe recent years. Larger farm households that havemore helping hands during the harvesting season aremore likely to harvest themselves and sell by weight.Farmers who have more education (formal orinformal) are more likely to sell by weight. Similarly,more experienced farmers are more likely to sell byweight. Transport is an issue for farms far away fromthe subdistrict, district or provincial market. Manyvillages in North Molo and South Molo are not con-nected to good roads. Farmers often take mandarinsto the market on foot. This is rather inconvenient, asthe weather is still a bit wet at the start of the har-vesting season in April. Farmers with farms closer tomarkets are more likely to harvest themselves andsell by weight at the markets.

Supply Chains of Keprok Soe

As indicated in Figure 1, there are two supply chainsfor mandarins grown in West Timor. About 90% ofthe mandarins are sold locally; the other 10% are soldto other provinces. In drought years, none are avail-able to sell to other provinces.

Local supply chain

Farmers have several avenues through which theycan sell their mandarins in the NTT Province. They


0


can sell by themselves at street stalls at any time, orsell at the subdistrict markets that open once a week.Their fruit can appear at the subdistrict, district, orprovincial market through the business activities oftraders. The most desirable avenue for growers is tosell directly at the Kupang provincial market run bythe government, but no farmers can sell through thischannel at this stage. An eligible retailer in the gov-ernment market must purchase the space of a standand farmers cannot afford the cost.

At present, there are about 15–20 local tradersdealing with mandarin farmers. Some of them sell toretailers and others sell directly in the local market.There are also about 15–20 mandarin retailers at thedaily Kupang wet market.

Inter-island mandarin supply chain

Selling mandarins to other, more prosperousislands is the aspiration of the industry in WestTimor. This occurred a few times since 1997 whentwo traders embarked on the venture with farmergroups in Bijeli and Oelbubuk villages. The traderssold to the central market in Jakarta, supermarketsand the food service industry in Bali.



10

This supply chain currently represents only a smallproportion of the outturn. As the supply of KeprokSoe is still not sufficient even to meet current localdemand, there is no urgency to work on this supplychain. However, if production increases in the nearfuture as predicted, it will be necessary to address theissues involved. According to the traders, farmerswere unable to supply to specifications for thedesired maturity level, grading and packagingrequirements. Another issue is payment terms.Growers operate on a ‘no cash, no goods’ principle,which makes it difficult for traders to do business astheir customers require credit for a few weeks.

Traders as supply-chain managers

Established traders play a key role as channel man-agers in the supply chain, especially for the inter-island supply chain. The incentive for traders toundertake supply-chain management is partly thatKeprok Soe is a premium variety and exclusive toWest Timor. For example, one established trader hasbeen actively involved in upstream external resourcemanagement with farmers. Under the auspices ofNGOs, traders conduct workshops for farmer groups

Figure 1. Mandarin supply chains in West Timor.

Farmers or farmer groups

Village marketsSubdistrict marketsDistrict markets

Local traders


1

Merchants

Cross-island traders

Provincial markets

SupermarketsSpeciality fruit shops

Food services

Local consumers
Provincial consumers Consumers in Bali and Java


in various areas, covering fruit fly control, organicfarming principles, re-use of water and postharvesthandling to meet market requirements. The traders’requirements for mandarins at the farm level includegrading by size and appearance, packaging prefer-ences and maturity level for harvesting. In anotherinstance, a trading company taught farmers how tomake wooden boxes, and provided grading guide-lines and definitions of maturity levels. Apparentlysimple guidelines on picking, grading and packingcan be difficult for subsistence farmers whose atten-tion is distracted by their immediate need for cash.The entrepreneurial actions that traders have initiatedto address farmers’ cash shortages include offeringworking capital and fertilisers to farmers. Repaymentis deducted later from the sale of mandarins back tothe trader. The presence of NGOs moderates thepotentially adversarial relationship between tradersand farmers.

It is quite exceptional that traders have motivatedfarmers to strive for good products, to be competitiveand to become champions. Hence, the traders have



10

been observed to play a mixed role of channel man-ager, information supplier, co-investor and extensionofficer. These activities and alliances suggest that areciprocal rather than a win–lose relationship exists(Brandenburger and Nalebuff 1996; Moore 1996).From a power perspective, such a relationship islikely to represent a high barrier to market entry forother serious traders, and thus an advantage of aclosed market for the established traders (Cox 1999).

In the recent past, one trading company with a sub-sidiary in West Timor tried to work with farmergroups to sell mandarins to Java. A complicatedmodel was tested where the company and the farmergroups had a joint account for the payment from Java.Unfortunately, the relationship did not last, mainlyfor two reasons: improper packaging by farmergroups, and perceived unfair distribution of subse-quent loss by farmers. The careful selection of tradersor trading companies and the sound functioning offarmer groups are antecedents for a good workingrelationship between farmer groups and their tradingpartners.

Figure 2. A trial model of alliance between farmers and a trader.

Farmer group

Functions:• provide own mandarins• purchase mandarins from

other farmers• grade and pack

Farmer 1 Farmer 2 etc.

emenn andings blish

2

Trader

Functions:• lend to farmers• train farmers in making

wooden boxes• sell mandarins in Java

Merchant in Java

Flow of product

t in develop P.J. Hofma

No. 119eed in 2004)

Payment to a joint account

50% of profit

n

40% of profit
10% of profit
ing countries


In the late 1990s, an inter-island trading company,with the support of an NGO, tried an alliance modelwith the farmers (Figure 2). Under this model, thetrading company provided training to farmers ongrading, packaging and manufacture of woodenboxes. The company also provided loans to farmergroups to purchase mandarins from other farmers.Farmer groups sent products directly to the centralmarket in Jakarta. Payment was sent to a jointaccount with the agreed breakdown of profits as 50%to farmers, 40% to the trading company and 10% tofarmers’ groups. However, according to the tradingcompany, due to improper packaging and grading,the price for Keprok Soe was slashed, causing lossesto the joint effort. The farmers, suffering from greatlosses, disagreed on the reason and suspected fraud inthe deal.

There are several explanations as to why the alli-ance did not work out. To start with, it was a rathercomplicated model for businesses that had neverworked together before. Many scenarios were notenvisaged, such as the allocation of payment whenthere were losses. The transaction between the WestTimor trading company and the merchant in Jakartawas not transparent to the farmers. As there was nocontact between farmers and the merchant in Jakarta,farmers later did not trust the actual amount ofpayment from the merchant. Farmers needed at leasta season to perfect grading and packaging practicesbefore selling their products to markets in otherislands that had strict requirements.



10

Farmers’ relationships with local traders

Unlike the relationship with inter-island traders,farmers’ relationships with local traders are moretransaction-based. According to our interviews, localtraders often hid from farmers the price informationat the Kupang provincial market. Farmers were oftentold that the market in Kupang was sluggish and theprognosis would be worse if they would not sellquickly at the price set by traders. Farmers are gener-ally price-takers rather than price-negotiators in thissupply chain. One reason that farmers would sell withany price suggested by traders is that farmers gener-ally do not have a good idea about the costs of pro-ducing mandarins, hence there is no bottom-lineprice as a guideline for a desirable price. In fact,many farmers see almost no cost for their producebecause there is little farm investment apart fromlabour and land.

Distribution of benefits

The value chain is not readily available, as mostfarmers do not keep a record of their costs. Manyfarmers do not use farm inputs and often ascribe nocosts to the production of mandarins if they have nothired any labour. The inter-island value chain shownin Table 1 has been approximated by including theequivalent costs of labour and median-level farminputs to produce a good grade of mandarins. Inter-estingly, the farmers’ share in the value chain islarger than the traders. As in many other developingcountries, traders in Indonesia are not just engaged in

Table 1. A value chain for mandarins in West Timor.

Chain members Costs and price/kg (IDR) Margin/kg (IDR) Relative share (%)

Farmers Farm-gate price: 4000 Costs: 2000

2000 29

Traders in West Timor Price: 10,000 Costs: mandarins, 4000 transport, 4000 damage, 500 packaging, 500

1000 14

Traders in other islands Price: 11,000Costs: 10,000

1000 14

Retailers Price: 15,000Costs: mandarins, 11,000 overheads and damage, 1000

3000 43

Total 7000 100


3


trading one line of product. They have multiplesources of income by trading in several areas wherethey see the potential for making a profit. While thefarmers’ share is about 30% of value created in thechain, this income from mandarins is the main sourceof revenue for many farmers in TTS and TTU.

Supply-chain Constraints

Production

The mandarin industry in West Timor facesseveral constraints in the production of Keprok Soe.Overall, farmers lack proper cultural skills and do notuse farm inputs to grow good fruit. The area is gen-erally short of water and can be affected by drought,as in 2000. Several NGO projects were designed toinstall irrigation facilities but for managementreasons were not successful in addressing the issues.The industry also faces serious disease challenges,including Diplodia canker, pink disease, sootymould, Phytophthora, powdery mildew, citrusgreening etc. Inappropriate harvesting methods,involving pulling the fruit from the tree, are still usedby farmers — this causes exposed flesh and stress tothe tree.

Poor road infrastructure and transport

Currently, fruit is transported on foot, via thepublic transport system or using the traders’ owntrucks. With public vehicles, passengers and produceare transported together. Public vehicles run onlyduring the daytime, and only two bags are allowedper passenger. This means of transport is less thanideal, as the daytime heat contributes to fruit losses.In addition, people often sit on the fruit, causing morelosses.

Subdistrict markets open once a week (e.g. Thurs-days in Kapan subdistrict) and district markets opendaily (e.g. the market in Soe — the capital city of TTS— about 20 km from Kapan). Depending on the loca-tion of the farm, on average it takes about an hour totake fruit to the subdistrict markets.

Farmers can transport their mandarins by traders’truck, for a fee, but there is a maximum of 10 bags,i.e. 400 kg (per farmer), because traders need to loadother fruits and vegetables, such as avocado, banana,onion and pumpkin. The maximum load of one truckis 6000 kg.



10

When asked why farmers cannot consolidate fruitand hire a private truck, one farmer leader said thatthey have not looked into this option. However, heexpressed that farmers are willing to pay forIDR200,000 for a 3 t load pick-up for fruit to go toKupang — in other words, about IDR70/kg (or 2% ifthe price is IDR3500/kg) for transport.

Postharvest losses

Postharvest losses were estimated to be 20%. Mostof the losses were due to a lack of proper cold storage.Keprok Soe is planted in the highland areas of 800 min TTU or above 1000 m in TTS. As the fruit is trans-ported from cooler areas to warmer and humidlowland areas during the daytime heat, fruit ripensfast and unsold fruit deteriorates quickly underambient conditions.

For fruit sold to other islands, no refrigerated con-tainers were used. There was a shortage of refriger-ated containers and priority was given to high-valueproducts, such as meat and seafood.

In 2000, one NGO — Winrock — worked with onetrader to refurbish and redesign a second-hand coldstorage of a 6 m container with 6 t capacity. Second-hand storage is adequate for fruits and vegetablessince they do not require storage below 0°C. How-ever, cold storage is generally unavailable for freshproduce.

For inter-island trade, fruit was graded and pack-aged twice, either at Kupang, the capital of WestTimor, or at the central markets in other islands. Atthis stage, farmers are unable to set a commonstandard to meet the grading needs of their cus-tomers. This function is unlikely to be fulfilledwithout the sound performance of farmer groups.

Potential for Chain Strategies

Horizontal integration at the farmer level

There are various kinds of informal social groupsin Indonesia, such as youth groups, women’s groups,veterans’ groups etc. Similarly, in villages, there areinformal farmer groups. Members of a farmer grouphelp each other during busy times of crop cycles,such as harvest seasons. They might share equipmentwith each other. In West Timor, farmer groups arealso affiliated with church; one church might have afew farmer groups. Many of the activities of an NGOin West Timor are based on existing farmer groups,


4


as members already know each other well and areeasier to mobilise as most of them go to the samechurch. NGOs’ soft-loan programs for farmer groupscapitalise on existing farmer groups for implementa-tion through the network of churches.

For farmers to be effectively integrated to improvethe efficiency of the supply chain, groups need todevelop norms for their members. A popular modelof group development described that groups usuallygo through four stages: (1) the forming stage; (2) thestorming stage, where interpersonal conflicts emergeas people try to express their individuality and resistthe emerging group structure; (3) the norming stage,where the group starts to evolve methods of workingtogether; and (4) the task-performing stage, wheremembers accept their own and others’ abilities andlimitations, and organise activities to achieve theirgoals (Tuckman 1965). It is fair to say that most ofthe farmer groups in West Timor are in the middle orleaving the second stage. There was some evidencethat in certain groups, individual farmers were havingproblems that affected the activities of the wholegroup. The challenge for the farmer groups is to rec-ognise and accept group structures and developnorms to organise activities and achieve group goals.

The policy implication is to train extension officersand key farmers in group management skills in addi-tion to production techniques. This support is neces-sary until group members and the leader have gonethrough the dependent, the counter-dependent and atthe interdependent phases (Banet 1976).

Traders as managers of inter-island supply chains

Keprok Soe was first introduced to other islands inIndonesia by a trader in West Timor, who stated, “Itravelled to Java and compared Keprok Soe withmandarins from Madura and Lumajang. I felt KeprokSoe is superior because of its taste, juiciness and skincolour.” Traders have been targeted by NGOs forparticipation in various activities, including training,micro-finance and logistics management. Thereappears to be a mutual interest for farmers and tradersto work cooperatively to improve the production,harvesting, and packaging of Keprok Soe, with aview to selling beyond the local market. The man-darin supply chain in West Timor is operating in alightly contested environment between cross-islandtraders and a reciprocal environment betweenfarmers and traders. Certain circumstances facilitated



10

the development of such a relationship betweenfarmers and traders. The demand for Keprok Soeexceeds supply. The exclusive production of KeprokSoe in West Timor assures that both parties retain thebenefits of a reciprocal relationship at least in theshort term, and the existence of a social networkamong farmer groups means traders need to commu-nicate effectively with only the groups’ leaders. Theinvolvement of NGOs as third parties in the chainprovides funding and opportunities for traders andfarmers to interact and to address the serious diseaseproblems which threaten the medium-term sustaina-bility of the industry. Finally, at this stage, bothfarmers and traders will not and could not integratebackward or forward to further appropriate value inthe supply chain.

In developing countries, as products are pushedthrough the channel, the business skills and foresightof traders are crucial to the linkage between farmersand retailers, and consequently the success of a chain.Traders can work better with farmer groups that are atthe task-performing stage, or at least at the normingstage.

Branding

Until now, Keprok Soe has been marketed underthe traders’ own names, losing its identity. WhileKeprok Soe is considered as a superior product, noeffort has been made to market the product. Becauseof the high transportation costs and the exclusivenessof Keprok Soe to West Timor, an ultimate marketingstrategy would be to sell the product as ‘Keprok Soe’(mandarins from Soe) rather than just as Keprok(mandarins). This would reduce the risks and uncer-tainties for consumers and businesses purchasing thefresh produce. In this environment, a good, consistentproduct identifiable by a brand may lead to a mar-keting advantage (Owen et al. 2000). However, oneissue is that such effects might be difficult to gauge,as the identity of the produce can be lost at the retaillevel since fresh produce is often not packaged.

To build capacities for developing these strategies,this project implemented two hands-on trainingworkshops on marketing and production, and radio-broadcasted related issues. The project purposefullyinvited an inter-island trader to conduct training onproduction, packaging and grading. Awareness of thebenefits of horizontal integration at the farm levelwas raised through farmers working together underthe project activities. Preharvest and postharvest


5


training workshops have provided the industry withthe necessary knowledge and skills for potentialbranding of Keprok Soe.

References

Banet, A.G. Jr 1976. Yin/yang: a perspective on theories ofgroup development. In: Pfeiffer, J.W. and Jones, J.E., ed.,The 1976 annual handbook for group facilitators. LaJolla, California, University Associates.

Brandenburger, A.M. and Nalebuff, B.J. 1996. Co-opetition. New York, Doubleday, 290 p.



10

Cox, A. 1999. Power, value and supply chain management.Supply Chain Management, 4, 167–176.

Leki, S. and Wadu, M.M. 2000. Factors affecting farmers inselecting marketing strategies in NTT. Unpublishedworking paper, University of Nusa Cendana.

Moore J.F. 1996. The death of competition. New York,Harper Collins.

Owen, K., Wright, V. and Griffith, G. 2000. Quality,uncertainty and consumer valuation of fruits andvegetables. Australian Agribusiness Review, 8 (August),paper 4.

Tuckman, B.W. 1965. Developmental sequence in smallgroups. Psychological Bulletin, 63, 384–399.


6


Getting Farmers to Work Together: the Experiences of Mango Growers in the Mekong Delta Region of Vietnam

Nguyen Minh Chau,* Sherrie Wei,† Vo The Truyen,* Marlo Rankin§ and Iean Russell¶

Abstract

In September 2001, The University of Queensland (UQ), Australia, and the Southern Fruit Research Institute(SOFRI), Vietnam, embarked on an ambitious project funded under the Australian Agency for InternationalDevelopment (AusAID) Capacity-building for Agriculture and Rural Development (CARD) program, toestablish four collaborative marketing farmer groups in two provinces in the Mekong Delta region of southernVietnam. The four groups were established in the provinces of Tien Giang and Tra Vinh. In both provinces,over 80% of the population rely on agriculture as their main source of income and both provinces are knownfor producing superior varieties of mango, such as Cat Hoa Loc (considered to have the best taste), Cat Chu(high yield), Cat Trang and Cat Den.

The problems faced by the majority of mango farmers involved in this project are indeed no different frommost farmers in developing countries. Factors such as small farm size, low level of knowledge relating toproduction techniques, and little or no knowledge of market pricing beyond the local collector agents werecommon challenges among project participants.

This paper reports on the success factors and challenges encountered with the establishment and maintenanceof the farmer groups, supply-chain characteristics of the mango industry in southern Vietnam, and interventionstrategies for the development of successful collaborative farmer marketing groups.

In September 2001, The University of Queensland(UQ), Australia, and the Southern Fruit ResearchInstitute (SOFRI), Vietnam, embarked on an ambi-tious project funded under the Australian Agency forInternational Development (AusAID) Capacity-building for Agriculture and Rural Development(CARD) program, to establish four collaborative

* Southern Fruit Research Institute, Tien Giang, Vietnam.Email: <[email protected]> (NMC);<[email protected]> (VTT).

† School of Natural and Rural Systems Management,University of Queensland, St Lucia, Queensland 4072,Australia. Email: <[email protected]>.

§ Australian Youth Ambassador to Vietnam. Email: <[email protected]>.

¶ School of Natural and Rural Systems Management, Gatton, Queensland 4345, Australia. Email: <[email protected]>.



10

marketing farmer groups in two provinces in theMekong Delta region of southern Vietnam. The fourfarmer groups were established in the provinces ofTien Giang and Tra Vinh. In both provinces, over80% of the population rely on agriculture as theirmain source of income and both provinces are knownfor producing superior varieties of mango, such asCat Hoa Loc (considered to have the best taste), CatChu (high yield), Cat Trang and Cat Den.

This study discusses the experiences, over a two-year period (2001–2003), of getting mango farmersin the four villages of southern Vietnam to worktogether. While the groups are still in the process ofdeveloping, the first two years were most chal-lenging and their experiences could be relevant toother crops in Vietnam and other developing coun-tries with similar social and economic back-grounds.


7


BackgroundThe Mekong Delta of southern Vietnam is an impor-tant area for fruit production. In 2000, the area had323,600 ha under fruit production, compared with theVietnamese total of 544,700 ha. About 3 million t ofvarious tropical fruits were produced in this region(Ministry of Agriculture and Rural Development2002). Vietnam has less than 20 years of experienceof being a market economy. As the fruit industry wasderegulated very fast, many problems have sincebecome evident.

At the nursery level, there was a shortage ofplanting material relative to market demand as manyfarmers quickly quit planting rice to growing cash-crop fruit trees. Many farmers also took the opportu-nity to sell fruit seedlings. These farmers had inade-quate nursery hygiene practices and no propagationskills. Consequently, there was widespread distribu-tion of diseased planting material, as well as prob-lems associated with the authenticity of varieties.Amongst other problems, lack of access to reliableplanting material has inhibited farmers fromengaging in larger-scale production and marketing.

At the orchard level, problems include poor agro-nomic conditions, poor planning and lack of culturalskills. Because of the potential of increasing farmerincome through fruit cultivation, many areas thatwere previously used for rice production have sincebeen turned into fruit orchards. These new orchardsoften face problems due to unsuitable soil types,drainage problems and high watertables. Due tolack of experience in fruit-tree growing, neworchards are often planted with little knowledge ofcultural practices, such as appropriate planting den-sity, orchard layout, pruning and training tech-niques, plant nutrition etc. The average size of eachfarm is small (approximately 0.5 ha) and farmersoften grow many types of fruit. All these factorscombine to make produce unsuitable for large-scalemarketing.

At the industry level, the key problems includelack of effective farmer organisations, poor posthar-vest handling, and inadequate agribusiness skills.Farmer associations and extension staff are poorlyorganised and have difficulty identifying andachieving group objectives and delivering potentialservices such as market information, sharing ofequipment and establishing quality standards. Untilthe recent formation of the farmer cooperatives,farmers sold all produce individually and were



10

subject to price-setting by first-level fruit collectors.Limited knowledge of postharvest techniques andlack of appropriate packaging and storage materialsresult in farmers harvesting immature fruit in anattempt to extend the shelf life of the fruit and reducetransport damage. Lack of agribusiness skills, insti-tutional problems and an overall poor understandingof free-market functioning has limited industrystakeholders (farmers, traders, extension personnel,researchers etc.) from fully embracing and imple-menting a market-oriented production system.

The aforementioned problems have had a negativeimpact on the efficiency of fruit production in the area.By working individually on small farms, fruit growersproduce small quantities of produce, with high inputcosts, making their products uncompetitive andresulting in low farmer income. Retaining this situa-tion, in the long term, they can neither establish astable marketing system nor develop new markets.

This study included four mango-growing groups:Hoa Hung and Cam Son villages of Tien Giang Prov-ince; and Binh Phu and Nhi Long villages of TraVinh Province. The majority of Binh Phu village con-sists of Khmers who have similar customs to Cambo-dian Khmers. Hoa Hung and Nhi Long villages aremature production areas, whereas Cam Son and BinhPhu villages are new mango-planting areas. Eachvillage has distinct needs and issues.

Establishment and Maintenance of Farmer Groups

By initially establishing farmer groups, thenupgrading some of these groups to grower coopera-tives, mango farmers involved in the project havebegun to realise the benefits of working together. In arecent evaluation of the project, farmers were askedto identify any benefits they believe that they haveexperienced as a result of participating in the farmergroup/cooperative. Key benefits highlighted were:access to technical production training, sharing ofknowledge and experience in production with othergrowers, access to lower-priced inputs, sharing ofprice information, greater understanding of how themarket functions, increased confidence when dealingwith traders, increased understanding of fruit gradingand basic quality assurance practices, higher fruitprices by selling through the cooperative, and greatercommunity understanding.


8


Steps involved in group/cooperative formation

Cooperative farming under a centrally plannedeconomy was practised in Vietnam during 1976–1980, but was unsuccessful for numerous reasons.This failure is still fresh in the minds of many farmersand hence this was a difficult mind-set to overcomewhen attempting to introduce the benefits of farmergroups and collaborative marketing. From the expe-rience of the farmers and extension staff involved inthe project, some guidelines for farmer group/coop-erative formation have been identified. Five phasesand their associated problems, needs and benefits ofgroup formation were identified: learning, steering,forming, implementing and developing (Tuckman1965; Banet 1976; Chamala 1995).

LearningThis was an important initial step conducted by the

project team to identify potential farmers in eachcatchment with similar needs. At this stage, identi-fied problems included lack of ideas, negative impactof variable market conditions and poor technicalskills. As problems could not be solved individually,there was a need for funding to organise group meet-ings. At this stage, farmers experienced the benefit ofgroup formation through access to technical trainingand sharing of production knowledge. In addition,agribusiness principles were introduced. The trainingworkshops conducted proved to be critical to thesuccess of later farmer-group formation, as they stim-ulated community interest and provided some imme-diate individual benefits via access to newinformation.

SteeringAt this stage, a steering committee was formed by

a handful of interested and respected farmers in thecommunity who began by visiting the local-levelgovernment to request permission to begin the pro-ceedings for the formation of a grower group/cooper-ative. Farmers in the area were visited by the steeringcommittee to generate further awareness of currentissues facing mango producers and gauge the interestof potential farmer-group members. Farmers wereasked to decide if they wanted to register as mem-bers. Technical training continued during this stageto sustain and increase farmer interest, with emphasison cooperative learning and sharing of experiences.

Key problems during this phase included a lack ofskilled persons to form the steering committee and



10

poor understanding of provincial grower group/coop-erative registration requirements and related laws.Depending on the skills of the steering-committeemembers and the individual farmers involved, thisphase progressed rapidly or slowly for differentgroups according to the interest and commitment ofthe farmers. Group needs during this phase includedpermission from the local government to begin pro-ceedings and funds to gather farmers together for reg-istration and individual farm visits. The main benefitsof group formation at this stage were increased iden-tification and awareness of production-related issuesand continuing to share production techniques andexperiences amongst farmers.

FormingAt this stage, farmers had already registered to

become a member of the farmer group or coopera-tive. Government approval and registration wereachieved and the first meeting was held at which themanagement board was democratically elected.Cooperative law and government guidelines wereread out at this meeting and the management boardbegan to discuss roles and allocate tasks. During thisstage, members decided how they wished the coop-erative to function, including sale of cooperativeshares to group members and the community to gen-erate funds.

Key problems during this phase included heavyresponsibilities placed on the management board,weak linkages between members who were stillunsure of the potential benefits of participation, lackof group-specific rules and objectives, and no clearvision of where the group was heading. Needsincluded training in cooperative principles and func-tions, understanding of cooperative registration andlocal law, support from institutions to monitor groupprogress, provision of ongoing technical training tokeep members involved, and skills training for themanagement board. Marketing concepts and thepotential benefits of selling collectively were intro-duced again at this stage. Benefits of group formationincluded an improved understanding of cooperativefunctions, increasing technical knowledge and devel-opment of a good relationship with supporting insti-tutions.

ImplementingThis stage was the most complicated of the four

phases thus far, as it required the farmer groups todesign action plans and begin implementing strate-gies. It required the management board and members


9


to be able to conduct a situation analysis to determinecommon member needs. They used this analysis toidentify key achievable goals, designed an actionplan with set dates to achieve the goals, realised theaction plan and evaluated the results. Critical prob-lems included poor management skills resulting ininferior action plans which could not be implementedand evaluated, internal conflict amongst memberswho were often reluctant to commit to the groupbecause they were unsure of the benefits to be real-ised, and poor facilities, such as lack of a set meetingplace. At this stage, members needed to directlyexperience some benefits of group participation tosolidify commitment.

Needs were extensive during this stage and signif-icant institutional support was necessary to monitorthe progress of the cooperatives and help them imple-ment their action plans. Further training andupgrading of management skills were crucial, partic-ularly focusing on financial management as the coop-erative began to generate some income. Introductionto potential trading partners and basic quality-assur-ance training and introduction of practices wereincorporated at this stage as the cooperative began tobecome more market-oriented. Benefits can takevarious forms depending on the developmental stageof the cooperative but should hopefully includeincreased income and stability for the marketingchannel. Benefits realised by the four farmer groupsin this project included:• improved price for fruit by selling directly to the

cooperative and bypassing intermediaries• access to current price information through

establishing an information channel amongstmembers

• cooperative seedlings purchased at low cost formembers

• trialling of new production techniques and sharingthe results.

DevelopingNone of our current farmer groups/cooperatives

have reached this stage yet due to limited experiencein cooperative functioning. The key objective for thefuture will be to build mechanisms for sustainability,including ‘train-the-trainer’ methods that willempower cooperative members and reduce relianceon external institutional support. Ongoing manage-ment training is essential to ensure cooperative prin-ciples are upheld throughout the developmentalstage. As the farmer group/cooperatives continue to



11

develop, they are likely to encounter a number ofinternal problems for which they will need to developguidelines and detailed business plans to cope.Quality-assurance practices should be upgraded withincreasing sophistication according to domestic andexport market requirements. Once they begin gener-ating consistent income, they should be able todirectly access the support they require by hiringexternal experts to provide training and services asneeded.

ConclusionsThroughout the course of this project, much has beenlearnt about the formation and functioning of farmergroups or cooperatives in the Mekong Delta region ofVietnam. The aforementioned guidelines for the fivestages — learning, steering, forming, implementingand developing — provide a framework for farmergroup/cooperative formation from the experiencegained. Each stage encountered its own list of prob-lems, however one concept is clear — in order tomaintain commitment and interest in the farmergroup/cooperative, farmers must continue to recog-nise the increased benefits of working together. Thisrequired significant support from local institutionsand extension staff. In the initial stages, access toongoing technical training appeared to be sufficientto sustain commitment. In the latter stages, moreemphasis was placed on reinforcing farmer groupand cooperative principles. This included ongoingmanagement training, helping to create commerciallinkages between farmers and traders and beginningto work with both groups to increase understandingof market needs and to introduce basic quality-assur-ance practices.

Further work will be directed at building the socialcapital to support the sustainable operation of thecooperatives. This will involve continuing involve-ment in technical issues, such as training in improvedproduction techniques, but an increasing emphasis onthe development of management capabilities is seenas a key aspect of successful scaling-up. The Govern-ment of the Socialist Republic of Vietnam recognisesthat farmer cooperatives can play a key role in ruraldevelopment. The preliminary success of the fruitgrowers’ cooperatives in Tien Giang and Tra VinhProvinces has attracted considerable attention withinthe country and there is mounting pressure for con-tinued progress with the formation and developmentof further groups. It is essential to learn from the


0


experience of the existing cooperatives to assist themto survive and prosper. Continued input into thetraining of government staff and cooperative leaderswill be necessary to achieve these ends.

AcknowledgmentThe authors would like to thank the AustralianAgency for International Development (AusAID) forits funding support under the Capacity-Building forAgricultural and Rural Development (CARD)program for Vietnam.



11

ReferencesBanet, A.G. Jr. 1976. Yin/yang: a perspective on theories of

group development. In: Pfeiffer, J.W. and Jones, J.E., ed.,The 1976 annual handbook for group facilitators. LaJolla, California, University Associates.

Chamala, S. 1995. Overview of participative actionapproaches in Australian land and water management. In:Chamala, S. and Keith, K., ed., Participative approachesfor Landcare: perspectives, policies and programs.Brisbane, Australian Academic Press, 5–42.

Ministry of Agriculture and Rural Development 2002.Statistics of Agriculture and Rural Development, 1996–2000 [Vietnam].

Tuckman, B.W. 1965. Developmental sequence in smallgroups. Psychological Bulletin, 63, 384–399.


1

Fruit and Vegetable Production in Vietnam and the Role of Traders in Marketing

Tran Cong Thang*

Abstract

Over the past 10 years, Vietnam’s agricultural production has grown at an average rate of 4.3% per year, oneof the highest growth performances of agriculture in the world. Over the next 10 years, the policy emphasis willbe on maintaining this high growth rate, while focusing on a more diversified agriculture. The fruits andvegetables subsector might well play an important role, as the potential world demand for these commoditiesis quite high and Vietnam might have a strong comparative advantage in their production.

The main objective of this paper is to describe the marketing of fruits and vegetables of Vietnam and the mainconstraints to fruit and vegetable commerce. Production trends in the fruits and vegetables subsector ofVietnam since the 1990s are reviewed, and the role of private traders (including assemblers, wholesalers andretailers) is discussed. At present, about 80% of fruit and vegetable output is sold to wholesalers andassemblers in spot market transactions. The constraints to marketing of fruits and vegetables in Vietnam arediscussed. These include inconsistent quality, low per-capita consumption, high transportation costs, poorinfrastructure, lack of facilities such as refrigerated vehicles for long-distance trade and cold stores for freshfruits and vegetables; and especially uncertainty in the export market.


* Information Center for Agricultural Research and Development, Ministry of Agriculture and Rural Development, Hanoi, Vietnam.



112


Who Benefits from Enhanced Management of Agri-Food Supply Chains?

Chris Wheatley* and Dai Peters†

Abstract

Improved management of agricultural supply chains affects the livelihoods and wellbeing of many differentgroups of people. Most obviously, it affects the different actors in the chain itself, and especially those mostdependent on the produce or product, including producers, traders and processors. It also affects those actorswho provide services to the chain, including input suppliers, equipment makers, credit providers, and researchand development (R&D) institutions (e.g. extension, information and facilitation services). These effects canbe beneficial — improved and/or more secure income, reduced use of pesticides, better food quality — butnegative effects can also occur, for example, if some actors are excluded from the improved chains, or ifincreased market power for some actors results in reduced income for others.

Analysis of the balance of positive and negative outcomes from improving supply chains depends on aconsideration of the wider context in which the chains are operating, and especially as regards the: • rural community within which production occurs, and the impact of improving this supply chain on other

agricultural and livelihood activities, and on the natural environment over time • structure, conduct and performance of the wider market for the produce/products to which the chain adds

value, especially considering changes in concentration within the subsector and of market power alongvertically integrated chains (e.g. in the case of traders and retailers)

• overall impact on target (urban) consumers (considering food cost, quality and safety, and availability). Mechanisms for enhancing the benefits that accrue to smallholder producers, including gaining access to

specialised markets through alternative trading schemes, are discussed. Examples of strengthening agri-foodsupply chains in both Asia and Latin America, with which the International Centre for Tropical Agriculture(CIAT) has been involved, are presented to illustrate these issues.

Globalisation, urbanisation and the reduced role ofgovernments in providing services are major trendsaffecting Asian agriculture. As markets become moreimportant, the agri-food sector is increasingly con-centrated (fewer, larger enterprises) and verticallycoordinated. This expansion of the role and impact oforganised supply chains is occurring internationally,but is also apparent at the national level across theregion.

An excellent example and indicator of this is therapid expansion in the role of supermarkets in Asia.

* Rural Agroenterprise Development Project, Inter-national Centre for Tropical Agriculture (CIAT), PO Box462, Nelson, New Zealand. Email: <[email protected]>.

† 67 To Ngo Van, Tay Ho, Hanoi, Vietnam.Email: <[email protected]>.



11

Supermarkets now account for a 15–20% share of theprocessed/packaged food market in Southeast Asiaand for 30% in East Asia (ex-PR China, including thePhilippines). In the People’s Republic of China (PRChina), the supermarket share of urban food marketsgrew from 30% in 1999 to 48% in 2001 (Reardon etal. 2003). Supermarkets provide an entry point forforeign investment in national economies of theregion, with many national chains now owned byregional or global firms. In 2002, five global retailfood chains invested USD120 million in Thailandalone (Jitpleechep 2002).

Over the last 20 years in both the European Union(EU) and United States of America (USA), foodsupply chains have become both more concentrated,especially at retail level, and vertically coordinated.The end result of this has been to make supermarkets


3


the dominant power in these chains, increasingly ableto set prices, product quality standards, productionand postharvest practices, and terms of sale to foodmanufacturers and produce suppliers (Hughes 1994).For example, in the United Kingdom (UK), the fivemajor retail chains’ recent unanimous and coordi-nated decision to refuse to stock genetically modified(GM) food products has essentially pre-empted thegovernment’s pro-GM crop production strategy, bydenying such produce and products access to the onlyretail market that matters (Morris 2003).

The growth of supermarket power across Asiaillustrates the dramatic changes now occurring in theagri-food sector at local and national levels (let alonein global markets). This transformation of foodretailing, coupled with increased vertical coordina-tion of their supply chains, will have equally dramaticeffects on the production components of these chains.Supermarkets are gaining great power to influencerural commodity and produce markets by the com-petitive pressures they face to reduce purchase andtransaction costs, raising and assuring productquality and safety, and procuring year-round sourcesof supply. These factors all favour larger-scale pro-ducers, as do the adverse terms of trade (payment at60–90 days) that they are frequently obliged toaccept. Some of the mechanisms that retail chains useto achieve their goals are:• centralisation of chain procurement (distribution

centres)• contracts and supply agreements specifying

production and postharvest practices, andproviding security over time (i.e. longer-term andmore stable transactional relationships)

• logistics efficiency and technology — investmentsby suppliers for seamless interfaces

• growing use of specialised wholesalers to cuttransaction costs and enforce private standards thattrend towards international standards

• growth of private standards to harmonise product— as a substitute for absent public standards andfor competitive advantage.The picture across Asia is of increasing develop-

ment of organised supply chains for agri-food prod-ucts/produce and a strong drive to improve theperformance of those chains along the lines detailedabove. More organised and efficient supply chainsare not, however, an end in themselves, but a meansto enhancing the benefits derived from participationin those chains. Key issues are, thus: who partici-



11

pates; how the benefits are apportioned among par-ticipants; and why this is the case.

Development aims to improve the life and liveli-hoods of the poor. Agri-food supply chains involvetwo groups of poor as major participants — rural pro-ducers and urban consumers, and other chain actorswho may also be poor — processors, farm labourers,and enterprise employees. The impact of the majorchanges in the agri-food sector on their livelihoods iscritical to meeting (or not) global targets for povertyreduction. Implications also exist for environmentaldevelopment goals.

Who? Actors and StakeholdersParticipants in the chain are those who directly pro-duce, transform, handle or otherwise add value to theproduce/products — this includes farmers/producers,processors, assembly agents, traders, wholesalers,transporters and retailers. Relationships betweenthese actors are usually transactional, although not allof them necessarily take title to the goods, but mayparticipate on a commission basis. Consumers canalso be considered as participants.

Participants can also be looked at from an ‘enter-prise’ or ‘economic organisation’ perspective,including informal household micro-enterprises,cooperatives and associations with social as well aseconomic objectives, and formal enterprises invarious scales of operation and legal constitution. Atthe small scale, ‘household’ may be synonymouswith ‘enterprise’, although one household can under-take more than one enterprise, especially in ruralareas, when seasonal factors are important (e.g. crop-processing seasons).

Other stakeholders in supply chains are those whoprovide services to the main participants or actors.These can be input suppliers (of fertiliser, seeds andpesticides), credit providers, equipment makers/sup-pliers, extension services and other providers of tech-nical assistance, marketing services, legal andaccounting services, and so on.

A common feature of rural agri-food sector serv-ices is that they are often ‘embedded’, so that, forexample, a trader may also provide some inputs,credit and technical assistance, covering the costs ofsuch services through the marketing margin, ratherthan charging direct fees.

Finally, there are other stakeholders in the processwho neither participate directly nor provide services,but whose income, wellbeing or livelihoods are


4


affected by the performance of the chain, or whoseactions impact on the chain participants. Local gov-ernment is one example — receiving (or not) taxincome from participants, and perhaps regulatingsome aspects of the enterprises involved. The ruralcommunity in general is another stakeholder, through(for example) changes in land use, off-farm employ-ment prospects, and the effects of by-products andwastes of any processing.

Figure 1 presents a complex supply chain — orsystem — found in a root crop, starch-processing



11

COMMUNE

Fish/pigraisers

Fish/pigraisers

Residuecollectors

Residuecollectors

Rootproducers

Roottraders

Stapro

Starchtraders

Starchrefiners

Consumers

cluster in Dong Lieu, in peri-urban Hanoi, Vietnam.This system contains a number of direct participants(starch processors and traders, producers of added-value products from starch, pig producers using theby-products) as well as some key input and serviceproviders (e.g. equipment makers). Two raw mate-rials (cassava and canna) are used by small, house-hold enterprises and two added-value products(maltose and noodles) made also at household level,as well as a refined starch product that enters severalhigh-value industrial markets (textiles, paper). Starch

Root traders

Dry rootgraters

rchcessors

Canna noodlemakers

Candymanufacturers

Maltoseusers

Food &candymanufac-turers

Maltoseprocessors

Communalengineer

credit

cash

cash and credit

Figure 1. Root-crop starch-processing system in Dong Lieu, Vietnam (Peters et al. 2002).


5


is also sold to a large-scale starch producer, Vedan, insouthern Vietnam, that in turn uses the starch toproduce monosodium glutamate (MSG), high fruc-tose syrup (HFS) and other derived products for thefood market. The starch system thus supplies bothtraditional (noodles, maltose) and modern (starchderivatives) food markets.

What? Effects and OutcomesThe effects of improving supply-chain performanceneed to be identified and evaluated at three levels:• the supply chain itself• the market in which the supply chain operates• the wider society (including rural livelihoods) and

the natural environment.

The supply chain

According to Kaplinsky and Morris (2002), anunderstanding of the ‘value chain’ involves obtaininginformation, over time, on:• gross output and net output (gross output less input

costs) values• physical and human resource flows along the chain• employment (including disaggregation by gender,

ethnicity and skills, as appropriate), salesdestination and concentration among buyers, andimports/exports.Net output can also be considered as the value

added, and can be calculated for each stage in thesupply chain. The distribution of this added valueamong the participants in each link of the chain isalso crucial — perhaps one trader handles the bulk ofthe product, for example. Such profits are related tobarrier to entry at that stage of the chain — higherbarriers lead to less competition and greater profits.Trends over time in volumes, value added and profitsof the participants are important.

The market

The market for a particular good may be composedof several distinct supply chains. Over time, this isbecoming clearer as vertical coordination increasesand each retail outlet is associated with preferred sup-pliers governed by long-term relationships. If onechain improves its performance through a particularinnovation, this can lead to negative consequencesfor other managed supply chains operating the samemarket, and for participants who do not form part of



11

any integrated chain. As vertical coordinationspreads though chains operating in a particularmarket subsector, there is potential for:• marginalisation of those participants who remain

outside the integration process• relative differences in market share, profits and

employment potential among the different chains. This leads to the topic of industrial organisation,

especially the relationships between market structureand conduct (strategic behaviour) and enterprise per-formance, and the analysis of market power.

Market structure affects competitiveness andmarket power and can be understood through infor-mation obtained on:• number and size of enterprises in the market, and

the market concentration ratio (the proportion ofsales, value added, employment etc. due to thelargest three, four or five firms)

• social networks between and within enterprises• degree of product differentiation — something that

makes substitution of other products moredifficult, and thus increases concentration

• degree of vertical and horizontal integration• barriers to entry of new firms or chains into the

market• barriers to exit — these are especially important in

agriculture and lead to output levels that cause themarket equilibrium to fall below the cost ofproduction for many producers. Smallholdercoffee production is a good example

• economies of scale and scope (making more thanone product from a particular process, e.g. fruitprocessing) — these greatly influence enterprisesize.Market conduct (or behaviour) is important, espe-

cially under conditions of imperfect competition, asoccur in vertically coordinated market situations. Insuch chains, the locus of decision-making in theseareas is a key indicator of market power. Marketconduct is essentially the balance between competi-tive and cooperative behaviours:• competitive behaviours — pricing policies, levels

of output, product designs, sales and promotion• cooperative behaviours — processes of interaction

and coordination of policies between competingsellers, influenced by numbers of enterprises in themarket, product and cost homogeneity,substitution possibilities, and frequency of orders.These are both affected by industrial and competi-

tion policies and their enforcement.


6


Market performance, the outcome of structure andconduct, is measured through:• levels of technical efficiency (processes) and

allocative efficiency (inputs, resource use)• capacity utilisation• innovation processes and incentives (for cost

reduction, product improvement and consumersatisfaction).This section provides a brief overview of the dif-

ferent aspects of the market for a particular good thatmay be affected by the operation of a coordinatedsupply chain. But the impacts of these chains gobeyond any specific market to include effects onsociety and the environment in general.

The wider society and environment

Livelihoods of rural chain participantsIn rural areas, the income and other benefits

derived from involvement in any particular supplychain (as raw material/produce producer, small proc-essor etc.) frequently constitute one of several com-ponents of household livelihood. Other componentsmay be crop production, livestock raising, day labourfor other farmers, off-farm employment and so on.Livelihood strategies can also be seasonal;responding to crop harvest and processing times.

In rural Asia, changes in a particular supply chainmay impact on other livelihood options. If the chainbecomes more competitive and demand for produceand processed products increases, this may increasethe need for resources and time dedicated to thatsupply chain, and thus decrease the potential forderiving benefits from other livelihood options. Theinability or unwillingness to forgo these options canalso be a constraint to supply-chain growth. Thus, thebenefit of improved supply-chain performance at thelevel of individual participants needs to be evaluatedfrom a holistic livelihoods perspective, rather thanjust calculating benefits derived from chain partici-pation itself.

An example of this can be found in Dong Lieu.Although root crop starch processing is a majorsource of livelihood (49% of income), the productionof pigs using processing by-product as a feed isalmost as important (45% of income). Improving thestarch extraction efficiency of the process wouldenhance the technical efficiency of the starch chain,and hence its performance, but would impact nega-tively on the pig production system — by reducingthe feed value of the by-product that is fed to the pigs.



11

An improvement of one component of rural liveli-hoods thus has a potentially negative impact onanother equally important source of income. Starchprocessors have not prioritised improving starchextraction rates as an objective, focusing more onimproving process efficiency to reduce time dedi-cated to the production of starch, and reducing pollu-tion (Peters et al. 2002).

Other impacts on the rural economy and the environment

Supply-chain performance also affects demand forrural services, and thus the income and livelihoods ofpeople who provide them. These backward linkagesto such services as input supply (fertiliser, animalfeed, technical services, accounting services) serve tostimulate rural employment in general. Increasedincomes from direct chain participants and fromthese service providers can also enter the ruraleconomy through forward linkages, as these peoplespend their incomes locally on other, unrelated goodsand services. The opposite impact, where small pro-ducers are marginalised from supply chains as ver-tical coordination proceeds, will have knock-oneffects for the rural economy in general unless otheremployment or income-generation opportunitiesemerge to replace them. Migration to urban areas isanother option.

Improved chain performance may result inchanges in farm practices and land-use patterns thatimpact on the sustainability of agricultural systems.If enhanced efficiency, as mandated by contractualarrangements, is derived from more intensive pro-duction practices, and a greater percentage of landarea is devoted to a particular crop/commodity (i.e.replacement of multi- by mono-cropping) the long-term environmental impacts need to be assessed.Equally, if food quality and safety assurance prac-tices control abuses of pesticides, these environ-mental benefits are positive outcomes that need to beincluded in any chain analysis.

Added-value processing often results in pollutionfrom wastes and by-products. Improved technicalefficiency, scale-up and capital investment mayreduce this, and provide opportunities for convertingthese low-value outputs into raw materials for othervalue-added products (e.g. animal feed). Both envi-ronmental impacts and positive income-generationopportunities should thus be considered.


7


Urban effectsMarket conduct — especially pricing policy and

competitive behaviour — will play a great role indetermining whether urban consumers benefit fromimproved supply-chain efficiency, or whether thesebenefits are captured by chain participants (espe-cially retail chains). The potential certainly exists forurban consumers to benefit greatly from more effi-cient supply-chain management — production prac-tices, distribution logistics, procurement — in termsof year-round product availability, product price, andalso through enhanced product quality and safety.Employment will also be generated through theseactivities. Indeed, quantitative financial benefits toindividual consumers need only be fractional in orderto generate very significant benefits for urban popu-lations in general.

However, as concentration advances at the retaillevel to approach the degree seen in the EU, forexample, the potential for anti-competitive arrange-ments between chains may occur — to capture profitsfrom enhanced efficiency rather than pass them on toconsumers through lower prices, especially if compe-tition law is weak or poorly enforced for regional ormultinational retail chains.

How? Mechanisms for Enhancing Positive Developmental Outcomes

Current trends in agri-food chains and markets acrossAsia are tending to marginalise small farmers andprocessors. The same phenomenon that has alreadyoccurred in the EU and USA of increased retailerconcentration and market power, combined with ver-tical coordination of supply chains, is making it dif-ficult for small-scale actors to remain majorparticipants in these chains. Supply-chain improve-ments run the risk of benefiting mainly urban retailchains and their rural agents, together (under favour-able competitive market conditions) with urban con-sumers, rather than rural producers and processors.This is true for chains focused on both national andinternational markets.

Is this process largely inevitable? Are there anymechanisms that will enable small-scale chain partic-ipants to maintain or increase their level of activity insuch chains as they develop over time?

This section will review some options, based ondifferent levels of intervention:



11

• macro or policy level• meso or institutional level• micro or individual enterprise/household level.

Policy level

Since this meeting discussed policy in another ses-sion, this paper highlights the importance of indus-trial and competition (anti-trust) policy in ensuring atruly competitive market that limits the potential ofchain participants with market power to captureexcessive rent to the detriment of other chain partic-ipants and wider society.

Other relevant policies are:• credit policy, especially for capital investment by

small-scale enterprises — the lack of collateral andformal legal status can be a major barrier toinvestment and upgrading of equipment andpractices

• trade policy — especially subsidies and tariffs forparticular subsectors and products that can distortrational decision-making

• research and development (R&D) policy,especially the degree to which public-sectoragencies align their priorities with the small-scaleagricultural sector, and understand the need to re-orient both their clients and their own organisationtowards market-based decision-making andpriority-setting

• food safety and quality standards and regulations.

Institutional level

Organisational innovation is critical for rural pro-ducers and processors, aiming to reduce transactioncosts involved in linking with vertically integratedsupply chains. This involves community-level plan-ning for production (volumes and year-roundsupply) and negotiation of contractual agreementswith other chain actors. Benefits can also be foundfor the organised supply of inputs and other services(veterinary, technical assistance). Traditionally,farmer cooperatives have attempted, with mixedsuccess, to accomplish these tasks. Anotherapproach, using informal intermediaries (traders)with such experience, is another an option and maybe especially valuable if the intermediary alsocomes from the same rural community, so that trustis easier to establish.


8


Micro level

Another alternative is to prioritise and developsupply chains that do not link to concentrated retailmarkets, for example, to high-value, speciality prod-ucts that depend more on quality than price. How-ever, this involves investment in productdifferentiation and marketing that is usually beyondthe capacity of rural organisations. Such services willneed to be contracted in, or the capacity for themdeveloped in-house. A variation of this is to developmarkets that value the quality or other attributes ofproduce/products from a specific region (followingthe French concept of terroir). It also helps to focuson crops and products that, through their inherentproduction characteristics, are not amenable to econ-omies of scale, e.g. where skilled labour require-ments are high.

The process of deciding which supply chains todevelop, from the perspective of a rural community,is one that needs much thought. It is easy to rush intonew, market-based activities, only to find the marketsaturated because others are doing the same. Timespent in selecting the best options for any given com-munity — taking market, farmer and environmentalcriteria into account — is a good investment. Meth-odologies for this exist (e.g. Ostertag 1999).

Alternative trade supply chains

Alternative trade markets have potential to benefitsmall-scale producers. Three types of alternativetrade markets exist — organic, ethical and fair trade.

Fair trade

The following definition was agreed by the Fair-trade Labelling Organizations International (FLOInternational), the International Federation for FairTrade (IFAT) and the European Fair Trade Associa-tion (EFTA). Fair trade is an alternative approach toconventional international trade. It is a trading part-nership which aims at sustainable development forexcluded and disadvantaged producers. It seeks to dothis by providing better trading conditions, by aware-ness raising and by campaigning.

Fair-trade goals are to:• improve livelihoods and wellbeing of producers by

enhancing market access, producer organisations,paying a better price, and providing continuity tothe trading relationship



11

• promote development opportunities for thedisadvantaged (women, indigenous peoples) andprotect children from exploitation

• raise consumer awareness• set an example of trade partnerships• campaign for trade rule and practice changes• protect human rights.

Fair-trade schemes are the most attractive to small-scale producers/processors since scale and direct par-ticipation of the poor is one essential criterion foraccessing these markets. Fair trade differs fromstandard trade in five principal ways (Traidcraft2003). As an organisation committed to fair trade,Traidcraft focuses on:• trading with poor and marginalised producer

groups, helping them to develop skills andsustainable livelihoods through the tradingrelationships

• paying fair prices that cover the full cost ofproduction and enable a living wage and other fairrewards to be earned by producers

• providing credit when needed to allow orders to befulfilled and paying premiums to be used toprovide further benefits to producer communities

• encouraging the fair treatment of all workers, andensuring good conditions in the workplace andthroughout the supply chain

• aiming to build up long-term relationships, ratherthan looking for short-term commercial advantage.CafeDirect is the most frequently cited example,

and is now the sixth largest brand of coffee in the UK.In total, sales of fair-trade agri-produce — coffee,bananas, tea, chocolate, fruit juice, cocoa, and honeysourced from around 0.5 million producers in thetopics — exceeded USD70 million in the UK in2001. A similar number of producers is now linked tofair-trade coffee markets internationally (Traidcraft2003). Key fair-trade food products can be identifiedby the Fairtrade logo on their packaging. Accessingthese markets thus requires certification and contactswith relevant organisations. Product quality isincreasingly important. Thus, while fair trade is stillonly a very small proportion of the total agri-foodmarket, it shows high rates of growth (24% in the UKin 2001–2002) and makes a difference to the liveli-hoods of millions of disadvantaged producers aroundthe world. One point of note — in Asia, Traidcraft’sproducer partnerships are almost entirely in the smallartisan and handicraft sector, not agriculture.


9


Ethical trade

Ethical trade is complementary to fair trade, andinvolves working with mainstream corporate firms,including multinationals, to ensure that they applybest practice in their relationships with suppliers,especially as regards labour law, e.g. exploitation ofchildren, paying a living wage, rights to union mem-bership and so on. The International Labour Organi-zation (ILO) is important in setting these standards.Consumer pressure has been a major factor in drivingcompliance with these standards.

Organic supply chains

While fair trade is still a niche market, organicproducts are a USD20 billion segment of the globalagri-food market, and are heading towards a 5%share of total sales in major developed countries, with5–10% annual growth rates (Yussefi and Willer2003) and a trend for the product range to expandfrom fresh to processed, added-value products.Fifteen per cent of this market is based on interna-tionally traded goods and produce. The Japanesemarket alone is over USD3 billion/year. Other majormarkets in Asia are Taiwan, Hong Kong and Singa-pore, with rapid development also occurring in majorurban centres of other countries. In Thailand, theorganic market reportedly grew by 60% in 2001(FAO 2002). A specific feature in some countries(Malaysia, Philippines, India) is the role of interna-tional supermarket chains in pushing the develop-ment of the organic sector (Yussefi and Willer 2003).

The Food and Agriculture Organization of theUnited Nations/World Health Organization (FAO/WHO) Codex Alimentarius Commission Committeeon Food Labelling has proposed Draft guidelines forthe production, processing, labelling and marketingof organically produced foods. According to theirdefinition, “organic agriculture is a holistic produc-tion management system which promotes andenhances agro-ecosystem health, including biodiver-sity, biological cycles, and soil biological activity. Itemphasizes the use of management practices in pref-erence to the use of off-farm inputs, taking intoaccount that regional conditions require locallyadapted systems. This is accomplished by using,where possible, agronomic, biological, and mechan-ical methods, as opposed to using synthetic materials,to fulfil any specific function within the system.”This definition goes further than simply eliminatinguse of artificial pesticides and fertilisers, to encom-



12

pass issues relating to system sustainability, biodi-versity, soil health etc.

From small beginnings, organic produce and prod-ucts are now undergoing ‘mainstreaming’ into manyinternational markets. As organic products progressfrom niche to mainstream supply chains, price pre-miums are falling and the scale of production isincreasing. Thus, ‘organic agribusiness’ — whichmaintains the pesticide and chemical fertiliser-freestatus (and certification) while defaulting on theother, sustainable-systems aspects of organics (e.g.using monocrops, not multi-cropping) — has devel-oped. Large-scale production of organic produce isthus a reality, and pesticide and fertiliser-free agricul-ture is no longer an area in which small farmers haveadvantages, except insofar as other sustainable pro-duction criteria are valued in the marketplace.

Two possible entry points exist for the develop-ment of organic agriculture in Asia, according toFAO (2002):• input-intensive production systems, where yield

has reached a plateau and environmental damagefrom excessive application of fertilisers andpesticides is apparent

• resource-poor smallholders, who have never usedartificial fertilisers or pesticides (organic bypoverty), making the transition to organiccertification faster and lower-cost than for otherproducers, and offering potential for over 200%yield increases.The latter of these two situations should provide

real incentives for supply chains actively seeking toprocure organic produce to invest in developing arelationship with these small-scale producers, butonly if they:• can be organised, to reduce the transaction costs of

maintaining a commercial relationship• produce reliable, good-quality produce —

something that requires support services to providetechnical assistance, credit and so on.Certification costs are a major constraint for these

small-scale producers. These costs can be reduced bydevelopment of group schemes that divide the costamong members of associations, and also by appro-priate local (low-cost) certification services that areaffiliated with and recognised by internationalbodies. This latter option has made progress in Thai-land, for example (Organic Agriculture CertificationThailand), but not yet in the Philippines.

Scope for small-scale production of organicproduce also exists in:


0


• local markets, usually not requiring certification• high-value outlets in major urban centres (e.g.

restaurants, high-income sector box schemes)• supply chains that combine fair-trade and organic-

production entry criteria.

Methodology

The methodology through which interventions aremade to enhance chain innovation is important. Atthe International Centre for Tropical Agriculture(CIAT; Centro Internacional de Agricultura Trop-ical), the starting point is not a particular chain, butthe rural community for which benefits are sought.‘Working groups’ are formed in each community,comprising local organisations (e.g. government,non-governmental organisations (NGOs), farmers’organisations) interested in agro-enterprise develop-ment. These groups take responsibility for facili-tating change at the local level. The first joint activityis selecting the best options for supply-chain devel-opment — a process that combines market informa-tion and contacts, producer preferences andenvironmental criteria. Once a ‘basket of options’ hasbeen identified, supply-chain development canproceed for each one.

Processes that are genuinely participatory,involving all chain actors, will allow scope for inno-vations that are relevant for smaller-scale ruralactors. All participants can identify critical points inthe chain where problems (or opportunities) arelocated, and use this information to generate solu-tions. Building trust among chain participants andgood communication are critical. Traditional supplychains are usually characterised by very limited com-munication among actors in different links of thechain — something that results in misunderstandingsand mistrust. This process can therefore benefit fromneutral facilitation. The solutions generated throughthis process can translate into ‘projects’ that chainparticipants can themselves implement, with externalassistance as needed, to improve the chain. Thesemay be technology, organisation or investmentrelated. This process also requires detailed informa-tion on the chain (chain mapping) as a basis for iden-tifying critical points and solutions, which can beobtained in two ways:• through formal surveys, by external agents — the

information is analysed and presented to chainactors



12

• through group participatory exercises. Differenttypes of actors can generate one map together, orseparate maps can be produced by (for example)producers and traders — this approach allows eachparty to see the chain as perceived by others.More information on these methodologies,

together with detailed examples from Latin Americaand Southeast Asia, are given in the companion paperthat was presented at the 21st ASEAN/3rd APECSeminar on Postharvest Technology (Wheatley et al.2003), and can also be obtained from the CIATAgroenterprise Project (see <www.ciat.cgiar.org>).

Examples

These approaches to supply-chain improvementhave been used by CIAT’s Agroenterprise Project,mainly in Latin America, but more recently in South-east Asia. One example from Latin America (Yorito,Honduras) and one from Asia (Dong Lieu, Vietnam)are briefly presented here. In addition, during therecent Rural Agro-enterprise Development TrainingCourse (CIAT-PHTI-SEARCA-UPWARD, April2003) in Ho Chi Minh City, the participants weregiven an opportunity to trial the methodology duringa two-day field visit to agri-food supply chains inNinh Thuan Province. They were divided into threegroups to focus on different chains (grapes, sheep andgoats, and cotton), with the production component ofeach chain based in a different district. During thisexercise, participants interacted with chain actors(producers, processors, traders etc.) and support serv-ices and agencies (including local government).Basic chain mapping was undertaken (from the per-spective of different actors, in most cases), criticalpoints were identified, and solutions to the problemsdeveloped with the chain participants. From this anaction plan was developed, that involved:• research and development• short-, medium- and long-term actions• actions that can be implemented using local

resources and cooperation between chainmembers, plus those requiring external assistance.

Yorito, Honduras

In Yorito, where CIAT works with a local consor-tium of farmer organisations (CLODEST), the coffeesupply chain was prioritised for attention, based onthe potential to develop niche and alternative marketsfor a high-quality product. The existing chain wasmapped using participatory methods that involved


1


producers and processors in one rural community.Based on this, critical points were identified, andcommunication between chain members increased(especially between the producer association andtraders).

One short-term outcome of this was a negotiationwith existing traders of higher prices for coffeebeans. A medium-term outcome was the decision bythe farmers’ association to seek organic certificationfor its members (about 45 households). This wasobtained in early 2003. As a result, the main localtrader is now interested in working with the group toaccess high-value markets, in which he will not onlyprovide marketing services, but also technical assist-ance and credit for capital investments needed toimprove and standardise quality. No formal ‘project’exists to achieve this, but it is nonetheless an outcomeof a process that improved communication and trustbetween producers and the trader.

Dong Lieu, VietnamIn Dong Lieu, a formal survey of the starch cluster

of enterprises was made in 2002. This involved inter-views with representative samples of all the differenttypes of chain participants (Peters et al. 2002). Anal-ysis of these results indicated a number of criticalproblems related to space limitations, disorganisationof procurement, and pollution. These were presentedto a meeting of all the enterprises, together with localauthorities. From this, the idea emerged to organise astudy tour of a larger-scale root-crop starch cluster insouthern Vietnam. Representatives selected for thismission were a processor, an equipment maker and alocal government official. The visit was highly suc-cessful. The group reported back to the community inDong Lieu, and a strategy for the development of thewhole cluster has now been developed, based onpractical solutions to the problems identified earlier.These solutions are basically organisational innature, and involve re-ordering the territorial layoutof the fresh root market in relation to individualprocessing households, and of the arrangement ofprocessing operations at the household level, toreduce space limitations and improve waste and by-product management. Equipment modifications arealso in process. A further study tour to China is alsoplanned. One lesson learned from this participatoryprocess is that identification of key actors (changeagents) within the supply chain is critical. In thiscase, through working with a few individual equip-ment makers and traders (who themselves are not



12

among the poor), it has been possible to facilitate theintroduction of innovations (identified by partici-pants, not experts) that can potentially benefit hun-dreds of poor processing households and (throughlinkages to crop production) thousands of cassavaand canna producers.

ConclusionsWhile current trends in the agri-food sector are notfavourable for the sustainable development of theAsian small farm sector in general, several optionsexist that can counteract this, including policy devel-opment, institutional innovations, and expansion ofparticipation in alternative trade supply chains.

A clear understanding of supply chains is needed,including who participates and is affected by them,how the economic and other benefits and costs of par-ticipation are apportioned among these actors, andhow chain development affects other livelihoodactivities and the wider environment.

Participatory methods that allow the perceptions ofdifferent actors to emerge, and that facilitate commu-nication, information exchange and building of trust(social capital) among chain members are essentialfor smallholder farmers to integrate equitably intothese more managed supply chains.

ReferencesFAO (Food and Agriculture Organization of the United

Nations) 2002. Report of the Regional Workshop onExploiting the Potential of Organic Agriculture for RuralPoverty Alleviation in Asia–Pacific, 26–29 November2001. Rome, FAO.

Hughes, D. 1994. Breaking with tradition: buildingpartnerships and alliances in the European food industry.Wye, UK, Wye College Press, 218 p.

Jipleechep, S. 2002. Who is who? Bangkok Post article. Onthe Internet: <www.siamfuture.com>.

Kaplinsky, R. and Morris, M. 2002. A handbook for valuechain research. Canada, International DevelopmentResearch Centre (IDRC), 105 p. Available on the Internet:<www.ids.ac.uk/ids/global/pdfs/vchnov01.pdf>.

Morris, S. 2003. Shops unlikely to stock GM foods. TheGuardian, 16 July 2003.

Peters, D., Wheatley, C., Prain, G., Slaats, J. and Best, R.2002. Improving agroenterprise clusters: root cropprocessing and piglet production clusters in peri-urbanHanoi. Presented at the Symposium on Local AgrifoodSystems: products, enterprises and the local dynamics,16–18 October 2002. Montpellier, France, Centre de


2


Coopération Internationale en Recherche Agronomiquepour le Developpement (CIRAD), 21 p.

Ostertag, C.F. 1999. Manual for market opportunityidentification with small farmers. Hillsides ecosystemtraining manual No. 7. Cali, Colombia, CentroInternacional de Agricultura Tropical (CIAT;International Centre for Tropical Agriculture).

Reardon, T., Timmer, C.P., Barrett, C.P. and Berdegue, J.2003. The rise of supermarkets in Africa, Asia and LatinAmerica. American Journal of Agricultural Economics,85(5) (in press).



12

Traidcraft 2003. Traidcraft: fighting poverty through trade.On the Internet:<www.traidcraft.co.uk>.

Wheatley, C., Best, R. and Peters, D. 2003. Supply chainmanagement and agro-enterprise development: CIAT’sapproach in SE Asia. Paper presented at the 21st ASEAN/3rd APEC Post-Harvest Technology Seminar, Bali,Indonesia, 23–26 August 2003.

Yussefi, M. and Willer, H. 2003. World of organicagriculture 2003 — statistics and future prospects.International Federation of Organic AgricultureMovements (IFOAM). On the Internet:<www.ifoam.org>.


3


Farmers’ Misconceptions about Quality and Customers’ Preferences: Contributing

Inefficiencies to the Vegetable Supply Chain in Southern Mindanao

Sylvia Concepcion,* Marilou Montiflor,* L.T. Hualda,* L.R. Migalbin,* L.N. Digal,* E.T. Rasco,* N.M. Manalili,† M.J. McGregor,§ P.J. Batt,§

R. Murray-Prior§ and F.M. Rola-Rubzen§

Abstract

A supply-chain framework encourages producers to ensure that their downstream customers are happy andsatisfied. A study to determine vegetable growers’ perceptions of vegetable quality and customer preferenceswas undertaken in Kapatagan, Digos City in southern Mindanao in the Philippines. Results revealedmisconceptions about the nature of the demand for their products, reflecting the low farmers’ awareness oftheir market’s needs and putting these farmers at a disadvantage. Their divergent, often erroneous, ideas andconcepts about vegetable quality and the market contributed to waste and inefficiency in the supply chain.

Correct information, a vital factor in maintaining balance and efficiency along the chain, is a rare privilegefor the Kapatagan farmers. They do not have direct and valid information about market preferences and relyon the information provided to them by intermediaries in the chain. Generally price-takers, farmers produce onthe basis of current availability of inputs and not on market demand. They are generally unaware of thecharacteristics of the market for temperate vegetables.

This paper discusses farmers’ perceptions of vegetable quality and customers’ preferences regardingattributes of quality vegetables, such as variety, size and shape, colour, taste, shelf life, and freedom from pests,diseases, physical damage and defects.

This study is a part of a research project which aimsto understand the systems that small farmers insouthern Mindanao employ to produce and marketselected temperate fresh vegetables and which aims

* University of the Philippines – Mindanao, Anda Campus,Davao City, Mindanao, Philippines. Email: <[email protected]> (S. Concepcion).

† SEAMEO Regional Center for Graduate Study andResearch in Agriculture (SEARCA), Los Baños, Laguna4031, Philippines.

§ Curtin University of Technology, GPO Box U1987,Perth, Western Australia 6845, Australia.



12

to examine the efficiency of the agribusiness supplychain. There are numerous factors affecting the effi-ciency of the agribusiness supply chain for temperatevegetables, and this paper discusses only the extent towhich farmers know (or do not know) their cus-tomers’ preferences regarding the desired qualityattributes for fresh vegetables. The differences in theperceptions of the farmers and their customers helpto explain why farmers are not able to optimise thereturn from their produce. This paper also discussesperceptions of the farmers and their marketing inter-mediaries on the attributes of quality vegetables.


ublished in 2004)

4


Customers’ perceptions of the quality of a productor service and their overall satisfaction have someobservable indicators. The terms customer satisfac-tion and perception of quality are labels used to sum-marise a set of observable actions related to theproduct and/or service (Govindasamy 1997).

Opara (1999) defined quality of agricultural prod-ucts, as “involving all of the attributes, characteris-tics, and features of a product that the buyer,purchaser, consumer, or user expects”, and stated thatquality assurance “involves those planned activitiesdesigned to consistently satisfy customer expecta-tions by defining objectives, planning activities, andcontrolling variability”.

One popular view is that quality is intangible,similar to truth, beauty, and goodness (Burrill andLedolter 1999). It is also seen as a ‘feature of excel-lence’ or an ideal (Saunders 1997; APICS Dic-tionary; Burrill and Ledolter 1999). On the otherhand, quality is seen as a combination of characteris-tics that are critical in establishing a product’s con-sumer acceptability, including fitness of use,freedom from deficiencies and provision of satisfac-tion (Satin 1997; Saunders 1997; Juran and Gryna1998, cited in Saunders 1997; APICS Dictionary,cited in Fredendall and Hill 2001).

The food industry defines quality as an integratedmeasure of purity, flavour, texture, colour, appear-ance, and workmanship (Satin 1997). This is an ideasimilar to total quality. “The concept of total quality,however, widens attention to include all aspects ofthe offering, including service and delivery time”(Saunders 1997, p. 187).

Marketers define quality as value or a consumer’sperception of the worth of the product in relation toprice (Satin 1997; Saunders 1997, pp. 184–187;APICS Dictionary, cited in Fredendall and Hill2001). Quality also refers to a product’s consistentadherence or conformance to a standard, specifica-tion or requirement (Satin 1997; Saunders 1997;Crosby 1979, cited in Burrill and Ledolter 1999; Fre-dendall and Hill 2001).

Collins (1994) believed that there are contradic-tory perceptions of quality due to differences in back-ground and training. Hill and Chung (1995) stressedthat a person’s concept of quality depends on her/hisapproach to that understanding.

The differences in perceptions of quality betweenfarmers and their marketing intermediaries con-tribute to market inefficiency. In southern Mindanao,market orientation among vegetable growers still



12

needs to be developed in order for the marketingsystem to become more responsive to customers’needs. Market efficiency includes the aspects ofquality, quantity and price of goods and the cost ofperforming marketing functions. Although effortshave been made to promote market-orientatedapproaches to production, to enhance markets andmarketing activities and to provide policy support,problems with efficiency, such as high productionlosses and product rejects still persist in developingcountries like the Philippines (Masajo-Manalili2000).

MethodologyData for this paper came from a research project1funded by the Australian Centre for InternationalAgricultural Research (ACIAR) and various datagathering methods were used. In Kapatagan, DigosCitiy, southern Mindanao, key informants were inter-viewed, focus group discussions were conductedamong farmers, agents, and storage operators, andsurveys of households were undertaken using purpo-sive sampling methods. There were three sets ofinterview schedules prepared for the householdsurvey: crop production, social organisation and mar-keting. The majority of the data used for this papercame from the marketing survey. A total of 207households were interviewed, accounting for 12.2%of the total households in Kapatagan.

Meanwhile, a downstream survey was conductedbased on the names of the buyers mentioned by thefarmers in the household survey. There were 47respondents interviewed. Additional informationfrom other players in the vegetable supply chain wastaken from interviews with farmers from other tem-perate vegetable areas in southern Mindanao, centralMindanao, and northern Mindanao. Wholesalersfrom Divisoria, the largest wholesale market inMetro Manila, were also interviewed, as well assupermarket representatives in Davao City andMetro Manila.

1 ASEM/2000/101: “Improving the Efficiency of theAgribusiness Supply Chain and Quality Management forSmall Agricultural Producers in Mindanao.”


5


The Project SiteBarangay2 Kapatagan was created on 10 May 1971under Republic Act No. 6210, despite the fact that itwas declared as a National Park in 1932 by the Com-monwealth Government. Logging operations startedin the 1960s and continued to proliferate. When thelogging workers started bringing their families, set-tlement areas were established. After the loggingcompanies ceased operations, some of the workersremained. They started utilising the area for agricul-tural purposes, particularly for coffee plantations.Residents from nearby towns started coming becauseof the promise of fertile, productive and vast lands inKapatagan. Modes of transportation both for thepeople and the products include horses, motorcycles,jeepneys, tricycles, trucks, and L300 vans.

As of January 2002, the total population of Kapat-agan was 8193 with 1694 households. Most of theconstituents were farmers (80%), while others werebusinessmen (15%), and professionals (5%).

The name Kapatagan means ‘plains’ or ‘flatlands’. However, its topography ranges from level togently sloping terrain (0% to 8%), strongly sloping(18% to 20%) and hilly areas (30% to 50%). Thelevel terrain is in the centre of the Barangay.According to the Barangay records, its land use as of2001 was 2500 ha or 37.45% of its 6675 ha total landarea. It lies at the foot of Mt Apo3 at an elevation ofaround 1100–1600 m above sea level.

The climate is cool at 22–25°C, with no pro-nounced maximum rain period or long dry season.The prevalent wind direction is north-east to south-west throughout the year (Mercado et al. 2000). It issafe from typhoons because it lies outside thetyphoon belt and is further protected by its moun-tainous borders.

Kapatagan is an ideal place for planting temperatevegetables (cabbage, tomato, bell pepper, Chinesecabbage, Kentucky bean, carrot), coffee, root cropsand other agricultural products. Table 1 shows theprimary crops planted by Kapatagan farmers in thefirst quarter of 2002. Most farmers in Kapatagan(38.2%) planted cabbages. Tomatoes (16.9%) andpotatoes (16.4%) follow as the next most-plantedcrops in the area. Other crops planted in 2002 were

2 Village; the lowest local government unit in thePhilippines.

3 Mt Apo is the highest peak in the Philippines with an elevation of 2954 m (9691 feet) above sea level.



12

chayote, bell pepper, onion and eggplant. Generally,farmers from Kapatagan believed that cabbage was themost saleable vegetable in retail. While 31% tried tosell directly to retail markets, only 5% continued to doso. The rest sold through agents and wholesalers. Thefarmers, locally known as planters, brought their prod-ucts from their farms or ‘gardens’ to the Trading Post,through the karyador.4 Marketing was done throughthe ahente or agent who received the produce from thefarmers at the Trading Post in Kapatagan. Then theahente passed on the produce to the wholesale buyerswith a PHP1–2 per kilogram profit margin. Buyersmostly decided the price, while farmers were generallyprice-takers. In some cases, buyers pre-ordered somevegetables through the agents, who obtained thesupply from various farms. Negotiations for the pricetook place during the day. Most of the vegetables weresold wholesale within a day, particularly in themorning. There were also owners and operators ofbodegas or storage areas who bought the vegetables,especially potatoes and carrots.

Vegetables were marketed mainly to the sur-rounding cities, including Digos City, KidapawanCity, Cotabato City and Davao City. Other Mindanaobuyers came from Cagayan de Oro City and Surigaoand Agusan provinces. There were also some buyersfrom the Visayas, such as Tacloban City, Iloilo Cityand Cebu City.

Most transactions happened during the marketdays: Monday, Thursday, Saturday (KidapawanCity, Cotabato City, Surigao City, Tacloban City,Iloilo City, Cebu City etc.); every day for Davao Cityand Digos City.

Table 1. Primary crops planted in Kapatagan.

Crop No. of farmers planting

Percentage

CabbageTomatoPotatoCarrotChinese cabbageKentucky beanOtherTotal

7935342711

615

207

38.216.916.413.0

5.32.97.2

100

Source: Survey of Kapatagan farmers, 2002.

4 People who transport vegetables on horses’ backs.


6


Some Issues in the Kapatagan Supply Chain

Several issues became apparent in the Kapatagansupply chain. First, the sustainability of farms inKapatagan was seriously challenged because of inse-cure land ownership. Farmers paid taxes on the use ofthe land but did not have title to the land becauseKapatagan is part of a national park. Different gov-ernment agencies had different ideas of whether thefarmers should stay or not.

Second, the production of quality vegetablesbegins with the agronomic practices of the farmers.In Kapatagan, traditional farming was used andfarmers generally had poor agronomic practices,basically because of a lack of technical knowledge orlack of finance for the proper farm inputs.

Third, farmers had very little market knowledgeand relied mostly on what their ahentes or immediatebuyers said about the market. Most of them saw theirmarket as the person who took the goods off theirhands, and rarely looked beyond this buyer.

Fourth, farmers were generally price-takers. Theyproduced based on current availability of inputs andnot on market demand. Since they did not have anystorage or sophisticated postharvest facilities, espe-cially for the leafy vegetables, they disposed of theirproducts at any available price.

Fifth, Kapatagan had very poor road conditionsand rough terrain. Until 2002, many of the roadsleading to the farms were unpaved. Barangay Kapat-agan received access to electricity only in 2000. Res-idents had no access to irrigation on the farms, norplumbing in their homes.

Sixth, different stakeholders in the supply chaindid not see each other as partners but as persons whoneed to be watched. While there was some degree oftrust among several farmers and their buyers, otherfarmers felt that the traders may not be giving themthe right price information (Batt et al. 2003).

These issues are typical in traditional supplychains of agricultural products in developing coun-tries. Supply chains in developed economies aredemand-driven, with ultimate consumers seekingbenefits such as health and nutrition, safety, qualityand convenience. In developing countries, traditionalchains dominate, driven by traders who act as finan-ciers for farmers at the same time. Examples of theseare goods delivered to wet markets by viajeros (trav-ellers). However, some chains in developing coun-tries have begun to improve — brought about by



12

increasing urbanisation, globalisation, changing con-sumer preferences, and agribusiness consolidation.Examples of these are the exports of banana and tunaand some agribusiness ventures catering to the fast-food market.

Non-traditional vegetable supply chains innorthern Mindanao supply the high-end market (highquality, high price). These are managed chains wheresmall farm holders collaborate through marketingclusters.

To help improve the Kapatagan supply chain fortemperate vegetables, members of the chain need tobe market-oriented. This market orientation will leadto greater efficiency in response to customer prefer-ences and lead to more competitiveness.

To begin to be market-oriented, farmers need toknow what their customers want. In this study,farmers’ perceptions of their customers’ preferencesor quality criteria are examined and compared withwhat their customers actually say they want.

Findings and Discussion

Desired attributes of vegetables according to farmers

Attributes to define quality in vegetables used inthe survey came from the farmers themselves duringthe initial visits to the village. In preliminary face-to-face interviews with the farmers, they were asked todescribe, in their own words and language, whatquality in vegetables meant. Some would simplydescribe features of vegetables in general, whileothers would first state what vegetable they wouldlike to describe. Those who proceeded to describewithout qualifying the vegetable would give generalcomments like ‘that which is not rotten’ (kanang dililata), or ‘that which has a few worms’. These initialdescriptions gave us a general sense of the level ofquality awareness of the farmers of Kapatagan. Theywere primarily concerned only with wilting or fresh-ness and pest infestation of vegetables.

Farmers described the vegetables they grew usingdescriptors in the vernacular and these descriptorswere translated into English. Other attributes fromsecondary materials that define vegetable qualitywere added to the list. This list of attributes was usedin the survey. Eleven attributes were used: shape,size, weight, maturity, colour, freedom from pests, noor little physical defect, no or little mechanical injury,cleanliness, freshness, and firmness. Farmers were


7


asked to rank the 11 attributes of quality in vegetablesaccording to the order of importance, 1 being themost important and 11 the least important.

The attributes of vegetables that were importantfrom the perspective of the farmers were those overwhich they had some degree of control, like maturityat harvest and freedom from pests (Table 2). Thefarmers decided when to harvest their crops and con-trolled the quality of their produce by preventinginsect infestation through proper cultural practices.Maturity referred to the appropriateness of the matu-rity of the product at the time of harvest (Lizada2000). This seemed to be an important qualityattribute for the farmers for almost all the crops.

There were also respondents who said that qualityvegetables were those that were free of pests and dis-eases. During the in-depth interviews with farmers,some noted that vegetables with a few insects were ofgood quality. Farmers referred to the vegetables asnaay ulod (with worms — since the insects wereobserved in the larval stage) and tung naay buslot(those with holes) for leafy vegetables. Theyexplained that the presence of these insects was proofof food safety. If an insect survived, the vegetablewas perceived to be free from chemicals. Thesefarmers, however, clarified that there must only beone or two of such pests in each head of cabbage orlettuce. Beyond that, it was considered an infestation.

Size and cleanliness of the produce affected theprice they received for their produce, hence farmerstended to give these quality attributes higher rank-

Table 2. Farmer rankings of desired attributes ofvegetables (where 1 = most important and11 = least important).

Attribute Mean Standarddeviation

ShapeSizeWeightMaturityColourFreedom from pestsNo or little physical defectNo or little mechanical injuryCleanlinessFreshnessFirmness

6.065.345.784.546.495.036.036.815.355.756.45

0.510.761.010.821.410.691.080.700.980.630.89

Source: Survey of Kapatagan farmers, 2002.



12

ings. Cleanliness meant that the vegetable was freefrom any dirt or stains. In the survey, most of thefarmers who planted cabbages and carrots said thesetwo vegetables should be clean to be of good quality.

Farmers gave very low ranks to attributes like no orlittle mechanical injury, especially for crops likecarrot and Chinese cabbage. Mechanical injurieswere those caused by careless handling, packaging orstorage, such as damage caused by impact, pressureor compression, or vibration. This damage appearedas abrasions (especially in potatoes and tomatoes)bruising, distortions, cracks, cuts, punctures, skinbreaks, skinning, or splitting (Lizada 1993). Many ofthe farmers did not give this quality attribute a highranking. This may be due to the fact that the farm-to-market roads from Kapatagan to the retail marketswere very bad and farmers felt powerless to preventthe mechanical damage.

There was a standard practice in Kapatagan ofdeducting 30% from the volume weight of leafy veg-etables to allow risk and shrinkage, locally known asreseko. Shrinkage and other forms of mechanicalinjury affected the quality of leafy vegetables.

In Kapatagan, vegetables were packed in pinksacks, except for tomatoes, which were packed incrates. The sacks did not provide any protectionagainst mechanical injuries, but did allow flexibilityin the amount of produce tightly packed in. Whilepackaging in sacks induced more mechanicaldamage, farmers were paid by the weight and size ofthe produce as well as the physical appearance.Farmers apparently did not perceive mechanical inju-ries during harvest or transit as variables affectingvegetable quality.

Overall, farmers in Kapatagan believed thatquality was reflected in the physical appearance ofvegetables. In an interview with a farmer from Mar-ilog, another village in southern Mindanao, hebelieved that high-quality tomatoes should be goodto look at — large and shiny. The emphasis on thephysical characteristics of vegetables was the samefor Marilog as it was in Kapatagan. The Marilogfarmer also believed that cabbages and other leafyvegetables like lettuce should not be completely freeof pests. The visibility of a few pests, he said, wasproof that the vegetable had just the appropriateamount of chemicals.

Very few farmers in Kapatagan mentioned thenutritional content (salubrity) of their crops as adescriptor of quality. Most of their definitions of thequality of their produce rested on the physical char-


8


acteristics of the product — something that could bevalidated with their eyes, like shape and size. Tastewas also mentioned only after some prodding. Whilesome farmers related quality to price, this constructdid not become part of the definitions that the farmersused to define quality.

Desired attributes of vegetables according to downstream customers

There were 47 respondents who came from the listof buyers identified by the farmers during the house-hold survey. Most of these buyers were 20–59 yearsold. Around 23% belonged to 35–39 age group, while2% belonged to 55–59 age group, and 44.7% of therespondents came from Kapatagan. Other buyerswere from Davao City (21.3%), Tagum City(17.0%), Digos City (8.5%), Dujali (2.1%), GeneralSantos City (4.3%) and Panabo (2.1%). Almost halfof the respondents (46.9%) were wholesalers, whileothers were farmers (8.5%), farmer-agents (4.3%),agents (2.1%), retailers (34%) or food service sup-pliers (2.1%). The majority of the respondents (83%)primarily bought their produce from Kapatagan.

The downstream customers were asked to rank theimportance of 21 criteria in their decision to purchasevegetables on as scale of 1 to 4 — where 1 was ‘notat all important’ and 4 was ‘very important’.

Table 3 shows that the respondents were unani-mous in ranking freshness, good taste, and cookingcharacteristics as very important quality attributes inchoosing which vegetables to purchase. This is con-sistent with what the farmers perceived the ultimatecustomers would want — freshness and good taste.However, while farmers believed that customerswant well-graded vegetables, the downstream cus-tomers themselves did not assign this much impor-tance.

Desired quantity and colour tied in second placewith mean score of 3.98. Since the respondents alsosold the products they bought, it was important forthem to have enough in quantity to supply thedemands of their downstream buyers. A good-col-oured vegetable was also an indication of a visuallyappealing, fresh and saleable vegetable. Likewise,the immediate delivery of the products was consid-ered to be more important than physical characteris-tics (size, shape, freedom from pests, freedom fromphysical and mechanical injury). The farmers did notmention this attribute during the in-depth interviews.



12

Farmers were not aware that on-time delivery is aquality consideration of the downstream customers.

Downstream customers gave importance to com-petitive price but the farmers did not perceive this asimportant to the ultimate customers. Filipino con-sumers are price-sensitive (Agbayani et al. 2000) butthe farmers are not aware of this.

Comparison of farmers’ responses with those of their customers

Table 4 shows the responses of the farmers anddownstream buyers using 13 attributes. The farmerswere asked to rank, on a scale of 1 to 6, what theythink their customers want where 1 is ‘not at allimportant’ and 6 is ‘very important’. On the otherhand, the downstream buyers used a scale of 1 to 4,where 4 is ‘very important’ to rank what they want.Since the farmers and downstream buyers used dif-ferent scales, the lowest common denominator (6)

Table 3. Desired attributes of vegetables as perceivedby downstream customers.

Attribute Mean Standard deviation

FreshnessGood tasteCooking characteristicsDesired quantityGood colourWell packedCompetitive priceAttractive, good-looking produceImmediate deliveryFirm Good sizeGood shapeWell-gradedFreedom from pest/disease damage Product that stores wellDesired varietyFreedom from chemical residuesFreedom from physical injuryAssortment of produce Free of soilFreedom from mechanical injury

444

3.983.983.953.95

3.933.913.913.863.863.86

3.843.813.793.733.713.703.59

3.66

000

0.150.150.210.31

0.260.290.480.410.520.64

0.530.550.710.770.720.710.92

0.73

Source: Survey of market intermediaries, southern Mindanao, 2002.


9


was derived and the responses were recomputed tohave a standard measure.

The corresponding ranks and standard deviationwere included to illustrate the different degrees ofimportance given by the farmers and downstreambuyers. Although both the farmers and the buyersranked freshness of produce as the most importantcriteria, all other attributes have different and oppo-site rankings. Using rank correlation coefficient cal-culations, the computed rank correlation was lessthan the critical value of α = 0.01. Thus, the rankingof the responses of the farmers was significantly dif-ferent from what their customers say they want.

The second and third most important attributes forthe farmers were the proper grading of the produceand having the desired size(s), respectively, whiletogether these were only the sixth most important forthe buyers. The second most important attribute forthe buyers was having produce available in the quan-tities required. Unlike farmers who only transactdownstream, the buyers have to transact withupstream (farmers, traders) and downstream(retailers, wholesalers, institutions) customers, sothey must have enough volume of products to main-tain their business arrangements.

Meanwhile, farmers thought that having a widerange of produce of the desired variety was veryimportant for their customers. However, the down-



13

stream buyers ranked this attribute much lower,therefore assigning it less importance.

The farmers put least importance on providingproduce that is competitively priced. However, thecustomers considered it to be the third most impor-tant attribute. The farmers are more concerned witheasy and early disposal of their products, since theylack facilities for postharvest storage. The faster itcan be sold, the lesser the problem with wastage.However, the farmers will complain later that theygot a low price for their products. Customers, on theother hand, have to set a lower price for the productssince they will sell these products to their down-stream buyers and they must get profit from thistransaction.

Farmers and their customers seem to be empha-sising different aspects of vegetable quality. Farmershave several misconceptions about what their marketwants, as manifested in Table 4, exhibiting their lackof market awareness. There is a need to coordinatefarmer and customer product specifications so thatthere is increased efficiency in the chain.

SummaryThe gap in perceptions of the farmers and the down-stream customers was manifested in the results pre-sented. The farmers defined quality according to thephysical and biological characteristics of the vegeta-

Table 4. Comparison of the responses of farmers and downstream buyers to perceived importance of vegetableattributes, based on responses where 1 = not at all important and 6 = very important.a

Desired vegetable attributes Farmer Buyer

Adjusted mean

Standard deviation

Rank Adjusted mean

Standard deviation

Rank

Have fresh produceHave produce that is appropriately gradedHave produce of desired size(s)Have wide range of produceHave produce that is appropriately packedHave produce of desired varietyHave produce available in quantities requiredHave produce that is free from physical injury Can deliver produce when neededHave produce that is free of pests and diseasesHave produce with long shelf lifeHave produce that is free of chemical residuesProvide produce that is competitively priced

5.8325.8135.7405.7255.5635.6375.3925.2255.2074.8244.7213.7643.350

0.780.680.720.801.051.021.111.301.361.761.651.981.96

123456789

10111213

6.05.7955.7955.5575.9325.6935.9665.5915.8645.7615.7275.1485.932

0.00.95.61

1.050.321.050.231.040.440.790.811.950.45

16.56.5123.5102

11589

133.5

a Downstream buyer responses were actually given on a 1–4 scale and had to be adjusted accordingly (see text for further details).Sources: Survey of Kapatagan households, 2002; Survey of downstream buyers, 2003.


0


bles, such as maturity, weight, size, shape, pest/mechanical and physical damage/defects, cleanlinessand freshness. Price was also mentioned as an indi-cator of quality. Farmers believed that the ultimatecustomer would want fresh vegetables that are wellgraded and taste good. They also thought that theconsumer would be concerned with physical appear-ance, such as colour and defects caused by insectdamage.

However, the downstream customers definedquality not only in the attributes described by thefarmers, but most especially in terms of taste, fresh-ness, cooking characteristics, colour, timely deliveryand consistent supply. The right maturity of the veg-etable, referring to the right timing of harvest, wasimportant to the farmer but not to the downstreamcustomers. Market intermediaries were concernedwith mechanical injuries but the farmers were not.The market intermediaries connect the producer andthe end user so they interact with both players. Theyare concerned with the delivery of goods so that theywill have a consistent supply of merchandise with theproper assortment and in the desired varieties. Logis-tical issues are crucial to them because they bear therisk of carrying the inventory.

Furthermore, farmers’ misconceptions of theircustomers’ criteria were emphasised when the rank-ings of the farmers and the buyers on certainattributes were compared.

ConclusionsFarmers use quality attributes that are within theircontrol — like the right maturity of the vegetable orthe freedom from pest damage. Weight is an impor-tant attribute for farmers because it affects their earn-ings. However, the farmers do not feel that it is withintheir financial or physical power to consider otherseemingly uncontrollable quality attributes.

Many of the problems related to the quality of thevegetables produced are due to the agronomic prac-tices of the small farmers and the low level of theirawareness of what is important to the market. Theirprimary focus is their income, which affects the sur-vival of their family.

Improving quality in the vegetable supply chainfrom Kapatagan must begin with raising the capacityof farmers to produce quality vegetables and helpingthem to understand market requirements for quality.Their perceptions are based on their reality and theirreality is the time of harvest and the physical



13

attributes, which they can control. The downstreamcustomers, on the other hand, base their under-standing of quality on their own reality which is thedemand of the retailers and the reliability of theirsupply.

Helping both farmers and intermediaries see theentire supply chain rather than focusing on only theirpart of the chain can help to align their perceptions.The promotion of cooperation and partnership tosustain the entire chain will lead to improved supply-chain efficiencies. This will mean a reorientation forall stakeholders and capacity building for farmers toincrease their production skills and market orienta-tion.

RecommendationsThe data showed that farmers and their customershad varying ideas on desired vegetable qualityattributes. Quality perceptions of the farmers are notthe same as the intermediaries. Farmers look at thephysical characteristics of the product but intermedi-aries are more concerned with the consistency andpromptness of delivery. With this differing perspec-tive, a quality system infrastructure needs to bedevised and implemented. A quality system infra-structure is the set of programs, policies and proce-dures aimed at defining the quality characteristicsand standards of agricultural commodities and agri-based products, disseminating the standards to theproducers, wholesalers, traders, retailers, consolida-tors, processors and end consumers, implementingthese standards in the concerned sectors and moni-toring the application and adherence to these stand-ards along the entire supply chain. The quality systeminfrastructure requires that standards and qualityassurance systems be in place, with adequate incen-tives, and communicated to farmers. Correct infor-mation is vital in ensuring the efficiency of the chain.With the current scenario, farmers are dependent onthe buyers and agents for information.

Quality system infrastructure also requiresincreasing professionalism among farmers, tradersetc. to get the product right, and collaboration to getthe required volume. Downstream customers puthigh importance on having produce available in thequantities required. There is also a need for capacity-building for all chain members to ensure the effi-ciency and effectiveness of the supply chain in termsof training, livelihood seminars, market awarenessexercises, and farmer education. Moreover, to ensure


1


efficient access to the market, the roads from farms tomarkets should also be good and passable.

When the quality system infrastructure is set up,farmers will be able to access correct information —a vital factor in maintaining balance and efficiencyalong the chain. They will have direct and valid infor-mation about market preferences, quality standards,training and livelihood programs. They will be awareof the characteristics of the market for temperate veg-etables. If the farmer gets some degree of improve-ment from the quality system infrastructure being setup, this will trickle down to other members along thechain, thus creating an efficient and effective vege-table supply chain, where all chain members benefit.

Acknowledgment

This project was funded by the Australian Centre forInternational Agricultural Research (ACIAR).

ReferencesAgbayani, A.L.P., Holmer, R.J. and Schnitzler, W.H. 2000.

Purchasing patterns and requirements of institutionalusers of fresh vegetables in Cagayan de Oro City. ThePeriurban Vegetable Project of Xavier UniversityCollege of Agriculture, funded by the European UnionCommission. Available on the Internet: <http://www.cityfarmer.org/philippinerefs.html>.

Batt, P., Conception, S., Hualda, L., Migalbin, L., Montiflor,M., McGregor, M., Murray-Prior, R. and Rola-Rubzen. F.2003. Building trust between southern Mindanaovegetable farmers and traders. Paper presented during the21st ASEAN/3rd APEC Seminar on PostharvestTechnology, Bali, Indonesia, 23–26 August 2003.

Burrill, C.W. and Ledolter, J. 1999. Achieving qualitythrough continual improvement. John Wiley & Sons, Inc.

Collins, P. 1994. Approaches to quality. The TQMMagazine, 6(3).



13

Fredendall, L.D. and Hill, E. 2001. Basics of supply chainmanagement, The St. Lucie Press/APICS Series onResource Management, USA.

Govindasamy, R, Italia, J. and Liptak, C. 1997. Quality ofagricultural produce: consumer preferences andperceptions. New Jersey Agricultural ExperimentStation, P-02137-1-97, February 1997.

Hill, R.G. and Chung, M.C. 1995. Quality assurance and themyth of rationality. International Journal of Health CareQuality Assurance, 8, 18–22.

Lizada, Ma. C. 1993. Postharvest handling: a trainingmanual. Los Baños, Postharvest Horticulture Trainingand Research Center, University of the Philippines.

Masajo-Manalili, N. 2000. The quality assurance challenge:can village marketing an cooperatives respond? In:Johnson, G.I., Le Van To, Nguyen Duy Doc and Webb,M.C., ed., Quality assurance in agricultural produce.Proceedings of the 19th ASEAN/1st APEC Seminar onPostharvest Technology, Ho Chi Minh City, Vietnam, 9–12 November 1999. ACIAR Proceedings No. 100.Canberra, Australian Centre for InternationalAgricultural Research, 388–397.

Mercado, J.R., Pagaran, E., Dequito, P. and Menegay, M.2000. Temperate vegetables in Mindanao. United StatesAgency for International Development (USAID),Growth with Equity in Mindanao Program.

Opara, L.U. 2000. New market-pull factors influencingperceptions of quality in agribusiness marketing (orquality assurance for whom?) In: Johnson, G.I., Le VanTo, Nguyen Duy Doc and Webb, M.C., ed., Qualityassurance in agricultural produce. Proceedings of the 19th

ASEAN/1st APEC Seminar on Postharvest Technology,Ho Chi Minh City, Vietnam, 9–12 November 1999.ACIAR Proceedings No. 100. Canberra, AustralianCentre for International Agricultural Research, 244–252.

Satin, M. 1997. Food quality and international trade. Foodand Agriculture Organization of the United Nations. Onthe Internet: <http://www.fao.org/waicent/faoinfo/agricult/ags/Agsi/AGSI.htm>.

Saunders, M. 1997. Strategic purchasing and supply chainmanagement, second edition. Great Britain, FinancialTimes, Pitman Publishing.


2


The Melon Value Chain in Gansu Province, Western China: Benefits to Growers from

Improved Disease-Control Practices

Zhang Yanrong* and Sherrie Wei†

Abstract

Melons are widely grown in the Minqin County of Gansu Province in western China. Besides supplyingconsumers within the province, good grades of melons are transported over 1000 km to interstate markets. Thecurrent supply chains of melons have various constraints that prevent delivery of satisfactory and consistentproducts to consumers in the local as well as interstate markets. These include technical issues of pests anddiseases and inadequate handling in cold-chain storage, packaging and quality standards. There are alsomanagement issues of growers harvesting their melons prematurely in order to capture an early-seasonpremium price. As a consequence, the industry suffers from decreasing consumption, albeit slowly, and poorerprice returns to growers. While these issues are recognised by the growers, no action has been taken to addressthe problems as growers are yet to be integrated for collective actions for common interests.

This study addressed the potential to deal with some of the industry’s constraints in a collective way throughcontrolling diseases, and improving cultural practices and selection of melon varieties. Extension workshops toaddress these issues, based on scientific research, can be used to encourage farmers to work together, and othersupply-chain issues are also being targetted. The potential benefits to farmers include a bigger ‘slice of the pie’ inthe value chain, but whether farmers can reap these benefits depends on the extent to which they can work together.

For centuries, Chinese consumers have regardedmelon as a delicacy. Melons are grown in the irri-gated arid remote areas of China, including the prov-inces of Xinjiang and Gansu. More recently, theyhave been planted in Mongolia and a few places insouthern China during the off-season. Melons fromwestern China are especially well known for theirgood taste and sweetness. Besides supplying thelocal market, good grades of melons from westernChina are transported over thousands of kilometres tointerstate markets.

* Agricultural Economics Department, GansuAgricultural University, People’s Republic of China.Email: <[email protected]>.

† School of Natural and Rural Systems Management, University of Queensland, St Lucia, Queensland 4072, Australia. Email: <[email protected]>.



13

This study focused on Huanghemi melon (literallyYellow River melon), grown in the Minqin County ofGansu Province in western China. Huanghemi melonis a cross-breed developed by a team at Gansu Agri-cultural University. This variety is one of the veryfew research and development (R&D) products thathave been successfully commercialised. However,like other melon varieties, Huanghemi melons sufferfrom downward price pressures. While this issue isrecognised by growers and other supply-chain part-ners, due to its complexity, there has been little actionto address the problem.

The objective of this study was to use value-chainanalysis to look at the supply-chain issues in theGansu melon industry and discuss grower benefitsfrom a value-chain perspective. Value-chain analysisrefers to the full range of activities that are required to


ublished in 2004)

3


bring a product from production to delivery to con-sumers. The costs and benefits of these activities atall levels in the supply chain are analysed and com-pared (Kaplinsky and Morris 2002). Value-chainanalysis is useful in that it provides an indication ofthe relative power of chain partners (Cox 1999). Part-ners who gain the larger shares of the value createdby the whole chain are, in theory, performing themost important functions in the chain and hencereaping larger rewards. In practice, they possess thepower over their suppliers and customers due to theirrelative competitiveness (Porter 1980, 1985). Value-chain analysis also offers an insight into chain inno-vation. Partners with larger shares are more likely toinvest in innovation than those with smaller shares.The application of new technologies for improveddisease control by farmers requires a value-chainapproach to better understand the incentive mecha-nisms for technology adoption.

Melon Supply Chains in Gansu, China

Over 80% of Huanghemi melons are sold in the inter-state market. The partners in the supply chainsinclude farmers, collectors, interstate wholesalers,and retailers in other provinces. There are variousconstraints within the current supply chains in thedelivery of satisfactory and consistent products toconsumers in the local as well as interstate markets.These include technical issues of pests and diseases,and inadequate handling in cold-chain storage, pack-aging and quality standards. There are also relatedissues of growers harvesting their melons prema-turely in order to capture an early-season premiumprice.

Farmers

The average size of melon farms in Gansu is about10 Mu or 0.67 ha (15 Mu = 1 ha or 1 Mu = 66.7 m2).Farmers have modest infrastructure for growingmelons. Many of them use fertilisers and plasticmulch, but not herbicides or pesticides, as melondisease problems do not often show up at the farm-gate stage. Besides growing and harvesting, farmersmay grade, package and transport melons to collec-tion points in the village. Harvesting is done manu-ally by collecting melons in hessian bags. Gradingand packaging are mostly based on instructions fromcollectors or wholesalers. Standards vary between



13

wholesalers and are not written down. Common indi-cators are size and blemishes, and judgments aremade visually. There are two types of packaging:large netted nylon bags of 20 kg capacity for theGansu market; and cartons of 10–15 kg capacity forinterstate markets.

Collectors

Collectors buy melons from farmers and sell tointerstate wholesalers. They are often farmers them-selves, who have a bit more capital and have sourcesof information and contacts with wholesalers. Thereare generally a few collectors in each village. Theybuild their own simple undercover stands by theroadside near the production areas through whichwholesalers and trucks can pass.

Wholesalers

Wholesalers are normally from other provinces andoperate as merchants rather than agents. They travelaround the country to obtain melon supplies in dif-ferent seasons. Wholesalers perform a critical functionin the chain by linking local production to interstatemarkets. They have the potential to become supply-chain managers, as they are the only channel partnersthat know both production (through collectors) andmarkets. However, this has not occurred for variousreasons. Given that individuals are not able to get loansfrom banks, wholesalers cannot operate on a largescale. Two to three of them work as a team on a smallamount of capital. One of them travels to the produc-tion area to buy the fruit and the other(s) sells the fruitat the central markets in other provinces. They only doone deal a year, at most twice, for each production areain Gansu, Xinjiang, Mongolia etc. The scale of eachdeal is one or two truckloads, about 10 or 20 t, butoften stretches to the limit of 14 or 28 t. Becausewholesalers go to each production area only once ayear, it is unlikely that farmers receive any feedbackfrom them about the current season.

Retailers

Retailers are located thousands of kilometres awayfrom Gansu. Wholesalers leave the scene completelyonce they sell the fruit to the retailers. There is littlefeedback of information between wholesalers andretailers unless serious problems occur.

The whole supply chain from farmer to retailer istransaction-based and payment is always made in


4


cash, on the spot. This is not surprising, given fewinstitutional bases for supply-chain coordination —including an absence of consolidation at all levels ofthe supply chains, an ineffective contract-implemen-tation system, and lack of cultural underpinning forinter-organisational collaboration (Wei 2003).

Logistics, transport and losses

In the current study, losses at the farm level wereabout 9.1%. Most of the losses were due to blemishescaused by diseases and pests. Farmers normally didnot apply sprays to control diseases and most of thetime they were able to get away with it. However,there were times where it was too late to save the cropand losses were devastating. Losses during shippingwere about 3.75% if everything went well, includingweather conditions, maturity level and no seriousdisease threats. Losses at the retail level were mostvariable, depending on how long retailers kept thefruit, but losses were regularly about 10%. Totallosses in the Gansu-to-Shanghai supply chain wereabout 23%.

Methodology

Supply-chain partners were interviewed about theircosts and profits in producing Huanghemi melons.Because the costs and benefits were based on dif-ferent lengths of time, their profits have been stand-ardised. Shoucheng Town of Minqin County inGansu Province is the major Huanghemi melon pro-duction area. Three major villages (Xing-Jin, Zhong-Xing and Tien-Cheng) from the town were selectedfor this study. Thirty farm households were randomlyselected for in-depth interviews about their coststructures in growing Huanghemi melons. Collec-tors, wholesalers and retailers were very sensitiveabout the cost/profit figures and were often unwillingto divulge information. The research team had tointerview a few collectors, wholesalers and retailersthat the team members already knew. While thesewere convenient samples, there is no particularreason to believe the samples were biased. Conven-ient samples could be an advantage in this study asthe respondents were less likely to give false infor-mation. Given the high competition at all levels ofsupply chains in the melon industry, the cost struc-tures of those interviewed were not likely to deviatemuch from their competitors.



13

ResultsBased on interviews with supply-chain partners, theirreturns were approximated and analysed at the firmlevel and their shares in the supply chain analysedfrom a value-chain perspective. Table 1 shows thecosts and returns to farmers in 2002, in which therewas no major disease attack and the weather condi-tions were good. The results were based on theaverage of 30 farmers surveyed. Average total yieldin 2002 was 2750 kg/Mu (or over 41 t/ha), but mar-ketable yield was 2500 kg/Mu. That meant farm-gatelosses of 9.1%. Farmers’ costs included, indescending order, labour, fertilisers, seeds, taxes,plastic mulch, and irrigation. Expenditure on pesti-cides was negligible at about CNY1–2/Mu. Returnsto farmers were about CNY0.11/kg (AUD1 =CNY4.5 at the time of the survey), or 40% for a 4-month production cycle.

Collectors’ costs and profits details are shown inTable 2. Collectors had no transport costs as farmerstook the fruit to the collection points. They had norent either, as they built simple undercover stands bythe roadside. They charge wholesalers (CNY250 per14 t truckload) without farmers’ knowledge of it. Thetotal return for collectors was about 10% for a periodof 3–4 days. There were few losses to collectors asthey were generally able to clear the goods quicklyduring the peak season.

As mentioned before, over 80% of the melons fromGansu were sold to interstate markets. Wholesalers inChina are merchants rather than agents. Deals were

Table 1. Costs and returns to melon farmers in GansuProvince (CNY4.5 = AUD1; 15 Mu = 1 ha).

Factor CNY/Mu CNY/kg Proportion of costs

(%)

LabourFertiliserSeedsTaxesPlastic mulchIrrigationTotal variable costsFarm-gate priceProfitReturn (4 months)

240200100

504840

678

0.09600.08000.04000.02000.01920.0160

0.27120.38000.108840%

352915

776

100


5


made in cash, on the spot. In addition to payments tocollectors, their costs included packaging materialsfor farmers, transport costs and losses during trans-port. In this study, the costs and profits in selling tothe Shanghai wholesale market were surveyed. Asshown in Table 3, wholesalers’ returns were about9% over a 2-week period.

Costs to retailers included purchasing price, labourcosts and an average of 10% losses. Rental costs wereminimal as they sold a variety of fruits at a stand. Asindicated in Table 4, returns to retailers were about11% over a 1-week period.

Table 2. Costs and returns to melon collectors in GansuProvince (AUD1 = CNY4.5).

Factor CNY/14 t load

CNY/kg

Purchase priceSelling price, nominalCharge to wholesalersSelling price, effectiveProfitReturn (3–4 days)

250

0.3800.4000.0180.4180.03810%

Table 3. Costs and returns to wholesalers in theGansu-to-Shanghai melon supply chain(CNY4.5 = AUD1).

Factor CNY/kg

Purchase priceTransportPackagingLosses during transport, 3.75%LabourTotal costsSelling priceProfitReturn (2 weeks)

0.4180.7140.2810.0250.0251.4631.6000.1379%

Table 4. Costs and returns to retailers of melons inShanghai (CNY4.5 = AUD1).

Factor CNY/kg

Purchasing priceLosses, 10%Cost of labour for 7 daysTotal costsSelling priceProfitReturn (1 week)

1.60000.1780.0251.8032.0000.19711%



13

To compare the returns to supply-chain partners,their returns were standardised over a 1-week period,as indicated in Table 5. This showed that farmers hadthe lowest return of 2.5% per week during the 4-month production season. Collectors had the highestreturn of 20% per week during the peak season.Wholesalers had 4.5% per week for a shipment fromGansu to Shanghai. Retailers in Shanghai gained11% per week for selling Huanghemi melons. It isnot surprising that some collectors have quit farmingto focus on collecting melons. In the off-season formelons, they collected different products in differentseasons or engaged in other lines of business.

Looking at returns at firm levels could not answerprofit distribution issues in the supply chain. Value-chain analysis was required to see how profits weredistributed among farmers, collectors, wholesalers andretailers. As can be seen from Table 6, a total chainvalue of CNY0.482 was created, indicating lean andthin value for Huanghemi melon from Gansu to theShanghai markets. Retailers had the largest share ofthe melon value chain from Gansu to Shanghai with41%. This is not surprising for a perishable product.Wholesalers, who linked farmers with markets, hadthe second largest share with 28%. Interestingly, col-lectors — who had the highest return at the individuallevel — had the lowest share of 8% in the supplychain. Farmers had a 23% share of the total value.

Discussion

In recent years, melons, including Huanghemimelons, have been under downward price pressure.The main reasons for this are unsatisfactory productquality and the availability of local and imported sub-stitutes, especially in large cities such as Shanghai,Beijing and Guangzhou. Value-chain analysisshowed that the total value created in the supplychains for Huanghemi melons were thin and lean.

Table 5. Comparison of returns for partners in theGansu-to Shanghai melon supply chain.

Partners Returns for the season

One-week stand-ardised returns

FarmersCollectorsWholesalersRetailers

40% for 4 months10% for 3–4 days9% for 2 weeks11% for 1 week

2.5%20%4.5%11%


6


Off-season melons from Shangdong Province weresold for four times the price of those from Gansuduring the peak season. This indicates much scopefor improving the Gansu value chain throughimproving product quality. Farmers get the lowestreturns (2.5% per week) among the supply-chainpartners. Consequently, they may have little incen-tive to improve the supply chain. Paradoxically,quality products start at the production and posthar-vest stages, through the adoption of proper culturaland disease-control practices. Losses at harvest andduring the transport and retail stages (23%, Gansu toShanghai in 2002) could be greatly reduced if properdisease-control practices were implemented.Growers would also benefit from improved diseasecontrol if product differentiation was then under-taken, and a premium price paid by consumers.

Product differentiation

Contrary to the Chinese consumers’ traditional per-ception about melons, the industry now competes onprice and has, over time, turned melons into commodityproducts, which are handled as such at all levels of thesupply chains. Improved disease-control practicesallow for better quality products with longer shelf life.Such improvements offer an opportunity for productdifferentiation and a potential branding strategy.

Improved quality for premium prices

There is a temptation to harvest melons prema-turely to capture early-season premium prices and to

Table 6. Summary of the Huanghemi melon valuechain — from Gansu to the markets inShanghai.

Item Cost and price

(CNY/kg)

Profit (CNY/kg)

Share of value (%)

Farmers: costsFarm-gate price

0.2700.380

0.110 23

Collectors: costsCollectors: price

0.3800.418

0.038 8

Wholesalers: costsWholesalers: price

1.4631.600

0.137 28

Retailers: costsRetailers: price

1.8032.000

0.197 41

Total value 0.482 100



13

hide the symptoms of diseases. Farmers reported thatthis often occurred at the request of wholesalers.Improved disease-control practices allow melons tobe harvested at a more mature stage, which results inbetter taste and sugar levels.

Improved disease control requires implementationof farm and postharvest-level practices by farmers.Value-chain analysis indicated that retailers andwholesalers had the largest shares in the value chain.Innovations that affect the whole chain, such asimproved disease-control practices, have the bestchance of success if partners with larger shares areinvolved. Retailers in melon supply chains arelocated in other provinces and have never had anyinteractions with farmers. To introduce new disease-control mechanisms at the preharvest and postharveststages, it is essential that the wholesalers are involvedat the outset. It is through the wholesalers that theefforts of farmers can be relayed to retailers. If theretailers, who currently capture the largest share ofthe value chain, appreciate the value of these effortsin terms of both improved quality and reduced losses,they will be more willing to pay a premium price forthe melons.

For farmers to gain an improved ‘share’ of thevalue chain with the introduction of new diseasecontrol practices, two issues must be considered.Firstly, the practices need to be coordinated at agroup level to ensure adequate quantities ofimproved products. In other words, some horizontalintegration at the farmer level needs to occur, albeitnot at a wide scale. Secondly, farmers should also bestrongly encouraged to perform the postharvestdisease-control function, rather than leaving it to col-lectors or wholesalers.

Horizontal integration at the farm level

The application of disease-control strategies coulditself facilitate farmer cooperation as farmers havethe opportunity to interact at workshops, demonstra-tions etc. These activities will also help farmers whosell to the same wholesalers to work together to con-solidate larger quantities of melons. The governmentcould make use of the existing farmer networkembedded in the ‘natural–social constitutes’ of theChinese rural society (Murdoch 2000). The currentdecentralised and short-term relationships will notachieve the goal of improving the benefits forfarmers.


7


Farmers performing more functions in the supply chain

Unlike farmers in developed countries who clean,grade and pack their fruit, farmers in China onlyperform the basic production function. Melonfarmers only pack and grade melons if instructed todo so by their wholesalers. With the introduction ofthe improved disease-control strategies, farmerscould potentially work together to perform somebasic postharvest handling tasks, such as washing,dipping and packaging. The more supply-chain func-tions that farmers undertake, the more likely they willbe to ‘catch’ a larger share of the value chain.

ConclusionIn summary, this study used a value-chain approachto investigate the returns to supply-chain partners andhow the value is apportioned among them. Theresults indicated that there is much scope to improvethe value chain if the quality of Huanghemi melonscan be improved, by introducing disease-controlpractices at the farmer level. This could result in



13

higher prices being paid by consumers, which wouldbenefit all members of the supply chain. However, toensure that farmers capture the benefits, they need tobe consolidated and perform more functions in theirsupply chain.

ReferencesCox, A. 1999. Power, value and supply chain management.

Supply Chain Management, 4, 167–176.Kaplinsky, K and Morris, M. 2002. A handbook for value

chain research. Ottawa, Canada, InternationalDevelopment Research Centre (IDRC).

Murdoch, J. 2000. Networks — a new paradigm of ruraldevelopment? Journal of Rural Studies, 17, 70–94.

Porter, M. 1980. Comparative strategy. New York, The FreePress, Chapters 1 and 2.

— 1985. Competitive advantage: creating and sustainingsuperior performance. New York, The Free Press,Chapter 1.

Wei, S. 2003. Supply chain management and one dragonapproach: institutional basis for agro-industrialisation inChina. Paper presented at the ASEAN/APEC PostharvestConference, Bali, Indonesia, 20–22 August 2003.


8


Improving Indonesian Vegetable Supply Chains

Wendy Morgan,* Syukur Iwantoro† and Ibu Alifah Sri Lestari§

Abstract

An Australia–Indonesia collaborative project used a case-study approach to introduce farmers, packing-housestaff and consumers (via retailers) to the concepts of food safety and meeting customers’ expectations.Activities undertaken to achieve this have included:• selection of supply chains and personnel in five locations to participate in case studies, after discussions with

senior Ministry of Agriculture (MOA) staff in Jakarta and the provinces• a training of trainers (TOT) workshop for 10 MOA staff at the Centre for Standardisation and Accreditation,

Jakarta, on food safety for packing houses, including packing-house hazard-analysis and critical controlpoint (HACCP), development of a packing-house HACCP manual, and accreditation preparation

• TOT on integrated pest management (IPM) and farmer field school (FFS) methodology for selected MOAstaff and experienced farmers at five locations

• FFS for farmers in each supply chain (over 400 farmers have received on-farm training)• packing-house food-safety awareness for the community at each supply chain’s location• packing-house food-safety training and HACCP methodology for managers, staff and farmers supplying

packing houses at five locations • training in product handling and storage for retail fresh-produce buyers, managers and senior store staff in

one supply chain.It is too early to evaluate the impact of the project, but change has occurred at farmer, packing-house and

retail sectors of the case-study supply chains.

In 2002, the Australian Government’s Department ofAgriculture Forestry and Fisheries (AFFA) fundedan Australian-led project team to help the Indonesianvegetable industry to improve the safety and qualityof vegetables supplied to consumers in Indonesia.

The Indonesian Vegetable Supply Chains projectwas a one-year project, undertaken by the VictorianDepartment of Primary Industries (DPI) and theIndonesian Ministry of Agriculture’s Center forStandardisation and Accreditation (CSA). Theproject used a case-study approach to introducefarmers, packing-house staff and consumers (viaretailers) to the concepts of food safety and meeting

* Department of Primary Industry, Victoria, Australia.† Indonesian Ministry of Agriculture, Center for

Standardisation and Accreditation, Jakarta.† FIELD Indonesia.



13

customers’ expectations by providing reliable sup-plies of vegetables of consistent, acceptable quality.

Specific objectives were: • to improve skills and knowledge of Indonesian

vegetable farmers and packing-house staff • to improve production efficiency and safety • to increase linkages between sectors of the supply

chains and government research and developmentagencies

• to increase the awareness of supply chain playersof the importance of safe, quality production.

Project ActivitiesFollowing lengthy discussions with senior Ministryof Agriculture (MOA) staff in Jakarta and the prov-inces, supply chains and personnel in five locations


ublished in 2004)

9


— East Java, South Sulawesi, Bali, South Sumatraand West Java — were selected as case studies.

A training of trainers (TOT) workshop was held inDarwin, Australia in February 2003. There were 10participants from CSA. This food-safety refresherworkshop covered food-safety risks for packinghouses, including packing-house hazard analysis andcritical control point (HACCP) methodology, devel-opment of a packing-house HACCP manual, and thesteps involved in developing and implementing anaccreditation system.

TOT was also provided to selected MOA staff andexperienced farmers at the five case-study locationsin Indonesia. This covered integrated pest manage-ment (IPM) and farmer field school (FFS) trainingmethodology. Over 400 farmers from all five supplychains have received on-farm training in IPM andfood safety.

Other activities included:• raising packing-house food safety awareness for

the community at each location• providing packing-house food safety and HACCP

training for managers, staff and farmers supplyingpacking houses at four locations

• providing training in product handling and storagefor retail fresh-produce buyers, managers andsenior store staff in a supermarket chain in Bali.

Project Outcomes

HACCP/food safety training for packing-house and DINAS staff and farmers

CSA is running this component of the project atfour locations.

HACCP is a method used to identify the food-safety risks associated with the operations of a busi-ness, in this case the vegetable packing house.HACCP and food safety are complex concepts andvery new in the Indonesian food industries. It wasanticipated that it would be difficult to introduce theideas and procedures involved to packing-house staffand farmers. The program of the refresher course inDarwin thus covered the three food-safety risks(microbiological, chemical and physical) and revisedthe 12 steps taken for analysis of these risks in theHACCP methodology. Also covered were productidentification and traceability, and staff training.

Support was provided to CSA staff to produce aFood Safety Manual for Indonesian packing houses.This was published in the Bahasa Indonesia lan-



14

guage, and used during training of packing housestaff.

It has proven difficult to improve packing houseprocedures, as there is little demand from purchasersto improve food safety in packing houses or on farms,and even the simplest modifications to packing houseoperations are expensive. Indonesian consumers areaware of the issue, but supermarkets are generallyfinding it difficult to source all their produce require-ments domestically and are therefore reluctant tospecify consistent supply of safe product.

It took some time for participants in the TOT activ-ities to accept that it is impractical, due to cost, toimplement at this stage some of the changes requiredto achieve food safety and quality assurance (QA)accreditation. These include, for example, manage-ment of temperature and water quality. Indeed, itmight be better in terms of food safety if there wereno washing steps at the packing house. This possi-bility needs to be discussed with the next links in thesupply chain and with CSA. Its implementationwould need to be accompanied by an education cam-paign to explain its rationale to the whole commu-nity.

Despite the various difficulties, the CSA group’sactivities are having an impact on the staff of thepacking houses they are training. They are seeingchanges in staff behaviour (personal hygiene and nosmoking), and procedural practices (logistics,cleaning programs and storage) occurring at all loca-tions.

Training for farmers

This component of the project is being run byFIELD Indonesia, a non-government organisation(NGO), at four locations.

The FFS model for delivering on-farm training hasas its first step community consultation. Even at thisstep, each location has different expectations, gov-ernment structures and personalities, and accommo-dating these variations requires considerablediscussion.

An issue of great interest is that competition toattend FFS is always so intense that farmers are inter-viewed for selection. They will attend training for 12hours and still have to be told to go home. They arevery hungry for information. Indonesian farmers arecompensated for attending training but this cannot bethe sole reason they attend.


0


Retail fresh-produce handling training in a supermarket chain in Bali

A key issue at this level in the supply chain is thatthe major supermarket chains were not interested inparticipating. They view staff training as their com-petitive edge and are therefore secretive about theirtraining programs. Nevertheless, there is a problemin that their in-store produce appeared to be no betterthan that of the small chain which participated in thetraining in this project.

This project component included the followingactivities:• TOT in Australia for an Indonesian postharvest

university lecturer. This training covered thecomponent content, methodology for delivery andselection of modules suitable for the supermarketchain’s business. The Indonesian presenter alsotranslated much of the documentation into Bahasa.

• A two-day workshop titled “Fresh produceretailing and profit improving practices” was heldin Denpasar on 18–19 March 2003. Seventeenfresh-produce managers (storage and in-storeselling) and buyers from the Tiara Dewatasupermarkets in Bali participated. Topics coveredincluded: delivery checks, storage, product careand handling, wastage and shrinkage,merchandising, cleaning and sanitation, managingcustomer feedback. Temperature andrefrigeration, humidity, and information on theshelf lives of different types of vegetables wereconsidered by participants as important tomaintaining product quality.

Results and EvaluationThe workshop participants rated the workshop highlyand have asked for further training modules. The



14

supermarket contributed financially to the training,which is quite unusual in Indonesia, and madeimprovements to in-store and storage practicesalmost immediately.

Conclusions

Although it is too early to evaluate the overall impactof this project, the project team has already observedthat some change has occurred at the farmer,packing-house and retail levels of the supply chainsconcerned. The project team plans to evaluate thelonger-term impact of project activities.

Putting an emphasis on the retail component of thesupply chain has had an impact already. The super-markets are looking into developing product specifi-cations and giving farmers more consistent orders,and to meeting farmers’ requests for more notice ofwhat and when they want a product. This will allowthese farmers a greater opportunity to schedule pro-duction, something that Australian farmers take forgranted. Farmers and packing houses are using saferfarming practices than before the project started.Communication between members of the supplychain has been enhanced, but needs to be continuallyimproved. Indeed, communication is a major con-straint to outcomes at all levels of the project — plan-ning, socialisation, delivery, expectations — as wellas between the diverse personnel — from two coun-tries and cultures, central and provincial government,government and business, farmers, packers, agentsand retailers.

Project follow-up activities should facilitate com-munication between supply chain members, so as tomaximise the benefits of initial activities andenhance overall understanding of the requirements ofeach member.


1


Indonesia’s Strategic Agricultural Commodities in Meeting the WTO Agreement

Rina Oktaviani*

Abstract

Indonesia is a developing country that is committed to the World Trade Organization (WTO) agreements. Thelatest WTO agreement, reached in Doha in 2001, allows agricultural products in developing countries to havethe special and different treatment in terms of market access, export subsidies and domestic support. Theproblem is how Indonesia can take advantage of this special treatment in the context of its strategic agriculturalproducts, so as to develop its economy and alleviate poverty, and be ready for the next round of WTOdecisions. This paper analyses these problems and suggests the proposed agenda for the next WTO round forIndonesia as an individual country and as a member of various groupings. The paper first considers whatIndonesian agricultural trade performance, how the Indonesian government chooses and defines its strategicagricultural products, and how to use supply-chain methods to select these products.

Indonesian economic policy has moved from protec-tionism (during the several years after independencein 1945), to outward orientation (late 1960s up to the1980s) to deregulation and openness (during the1990s and 2000s). Numerous trade and investmentreform packages have been launched by the govern-ment since 1989 in order to face the more open andcompetitive world economy. Since 1989, the restric-tions on trade, including the tariff and non-tariff bar-riers, have been gradually eliminated. Traderegulations have followed investment regulations toencourage direct foreign investment. The year 1994saw a significant change in investment: essentiallyunrestricted direct foreign investment was permittedfor the first time in all sectors. It was hoped that thecomprehensive economic reforms would improveeconomic efficiency and lead to an expansion of the

* Head of Agricultural and Resource Economic StudyProgram, Department of Socio-Economic Sciences,Faculty of Agriculture, Bogor Agricultural University, Jl.Kamper, Kampus IPB Darmaga, Bogor 16680,Indonesia. Email: <[email protected]>.



14

Indonesian economy, which would stimulate furtherinvestment and export trade activity.

As an open economy, Indonesia is committed toregional and global free trade. In the East Asiancountries, Indonesia is a member of the Asian FreeTrade Area (AFTA) agreement and, in the worldeconomy, of the World Trade Organization (WTO).The objective of the agreements is free trade amongnations in the region. According to economic theory,free trade would increase the welfare of nations thatjoin the agreement, based on the comparative advan-tage it brings. The gains from trade liberalisation canbe identified as coming from two sources: increasingthe efficiency of use of domestic resources, andincreasing access to other countries’ markets(Stephenson 1994). However, in reality, most coun-tries try to protect themselves with tariff and non-tariff barriers.

Before the last WTO Ministerial meeting in Dohain 2001 and the Uruguay Round agreement in 1994,there were several rounds of multilateral trade nego-tiations under the General Agreement on Tariffs andTrade (GATT). Before the Uruguay Round, agricul-


ublished in 2004)

2


tural trade was largely kept off the agenda by theUnited States of America (USA) and other developedcountries. Consequently, agricultural trade wasafflicted with high levels of protection, increasinguse of subsidies, worsening fluctuations in worldprices and an increasing cost to the national budget tosupport production. Especially for developing coun-tries, often predominantly agricultural in export ori-entation, it was hoped that the agreement wouldreduce restrictions on agricultural trade betweencountries. The Uruguay Round Agreement on agri-culture has three main components: markets access,export competition, and domestic support outlays.

The Doha Ministerial Conference in November2001 delivered new declarations, especially in agricul-ture. The declarations emphasised the importance ofinternational trade in promoting economic growth andalleviating poverty (Roberts et al. 2002). Growth onworld trade will enhance the economic wellbeing ofdeveloping countries. Indonesia supports the Dohadeclaration, which will reduce barriers to marketaccess, and reduce export subsidies and domesticsupport for agricultural product. As a developingcountry, Indonesia receives ‘Special and Differential’(S&D) Treatment in agriculture (Roberts et al. 2002).The treatment allows Indonesia to reduce its barriersagainst imports and its market-distorting forms ofdomestic support to a lesser extent than developedcountries. Indonesia must capitalise on the this specialtreatment to promote its agricultural and economicdevelopment.

Despite a declining share in output and exports,agriculture has maintained its dominant role in theIndonesian economy. In 2000, agriculture accountedfor 16.9% of the gross domestic product (GDP) andprovided work for around 40% of the active popula-tion (World Bank 2001). Devaluation of the rupiahhelped boost agricultural exports (in value terms), par-ticularly during the post-crisis period. However, Indo-nesia could not depend on the weakness of the rupiahin order to increase its trade balance. Indonesia mustalso meet its WTO commitment. For the WTO Minis-terial Conference held in September 2003, Indonesia,together with other developing countries, had to beready to meet additions and/or revisions to the specialtreatment on agriculture. The question was what andhow the Indonesian Government should choose anddefine strategic agricultural products?

The high dependence on the agricultural sector inthe Indonesian economy means that Indonesia neededto be well prepared for any pushes at the WTO Minis-



14

terial conference. This paper analyses the Indonesianagreement on agriculture and Indonesia’s strategy formarket access, export subsidies and domestic supportand the proposal for S&D treatment at the next WTOMinisterial Conference. The paper also seeks to iden-tify Indonesian agricultural trade performance andhow the Indonesian Government defines and choosesstrategic agricultural commodities.

Indonesian Agricultural Trade and Strategic Agricultural Products

Indonesia is the world’s largest producer of coconuts,the second-largest producer of copra, palm kernels,palm oil and natural rubber, and the third-largest pro-ducer of rice (WTO 2003). However, most farms aresmall and only 13% of cultivated land is worked bylarge state-owned and private estates. The small scaleof farms contributes to the low productivity of land.For example, the profitability of rice production fellfrom 5.3% in the 1980s to 1.5% in the 1990s (FAO2002). It was followed by a fall in the harvested areaand productivity growth. The fluctuation in harvestedarea was caused by the depredations of pests and dis-eases and the sensitivity of the rice to climate change.The stagnation of productivity could be the result ofstagnation in new technology development followingthe green revolution in the 1980s. Before Indonesiagained the rice self-sufficiency in 1984, rice produc-tivity in Indonesia was the highest one in the world.However, after 1985, the productivity growth inIndonesia was the lowest in Asia. Rice productivitygrowth in Indonesia was negative in the period of1996–2001, while productivity in China and Vietnamcontinued to increase (Oktaviani 2002).

Besides facing a low productivity rate, Indonesianagricultural exports have declined in recent years.Table 1 shows that the export value increased duringthe huge devaluation of the rupiah. Agriculturalexport commodities become more competitiveduring the Asian economic crisis. The IndonesianGovernment hopes that this will lead to an export-ledrecovery from the economic crisis. Recently, how-ever, the agriculture sector has shown poor exportperformance, the worst case being rubber. It can beseen from Table 1 that the prices of imported goodshave fallen, except for fruits and vegetables.

The weak export performance should increase theefforts of Indonesian negotiator in the next WTOround to put a case that will help to recover export


3


performance, even though trade policy is not the onlyinfluence on export value. The business environ-ment, such as a perceived increase of Indonesia’scountry risk, also contribute to export performance.

Indonesia also imports agricultural products. Table2 shows that the annual value of food and agriculturalimports increased dramatically in the 10 years between1984–86 and 1994–96. This caused a decline in theagricultural trade surplus. Annual agricultural importvalue grew slowly and annual food import value fellslowly between 1994–96 and 1998–2000. The largedevaluation of the rupiah contributed to this importperformance between 1994–96 and 1998–2000.

The value and quantity of rice and sugar importsrose rapidly between 1994–96 and 1998–2000.Besides the effect of the stagnancy in rice productionbetween 1996 and 2002 (Tabor et al. 2002), theincrease of rice imports was caused by a change inrice policy, in line with the trend to globalisation inthe world market. The National Logistics Agency(BULOG) does not monopolise the rice market anymore, since Indonesia signed an International Mone-



14

tary Fund (IMF) agreement in 1998. Private importercan now bring rice into the country through normalmarket channels. At the same time, the rice importprice has tended to fall, because of dumping fromother countries such as the USA, Thailand andVietnam (Tabor et al. 2002). Increasing rice importscaused the domestic price of rice to fall. On 19December 1999, the government applied a riceimport tariff of Indonesian rupiah (IDR) 340, equiv-alent to 30%.

The sugar industry faces a structural problem —the state-owned mills are inefficient and it is moreprofitable to grow other crops (Magiera 2002). Eventhough the government has made an effort to movethe cane production to extensive areas off Java, thesugar imports continue increase. As with other foodcommodities, the world market in sugar commoditiesis thin. Production growth is less than the export andimport growth in the world market (Oktaviani 2002).This means that if sugar production in one countryfalls, an increase of the import demand mightincrease the world market price. Indonesia is one

Table 1. Indonesian agricultural exports, 1984–2000.

Commodity Period average Annual percentage change

1984–1986(A)

1994–1996(B)

1998–2000(C)

B/A C/B

Animal/vegetable oilValue (USD million)Quantity (‘000 t)Unit value (USD/t)

249696357

14132693525

17054461382

19.014.53.9

4.813.4–7.6

RubberValue (USD million)Quantity (‘000 t)Unit value (USD/t)

753951792

167613061283

9361490628

8.33.24.9

–13.63.4

–16.4

Coffee, tea, spicesValue (USD million)Quantity (‘000 t)Unit value (USD/t)

1017469

2170

1274763

1670

1305957

1364

2.35.0

–2.6

0.65.8

–4.0

Fruits/vegetablesValue (USD million)Quantity (‘000 t)Unit value (USD/t)

70540130

3271054310

294728403

16.66.99.1

–2.6–8.86.8

Food exports (USD million) 1244 1987 2038 4.8 0.6

Agricultural exports (USD million) 2488 5414 5045 8.1 –1.7

Source: FAOSTAT, cited in Magiera (2002).


4


such example; we have a decrease of productiongrowth but an increase in import growth.

The information in Tables 1 and 2 makes it clear thatIndonesia both exports and imports large quantities ofagricultural commodities. Because of the high propor-tion of the population who are engaged with the agri-cultural sector, the trade policy will strongly affecteconomic welfare. A careful and strategic agendashould be made for the next WTO round to minimisethe detrimental impacts of trade liberalisation.

As mentioned in Doha Mandate, strategic productsrelate to the Non-Trade Concerns of food security,rural development and poverty alleviation. The Indo-nesian Government has identified four commoditiesas strategic products — rice, maize, soybean andsugar. The basis for the government’s choice of these



14

products is not clear. The argument of food securityis relevant for rice, but not for sugar. As mentionedabove, the main problem for the sugar industry isinefficient, state-owned mills. Protection of theindustry does not deliver a direct benefit to sugarfarmers. The poverty alleviation argument may berelevant to these industries as a whole, since Sawit(2003) argues that rice, maize, soybean and sugarinvolve 23 million, 9 million, 2.5 million and 1million households, respectively, or 68% of totalhouseholds in 1999. However, because of IMF pres-sure, the dependence on imports of those productshas increased dramatically (Table 2).

Although the product is related with food crops,Indonesia can actually choose other products as stra-tegic, such as exported goods. Through supply-chain

Table 2. Indonesian agricultural imports, 1984–2000

Period average Annual percentage change

1984–1986(A)

1994–1996(B)

1998–2000(C)

B/A C/B

RiceValue (USD million)Quantity (‘000 t)Unit Value ($/ton)

49159309

6031976305

8362999279

28.528.7–0.1

8.510.9–2.2

Other cerealsValue (USD million)Quantity (‘000 t)Unit Value ($/ton)

2971581188

10144871208

6884327159

13.111.91.0

–9.2–2.9–6.5

Textile fibresValue (USD million) Quantity (‘000 t)Unit Value ($/ton)

200174

1149

875475

1840

726497

1459

15.910.64.8

–4.61.1

–5.6

Sugar/sweetenersValue (USD million)Quantity (‘000 t)Unit Value ($/ton)

1025

422

285694411

4171735240

39.339.7–0.3

10.025.8

–12.5

Animal feedsValue (USD million)Quantity (‘000 t)Unit Value ($/ton)

85376226

4021405286

3091348229

16.814.12.4

–6.4–1.0–5.4

OilseedsValue (USD million)Quantity (‘000 t)Unit Value ($/ton)

118402295

337882382

2651084245

11.08.22.6

–5.85.3

–10.5

Food imports (USD million) 589 2963 2901 17.5 –0.5

Agricultural imports (USD million) 985 4545 4145 16.5 2.3

Source: FAOSTAT, cited in Magiera (2002).


5


analysis, Indonesia can identify weaknesses in thesupply chain for exported goods. The approach canbe used to choose strategic products for the globalmarket (Kaplinsky and Morris 2000). The approachcan identify levels of competitiveness and helpunderstanding of the advantages and disadvantagesof firms and countries specialising in individualproducts. Production efficiency is just one of the pre-requisites for entering the global marketplace. Weneed also to understand how the ways in which pro-ducers are connected to final market influence theability to win in the global market and determine thedistribution of benefits to participants.

Indonesia could argue to the developed countries toopen their markets to Indonesian exports if marketaccess is a barrier in the supply chain. In practice, Indo-nesia promotes its exports less than do other developingcountries. Instead of supporting agricultural exports,the Indonesian Government has applied export taxes togoods such as for palm oil (Sawit 2003).

The WTO Agreement on Agriculture and Indonesia’s Trade Policy

The agricultural negotiations in the WTO began in theearly 2000, under Article 20 of the WTO agreement.The Doha Ministerial Conference in November 2001reconfirmed the present WTO agreement to establish afair and market-oriented trading system through aprogram of fundamental reforms. The programencompasses strengthened rules, and specific commit-ments on government support and protection for agri-culture. The purpose is to correct and preventrestrictions and distortions in world agriculturalmarkets (WTO 2003, paragraphs 13 and 14). Themember governments, including Indonesia, committhemselves to reducing the barriers to market access,export subsidies and domestic support. The declara-tion makes special and differential treatment for devel-oping countries integral throughout the negotiationssuch that they should be able to meet their needs, inparticular in food security and rural development. Theexplanation below about the agreement on agricultureis based on WTO (2002).

Market access

Reducing barriers to market access means that theWTO members should reduce tariff and non-tariffbarriers to agricultural products as a result of theUruguay Round. The Uruguay Round has focused



14

broadly on two issues: the high levels of tariffsoutside the quotas (with some countries pressing forlarger cuts on the higher tariffs), and the quotas them-selves — their size, the way they have been adminis-tered, and the tariffs charged on imports within thequotas. Another market access agreement is a specialagricultural safeguard.

The tariffs cover both tariffs on quantities withinquotas and those outside. Traditionally, the tariffreductions that resulted from trade negotiations camefrom bilateral product-by-product bargaining, or theywere based on formulas that applied over a broadrange of products, or a combination of the two. Howthe reductions will be handled in the present negotia-tions is still undecided. The developing countriesargue that tariffs and other import barriers are neces-sary in order to protect domestic production and main-tain food security. For this reason, some countries arelinking lower import barriers with disciplines on othercountries’ export restraints and export taxes — if pro-ducing countries do not restrict their exports, thenimporting countries can feel more secure about beingable to obtain food from them. Some developing coun-tries say they need flexibility in deciding the level ofimport duties they charge to protect their farmersagainst competition from imports whose prices arelow because of export subsidies.

The tariff quotas are the regulation coveringwhether a product exported from one country cangain access to the market of another country at thelower, within-quota tariff. The method for givingexporters access to quotas include first-come, first-served allocations, import licensing according to his-torical shares and other criteria, administered throughstate trading enterprise, bilateral agreements, andauctioning. The terms can also specify time periodsfor using the quotas — for example, periods of timefor applying for licences, or for delivering the prod-ucts to the importing countries. Exporters are some-times concerned that their ability to take advantage oftariff quotas can be handicapped because of the waythe quotas are administered. Sometimes they alsocomplain that the licensing timetables put them at adisadvantage when production is seasonal and theproducts have to be transported over long distances.

Each method has advantages and disadvantages,and many WTO members acknowledge that it can bedifficult to say conclusively whether one method isbetter than another. Several countries want the nego-tiations to deal with tariff quotas: to replace themwith low tariffs, to increase their size, to sort out what


6


they consider to be restricting and non-transparentallocation methods, or to clarify which methods arelegal or illegal under WTO rules in order to providelegal certainty.

Safeguards are contingency restrictions on importstaken temporarily to deal with special circumstancessuch as a sudden surge in imports. The special safe-guard provisions for agriculture differ from normalsafeguards. In agriculture, unlike with normal safe-guards:• higher safeguards duties can be triggered

automatically when import volumes rise above acertain level, or if prices fall below a certain level

• it is not necessary to demonstrate that seriousinjury is being caused to the domestic industry.The special agricultural safeguard can only be used

on products to which tariffs applied — which amountto less than 20% of all agricultural products (asdefined by ‘tariff lines’). But they cannot be used onimports within the tariff quotas, and they can be usedonly if the government reserved the right to do so inits schedule of commitments on agriculture. In prac-tice, the special agricultural safeguard has been usedin relatively few cases.

Proposals range from continuing with the provisionin its current form, to its abolition, or its revision toprevent its use on products from developing countries.Some developing countries have proposed that onlythey should be allowed to use special safeguards —developed countries should not be allowed to do so.

Export subsidies Proposals to reduce export subsidies differ

between countries. Some countries are proposing thetotal elimination of all forms of export subsidies.Others are prepared to negotiate further progressivereductions without going so far complete elimina-tion, and without any ‘down payment’.

Many developing countries argue that theirdomestic producers are handicapped if they have toface imports whose prices are depressed because ofexport subsidies, or if they face greater competitionin their export markets for the same reason. Thisgroup includes countries that are net food importersand also want help to adjust if world prices rise as aresult of the negotiations. In addition, many countrieswould like to extend and improve the rules for pre-venting governments circumventing their commit-ments on export subsidies — including the use of



14

state trading enterprises, food aid and subsidisedexport credits.

Domestic support: amber, blue and green boxes

In WTO terminology, subsidies are in generalidentified by ‘boxes’ which are given the colours oftraffic lights: green (permitted), amber (slow down— i.e. be reduced), red (forbidden). In agriculture,things are, as usual, more complicated. The Agricul-ture Agreement has no red box, although domesticsupport exceeding the reduction commitment levelsin the amber box is prohibited; and there is a ‘bluebox’ for subsidies that are tied to programs that limitproduction. There are also exemptions for devel-oping countries (sometimes called the ‘S&D box’).

(a) The ‘amber box’For agriculture, all domestic support measures

considered to distort production and trade (with someexceptions) fall into the ‘amber box’. The total valueof these measures must be reduced. Various pro-posals deal with how much further these subsidiesshould be reduced, and whether limits should be setfor specific products rather than having overall‘aggregate’ limits.

(b) The ‘green box’In order to qualify for the ‘green box’, a subsidy

must not distort trade, or at most cause minimal dis-tortion. These subsidies have to be government-funded (not by charging consumers higher prices)and must not involve price support. They tend to beprograms that are not directed at particular products,and include direct income support for farmers that isnot related to (is ‘decoupled’ from) current produc-tion levels or prices. ‘Green box’ subsidies are there-fore allowed without limits, provided they complywith relevant criteria. They also include environ-mental protection and regional development pro-grams (for details, see Article 6 and Annex 2 of theAgriculture Agreement, available at <http://www.wto.org>).

(c) The ‘blue box’The ‘blue box’ is an exemption from the general

rule that all subsidies linked to production must bereduced or kept within defined minimal levels. Itcovers payments directly linked to acreage or animalnumbers, but under schemes which also limit produc-tion by imposing production quotas or requiringfarmers to set aside part of their land. Countries using


7


these subsidies — and there are only a handful — saythey distort trade less than alternative ‘amber box’subsidies.

Before WTO agreements are applied to developingcountries, Indonesia already has investment and traderegulations, which is in line with WTO agreement andaffect the agricultural sector. For the first 25-yearIndonesian development program, government policyfor the agricultural sector has focused on food self-suf-ficiency, and primarily on rice. On the other hand,assistance received by the major agricultural exportingindustries was below average, often negative. Exportcommodities such as cassava, rubber, coconut oil,palm oil, coffee, pepper, nutmeg and tea were, ineffect, taxed by the trade policies of Indonesia (GATT1991). However, some changes have been made intrade policy on export commodities since the mid-1980s. Quantitative trade restrictions (Qts) were, onpaper at least, eliminated in October 1989 for cassia-vera (cinnamon), for nutmeg and mace in the policypackage of May 1990 (PakMei 1990), and for crudepalm oil, other palm oil, palm kernel oil, copra andcoconut oil in the policy package of 3 June 1991(PakJun 1991) (Tomich 1992). Regulations on agri-cultural export commodities meant the assistance thatwas offered to those commodities was lower than theassistance provided to the other crop sectors, and evento the manufacturing sector. Even though there islimited assistance for estate crops, these commodities,especially coffee, oil palm, cocoa and rubber, have alower cost than those in other exporting countries. Inrubber production, for which Indonesia is not so prom-inent in the world market, the smallholder costs of pro-duction are lower than the cost for estates in Malaysiaand Thailand (Tomich 1992). Palm oil production inIndonesia also has the lowest cost in the world. Basedon Sucofindo data, Larson (1996) showed that the pro-duction costs for crude palm oil, ex-factory, wasUSD127/t in 1993. Compared with the 1995 averageinternational price of USD600/t and the historicallylow price in 1990 of USD290/t, the Indonesian palm-oil sector still profitable.

Besides the regulation in these commodities, therewas re-regulation in some estate crops in 1992. TheBPPC (Badan Penyangga dan Pemasaran Cengkeh)was established as a Clove Marketing Board andgiven monopoly rights for clove marketing. TheBPPC was not successful in terms of increasingfarmer incomes because, according to field reports,the purchase price was well below the floor price inthe harvesting period (Tomich 1992). The West Kali-



14

mantan citrus industry was also regulated, restrictinginter-island trade and pushing down the localfarmers’ incomes.

The financial crisis that began in the middle of1997 has induced the government to deregulate inseveral areas, including trade policy. The followingsteps in relation to trade regulation to be imple-mented as part of an agreement reached with the IMFfor receiving international aid to help with the crisis(Soesastro and Basri 1998):• gradual reduction of import tariffs to 5–10% by the

year 2003, including those on chemical products,iron and steel, and fisheries products

• trade deregulation for various commodities• wheat and wheat flour, soybeans, and garlic would

be able to be imported freely under a generalimporter licence from 1 January 1998

• with imports of soybeans and garlic subject to a20% tariff, and imports of wheat flour to a 10%tariff, those tariffs to be reduced to 5% by 2003,the government would provide a temporarysubsidy for wheat flour to protect consumers.

• the administrative retail price of cement would beeliminated in the near future

• gradual reduction of barriers to exports, includingexport taxes

• elimination of the special tariff for automobileproducers by 2000

• government review of investment and expenditureby the public sector.The failure of the IMF Agreement led the IMF to

reinforce the economic program. On 15 January1998, the President signed a second agreement, theIMF II Agreement. The microeconomic reformsunder IMF II included the following (Soesastro andBasri 1998):• elimination of BULOG’s monopoly over the

importation and distribution of sugar and over thedistribution of wheat flours. In contrast to theNovember IMF reform package, in which wheatwas to be distributed through BULOG for a 3–5year transition period, the Letter of Intentderegulated the distribution of wheat, allowingflour millers to market it from 1 February 1998

• complete deregulation of domestic trade in allagricultural products; elimination of the CloveMarketing Board by June 1998

• abolition of all other restrictive marketingarrangements by February 1998; specifically thedissolving of the cement, paper and plywoodcartels


8


• elimination of internal and external traderestrictions on cement; permission for traders tobuy and distribute all cement brands in allprovinces and to export under the general exporterlicense

• with respect to foreign investment, removal offormal and informal barriers to investment in palmoil plantations from 1 February 1998, and liftingall restrictions on investment in wholesale andretail trade in March 1998

• discontinuation of special taxes, customs andcredit privileges to the National Car Project, aswell as any budgetary and extra-budgetary supportand credit privileges to IPTN (the state-ownedaircraft industry) projects

• reduction in tariffs on all food items to a maximumof 5% in order to secure food supplies for lowerincome groups

• abolition of local content rules on dairy products• abolition of import restriction on all new and used

ships• abolition of export taxes on a wide range of

products such as leather, cork, ores and wastealuminium from 1 February 1998

• reduction in export taxes on sawn timber, rattanand minerals to a maximum of 10%; elimination ofquotas by the end of the year 2001

• exemption of export restrictions on palm oil, toensure adequate domestic supplies; this exception,however, was to be eliminated by March 1998.The IMF agreement represents radical changes,

even before the WTO implementation for developingcountries. The IMF agreement serves to furtherencourage trade liberalisation in Indonesia. It can beseen from the IMF agreement that Indonesia hasalready implemented aspects of the Uruguay Round,such as:1. To maintain actual tariff rates at or below bound

rates, and reduce bound rates by an average of33% by 2004. In this case, Indonesia hasalready fulfilled this commitment because thetariffs for agricultural commodities were mostlybelow bound rate.

2. To eliminate all non-tariff imports. In this case,Indonesia has eliminated BULOG’s sole importrights, even though it is legal under the WTO.However, Indonesia has introduced new licensewhich restrict imports to sugar producers thatwould be illegal under WTO agreement.Indonesia also already eliminated the local



14

content rules for soybean meal and dairyproducts.

Indonesia’s Proposed Agenda As a developing country, Indonesia can proposespecial and differential treatment at the WTO Minis-terial meeting. Indonesia can make a proposal as anindividual country or as a members of a group ofcountries such as the Association of South-EastAsian Nations (ASEAN) and the Cairns Group, thelatter consisting of Argentina, Australia, Bolivia,Brazil, Canada, Chile, Colombia, Costa Rica, Guate-mala, Indonesia, Malaysia, New Zealand, Paraguay,Philippines, South Africa, Thailand, and Uruguay.This group favours much greater liberalisation inagricultural trade and is an alliance that cuts acrossthe developed–developing country boundaries.Because 14 of its 17 members are developing coun-tries, the Cairns Group would also like to see devel-oping countries given some kind of ‘special anddifferential’ treatment to take account of their needs.However, some developed countries that protect theiragricultural sector with subsidies, including theEuropean Union, Switzerland, Norway, Japan, andSouth Korea, have been resisting such a move. Indo-nesia could seek special and differential treatment asan individual or jointly with other developing coun-tries in the Cairns Group.

ASEAN could take a position similar to that of theCairns Group. The Group urges negotiations on allaspects of market access including all tariffs, tariffpeaks, tariff escalation, tariff quota volumes, andtariff quota administration and other rules applying tomarket access commitments. Further, ASEAN couldpush for a better market access for all agricultural andfood products, including value-added products inprocessed forms.

Avila (2001) argues that developing countries seekgreater acknowledgment of their difficulties and abroader application of S&D Treatment provisions ofthe GATT and other WTO agreements, particularlythrough: a lower level of obligations; more flexibleimplementation schedule; best endeavour commit-ments by developed countries; more favourable treat-ment for least-developed countries; and technicalassistance and training. Indonesia also seeks thisgreater acknowledgment. As an individual country,Indonesia can also propose more flexible WTOarrangements so that it can support and protect itsagricultural and rural development and protect the


9


livelihoods of its large agrarian populations whosefarming is quite different from the scale and methodsin developed countries. Indonesia can argue subsi-dies and protection are needed to ensure food secu-rity, to support small-scale farming, to make up for alack of capital, or to prevent the rural poor frommigrating into already over-congested cities.

In the market-access agenda, a possible Indonesianproposal is in the areas of access to developed-country markets, food security, tariff binding, specialsafeguards and anti-dumping, and minimum access.Indonesia could complain that its exports still facehigh tariffs and other barriers in developed countries’markets, and that its attempts to develop processingindustries are hampered by tariff escalation (higherimport duties on processed products compared withraw materials). Indonesia should propose to devel-oped countries, especially its trading partners, suchas Japan, the USA and the European Union, toprovide quota-free and tariff-free access for productsfrom Indonesia. This would expand the marketaccess of Indonesian agricultural products. Carefulanalysis using supply-chain methods can identify thecritical points maintenance of the competitiveness ofthe products.

Indonesia also can propose to raise tariffs, based onfood security argument to reduce the market access toIndonesia. The Food and Agricultural Organizationof the United Nations defines food security in threedimensions — availability, stability and accessibility(FAO 1997). Adequate food availability access tofood supplies that are sufficient to meet the consump-tion needs. Formally, food security can be defined asa situation in which all households have both phys-ical and economic access to adequate food for allmembers, and where households are not at risk oflosing such access. Actually the food is not only rice;however, as the main staple food, the Indonesiangovernment has always focused on rice.

The choice of trade regime will influence foodsecurity in Indonesia. Trade liberalisation for foodcommodities, which was fulfilling the IMF II agree-ment in 1998, increased food imports, especially ofrice and soybean (Oktaviani 2002). In the short run,food security can be achieved through an increase inimport volume and the availability of food at lowerprices. However, this will discourage farmers fromincreasing production and productivity, reduce thefarmers’ incomes and disadvantage the rural-basedmilling and marketing sector (Tabor et al. 2002). Inthe long run, greater reliance on importing countries



15

will accelerate high dependency not only in the eco-nomic area but also in the political and social arenas.To reduce the high rice imports, the governmentapplies an import tariff. However, the import tariffpolicy is not applied very effectively. There is anindication of smuggling and under-invoicing of riceimports (Oktaviani 2002). An increase in the importtariff gives an even greater incentive for smugglingand under-invoicing.

In order to minimise an ineffective import tariff,Tabor et al. (2002) suggest a tariff quota. They alsosuggest BULOG could use the government portion ofthe rice import quota and establish a rice policycouncil. However, it seems that BULOG’s monopolyin the rice market could re-emerge. Controlling anddeciding of who is the importer, how many quotas peryear, how many quotas for each importer is also diffi-cult. Moreover, tariff quota policy is more difficult toapply than the import tariff in terms of the manage-ment system. Tariff management is needed in order tomake the simple rice tariff policy effective. Indonesiacan propose to increase the tariff, to even higher thanthat tariff binding in the harvest season and otherwisein the dry season. Indonesia needs flexibility in thetariff rates for food crops, especially rice.

In the domestic support agenda, Indonesia canmake proposals the area of S&D Treatment and‘green box’. For the S&D Treatment, Indonesiacould propose that subsidised credit and othercapacity-building measures should be permitted asexemptions when provided to low-income orresource-poor farmers. Indonesia could argue to havegreater flexibility because of an ‘unequal playingfield’ with developed countries, such as the level ofeconomic development, technology, infrastructureand human resources. The greater flexibility toincrease the domestic support could be proposedwithin the ‘green box’ framework.

As a country that exports agricultural products,Indonesia has a strong interest in seeing developedcountries export subsidies further reduced. Thiswould improve Indonesia’s competitiveness in inter-national trade.

Because there are differences in transaction costsbetween developed and developing countries, thedomestic strategic policy should be aligned with theinternational trade policy. The Indonesian Govern-ment should increase the investment on infrastruc-ture, better apply competition policy, provide greateraccess to international services and transportation,increase the efficiency and effectiveness of law and


0


order, and disseminate information about andpromote the agreement reached.

Conclusion

This presentation has outlined the numerous tradeand investment reform packages that have beenlaunched by the Indonesian Government since 1989in order to face the more open and competitive worldeconomy. Indonesia signed the commitment ofregional free-trade agreement various region whichare AFTA, APEC and WTO. The Doha MinisterialConference in November 2001 delivered new decla-rations, especially on agriculture. The declarationsemphasise the importance of international trade inpromoting economic growth and alleviating poverty.Indonesia agrees on the declaration, which willreduce barriers to market access, export subsidies anddomestic support for agricultural product. The ‘Spe-cial and Differential’ (S&D) Treatment allows Indo-nesia as a developing country to reduce its barriersagainst imports and its market-distorting forms ofdomestic support by less than developed countries.

In the market-access agenda, a possible Indonesianproposal is in the areas of access to developed-country markets, food security, tariff binding, specialsafeguards and anti-dumping, and minimum access.Indonesia could complain that its exports still facehigh tariffs and other barriers in developed countries’markets, and that its attempts to develop processingindustries are hampered by tariff escalation (higherimport duties on processed products compared withraw materials). Indonesia should propose to devel-oped countries, especially its trading partners, suchas Japan, the USA and the European Union, toprovide quota-free and tariff-free access for productsfrom Indonesia. This would expand the marketaccess of Indonesian agricultural products. Carefulanalysis by supply-chain methods and managementcan be applied to find the critical points affecting thecompetitiveness of agricultural products.

Acknowledgment

The author thanks the Australian Centre for Interna-tional Agricultural Research (ACIAR) for fundingparticipation in the workshop to make this presenta-tion.



15

ReferencesAvila, J.A. 2001. From Seattle to Doha: prospects for a new

round of multilateral trade negotiations. Paper waspresented at the Third Regional Workshop — MovingForward: Closing the ASEAN Gap and Preparing for theNext WTO Round, 9–11 September 2001, Hanoi,Vietnam.

FAO (Food Agricultural Organization of the UnitedNations) 1997. FAO year book 1997, production. Rome,FAO.

— 2002. FAO home page. On the Internet: <http://www.fao.org> (accessed 2 July 2002).

GATT (General Agreement on Tariffs and Trade) 1991.Trade policy review, Indonesia, volume 1. Geneva,GATT Secretariat.

Larson, D.F. 1996. A review of the palm oil sub-sector inIndonesia. Washington, International EconomicsDepartment, Commodity Policy and Analysis Unit,World Bank.

Magiera, S.L. 2000. Indonesia’s international trade policycommitments. Jakarta, Nathan Associates, Partnershipfor Economic Growth.

Oktaviani, R. 2002. Food security and rice import tariffs: abackground paper for the Indonesian Case Study on theMacroeconomics of Poverty Reduction, September 2002.Jakarta, United Nations Development Programme.

Roberts, I., Buetre, B. and Jotzo, F. 2002. Agricultural tradereform and special treatment for developing countries inthe WTO. Canberra, Australian Bureau of Agriculturaland Resource Economics (ABARE).

Sawit, H. 2003. The development of the WTO agreement ofagriculture: Harbonson proposal and Indonesian need.Paper presented at Road to Cancun: Indonesianpreparation to the next WTO Agreement, Jakarta.

Soesastro, H. and Basri, M.C. 1998. Survey of recentdevelopments. Bulletin of Indonesian Economic Studies,34(1), 3–54.

Stephenson, S.M. 1994. The Uruguay Round and its benefitto Indonesia. Jakarta, Ministry of Trade, Republic ofIndonesia.

Tabor, S.R., Sawit, M.H. and Dillon, H.S. 2002. Indonesiarice policy and the choice of a trade regime for rice inIndonesia. Jakarta, INDEF Roundtable Discussion.

Tomich, T.P. 1992. Survey of recent developments. Bulletinof Indonesian Economic Studies, 28(3), 3–39.

World Bank 2001. Indonesia: the imperative reform. Brieffor the Consultative Group on Indonesia.

WTO (World Trade Organization) 2002. WTO agriculturenegotiations, the issues, and where we are now. On theInternet: <http://www.wto.org> (accessed 10 July 2003).

— 2003. Trade policy review Indonesia. Report bySecretariat. Geneva, WTO.


1


Market Access and Job Creation: a Supply Chain Action Agenda (the Case of the Philippine Fruit

Export Winners)

Nerlita M. Manalili*

Abstract

Philippines’ bananas, pineapples and mangoes have a niche in the international market and are among thecountry’s export winners. With a combined export value of US$236.5m, they account for approximately 38%of the value of the country’s top 10 exports. The country has much to gain by tapping the potential of theseexport winners, not only to gain foreign earnings, but also for job creation among its primarily agriculture-dependent rural population.

To position Philippine fruits in the global market, will necessitate a review of the market, the product andproduct flow, to ensure that they come together. This involves issues of market access as well as thefunctioning of the supply chain.

The paper examines the supply chain for the Philippine fruit export winners (bananas, pineapples andmangoes) and identifies three areas needing attention: product flow (internal), trade impediments (market), andpolicy support. The focus is to enhance market access, as it is a means to expand trade, stimulate growth anddevelopment, and create job opportunities in the agricultural sector. A framework for market promotion anddevelopment within the context of the supply chain is outlined.

* Research and Development Department and Agro-industrial Development Program, SEARCA,Philippines



152


Public Policy Issues in Supply-Chain Management

Donna Brennan*

Abstract

In this paper, the organisation of agricultural markets is explained from the perspective of economicinterdependence between agents in the supply chain. The high transactions’ costs associated with conveyinginformation about quality, monitoring and testing quality of inputs in the supply chain, and the high degree offinancial risk associated with investing in specialised agri-food enterprises, has led to a move away from spotmarkets to integrated supply chains. Various forms of vertical organisation, including contracting and verticalownership, have evolved as solutions to information and incentive problems associated with this economicinterdependence.

The experience of contract farming as a means of providing opportunities to smallholders to participate inagri-food supply chains of developing countries is presented in this context. While the private sector has anincreased role in the development of agricultural marketing services that were traditionally provided by thepublic sector, there is still an important facilitative and regulatory role for government. The public policy issuessurrounding the vertical organisation of supply chains, particularly contract farming, are discussed.

The traditional form of agricultural marketinginvolves the physical exchange of goods after har-vest, where the prevailing market price is determinedby the interaction of demand and supply. Spot-market transactions occur along the supply chain atdifferent stages of exchange, between farmers andtraders; traders and processors; and on to the retailsector. Where goods are homogeneous or wherequality is easy to measure against industry standards,prices determined through these spot-market transac-tions contain the necessary incentives to direct farmoutput and marketing decisions.

In contrast, in satisfying today’s food consumer,the emphasis is on product differentiation and thesupply of quality attributes that are difficult tomeasure. This has led to a revolution in the organisa-tion of modern agri-food systems. Two main ele-ments of change that stem from this consumer-

* REAP Research, PO Box 453, North Perth, WesternAustralia 6906, Australia. Email: <[email protected]>.



15

focused revolution are increased technical innova-tion in agri-food production, and the high cost ofmonitoring and assuring quality along the supplychain.

Technical innovations in the food chain, whichhave generally led to more capital- and knowledge-intensive production, have led to economies of scaleat the food-processing level, and there is increaseddependency between players in the marketing chain.Investors bear the risk of stranded assets if they donot have a ready source of raw material input (farmproduce). The farmer may also face asset specificityrisk if there are sunk start-up costs with entering intoa new type of production. The increased concentra-tion of industry that results from economies of scalein the food processing and marketing end of thesupply chain raises the potential for abuse of marketpower.

The high transactions’ costs associated with con-veying information about quality, monitoring andtesting quality of inputs in the supply chain also con-tribute to the trend towards vertical reorganisation ofmarkets. If it is impossible or too costly to measure


ublished in 2004)

3


the quality of a product at the time of sale, the scopefor using premiums to reflect quality differences, andthus provide market incentives for quality produc-tion, is diminished.

Management of the supply chain has become anessential element of modern food-production sys-tems. In this paper, the policy issues associated withmodern agri-food systems are discussed. The issuesare presented by first examining the main factorsinfluencing the vertical organisation of supplychains. Economic interdependence has led to theemergence of alliances between the downstreamprivate sector and the agricultural producer, whichimplies a much greater role for the private sector inagricultural sector development. The main type ofvertical organisation is contract farming, and afteroutlining the main forms of contracts, the literatureon developing-country experience with contractfarming is reviewed. The discussion then turns to thequestion of private and public sector roles in agri-food supply chains in developing countries, andpublic-policy issues are presented.

Characteristics of Agri-food Marketing Problems that Promote

Vertical Coordination

There are two main explanations for the rise in ver-tical coordination in agri-food industries. These are:• asset-specific investments required by parties to a

transaction create dependencies that can beprotected better through contracting vis-a-vis openmarkets (financial interdependence)

• the transactions’ costs of producing andmonitoring quality throughout the interdependentproduction and marketing decisions associatedwith modern food chains (informationinterdependence).

Financial interdependence (asset specificity)

The asset specificity problem refers to relation-ship-specific investments that are made in setting upa supply chain. As long as the asset has a lower valueoutside the supply-chain relationship, there is a riskthat parties to the transaction will act opportunisti-cally. For example, a farmer may invest in a partic-ular type of machinery in order to supply a particularproduct to a processor. The farmer may make hisinvestment decision based on a negotiated price, but



15

once he has made the investment he bears the risk thatthe processor will renege on the agreement. The proc-essor will have the incentive to renegotiate prices ifthe farmer has incurred a sunk cost and the asset haslittle resale value. Having made the sunk investment,the farmer will be forced to accept a lower return tothe invested capital because it has low opportunitycost elsewhere. This problem is also referred to as a‘hold up’ problem, because fear of opportunism asso-ciated with asset specificity can prevent investmentsfrom going ahead.

Asset specificity problems can arise at any point inthe supply chain. At the farm level, examples ofasset-specific investments include tree crops andinvestments specific to livestock handling or posthar-vest handling. Production of highly perishable cropsalso represents an asset specificity problem. Once theproduct is ready for harvest, the producer has littlebargaining power because the value of the productrapidly diminishes, and thus the buyer has the incen-tive to threaten to delay purchase and offer a lowerprice. Forward-contracting of supply schedules anddelivery prices can assist in removing the risk ofopportunism associated with selling perishable pro-duce.

In the downstream end of the marketing chain,asset specificity problems also arise. For example,the investor in a processing plant makes a highlylocation-specific investment and is dependent onacquiring raw-material input from the farms in thevicinity of the plant. High economies of throughputimply that a steady source of material is required, andthere is potential for opportunistic behaviour by thefarm sector. The severity of this threat will depend onthe nature of the farm product — if long-distancetransport of alternative raw-input supplies is unfea-sible, such as in the case of eggs, then the farm sup-pliers have stronger bargaining power in the post-investment situation.

In many cases, the entire supply chain has relation-ship-specific investments that imply that there ispotential for opportunistic behaviour by all parties.While this co-dependency may lead to a mutuallybeneficial outcome being struck even in the absenceof formal arrangements between the agents, there is atendency for relationships to be formalised throughcontractual arrangements. These contracts attempt tospell out various contingencies and reduce the scopefor opportunistic behaviour in a post-investment sit-uation, thus providing greater incentives for mutuallybeneficial supply-chain investments.


4


Information interdependence

Increased dependency between decision-makers insupply chains is a characteristic of modern agri-foodproduction systems. This interdependency gives riseto information and incentive issues in the design ofsupply chains. Problems arise where a decision-maker, whose actions affect the wealth of anotheragent in the supply chain, can hide information abouttheir actions. In this situation, it is necessary to designmonitoring and enforcement mechanisms to over-come incentive-incompatibility problems. Contrac-tual arrangements between agents in the supply chainprovide a lower-cost means of dealing with informa-tion-asymmetry problems than in open market trans-actions.

The source of many of these information-asym-metry problems stems from the value placed onquality attributes in the consumer product, wherethese quality attributes are difficult or costly tomeasure. Agents in the supply chain have little incen-tive to supply quality if it is not possible to trace lowquality back to the individual supplier. Other sourcesof information asymmetry include opportunities forcheating on agreed supply-chain arrangements —this problem arises because one individual has aninformation advantage over the other and because itis costly (or impossible) to monitor his performance.

There are two distinct classes of information-asymmetry problems, hidden information and hiddenaction (Sexton 1994).

Hidden information (adverse selection)One of the important adverse-selection problems

in agri-food supply chains stems from the fact thatfood consumers have strong preferences forembodied attributes that are difficult to measure fromvisual inspection of the consumer good. For example,consumers have preferences for food safety and pro-duction technique (e.g. free-range eggs) and arewilling to pay premiums for these attributes. They areunable to assess whether these attributes are in theproduct they are consuming and rely on informationprovided to them by suppliers. There is an incentivefor suppliers to lie about these attributes and claimthe premium. The adverse-selection problem, if notdealt with, results in a sub-optimal supply of qualitybecause, in the absence of screening information,consumers base their willingness to pay on a proba-bility-weighted expected value — which only low-quality suppliers have the incentive to supply (Ack-erlof 1970).



15

There are various ways in which product differen-tiation (markets for quality) can be established, evenwhere it is difficult for the consumer to judge qualityfrom appearance of the good. Branding or labellingprovides one mechanism for signalling the quality ofa good. For example, companies using branding relyon an established reputation to signal quality, andconsumers can obtain information about the qualityof the good through advertising or repeated pur-chases and can be assured that quality will be main-tained because of the cost to the supplier of lostreputation. Mandatory labelling of food attributes isan example of how public regulation can assist inpromoting markets for quality (Antle 1996). How-ever, in many cases, there is considerable uncertaintyabout food safety and the cost of measuring quality isprohibitively costly, so alternative means of qualityassurance, such as monitoring of production proc-esses (e.g. hazard analysis and critical control point— HACCP), are necessary.

Information-asymmetry problems regarding thequality of agri-food products pervade the entire mar-keting chain. For example, the provision of productguarantees at the consumer end also requires thathidden-information problems be dealt with along thelength of the supply chain. Vertical coordination in thesupply chain is one means of overcoming these infor-mation-asymmetry problems — for example, throughcontracts that specify measurable quality. However,other means include advertising and branding by inputsuppliers; or by government intervention in licensingor quality standards in upstream processes.

While contracting helps to overcome adverse-selection problems related to the provision of foodquality, it can give rise to other types of information-asymmetry (moral-hazard) problems, which are dis-cussed below. Moreover, contracting does not neces-sarily overcome all adverse-selection problems. Forexample, participants in the contracting process faceadverse-selection problems in selecting with whomto contract.

Hidden action (moral hazard)Hidden-action problems arise in a post-contracting

situation, where there is an incentive for the agent tocheat on the deal that has been struck. Such cheatingcould be undertaken by the farmer, such as usinginferior (cheaper) inputs to production or not fol-lowing specified production protocols aimed at pro-viding the processor with desired quality of rawmaterials. Successful development of contract


5


farming requires that attention be paid to the designof incentives and monitoring procedures to overcomemoral-hazard problems. The nature of these prob-lems is specific to the good being produced, andsome examples of contract design to overcome suchproblems are provided in the next section.

Vertical Organisation in Agri-food Marketing Chains

Contractual arrangements between agents in thesupply chain can take a range of forms, and the natureof the arrangements can be categorised by the degreeof control offered to the contractor. The choice ofcontrol will be determined largely by the nature of theindustry, such as the degree of asset specificity andthe extent of information asymmetry at points alongthe supply chain. The degree of control ranges alongthe spectrum from the spot market, where marketprices provide the only information guiding produc-tion and marketing decisions, to vertical integration,where the downstream and upstream operations areowned and managed by a single decision-maker. Thiscontinuum is represented in Figure 1.

In practice, there is no clear distinction betweendifferent types of contracts along the continuum, butthe marketing contract generally refers to a contractregarding delivery schedules, pricing methods andquality requirements. There is little direct input intoproduction decisions, and the contract helps to assureboth the farmer and the buyer of a market, whilstmanaging the timing of marketing and conveyinginformation about quality premiums. This type ofcontract is commonly used by small-scale con-tracting operators (classified by Eaton and Shepherd2001 as the ‘informal sector’). Characteristics ofthese systems are products that have minimalprocessing and few scale economies. Technicaladvice is usually limited to grading and quality con-trol, with little advice on production techniques. The

LeastControl offered to contractor

Most

Marketingcontract

Productioncontract

Vertical integration

Spotmarket

Figure 1. Methods of vertical organisation along thespectrum of control. Source: Martinez(2002).



15

success of these systems is to some extent dependenton the availability of public extension services (byEaton and Shepherd 2001), and also on the competi-tiveness of the market, which affects the opportuni-ties for buying or selling outside the contract.

Production contracts generally confer morecontrol to the contractor, and can include provision ofraw material inputs such as seed and fertiliser, tech-nical directions regarding production technique, aswell as specifications regarding price schedules. Thespecification of production contracts can help toovercome monitoring problems by specifying inputs(Martinez 2002). Where managing throughput in adownstream processing plant is important, contractsmay include a delivery quota that helps assure aregular delivery schedule.

Vertical integration is associated with a higherdegree of uncertainty, where it is difficult to specifyall contingencies via a contract (Hobbs 1996). How-ever, the management costs of full vertical integra-tion can preclude its use in some industries. It is morelikely to occur in industrialised production systemswhere there is less reliance on decentralised decision-making skills (like local farmer decision-making).

Use of Contract Farming in Developed Countries

Contract farming is becoming an important form ofagricultural production in developed countries, par-ticularly for crops that have a high degree of assetspecificity at the processing level; where qualitycontrol and timing of delivery are important. Suchindustries include pig and chicken meat production,egg production, and the canning and frozen foodindustries. For example, more than 80% of broilerproduction and 70% of pig production is under con-tract in the United States of America (USA) (e.g.Martinez 2002). Overall, about one-third of the valueof agricultural production in the USA is now pro-duced under contract (Young and Hobbs 2002).

That contracts are widely adopted in some indus-tries indicates that they have cost advantages in over-coming quality control and investment issuesassociated with spot markets, while avoiding thelarge investment and difficult management costsassociated with vertical integration. Contract designvaries from industry to industry, as contracts aredesigned to deal with transactions’ problems that arespecific to that industry. However, problems are still


6


encountered in contract farming for a number of rea-sons. Firstly, it is difficult to specify all contingenciesin a contract, so there is always some scope for rene-gotiation in an ex post setting, and this can lead to fearof opportunism. Secondly, recourse to litigation isoften expensive or non-existent. Thirdly, even if itwere possible to specify fully the terms of the con-tract, it is not possible to determine without costwhether the terms of a contract are being fulfilled.High costs of monitoring mean that the informationand incentive problems in agri-food productionsystems continue to be an issue. Other problems withcontract farming are associated with the high degreeof concentration at the downstream end of theindustry. The potential for exercise of market powerby these firms in developed-country agri-foodsystems is an issue of ongoing debate (e.g. Griffiths2000; Young and Hobbs 2002).

Contract Farming in Developing Countries

In the past few decades, the use of contract farminghas expanded rapidly in developing countries. Con-tracts are used to source raw-material supply forprocessing industries, such as canned and frozenfruits and vegetables in Mexico (Key and Runsten1999) and fresh horticultural exports from Africancountries. In Indonesia, smallholder contractsinclude production of seed corn, mangosteens, gingerand fresh vegetables for the tourist trade (Simmons2000). Firms entering into contract farming have hadmixed success (Key and Runsten 1999), and there ismuch debate about who in the farming sector benefitsfrom successful contracts (e.g. Warning and Soo Hoo2000; Echanove-Huacuja 2001).

Contract farming is used in developing countries toovercome asset specificity and quality-control prob-lems in agri-food marketing, just as it is in developedcountries. However, there are other dimensions tocontract-farming practices in developing countriesthat affect the attractiveness of contracts to down-stream firms. They also affect the scale at which con-tracts will be offered and the distributional impact onthe farming sector. These extra dimensions to con-tract farming relate to problems of imperfect ormissing markets in developing countries. Much ofthe literature on contract farming in developing coun-tries focuses on production or resource providingcontracts which have the advantage of overcoming



15

constraints associated with access to farm inputs(factors of production, extension) commonlyencountered in these countries. In some cases, thesemissing markets are associated with removal of par-astatal marketing agencies; and agribusiness hasstepped in to fill the void by providing input supplyservices in their contractual dealings with farmers(Eaton and Shepherd 2001).

The question of whether contract farming canbenefit smallholders by giving them access to globalagri-food opportunities really comes down to threeissues. These are the attractiveness of market devel-opment in the developing country, and hence thenumber of contracting opportunities available; theability of smallholders to access these contractopportunities; and the extent to which farmers ben-efit, which depends on the terms of the contract.Second-round impacts of contract farming also affectpoverty. These matters are discussed below and theirpolicy implications highlighted.

Smallholder access to contracting opportunities

There is concern that smallholders do not getaccess to opportunities for contracting, and there area number of reasons why this may be so. One of themost commonly cited reasons is the high transac-tions’ costs of dealing with smallholders (e.g. Sarto-rius et al. 2003). These include costs of search andnegotiation; administration costs; higher costs of pro-viding extension advice because farmers have agreater need for it, and there are more of them; costlycommunication because there is no access to tele-phones; and higher monitoring due to pesticide vio-lations (Key and Runsten 1999). In addition, there isa need to provide more resources to these growers,and while this invested capital can be recouped atharvest/payment, there is a greater loss incurredwhen there is a default on the contract.

Other reasons promoting contracts with largergrowers versus smallholders are that technology usedin farm production usually comes from developedcountries and consequently is capital-intensive andhas economies of scale. Larger farmers are usuallybetter educated and are better at adapting to new tech-nologies. Larger farmers can also deal better withyield risk, as they can self-insure through crop diver-sification. It is difficult for downstream contractors toassist in providing insurance against yield riskbecause of the difficulty in monitoring whether crop


7


failure is due to bad luck or bad management. Thus,smallholders cannot be readily involved in produc-tion of highly risky crops (Key and Runsten 1999).

However, there are some reasons why small-holders might be advantaged over larger farmers inthe choice of contracting partners. These relate tomissing or imperfect markets. For example, they arelikely to be credit constrained, which can work to thecontractor’s advantage if there is a premium to beearned from filling missing credit markets. One of theproblems with supplying credit to farmers is that thecash can be diverted into other activities, but Key andRunsten (1999) argue that the risk of default can bereduced by supplying credit in-kind. Since produc-tion contracts are normally more lucrative than tradi-tional crops, the desire to maintain the contract overthe longer term can provide a further incentive forcompliance. Group dynamics and peer pressure canprovide an effective self-monitoring role where asmallholder group faces the prospect of losing a con-tract if one of the members defaults.

Where price (as opposed to yield) risk is the keyproblem in a new crop, there may be an incentive tocontract with smallholders because of the returns toproviding ‘price insurance’. That is, smallholders arelikely to be more risk averse and hence will be willingto accept a lower (fixed) price in the contract, whichessentially reflects a market risk premium afforded tothe contractor.

Another feature of smallholders is that they nor-mally have an abundance of labour and are thuswilling to take on labour-intensive activities at areturn less than what would be achieved if the con-tractor had to hire labour. Some examples of casestudies that have demonstrated a smallholder advan-tage in contract farming are illustrated in Table 1.

The requirements of large and small farmers differin that the latter require a much higher level of service(e.g. resources and information) and are also muchmore costly to deal with. In theory, both types offarmers could be accommodated in contracts as longas the agribusiness firm can discriminate betweenthem, offering a range of contracts that provide a dif-ferent level of service and a different price, to accountfor the extra cost of service. However, experiencefrom Mexico reveals that this can be politically unac-ceptable — for example, Campbells offered seventypes of contracts designed to cover large and small-holder requirements but were eventually pressured toremove their ‘price discrimination’ practices; andwere thus no longer able to offer contracts that recov-



15

ered the transactions’ costs to smallholders (Key andRunsten 1999).

Since the main cost disadvantage of contractingwith smallholders is the cost of transactions, policiesaimed at reducing this cost will assist in levelling theplaying field for smallholders. For example, govern-ments can play a development role by introducingsponsors to farmer groups (and helping in selectionof suitable regions). They can also act as intermedi-aries and protect farmers by scrutinising the spon-sors’ plans and intentions on behalf of the farmerbefore contract development. Such a developmentalrole reduces the search costs associated with findingand negotiating with potential contractors. This facil-itating role could also be played by non-govern-mental organisations (NGOs), and there is someevidence to suggest that the involvement of NGOsdoes contribute to contract success (Simmons 2000).

One of the reasons for failure of contracts is a lackof understanding on the part of agribusiness firms asto the social and cultural constraints to production.For example, lack of awareness of the religious orsocial calendar could result in contracts that haveinappropriate demands on labour that conflict withsocial or religious obligations. Government (orNGO) mediators could play a role in scrutinising theterms and conditions of the contract to ensure thatthey do not pose such conflicts.

Developing the capacity of the smallholder to par-ticipate in contract farming, through provision ofpublic extension advice concerning production, willalso reduce the private cost of contracting with small-holders. The public sector might also provide publicextension services to advise farmers on the implica-tions of various contracting decisions. One of theproblems with contracting is the lack of transparencyin market transactions, which makes it difficult forfarmers to assess the merits of contracting. The gov-ernment may play a role in advising farmers onassessing contract terms and in dealing with contractdisputes (Young and Hobbs 2002). Similarly, provi-sion of public market-information services will assistthe farmer in choosing between agribusiness mar-keting alternatives.

Land policies that restrict foreign ownership maybe conducive to improving opportunities for small-holders because they preclude plantation farming andvertical integration. Warning and Soo Hoo (2000)present the case of a particular region in Mexicowhere local constraints on land markets meant thatsmallholders had a cost advantage (low rent) and


8


were thus chosen as contractors. However, it shouldbe noted that there are other factors that go againstplantation farming, such as a high cost of investment,and the production risk. The high cost of supervisinglabour in less industrialised agricultural systems,such as tree crops, is cited as the reason why manycrops formerly grown as plantation industries arenow being farmed under contract (Key and Runsten1999; Eaton and Shepherd 2001).

Most of the studies of smallholder experience withcontracts have focused on resource-providing pro-duction contracts associated with processed or freshexport marketing. The nature of the contract is that ahigh degree of quality control is important and small-holders are generally disadvantaged because of thehigh transactions’ costs of monitoring performance.However, other opportunities for contract farming



15

are possible in domestic urban markets. For example,contract farming of vegetables and milk for thedomestic market is common in Asia. In the case offresh vegetable markets, there are lower investmentcosts (and less distinct scale economies) in the down-stream sector; and there are likely to be less stringentquality standards than in export marketing. Thesetwo factors imply that the degree of control requiredby the contractor will be less, and vertical organisa-tion of markets is more likely to have a spot-marketor marketing-contract orientation. Policies specific tothe promotion of marketing contracts will improvesmallholder access to these opportunities. Oneimportant factor impinging on the success of mar-keting (as opposed to production) contracts is thatproblems of missing markets must be overcome. Forexample, if contractors only supply marketing serv-

Table 1. Some case studies on smallholder experience with contract farming.

Commodity Country Smallholder disadvantage/advantage Reference

Frozen vegetables Mexico Disadvantaged. They did not have access to reliable irrigation water (as timing of delivery was unreliable due to common-property nature of wells).

Echanove-Huacuja (2001)

Frozen vegetables Mexico (one region)

Advantaged. Farm family members worked in processing factory and this ensured compliance of farmers, for fear of relatives’ job loss.Smallholders had lower land rental costs to local land policy.

Warning and Soo Hoo (2002)

Processing tomatoes Mexico Advantaged. Large holders were defaulting on contracts due to lucrative fresh market. Smallholders couldn’t access this market so were more reliable. They were also credit dependent, which promoted compliance due to longer-term demand for credit.


Peanuts Senegal Neutral. Simple technology did not disadvantage smallholders. Firm used local intermediaries to screen and monitor potential growers, keeping transactions’ costs low.


Seed corn Indonesia Potentially neutral. Firm used traditional grower groups to keep transactions’ costs low. Contracted with 40 groups involving 10,000 individual growers. However, comparison of contracted and non-contracted farmers revealed contracted farmers generally larger scale.

Simmons (2002)

Pickling cucumbers Mexico Advantaged due to low labour cost. Warning and Soo Hoo (2000)

Frozen vegetables Mexico (one case)

Used as last resort because larger growers were attracted to grain production due to pro-grain agricultural policy.



9


ices, smallholders will need to be able to accessextension services, credit and obtain access to factorsof production through alternative means. Ruraldevelopment policy aimed at overcoming thesemissing-market problems will assist in promoting theuse of marketing contracts, and may improve theaccess of smallholders to marketing opportunitiesassociated with rapidly growing domestic urban mar-kets. Under such improved conditions, marketingcontracts may offer a better alternative to spot-market transactions because of the value added bygiving growers signals on the quality and type ofproduct demanded in urban markets, and in man-aging the timing of delivery.

There are, however, other problems associatedwith marketing contracts that need consideration.These are that volatile markets provide one of thecontracting parties an incentive to renege on theagreement, and source/sell outside of the contract.For example, the contracting party, after agreeing tobuy a certain crop at a particular price may ‘disap-pear’ if there is a glut in the market. Similarly,growers may sell elsewhere if prices are better.Buyer/seller default is a commonly cited problem infresh-produce markets (e.g. Poole 1998). Govern-ment intervention to facilitate a bonding or down-payment scheme could assist in providing greatersecurity to contracting parties (Key and Runsten1999).

Terms of contract — market power issues

The extent of market power that can be achieved inan agri-food market is affected by the relative bar-gaining power between the contracting firm and thefarmer. The bargaining power of the contractor isstronger where they have a monopoly on input oroutput markets. For example, production of non-tra-ditional crops that have no market demand domesti-cally, such as cauliflowers in Mexico, require specialinputs (seed) and access to an export market — thisoffers significant market power to the contractingfirm. Farmers have some bargaining power wherethey are able to form groups; and where they haveaccess to other factors of production, other marketsfor their products, and to other production opportuni-ties.

In situations where the contracting firm has signif-icant market power, there may be a role for govern-ment in regulating their pricing behaviour. Antitrustlegislation provides a framework for protection in



16

developed countries although it has not been success-fully used in appeal against pricing behaviour of agri-business firms (Simmons 2000). One factor thatmakes regulation of pricing behaviour in agri-foodchains difficult is the associated decline of spotmarkets (Young and Hobbs 2002). Thin spot marketsdo not provide a reliable measure of market condi-tions and therefore make it difficult to compare con-tract returns with a market benchmark.

Difficulties in applying antitrust regulation indeveloped countries would imply that prospects forits use in developing countries, where the legalsystem is poorly developed, are dim. Jones (1995)points out that attempts to regulate behaviour can becounterproductive, as enforcement relies on the localadministration, which is likely to be influenced bylocal political pressures. Measures designed tocontrol exploitation, such as licensing and the restric-tion of trade to certain locations, can actually be usedto reduce competition. Some authors raise concernsthat the threat of overzealous regulation could reducethe attractiveness of investment. For example, Keyand Runsten (1999) argue that investors need to beguaranteed of some profits to justify the risks and, inparticular, the start-up costs associated with industrydevelopment, and that excess profits will be removedby the threat of entry anyway.

Echanove-Huacuja (2001) reports that exploitationof growers usually occurs through ‘quality’ down-grades when there is an excess supply. Growers saythat there is much more argument over quality assess-ment than price. This implies that the public sectormay play a role in ensuring consistency in the appli-cation of quality standards, either by creatingindustry standards, if appropriate, or by providingmediation over quality disputes between growers andcontracting firms.

One of the developmental roles that the govern-ment can play is in supporting and assisting producerorganisations. These associations are particularlyimportant for dealing with transactions betweensmallholders and large firms, because of the associ-ated transactions’ costs (Key and Runsten 1999). Inthe USA, several states have recently passed legisla-tion to strengthen the rights of producers to form bar-gaining groups, in response to concern over marketpower associated with increased concentration in thedownstream market (Young and Hobbs 2002).

Scrutiny of contract terms and conditions at thestart of a contract may not be sufficient to guaranteesmallholder welfare. There is a perception that con-


0


tract terms and conditions gradually deteriorate overtime, although there is little hard evidence on whetheror not this is true. Some conjecture that initially betterterms are provided to cover grower set-up costs; analternative explanation is that firms can tightenpricing as they identify the cheaper operators andsack high-cost farmers from their contracts (Sim-mons 2000). Further research on the experience ofsmallholders with contracts over time is warranted toassist in the public debate over the long-term benefitsof contract farming for smallholders. Meanwhile,one method of scrutinising the merits of contractsduring the set-up phase is to examine the likely ‘exit’costs imposed on farmers. If there are sunk costsassociated with moving into contract farming, or ifcontract farming results in loss of traditional markets,then smallholders are less able to move back to tradi-tional practices. These higher exit costs mean thatfarmers have lower bargaining power and are likelyto be subject to deterioration of contract terms afterthey have been induced to switch into contractedfarming.

Encouraging market development

Opportunities for smallholder access to supplychains are ultimately limited by the development ofthese supply chains by investors. There are a numberof areas where the public sector can play a role infacilitating such development.

Much of the promotion of contract marketing indeveloping countries can be attributed to foreignfirms that have brought their experience with con-tracting from developed countries. They have accessto appropriate technology, output markets and distri-bution networks in the exporting country and aretherefore in a good position to develop supply chainsin developing countries. They also provide spilloverbenefits through the technology they introduce (Gowand Swinnen 1998). Consequently, policy towardsforeign direct investment (FDI) will have an impor-tant bearing on opportunities for agribusiness devel-opment. Echanove-Huacuja (2001) reports on theexperience of frozen food sector in Mexico, whichwas initiated by two large multinationals, but nowdomestically owned agribusiness firms have thelargest market share.

Suitable laws of contract and an efficient legalsystem are prerequisites for a strong agribusinesssector. The state has a role in providing a regulatoryframework that defines what constitutes legitimate



16

contracts, and a system of authority to enforce con-tracts (Jones 1996). The government sector can assistin assuring food quality either directly by providinglaws relating to food quality and public health; aswell as indirectly by assisting with voluntary certifi-cation schemes. For example, it could play a role inthe verification of industry quality-assuranceschemes, industry standards and accreditation. It mayalso invest in research to reduce monitoring costs,thus reducing transactions’ costs.

Whilst agribusiness firms are active in researchand often bring technology to bear in a contract, thereare many cases where public research and extensioncan assist the development of agri-food chains. Inmany cases, private-sector developers find it easier tomove on than to invest research funds in local issuessuch as pest management. A stronger research anddevelopment system, centred on local agro-ecolog-ical issues where spillover benefits to the country arepossible, is likely to promote development of agri-business ventures.

Agricultural policies may impact on the attractive-ness of contract farming. For example, if there areagricultural subsidies used in promoting traditionalcrop production for food security, the relative attrac-tiveness of contract farming will be distorted and itwill cost more to entice farmers to enter contracts.Agricultural policies can affect the participation oflarger farmers in contract farming and thus affectopportunities for smallholders. For example,Warning and Soo Hoo (2000) note that opportunitiesfor smallholder participation in contract farming inMexico arose because large producers were attractedto grain production as a result of pro-grain agricul-tural policy. A subsequent policy shift reduced theprofitability of grain production and, as a result, thepool of available large growers increased and small-holders were shut out of contract opportunities.

Customs and quarantine arrangements will affectthe transactions’ costs associated with exporting theagri-food product. High taxes, cumbersome proce-dures, and corruption can all affect the cost of settingup export markets and therefore impact upon incen-tives to invest in a particular country. Inadequatequarantine arrangements and poor capacity in pestmanagement can affect the export attractiveness ofcertain crops, through the exercise of sanitary andphytosanitary (SPS) measures in importing coun-tries. The government has a role to play in promotinggood quarantine and conducting research in quaran-tine issues of national importance.


1


Public investment in infrastructure will improvethe access of smallholders to markets and reduce thecosts associated with transacting with them. One ofthe successful smallholder contracting experiences inMexico was attributed to the selection of farmersadjacent to the national highway (Warning and SooHoo 2000). A strong transport infrastructure alsostimulates development of other market opportuni-ties, including spot markets, and creates opportuni-ties for market development by smaller domesticagribusiness firms.

Governments also have a role in setting an effec-tive general environment for agribusiness develop-ment. Sound macro-economic policy is essential forindustry development. For export-oriented supplychains, a stable exchange rate is necessary to ensurethe viability of the operation, which earns receipts inone currency and incurs costs in another. A stablepolitical environment is also essential for assuringaccess to markets and services. For example, Eatonand Shepherd (2001) give the example of the disrup-tion caused to tourism, and hence access to air-freightservices, that can result from military coups.

Broader issues

There are broader issues associated with contractfarming that can impact on the welfare of small-holders. These are the second-round effects associ-ated with adoption of contract farming in a particularregion. Widespread adoption of contract farming in aparticular area could cause thinning of traditionalmarkets, which can impact on those producers stillproducing for that market. For example, if marketsize is significantly diminished, it may not be viablefor traders to source any product from that region.Where a region’s traditional markets are lost, oppor-tunities to moving out of contract farming are dimin-ished and this can reduce the bargaining power ofcontracted farmers. Other potential negative effectsof contract farming may be an increase in factorprices as production of high-input crops increasesfactor scarcity. Food prices will also go up if contractfarming is associated with a reduction in food pro-duction and markets are fragmented. Where contractsare only awarded to larger-scale farmers, the neteffect on smallholders may be negative. Positivesecond-round impacts of contract farming are thoseassociated with increased income in the region,which can increase demand for goods and services.The potential importance of all of these factors



16

should be accounted for in the process of selectingregions for promotion of contract farming, and poli-cies for alleviating any adverse distributional impactsshould be considered.

Promotion of alternative institutions for local agribusiness growth

The importance of transactions’ costs in the verticalorganisation of agricultural markets implies that gov-ernments may have a role to play by providing insti-tutional arrangements that reduce these costs, in orderto influence the structure of the industry. Hubbard(1997) notes that weak institutions in developingcountries lead to a bi-modal industry structure wherethe only firms able to enter the high-value exportmarket are those with large enough capital, their owninstitutional arrangements for overcoming missingmarkets etc. The implication for the agri-food sectoris that market concentration could reduce the benefitsto the farming community, and to the domesticeconomy. The potential for growth of smaller-scaleregional firms into the agri-food industry could beimproved by improving public institutions relevant tothe agri-food trade. For example, the need for brand-based quality assurance at a large scale may be due tothe lack of standards/legislation in food handling thatwould otherwise guarantee compliance to safe foodpractices by the small–medium enterprise sector. Animproved food-standards code may promote opportu-nities for domestic agribusiness firms to enter thedomestic food market in competition with multina-tionals. This will reduce the market power of largeagribusiness firms providing a better outcome forboth domestic consumers and farmers.

Similarly, a publicly coordinated strategy forimproving national reputation in the export sector mayassist the smaller-scale sector from establishing exportmarkets, by reducing establishment costs associatedwith individual firm reputation development. This willprovide a more competitive industry structure that willreduce the potential problems associated with currentvertical arrangements in the food industry.

ConclusionThe agri-food sector has moved from a production-driven to a customer-driven focus, and this hasresulted in a restructuring of vertical arrangements inthe industry. Contract farming has emerged as ameans of managing supply-chain interdependencies


2


in both developed and developing countries. There isconsiderable debate about whether such arrange-ments actually benefit smallholders, and evidence onthis matter is mixed. In general, the high transactions’costs associated with dealing with this sector placesthem at a competitive disadvantage, although in somecircumstances other factors may contribute to theirattractiveness as contractees.

Public policies that promote the role of the small-holder in contract farming will ensure that small-holders can capitalise on the opportunities in today’sglobal agri-food market. Efforts to reduce the transac-tions’ costs of dealing with smallholders, through pro-motion and facilitation of smallholder links toagribusiness, and provision of research and extensionservices, will improve smallholders access to con-tracts. Governments may need to play a role in over-seeing the terms of contracts to ensure thatagribusiness does not abuse market power associatedwith the high degree of concentration in the down-stream sector. Promotion of growers’ organisationsand monitoring of contract terms and conditions aremeans of achieving this. Finally, attention needs to begiven to policies that affect the attractiveness ofinvestment in the country’s agri-food sector, and theseinclude foreign direct investment (FDI) policies,general macro-economic stability, as well as agricul-tural and trade policies that affect the comparativeadvantage of establishing supply chains in thatcountry.

Over the longer term, policies aimed at improvingthe competitive structure of the industry should beinvestigated. These would be focused on removingthe technology bias towards large-scale firms by pro-viding public institutions for quality assurance, andother public services such as extension, that willreduce the large (private) set-up costs associated withagri-food market development.

ReferencesAckerlof, G. 1970. The market for lemons: quality

uncertainty and the market mechanism. Quarterly Journalof Economics, 84, 488–500.

Antle, J. 1996. Efficient food safety regulation in the foodmanufacturing sector. American Journal of AgriculturalEconomics, 78(5), 1242–1247.

Eaton, C. and Shepherd, A. 2001. Contract farming:partnerships for growth. FAO Agricultural ServicesBulletin No. 145. Rome, Food and AgricultureOrganization of the United Nations (FAO).



16

Echanove-Huacuja, F. 2001. Working under contract for thevegetable agrofood industry in Mexico: a means ofsurvival. Culture and Agriculture, 23(3), 13–23.

Gow, H. and Swinnen, J. 1996. Up- and downstreamrestructuring, foreign direct investment, and hold-upproblems in agricultural transition. European Review ofAgricultural Economics, 25(3), 331–350.

Griffiths, G. 2000. Competition in the food marketing chain.Australian Journal of Agricultural and ResourceEconomics, 44(3), 333–368.

Hobbs, J. 1996. A transaction cost approach to supply chainmanagement. Supply Chain Management, 1(2), 15–26.

Hubbard, M. 1997. The new institutional economics inagricultural development: insights and challenges.Journal of Agricultural Economics, 48(2), 239–249.

Jones, S. 1995. Food market reform: the changing role of thestate. Food Policy, 20(6), 551–560.

Key, N. and Runsten, D. 1999. Contract farming,smallholders, and rural development in Latin America:the organization of agroprocessing firms and the scale ofoutgrower production. World Development, 27(2), 381–401.

Martinez, S. 2002. Vertical coordination of marketingsystems: lessons from the poultry, egg, and porkindustries. United States Department of Agriculture,Economic Research Service, Agricultural EconomicReport No. 807.

Poole, N., Del Campo Gomis, F., Igual, J. and Giminez, F.1998. Formal contracts in fresh produce markets. FoodPolicy, 23(2), 131–142.

Sartorius, K., Kirsten, J. and Masuku, M. 2003. A newinstitutional economic analysis of small farmer contractsand relations in the sugar supply chains in South Africaand Swaziland, Department of Agricultural Economics,University of Pretoria. On the Internet: <http://www.ifama.org/conferences/2003Conference/papers/masuku.pdf>.

Sexton, R. 1994. A survey of non cooperative game theorywith reference to agricultural markets: part 2. Potentialapplications in agriculture. Review of Marketing andAgricultural Economics, 62(2), 183–200.

Simmons, P. 2000. Overview of smallholder contractfarming in developing countries. Unpublishedmanuscript. Armidale, New South Wales, University ofNew England.

Warning, M. and Soo Hoo, W. 2000. The impact of contractfarming on income distribution: theory and evidence.Paper prepared for presentation at the WesternEconomics Association International Annual Meetings,30 June 2000.

Young, L. and Hobbs, J. 2002. Vertical linkages in agri-foodsupply chains: changing roles for producers, commoditygroups, and governmental policy. Review of AgriculturalEconomics, 24(2), 428–41.


3


Supply-chain Management and Agro-Enterprise Development: CIAT’s Approach in Southeast Asia

Christopher Wheatley,* Rupert Best,† Dai Peters§ and John Connell¶

Abstract

The Rural Agroenterprise Development Project of the International Centre for Tropical Agriculture (CIAT)has taken a territorial approach to equitable, market-oriented, agriculturally based development in the ruraltropics, with the objectives of poverty reduction (through income generation) and environmentalsustainability. A four-stage methodology has evolved based on experiences in South America, Africa and,more recently, Southeast Asia. These stages are:• formation of working groups at the level of rural communities, comprising stakeholders interested in

equitable, market-oriented agro-enterprise development, and building consensus on a vision for the future• prioritisation of agri-food subsectors for further development, based on integration of market demand,

production and environmental criteria, and economic profitability, and in line with overall working-groupobjectives

• strengthening of the supply (value) chains associated with each prioritised subsector, with activeinvolvement of local community groups, support organisations and supply-chain actors from outside therural area

• development of sustainable services (business development services) to support and further enhance thecompetitiveness of the supply chains into the future.Examples of this approach from South America and Vietnam — the root-crop starch subsector — are

presented, along with details of a new project in Vietnam and Laos, funded by the Swiss Agency forDevelopment and Cooperation (SDC) — Small-scale Agroenterprise Development in the Uplands (SADU) —which aims to adapt the process to the situation of these two Southeast Asian countries.

Globalisation, trade and public-sector reforms, urban-isation and technological advances are all contributingto an agricultural sector in rapid change across thedeveloping world. Rural smallholders, who must bereached if the millennium goal of reducing poverty

Rural Agroenterprise Development Project, InternationalCentre for Tropical Agriculture (CIAT),* PO Box 462, Nelson, New Zealand.

Email: <[email protected]>. † PO Box 6247, Kampala, Uganda.

Email: <[email protected]>.§ 67 To Ngo Van, Tay Ho, Hanoi, Vietnam.

Email: <[email protected]>.¶ PO Box 783, Vientiane, Lao People’s Democratic

Republic (PDR). Email: <[email protected]>.



16

rates by 50% by 2015 is to be met, face declining realprices for their basic commodities. Competitive pres-sures, often from imported foodstuffs, are driving aprocess of intensification in the use of naturalresources. This has potentially serious consequencesfor sustainability in the longer term.

Markets are penetrating deep into what were for-merly rural subsistence economies. To survive, pro-ducers now need to operate successfully in adifferent, market-oriented environment where newskills and knowledge are needed to make differenttypes of decisions. At the same time, the agri-foodindustry is itself changing, with a rapidly increasingrole for managed, coordinated supply chains that are


ublished in 2004)

4


dominated by a few large — often multinational —supermarket retailers.

This trend of increasing concentration and verticalcoordination in agri-food supply chains tends to mar-ginalise smaller-scale producers. In turn, rural pro-ducers are seeking options that will provideopportunities for them to improve their livelihoodsand incomes. These can include production ofhigher-value crops (rather than basic commodity sta-ples), differentiation and added value through pro-duction practices (e.g. organics), product quality,packaging and marketing strategies (e.g. fair trade).Options also include leaving agriculture to seek off-farm income, either in the local rural area or viamigration to urban centres.

To achieve success with the demand-side options,smallholder producers need to participate in supplychains for added-value products with growing mar-kets. This means finding ways to participate in thetype of managed supply chains that are now devel-oping, in a manner that is both efficient (i.e. compet-itive), but that is also compatible with environmentaland social sustainability. This implies a need tocombine a supply-chain approach with local devel-opment processes in specific communities (a territo-rial approach). This paper presents an approach bythe International Centre for Tropical Agriculture(CIAT; Centro Internacional de Agricultura Trop-ical) Rural Agroenterprise Development Project tomeet this challenge.

The Rural Agroenterprise Development Project at CIAT1

Based in Cali, Colombia, the project started in 1996as an outgrowth of previous work on postharvesttechnology, marketing and enterprise developmentof cassava. The purpose of the project is to link small-holders with growth markets and motivate the adop-tion of natural resource conservation practicesthrough the development of techniques and informa-tion for the establishment and strengthening of ruralagro-enterprises and their complementary supportservices. In particular, the project focuses onstrengthening local capacities for rural businessdevelopment through information, methods and

1 This section draws on the paper prepared by the CIATproject staff in Latin America (Lundy et al. 2002).



16

institutional schemes, all in collaboration with localpartners.

Basic values of the project include: (a) an entrepre-neurial, market-oriented focus, (b) participatory deci-sion-making with partners, (c) a focus onstrengthening existing local skills and building newones, (d) a search for consensus among actors, (e)equal access to opportunities for participatinggroups, and (f) social, economic and environmentalsustainability.

The territorial focus has been developed in threespecific field sites in Latin America: Pucallpa, Peru;Cauca, Colombia; and Yorito, Honduras. In each ofthese sites, CIAT has worked with a variety of localpartners including producer groups, non-govern-mental organisations (NGOs), governmental organi-sations, the private sector and others. It is out of thisfield work and dialogue with partners that theapproach has evolved.

Before explaining the approach in detail, it is impor-tant to explain why CIAT has chosen to combine a ter-ritorial approach with the development of supplychains for specific, prioritised commodities or prod-ucts. By focusing on a given geographical area or ter-ritory, it is hoped that a local skills base may be builtthat not only generates positive returns for a specificsubsector or supply chain, but also produces spillovereffects which contribute to a diverse and dynamic localeconomy. Market systems will change, so by not lim-iting work to a specific product, a territorial approachallows flexibility and adaptive learning which theworking groups can continue to apply as the marketopportunities change. For agricultural products, afocus on the land where they are produced also helpsthe development of more sustainable and diverse pro-duction systems, whereas a single supply-chain focuscould tend to do the opposite. In addition, the selectionof a number of options for a given territory makes itpossible to target different socioeconomic groups oragro-ecological niches, providing for more balancedsocial and agricultural development. Finally, the crea-tion of human capital and the improvement of bothbonding and bridging social capital among organisa-tions are embedded in this approach. This last point isimportant for achieving sustainable gains againstpoverty in a region.

The territorial approach consists of four majorareas of work:(a) identification of a specific working group

composed of diverse local organisations withinterest in rural business development


5


(b) identification of supply-chain priorities basedon the market opportunities available to theregion

(c) participatory supply-chain analysis and devel-opment, through consensus-building with chainactors

(d) provision of appropriate and sustainablebusiness-development services for the region.

The entry point for this approach is the identifica-tion and consolidation of a local working group in aparticular community or territory. The other areas ofwork are subsequently developed in collaborationwith that group.

Local working-group formation

The formation of a working group around the themeof rural business development is an iterative processthat varies depending on the organisations present inthe area, previous experiences and the necessities ofthe local population. In our experience, these groupsusually include strong representation from producerorganisations and NGOs, with somewhat lesser partic-ipation by public- and private-sector actors. Member-ship in the interest group and the organisational formare decided by the participants, as is the demarcationof the territory in which the interest group seeks towork. To facilitate these decisions, two specific activ-ities are carried out with the interest group at the begin-ning of the process. First, a profile of the territory,including biophysical, social, organisational, institu-tional, economic and political concerns, is developedwith secondary data and the use of rapid rural-appraisal tools. This information provides a commonbasis for decision-making among group members.Based on this information, a consensus for action isdeveloped that builds on agreements around acommon vision, mission and values, and the organisa-tional structure and rules for working-group operation.An initial action plan is then developed. At this stage,topics like market orientation, entrepreneurship, par-ticipation and alliances are debated. This process iskey, since it allows group members to discuss andanalyse past experiences and decide on what actionsare appropriate in the future.

Identification and management of market opportunities

Once the working group exists, one of the firstquestions is which products and/or areas are mostlikely to generate positive impact for the region. To



16

avoid past mistakes where increased production of asingle or restricted range of crops/products led to sat-urated markets, low prices and continuance of thepoverty cycle, a market orientation is fostered byinvolving the local actors directly in the identifica-tion of market opportunities. This process consists oftwo types of work: specific market studies and theon-going management of market intelligence. In thefirst area, CIAT has developed a market-opportuni-ties identification manual (Ostertag 1999) whichseeks to respond to three main questions: (a) what products show strong market demand in

terms of increasing volumes and prices(b) which of these products can be produced in the

region, given the biophysical characteristics,infrastructure and access to productiveresources

(c) of those products identified in (a) and (b), whichare of interest to smallholders?

This opportunity-identification process involvesthe collection of information from different marketoutlets, including produce markets, local shops andsupermarkets, food processors and traders in order toassess the prospects and potential for developingproduce and product supply options. These marketoutlets can be local to the territory or beyond, inurban centres, or in some cases in neighbouring coun-tries. Opportunities for export can also be considered.

The end result is a portfolio of options. The sizeand diversity of this portfolio depends on market con-ditions, biophysical characteristics and potential ofthe territory to produce any given alternative, profit-ability and on farmer interest, but normally includesfrom 10–30 possibilities. Sustainable-production cri-teria — soil conservation, biodiversity etc. — can beincluded in the evaluation and prioritisation process.

In the area of market intelligence, we seek to buildlocal capacity to generate, manage and disseminatekey market information on a permanent basis. Thiscapacity involves not only direct market visits byworking-group members and/or interested groups offarmers, but also strategic alliances with nationalmarket information system programs and the devel-opment of information dissemination tools appro-priate to the rural context and local culture.

The end result of a market-opportunity identifica-tion study is a basket of possible options for develop-ment in the selected region. At this stage, the workinggroup prioritises these options based on local criteriain a participatory fashion. Local criteria used haveincluded strength of market demand, product profit-


6


ability, environmental impact, perceived ex antedevelopment impact, and interest in the product byorganisations, among others. These criteria vary byregion and culture. Using local criteria, the marketoptions are ranked and a decision made on whichoption(s) to pursue first.

Integrated supply-chain projects

At this stage, the local working group moves intothe participatory analysis of the selected productsupply chain. CIAT has developed a method thatseeks to facilitate the analysis of the market chain bythe actors directly involved and, through this process,to generate collectively owned information and aconsensus for action. The scope of this analysis issomewhat broader than a typical subsector approachin that it includes not only the supply chain as such(production, postharvest/processing and marketing),but also two important cross-cutting areas: businessorganisation and the provision of business develop-ment services (see Figure 1).

Business (enterprise) organisation and supportservices present in a supply chain are key to under-standing the prospects for improving chain perform-ance through the effective use of existing skills andservices, as well as identifying important bottlenecksthat constrain such improvements.

Once priority supply chains have been agreed, spe-cific market contacts are identified. This is comple-mented by a broader identification of relevant actors(those involved in production, postharvest and mar-keting operations) who can participate in the analysisof the chain. Participatory tools, focus groups anddirect interviews with the different actors are used to

Figure 1. The scope of supply-chain analysis.

ProductionPostharvest

handling and/or processing

Marketing

Business organisation

Support services



16

collect supply-chain information (chain mapping).This helps to group actors so that the perceptions oftraders, producers etc. can emerge independently, forlater comparison and analysis in a wider group set-ting. All actors then review this information to iden-tify and analyse bottlenecks and propose solutions.At the end of the process, facilitated consensus-building workshops are held where all the informa-tion is shared and discussed with the various actorswith the goal of identifying positive synergies amongactors, common interests and critical points wherestrategic investments can achieve high returns.Figure 2 shows the steps used in this analysis.

After the process of negotiation with actors occurs,an action plan, or integrated agro-enterprise project(IAP), is drafted, which includes research and devel-opment (R&D) activities in the short, medium andlong term. The goal of this project is to improve thecompetitiveness and sustainability of the chainthrough the development of a common business-development vision among various actors. Once acommon vision has been established, specific devel-opment or research activities may be disaggregatedinto discrete projects, depending on funding opportu-nities and donor interest, while conserving a clearidea of where everything fits together.

The implementation of activities is coordinated bythe working group, which sources appropriate fundsand technical services based on the demands identi-fied during this process. By learning how to designand implement an IAP — diagnose, analyse, design,source funds and coordinate implementation activi-ties — the local working group builds importantcapacities, which are needed for other future projects.

Provision of appropriate and sustainable business development services

A final component in the CIAT approach is theprovision of appropriate and sustainable businessdevelopment services (BDS) that support the partici-pation of rural communities in these more efficientsupply chains. A methodology is now under develop-ment at CIAT for assessing the supply and demandfor services in local communities, and for ensuringthat gaps in the market for services are filled in a sus-tainable manner. This covers financial, non-finan-cial, formal and informal services and seeks to buildfunctional markets for BDS that link specificdemands with suppliers either at the local, regional ornational level. This is currently under development in


7


a project in Honduras and Colombia supported by theNew Zealand Agency for International Development(NZAID).

These methods have been developed through par-ticipation in local and supply-chain developmentprojects in Latin America — see Lundy et al. (2002)for more information on the results obtained in Peru,Colombia and Central America to date.

CIAT Project Activities in AsiaBetween 1998 and 2002, CIAT’s AgroenterpriseProject has had two areas of activity in Asia, onefocused on the root-crop starch subsector in Vietnam— especially the small-scale processing enterprisesaround Hanoi — and the other concerned with devel-oping a strategic alliance with the SEAMEO (South-east Asian Ministers of Education Organization)Regional Center for Graduate Study and Research inAgriculture’s Agroindustry Development Pro-gramme (SEARCA-AIDP) and the network Users’Perspectives With Agricultural Research and Devel-opment (UPWARD) for capacity-building in theagro-enterprise development area. During 2003, amajor agro-enterprise development project for Lao



16

People’s Democratic Republic (PDR) and Vietnamhas been initiated, funded by the Swiss Agency forDevelopment and Cooperation (SDC), representingan opportunity to adapt the methodologies developedin Latin America (and now also being trialled inAfrica) to the Asian regional situation.

Rural agro-enterprise development training courses with SEARCA and UPWARD

Two regional courses have been conducted, one atSEARCA, Los Baños, Philippines, in 2001, and asecond at the Post-Harvest Technology Institute, HoChi Minh City (PHTI-HCMC), Vietnam, in April2003. The courses stressed markets and supply-chaindevelopment in the context of territorial (micro-regional) processes and priorities. Each course com-prised modules on:• Asian context — macro policies and trends in rural

development and the agri-food sector• local participation• methods for designing and implementing rural

agro-enterprise projects• learning from experiences• project design, including field work.

Figure 2. Steps in the supply-chain analysis method.

Prioritise the production chain

Identify market contacts

Identify and convene actors

Map the farm to market chain

Map the farm-tomarket change

Analyse business organisations

Analyse business organisations

Evaluate the business

development services system

Evaluate the business

development services system

Analyse critical points

Market chain diagnosis


8

Negotiate and design the integrated agro-enterprise project


Participants in the first course (13 from 3 coun-tries) were mainly from academic or research institu-tions, while those in the second course (25 from 4countries) were principally from rural developmentagencies in both the NGO and public sectors (provin-cial level). Course evaluations have proved very pos-itive, and a further Southeast Asian regional course isplanned for 2004, perhaps in Indonesia. PHTI-Vietnam is planning to adapt course materials for aVietnamese national course, also in 2004. A loosenetwork of course participants exists, and the newCIAT project in Vietnam will serve to strengthen thisfurther, especially in Vietnam and Laos.

Vietnam starch cluster project

A national study of the small-scale root-crop starchindustry in 1998 (Goletti et al. 2001) identified thepotential of rural industrialisation to generate incomeand reduce poverty. Since then, an more detailedstudy has been undertaken of the cluster of root-cropprocessing enterprises in Dong Lieu commune, some20 km from Hanoi. This has since developed into amore development-oriented project to improve theperformance of the supply chain (or system of enter-prises), supported by Urban Harvest (formerlySIUPA; the Strategic Initiative on Peri-Urban andUrban Agriculture of the Consultative Group forInternational Agricultural Research — CGIAR).

The area is traditionally agricultural but has, sincethe late 1960s, specialised in household-level root-crop (cassava and canna) processing, due to its prox-imity to Hanoi and access to its growing markets.Since then, processing capacity has increased 3–10times, an average of 600% increase over 15–25 years.The average amount of cassava processed increasedfrom 0.05 t/household (hh)/day in 1978 to 3 t/hh/dayin 2001, while the average amount of canna proc-essed has increased from 0.04 t/hh/day in the 1960sto 9 t/hh/day. Thus, the volume of roots handled byeach trader has increased by 200–300% over recenttimes. Of the 2193 households in the commune, 1410households (64%) are directly involved in root-cropprocessing, while others supply raw materials, tradeend products, use processing by-products, or providea wide range of support services. On average, pigraising using the residue from cassava processing asa major feed ingredient is a common supplementallivelihood activity in root-crop processing house-holds (1409, or 64% of households raise pigs). Only4% of households obtain a livelihood mainly from



16

crop production. In the 2000–2001 processing season(approximately September to April), the communeprocessed 680 t of cassava roots and 314 t of cannaroots daily.

As the starch processing developed, a starch-basedcluster of enterprises emerged in support or in asso-ciation with starch processing (Table 1). The ever-increasing enterprises are packed in the small villagearea with little space to operate and no space toexpand. The major constraints facing the starch proc-essors are not the technologies, as they are developedappropriately, but the limited space and the associ-ated constraints to production.

Consequently, the women often queue for hours(some claim 3–4 hours) to obtain roots beforepushing/pulling the heavy cartload back home,which, for some, can be a fairly long journey,depending on location. Thus, much time and labour iswasted on root procurement. Moreover, due tolimited space for drying, many processors push cart-loads of starch products to the fields and spread them

Table 1. Frequency of different household enterprisesin Dong Lieu, Vietnam (total number ofhouseholds surveyed = 2193).

Household activity No. of households

Cassava starch processingCanna starch processingCassava starch filteringCassava root grating (service)Canna waste drying for saleCanna waste filteringMaltose productionCanna noodle productionSugar processingRice noodle productionCandy productionTofu productionProcessing solid waste tradeCassava/canna root tradeRice production for maltoseAgricultural labour for hireIndustrial labour for hireGreen bean processingMushroom productionPig raisingAlcohol productionTile cuttingDrying cassava waste (fuel)Other (including services)Total number of activities

630141311

59209

32146

652

8632

81133

3201

911512

140921

2432847

4798


9


out to dry in the morning and collect them in the after-noon. Again, depending on the location of the housein relation to the field, this can also be a time-con-suming activity. The limited space also contributes tolow starch quality, as there is not enough space to setup various settling tanks to produce high-qualitystarch. The starch quality is further adverselyaffected by drying on the very dusty or muddy road-side. Thus, the limited space has resulted in seriouswasted labour and low starch quality.

In addition to the adverse effects it has on produc-tion, the confined space has caused another seriousenvironmental pollution as starch processing gener-ates a large amount of wastewater and solid matter.Dong Lieu generated almost 1.45 million m3 ofwastewater during the processing season of 1999–2000, and estimated 51,750 t of solid wastes.

During a stakeholders’ meeting with the communeleaders and processors, limited space, wasted labour,and environmental pollution were clearly recognisedby the participants as the major constraints to theirenterprise development. During the meeting, no pro-posals emerged for viable solutions. The constraintswere evident, but solutions were elusive.

Subsequently, a trip to Dong Nai Province insouthern Vietnam to visit some medium-size proces-sors was organised for Dong Lieu to help generaterelevant ideas for overcoming the constraints. Thevisiting team (comprising processors, an equipmentmaker and a local government representative) wasmost impressed with the continuous filtering tanksystem, which accounted for the high quality of thestarch, and the way in which the wastes were proc-essed or disposed. Based on this observation, thecommune brainstormed the idea of designing aprocessing zone in Dong Lieu that creates a space toaccommodate the continuous filtering tank systemand a better organised processing layout. The solu-tion came from the commune itself when theyobserved another production system and compared itwith the constraints they face. Concrete steps toimplementing the solution may be learned in anothervisit to a processing zone of the similar nature,planned for late 2003.

Small-scale agro-enterprise development in the uplands of Lao PDR and Vietnam

There are continuing high levels of poverty (40–50%) in the upland areas of both Lao PDR andVietnam. While poverty alleviation is a major aim of



17

rural development programs, market limitationsremain a major impediment to success in develop-ment. Agro-enterprise development can contribute topoverty alleviation through creating more diverseincome sources by providing improved access tomarkets, improving product quality, adding value toraw products through intermediate processing, and inproviding service industries. The Small-scaleAgroenterprise Development in the Uplands projectproposes to develop approaches to agro-enterprisedevelopment at the district and community levels thatare appropriate to the economic, cultural and politicalsetting in Lao PDR and Vietnam. The goal is “todevelop sustainable agroenterprise initiatives withupland rural communities that generate income andemployment opportunities through diversifying andadding value to local natural resources”.

Lao PDRIn Lao PDR, the project is initiating work in the

poorest districts of the relatively isolated XiengKhouang Province. Contacts with the local provin-cial government have confirmed that communitydevelopment should be a major concern of theproject, in addition to the development of specificsupply chains based on identified market opportuni-ties.

The province is changing rapidly — new roads toboth Vientiane and to the Vietnamese frontier arenow open, electricity in urban centres is now muchmore reliable (power cuts were common) and flightshave been increased to bring greater numbers ofinternational tourists to the area.

Although the project is still in the initial phase ofworking-group formation, some market opportuni-ties are already appearing, based on the improvedmarket access that recent infrastructure develop-ments have brought. These include potential in localand national markets to obtain higher prices for newvarieties of fruit (plums, nectarines) and prospects forhigher prices for local asparagus, if selection andpackaging can be improved. In international markets,the region is already exporting a specialty rice (gluti-nous rice) to Vietnam, and a local mushroom is beingair freighted via Taiwan to Japanese supermarkets.These and other options will be used as a basis forparticipatory market-opportunity identification as theproject progresses.

VietnamUnderstanding the potential role of private enter-

prises in the economic development of the country,


0


the Vietnamese government has recently introducedmany policies with regard to small-enterprise estab-lishment, operations, and tax burdens to favour thedevelopment of small and medium enterprises, inboth agricultural and non-agricultural sectors. Thus,the current environment is very favourable for theproject to introduce, test, and adapt CIAT’s experi-ence and approach in agro-enterprise development toVietnam.

The CIAT approach will eventually be tested in theupland districts of three provinces in Vietnam —Tuyen Quang, Thue Thien Hue, and Dak Lak. As inLaos, the project is still in its initial stages. Previousexperiences of working in these areas have helpedidentify some opportunities among the current prod-ucts and potential projects. In Yen Son District ofTuyen Quang, there are opportunities to improve pro-duction of tea, coffee, various fruit trees, and live-stock, such as pig, fish, and meat cattle. The potentialmarkets for Tuyen Quang include non-timber forestproducts (NTFPs), which are yet to be identified,private nurseries, or perhaps organic tea and gourmetcoffee. Nam Dong District of Thue Thien Hue cur-rently produces NTFPs (rattan, bamboo), fruit trees,pepper, fish, and rubber, but pigs, chickens, and veg-etables also have potential to contribute income ifproperly developed. Coffee, NTFPs (rattan, bamboo,medicinal plants), timber, maize, rice, pepper in DakR’Lap District of Dak Lak can be improved toincrease their market opportunity, while fruit treesand livestock also should not be overlooked as poten-tial enterprises.

The complete supply chain of current enterpriseswill be evaluated from production to market toexamine breakdowns or bottlenecks in the chain thatcause low profitability of the enterprises. Once a bot-tleneck has been identified, strategies can be devel-oped to modify or eliminate it, or to enhanceperformance so that obstacles can be removed. Forexample, if product quality is identified as a majorconstraint, further investigation into all areas of thecrop — variety, agronomic practice, field manage-ment, harvesting and handling, and storage — will benecessary to understand the root of the problem.Once that is understood, uncomplicated and short-term on-farm or farmer participatory trials can beconducted to seek solutions. If transportation orvolume of produce to meet purchaser requirementsare identified as a major constraint, investigation intogroup marketing, various transportation pros andcons, alternative means of transport, and negotiation



17

with buyers on sharing the burden will need to beconsidered. Each step of the supply chain will haveseveral aspects that can be considered for improvingthe function of the whole chain. Through thisprocess, the working groups will learn to analyse theweaknesses of the supply chain and ways to findsolutions to overcome them. This skill, once learned,can be applied to analyse the supply chain of each ofthe income-generating activities.

Going beyond the current products to exploreuncharted markets involves risk, time, and possiblecash investment. For cash-strapped and risk-aversefarmers, such an endeavour must proceed withcaution and comprehensive understanding of marketdemand and requirements. Both the supply anddemand sides must be considered. For example, inorder to consider gourmet coffee or organic tea aspotential enterprises for Yen Son District of TuyenQuang Province, the working group must have theknowledge of markets — where the market is andhow to connect to it directly or indirectly, qualityrequirements, quantity required, frequency ofdelivery, and price stability, as well as productionknowledge in order to meet the quality, quantity, andseasonal demand with a profit, while withstandingthe occasional risk caused by market fluctuation.Such endeavours take time to develop, but the poten-tial benefits of developing new agro-enterprises tomeet new market challenges could be enormous andshould not be overlooked.

The strategy of the project is to focus on theimprovement of the supply chain of current enter-prises that show strong demand growth for the shortrun, while beginning to assess new market opportu-nities and assist the working groups in developing thesupply chain to meet the market demand in the longrun. An important output of the project is that theworking group will learn to assess the weaknessesand find solutions for the current supply chains, andassess the potential and find entry-ways into thepotential supply chains. The principles of assessingthe supply chains are the same, but the differentstarting points require different methods in theseassessments.

ConclusionsThe agri-food sector is changing fast in Asia.Managed supply chains are expanding, and will soontake a major share of processed-food and fresh-produce markets in many countries in the region. Can


1


smallholder producers bridge the gap that currentlyexists between the traditional and the more coordi-nated, efficient supply chains? Can they participateequitably in such chains?

CIAT believes that opportunities for this do exist,but that success requires a pro-active R&D effort thatlinks supply-chain and local-development processes,combined with conducive local and national policiesthat support entrepreneurial endeavours in ruralareas. CIAT’s Rural Agroenterprise DevelopmentProject, with its national and regional partners, is acontribution to this end.

ReferencesGoletti, F., Rich, K. and Wheatley, C. 2001. The cassava

starch industry in Vietnam: can small firms survive andprosper? International Food and AgribusinessManagement Review, 2(3/4), 345–357.



17

Lundy, M., Ostertag, C.F. and Best, R. 2002. Value adding,agroenterprise and poverty reduction: a territorialapproach for rural business development. In: Proceedingsof the First Henry A. Wallace CATIE/USDA Inter-American Scientific Conferences Series on Globalizationof Agricultural Research, 25–27 February, Turrialba,Costa Rica. Tropical Agriculture Research and HigherEducation Center – United States Department ofAgriculture (CATIE–USDA).

Ostertag, C.F. 1999. Manual for market opportunityidentification with small farmers. Hillsides ecosystemtraining manual No. 7. Cali, Colombia, CentroInternacional de Agricultura Tropical (CIAT;International Centre for Tropical Agriculture).

Peters, D., Wheatley, C., Prain, G., Slaats, J. and Best, R.2002. Improving agroenterprise clusters: root cropprocessing and piglet production clusters in peri-urbanHanoi. Presented at the Symposium on Local AgrifoodSystems: products, enterprises and the local dynamics,16–18 October 2002. Montpellier, France, Centre deCoopération Internationale en Recherche Agronomiquepour le Developpement (CIRAD), 21 p.


2


The Supply Chains of Melons in Western China

Sherrie Wei,* Zhang Yanrong† and Niu Gang§

Abstract

Melons are regarded as a delicacy among the Chinese consumers. They are well known for their good flavour,sweetness and crispness. Melons are grown in the arid, remote areas of China, including Xinjiang, Gansu andMongolia. The major markets for melons, however, are located hundreds of kilometres away, or even over1000 km away. This study illustrates the supply of melons in western China at each of the supply levels:production, harvest, grading, purchasing, wholesale and retail, and the transport logistics. It highlights someof the issues that are obstacles to the effective supply of melons to other regions. This includes small-scaleproduction, postharvest losses, large distances between growing areas and end markets, transaction-basedrelationships between growers and traders, and little information flow from end markets to farmers andcollectors.

To address these issues in the Chinese context, this study proposes to focus on the following to improve thesupply chain: formalising the existing relationships among farmers with a view to sharing experiences andexchanging information; carrying out projects to identify and involve appropriate extension officers; andimproving technological knowledge through the participation of in research and development (R&D) projects.

Melons have traditionally been regarded as a deli-cacy among the Chinese consumers. They are wellknown for their good flavour and sweetness. Theyare grown in the irrigated arid remote areas of Xin-jiang and Gansu provinces in western China and,more recently, have been introduced to Mongolia,Shandong (where they are grown in greenhouses)and some dry areas in southern provinces, to captureoff-season premium prices. Among all the melons,Hami melons have been the best known for centu-ries — ever since the Hami king brought them fromthousands of kilometres away as a special offeringto a Chinese emperor.

* School of Natural and Rural Systems Management,University of Queensland, St Lucia, Queensland 4072,Australia. Email: <[email protected]>.

† Department of Agricultural Economics, GansuAgricultural University, People’s Republic of China.Email: <[email protected]>.

§ Department of Agricultural Economics, XinjiangAgricultural University, People’s Republic of China.Email: <[email protected]>.



17

Most Hami melons are grown in Xinjiang Province,but more recently are also grown in Mongolia andsome southern provinces. Gansu Province is ratherwell known for honeydew melons, including Huang-hemi melons (literally Yellow River melons) — avariety developed two decades ago by a research teamin Gansu. Over 85% of the melons from western Chinaare transported over thousands of kilometres to inter-state markets. While melons were once regarded asfruits exclusive to the imperial family, they now sufferfrom downward price pressures. Industry-level prob-lems include technical issues of pests and diseases,lack of cold-chain storage, packaging and supply-chain relationships. The issues are recognised by allstakeholders in the industry and the government.However, there have been few systematic actions toaddress these problems.

This study looked at each level of the melon supplychains in western China, including supply-chainfunctions, transport logistics and relationships. Someissues that are obstacles to effective supply chains arediscussed, such as small-scale production, long-dis-


ublished in 2004)

3


tance transport, and transaction-based relationshipsbetween chain partners. The discussion is based oninterviews with farmers, collectors, wholesalers andextension officers in Gansu and Xinjiang provinces.

Melon Supply Chains in Western China

The partners in the melon supply chains includefarm-input suppliers, farmers, collectors, whole-salers and retailers. The bulk of the melons sold atinterstate markets pass through all levels in the chain.For the local market, melons may go straight towholesaler, retailers or directly to consumers.

Suppliers of farm inputs and services

These suppliers include seed companies, chemicalsuppliers and county-level extension service stations.Many of the suppliers, especially seed companies,are state owned or with state shares. There areincreasingly more private businesses selling seeds.However, farmers have had bad experiences withthem in regard to quality standards and authenticityof the claimed varieties. Under the recent ‘onedragon’ policy of agro-industrialisation, some farm-input corporations now work closely with farmers orfarmer groups to integrate production and distribu-tion functions (Wei and Zhang, these proceedings).This has not yet occurred in the melon industry, butthe potential exists for input suppliers to work moreclosely with farmers.

Farmers

Farmers in Gansu and Xinjiang have very differentscales of production. In Xinjiang, many melonfarmers rent large blocks of land from the govern-ment’s ‘military settlement farms’: normally 50–100Mu, up to a few hundred Mu (15 Mu = 1 ha or 1 Mu= 67 m2). Military farms were unique in Xinjiang.They were established by massive migration of sol-diers to the areas soon after the liberation in 1949.The soldiers played the dual roles of maintaining sta-bility and farming the vast tracts of undeveloped landin Xinjiang. Now that the soldiers are passing away,the land is rented to younger members of the soldiers’families. In the past, military settlement farms gaveorders to the tenants as to what to plant and boughtback the produce for distribution. They had their own



17

technical teams to assist farmers in preharvest prac-tices. Recently, the government quit its distributionrole and farmers are now responsible for their ownlosses and profits. Farmers have much autonomy inmaking planting decisions. In addition to militaryfarms, some melons are produced by small farmhouseholds. In Gansu, farm size is much smaller —about 10 Mu (0.67 ha) for an average household, andfarmers are used to making their own planting deci-sions.

Melon farmers in both Gansu and Xinjiang havemodest infrastructure for growing melons. Many ofthem use fertilisers and plastic mulch but not herbi-cides or pesticides, as their disease problems do notoften show up at the farm-gate stage. Disease prob-lems are most serious for Hami melons. To addressthe problems, some Xinjiang farmers are now onlyrenting land that has not been planted with melon inthe past few years. Some also use sheep manurerather than fertilisers as they see its benefits inreducing disease problems and improving qualityand shelf life.

Besides growing and harvesting, farmers maygrade, package and transport melons to collectionpoints in the village. Harvesting is done manually bycollecting melons in hessian bags. Grading and pack-aging are mostly based on instructions from collec-tors or wholesalers. Standards vary betweenwholesalers, and are not written. Common indicatorsare size and blemishes and judgments are made byvisual observations. There are two types of pack-aging: large, netted nylon bags of 20 kg capacity forthe local market; and cartons of 10–15 kg capacity forinterstate markets.

Collectors

In Xinjiang, collectors (known as Ma Zai) merelyplay the role of go-between. They bring wholesalersfrom interstate to farms to inspect the fruit and collectfees. They are not involved in the actual business. InGansu, collectors buy melons from farmers and sellto interstate wholesalers. They are often farmersthemselves, who have a bit more capital and havesources of information and contacts with whole-salers. There are generally a few collectors in eachvillage. They build their own simple, undercoverstands by the roadside near the production areasthrough which wholesalers and trucks can pass.


4


Wholesalers

Wholesalers are normally from other provincesand operate as merchants rather than agents. Theytravel around the country to obtain melon supply indifferent seasons. Wholesalers perform a criticalfunction in the chain by linking local production tointerstate markets. They have the potential to becomesupply-chain managers, as they are the only channelpartners that know both production (through collec-tors) and markets. However, this has not occurred forvarious reasons. Given that individuals are not able toget loans from banks, wholesalers cannot operate ona large scale. Two to three of them work as a team ona small amount of capital. One of them travels to theproduction area to buy the fruit and the other(s) sellsthe fruit at the central markets in other provinces.They only do one deal a year, at most twice, for eachof the production areas in Gansu, Xinjiang, Mongoliaetc. The scale of each deal is one or two truckloads,about 10 or 20 t, but often stretches to a limit of 14 or28 t. Because wholesalers go to each production areaonly once a year, it is unlikely that farmers get anyfeedback from them about the current season.

Wholesalers are the link in the supply chain whothat have the whole picture of melon production,transport and marketing. They have years of experi-ence in the marketing of melons in their region. How-ever, they may not purchase melons in any particularyear if they do not expect it to be profitable. Beforetravelling to Gansu, wholesalers first contact collec-tors by phone on supply and price.

Local business people from the production area arehesitant to enter the wholesale business due to lack ofan interstate network, and lack of understanding ofthe end markets. In addition, melons are shipped withno refrigeration and these people would be underpressure to find an outlet in cities in which they haveno contacts.

Retailers

Retailers are located thousands of kilometres awayfrom the production areas. Wholesalers leave thescene completely once they sell the fruit to theretailers. There is little feedback of informationbetween wholesalers and retailers unless seriousproblems occur.

The whole supply chain from farmers to retailers istransaction-based and payment is always made incash, on the spot. This is not surprising, given fewinstitutional bases for supply-chain coordination,



17

including an absence of consolidation at all levels ofthe supply chains, an ineffective contract-implemen-tation system and lack of cultural underpinning forinter-organisational collaboration (Wei 2003).

It was estimated that in the Gansu melon valuechain, retailers have the largest share (41%), fol-lowed by wholesalers (28%), farmers (23%) and,lastly, collectors (8%) (Zhang and Wei, these pro-ceedings). One complaint from farmers was that theypaid over 7% of their cost of production in varioustaxes.

Characteristics of Melon Supply Chains in Western China

The melon supply chains as described above haveseveral characteristics that make supply-chain man-agement difficult to implement, as discussed below.

Undifferentiated product

The industry competes on price and has turned anexclusive product into a commodity product. Giventhat interstate, urban consumers are able to pay apremium price for quality, there is an opportunity forproduct differentiation and a branding strategy.While Hami melons have been introduced to otherprovinces, consumers still perceive Hami melonsfrom Xinjiang as the best. Hami melons from otherprovinces are often sold with the false claim of‘Product of Xinjiang’ on the box.

A vast market

China has a vast production area and a vast marketwith many segments. Both top and poor quality prod-ucts find their way to consumers. While China isopening up its doors to overseas commodities, localproduce still has a large share of the market. Some ofthe reasons why the domestic market has not becomemore integrated include the huge distances betweenproduction and consumption areas, poor road infra-structure, and imperfect information flow.

No horizontal integration at each level of the supply chain

Consolidation of supply-chain levels has been onedriver for supply-chain management in the food andfibre industries in developed countries. In China,businesses are not consolidated at any level of themelon supply chains. There are myriads of unorgan-


5


ised producers, collectors, wholesalers and retailers.Wholesalers operate on low capital costs and canenter and exit the industry easily. The prosperity ordownturn of the melon industry will thus not affectthe wholesalers in a significant way.

Transaction-based supply chains

Competition has forced business operators withlimited capital to enter into short-term businesses forimmediate benefits. Melon supply chains are charac-teristically loose, fragmented and unstable over time.They involve a series of decentralised, dyadic inter-actions, with no purposeful intention to deliver thebest products to the end consumers. As no channelmanager exists, the chain partners do not see the pos-sibility of coordinating the marketing functionsamong all chain actors.

Low bargaining power by farmers

For several reasons, melon farmers do not haveequal bargaining power over collectors or whole-salers. One of the main limitations is the absence ofcool-chain storage, which forces farmers to sell theirperishable products at the earliest opportunity afterharvest. During the one-month peak season, there ismuch competition for price within the same melon-growing village, rather than the farmers cooperatingto achieve any collective power in determining theprice paid for their melons.

Farmers performing only the basic function of production

Unlike farmers in developed countries who clean,grade and pack their own fruit, farmers in China onlyperform the production function. They grade andpack only when this is requested by wholesalers.Farmers can sell only in their own neigbourhood or toorganisations with which they have contacts.

Declining quality

There is a temptation to harvest melons prema-turely to capture early-season premium prices. Thisoften occurs at the request of wholesalers, as the bestprices may be obtained by being first on the market.Declining fruit quality has resulted in poor returns forthe industry. The concept of a consumer focusremains only a concept and has not been translatedinto action. At this stage, the whole chains are not



17

capable of being coordinated to best serve the market.Declining fruit quality needs to be addressed asmelons face competition from a range of othersummer fruits, such as stone fruits, mangoes etc.

Improving the Melon Supply Chains in China

Improved disease control practices and product differentiation

Diseases are a serious threat to Hami melons inXinjiang. To reduce losses from disease, wholesalersoften instruct farmers to harvest melons prematurely.Consequently, poor-quality melons in the markethave affected the industry as a whole. Improveddisease control technologies, such as enhancing theself-defence mechanisms of plants, are availablethrough research organisations. The challenge is tospeed up the adoption process through an effectiveextension system. Product differentiation can followif the quality of fruit is improved. The success of thestrategy also relies on state power to prosecute thosewho use misleading branding. As this is not going tooccur quickly, one way to identify quality product isthrough reputation from defined supply chains.

Consolidation at the farmer level

At all levels of the melon supply chains in China,there is no horizontal integration. One strategy toimprove this is to start at the farmer level. Farmers inthe same village know each other quite well. Such‘natural–social constituents’ (Murdoch 2000) can beharnessed to get farmers to work together — firstlyon production and postharvest areas, and later ongroup marketing. This concept is consistent with thegovernment policy of getting farmers into groups.However, the approach needs to emphasise self-managed groups, not government-directed groups. Itis a critical success factor to identify and involvemotivated extension officers. Consolidation at thefarmer level will allow better collaboration betweenfarmers and wholesalers and an opportunity forfarmer groups to link with supermarkets directly.

Farmers to perform more functions in the supply chain

For farmers to improve their share of the valuechain, they need to perform more functions, both


6


technical and business ones, in the supply of productsto consumers. Potential technical functions at thefarm level include washing, dipping and packaging.In terms of business functions, once farmer groupsare developed, they may take over the function cur-rently fulfilled by collectors. Whether farmers canperform these potential functions in the supply chaindepends to a large extent on whether self-managedgroups can be developed.

China is a large recipient of international aid pro-grams. A postharvest and economic program for themelon industry is currently funded for by the Aus-tralian Centre for International AgriculturalResearch. Technologies for disease control are beingdeveloped to suit local agronomic conditions. Thelong-term effort to improve the ‘soft infrastructure’will include training on extension techniques, infor-mation provision, credit system and other businessservices (Morgan 1997).

The government will need to play a facilitative rolein the whole process. There have been complaintsthat various farm taxes add to the burden of produc-tion costs. With the increasing tax base from the



17

urban population, the government needs to consideran alternative way of obtaining revenue. At the ‘playof the game’ level (Williamson 2000), the govern-ment needs to improve the effectiveness of imple-menting contract laws and accreditation systems(Wei and Zhang, these proceedings). This will assistindustries to restore business order and improvesupply-chain management.

ReferencesMorgan, K. 1997. The regional animateur: taking stock of

the Welsh Development Agency. Regional and FederalStudies, 17, 70–94.

Murdoch, J. 2000. Networks — a new paradigm of ruraldevelopment? Journal of Rural Studies, 16, 407–419.

Wei, S. 2003. Supply chain management and one dragonapproach: institutional basis for agro-industrialisationChina. Paper presented at the 21st ASEAN/3rd APECPostharvest Seminar, 20–22 August, Bali, Indonesia.

Williamson, O. 2000. The new institutional economics:taking stock, looking ahead. Journal of EconomicLiterature, 38, 595–613.


7


Development in Agribusiness Chains and Challenges for Postharvest Technology:

Experiences from The Netherlands

George Beers*

Abstract

The definition of quality in fresh produce has gone well beyond classical physiological concepts, and the foodsystem is now confronted with the situation that the consumer is defining quality. Product quality will bedetermined by a broad set of attributes. Not only are there more parameters, but also the values of theseparameters will vary for different consumers, purposes, times and places. Led by this new consumer-drivenparadigm, this contribution identifies some implications for the treatment of fresh produce.

Society is ‘individualising’; people are more and more following their own lines of life. There are manyattributes that can differentiate products; some of them are appreciated by only a (small) part of the consumermarket. The food system is challenged to look for opportunities to make money out of this urge fordifferentiation; product differentiation is a strategy for many companies. So product differentiation will leadto differentiation in postharvest treatment.

Another aspect is the dynamics of the scope of the firms involved in food chains. Companies have developedaround so-called asset specificity; equipment, knowledge and capabilities to do things they are good enoughto make money with. If products and product requirements are changing, it might happen that the capabilitiesof the businesses in the supply chain change more drastically. Many examples can be observed of new(sometimes unusual) companies entering the supply chain. An issue in this that it might be interesting to lookat from a postharvest technology point of view, is that the flow of fresh produce has to be integrated in a systemwith substantial differences from other product flows. Also, new types of companies, so called ‘trusted thirdparties’, emerge and take responsibility for food safety and other quality attributes.

There are many opportunities for reducing quality loss in the last stage of the chain — the consumers.‘Consumer equipment’, in the kitchen or during transportation, is evolving rapidly. More dedicated equipmentand ICT-driven opportunities will create new challenges for the postharvest community.

Shifting from supply to consumer-driven food production, some interesting contributions from postharvesttechnology are expected. These can be considered to be challenges to exploit the postharvest knowledge andexpertise in the context of the consumer-driven paradigm.

* Wageningen University and Research Centre, TheNetherlands.



178


Linking Farmers with Markets: the Case of Cocoa

G.I. Johnson,* Arief Iswanto,† J. Ravusiro,§ P.J. Keane,¶ N. Hollywood,** S.V. Lambert,†† and D.I. Guest§§

Abstract

‘Supply-chain management’ means very little to most smallholders — they are concerned with managing theirfarms, saving sufficient for their own needs and selling any surplus for the best price they can get. Their contactwith ‘markets’ is often limited to dealing with a produce collector, or to sales at the local ‘fresh market’.Limited contact with markets probably means that growers have little awareness of product suitability, qualityor choice of crop. While crop choice is often dictated by what other local growers find profitable, crops indemand can quickly become ‘surplus to requirements’. In the case of cocoa, however, global demand is strongat present, and growers in Asia can earn good incomes from the crop. Cocoa is a crop of the developing world,while chocolate is largely consumed in the developed world. In Indonesia, a large smallholder cocoa industryhas developed in Sulawesi over the past 20 years, while in Papua New Guinea (PNG) there has also been amajor shift from plantation to smallholder production. Cocoa has been a good source of income to smallholderfarmers for meeting financial commitments such as school fees in these countries, but this may not be assuredin the longer term. As communities continue to develop, greater focus on ‘linking farmers with markets’ mightbe the key to sustainable income generation from cocoa. This paper describes some characteristics of the cocoaindustries in Indonesia and PNG, discusses the key issues for sustainability of their industries, and describesresearch and development initiatives that aim to improve smallholder incomes.

Cocoa fortunes Indonesia is currently the third-largest producer of cocoa with about 20% of globalproduction (Table 1), mainly of bulk cocoa based on

* ACIAR, GPO Box 1571, Canberra, Australian CapitalTerritory 2601, Australia.

† Research Institute for Coffee and Cocoa, Jalan PB.Sudirman 90, Jember 68118, Indonesia.

§ Cocoa and Coconut Institute, PO Box 1846, 10 Rabaul,East New Britain, Papua New Guinea.

¶ Department of Botany, LaTrobe University, Bundoora,Victoria 3083, Australia.

** Centre for Food Technology, Department of PrimaryIndustries, GPO Box 46, Brisbane, Queensland 4001,Australia.

†† Masterfoods Australia, PO Box 397, Wyong, NewSouth Wales 2259, Australia.

§§ Department of Botany, University of Melbourne,Parkville, Victoria 3052, Australia. (Present address:Department of Botany, University of Sydney, Sydney,New South Wales 2006, Australia.)



17

Forastero hybrids. Papua New Guinea (PNG) pro-duces only 2% of the world crop, but supplies a nichemarket of ‘fine’ cocoa based on Trinitario × Amazo-nian hybrids. Global demand for cocoa is strong, andsupply projections suggest potential shortfalls insupply. As a consequence, interest in overcomingdeficiencies in supply has become stronger amongstchocolate manufacturers and government agencies indeveloped countries (such as USA), where localfarms produce milk and sugar, which are also used inchocolate manufacture. While global demand forcocoa is strong, threats such as the potential formarket oversupply by emerging future producerssuch as Vietnam, and a decline in demand due to theuse of non-cocoa fats in chocolate manufacture,heighten the need for producing countries to havegreater market focus in planning research and devel-opment (R&D).


ublished in 2004)

9


Cocoa in Indonesia

In Sulawesi, an industry involving more than300,000 smallholders has developed since the 1980s.Key drivers in the development of the industry havebeen the improvement of land access, the settling oftransmigrants and the experience of returnees fromMalaysian cocoa plantations bringing farmingknowledge and seed. The Sulawesi industry supplies‘bulk cocoa’ used for cocoa butter. Annual produc-tion os over 300,000 tonnes, 90% of this by small-holders. Smallholder yields average 800–1000 kg/ha,as compared with 1800 kg/ha on plantations, butsmallholder input costs are lower (Bedford et al.2002).

The main factors affecting productivity include:• weather extremes • pest (particularly the cocoa pod-borer moth (CPB),

Conopomorpha cramerella) and disease losses • labour shortages• restricted access to finance and high interest rates

(Bedford et al. 2002).

Industry characteristics

• Labour requirements in Indonesia are higher thanthose of the West African producers. Labour isneeded throughout the year during establishment,but the requirement falls to 80–90 days/per year/hain established but non-bearing plantings, and to 30days/ha when trees are bearing (although the last-mentioned input may not be sufficient for optimalmaintenance). As a consequence, a family of 2–4can care for a 2–4 ha farm.

• Rainfall patterns allow harvesting throughout theyear, so labour requirements for harvesting arehigher than in the West African industry.



18

• Producers can be owner–farmers, sharecroppers orfarm managers.

• There are few co-operatives or farmer groups.• Most producers sell semi-dry beans of 15–20%

moisture to village collectors.• The industry has a fairly efficient marketing

system, fostered by the marketing policies of theIndonesian Government, but there are fewincentives to improve quality. Industry middlemenhave limited knowledge of handling, quality andstorage.

• Indonesian cocoa sells for a lower average pricethan cocoa from Ghana and Côte d’Ivoire (whichproduce ‘fine’ cocoa), but Sulawesi cocoa farmersearns a higher percentage (70% +) of ‘free-on-board’ (FOB) prices.

• Recent trends in the industry include the growth ofprimary processing in producing countries, e.g. thePT Effem (Masterfoods) processing factory inMacassar, Sulawesi, and multinationals nowdominate the trade (declining from 60 nationaltraders in 1998 to 2 in 2000, with 11 internationaltrading companies).

• As a ‘bulk’ cocoa supplier, the provenance ofcocoa at grower level is less important, andprocessors can address the quality issue of low orno fermentation, but the real quality problem is thephysical quality of cocoa, specially the percentagewaste (placenta and flat beans, small beans andclumps due to CPB infestation, and contaminantresidues may also become a problem) (Bedford etal 2002). Although processors can address minor quality

defects through blending and processing technology,there is the risk that the mean quality can become toolow, for example when CPB damage becomes exces-sive.

Table 1. Cocoa bean production (Mt) in the Americas, Africa, Indonesia, Malaysia and Papua New Guinea, 1996– 2003. Source: FAO STAT (2004).

Country/region Year

1996 1997 1998 1999 2000 2001 2002 2003

Africa 2,144,525 1,940,505 2,169,731 2,136,463 2,344,348 2,048,042 1,891,396 1,892,396

Americas 571,117 575,282 540,750 474,320 435,270 456,566 561,659 471,726

Indonesia 350,800 329,700 430,800 442,700 465,700 380,900 450,000 450,000

Malaysia 120,071 106,027 90,183 83,700 70,200 58,000 47,661 47,661

Papua New Guinea 36,000 40,000 29,800 35,600 46,800 38,800 45,000 42,000


0


In summary, there is little traceability of product(cf. horticultural produce), grower–trader relationsare often short-term, quality and reliability of volumehave not been high enough to favour long term links,and chain members may be tempted to add foreignmatter to boost weight. While the quality of bulkcocoa is important, managing it is complex and theIndonesian value chain for cocoa is less suited to theintroduction of ‘quality improvements’ than arethose for the horticultural industries (Bedford et al.2002).

Critical issues for industry improvement in Indonesia

• Product supply needs to be more reliable (inquality and quantity).– Losses due to pests and disease need to be

reduced.– Cocoa butter levels in cocoa beans need to be

improved.• Any new inputs for crop improvement must not be

too labour intensive, as labour is already in shortsupply.

• Strategies for improving grower returns throughimproved production and quality are needed.Sulawesi farmers already have the highestpercentage of world cocoa price and the cocoapipeline is very efficient with very low margins forthe intermediary collectors/traders.

• In dealing with these issues, chocolatemanufacturers are important drivers.Some 85% of the cocoa from Sulawesi, worth

US$140 million in 2000, goes to the USA, but theCPD has destroyed 40% of recent crops and reducesquality in the remainder.

Research and development

The Indonesian Government has placed high pri-ority on extension and implementation of R&D in thelast few years, while devolving more responsibility tothe provincial level. The Balai Pengkajan TeknologiPertanian (BPTP) centres have the charter ofextending and developing all forms of agriculturaltechnology in regional areas. Cocoa, after rice andother subsistence food crops, is the most importantcrop in Sulawesi and has underpinned a large part ofthe recent economic development. In tandem withBPTP, the Dinas Perkebunans provide the provincialextension service for small-scale plantations. Whilecocoa R&D is centred at the Indonesian Cocoa and



18

Coffee Research Institute (ICCRI) in Jember, Indo-nesia, investment in infrastructure and resources inSulawesi has been strengthened (for example, theBPTP facility in Kendari). This investment is com-plemented by the following suite of internationaldevelopment initiatives which seek to overcomemajor industry constraints.

ACDI/VOCA SUCCESS Alliance project:1 (USAID funded)

This initiative focuses on integrated farmertraining, information exchange and applied researchon pest control (regular harvests etc.) in the Sulawesicocoa industry. Between 2000 and 2002, more than10% of Sulawesi cocoa farmers were trained, croplosses for trained farmers dropped by 30%, andfarmer incomes rose by more than US$500 p.a.

In a second stage of the SUCCESS Alliance thereis a new focus on quality, farmer organisation andleadership. Under the Alliance, PT Effem (Master-foods) Sulawesi started to buy small quantities ofcocoa directly from smallholders, and private sectorpartners have agreed to buy cocoa worth more thanUS$10 million p.a.

The project has a spillover activity in the Philip-pines and is also planning work in Vietnam. In Indo-nesia, challenges for the Alliance include: • accessing locally proven germplasm and

technologies – there are good opportunities for synergy with

ACIAR initiatives (see below)• assuring some carryover of experience when the

Alliance ends. Options include:– maintenance of links with processors– continuing to build local extension and

information dissemination capacity– fostering farmer organisations.

1 ACDI/VOCA was formed in 1997 by the merger ofAgricultural Cooperative Development International(ACDI) and Volunteers in Overseas CooperativeAssistance (VOCA). The merger blended ACDI’ssystemic, long-term approach to development andVOCA’s people-to-people volunteer activities. ACDI(first known as the International CooperativeDevelopment Association) was formed in 1963 by majorUS cooperatives and farm credit banks to assistcooperatives in developing countries. ACDI eventuallygrew into an international technical and managementassistance organisation with rural finance, naturalresource management and agribusiness capabilities<http://www.acdivoca.org/acdivoca/acdiweb2.nsf/whoweare/history?opendocument >.


1


Pest Reduction Integrated Management (PRIMA)The main aim of the PRIMA project (under Neth-

erlands Government funding) is to assist a group of900 Sulawesi farmers on a 1000 ha area to improvetheir production and quality of cocoa by using anintegrated management approach. Development of aquality cocoa pipeline, with training of farmers andtraders on grading and cocoa quality, is also a veryimportant part of this project. The most efficientmethods for biological control of CPB are also beingtested. One component of this approach is the reha-bilitation of plantations by side grafting with CPB-resistant cocoa clones, aiming at improved produc-tion and quality. The project is not undertakingprimary collection of putative resistant material —this is being undertaken in a parallel ACIAR project,and some of the most promising locally selectedclones from the ACIAR trial will be re-tested in thefield trial in PRIMA project area in Noling, nearPalopo, Sulawesi. In this way, the superior agro-nomic characteristics and pest and disease resistanceof clones will be confirmed and budwood multiplied.Budwood from the ACIAR selected clonal materialswill then be made available for the farmers trained onintegrated management in the PRIMA project.

ACIAR supportACIAR project PHT/2000/102, ‘Selection for

improved quality and resistance to Phytophthora podrot, cocoa pod borer and vascular-streak dieback incocoa in Indonesia’, in Sulawesi began 2000, afterthe start of ACDI–VOCA SUCCESS Allianceproject and before the start of the PRIMA project.The project focuses on evaluation of germplasm withputative pest or disease resistance or improvedquality, collected from across Indonesia by DinasPerkebunan personnel (Iswanto et al. 2003). Theproject has stronger links with Indonesian agenciesthan do the ACDI–VOCA and PRIMA initiatives andemphasises:• evaluation of local selections with resistance to

pod borer, disease (Phytophthora pod rot andcanker caused by Phytophthora palmivora andvascular streak dieback (VSD) caused byOncobasidium theobromae), and higher cocoabutter and bean size

• farmer participatory side-grafting of bearing treeswith grower/adviser selected superior material

• improvement of Phytophthora pod rot and VSDcontrol.



18

The project is linked to and complements the otherinitiatives.

Potential impacts of the ACIAR project include:• risk reduction if lines with resistance to one or

more pests are identified• lines may give more cocoa butter, less shell• growers will be able to move to improved cultivars

through side grafting• there is likely to be an interest from manufacturers

to source cocoa from improved clones.

Summary and conclusions

The Sulawesi cocoa supply chain is very efficient,with farmers receiving probably a larger share of theselling price than any other cocoa farmers around theworld. There are few intermediary collectors andtrader intermediaries, and they make relatively lowprofits. Nevertheless, quality (as percentage waste,flat and small beans, and the lower fat percentage insuch beans, which are a result of the CPB infestation)is critical. Manufacturers can play a key role in over-coming these problems. Probably the best solutionwould be to introduce differential pricing. Differen-tial pricing would encourage farmers to producebetter-quality cocoa. This way, farmers couldincrease their incomes and manufacturers wouldobtain more cocoa of the preferred quality standard.

The other element of quality improvement andincome generation is to reduce losses throughimproved, pest-and-disease-resistant planting mate-rials (as is being investigated in the ACIAR project),and training of farmers in integrated pest manage-ment (as in the SUCCESS Alliance and PRIMAprojects).

The Indonesian cocoa industry and the R&D pro-grams that support it have many of the elements crit-ical to sustainability: a crop with a well-identifiedmarket, and strategies to reduce losses and improveproductivity. The challenges will be to foster wideadoption of improved cultivars, and to encourageadherence to control measures recommended for podborer and diseases. Given the labour shortages, andthe costs and extension challenges associated withencouraging farmers to use other control methods,resistance is a good option for sustainable cropimprovement, with the larger market for ‘bulk’ cocoaremaining as a better option than ‘fine’ cocoa. Forindustry improvements to be sustainable, linksbetween farmers and manufacturers that enable ade-quate income improvements to cover increased costs


2


of management, will be critical. The strong commit-ment by some manufacturers to participatory R&Doffers hope that this will happen.

Cocoa in Papua New Guinea Papua New Guinea (PNG) supplies just 2% of theworld market, a tenth of that of Indonesian produc-tion. However, the 35,000 tonnes produced each year(mostly from East New Britain) is acidic, ‘fine’cocoa, with most (80%) now coming from small-holder production. In contrast to Sulawesi, whereunder-fermented beans are sold for processing asbulk cocoa, PNG cocoa is fermented and driedlocally. Papua New Guinea cocoa beans are recog-nised worldwide for the quality attributes that reflecttheir Trinitario origin.2 However, they also have areputation for some undesirable characteristics, suchas excessive acidity, high shell content and smokyflavour (especially in smallholder produce), the lattera result of smoke contamination during drying orstorage In addition, the introduction of hybrids ofinferior flavour led, in recent years, to a decline in thepremium paid for PNG cocoa, with PNG’s 75% ‘Fineor Flavour’ rating being reduced to 25%. Otherdimensions of the industry include the following:• yield averages are increasing (in East New Britain)

from 300 kg/ha in 1989 to 620 kg/ha in 1999• industry growth has been hampered by

– the decline in the value of local currency – the civil unrest in Bougainville, one of the main

production areas, – problems with weather, pests and diseases –volcanic eruptions

• Productivity has also been affected by theinefficiency of smallholder production and lowlevels of inputs.

PNG contrasts with Indonesia

• ‘Fine’ versus ‘bulk’ cocoa• Diseases are the more serious problem in PNG

versus the pod borer in Indonesia (CPB is not yet aproblem in PNG)

2 The original material, from early last century wasTrinitario. Since the early 1980s and now, materialdistributed by CCRI has been Trinitario × Amazonianhybrids. There have been claims that this has diluted theTrinitario attributes. However, PNG cocoa is still soughtby manufactures for its’ flavour attributes.



18

• as a subsistence crop, cocoa will provide someincome even when neglected

• traditional land rights in PNG affect access• lower literacy levels affect information access,

extension and financial management• high transport costs cut into profits• civil unrest and natural disasters have had more

adverse impacts• less experience in repayment of microfinance

affects credit availability to smallholders. Nevertheless, PNG receives prices above world

averages for its cocoa and, as in Indonesia, manufac-turers have a strong interest in fostering improvementof the PNG industry: improvement of cocoa qualityand ensuring that smallholder production is sustain-able are key focuses of R&D.


The PNG Government also places high priority onfostering improvement and expansion of the cocoaindustry. Research and development is undertaken bythe PNG Cocoa and Coconut Institute, formed in2003 by the amalgamation of Cocoa and CoconutResearch Institute and the Cocoa and Coconut Exten-sion Agency (CCEA). Cocoa and Coconut Institutecocoa research is centred on East New Britain.

AusAID Cocoa Improvement Project 1992–1996To re-establish and improve the quality character-

istics of PNG cocoa beans, the PNG Cocoa andCoconut Research Institute (CCRI) started a R&Dproject in 1992, supported by the Australian Agencyfor International Development (AusAID) (the CocoaQuality Improvement Project). The project investi-gated several aspects of fermentation and qualityimprovement: • screening of germplasm for cocoa quality traits to

improve the genetic base for quality cocoaproduction in PNG

• development of fermentation and drying methodsto enable smallholders to increase their incomethrough the sale of fermented, dried beans ratherthen wet beans.

• a review of the regulations for fermentaries anddrying facilities in order to provide advice to theCocoa Board of PNG on changes needed to enablesmallholders to undertake these processes.More recently, AusAID, in partnership with the

United Nations Development Program (UNDP), hasprovided further support for the PNG cocoa industry


3


under initiatives for the rehabilitation of cocoa onBougainville.

ACIAR Project PHT/1995/136 ‘Cocoa fermentation, drying and genotype × product quality assessment

The ACIAR project3 was initiated in 1998 as afollow-on to the AusAID-funded activities at theCocoa and Coconut Research Institute (CCRI). Incollaboration with the Queensland Department ofPrimary Industries and the University of New SouthWales, its objective was to complete assessment of anintegrated approach to quality improvementinvolving changes to fermentation, drying and selec-tion of cocoa varieties with superior flavour.

ACIAR later extended the project to (a) finaliseevaluation of fermentaries and dryers, and to developand implement technology transfer strategies, partic-ularly in relation to the re-establishment of theindustry on Bougainville, and (b) finalise participa-tion in the International Cocoa Confectioners’Organisation (ICCO) collaborative project to estab-lish the benchmark physical, chemical and orga-noleptic parameters that differentiate between fineand bulk cocoa. Papua New Guinea cocoa was com-pared with the industry bulk standard (West African)and with cocoa produced by other partners (Trinidadand Tobago, Ecuador and Venezuela).

The project has investigated the following key ele-ments of quality improvement and industry develop-ment:• fermentation process and time (smaller volumes of

beans, shorter times) (Hollywood 1998)• cocoa drying (A-framed solar collectors)

(Hollywood et al. 1997)• varieties with better ‘PNG fine’ flavour• revision of cocoa industry regulations• industry extension and uptake• support for the Bougainville industry through

testing of methodologies, particularly related todrying

• ‘PNG’ chocolate options• benchmarking of PNG cocoa in an ICCO

collaboration• income generation for smallholders.

3 Funded under the ACIAR-AusAID Record ofUnderstanding for PNG.



18

Table 1 summarises achievements to date and the factors that remain to be dealt with in order to realise the benefits of the current investment.

What are the key messages from the PNG research?

Smallholder issues• Fermentation. Fermentation methods for small

quantities of cocoa (down to 25 kg) have beendeveloped. This means that virtually any sizeproducer could ferment their harvest and produce agood quality cocoa.

• Solar drying. The original dryers distributedduring the AusAID program had limited successdue to severe maintenance problems. Most of themaintenance problems have now been solved andthere is a need to ensure recommendationsregarding construction are adhered to. Farmersalso need to be encouraged to take greaterownership for acquisition and maintenance ofdrying units.

• In provinces or districts with similar rainfall toEast New Britain Province, stand-alone solardryers are an option, provided the maintenancerecommendations are adhered to.

• For wetter provinces, combination solar/kilndryers have been developed and test unitsdistributed on Buka Island and Bougainville.These have proven a popular development with thelocal population. However, their long-term valuewill depend upon maintenance by users.

Quality issues• The Cocoa Quality Laboratory of CCRI has

developed good capabilities for quality assessmentand sample throughput.

• Recommendations regarding fermentationprocedures to improve quality attributes have beendeveloped; e.g. by reducing fermentation timesfrom 7 to 5 days, shell content is reduced by 2%,acidity of the cocoa is lower and flavour attributesimproved (enabling distinctive ‘PNG chocolate’ tobe made).

• With PNG export cocoa, successful participationin the ICCO project could enhance PNG’sreputation as a producer of fine-flavour cocoas.Provided support from CCRI is ongoing, furtherimprovements in fermentation and dryingtechnologies and selection for flavour attributes inplant breeding could be expected.


4



185

Table 1. Cocoa quality improvement in PNG: issues, achievements and future needs.

Element of quality improvement

Key achievements What needs to be done now?

Fermentation process and time

Smallholder technologies developed: for shorter fermentation times and smaller volumes of beans

Procedures for small-scale fermentation and the amended regulations need to be approved by the PNG Cocoa Board, and follow-up extension activities undertaken.

Cocoa drying Small-scale, solar-drying technologies have proven useful for East New Britain

Recommendations regarding their construction, use and maintenance, and amendments to regulations need to be approved by the Cocoa Board and follow-up extension activities undertaken.

Options for wetter areas require more work.

Varieties with better ‘PNG fine’ flavour

Large range of germplasm screened, and testing for quality incorporated into routine breeding.New release lines shown to have good ‘PNG fine’ flavour.Training of CCRI cocoa quality laboratory staff in cocoa quality assessment. Training for chemist in taste panel procedures.

CCRI should continue screening of breeding lines for quality traits.

Resources and experience in taste panel evaluation should be established and maintained. This will reduce need for taste evaluation by manufacturers.

Cocoa industry regulations

Revisions to industry regulations drafted and presented to the Cocoa Board.

Board needs to formally consider and approve the revised regulations before cocoa produced with smallholder fermentation and drying technologies can be sold.

Industry extension and uptake

Training manual drafted.

Extension personnel trained.

Manual needs to be updated to include recommendations for smaller fermentations, down to 25 kg, and the latest developments in solar-dryer construction.Need to increase commitment to extension and involve other groups (training institutions, NGOs) in training and implementation of the technology.

Bougainville industry rehabilitation

Support for United Nations Development program/AusAID installations

The PNG Cocoa Board needs to approve modified specifications on dryer size in cocoa regulations. Consideration should be given to distributing combination solar/kiln dryers (as a method of saving of firewood) and/or purely solar alternatives for drying in suitable weather conditions.

PNG and donor agencies need to review future needs/sustainability of industry on Bougainville.

‘PNG’ chocolate Distinctive flavour of ‘PNG’ chocolate demonstrated through collaboration with Masterfoods Australia.

An economic analysis should be undertaken of opportunities which could include: local marketing of products made from cocoa nibs, and links with a specialist manufacturer who might want to market ‘PNG fine’ chocolate to international markets.



ICCO ‘Fine/Flavour Project’. Partner countries and commercial users of PNG cocoa are involved in ‘benchmarking’ fine/flavour criterion.b

Some progress has been made in ‘bench-marking’ PNG standard fine cocoa against other producers.

Ongoing support is needed for CCI participation in the current project. Future directions/needs will depend on progress made in current ICCO project.

Income generation for smallholders

This project has developed affordable options for smallholders to produce higher quality cocoa and potentially earn more income.In 2003–2005, a new ACIAR project will provide additional resources and effort in this area.

The Cocoa Board has to approve revised regulations before farmers can use project-developed technologies to produce and market cocoa.

International collaboration

Partnership initiated in ICCO projectaInternational cocoa conference presentations madeCCCRI staff participated in an ACIAR–Indonesia cocoa workshop in 2001, and discussions were held between CCRI and the Indonesian Cocoa and Coffee Research Institute (ICCRI) about fostering collaboration.

Collaboration in the current ICCO project could foster future links and funds.The profile of CCI in international cocoa R&D should be maintained.Links with Indonesia and other ASEAN cocoa producers (including Vietnam) should be fostered both for research gains (e.g in developing strategies for exotic pests such as cocoa pod-borer) and to enable the PNG industry to have a better understanding of future competition.

CCRI should continue to foster good links with manufacturers.

Table 1. (Cont’d) Cocoa quality improvement in PNG: issues, achievements and future needs.

Element of quality improvement

Key achievements What needs to be done now?

Extension liaison• This is the most critical and challenging issue to

handle at the present time (resources, farmerlinkages and security). There is a major need for aconcerted effort for the recently merged CCRI andCocoa and Coconut Extension Agency (CCEA),and the Cocoa Board, to deliver research outcomesto the field and foster adoption by farmers.Adoption of recommended procedures country-wide would automatically deliver an improvementin quality attributes of PNG cocoa (and thusreputation and income). The challenge will be ingetting this message across.

Future ACIAR support

In parallel with the ACIAR support for research oncocoa fermentation, drying and genotype evaluation,another ACIAR project in PNG has promoted



18

options for income generation in the smallholder oilpalm sector of PNG, including the increased partici-pation of women in the industry through the ‘MamaLus Frut’ card scheme. In recognition of the oil palmproject achievements and of the opportunities forcocoa industry improvement described here, a newproject funded by ACIAR (ASEM/2002/014) willfocus on improving productivity and the participa-tion of young people and women in the Papua NewGuinea cocoa, coconut and oil palm industries. Part-ners in the project are Curtin University, CCRI/CCEA and the PNG Oil Palm Research Association.

The new project will capitalise on the oil-palmproject interventions that led to significant increasesin smallholder productivity. The new project aims toreplicate such achievements in the PNG smallholdercocoa and coconut sectors. Researchers will alsoconduct an in-depth evaluation of a promising new


6


payment system (also arising from the earlier ACIARproject) for oil-palm smallholders at Hoskins, WestNew Britain, and seek to further adapt it for othersmallholder oil-palm regions and for the smallholdercocoa sector in PNG. The project will promote thesharing of knowledge and expertise between the keysmallholder extension agencies and research organi-sations in the three industries.

For the farmers of PNG to be better linked to mar-kets, the most important issue is to enable them toferment small quantities of beans harvested fromhybrids that produce cocoa of superior flavour. Theremust also be a continuing effort to refine postharvestprocedures suitable for farmer use and which wouldenable them to match manufacturers needs moreclosely and deliver superior product to traders, with aprice premium paid for beans of superior quality. Inthis way, smallholders in remote locations wouldhave the chance to improve their incomes whileenhancing the quality and reliability of PNG cocoa.One option to consider is that proposed by localindustry leaders in Bougainville — the concept of‘cocoa traders’ as middlemen between growers andexport companies. Traders would have their owntransport and travel to villages both close to anddistant from export outlets. This would, in theory, doaway with problems farmers have in transport of cropto buying points, and the traders would also act asquality assessors, as they would wish to establish agood reputation for the product they handle, with theexporters. Under such a system, traders could alsoprovide advice at the village/smallholder level, aboutsuch matters as what needs to be done to correctquality problems encountered (i.e. they would act as



18

extension people). Such an approach might also besuitable for other provinces and ensure that the PNGCocoa Board developed policies that were in tunewith industry needs.

In PNG cocoa, smoke contamination of cocoa isanother problem that farmers should seek to solvethrough better dryer management. The ACIAR/AusAID collaborations have demonstrated a suitableoption for regions such as East New Britain, but otheroptions (such as combination dryers) are needed forareas that experience annual rainfalls above 2500mm. Critically, Cocoa Board approval is also neededfor the smallholder dryers. In managing smoke con-tamination, it also needs to be determined if driedbeans are being further contaminated by cook-firesduring household storage.

ReferencesBedford, A., Blowfield, M., Burnett, D. and Greenhalgh, P.

2002. Value chains: lessons from the Kenya tea andIndonesia cocoa sectors. In: Focus 3, summary and report,Natural Resources Institute and the Resource Centre forthe Social Dimensions of Business Practice, InternationalBusiness Leaders Forum, London, UK.

Iswanto Arief, Guest, D., Keane, P., Lambert, S. andMcMahon, P. 2003. Selection for disease and pestresistance in cocoa in Sulawesi. In: 14th InternationalCocoa Research Conference (COPAD), October 2003,Ghana, Abstracts of posters, No. 124E, 194.

Hollywood, N. 1998. The effect of fermentation time andwashing of cocoa prior to drying on cocoa quality inPapua New Guinea. Cocoa Growers’ Bulletin, No. 51.

Hollywood, N., Brown, S. and Toreu, B. 1997. A design forimproved efficiency in solar drying of cocoa. CocoaGrowers’ Bulletin, No. 50.


7


The Benefits of Supply-Chain Practice in Developing Countries – Conclusions from

an International Workshop

Chris Wheatley,* Elizabeth J. Woods† and Setyadjit§

Abstract

Interest in supply-chain management (SCM) in developed countries has grown as consumers demand productquality and integrity that can be achieved only by integrated management from farm to retail shelf. Effectiverelationships between members of a supply chain have been shown to contribute to improving its efficiencyand innovativeness, and enhance its competitiveness. As food security is achieved in developing countries,farmers are seeking to generate income by sale of a more diverse range of products. This trend, combined withincreasing urbanisation, population growth, rising standards of living and gradual changes to traditionalmarkets for foodstuffs, has created interest in application of the concept of SCM to market situations indeveloping countries.

An international workshop (Bali, August 2003) attended by personnel from Asia–Pacific countries associatedwith projects that had a supply chain dimension reviewed the theory of SCM as it relates to developing countries,and the approaches that are being used to work with local supply-chain members on improving their productsand service to meet the demands of markets. A key question considered by workshop participants was thedistribution of the benefits which arise from SCM approaches, and the extent to which small farmers and tradersshare in these benefits. This paper reports on the key conclusions of the international workshop.

Supply-chain management (SCM) is ‘the manage-ment of the entire set of production, distribution, andmarketing processes by which a consumer is suppliedwith a desired product’ (E. Woods <www.lfwm.net>;see also Woods (2004)). Interest in better managementof supply chains in developed countries has expandedin line with increased consumer demand for quality,

* Braun Wheatley Partners, PO Box 462, Nelson, NewZealand.†University of Queensland Gatton, Gatton, Queensland4343, Australia. Current address: Executive Director,Research and Development Policy, Department ofPrimary Industries, Meiers Road, Indooroopilly,Queensland 4067, Australia. Email: <[email protected]>.

§ Indonesian Agricultural Postharvest TechnologyResearch Institute, Jalan Ragunan 29A, Pasar Minggu,Jakarta, Indonesia.



18

convenience, novelty and other non-food attributes inthe food products they buy, together with an increasedconcern over food-product integrity and safety. Satis-fying these consumer demands can be achieved onlyby integrated management of the supply chain fromfarm to retail shelf. Many food-industry experiencesdemonstrate that effective, cooperative relationshipsbetween members of a supply chain can contribute toimproving the efficiency of the chain, enhancing bothinnovation and competitiveness.

An international workshop on this topic wassponsored by ACIAR and the ATSE Crawford Fund(19–22 August 2003, Bali, Indonesia). The work-shop reviewed the theory of SCM as it relates todeveloping countries, and the approaches that arebeing used to work with local supply-chainmembers on improving their products and service to


ublished in 2004)

8

http://www.lfwm.net

http://www.lfwm.net

http://www.lfwm.net


meet markets demands. The 39 workshop partici-pants included staff from current supply-chainprojects in Australia, China, Ghana, Indonesia,Laos, Papua New Guinea, the Philippines, Thailandand Vietnam.

Supply chains in developing countries are typi-cally long and fragmented, involving multiple small-holder producers delivering produce to collectors.Product then moves to traders and wholesalers andpossibly several layers of retail distribution. Primaryand secondary food processing may also occur, oftenat a small to medium enterprise scale. These chainsare characterised by multiple product handling steps,poor information flows and a predominance of spottransactions over longer-term buyer– seller relation-ships.

As basic agricultural commodity prices continuetheir worldwide decline, and food security is largelyachieved in most developing countries, farmers inSoutheast Asia are increasingly concerned toimprove their livelihoods through income derivedfrom the sale of a more diverse range of high oradded-value produce and products. This has pro-duced a strong trend towards a more market-orientedagriculture, even at smallholder level in remote areas.Alongside this, population and incomes are rising,the region is becoming more urbanised, and foodhabits and markets are changing accordingly. Theresult of this is an increasing dualism in the agri-foodsector. Shorter, more efficient, coordinated supplychains are growing, especially those associated withhigher-value commodities and large-scale retailoutlets (supermarkets and hypermarkets). Mean-while, traditional supply chains continue to handlebulk commodities and basic food products for mostof the population.

Given the current trend towards more managedsupply chains in Southeast Asia, the workshop wasorganised to undertake a review of theory and currentpractice, to provide participants with a greater under-standing of the potential benefits of the SCMapproach, to enhance the capability of supply chainsin the Southeast Asian region to supply produce tohigher-value markets (e.g. supermarkets and the hos-pitality trade), to identify constraints to improvingsupply chains in the region (for better targetedresearch and development (R&D) activities), and tounderstand the implications of the rapid growth of theSCM approach for governments, the agri-foodindustry and rural communities.



18

Learnings from the Workshop

The potential benefits and implications of supply-chain management for smallholders

Experience with the development of more efficientand managed supply chains in Southeast Asia andelsewhere is that the number of suppliers tends to fallover time, as the nature of the relationship betweenproducers and retailers deepens. Working with mul-tiple smallholder producers entails additional trans-action costs for SCM at retail level. Opportunities forsmallholders to participate (and benefit) from suchhigh-value chains are therefore uncertain. Mecha-nisms that reduce the transaction costs associatedwith small-scale production are needed, and this maywell require significant R&D assistance.

One option to improve prospects for small farmersto participate and benefit from these chains is to formproducer groups or associations. These may enablesmallholders to work together to obtain the productvolumes and economies of scale needed, continuity ofsupply over time, and increased market power. Pro-ducers need assistance to make the transition from aproduction to a market-orientation, to obtain and useinformation on consumer demand, to access and adoptbetter production and postharvest technology, and toincorporate quality and safety management systems.

Experience in the projects represented at the work-shop indicates that existing supply-chain actorsprovide many services in addition to their principalmarketing function (e.g. traders may provideinformal market information, credit and technicalassistance services). These services are also providedin a manner that is compatible with local cultures andvalues, something that may not be the case for exter-nally driven SCM approaches. Another option for thedevelopment of efficient supply chains that includethe small-farm sector is to build on existing supplychains, specifically incorporating a role for someactors (e.g. traders) to provide these and other serv-ices (e.g. organisation of produce supply volumesover time) in a culturally appropriate manner, so thattransaction costs are reduced without the need for thecreation of formal farmer organisations.

Enhanced capability for supplying produce to thehigher priced supermarket and hospitality trades,by increasing product quality and supplyefficiency

Timely, reliable information about consumerrequirements is required if farmers are to become


9


more market-oriented, and to ‘produce what they cansell’, rather than trying to ‘sell what they produce’.Workshop participants identified two types of marketinformation:• information on long-term consumer trends,

influencing decisions on what to produce• information on current market prices, important

for decisions on when to sell.Producers currently have poor access to both types

of information, and may have basic misconceptionsabout consumer preferences. Examples of this wereclear from the workshop cases presented (e.g. forpotatoes in northern Vietnam and vegetables inMindanao). Often this is to the result of poor commu-nication between producers and traders.

Potential does exist to build on existing supplychains, e.g. for high-quality, local variety bananas tosupermarkets in Indonesia, where adoption of SCMpractices could be beneficial. This would requireimplementation, through the chain, of quality-assur-ance practices and standards, with culturally appro-priate incentives in place for producers, andcommunication strategies to reach them. It alsorequires organisation to obtain required volumesover time from many small producers, and increasedprofessionalism at producer and trader levels to getthe product right; capacity building is therefore anessential component of any SCM program.

An additional barrier remains in many areas; theexisting transport, storage and communicationsinfrastructure is inadequate to ensure efficient accessto the market. This has implications for national andlocal governments.

The development of enhanced and efficient supplychains for high-quality produce in domestic marketswill help chain actors prepare for their eventual par-ticipation in export markets.

Better identification of the real constraints pre-venting improvement in the targeted industries,so that research and development activities can beimplemented more effectively

There are few documented experiences of theSCM approach in the developing world, and espe-cially for national markets in Southeast Asia. Partic-ipants felt that, based on these experiences, we stillhave only a preliminary understanding of the SCMapproach in these situations. There is a real need toinvestigate, document and systematise cases, in order



19

to be able to demonstrate actual and potential benefitsto rural producers.

There is plenty of relevant technology on produc-tion and postharvest handling available, but it is not‘organised’ or readily available to supply-chainactors, resulting in missed opportunities and inwasted R&D effort that duplicates existing knowl-edge. Better organisation of, and access to, informa-tion on existing postharvest technologies wouldpermit much greater efficiency through identificationof knowledge gaps and better prioritisation of futureR&D activities.

Workshop participants also acknowledged that westill lack a good understanding of the constraints(infrastructure, capital and policy) to adoptingmarket-oriented approaches that farmers face in spe-cific contexts. These range from illegal taxes to lackof tools to monitor quality at the farmer level.

Understanding the implications for governments,the agri-food industry and rural communities

Rural communities will benefit from adopting amarket orientation only if smallholder producers inthat community are able to gain from participating inhigher-value chains. In this context, proactive facili-tation is required to ensure that smallholders doindeed benefit from improved SCM. Some of theprojects represented at the workshop were able todemonstrate effective facilitation of the supply chainimprovement process by local and national govern-ment. Other actors (e.g. non-government organisa-tions (NGOs)) can also undertake this role. Ensuringthat smallholders can access higher-value marketswill often require different levels of governmentworking together with NGOs, the private sector, andacademics to deliver training and facilitate integratedefforts.

It is important that the process of improving supplychains is carried out in a manner that is compatiblewith, and takes advantage of, the existing localculture and social structures. Opportunities should besought to build on existing social capital (e.g. throughengaging women and village leaders) and trying towork with the high levels of trust that already existingin some chains. This will facilitate the developmentof sustainable and efficient supply chains (by usingsocial capital to minimise the transaction costsinherent in incorporating smallholder producers) andreduce any social impact of market-induced changesin these communities.


0


Priorities for Future Action: What Next?

During the workshop, group discussions took placeto identify major issues where future R&D activityshould be concentrated. These were subsequentlysynthesised and organised around three levels ofintervention:• macro level – policies and regulations • meso/institutional level – R&D and capacity building • micro level – local chain development and infra-

structure provision. This synthesis was presented to the 21st ASEAN/

3rd APEC Post-Harvest Technology Seminar, whichimmediately followed the SCM workshop in Bali.This section of the paper summarises the synthesis ofthe SCM workshop outcomes at these three levels.

Policies and regulations

While the group discussions identified several spe-cific policy areas where government action is needed,they also highlighted some deficiencies in the currentpolicy-making process itself. The potential benefitsthat flow from including smallholder producers inhigh-quality supply chains, and the negative implica-tions for equitable economic and social developmentif they are not included, are often poorly communi-cated to governments and policy makers. This maymean that the concerns and needs of rural communi-ties and smallholder farmers are not adequately takeninto account in the formulation of policies that affectthese rural people, with implications for the successof poverty-alleviation initiatives in the medium tolong term. It is vital that governments recognise theimportance of creating an environment where small-holders can also benefit, in an equitable manner, fromtheir active participation in higher-value supplychains.The institutions involved in SCM projects andinitiatives in Southeast Asia have a responsibility toprovide information and advice to national govern-ments (and appropriate regional bodies) in fulfillingthis policy-development function.

Specific areas where government policy interven-tions are needed if smallholders are to maximise theirpotential to be involved in, and to benefit from,higher value supply chains, are as follows: • Suitable legal systems must be established and

enforced. This will include creating a legalframework for contracts agreed between parties in



19

supply chains, and ensuring that the capacity andability to enforce these contracts exists.

• Improving the availability of capital for businessinfrastructure investments (e.g. storage anddistribution facilities) and access to credit for allactors in supply chains.

• Providing the public infrastructure that is aprecondition for rural communities to gain accessto markets and for business to prosper. Thisincludes roads, harbours, law and order, andpolitical stability.

• Provision of market information and support fortraining in business management and marketingfor small and medium enterprises.

• Ensuring smooth operation of the markets withinwhich supply chains function, through appropriatecompetition policies, regulatory frameworks forbusinesses and markets, and regulations andstandards for food quality and safety.


Workshop participants identified R&D activitiesin four distinct areas: markets, supply-chain develop-ment, postharvest technology and food quality/safety. In all cases, this is action-oriented (i.e.involves working with chain participants, govern-ment agencies and other stakeholders in a range ofsituations) and is thus highly collaborative. Many ofthe topics are framed as ‘how’ questions, the answersoften involving the development of methods to helpchain actors, and especially smallholders, to makebetter decisions as they enter supply chains and thenparticipate in their subsequent development.

Markets – Key questions in this area include the fol-lowing:• How can timely market information be made

available to farmers so they can decide who to sellto in ‘spot transactions—, and reduce theinformation imbalances often present in farmer–trader negotiations? Many projects attempt toprovide market information to rural communities,but transforming these into sustainable servicesthat continue after projects finish is more complex.This implies creation of sufficient demand for theservice to support the cost of its provision, unlesslong-term public sector subsidies are available.

• Understanding the long-term trends in consumermarkets can help farmers and other chain membersdecide what to produce. How can this type of


1


longer-term demand forecasting be madeaccessible to chain actors, including farmers?

• Once a chain is operating, how can the chainmembers explore new options and identify marketsegments?

Supply-chain development – The key issue here ishow to ensure that smallholder farmers can beincluded in the development of higher-value andmore-coordinated supply chains. As mentioned ear-lier, mechanisms are needed to reduce the additionaltransaction costs that are involved in working withmany smallholders, rather than one or few major sup-pliers.

One option is to encourage the formation of farmergroups, so that from the perspective of a major retailchain, for example, the farmer group acts as a singlesupplier. In Southeast Asia, this approach has hadmixed success to date, with such farmer groups oftenrequiring extensive support for their formation(reducing prospects for replication), and lacking sus-tainability once such support is removed. Practicalmethods for forming and strengthening such farmergroups need to be developed. Group formation shouldbe focused on a commercial opportunity (rather thanbeing an goal in itself) and on following the processthrough to delivering business success. The processmust be replicable and not too expensive.

Another option is to include traders in supplychains, specifically for their ability to organise small-holder farmers in a sustainable, low-cost and culturallyappropriate manner. This implies building on existingarrangements to include technical assistance to pro-ducers in critical areas, such a quality assurance andrelated production practices. There has been very littledocumented experience of working with traders andsmallholders in this way, and methods for accom-plishing this— across the range of cultural situationsfound in Southeast Asia—are urgently needed.

For both these options, it is essential to communi-cate the incentives and rewards of participation inthese new supply chains to farmers and rural commu-nities in a culturally appropriate way, and to improvethe business skills of these rural actors. Methods toachieve this are needed; they could involve training,facilitation and working with existing traders as pro-viders of these services.

Once these supply chains are operating, theirfuture development and competitiveness is related toseveral other key issues that were identified at theworkshop, and which require further research. These



19

include how to Trust and credibility must be builtbetween the different stakeholders in the chain. Thistype of social capital can reduce transaction costs(e.g. the need for formal contracts) between actors inthe chain. Mechanisms that chain actors and facilita-tors can use to build trust in these situations may beculturally driven.

Benefit distribution along the chain is a key issue.Experience from the developed world suggests thatbenefits may accrue disproportionately to actors withmost power in the chain (usually retailers). Mecha-nisms to ensure that smallholders receive an equi-table return from their participation in these high-value chains are needed. These could include farmerorganisation, to increase market power, and/or theadoption of ethical trading standards through thechain.

Small farmers are often at a disadvantage to otherchain actors, for example as regards access to credit(where they may lack collateral) and to legal services(e.g. for contract enforcement). How to resolve theseimbalances, through, for example, novel creditarrangements, needs investigation.

Finally, a supply chain is necessarily focused onone commodity, product and market. Enhancing theperformance of one chain may have implications forothers, and for the wider society and natural environ-ment. For example, increasing production of onecommodity as demand within a supply chainexpands, could greatly affect land-use patterns andlivelihood strategies in a rural community, affecting(positively and/or negatively) both environmentaland social sustainability. It is important that thesewider implications of supply-chain development arecaptured in the decision-making processes of the dif-ferent actors involved in the chain. Mechanisms tofacilitate this need to be developed.

Postharvest technology – Workshop participantswere more concerned with accessing existing post-harvest technologies than with the development ofnew technology. This requires better organisation ofexisting information, and enhanced access to thisinformation at the level of rural communities and theagencies that provide technological support services.Short-term technological priorities for small farmerswere identified as: • cold-chain development • shelf-life improvement• quality assurance.


2


Food quality and safety – Existing knowledge aboutfood quality and safety issues is not extending downthe chain to farmers, or to consumers. Mechanisms toensure that farmers are aware of the issues, and thesteps they need to take to overcome any problems,are needed. Direct involvement of other chain actors— traders and retailers — in communicating andaddressing these issues (and implementing appro-priate assurance systems) is probably essential.

Capacity building

Training topics that the workshop identifiedincluded: • increasing the market orientation of chain

members• building the business skills of chain members • enhancing chain members’ awareness of food

safety issues and measures to deal with them. If smallholder producers across Southeast Asia are

to benefit from their involvement in supply chains,this implies a massive effort. Strategies at national(and perhaps regional) level for developing anddelivering this training need to be defined, includingwho should be responsible for delivery, and whoexactly should be trained. As agriculture becomesincreasingly market-oriented, it is clear that trainingsmallholder farmers (and their organisations) in theseareas is essential, but how this should be accom-plished when support services are weak, especially inmore remote areas, is not clear. The strategy shouldmeet the need to strengthen rural support serviceinstitutions capable of providing this type of training.

Building supply chains at the local level

In order to maximise the prospects for smallfarmers to benefit from their involvement in higher-value supply chains, it is important that lessons arelearned from supply chains that are now being devel-oped. The key process at local level will be actionlearning; that is, learning by doing. It is likely toinvolve processes such as benchmarking, best prac-tice, and case-study analysis across of range ofsupply chains in different countries (in order toprovide culturally acceptable solutions), types ofproducts and market situations, aiming to improvethe efficiency of individual chains, and the benefitsthey provide to all actors. The results of such a cross-case analysis should translate into improved per-formance and a greater scale of benefits to all partic-ipants from these chains.



19

The question of entry points for small farmers andhow to build on existing products and chains toaccess higher quality and new markets is also likelyto be informed by case analysis.

Practical, local-level pilot activities will also helpto identify appropriate and high priority roles forgovernment, NGOs, producer organisations, and theprivate sector, in supporting chains. One positivefeature of the current environment is that decentrali-sation policies in many countries have created anopportunity for local (provincial or district level) ini-tiatives. This creates scope for piloting a range ofinnovative solutions, including local policies.

Infrastructure provision

Infrastructure constitutes a major barrier to smallfarmers participating in high-value chains. Ensuringadequate storage, handling and transport facilitieswill be critical to chain competitiveness, as willensuring that the chains have access to that infra-structure. Decentralisation can also be important, sothat the provision of basic infrastructure investmentcan be addressed through appropriate local policies,as well as at a national level.

Conclusions

Workshop participants concluded that SCM isbecoming increasingly important in developingcountries because:• the supermarket sector is already well established

(in major urban centres) and shows high levels ofcapital investment and market share growth

• traditional food products in domestic markets willface increasing competition from imports

• consumers across the region, and internationalretailers, share a desire to ensure that all products(in both traditional and more-managed supplychains) move towards global standards of foodsafety and health.The growth of managed, high-value supply chains

has profound implications for smallholder producersacross the developing world. One key issue identifiedand considered by workshop participants was that ofthe distribution of benefits that arise from enhancedSCM, and the extent to which rural communities,smallholder farmers and traders across SoutheastAsia can share in these benefits. Several key areaswere identified where action is required in order to


3


maximise the potential of small farmers to participatein, and benefit from, such supply chains.

It is important that action, based on these ideas andissues, is indeed taken. Governments need to beinformed of the implications of these changes for thesmall-farm sector of their economies. Agenciesworking in the rural development and agriculturalsectors need to incorporate these major agri-foodsector developments into their strategies. Retailchains need to become more aware of the widersocial and environmental consequences of a SCMapproach that tends to place most emphasis on eco-nomic efficiency. The people, communities, enter-prises and other actors involved in producing,processing, and marketing food products need tolearn to take a more market-oriented approach, some-thing that (for many) requires a new set of skills,including how to work together in different ways.

There is much we still need to learn about thisprocess. Supply-chain management in developing



19

countries crosses many disciplinary boundaries.Research institutions and donor agencies will need toadjust to these realities and ensure that they areaddressed in a coherent and holistic manner. It is alsoessential that research be action oriented, involvingthe various supply-chain actors themselves. This willhelp to ensure that efficient, competitive supplychains can make a significant and positive contribu-tion to the development of prosperous and sustain-able rural communities in Southeast Asia.

Reference

Woods, E. 2004. Supply-chain management: understandingthe concept and its implications in developing countries.In: Johnson, G.I. and Hofman, P.J., ed., Agriproductsupply-chain management in developing countries.Proceedings of a workshop held in Bali, Indonesia, 19–22August 2003. ACIAR Proceedings No. 119, 18–26.


4

Documents

Agriproduct Supply-Chain Management in Developing Countries