Mr. Panos Konandreas FAO Geneva Office Food and Agriculture Organization

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1 UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT UNCTAD Expert Meeting "Enabling small commodity producers in developing countries to reach global markets" Organized by UNCTAD Commodities Branch Web: December 2006 Expert Presentation: Some issues in enhancing small-scale producers in developing countries to meet challenges in global and domestic food markets by Mr. Panos Konandreas FAO Geneva Office Food and Agriculture Organization The views expressed are those of the author and do not necessarily reflect the views of the UNCTAD Secretariat, nor do they imply the expression of any opinion whatsoever on the part of the secretariat of UNCTAD concerning the legal status of any country, territory, city or area, or of this authorities or concerning the definition of its frontiers or boundaries.

2 UNCTAD Expert Meeting on Enabling Small Commodity Producers and Processors in Developing Countries to Reach Global Markets Geneva, December 2006 Some issues in enhancing small-scale producers in developing countries to meet challenges in global and domestic food markets Panos Konandreas, FAO Geneva Office The main source of growth in global agricultural trade in recent years has not come from the typical primary commodities traditionally exported by developing countries. Instead it has come from higher-value or added-value exports, what is referred in FAO studies as nontraditional agricultural exports (NTAEs). The global market for NTAEs is both valuable and dynamic and developing countries as a whole have taken advantage of opportunities presented to them. Across a broad range of NTAEs, developing countries have been gaining market share. This has been particularly the case for vegetables and specialty products, in which developing countries have captured a large share of the very substantial growth in global trade during the last decade. However, the bulk of developing countries NTAEs originated in a handful of countries and it is not clear whether small-scale producers benefited much from this development. Nonetheless, what we do know is that those developing countries that have been successful in NTAEs have created the necessary infrastructure (physical, commercial and organizational) by investing in the sector over a number of years. Many of them also enjoy economies of scale throughout the supply chain and this allows them to take advantage of opportunities to add value, or to further diversify their export base. As in other economic activities, the promotion of NTAEs must be founded on a sound investment plan for products for which there is a long-term and reasonably-assured market. But there are other preconditions for the success of NTAE projects which have been identified in FAO s work and which I would like to highlight 1. These are particularly important for enabling small-scale producers to reach global markets. But these preconditions are also equally important for small-scale producers to reach the domestic market in developing countries themselves, which is also undergoing major transformation in recent years (I will return to this point later). Availability of key inputs There are a number of inputs which are critical in the production of high value exports. Timely access to, often specialist, agrochemicals and fertilizers is essential. For example, one problem identified in the horticultural sector in Ethiopia was the time taken to gain approval for the importation of a necessary agrochemical. The quality, cost and availability of packaging is also very important. In the short term, packing materials can be imported, but in the long term local manufacturing capacity needs to 1 Some relevant FAO studies can be found in the FAO website under: and

3 be developed. Organic products have special requirements and may need to be packaged in biodegradable packaging. Investing in infrastructure The efficiency of the supply chain from production through to export is a major determinant of competitiveness and of critical importance for perishable products. The logistical infrastructure cannot generally be met solely by investment from the private sector and governments have a role to play in making the necessary investments in public sector infrastructure, such as roads and railways. They also have a role to play in directly financing or encouraging private sector investment in specific infrastructure such as cold storage facilities at airports or ports. Because internal freight costs often account for a high percentage of the total c.i.f. costs, it is essential that governments pursue policies which result in lowering related costs through competitive markets for storage, handling and transport throughout the supply chain. There is also scope for subsidies in this area (and I will return to this later). Maintaining grades and standards The trend is increasingly towards private grades and standards imposed by the large supermarkets and processors. But governments still have an important role to play in ensuring that all producers, including small-scale producers, are able to meet SPS and minimum residue level (MRL) standards; not least, because if one exporter has problems all exporters from that country can be penalized. Governments should support private sector initiatives to encourage common grades and standards across commodities. Managing risk The major risk facing producers diversifying exports is structural over-supply and hence the possibility of collapsing prices in the world market. Although the market for NTAEs has been buoyant during the last decade and unit values appear to have held up reasonably well, such products are potentially vulnerable to the kind of supply and demand shocks present in many of the traditional commodity markets. Policy makers need to be mindful of this risk and projects must always be based on careful and thorough market research, incorporating risk analysis. Flexible/quality labour market It is clear that there is greater demand for a high calibre skilled labour to deliver products of the standard and quality required by the export market. Technical assistance can be particularly vital in enhancing labour quality, particularly with respect to new production processes, packaging and cool chain technologies. There is also need for greater flexibility in the labour market. Sometimes, government intervention in the labour market can adversely affect competitiveness. In Senegal, for example, the government placed restrictions on the employment of short-term and casual staff, and this rendered Senegal s exports less competitive relative to other suppliers. Secure land tenure The NTAE sector requires considerable start-up capital, often including investment in irrigation infrastructure on the land itself. Security of land tenure is essential for producers,

4 not least for those that must raise loans with the banks. For example, one of the key constraints to developing the Ethiopian horticultural sector has been identified as uncertainty with respect to its land tenure policy. Monetary policy High and volatile interest rates represent a major cost, and deterrent, to investors. Monetary stability is essential. Also a sound exchange rate policy and access to foreign exchange to purchase imported inputs are essential to success in NTAE projects. For example, Kenya's development of NTAEs has been enhanced by a liberalized market for foreign exchange. In contrast, Senegal has been hampered by an over-valued exchange rate. Fiscal and other policy incentives These may include, among others, financial incentives, such as tax breaks, and favourable access to finance schemes. Also important is a rational tariff structure on imported inputs. For example, zero duties on inputs are cited as some of the factors contributing to the success of the Kenyan NTAE sector. Many successful smallholder schemes, not only in NTAEs but also in traditional commodities, have been initiated and led by the private sector. However, more financial assistance could be provided by governments and/or donor agencies to support those initiatives, such as revolving credit funds, micro-credit, extension services, training, building of cold stores etc. Targeted fiscal policies for small-scale producers, in particular, should also include subsidies, when appropriate. Countries may wish to take advantage of the special provisions of Article 9 of the Agreement on Agriculture (AoA) which exonerates developing countries on subsidizing marketing/processing costs and internal freight charges for products destined for the export market. Exploiting the opportunities in the domestic market first! In the last two decades there have been significant changes in food consumption patterns in many developing countries, largely driven by increases in per caput incomes, and trends in urbanization (including the emergence of an urban middle class). There has been a marked shift in most developing countries towards increased consumption of proteins, sugars and fats, largely in processed form. For better or worse, food consumption patterns show signs of convergence towards a Western diet. Because consumers are changing their dietary preferences and shopping habits, there are substantial organizational and institutional changes throughout the food marketing chain in the developing countries. Agriculture is on an irreversible path towards a production system that is becoming increasingly commercialized and diversified. Products demanded by domestic consumers tend to resemble more and more those demanded by the global market and domestic agriculture should respond to meet this demand. Domestic producers face many challenges (including competition from imports) in adjusting to the exigencies of the evolving market. But the challenges for small-scale producers are even greater. The implications for them could be serious, unless they are assisted through targeted government support and incentive policies that allow them to move away from

5 subsistence agriculture and become more integrated in the rapidly evolving national food system. Of particular relevance here is Article 6.2 of the AoA on investment subsidies generally available to agriculture in developing countries and input subsidies to low-income and resource poor farmers. Such subsidies are not subject to reduction commitments under the WTO. To the extent that resources permit, developing countries should be encouraged to make full use of such provisions. Another connection that I would like to make in this respect is with the Aid for Trade (A4T) initiative. While it is still early to know how this initiative would be managed, there appears to be a bias on activities and projects that necessarily promote exports. This would be unfortunate, as small-scale producers are not likely to benefit much by such activities, especially where there are infrastructural impediments in the market beyond their control. In my view, a broader approach would be more desirable, whereby A4T resources are used to alleviate production and marketing constraints on key country-specific agricultural products, whether they are destined for export or for the domestic market. In other words, where appropriate, import substitution should have a fair claim on A4T resources as export promotion. In many cases it could well be that the effects on poverty reduction are much greater when producing for the domestic market than for export.