Tuesday, March 23, 2010

Agriculture in the Global Marketplace

Written By C. Peter Timmer

Twenty-first-century agriculture is likely to build stronger links between farmers in rural areas and city dwellers in order to create market systems with greater efficiency and better technologies.

C. Peter Timmer is a leading economist in the fields of agricultural and development economics. He has held professorships at Stanford, Cornell, and the University of California, San Diego. He is currently the Thomas D. Cabot Professor of Development Studies, emeritus, Harvard University.

The increasing globalization of agriculture and the resulting dominant role of supermarkets benefit many but harm others. Those who influence the 21st-century global marketplace should seek to allocate its burdens equitably, while preserving the real gains that afford millions a greater variety of healthful, more affordable sustenance.

By its very nature, agriculture is mostly a local activity, its roots in the soil. Most of the world's billion or more farmers live within walking distance of the crops they grow and eat. The co-evolution of human societies and cultivated species has led to superb adaptation to specific environments, and has created highly diversified cropping systems that can meet the wide nutritional needs of household members. Localized agriculture is still the norm for the vast majority of the world's poor people.

Economists have long viewed this dependence as a cause of poverty, not a historical accident. Agriculture limited to indigenous crops, locally available soil nutrients, and household labor, they argue, is a recipe for poverty and malnutrition. Local food self-sufficiency, they conclude, impoverishes individual households and the overall economy. Two Nobel Prizes in Economics were awarded in 1979 for these insights: to T.W. Schultz for emphasizing the need for new technologies to overcome rural household poverty, and to W. Arthur Lewis, for his emphasis on the role of agricultural modernization as a crucial input to overall economic development.

Globalized Markets

Market interactions between farm and urban households are the key to solving both problems. However, markets bring not just access to better technology and greater efficiency, they also bring new risks - that price fluctuations may offset farmers' hard work and leave them in debt. At the same time, dynamic urban economies offer farmers, and especially their children, the chance for a new life in the city. Expand markets to a global scale, and the opportunities, choices, and risks at the farm and national levels all multiply.

The globalization of markets is not new. Those of us who live in the United States have relied on global markets for centuries - they supply our coffee, tea, and spices, for example, and buy our surplus grain, tobacco, and vegetable oils. Other parts of the world have been connected similarly since the beginning of modern economic growth. Wheat prices in 18th-century England were tied directly to prices in the Baltic ports; rice prices in Calcutta and Bombay, even Paris, were linked to prices in Rangoon and Saigon. Long-distance trade in agricultural commodities benefits people on both ends of the transaction.

Still, the modern round of globalization is broader and deeper than anything seen in the 18th or 19th centuries. Three revolutions have stimulated the rapid integration of commodity markets:

--The revolution in agricultural technologies that permits highly productive but specialized farming techniques;

--The revolution in communications and transportation that permits buyers and sellers to connect quickly and at low cost across vast distances;

--The revolution in global living standards that has brought billions of new consumers into a world of discretionary purchases.

Modern globalization is the result of progress in supply, marketing, and demand.

Driven by these forces, agricultural globalization shapes the diet of consumers and the practices of farm producers. The former benefit from the ready and affordable availability of more diversified foodstuffs, a cornucopia far beyond what domestic agricultural production can provide. European consumers have daily access to fresh green beans from Kenya; American consumers enjoy fresh Peruvian asparagus in February. Low-cost transportation systems and falling trade barriers offer many consumers a market basket that draws from the entire world's bounty and diversity.

At the same time, globalization can incentivize individual famers to specialize in a single crop even as national agricultural sectors on balance may grow more diversified. Unless agro-ecological conditions are nearly identical throughout a country, farmers will - for reasons of resources, soil quality, or a number of other factors - develop a competitive advantage in growing a particular kind of crop. They utilize their farm resources most efficiently by specializing in growing that crop. This narrow specialization is consistent with greater diversity at the national level because of the commercialization of agriculture and international trade in food commodities.

The Role of Supermarkets

Modern supermarkets afford consumers the bounty of an international marketplace. By focusing the purchasing power of billions of consumers, they can offer a wide variety of appealing foods at low prices. But supermarkets also amplify the globalization-driven pressure upon the farm sector to adopt efficient, supply-chain management practices. The impact on the structure of farm production, on who participates in the marketing process, and on the nature and cost of products available to consumers is profound.

Supermarkets and the transnational corporations (TNCs) that commonly own them also face fierce competition. TNCs such as Wal-Mart in the United States, Tesco in the United Kingdom, Carrefour in France, and Ahold in the Netherlands try to escape the resulting squeeze on profits by applying new information technologies to lower supply-chain costs and by fleeing the home market and moving into countries where food retailing remains comparatively inefficient and profit margins high. Most transnational corporations engaged in food marketing have done both.

TNC-owned supermarkets increasingly dominate the global food supply chain. Backed by foreign direct investment, TNCs consolidate the food retailing industry in many countries and, some allege, extract high, even monopoly profits. But what does this mean for consumers? The answer is complicated.

Technology that lowers transaction costs throughout the food supply chain can enhance supermarket profits even as customers reap the benefit of lower prices. Increasingly, information technology affords supermarket managers exquisite control over procurement, inventory levels, and knowledge of consumer checkout profiles. This translates into powerful competitive advantages in cost control, quality maintenance, and product tracking in case of defects or safety problems.

Globalized agriculture affords a number of other benefits. If Florida, for instance, experiences a killing frost, American consumers do not lack for orange juice; Brazilian and other substitutes are readily available in the United States, and vice versa. Global production boosts global food security, and affords a partial insurance policy against the impact of climate change on crop production.

But as the cost of information technology drops, determining the beneficiaries becomes less clear. As more competitors adopt the latest technology, competition among food retailers intensifies. The resulting low prices benefit consumers. The TNCs in turn require ever-greater efficiency from their suppliers. The constant pressure to lower costs in the food aisle ultimately is transferred all the way back to the individual farmer.

Concerns about Equity

The increasing dominance of supermarkets generates real concerns about fairness and equity in the agricultural marketing system. As many transactions shift from open and transparent public markets to supermarket procurement officers representing a few large buyers, food producers are more easily excluded from the negotiations. Prices are squeezed ever lower. Farmers adapt, or they are pushed out of farming.

But there is another side to this story. In a competitive environment, supermarkets must respond to customer preference. Some consumers care deeply about the environment. Others willingly pay somewhat higher prices to better sustain local farmers. TNCs manage some procurement contracts with these concerns in mind. Fears that a given TNC will establish monopoly control and market power in the developing world appear overstated: The success of one supermarket chain attracts others. The TNCs compete, fiercely, among themselves. The market for the food consumer's dollar seems to be highly contestable, even when only a small handful of retailers survive the cost competition.

Unquestionably, the growth of the TNC-owned supermarket poses risks to small farmers. Because of the high transactions costs, working with large numbers of small farmers is more expensive than doing business with a few large suppliers. Small famers easily can lose access to supermarket supply chains, and fall further into poverty. But with risk often comes opportunity. Some small farmers have gained profitable access to modern supply chains. Small farmers in Central Java, Indonesia, now sell their specialized "black watermelons" not just to local consumers, but to consumers in Jakarta, Singapore and Kuala Lumpur as well. Poor countries that successfully integrate some small farmers into the supermarket supply chain will benefit greatly.

Globalized food supply chains are a two-edged sword. They afford consumers lower prices and greater food security. But countries can lose control of their own food production and trade, as foreign consumers and producers drive local prices. A new international trade regime must balance equitably these positives and negatives, especially so that the poorest countries - the least food secure - do not suffer.

The opinions expressed in this article do not necessarily reflect the views or policies of the U.S. government.

(This is a product of the Bureau of International Information Programs, U.S. Department of State)