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Global Value Chain in the Agrifood Sector

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Togar Simatupang
Togar Simatupang

Bioeconomy is a major opportunity for regional and local communities. Agricultural growth is central to poverty reduction in rural areas, and one opportunity for such growth lies in increasing exports of agricultural products from poor countries to global markets. The potential of Indonesia to develop a bio-based economy based on local resources remains largely untapped. The solution is to develop technology options or business models for local deployment. Raising awareness activities, knowledge development (studies), clustering, and networking are needed to support new bio-based value chains and business models.

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Global Value Chains in the Agrifood Sector Togar M. Simatupang Institut Teknologi Bandung 17 December 2020
Overview • Bioeconomy • Emerging value chains within the bio-economy • Global value chains in the agriculture sector • Coffee Value Chains
Bioeconomy
Introduction • Bioeconomy is a major opportunity for regional and local communities. • Agricultural growth is central to poverty reduction in rural areas, and one opportunity for such growth lies in increasing exports of agricultural products from poor countries to global markets. • The potential of Indonesia to develop a bio-based economy based on local resources remains largely untapped. • The solution is to develop technology options or business models for local deployment. • Raising awareness activities, knowledge development (studies), clustering, and networking are needed to support new bio-based value chains and business models.
Definition of scope • BioEconomy (BE): food and feed industries (agriculture, forestry, horticulture, fisheries and aquaculture, plant and animal breeding, the nutrition and beverage industry) + biobased economy • BioBased Economy (BBE): non-food industries – chemical, material, medicine, pulp+paper and wood industries + bioenergy (including biorefineries) • BioBased Industries (BBI): individual sectors of industries – food, biochemical, biomaterial, biomedicine, pulp+paper and wood processing • BioENergy (BEN): electricity, heat, transportation biofuels, gaseous and solid energy carriers
The Concept of Bioeconomy Source: Bioeconomy Concepts by Regina Birne (2017) in Bioeconomy pp. 17-38, https://link.springer.com/chapter/10.1007/978-3-319-68152-8_3 Fine & bulk chemicals and pharma Fertilizers
Bioeconomy
Bioeconomy Value Chain
Bioeconomy Value Chain
Complex value chains • The conflicting pressures of differentiation and interdependence in a supply chain: • Actors have different opinions on problems and solution but no one is in charge. • The problems of coordinating supply and demand • The issues of uncertainty and risk: • Actors admit that they cannot solve the problem, or that they can solve it only partially. • Parameters of uncertainty include demand, supply, resource capacity, production costs, exchange rates, transportation (lead times and costs), duties, prices (product and raw-material), and extreme events. • The risks along the value chain, from input to output. • Market failures • Market failures arise when free markets fail to develop, or when they fail to allocate resources efficiently • Government failure • This occurs when government intervention in the economy causes an inefficient allocation of resources and a decline in economic welfare. • Bioeconomy, like many other industries, is interdependent in the complex value chains. • A global supply chain network involves various factors related to internationalization, such as tariffs, income tax legislation, transfer prices, government policies, trade barriers, and competition. How to cooperate? • interaction and negotiation • Incentives to reach consensus
Responses to Complex Value Chains • Understanding the different stages and complexity of the value chains and an innovative, collaborative approach is required to ensure the building of resilient value chains. • In the highly volatile agriculture landscape, different countries can create industry coalitions and partnerships to unlock their potential by leveraging their combined agri-food market. • Innovation and private sector involvement are crucial to improving the future competitive position. • The agri-food sectors can attract private investors with fair risk-sharing and smarter allocations of capital, which in turn can foster innovation. • Making a difference: policy options for agribusiness and poverty reduction
Major opportunities of the bioeconomy • New business models for agriculture and forestry • To tap the emerge of new business model, it needs to set clear goals to catalyze private and public investment and enhance the competitiveness in the agriculture sector. • Value Chain Development offers a tool to deepen and widen value chains, explore synergies between chain actors, facilitate connectivity to the global markets, invest in science, technology and innovation, and ultimately build resilience for the future of the agricultural sector.
Value Chain Solutions: Development of Bio-based value chains and Acceleration of the transition to a bio-based economy • Building new value chains based on the development of sustainable biomass collection and supply systems with increased productivity, and improved utilisation of biomass feedstock (incl. co- and by-products), while unlocking utilisation and valorisation of waste and lignocellulosic biomass. Building new value chains • Bringing existing value chains to new levels, through optimized uses of feedstock and industrial side-streams, and offering innovative added value products to the market, thus creating a market pull and reinforcing the competitiveness of EU agriculture and forest based industries. Bringing existing value chains to new levels • Bringing technology to maturity through research and innovation, and through upgrading and building demonstration and flagship biorefineries that will process the biomass into a range of innovative biobased products. Bringing technology to maturity Source: Bio-based Industries Consortium, https://biconsortium.eu/about
Bio-based value chain An industrial value chain is defined as stages of value creation by enterprises and other organizations as part of the process of designing and delivering goods and services for their users. VCA has been used in the bioeconomy sector for three purposes: 1. to try to understand the structure of the chain to assess whether it is operating effectively and efficiently, from the perspective of the various interested or involved actors; 2. to calculate financial effects on actors in the chain, usually farmers and consumers, of improvements in the chain; and 3. to assess the consequences on the chain of a shock or disruption to the system.
Multistakeholder decisions and the value added chain A, B, and C are agents along the value-added chain: each of them expects a share from bio-based added value. They negociate this share with other egents as the total value is limited by the market price. Each agent has an attribute which is its perception of fair share. Natural Dynamics and Impact Interactions of autonomous agents Outcomes of decision process Actions assessing their effects on the system as a whole modify some of their perceptions and behaviors Evaluation Observations/precepts • Goals, Objectives, Preferences • Prior knowledge State histrory Changes in initial conditions and perceptions
Problem-Solving Value Chain Analysis Governance Analysis 1 2 Value Chain Solutions 3 Value Distribution4 Better Business Models 5 Implement the Solution 6 Monitor and Evaluate the Solution 7 • Develop and select required interventions: what should be done? • Set priorities for improvement: what can be afforded? • Plan for ustanability of the progranm and achievements: involve all stakeholders • Feasibility Study • Analyse the risks • Willingness to act • Set order of implementation • Implement the set of interventions according to agreed order • Identify areas of unmet need • Describe the pattern of the problem • Identify underlying factors for the gaps • Develop evaluation work plan • Determine regularly the implementation successess, constraints, and recommen on the way forward
Root-Cause Analysis Template Source: Root Cause Analysis, https://www.mindtools.com/
Global value chains in the agriculture sector
Bio-economy: Agriculture • Ensure food security, enhance nutrition and improve health and enable job creation through expansion and intensification of sustainable agricultural production and processing. • Strategic projects: • Crop/livestock improvement both for biotic and physical stresses associated with climate change (including indigenous crops) • Agro-processing initiatives • An integrated food nutrition research program • Animal vaccine capabilities • Energy-crop initiatives • Biocontrol and bio-fertilisers • Aquaculture • Soil conservation • Water resource management • Build high-value skills and capacities to enable agro-innovation • Co-funding initiatives for innovation
Global value chains in the agrifood sector • Global agricultural markets have become increasingly complex because of concentration at all points in the value chain and the increasing scope and complexity of food standards, particularly those relating to food safety. • Therefore, realizing the potential benefits of agricultural export growth for poverty reduction requires careful analysis of trends in global markets and the policies that will unlock the potential for growth and poverty reduction. • Trends in global agribusiness and their consequences for strategies to eradicate poverty through increasing export growth are analysed using the GVC perspective. • This perspective analyses inter-firm linkages in global agribusiness, placing agricultural production and processing in developing countries in the context of the dynamics of the broader global agribusiness and agrifood systems.
Main issues within the agriculture Codification of knowledge in value chains Actor (supplier) competence The costs of governance Power asymmetries Concentration • The value chain perspective has highlighted issues of codification of knowledge in value chains, supplier competence, strategies to reduce the costs of governance, power asymmetries, and concentration. • These issues are decisively affected by the two major trends in agribusiness value chains, namely the increasing importance of standards and increasing concentration.
GVC analysis applied to agribusiness • The metaphor of the “chain” highlights the fact that most goods and services are produced by a sequence of activities which are carried out by multiple enterprises. • These types of linkages refer to “vertical coordination” or “supply chains” to distinguish them from arm’s-length market relationships or the vertically- integrated enterprise. • Coordination through direct exchanges of information between firms is usually referred to as “value chain governance”. • GVC analysis then poses four questions about this governance: 1. Why does governance arise? [non-standard products/customization, performance risks] 2. Under what conditions is governance possible? [instructions, sanctions] 3. What different forms does governance take? [markets, networks, and hierarchy] 4. How do firms try to reduce the cost of governance? [the division of labour, coordination power, market power, contractual agreements]
VC Governance GVC analysis then poses four questions about this governance: 1. Why does governance arise? • non-standard products/customization, performance risks 2. Under what conditions is governance possible? • instructions, sanctions 3. What different forms does governance take? • markets, networks, and hierarchy 4. How do firms try to reduce the cost of governance? • the division of labour, coordination power, market power, contractual agreements
Standards • Standards are agreed criteria by which a product or service’s performance, its technical and physical characteristics, and/or the process and conditions under which it has been produced or delivered can be assessed. • Standards operate at multiple points along the GVC and are created, adopted, applied and verified by different actors. • Standards impact in two particularly direct ways: 1. the extent and codification of information required to sustain transactions 2. their impact on supplier competence.
The nature and purpose of standards Source: “Global Value Chains and Production Networks: Prospects for Upgrading by Developing Countries”, by John Humphrey and Olga Memedovic (2006), UNIDO
Examples of major food safety “events” in industrialized countries Source: “Global Value Chains and Production Networks: Prospects for Upgrading by Developing Countries”, by John Humphrey and Olga Memedovic (2006), UNIDO
Different types of standards Source: “Global Value Chains and Production Networks: Prospects for Upgrading by Developing Countries”, by John Humphrey and Olga Memedovic (2006), UNIDO
Standards from a GVC perspective: Food safety and quality control in the fruit, vegetable, and fish supply chains Source: “Global Value Chains and Production Networks: Prospects for Upgrading by Developing Countries”, by John Humphrey and Olga Memedovic (2006), UNIDO The impact of standards upon information flows in value chains, and hence on value chain governance, takes two distinct forms. 1. Standards increase information requirements: process control 2. The level of competence required from suppliers
Concentration in agribusiness value chains • The importance of increasing concentration relates to input supplier concentration; production concentration; processing; and consumer outlet concentration. • In terms of the value chain, concentration matters for two reasons: 1. concentration at one point of a value chain, often leads to concentration at other levels 2. concentration at particular points in the value chain creates oligopolies and inequalities in market power.
Simplified agribusiness value-chain diagram
Policy issues for developing country governments and other agencies concerned with export agribusiness 1. ensuring the continued access of agribusiness producers to global markets and supporting the competitiveness of the sector 2. increasing revenues from agribusiness, particularly through adding value to exports 3. enhancing the poverty alleviation impact of export agribusiness.
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Global Value Chain in the Agrifood Sector

  • 1. Global Value Chains in the Agrifood Sector Togar M. Simatupang Institut Teknologi Bandung 17 December 2020
  • 2. Overview • Bioeconomy • Emerging value chains within the bio-economy • Global value chains in the agriculture sector • Coffee Value Chains
  • 4. Introduction • Bioeconomy is a major opportunity for regional and local communities. • Agricultural growth is central to poverty reduction in rural areas, and one opportunity for such growth lies in increasing exports of agricultural products from poor countries to global markets. • The potential of Indonesia to develop a bio-based economy based on local resources remains largely untapped. • The solution is to develop technology options or business models for local deployment. • Raising awareness activities, knowledge development (studies), clustering, and networking are needed to support new bio-based value chains and business models.
  • 5. Definition of scope • BioEconomy (BE): food and feed industries (agriculture, forestry, horticulture, fisheries and aquaculture, plant and animal breeding, the nutrition and beverage industry) + biobased economy • BioBased Economy (BBE): non-food industries – chemical, material, medicine, pulp+paper and wood industries + bioenergy (including biorefineries) • BioBased Industries (BBI): individual sectors of industries – food, biochemical, biomaterial, biomedicine, pulp+paper and wood processing • BioENergy (BEN): electricity, heat, transportation biofuels, gaseous and solid energy carriers
  • 6. The Concept of Bioeconomy Source: Bioeconomy Concepts by Regina Birne (2017) in Bioeconomy pp. 17-38, https://link.springer.com/chapter/10.1007/978-3-319-68152-8_3 Fine & bulk chemicals and pharma Fertilizers
  • 10. Complex value chains • The conflicting pressures of differentiation and interdependence in a supply chain: • Actors have different opinions on problems and solution but no one is in charge. • The problems of coordinating supply and demand • The issues of uncertainty and risk: • Actors admit that they cannot solve the problem, or that they can solve it only partially. • Parameters of uncertainty include demand, supply, resource capacity, production costs, exchange rates, transportation (lead times and costs), duties, prices (product and raw-material), and extreme events. • The risks along the value chain, from input to output. • Market failures • Market failures arise when free markets fail to develop, or when they fail to allocate resources efficiently • Government failure • This occurs when government intervention in the economy causes an inefficient allocation of resources and a decline in economic welfare. • Bioeconomy, like many other industries, is interdependent in the complex value chains. • A global supply chain network involves various factors related to internationalization, such as tariffs, income tax legislation, transfer prices, government policies, trade barriers, and competition. How to cooperate? • interaction and negotiation • Incentives to reach consensus
  • 11. Responses to Complex Value Chains • Understanding the different stages and complexity of the value chains and an innovative, collaborative approach is required to ensure the building of resilient value chains. • In the highly volatile agriculture landscape, different countries can create industry coalitions and partnerships to unlock their potential by leveraging their combined agri-food market. • Innovation and private sector involvement are crucial to improving the future competitive position. • The agri-food sectors can attract private investors with fair risk-sharing and smarter allocations of capital, which in turn can foster innovation. • Making a difference: policy options for agribusiness and poverty reduction
  • 12. Major opportunities of the bioeconomy • New business models for agriculture and forestry • To tap the emerge of new business model, it needs to set clear goals to catalyze private and public investment and enhance the competitiveness in the agriculture sector. • Value Chain Development offers a tool to deepen and widen value chains, explore synergies between chain actors, facilitate connectivity to the global markets, invest in science, technology and innovation, and ultimately build resilience for the future of the agricultural sector.
  • 13. Value Chain Solutions: Development of Bio-based value chains and Acceleration of the transition to a bio-based economy • Building new value chains based on the development of sustainable biomass collection and supply systems with increased productivity, and improved utilisation of biomass feedstock (incl. co- and by-products), while unlocking utilisation and valorisation of waste and lignocellulosic biomass. Building new value chains • Bringing existing value chains to new levels, through optimized uses of feedstock and industrial side-streams, and offering innovative added value products to the market, thus creating a market pull and reinforcing the competitiveness of EU agriculture and forest based industries. Bringing existing value chains to new levels • Bringing technology to maturity through research and innovation, and through upgrading and building demonstration and flagship biorefineries that will process the biomass into a range of innovative biobased products. Bringing technology to maturity Source: Bio-based Industries Consortium, https://biconsortium.eu/about
  • 14. Bio-based value chain An industrial value chain is defined as stages of value creation by enterprises and other organizations as part of the process of designing and delivering goods and services for their users. VCA has been used in the bioeconomy sector for three purposes: 1. to try to understand the structure of the chain to assess whether it is operating effectively and efficiently, from the perspective of the various interested or involved actors; 2. to calculate financial effects on actors in the chain, usually farmers and consumers, of improvements in the chain; and 3. to assess the consequences on the chain of a shock or disruption to the system.
  • 15. Multistakeholder decisions and the value added chain A, B, and C are agents along the value-added chain: each of them expects a share from bio-based added value. They negociate this share with other egents as the total value is limited by the market price. Each agent has an attribute which is its perception of fair share. Natural Dynamics and Impact Interactions of autonomous agents Outcomes of decision process Actions assessing their effects on the system as a whole modify some of their perceptions and behaviors Evaluation Observations/precepts • Goals, Objectives, Preferences • Prior knowledge State histrory Changes in initial conditions and perceptions
  • 16. Problem-Solving Value Chain Analysis Governance Analysis 1 2 Value Chain Solutions 3 Value Distribution4 Better Business Models 5 Implement the Solution 6 Monitor and Evaluate the Solution 7 • Develop and select required interventions: what should be done? • Set priorities for improvement: what can be afforded? • Plan for ustanability of the progranm and achievements: involve all stakeholders • Feasibility Study • Analyse the risks • Willingness to act • Set order of implementation • Implement the set of interventions according to agreed order • Identify areas of unmet need • Describe the pattern of the problem • Identify underlying factors for the gaps • Develop evaluation work plan • Determine regularly the implementation successess, constraints, and recommen on the way forward
  • 17. Root-Cause Analysis Template Source: Root Cause Analysis, https://www.mindtools.com/
  • 18. Global value chains in the agriculture sector
  • 19. Bio-economy: Agriculture • Ensure food security, enhance nutrition and improve health and enable job creation through expansion and intensification of sustainable agricultural production and processing. • Strategic projects: • Crop/livestock improvement both for biotic and physical stresses associated with climate change (including indigenous crops) • Agro-processing initiatives • An integrated food nutrition research program • Animal vaccine capabilities • Energy-crop initiatives • Biocontrol and bio-fertilisers • Aquaculture • Soil conservation • Water resource management • Build high-value skills and capacities to enable agro-innovation • Co-funding initiatives for innovation
  • 20. Global value chains in the agrifood sector • Global agricultural markets have become increasingly complex because of concentration at all points in the value chain and the increasing scope and complexity of food standards, particularly those relating to food safety. • Therefore, realizing the potential benefits of agricultural export growth for poverty reduction requires careful analysis of trends in global markets and the policies that will unlock the potential for growth and poverty reduction. • Trends in global agribusiness and their consequences for strategies to eradicate poverty through increasing export growth are analysed using the GVC perspective. • This perspective analyses inter-firm linkages in global agribusiness, placing agricultural production and processing in developing countries in the context of the dynamics of the broader global agribusiness and agrifood systems.
  • 21. Main issues within the agriculture Codification of knowledge in value chains Actor (supplier) competence The costs of governance Power asymmetries Concentration • The value chain perspective has highlighted issues of codification of knowledge in value chains, supplier competence, strategies to reduce the costs of governance, power asymmetries, and concentration. • These issues are decisively affected by the two major trends in agribusiness value chains, namely the increasing importance of standards and increasing concentration.
  • 22. GVC analysis applied to agribusiness • The metaphor of the “chain” highlights the fact that most goods and services are produced by a sequence of activities which are carried out by multiple enterprises. • These types of linkages refer to “vertical coordination” or “supply chains” to distinguish them from arm’s-length market relationships or the vertically- integrated enterprise. • Coordination through direct exchanges of information between firms is usually referred to as “value chain governance”. • GVC analysis then poses four questions about this governance: 1. Why does governance arise? [non-standard products/customization, performance risks] 2. Under what conditions is governance possible? [instructions, sanctions] 3. What different forms does governance take? [markets, networks, and hierarchy] 4. How do firms try to reduce the cost of governance? [the division of labour, coordination power, market power, contractual agreements]
  • 23. VC Governance GVC analysis then poses four questions about this governance: 1. Why does governance arise? • non-standard products/customization, performance risks 2. Under what conditions is governance possible? • instructions, sanctions 3. What different forms does governance take? • markets, networks, and hierarchy 4. How do firms try to reduce the cost of governance? • the division of labour, coordination power, market power, contractual agreements
  • 24. Standards • Standards are agreed criteria by which a product or service’s performance, its technical and physical characteristics, and/or the process and conditions under which it has been produced or delivered can be assessed. • Standards operate at multiple points along the GVC and are created, adopted, applied and verified by different actors. • Standards impact in two particularly direct ways: 1. the extent and codification of information required to sustain transactions 2. their impact on supplier competence.
  • 25. The nature and purpose of standards Source: “Global Value Chains and Production Networks: Prospects for Upgrading by Developing Countries”, by John Humphrey and Olga Memedovic (2006), UNIDO
  • 26. Examples of major food safety “events” in industrialized countries Source: “Global Value Chains and Production Networks: Prospects for Upgrading by Developing Countries”, by John Humphrey and Olga Memedovic (2006), UNIDO
  • 27. Different types of standards Source: “Global Value Chains and Production Networks: Prospects for Upgrading by Developing Countries”, by John Humphrey and Olga Memedovic (2006), UNIDO
  • 28. Standards from a GVC perspective: Food safety and quality control in the fruit, vegetable, and fish supply chains Source: “Global Value Chains and Production Networks: Prospects for Upgrading by Developing Countries”, by John Humphrey and Olga Memedovic (2006), UNIDO The impact of standards upon information flows in value chains, and hence on value chain governance, takes two distinct forms. 1. Standards increase information requirements: process control 2. The level of competence required from suppliers
  • 29. Concentration in agribusiness value chains • The importance of increasing concentration relates to input supplier concentration; production concentration; processing; and consumer outlet concentration. • In terms of the value chain, concentration matters for two reasons: 1. concentration at one point of a value chain, often leads to concentration at other levels 2. concentration at particular points in the value chain creates oligopolies and inequalities in market power.
  • 31. Policy issues for developing country governments and other agencies concerned with export agribusiness 1. ensuring the continued access of agribusiness producers to global markets and supporting the competitiveness of the sector 2. increasing revenues from agribusiness, particularly through adding value to exports 3. enhancing the poverty alleviation impact of export agribusiness.