Advisory report
RLG 03/6a: The farmer in the chain: escape artist or team player?
Advice on the position of primary producers in food supply chains -
September 2003
The advice on the position of farmers and growers in the food supply chain was presented to Cabinet Minister Veerman of Agriculture, Nature and Food Quality on 4 September 2003. With this advice, the Council addressed the Minister's question of how farmers and growers could consolidate their position within the chain in order to achieve a better reward for their input of labour, capital and entrepreneurship. The reason for the advice is that the incomes of farmers and growers and their share in the aggregate margin of the chain are under pressure. This has its root in an abundant supply, the increasing international competition and the decreasing support to farmers and growers in the European context.
For farmers and growers, it is their move
In its advice, the Council concludes that farmers and growers must develop their entrepreneurship further and focus more on the consumer's demand. On this basis they must make a conscious choice for which market segment they want to produce and in which chain(s) they, as a partner, want to come to an agreement with other links of the chain. On the level of chains, the Council outlines the choice between product differentiation and cost price leadership. The Council sees for farmers and growers a choice between three strategies: (1) the lowest possible cost price; (2) a differentiation strategy, e.g. a special variety of flowers or fresh vegetables, biological or regional products; (3) supplying a specific product with which a next link in the chain can make a specific product (focus strategy). As regards the question in the title, the Council is of the opinion that adaptation and co-operation as a team partner, both vertically with other links in the chain and horizontally with other primary producers, are indispensable for carrying the selected market strategies through. The Council does not see enough perspective in the farmer as the unattached escape artist.
The Government decides on the playing field, encourages, and facilitates
The Government sets the preconditions to foods and ornamental products of horticulture: safety for the consumer, sustainably produced and with a guaranteed and univocal quality. Within these preconditions, the entrepreneurs in agriculture and horticulture make the first move to improve their market position. However, there must be fair relations: a 'level playing field' at the European level, and fair competition at various levels in the chain. The Government must ensure that the rules for fair play are adhered to. The Government also has a supporting role: with fewer and simpler rules and by strengthening the knowledge infrastructure, it can help entrepreneurs implement reforms and innovations. Proper initial schooling and a demand-oriented supply of training courses are of paramount importance to develop the farmers' and growers' entrepreneurship. Spatial policy continues to be important to offer opportunities for establishing a business, to facilitate the formation of agricultural clusters, to create proper external production circumstances and to maintain a high standard of infrastructure for logistics, sales, services and provision of information.
The Cabinet's reaction
In his reaction to the advice, the Minister termed the analysis as clear and solid. He also endorsed the division of roles between the business community and government as outlined by the Council. Regarding the balance of power (power relations) within the chains, the Minister referred to the attention the Dutch Competition Authority will pay to buyer power in 2004, the activities OECD will carry out in this field, and he also referred to the own responsibility that the primary sector can show in this field. As regards the encouragement of initiatives, the Minister described the progress of the policy on the themes put forward by the Council: decreasing administrative burdens, streamlining the supervision of quality, innovative policy, agro-logistics, and the transparency of chains.
Conclusions and Recommendations
1. Incomes and margins are constantly under pressure - competition
authorities must check, both on the national and on the European levels,
whether measures must be taken against abuse of buyer power.
The incomes of primary producers and their share in the
aggregate margin of the chain are under pressure. This is very much the
case with pig farming, vegetables and potatoes. In public debates, concentration
and globalisation of the retail trade were mainly held responsible for
this. This phenomenon has attracted much public attention in many European
countries. The Council found that so far investigation into this issue
has not shown that there is an unauthorised exercise of buyer power in
agricultural chains by the retailers.
The continuity of a substantial number of agricultural enterprises hangs
in the balance. Though no threat to the food supply on the European level,
there is indeed a social problem when a considerable number of farmer
families must structurally live below subsistence level and when the function
that agriculture has as a steward of the quality of Europe's green spaces
is jeopardised. Reforming European agricultural policy in the direction
of more market-oriented production with less government support makes
this problem even more pressing.
The Council therefore advises that the Competition Authority should regularly
verify whether there is unauthorised exercise of buyer power by the retailers
and whether this requires measures. As this issue takes place on the European
level, this also requires an action plan on EU level. The Council warmly
applauds OECD's proposal, also on the initiative of the Dutch Minister
of Agriculture, to put the balances of power in agricultural chains on
the research agenda for the coming years.
2. Primary producers have the opportunity to improve
their position
The Council holds the view that the fact that the position of the farmer is more and more decided by the dynamics of the market should not lead to defaitism. As yet, Dutch agriculture and its infrastructure have still sufficient quality and strength to capitalise successfully on the turbulent environment. However, this requires the understanding that market orientation, innovation-directed management qualities, skills for co-operation and the ability to negotiate, should be one of the agricultural entrepreneurs' standard stock-in-trade. It also requires a government that is positively involved in agriculture and that encourages desired developments and new impetuses where necessary, naturally within the perspective of sustainable agriculture
3. Three strategies for primary producers
The primary producers must make a more conscious choice
of what they want to produce, and for which market segment. The Council
believes that they must do this within the framework of the strategy of
the chain in which they operate. The Council does not see the primary
agricultural producers as escape artists struggling out of their chains,
but rather as team players who, from their own strength and enlightened
self-interest, enter into relationships with other partners in the chain.
On the level of the agricultural chain as a whole there is the
choice between a differentiation strategy with products that are
distinguished for their quality. The alternative is a low-cost strategy
that puts keen prices before anything else.
There are roughly two possibilities for the primary agricultural producer
that opts for producing as part of a chain with a differentiation strategy.
If the product at farm stage has distinguishing features for the consumer,
the primary producer is the holder of the chain strategy; we can speak
of a differentiation strategy of the primary producer.
However, the processing industry and the retail sector often play a pivotal
role in the differentiation of the supply in the chain, and the primary
agricultural producer will adjust the quality of the product to the wishes
of these partners in the chain. In this case, we can speak of the focus
strategy of the primary producer.
And finally, the cost-price strategy of the primary producer fits
in the low-cost chain strategy.
The Council is of the opinion that a differentiation strategy for agricultural
chains, whereby the primary agro-producers adopt a focus or differentiation
strategy is most preferable for the future, and, considering its size,
the Council sees only limited prospects in the long term for the Dutch
producer with a low-cost strategy.
4. Quality and sustainability form the basis for differentiation
The quality of the product and its presentation to the consumer form the basis for differentiation. Characteristics such as taste, appearance, nutritional value, health, convenience, variation and special character are determining factors, and these product-related qualities are noticeable to the consumer. The Council also sees prospects for making more use of the method of production as the basis for differentiation, particularly the aspects connected with sustainability: a clean production method, handling natural resources economically, management of the landscape, welfare of animals and righteous global relations. The Council is convinced that the competitiveness of the Dutch supply of foods and ornamental products of horticulture would surely profit from the image that 'in sustainability, the Dutch producer takes the lead in the European pack'.
5. Expertise must be supplemented with good entrepreneurship
For many primary agri-producers, the development of entrepreneurship
often means breaking with the pattern they used to follow in the internal
organisation of their enterprise as an expert and a manager. As an entrepreneur,
the agri-producer looks upon his enterprise from the angle of the market
and of his environment. The ideal agri-entrepreneur must have the skills
• to orient towards the demand, and select marketing and sales methods
on this basis;
• to implement innovations in the range of products and business
processes;
• to organise the enterprise from the angle of the selected product-market
combination, especially regarding the position and the co-operation within
the chain.
Professional organisations of agricultural entrepreneurs can play an important
role in developing and encouraging entrepreneurship by strengthening the
primary producer's market position. Another essential aspect is initial
practice-based education with broad training programmes, followed by in-depth-courses
attuned to the demands of both young and more experienced entrepreneurs.
6. Simple and attractive quality systems
For the producer who wants to distinguish himself with his
supply, quality systems are a sovereign remedy to guarantee the consumer
as end user as well as intermediate chains that the product is as good
as expected; in other words, that a sound and safe product is offered,
and that it is produced sustainably.
Quality marks mean little to the average consumer, with the EKO-brand
as a favourable exception. Primary producers, for their part, see an overlap
and even conflicting requirements in the various quality systems. Branch
organisations and consumers' organisations must therefore set to work
briskly to prune down this jungle of self-developed rules. To the Council,
the leitmotiv are the keywords univocal, simple and appealing.
7. Possibilities for intensifying the relationship between producer and consumer
Shortening the chain is the result of integrating
prior or following links in the chain into the enterprise. In this sense,
co-operatives are a form of shortening the chain. Co-operatives that were
involved formerly in the first stages of processing an agricultural product
(sugar beets, milk, slaughtering cattle) now often adopt a policy focussed
on forward integration and offer consumer products including logistic
service to the retailers. If carried through efficiently, this offers
good chances for building up a solid market position vis-à-vis
the retailers. However, this strategy appears to be 'a bridge too far'
for individual agricultural producers.
Product subscriptions are mainly known in small-scale chains for
organically grown products; they particularly fit a market segment with
niche marketing. The necessary condition is that the consumer wants to
enter into such a permanent relationship and does not mind taking potluck
(seasonal products). The more growth we see in this market segment where
sustainable consumption is put first and foremost, the more the market
of product conscriptions can grow.
8. Cross-border enterprising
For the Dutch export-oriented agricultural chains, cross-border enterprising is an essential aspect of a successful strategy. This can be seen at the flower auctions functioning as an international marketplace where not only Dutch supplies are traded but also flowers from other continents. An interesting development is the extension of Dutch agro-enterprises with branches abroad, such as in Germany, Spain or Kenya. The vegetable sector also knows such cross border enterprising whereby the Dutch and the Southern European branch of the agri-enterprise make a year round supply possible. The Council sees this as a strengthening of the international position of the Dutch agri-chains, and expects this to increase in the future.
9. Applying government instruments more effectively from an integral viewpoint on agricultural entrepreneurship
The government attaches prior conditions to the activities of the entrepreneurs and may encourage desirable developments. The Dutch coalition agreement has a number of intentions that in this context point in the right direction: strengthening the competitive power, less bureaucracy and mania for regulation, strengthening the innovative capacity and the knowledge infrastructure, a liveable rural area with a vital, sustainable agricultural sector, spatial policy with less pressure of rules and in the sphere of sustainability, a European level playing field. The Council believes that these intentions should be implemented effectively, but wants to make some comments and put emphasis on this. As yet, the Council holds the view that there is not so much need for new instruments, but would rather see that the existing instruments are applied more connectedly and more effectively.
10. Decrease the pressure of rules
The jungle of regulations with which primary agriculture has to deal in the Netherlands forms by its magnitude a bothersome administrative burden, an impediment for innovation, and a stand in the way of flexibility. Many entrepreneurs would rather be judged for realising measurable targets than for complying with a complex set of regulations. Simplifying the regulations and emphasising the realisation of objectives may contribute towards the creation of a level playing field for the Dutch farmer at the European level. In complying with policies, more use could be made of the quality systems that are developed by the agri-chains themselves, provided that there are a limited number of univocal, simple and robust systems.
11. Strengthening innovation and knowledge structure
The coalition agreement that constitutes the present government
points at innovation as one of the spearheads of government policy. The
Council would like to endorse it, and in this connection refers to its
advice 'Terug op de grond en weer tussen de mensen' ['Back on solid ground
and again among people'] from 2002, in which the Council advocates a better
combination of fundamental and strategic research with the innovative
capacity of practice. A recent advice issued by the Science and Technology
Advisory Council endorses the plea for putting more emphasis on innovation
- backing the winners - and less on the development of technology per
se. The Council is of the opinion that a number of agri-chains belong
to the hotspots on which the above-mentioned Advisory Council would like
to see the innovation policy be focussed.
An effective innovation policy also requires large investments in fundamental
and strategic research and in programmes that strengthen the interaction
between research and practice. By shifting the accent on innovative policies,
the funding of technology development may get less priority. Innovative
entrepreneurship also requires vital 'green' education and a demand-oriented
supply of courses. The Council will issue a separate advice on education
for the green sectors in mid-2004.
12. Spatial policy must facilitate
The larger part of the rural area is used by the agricultural
sector. In its advice on the 'Structuurschema Groene Ruimte 2' ['Second
Structural Scheme for Rural Areas'] the Council argues in favour of the
specification of a positive allocation in spatial policy for land-related
agriculture to safeguard space for the development of agricultural enterprises.
As to intensive forms of agriculture, such as cultivation under glass,
there is the need for a planning policy that takes the dynamics of the
sector more into account and that, at the same time, sets stringent requirements
from the angle of sustainability and quality of the living environment.
For the competitiveness of the primary agri-producer it is very important
that he can have proper external production circumstances (allotment,
water management, no scattered residential buildings) and services in
the field of information provision, finance and sales. But above all,
a dynamic region may provide a strong impetus to the individual entrepreneurs.
The government must have an eye for the development and facilitation of
regional agri-clusters. The government plays an important role, among
other things, in helping realise high-standard production facilities,
suitable training programmes, provision of information for agri-entrepreneurs
and an efficient logistic infrastructure.
Proper external production circumstances and an efficient logistic infrastructure
demand a permanent effort in the sphere of land planning and reconstruction.
It is important to include this explicitly in the new national spatial
policy: the memoranda 'Space' and 'Vital Rural Area'.