Linking Food Market Transformation

to Improved Food Security in Asia

• Tom Reardon

• Michigan State University

• Talk at ASEAN Food Security Conference: Role

of the Private Sector

• 17 June 2010

1. Food Security is a dinner table with

4 inter-dependent legs

a) Leg 1 is “availability” from raising farm production/productivity.

… But this leg is necessary but not sufficient – and without the other three legs the table will fall.

b) Leg 2 is “access” from raising household incomes to buy food.

… I will show that about 80% of the food in ASEAN countries is bought by only-consumers (households not producing food)

c) Leg 3 is “access” to food by raising efficiency

of market supply chains to deliver food to

consumers.

…. 50-70% of consumer’s cost of food is formed in post-farmgate segments of supply chain

Æwholesale/logistics

ÆProcessing

Æ retail

Î For food security, raising efficiency in post-farmgate segments is at least as important as raising farm yields.

d) Leg 4 is raising “utility” of food by raising food

safety/quality/nutritiousness.

Î If any of the legs is not strong all will fall

together.

2. Food Security is a dinner with two

important courses

a) Rice is the important base –

… it is about 50% of consumer calories –

… but is only about 10% of consumer spending on food,

… but only 8-32% of agriculture – and that share is declining, 1961, 1980, 2007 (Timmer): … Rice/Agriculture: East Asia: 19%Æ8%; South Asia: 20% Æ

15%; Southeast Asia: 40% Æ 32%

… Rice/GDP: East Asia: 6.8Æ1%; South Asia: 8.4% Æ 2.7%;Southeast Asia: 14.5% Æ 3.8%

… Per capita rice consumption growth negative or trending negative (in Indonesia, negative in 4/5 quintiles in urban and zero or negative in top and next quintile in rural Indonesia; India and Bangladesh showing similar trends but earlier on path)

b) Food-beyond-rice (vegetables, fruit, fish/shrimp, meat, edible oils, dairy, spices/condiments) is the other important base

… about 50% of consumer calories in ASEAN

… 90% of consumer food spending, and

… 90% of their protein & vitamins

… 92% of agriculture in East Asia, 85% in South

Asia, and 68% in Southeast Asia.

… 4 times more income/ha to farmers than rice

(3) Thus – a holistic-integrated

Food Security Investment Strategy

Matrix has 5 rows + 2 columns

Food Security Investment Strategy

Matrix

rice Beyond-rice

1) Farm input supply

2) farming Common focus of debate –

necessary but not

sufficient

3) Wholesale/logistics

4) processing

5) retail

(4) The two elephants in policy-debate

room are only two wheels on the 10-

wheel truck delivering food security

a) Government is important

… as an investor in the soft and hard infrastructure as foundation for the 10-block food security matrix

… as ONE of the policy setters for players in the food supply chains -

… but government is a MINOR direct player in this game.

… ASEAN governments’ procurement/marketing of food touches maybe 1% of ASEAN food economy (at most 10% direct involvement in the 10% which is rice).

…. The private sector is the other 99%: these are

the business investors in ALL the segments of

the supply chain. This includes farmers!

… A key role of government: create enabling

conditions to promote investment by the 99%

ÆReduce risk in investment (including policy

uncertainty)

ÆIncrease soft and hard infrastructure

b) Trade is important at the MARGIN –

… but is only about 5% of the food economy of

ASEAN

… trade is only 10-20% as important as the

modernizing food market inside ASEAN urban

areas

... I focus next on rapid modernization of the

ASEAN food economy

5) The ASEAN food economy has

changed ENORMOUSLY in the 40 year

period Timmer discussed – from the

1973 food crisis to now:

with big implications for food security

investment strategies

a) Extremely rapid urbanization

… 50% in urban areas by 2010, rising fast

Example: South Korea did in 2 decades (1970-

1990) what US did in 9 decades

… 75% of the ASEAN food economy in urban

areas

… that market is growing 5-7 times faster than

OECD food markets

Æ big opportunity for income growth for

farmers

b) Consumption and production have diversified

very fast (income growth + urbanization +

Bennett’s Law)

… as noted, share and level of rice in

consumption dropped

… diversification into non-rice products rose

very fast

Î A huge opportunity to raise farm incomes as

produce products that pay 4 times what rice

pays to small farmers

c) The post-farmgate segments of the agrifood

supply chain have developed to become 50-

70% of the formation of the food price

… only 30-50% of the food price is formed at

the farm sector…

… yet the debate focuses mainly on farm

productivity productivity: this is necessary but

not sufficient

Î increases in efficiency of wholesale/logistics,

processing, and retail would have as much or

more impact on food security

d) Wholesale/logistics, processing and food

retail (inside ASEAN + China) have VERY

quickly transformed in the past 10-20 years –

the fastest in the world, in history

… based mainly on massive investments by

private sector (domestic and foreign)

… with impacts on the ASEAN food economy 6-

10 times more important than international

trade effects

… wholesale/logistics

… first stage was massive government

investment in wholesale markets (China,

11,000% increase in these markets in 1990s;

India, from 450 in 1950 to 5500 in 2008)

… second stage (1990s/2000s) HUGE private

sector investment in logistics firms, specialized

wholesalers

… third stage is “follow sourcing” (large

processors and retailers “bring along”

multinational logistics/traders

… food processing

… first stage was parastatal processing and small

informal processing

… second stage was HUGE investment (by

domestic and foreign, following FDI

liberalization) in 1990s/2000s

example: Thailand’s CP creates largest shrimp

farm/processing in world in Indonesia

… third stage is rapid concentration &

multinationalization of food processign

(integration of ASEAN food economy!)

… food retail modernization

… first stage was (limited) public sector “fair

price shops” and some cooperative chains

… second stage (1990s/2000s) “supermarket

revolution” in ASEAN & China, starting India

… growing THREE times faster than GDP

… example: just top 47 chains in China, 13

billion USD in 2001, 92 billion USD in 2009

… example: Philippines, leading chains, from 1

billion USD to 10 billion USD just over 2000s

… modern retail from tiny share early 1990s to

30-60% of food retail over the past 15-20

years

… third stage: concentration and

multinationalization of food retail in the

region

e) Food Trade has a small share of the ASEAN

food economy

… but the fastest growth (and the future) is

INTRA-ASIAN trade

… heavily encouraged by the food industry

transformation & their procurement system

changes

ÎBig opportunity, but also competition

… 30% of vegetables and 70% of fruit in

Indonesian supermarkets from Thailand and

China

f) Consumers win from this transformation

… Supermarkets in Delhi charge 15-20% less for

staples (rice and wheat) and 10% less for basic

vegetables than traditional retailers

ÆModern food industry can increase efficiency

in the supply chain and reduce food prices

(this is international experience as well)

g) Farmers both win and lose …

… farmers selling to supermarkets tend to

increase incomes because of quality

differentiation and price premiums

… but tends to favor medium farmers and asset-

rich small farmers

… so issue over time of helping asset-poor small

farmers to upgrade

… opportunity for public-private partnerships to

help small farmers participate:

… Malaysian program helping small farmers

into supermarket supply chains

… “Diamond” arrangements with

supermarkets, modern wholesalers, input

supply companies, farmer associations, and

government (Indonesia)

… rural business hubs, integrated platforms,

and economic corridors (PPP programs with

private sector anchor firms and hub+spoke

approach to include small farmers in area)

6. Harnessing the private sector’s

investment

a) Crucial role of private sector in transforming

the ASEAN food economy

b) This raises consumer and producer food

security

c) Policy could aim at reducing risk and

increasing incentive for this investment

d) Governments can enter PPP where there is

win-win for business, small farmers, and

consumers