Over the past 20 years, the value of world trade in processed agricultural products grew more quickly than trade in primary agricultural products. Exports of processed agricultural products grew 6 percent per year during the period 1981-2000, compared with 3.3 percent for primary products. As a result, the share of processed products in total agricultural trade increased from 60 percent in 1981-1990 to 66 percent in 1991-2000. Growth rates have been exceptionally high (above the average of 6 percent) for the processed forms of cereals, fruit, vegetables, pulses, tropical beverages and poultry products.
A number of factors have contributed to the decreasing share of primary commodities in agricultural trade. On the demand side, rising incomes globally and changing lifestyles have prompted consumers to spend an increasing share of their incomes on manufactured and processed goods. On the supply side, continuous improvements in packaging and processing technologies as well as lower transport costs and reductions in barriers to trade have increasingly facilitated trade in processed products. The high costs associated with processing, packaging, advertising, marketing and distribution mean that the share of the primary commodity in the value (price) of the final processed product has inevitably diminished. The use of agricultural raw materials in other sectors of the economy has also diminished with the development of synthetic alternatives.
Although some developing countries increased their share of world exports of processed agricultural products, the developed countries captured most of the rapidly growing trade in this sector. Many developing countries, particularly the LDCs, still depend heavily on exports of primary agricultural products. The share of developing countries in world exports of processed agricultural products decreased from 27 percent in 1981-1990 to 25 percent in 1991-2000. For the LDCs as a group, their share in processed agricultural exports fell from a negligible 0.7 percent to 0.3 percent over the same period.
Developing countries' shrinking share of exports of processed products has been particularly evident in such products as cocoa and coffee. The share of the top ten cocoa-producing developing countries in world exports has declined as the stage of processing has increased. While the share of chocolate exports in total cocoa trade rose from 22 percent in 1975-80 to 58 percent in 1998-2002, the share of these countries in chocolate exports declined from 2.4 percent to 2 percent during the same period.
Similarly, the top ten coffee-producing developing countries' share in green coffee exports remained unchanged at about 67 percent between 1975-80 and 1998-2002, but their share in roasted coffee declined from 8.5 to 1.8 percent during the same period.
Market access and market entry barriers in importing countries have limited the ability of developing countries to expand exports of their processed products. Tariff escalation, in particular, constitutes a major barrier to market access for most of the processed agricultural exports of developing countries.
Several studies have shown that agricultural commodity chains, particularly those of high-value crops and processed products, are increasingly dominated by a few transnational enterprises and distribution companies with significant market power.
Internal supply constraints also limit the ability of many developing countries, particularly LDCs, to take advantage of opportunities to trade processed agricultural products. These include obsolete technology; inadequate transport, storage and marketing infrastructure; inadequate legal and regulatory frameworks; and trade and economic policies that are biased against agriculture and exports.
Much attention has understandably focused on tariffs and other trade barriers that limit developing countries' commodity exports to the developed world. But several studies have suggested that in the long run developing countries stand to gain a great deal from reducing barriers to agricultural trade among themselves as well.
Since the mid-1980s, agricultural trade among developing countries has grown rapidly, at an annual rate of 8.8 percent, outstripping the 4.2 percent increase in shipments to developed countries. The share of agricultural exports that move between developing countries has increased by more than one-third, from 31 percent to 44 percent.
Much of this increased trade took place between neighbours in developing regions. Latin America registered the most rapid growth in intraregional trade, with an increase of more than 90 percent in the proportion of exports shipped to other countries in the region.
The proliferation of regional trade agreements (RTAs) has contributed to reducing trade barriers and stimulating trade among developing countries. In many developing regions, RTAs are seen as a vehicle for promoting and diversifying trade. This is particularly true of those agreements that have reduced tariffs and other barriers to agricultural trade within their regions. A recent FAO study concluded that regional trade agreements had been the main trigger for rapid growth of agricultural trade within Latin America.
Some of the RTAs among poorer developing countries, however, have not seen significant growth in agricultural trade. Many have been hampered by major structural and policy obstacles, including inadequate transport and communication facilities and poor information about markets and investment opportunities. The lack of standardized packing, grading and quality control systems at regional levels also continues to frustrate efforts to expand trade.
In the past, many RTAs deliberately excluded significant parts of agricultural trade. Often agricultural commodities or food products were classified as "sensitive", allowing members to reduce tariffs more slowly and retain them at higher rates for these products or to exempt them altogether.
RTAs formed in the past decade are more comprehensive in their treatment of agriculture. The North American Free Trade Agreement (NAFTA) and the Southern Common Market (MERCOSUR) have removed nearly all agricultural trade barriers.
The number of RTAs has grown rapidly since the late 1980s. As many new RTAs have been formed since the WTO was established in 1995 as during the preceding 37 years. On average, each WTO member is involved in five RTAs, though some belong to ten or more (see map).
The configuration of RTAs is also becoming increasingly complex. Many RTAs overlap. Networks of RTAs span within and across continents. A number of schemes, such as NAFTA, straddle the North-South divide, involving both developing and developed countries. NAFTA's impact on Mexican agriculture, however, provides a cautionary reminder that RTAs can produce losers as well as winners, particularly when they include countries at starkly different levels of economic development (see box).
NAFTA and the Mexican maize sector
The NAFTA agreement has had a significant influence on the structure of Mexican agricultural production and trade. On the one hand, large-scale producers, often linked to United States agribusiness interests, have expanded production of fruits and vegetables, resulting in a considerable increase in exports to the United States. Net exports of tomatoes, for example, have almost doubled from their pre-NAFTA levels. On the other hand, the replacement by Mexico of import licensing by tariff quotas and the decision not to impose the transitional out-of-quota tariffs allowed under NAFTA, have permitted maize imports from the United States, mainly for feed use, to more than treble. Maize prices have fallen by 50 percent, to the benefit of livestock producers and consumers. Maize production on Mexico's large-scale, irrigated farms has declined, suggesting that more prosperous farmers have shifted to other crops. However, it appears that the brunt of the price deterioration has been borne relatively more by the 3 million small-scale maize farmers producing on non-irrigated hillside fields, who do not have the flexibility to shift into other crops.
Agricultural commodity chains, particularly those of high-value crops and processed products, are increasingly dominated by transnational trading, processing and distribution companies. On its way from farmer to consumer, for example, nearly 40 percent of the world's coffee is traded by just four companies and 45 percent is processed by just three coffee-roasting firms.
Increasingly, these large companies dominate world agricultural commodity markets and wield direct and increasing influence on what is produced, and how. As the UNCTAD World Investment Report 2001 noted, this can bring significant advantages as a result of economic linkages established through sourcing from domestic producers, the development of new suppliers and the upgrading of existing ones. Reliable quantities and consistent quality are key to the business operations of the transnational companies and they have developed their relationships with suppliers so as to ensure them. This includes collaboration in product development, technology transfer and training, contract farming and financial assistance. For some producers and exporters, therefore, these changes are opening up unprecedented opportunities. However, without assistance to improve their efficiency and competitiveness, many smallholders and domestic traders will struggle to meet the new market requirements.
The increasing dominance of large companies can be seen at three levels - the exporting developing countries, the international markets and the retail markets of importing countries.
In exporting developing countries, particularly following the elimination of many marketing boards, large companies with warehousing and shipping facilities have been able to exploit their financial and logistical advantages. Many now buy produce directly from farmers, specifying their requirements and prices. Intensified competition favours those farmers and traders with access to cheaper finance and good logistics. Larger enterprises have advantages in both respects.
In Kenya, for example, exports of fruits, vegetables and cut flowers have become the second biggest source of foreign exchange. The industry earns US$300 million per year and employs more than 70 000 people. However, as the scale of exports has grown, the number of suppliers and the share produced by smallholders and shipped by small- and medium-sized domestic exporters has shrunk.
Prior to the horticultural export boom in the 1990s, smallholders produced 70 percent of fruits and vegetables exported from Kenya. By the end of the 1990s, 40 percent of the produce was grown on farms owned or leased directly by importers in the developed countries and another 42 percent was produced on large commercial farms. Smallholders' share of this lucrative business had dwindled to just 18 percent. Among exporters, seven large companies controlled more than 75 percent of the market.
At the international level, a few vertically integrated companies have gained increasing control over agricultural trade. In cocoa, the number of trading houses in London shrank from 30 in 1980 to around ten in 1999. Similarly, the six largest chocolate manufacturers account for 50 percent of world sales.
A handful of vertically integrated companies now dominate the production, distribution and international trade of both oilseeds and oils. Just three global companies control 80 percent of the soybean crushing market in Europe and more than 70 percent in the United States.
Grain trading, storage, processing and milling is also dominated by a few big companies. Three or four companies control 60 percent of the terminal grain-handling facilities, 61 percent of the flour milling, 81 percent of the maize exports and 49 percent of the ethanol production in the United States.
At the retail level, supermarkets have grown rapidly in both developed and developing countries. In Latin America, for example, supermarkets increased their share of food retailing from less than 20 percent in 1990 to 60 percent in 2000. Worldwide, the top 30 supermarket chains now control almost one-third of grocery sales. At the national level, the five biggest retailers control between 30 and 96 percent of food retailing in the EU and the United States.
Supermarkets' domination of the market gives them significant leverage over production, distribution and trade, including through direct involvement with developing country suppliers. To simplify operations, most supermarkets prefer to work with a limited number of suppliers who have the resources to meet their quality requirements and delivery schedules.
As in the example of Kenyan horticulture cited above, a few large commercial producers typically benefit from this expanded trade. The majority of smallholders are left out.
Much attention has been focused on the apparently small share of farmers and producing countries in the revenues eventually derived from their exports.
Growers' prices do typically represent a small fraction of the retail price for finished products, ranging from as low as 4 percent for raw cotton to 28 percent for cocoa.
Even with bananas, which require almost no processing, international trading companies, distributors and retailers claim 88 percent of the retail price; less than 12 percent goes to the producing countries and barely 2 percent to the plantation workers.
However, without knowing the cost structure of marketing and distribution, it is difficult to judge what an "appropriate" farmers' share might be. It is also inevitable that a greater value-added content in the final product will reduce this share. More important is the absolute value of the return to farmers. More detailed analyses of commodity value chains are needed to establish whether margins are competitive.