Impact of agribusiness linkages

Impacts at producer level

In all the cases studied, it is agreed that agribusiness linkages associated with an organizational structure enable improvement in the producer's negotiating ability (because profitability is higher). This occurs because either the prices obtained are higher or the costs of inputs nd services are lower prior to collective negotiation, or because technical support enables higher levels of productivity.

The second favourable aspect seen in all cases is that there is the opportunity of participating in decision-making in production and even negotiation. This is explained by the existence of a participatory structure that prevails in most organizations, or by the same activity developed in order that the producers improve their capacity for entrepreneurial management. For this reason, the structure becomes more active.

Another overall impact of agribusiness linkages for producers is their capacity to have a positive effect on the regional workforce and the use of family labour (Table 14). There are other particular effects that influence the living standards of beneficiaries according to the circumstances of the regions. For example, in some countries, favourable effects are evident in nutrition, education, health and housing.

Some organizations advance explicit programmes of health, housing, female employment and infrastructure. Examples include FECOAGRO (Argentina), the Salinas dairies (Ecuador) and Moras del Oriente (Colombia) where the support programmes aim to improve the service infrastructures of the district or locality (Table 15). This seems to be a specific pattern for areas that develop or have horizontal chains, which at the same time enable the construction of positive externalities for producers, organizations and their families.

In general, the impact observed in the linkages on the supply of manual labour is minimal. Traditional conditions of predominantly family labour prevail in the primary link. This link of artisanal processing does not require particularly skilled manual labour. However, different organizations are concerned with improving product quality; this is why they resort to training to improve processes. In cases using industrial technology to adapt to or process products, skilled manual labour is required, but only in a small amount and, therefore, linkages do not need to be created.

Impact at the level of the producers organization

Agribusiness linkages may have an impact by developing new skills in the organizational structure and at the economic level. With regard to the former, it was not possible to evaluate this subject matter in all its dimensions. However, in the aforementioned case studies, almost all the associative organizations have had to develop skills in business management and organizational capacity in order to progress on three fronts: (i) planning production at the level of associate producers and the organization group; (ii) associated with point (i) is the adoption of explicit policies of commercial development that require advances in product quality, either raw or processed material; and (iii) strategy development to face growing risk at both associative and individual level.

In relation to the first point, associative organizations must commit to buying volumes with remunerative prices and advances in order to be successful. However, they need to increase demands on coordinating the productive processes in such a way as to obtain the volumes and qualities programmed in a timely manner. To achieve this, a strategy is established involving sowing programmes and providing inputs, capital, technical assistance and other necessary services such as irrigation and transportation. The permanent use of information is an important requirement forcing the producer and the organization to develop appropriate skills.

TABLE 14
Linkages with programmes for improving living standards

TABLE 15
Impact of agribusiness linkages on beneficiaries

The second aspect, trade development, means that both the associative organization and the producers show negotiating skills to secure factors and services to produce at the lowest cost and highest quality while placing their final products on the market in favourable conditions. Collective negotiations have proved to be an efficient instrument, as FECOAGRO has shown in collective negotiation of an incentive credit with the IDB, and land negotiation in favourable conditions. They have also shown, more typically, organizations that purchase inputs directly at the producing or distributing companies.

The third aspect of developing managerial skills is reducing and preventing risk. The strategies involve primary production, the processing stages and final markets. In this way, producers diversify productivity, while the associative organization diversifies the range of products processed or traded. It also diversifies uses and final or intermediate product markets. In addition, this may involve creating risk, stabilization and compensation funds. In general, the organizations have intervened actively to encourage diversification of primary production, of product use, and of markets.

Associative organizations have also been developing skills in managing relationships, as shown in agribusiness linkage diversification. They have done so in order to extend to other segments of the productive chain, towards other similar organizational structures (cooperatives that negotiate with each other), and third parties, including international cooperation. However, these changes have not necessarily modified the administrative structure of the organizations towards more bureaucracy. On the contrary, in some organizations the administration has been simplified while the demands on the managerial staff functions have increased.

The economic results in the agribusiness linkages analysed are positive in 8 of the 12 cases analysed (Table 16). The main feature of the economically successful organizations is low administrative costs with regard to service provision. This is because of receiving a subsidy or financing from government or international cooperation. Alternatively, they might not be in receipt of a subsidy, or their service provision is carried out through third parties. Another characteristic common to most of the case studies is that the final market is mainly domestic or has less-competitive special niches in the foreign market.

TABLE 16
Economic impact of agribusiness linkages

In the cases with negative economic results or that have required restructuring processes, it is mainly organizations that have been affected by difficult market situations and/or administrative problems.

Constraints on agribusiness-linkage development

There are limitations to the development of agribusiness linkages at all levels in the economy, in macroeconomic and environmental aspects, in managing sectoral policies, in public-private relationships, in regional conditions, and in organizational and micro aspects.

Macroeconomic policies and their environment can inhibit the development of agribusiness linkages as can economies where the national currency undergoes persistent revaluation. There are also low rates of economic growth and employment-generation to consider. The main adverse effect is observed in the poor economic results of the organizations that therefore have to restrict or eliminate emerging linkages that profit from great innovative ability but which can initially entail high costs to the organization.

At the sectoral level, there is no explicit policy to support innovations that can give rise to matrix linkages and a complex network of favourable interactions for agribusiness agreements. Small producers frequently do not benefit from basic research in different fields or innovative pilot programmes aimed at promoting competitiveness with respect to other entrepreneurial producers. In the cases studied, the exceptions of Argentina, Chile and Guatemala only highlight the urgency of such policies.

Most of the countries analysed have formulated an active policy to foster competitive agreements with greater involvement of private enterprises in advancing productive chains. However, there is a lack of the active interaction that should establish synergies between the public and private sectors for the benefit of small producers. A positive intervention in this sense means that the public sector actually promotes those agents with the capability of setting up the links required in agribusiness linkages (in certification, quality control, transportation services, financing, etc.). Similarly, within the framework of a relevant incentive policy, private agents could take on risks after a pilot stage has shown the feasibility and convenience of their intervention.

Prevalent poverty and misery in most countries, particularly in rural areas, are other conditions that have a negative impact on the efficiency and cost of agribusiness linkages. The very benefits of the agribusiness linkage consist in rectifying the precariousness in living conditions through programmes to improve nutrition, health, housing, etc. In addition, the low living standards of producers and their families means they are not enable to accumulate or invest. Incomes are frequently directed towards remedying deficiencies in health, housing, nutrition and infrastructure.

Moreover, consideration should be given to the great gaps and deficiencies in the education and skills of the population, workers and rural owners in most countries. An indispensable condition to rectifying such gaps entails stabilizing the progress obtained in the long term from the innovative agribusiness linkages.

At the most individual and micro levels, associative organizations are limited in their negotiation ability vis-à-vis agents with better capabilities and greater economic power, such as supermarket chains, large processors and international dealers. Contractual development could incorporate aspects of participation of these associative organizations, which could be more explicit where negotiation is asymmetric. It is also necessary to develop skills in export procedures and commercial development in general.

Included among the major constraints on agribusiness linkages are informality and benefits offered to agents concerning tax evasion and the use of economically favourable conditions. In some cases of exports, the recent crises in foreign markets have enforced readjustment and limited the type of linkages that have been developed successfully.

Finally, there is a lack of clear criteria that enable associative structures to formulate priorities in the form and content of agribusiness linkages, such as costs that may arise. Most of these structures behave like beneficiary producers, through trial and error. Systemizing essential experiences in agribusiness linkages could help them to evaluate different intervention possibilities that are public or private, endogenous or exogenous to the organization or fundable by the government, the associative organization, producers, or jointly.

Evolution in the content of agribusiness linkages

With regard to the cases analysed, the themes discussed in this section are:

• Do agribusiness linkages in which small-scale producers participate change towards a more complex structure in accordance with the increased requirements of a globalized or competitive environment?

• Which factors influence changes in agribusiness linkages?

• How do they affect the primary producers and their standard of living?

In general, in all the cases, there are two nodal or main agribusiness linkages: (i) the linkage between the producer/processor enterprise and the trading enterprise; and (ii) the linkage between the processing enterprise and the trading/marketing enterprise. These nodal axes define the type of contractual agreement and the network of relations involved.

In addition to nodal linkages, there are other agribusiness linkages that could be called "emerging" either because they depend on core linkages or because they are complementary, marginal or have recently begun to emerge. These collateral linkages can be exogenous to the associative organization, in which case this is the one that establishes these links, or endogenous to the organization, with the organization frequently in the role of intermediary.

Table 17 shows the types of agribusiness linkages and their configuration. It is in the emerging linkages where the main innovations regarding agribusiness linkages occur. The linkages are included to the extent to which they are observed in some of the cases studied and have great potential for development in the future.

The following fronts of innovation in agribusiness linkages are highlighted:

• Service provision to producers and enterprises: these are services for the chain, cold-storage facilities, transportation, and collection. They include processing, packaging and labelling.

• Trade support and development. This includes links with marketing chains, such as supermarkets, with foreign commercial enterprises, and creating complementary alliances in order to improve marketing conditions.

• The integration of links in the agro-industrial chain. It incorporates services to the cold chain, transport, packaging and promoting agro-industrial exports.

• Investment. This includes private investors connected with the associative enterprise directly and/or with producers. There are also new forms of investment and supply of productive factors, such as the leasing of permanent crops.

TABLE 17
Change in the content of agribusiness linkages

In general, where processes are artisanal and targeted directly towards the domestic market, innovations in agribusiness linkages are minimal. When the process stops being artisanal and incorporates an industrial process, it is integrated to links subsequent to the processing, and the products are intended for the international market or modern market niches. This is when a greater frequency of new agribusiness linkages is observed.

Through more decisive intervention by government and private agents, the possibilities of emerging agribusiness linkages are extended towards more diverse, non-traditional areas. Examples include: the development of services to the chain, such as transportation and cold-chain services (Chile); the use and supply of information (Chile and El Salvador); new credit and savings methods(Colombia); risk prevention (Colombia); quality control (Chile); and new forms of land access (Colombia).

These emerging innovative linkages become consolidated while becoming institutionalized and formalized. Therefore, they receive public and private assistance in financing, regulation, infrastructure and technology. This behaviour is clearly illustrated through cases in Chile, where there is a wide variety of institutional, normative and instrument support in policies and promotion plans.

On the other hand, a lack of support and policy definition leaves innovative linkages at a purely experimental or trial stage. This is what has occurred, for example, with the leasing of permanent crops, a method observed in Moras del Oriente. When innovative agribusiness linkages emerge spontaneously and have no public or private institutional support, they become highly vulnerable and may not last.

Other aspects of developing emerging agribusiness linkages arise with other second-level or second-generation processing enterprises, which satisfy the need to specialize the supply for new segments of the market (e.g. domestic market for the consumer, and foreign markets).

The other alternative of the agribusiness linkage is the supply of new services for the associative organizations, geared towards satisfying greater market demands. These include: collection services, packaging, specialized transportation and cold-storage services. An interesting linkage relates to investors that expand the activity of processing enterprises through fixed-term companies. These companies can decide on the investment needed to increase the supply for a potentially attractive market and can involve small producers that lack capital.

As already pointed out, other environmental aspects play an important role in connecting emerging new linkages. These include progress in the level of education and skills of the labour force, the development of domestic markets, and special market niches at international level.

The content of the agreements is another significant object of change and evolution. The most substantial innovations in agribusiness linkages are seen mainly in the content of the contracts rather than in the emergence or disappearance of linkages. Table 17 summarizes the content of agribusiness linkages and highlights the trends.

More than ten years ago, producers operated more like simple providers as the level of market demand was different. Today, the relationships between the producer and the associative organization are more contractual than some years ago. This means greater commitments in terms of quantity, quality and specified delivery times. Nevertheless, the supply contracts and even the affiliation contracts at the organizational structure are verbal in most cases. However, almost half of the organizations have defined the possibility to stipulate written agreements, according to the beneficiary's preference.

The quality and quantity demands are greatest when dealing with products for export or established markets, such as chain or institutional warehouses. At the same time, the associative organizations must guarantee the sale of the entire volume previously agreed on at paid prices in relation to quality. These mutual agreements of quantity, quality and paid prices increase the risk situation for both parties participating in the agribusiness linkage. Producers and organizations have subsequently had to increase their managerial skills in planning production and input supply, such as seeds and fertilizer. In four of the cases analysed, sowing is planned in advance. The producers receive training in business management. In four other cases, the planning aims at avoiding oversupply with a strategy for diversifying activities.

The fronts of intervention of associative structures have increased in diversity and complexity, while needing to offset the current deficiency of government. In the cases with the greatest range, the associative organizations serve virtually all basic fronts, not only production, but also family well-being. They have also had to adopt agile mechanisms in order to rectify some gaps. For example, in credit, associative structures frequently have to act as the intermediaries and/or guarantors on behalf of credit organizations that find themselves at a high level of risk in agricultural production.

Negotiations with highly competitive commercial structures affect associative organizations as well as producers by incurring transaction and non-direct trade costs, e.g. late payments extended for up to one month; commission payment to be part of the group of providers; and funding promotion campaigns carried out by commercial chains. In the same way, the cooperatives lose competitiveness in relation to their member providers while other individuals are able to pay better prices or make cash payments.

From the case studies, there was no evident availability of incentives and sanctions to enable members of organizations to face unfairness and low-commitment situations. On the contrary, in various cases, the cooperatives have experienced critical situations and have had to restructure. Even today, Chilean cooperatives need to face the negative effects of competition from individual traders. These weaknesses seem to come from the arrangements or agreements themselves in which informality prevails, such as in most cases studied. On the other hand, Azules, El Limón and the Salinas dairies have established unequivocal obligation agreements in sales and quality requirements that envisage sanctions.

Changing trends can also be seen in the important nodal linkage between the associative organization and traders. The commercial agents that operate individually tend to substitute for marketing enterprises that are able to actively intervene in the management of product sales, through transportation, packaging, labelling, quality control, and, occasionally, credit supply to finance previous commitments or carry out maquila agreements with the processing organizations. Supermarket chains can be included here. Their intense competition has led them to make incursions into food processing to be sold under their own brand through maquila contracts. Alliances with other enterprises that are eventually set up to complement the activity can also be included here.

Governments used to be the main agent participating in the emerging traditional linkages. Until two decades ago, they directly supplied services such as technology transfer, technical training, technical assistance and subsidized credit. Substitution by private enterprises was foreseen in this kind of service. However, this has frequently failed to materialize or the substitution has been partial or sporadic. Governmental readjustment is shown in the partial financing of some services through third parties. In the new emerging linkages, government participates partially in some activities that it considers priorities, such as market and information development. Other new linkages have been advanced by private initiative, even without enough width or coverage.

A particularly interesting aspect where major advances have not been observed is in the development of the contractual design of businesses, notwithstanding their greater complexity. In fact, informality is all pervasive, becoming a prohibitive factor for developing agribusiness linkages while different agents weigh the conveniences of modernization with the advantages of staying at the margin of the legal and/or tax systems (lower costs).

The contractual development of agreements with the kind of linkages should be pointed out. The relationships between organizations and third parties are normally carried out formally through written agreements. In relationships between producers and the associative organizations, there is a combination of informal, verbal and formal written agreements. While the associated producers establish relationships with third parties, informality in associative structures (as has occurred with some cooperatives) has a negative effect on the agribusiness linkage.

The changes in the content of agribusiness linkages have driven the development of learning and skills of both the associated producers and the organizations. This relates to planning, risk forecasting, quality control and designing mechanisms to make proper use of existing resources.

Research has not succeeded in evaluating some aspects of agribusiness linkages that are important for establishing their strength and sustainability in the long term. In order to achieve this, it is necessary to establish: the costs for each of the parties; the capacities of the associative organization and the producers to finance said costs; the benefits recorded; the quality of the linkage; and the possibility to replicate the most successful linkages for other groups of producers.