COMMITTEE ON AGRICULTURE
Rome, 13-16 April 2005
The Globalizing Livestock Sector: Impact of Changing Markets
Item 6 of the Provisional Agenda
1. At its 29th Session in May 2003, the Committee on World Food Security1 identified international trade as a factor affecting food security and food safety and recommended that FAO “document and analyse ways in which trade, including trade distortions, have affected food security in countries”. At its 17th Session, also in 20032, COAG had noted the need to strengthen the capability of small farmers in market access.
2. International trade is an important element in the larger phenomenon known as globalization. Globalization can be seen as integration of economies through trade, flows of finance, knowledge, ideas and people. Globalization in the livestock sector is manifested as increasing international flows of livestock and livestock products as well as capital, exchange of information and technologies, pervasiveness of increasingly demanding standards, and changes in sectoral structure towards concentration and integration. As such, it can affect the functioning of domestic livestock markets.
3. The livestock sector, traditionally based on locally available resources, supports the livelihoods of an estimated 600 million rural poor. The present paper addresses the ways in which globalization is changing the sector, and the effect that this is having in developing countries, on small-scale livestock producers, traders and processors. In order to do so, it:
4. Ultimately, the purpose of this paper is to receive guidance from COAG on the priority to be assigned to the collateral social, public health and environmental impacts of the globalizing livestock sector as well as on the approaches, both from a technical and policy perspective, to be used by FAO and its Members in addressing these consequences.
International flows of livestock and their products
5. The volume of livestock production in developing countries has steadily increased since the early 1980s, both for internal consumption and for export. At the same time, consumption of meat and milk worldwide has been growing. Growth in developing countries has accounted for a large share of this increase, and growth in poultry and pork consumption in developing countries has been particularly striking (190 percent and 160 percent respectively between 1983 and 1997). In 1980, the human population of developing countries made up 76 percent of the world population and consumed one-third of the world’s meat and milk. It is estimated that by 2020, they may account for 80 percent of the world’s population but two-thirds of direct consumption of meat and 60 percent of milk consumption.
6. Livestock production traded across international borders has increased from 4 percent in the early 1980s to approximately 10 percent. Developing countries are among the top 20 exporters and importers in value terms3 for livestock products including live animals and the meat of cattle, sheep, goats, pigs, horses, chickens and ducks, fresh and condensed cow milk, as well as pig and cattle feed. Imports in large quantities include meat of cattle, sheep, chickens and ducks, fresh and dried cow milk, ghee, animal feeds and live cattle, goats, sheep, buffaloes and chickens. Regional trade agreements are of growing importance to maintaining trade with neighbours as well as offering the potential for economies of scope and scale to their members trading on global markets. Import by industrialized countries, although large in volume and value, is stable and includes only a few trading partners from the developing world.
7. Population growth and increased incomes have both contributed to rising demand. Among urban consumers in developing countries, rising purchasing power and the emerging middle class drive both the volume of livestock products demanded and their type and quality.
8. Liberalized international markets with decreasing tariffs4, “tariffication5”of non-tariff barriers for some products and expanding membership of the World Trade Organization (WTO), should be encouraging globalization of the livestock sector by “levelling the playing field” for all trading partners. In practice, however, while the impacts of the Agreement on Agriculture are complex to interpret, it appears that the “playing field” is still very uneven. Preferential market access and longer schedules for tariff reduction have been permitted for developing countries, but the benefit of these concessions is tempered by the fact that their tariffs before the Uruguay Round were often lower than those of developed countries. Moreover, even after “tariffication” adjustments, high tariff peaks for dairy products and meat have been observed in developed countries. Non-tariff barriers still exist (and appear to be growing) in the form of requirements and regulations, related principally to animal health and food safety but perhaps in the future to other factors such as animal welfare and environmental concerns.
9. There is a two way relationship between livestock disease and globalization. Under the principles of equivalence laid down by the WTO Sanitary and Phytosanitary (SPS) agreement, it is easier for countries with similar disease status to trade with each other than for those with different levels of disease. In the markets of industrialized countries, disease control requirements create high entry barriers. At the same time, longer market chains and sourcing of products from wider geographical areas increase the risk of spreading disease and heighten the challenge of traceability. Outbreaks of transboundary diseases (foot-and-mouth disease, Contagious Bovine Pleuropneumonia) and emergence of new threats (Highly Pathogenic Avian Influenza) cause disruption within national markets and regional trade groups as well as for international trade.
Flows of finance
10. Inward investment or foreign direct investment by large retailers (supermarkets, fast food chains and food processors) is providing an important flow of finance into developing country livestock sectors. Stable political and economic conditions, combined with incentives to investment, in Latin American, Asian and African countries, and saturated markets in the United States and the European Union have created a climate for global expansion of large retailers. While this phenomenon has only occurred in the last 10-15 years, once established the large retail market has spread very fast.
11. The spread of supermarkets provides an example of the interaction between inward investment and globalized livestock markets. In the early 1990s they were relatively insignificant in developing country markets, but growth since that time has been rapid. Although expansion has not followed an identical pattern in all countries, it generally seems to occur in “waves”, beginning with the development of wholesalers, progressing to local large format stores and national chains, and finally to the establishment of multinational chains and consolidation of national chains. Supermarkets have grown to account for an estimated 55 percent of national food retailing in South Africa, Argentina, Chile, the Philippines and Mexico. The most notable uptake has been of vegetables and fruit, but milk, meat and processed dairy products are also sold. In China, supermarkets are estimated to turn over US$40 billion of food annually, mostly from domestic sources, accounting for 35 percent of urban food retailing, and growing fast. In its large and medium sized cities (20 percent of the market), supermarkets sell 40-50 percent of all milk.
Flows of ideas and technology
12. Technology innovation has made it possible to preserve livestock products (dried milk, frozen meat, semen) while improved transport infrastructure allows products to be transported rapidly across long distances and lengthens market chains across international borders.
13. International information flow has been created by world travellers, television, films, the internet and the spread of international retailers. Dietary convergence – demand for the same foods across many countries – appears to be one result. There has been a two-way flow of ideas about nutrition and preferred foods, and in urban markets across the world a widening range of products and recipes from many countries can be found.
14. Dietary recommendations from international organizations, including FAO, would, if adopted, influence global trade. Figures presented at the 18th session of COAG6 suggest that production, processing and the flows of livestock products worldwide would be affected if consumers followed recommendations to raise consumption levels of livestock products by poor consumers, while limiting fat intake by the better-off. In the poorest countries, average consumption of livestock products is below recommended levels, while in developed countries, obesity has been identified as a rising problem. A spontaneous shift towards healthier consumption patterns can already be seen by some middle-class urban consumers in developed countries, although they represent only a small proportion of the whole.
15. Information flow related to zoonotic livestock diseases can increase the volatility of globalized livestock markets by rapidly affecting consumer preferences for meat from different species or different sources (e.g. BSE had an adverse impact on consumption of beef. In countries affected by HPAI, export markets for poultry were closed and many domestic consumers switched to other meats such as pig meat.)
16. Globalized livestock markets are visible in three structures:
With globalization, international and domestic markets can become connected. Flows of products and movements of people take place between one market and another. Within poultry markets, for example, not all cuts are exported; those not required for export are sold in the domestic market. Pig producers in some southeast Asian countries switch from national to regional markets depending on relative prices at different times of year.
Although these markets are not identical, there are some common features in their requirements and their impact, particularly in the first two cases.
17. Globalized markets have the potential to increase national income and create employment. For producers and traders, developing domestic markets can offer flexibility and a greater diversity of livelihoods options.
18. Investments in livestock disease control may raise the standards of national animal health services and reduce the costs of clinical and sub-clinical disease. Consumers may benefit from food safety standards if they purchase from large retailers, or if food safety standards imposed for the export market lead to raised standards in domestic markets. Safety and quality requirements for one market chain eventually impact on others as consumers become used to higher standards and producers switch between markets.
19. In some cases, the presence of large retailers can reduce prices to consumers - in China, for example, the influx of supermarkets broke the monopoly of local dairy firms, drove down prices of dairy products and introduced product variety.
20. Under appropriately designed contractual arrangements risks can be reduced. Safety and quality requirements also facilitate market development and entry. When there are no standards, retailers must vertically integrate since they have to assure quality and safety. When standards are widely applied, vertical integration may not be necessary.
21. Equally important, the interest of the private sector in setting standards can provide a benefit if the sector contributes to the costs associated with institutional and technical change in establishing effective standards.
Standards and regulations
22. Regulations on animal health and food safety tend to be strict in international and inward investment chains, driven by zero-risk preferences of importers, large retailers and middle class consumers. International codes and standards from the Organisation internationale des épizooties (OIE) and Codex Alimentarius form the basis of negotiations. In order to comply, an exporting country may need to adopt a number of measures. For example, national or zonal disease freedom may be required, with a need to create surrounding buffer zones against disease, producers may need to be relocated, or areas of the country physically separated by fences or subject to strict livestock movement control. Abattoirs must meet high animal health and food safety standards, and biosecurity on producer and processor premises must be strict in order to control zoonotic diseases. Food control and certification systems must be of a high standard. In addition to the health and safety standards and regulations agreed by international bodies, additional technical requirements may be imposed by retailers, such as particular meat cuts, carcass size and weight, leanness of meat, fat levels in milk, egg colour, labelling with particular information or in specified languages, organic production and welfare of animals. In interconnected markets, standards of the higher value market may be taken up by the lower value market, although in general they will be less strictly monitored.
23. Globalized markets are exclusive. Only some producers meet the requirements to access them, and small producers can find it hard to learn of the necessary requirements or make the necessary investments. In vertically integrated chains controlled by large retailers, procurement processes tend to shift towards centralized procurement systems, including the use of wholesalers specialized in a product category, and/or dedicated to this market chain. Large supermarket chains may use preferred supplier systems to select producers meeting quality and safety standards and reduce transaction costs. Products may be procured from a wide geographical area, and procurement is coordinated across different geographical areas of operation.
24. Safety and quality requirements can become non-tariff barriers, as expensive to overcome as the former tariffs. Requirements are frequently updated, and the speed of change in requirements can be as much of a problem as the amount of change. Larger producers and processors invest beyond today’s requirements to reduce the number of changes needed, but small producers find it harder to do this, or to anticipate what additional needs will be asked for next.
25. Those who are excluded from globalized markets may continue to supply local markets, change to an alternative livestock enterprise, or go out of livestock production. Other employment opportunities may grow within the chain e.g. for transport, processing, inspection, and employees have increased livelihood opportunities, but their autonomy is limited and they are dependent on the survival of the retailer.
26. Prices to consumers may increase to cover packaging and quality control costs – the relative impact of price reductions from economies of scale and price increases for quality is affected by competition and varies from case to case. Rural consumers may suffer if products they want become less accessible locally.
27. Producers who become part of an integrated chain may face a change in contractual arrangements (e.g. becoming dedicated contract farmers) with increased levels of assistance and higher prices for quality products, but increased risk if contracts are not met or the retailer closes down. This applies particularly where the farmer must specialize to satisfy volume and safety and quality requirements – typically, smallholders use enterprise diversity to hedge against risk and make relatively small investments in several enterprises, but this becomes harder if they are required to invest more in one enterprise to meet the needs of a retailer. Globalized markets, with higher safety and quality requirements, are typically riskier, since the entire market can close down with the outbreak of a disease or the discovery of a quality problem. Smallholder producers and small traders have limited scope and ability to insure themselves against loss.
28. Producers who are not able to be part of a globalized market may experience negative externalities from it. Off-cuts from the export market or cheap imports may create competition for small suppliers in domestic markets. Those in a disease free or buffer zone have to comply with rules on movement. The market risks may also increase. If an outbreak of a transboundary animal disease closes the international market, the domestic market can be flooded with excess products. In recent years, Contagious Bovine Pleuropneumonia (CBPP), foot-and-mouth disease (FMD) and Highly Pathogenic Avian Influenza (HPAI) have all caused such situations. Exporting countries within the WTO must also open up their markets to imports, creating competition on price or quality. The ability of local operators to compete is affected by the economic and policy environment within which they work.
29. Negative environmental externalities can also be created. Fences for a disease free zone may have a cost to wildlife. Poultry and pig exporters usually take advantage of economies of scale, resulting in the creation of large industrial units with potential problems of waste management and threat to the quality of local water supplies.
30. Negative externalities to human health may occur if zoonotic diseases are carried across borders by trade in animals. International markets increase the potential scope of disease spread, while interconnected markets can increase the problems of disease surveillance and the risk of spread between chains.
Balancing the advantages and challenges of globalization
31. Well managed, a globalized livestock sector can benefit the national economy, provide employment, introduce new technology, increase food safety and raise the diversity of food products available. However, there is potential for adverse effect in the form of market exclusion, heightened risk and negative externalities. The challenge is to promote a reasonable sharing of the benefits while mitigating the externalities and to encourage the promotion of safe food of high quality while at the same time discouraging the development of unjustified standards/requirements. Compartmentalisation7 of livestock products provides an interesting example, whereby it is possible to apply very high standards to certain products or sectors for a premium market while not requiring them in other parts of the livestock sector. The following section proposes a framework to facilitate discussion between FAO member countries and identify areas for capacity building.
32. The framework is proposed to identify clearly the benefits and challenges of moves towards globalization in the livestock sector. It aims to assist Member Nations to make carefully considered decisions on their approach to globalized livestock markets. The approach of any individual country would clearly be dependent on factors such as its reliance on export, the stage of development of inward investment, projected growth of domestic demand and strategy towards public health and food security. FAO could, within this framework, provide examples, tools and other assistance to help countries arrive at the desired outcomes for their livestock sector and achieve both growth and the Millennium Development Goals for poverty reduction.
33. Demands and complexities are likely to grow, not diminish. Standards setting processes require a dialogue between the international community and national governments and between the public and private sectors. What is proposed here is not entirely new, since individual impacts of globalization have been under discussion in many fora – rather, a more coordinated approach to the problem is presented, in order to assist countries to take appropriate decisions to deal with it.
34. It is proposed that a framework be used for systematically examining impacts of globalization on livestock markets. The framework would consist of the five elements of market impact reviewed in the previous section:
Each of the five elements could be subdivided into a number of areas. The following is by no means an exhaustive list of factors that might be considered for each element. General considerations in making use of the framework are discussed at the end of the section.
35. Benefits from globalized markets may accrue to those directly involved in the market chain (producers, traders, processors, inputs suppliers, retailers, etc.), consumers of livestock products and those in sectors affected by livestock production such as tourism and crop production. New employment opportunities may be offered by expanded and diversified markets. They may take the form of increased income, direct cost savings, reduced transactions costs, or factors that are harder to quantify such as increased choice or feelings of security. Positive externalities may be felt by those who do not participate in the globalized chain, but have greater access to services promoted by globalization, or consumers who benefit from the effects of competition that reduce prices or increase quality in the markets from which they purchase food.
36. Important considerations will be:
37. Animal health, food safety, technical and quality standards –both those defined by international regulations and those required by private retailers– might all apply to a market chain. Issues of interest here include:
38. Three different exclusion dynamics may be important and need to be examined. Barriers to entry into a globalized market may prevent small-scale operators from benefiting from a more lucrative market. Secondly, with more serious consequences for poverty, the shrinking of other traditional markets as the globalized one grows may result in a situation where people who neither can nor wish to participate in a globalized market lose their livelihoods anyway. Thirdly, as new regulations and standards are introduced into already globalized market chains, existing participants may be forced out.
39. Typical challenges might include: lack of information or training; lack of capital to invest in improved housing or transport facilities; gender, if access to commercial activity is defined by gender; unwillingness or inability to take on new risks. When reviewing exclusion it will be important to:
Depending on policy choices, we may see reduced diversity of domestic markets with higher market barriers for the poor or, instead, a growth of profitable niche markets operating in parallel with global products, representing a change in structure but still with rich diversity.
40. Perhaps the most important factor here is the trade-off between potentially increased profit from participating in a global chain compared to risks that may be created from insecure contracts, or reduced diversification of enterprises, or dependence upon one supplier for whom, perhaps, management practices have been modified so that the product produced is no longer suitable for other markets. To give one illustration, contract farmers may form part of a vertically integrated market, whether with international or inward investment. There are examples of very poor treatment of contract farmers and workers, but equally, examples exist where being part of a vertically integrated chain has buffered farmers against market failure.
41. In order to assess risks it is necessary to:
42. Externalities to participants in other market chains are complex to examine because they can be very dynamic. For example, competition from overflow from globalized markets may be seasonal or may be influenced quite quickly by change in consumer tastes. Outbreaks of disease affecting trade are rarely predictable but can be devastating in the short term. This suggests the need for scenario analysis and creative assessment of risk.
43. It is well known that large commercial livestock units create waste. However, environmental externalities in many countries are poorly regulated and constitute an equity issue, since they often result from unregulated activities of large private sector companies but impact on poor individuals. Solutions exist but may require quite radical management changes and will only be applied if the financial penalty for polluting is heavy. For management of livestock waste, there is no international framework and guidelines are more common than regulations. The most urgent need in this area is policy dialogue, since case studies and decision support tools already exist.9 National government policies can influence, for example, geographic relocation of large units away from towns and major water sources.
44. Externalities to wildlife have been most publicized in cases where fences are required to support a global market. Here again, the impacts are well documented but the challenge is to develop and implement policies that take account of the needs of multiple stakeholders and the problem of managing a resource that is both national and global in its importance.
45. Externalities to human health are most evident where intensified and interconnected markets create the conditions for emerging zoonotic disease. There are also important but less well documented situations where humans live in very close proximity, exacerbating the problem of familiar but unconsidered zoonoses such as internal parasites. A particularly pressing issue in this area, still requiring attention, is the structure of national and regional government services. On the one hand, development and strengthening of regional structures makes possible regional initiatives with economies of scope and scale (e.g. surveillance and monitoring of transboundary animal diseases (TADs)). On the other hand, decentralization of national governments (including animal health, livestock production and information, and financing) to allow for locally appropriate solutions means that many more actors are involved in policy making and implementation.
46. Impacts on biodiversity also need to be considered. One impact of globalization has been the ability to introduce genetic material, by means of imported semen and animals, from developed to developing countries. It has also become possible to preserve biodiversity, by means of gene banks, although rarely in its natural environment.
Proposals for using the framework
47. A number of Major Outputs under the MTP 2002-2007 are already producing information of relevance to the framework, and this can be expected to continue in the MTP 2006-201110. It is proposed that an exercise should be undertaken to:
48. A body of literature exists within FAO on market development, some from previous FAO work, some from the work of its partner agencies and some within the “grey” literature. This represents a valuable resource. Lessons can be learned for the livestock sector from experiences in other sectors such as horticulture and fisheries and by comparing the experiences of countries that face similar problems.
49. As a general principle, historical analysis and description will be used to provide context, but the focus should be on practical ideas to monitor and manage change in the future. Countries dealing with globalization are often facing very rapid transitions. It will be important to review and repeat analysis as markets develop and their participants learn and adapt, and high quality data may not always be available to facilitate analysis. Therefore, analytical processes must be susceptible to repetition and limited data. It will be important to use a wide range of approaches in exploring impact and to sample from a wide base, in order to account for quantitative and non- quantifiable effects, and to capture externality effects.
50. Further support will be needed to prepare case study material in areas where it is lacking, to synthesize the available material and to proceed towards capacity building with developing countries. The aim will be to stimulate thinking, raise appropriate questions and provide examples of actual practice, rather than to be too prescriptive.
51. COAG is invited to provide its views on the present paper, the proposed framework and process suggested for using it towards assisting vulnerable countries and people to deal with unintended consequences of globalization in livestock markets. In particular it may wish to:
1 Report of the 29th Session of the Committee on World Food Security, 12-16 May 2003, Rome, CL 124/10.
2 Report of the 17th Session of the Committee on Agriculture, 31 March-4 April 2003, Rome, CL 124/9.
3 FAOSTAT 2002 figures.
4 Developing countries and developed countries have had different agreed levels and schedules for tariff cuts since the Uruguay Round - developing countries were allowed to reduce tariffs more slowly and by a smaller percentage.
5 “Tariffication” is a process that converts non-tariff barriers into tariffs, which are considered to be more transparent than non-tariff barriers and are subject to negotiation downwards. It does not apply to primary agricultural products unless they are designated as subject to special conditions.
6 Report of the 18th Session of the Committee on Agriculture, 9-10 February 2004, Rome, CL 127/9, in particular paragraphs 11-12 and 48-49.
7 From the OIE Terrestrial Animal Health Code, 2004, Chapter 1.3.5. “Compartmentalisation and zoning are procedures implemented by a country....... with a view to defining subpopulations of different animal health status within its territory for the purpose of international trade.... Compartmentalisation applies to a subpopulation when management criteria are applied while zoning applies when a subpopulation is defined on a geographical basis.”
8 Quality standards, which include animal welfare, have no international regulatory framework, althought the OIE has begun to work on some elements of animal welfare. Private sector initiatives exist to harmonize standards, and may become very important to reduce compliance costs.
9 FAO Major Output 213A8 001 Livestock, Environment and Development (LEAD) Initiative.
10 The MTP 2006-2011 indicates relevant outputs to be produced by AGA, ESC, ESA, ESN and AGS.