Chapter 10. Capital market liberalization and the Latin American agrifood system^[148]

10.1 Introduction

This chapter draws attention to the increasingly important role of capital market liberalization (as opposed to the product market liberalization commonly associated with trade liberalization) in shaping the market opportunities for agricultural producers. It draws lessons from experience in Latin America where recent changes in agrifood systems have been dramatic. Caution may be required when generalizing to other developing regions, given the contemporary demographics in Latin America which has a relatively large middle income, and an urbanized consumer population, in a region where policy previously suppressed demand and was ripe for rapid expansion on the liberalization of foreign direct investment (FDI). Whilst similar patterns may be expected in South-East Asia for example, the demographics and income distributions are significantly different in South Asia and sub-Saharan Africa, and the impact of these changes may not be the same at this stage in their development.

Product market trade has been liberalized greatly in Latin America over the past two decades via individual countries’ structural adjustment programmes (SAPs), regional free trade initiatives such as NAFTA and MERCOSUR, and adherence to GATT and WTO. The reforms have been substantial but, as elsewhere in the world, not complete and they are expected to continue (see Chapter 14). However, here it is argued that product market liberalization is only half of the story of trade liberalization, and perhaps not even the more important half in terms of long-term effects on household food security and on the agrifood system: the chain from farm input supply, to farming, to food processing, to wholesale, to retail, and across the product chains. The other half of the story concerns the capital market, and in particular the deep liberalization of capital flows in the form of FDI. Product-market and capital-market liberalization have usually been inextricably linked in the policy reforms (for example in the reforms in Brazil and Argentina and Mexico and NAFTA and MERCOSUR).

This liberalization has spurred a giant river of investment in part of the agrifood system - downstream, in retail, food services, and second-stage processing - very different from the pre-liberalization era when there was a relative trickle of FDI which was found upstream in the chains (in farming and first-stage processing). This change has resulted in a supermarket revolution, and rapid consolidation and multinationalization in the second-stage processing sector.

The effects of this expansion on the agrifood system are described in the following sections.

10.2 Increased foreign direct investment to the export sector

The expansion of trade increased the profitability of exporting and that drew FDI into the agrifood export sectors. Nearly all of the inward investment occurred via mergers and acquisitions rather than the establishment of new firms. This in turn drove two very important changes:

• a rapid consolidation and increase in the scale of packing, processing and exporting firms and growers in the commodity sectors (cereals, orange juice, soy, sugar), in some product sectors (e.g. dairy products), but less so in most fruits and vegetables;

• a rapid multinationalization of the agrifood export industries, with huge FDI mainly via mergers and acquisitions.

Brazil provides a clear illustration of these changes. In the main export sectors (tobacco, poultry, oranges, orange juice, soybeans, beef, sugar, coffee) the share of multinational firms soared between 1994 and 1998. In tobacco, it increased from 82 to 90 percent, in soybeans from 30 to 48 percent, in pork from 11 to 40 percent, and in poultry, from 8 to 34 percent. Coffee alone did not multinationalize (the share stayed at 10 percent) although Jank points out that expectations are that this will change in the next decade. Brazilian export agribusiness is very concentrated (17 firms controlled 43 percent of exports, 42 firms, 60 percent, 156 firms, 80 percent; but 70 percent of exporters (4000 firms), have 1 percent of exports^[149].

10.3 Exclusion of small farmers

A second impact was the substantial exclusion of small farms and firms because of the increase in trade. A number of factors contributed to this.

• Increases in imports of cheaper staples, while helping urban consumers, meant that there were depressing effects on the economies of the zones where mainly small farmers produced staples such as cereals, beans, potatoes. The general tendency (such as in Mexico, Chile, Guatemala) was to find ways to continue protection and to subsidize farmers, albeit with great variety over countries and with a gradual tendency to reduce these policies over time. Some grain zones boomed, for example the soybean zones (traditional and new) in Brazil. Latin American farmers who stayed, and continue to stay, in basic staples will be protected/subsidized, find a place in the handful of grain niche markets or get bigger and more mechanized.

• Increases in exports of meat occurred in sectors that were already relatively concentrated as a result of a gradual shake-out of smaller players over several decades, for a diverse set of reasons including path dependence (a history of large ranches), technical change, animal health requirements, and the consolidation of slaughtering facilities.

• It has been generally argued that there are few, if any, economies of scale to be realized in the production of fresh fruits and vegetables, and thus one should expect small farms and firms to flourish in exports of this sector. There are some examples where small farmers have participated successfully in horticulture exports (such as that of snow peas from Guatemala in the 1990s). Nevertheless, there is emerging evidence that small farms and firms have had substantial difficulty in participating in the fruit and vegetable export boom following liberalization. For example, the low participation rate of small farmers in the fruit export boom in Chile^[150], and the shedding of small farmers from berry exports from Guatemala after the cyclosporine crisis in the mid-1990s.

The main reason for the low levels of participation is the apparently low elasticity of substitution between unskilled labour and the diverse forms of capital required to meet the standards of fruits and vegetables for export, as explained in the next section.

The developing literature on Value Chain Analysis supports this conclusion, suggesting that value chains can act as a barrier to participation in new trade opportunities, but that the benefits of being a participant in the chain can be substantial. Tasks such as chopping, washing and combining vegetables are increasingly being transferred to Africa, for example, and in the process are generating new jobs. However, analyses generally conclude that decisions made at the top of the chain (e.g. in supermarkets) are increasingly defining what other actors in the chain have to do in terms of both the level and consistency of cost, quality, delivery etc. The fact that these factors need to be monitored and deficient performance acted upon, make it is easy to argue the case against obtaining supplies from large numbers of smallholders^[151]. Evidence of a shift to sourcing from larger-scale producers is used to support this contention. This is coined as a “simultaneous process of power concentration in importing countries and power deconcentration in producer countries”^[152].

Whilst there is evidence of the increasing importance of value chains, it is also important to recognize that the production of some commodities (notably higher value added products) is affected more than others. In discussing prospects for diversification for example, value chains are likely to impact strongly upon the prospects for smallholder entry. There may however be the possibility for smallholders to become integrated into the chains of larger exporters.

10.4 Domestic agrifood system change: foreign direct investment and supermarkets^[153]

Latin America has experienced nearly the same increase in the importance in supermarkets in the national retail sector in one decade as the United States experienced in six decades, where supermarkets are now about 70 percent of the retail sector. The share of supermarkets in the national retail sectors of three-quarters of the Latin American economy increased from about 15-20 percent in 1990 to 60 percent in 2000. For the poorest one-quarter of the LAC countries, it increased from 5 percent to about 30 percent over the same decade, and is still rising.

While supermarkets in the 1970s and 1980s were located in the upper-income neighbourhoods of the largest cities, by the 1990s they were expanding rapidly from those niches into middle class neighbourhoods of big cities, then into intermediate cities, then into towns by 2000.

There has been rapid consolidation and multinationalization of the supermarket sector in Latin America mainly over the past 8 years. Competition for growing markets and increased FDI in the sector, mainly from the leaders Wal-Mart, Carrefour, and Ahold (which are also the top supermarkets in the world), has driven the process. Between 50 and 60 percent of the supermarket sector in Mexico, Brazil, and Argentina (about two-thirds of the Latin American economy) is controlled by four or five firms, three or four of which are multinationals.

Because supermarkets have taken over most of the retail sector in the region, small farms and firms now have to deal with them. Supermarkets are clearly dominant in urban (even town) food markets, and within those, in the most dynamic parts of those markets. Half or more of dairy products and a minority but growing share of fruits and vegetables are being sold through supermarkets. Moreover, whereas urban markets were considered as promising markets for the poor; to sell to these markets now means mainly selling to supermarkets.

Supermarkets are restructuring the agrifood chains from which they buy their products, in several crucial ways.

• They impose private quality and safety standards, especially in fruit and vegetable chains, as well to a certain extent in dairy and meat chains. These standards relate to the physical aspects of the products, as well as to cost, delivery and volume requirements. The public standards for such exports tend to be related to phytosanitary conditions of the produce but not the quality of food safety. However, private standards of quality and safety are more ubiquitous and more demanding than the public standards, and perhaps more difficult for small farmers to meet than the public phytosanitary and animal health standards. An example is the private standards for produce, formulated and implemented by EUREP (Euro-Retailer Produce Working Group), an association of the leading supermarket chains in Europe^[154]. These include stringent requirements related to agricultural, post-harvest, environment, and labour practices. The equipment, knowledge, management and accounting practices and investments implied by them are costly to small farmers. To the welfare of the small farms of Latin America, supermarket private standards are at least as important as WTO rules and United States public standards.

• Their procurement systems are shifting toward contracts rather than wholesale markets, and/or are establishing their own distribution centres, such as the huge Carrefour distribution centre in Sao Paulo serving a market of 50 million consumers). They are also moving quickly on sourcing via national, regional, and global networks (such as Ahold’s new global melon sourcing network). The consolidation of purchases implied by these distribution centres and procurement networks implies more power to impose private standards, and need for larger volumes and/or continuous delivery in individual transactions.

• Where supermarkets still rely on wholesalers, such as in Mexico, they have induced change in the wholesale sector, with agroexporter-wholesalers becoming the main intermediaries for supermarkets, skirting traditional wholesalers.

• Supermarket chains have themselves become wholesalers and even exporters - such as melon exports by Carrefour via its global sourcing network to Brazil stores and to stores in 20 countries.

There are important implications of the above changes for small farms and firms and thus income and employment opportunities. The main point is that there is a huge potential for the supermarket and fast-food revolutions to exclude - or create markets for - small farms and firms. This potential is much greater than the export market one, simply because the export market is smaller than the domestic market for Latin American farmers, and because small farmers are more able to access, and in general more focused on, the domestic food market.

On the other hand, these changes bring the spectre of exclusion of small farmers. A poignant illustration is that of the experience of ASUMPAL, a farmers’ association in Guatemala detailed in Box 10.3.

This is not just a Latin American situation: the Ahold supermarket chain in Thailand, Tops, recently cut its 250 vegetable suppliers to 50 and is aiming for 10 best-producers. The changes in procurement systems - with the large increase in scale and the increase in system coordination via private standards of quality and safety - are a double edged sword. On the one hand, they increase the market. But on the other hand, they remove the distinction between the export economy and the domestic economy, because standards and even products from the competition are being injected into the local market from the global market by the supermarkets. The supermarket brings global rules of the game and global competitors into the backyard of the local small farms and firms.

10.5 Conclusion

The long-used and long-cherished conventional distinction between the global/export and the domestic/local market has collapsed. NGOs, donors and governments have cherished the hope that if the going is too tough in the export/global market, the small farm and firm can easily retreat to the local market where standards are lower, and where global competitors do not operate. This is no longer the case. Urban and even small town food markets are now linked to the international economy through the thorough-going presence of supermarkets.

All eyes are on public standards and regulations (with focus on WTO). But at least half of the action in setting the rules of the game is in the domain of private standards set by large multinationals (global and regional) and large domestic firms. The debate needs to open as to what the effects are of these private standards, and how public policy should take them into account, such as harmonizing with them.

In June 2002, CIES (the world association of supermarkets and their main suppliers, with a combined sales figure represented of 2.8 trillion dollars!) met and decided on a global private standard system for food safety for their stores. Would such an initiative have an effect on the farmers of Latin America, selling to the global market, and selling to those same supermarkets or food manufactures that now dominate the food sector in Latin America?

The phenomenon detailed above has been so fast that it has not entered public debate and the policy implications have not been discussed. Much more research and action are needed on this, as well as on how small farms and firms can sell to supermarkets and what investments and training are needed.

Moreover, the extremely rapid rise of fast-food chains in Latin America raises the same sorts of consolidation and multinationalization issues as in the supermarket sector. There are 1581 McDonalds in 2001 in Latin America, and 500 Kentucky Fried Chicken and Pizza Hut outlets in Mexico. This constitutes the start of a fast-food revolution. The effects on the agrifood system are similar to if not more intense than are the effects of the supermarket revolution. Similar changes are also apparent in second stage processing (defined as processed food products for final consumers, such as yoghurts and cheese, breads and noodles).