Transformation of HighValue Food Markets in Asia Implications

Transformation of High-Value Food Markets in Asia: Implications for small producers and policies Ashok Gulati, IFPRI Director in Asia, Thomas Reardon, Prof. at the Michigan State University Co-directors of IFPRI/MSU joint program on “Markets in Asia” August 9, 2007 IFPRI-ADB “Policy Forum”, Manila, Philippines.

Three key messages… • Changing Asian platter towards high value agriculture (HVA such as fruits and vegetables, dairy, meat and fish); • Rapid transformation and scaling up of wholesale markets, processors, and organized retailers (Consolidating top) while farms are still fragmenting • opportunity for small holders if they can connect to new markets, else a major challenge to remain afloat. INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 2

Changing Asian Platter: Diversification and “westernization” of diets Average Annual Growth in per capita consumption (1991 -2005) in Selected 8 Countries in South and South East Asia Notes: Grains include cereals and pulses, Consumption measured as grams/capita/day, the 8 countries include Bangladesh, China, India, Indonesia, Pakistan, Philippines, Thailand Viet Nam. Source: FAOSTAT, © FAO Statistics Division 2007, 30 July 2007 INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 3

counterpart: High-value PRODUCTION growing fast, already important; …. Share of HVA in total agriculture production growing, surpassing the staples group (e. g. , in India, share of HVA during 1981 -83 was 32%, which increased to 48% in 2002 -05; Similar changes in Indonesia, China, etc. . . ) INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 4

Trade is still a tiny part of the story… • Trade of HVA is only at the margin (less than 3% of consumption or output). • Change is driven largely by domestic demand. INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 5

Next 10 years…. • Although staples are important from food security point of view, future sources of growth and prosperity in agriculture will come increasingly from high value products, driven by domestic demand, production & markets; • But being perishable in nature, it needs a fast moving infrastructure and institutions that can compress the value chains and reduce risk INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 6

That domestic market is transforming: wholesale segment • From truck-market to public wholesale markets (WM) in big cities: 1970 s-80 s • Expansion of WMs in big cities and spread to smaller cities: 1990 s 2000 s • Crisis of interface of growing hort/meat demand – and capacity and performance of WMs: 2000 s • Restructuring of WMs: 2000 s … major debate and programs: india, china, indonesia … rise of “new-generation” wholesalers – specialized and dedicated to modern segments (Indonesia case) … rise of large-scale capitalized wholesalers displacing traditional small brokers (Indonesia and China cases) INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 7

That domestic market is transforming: processing segment • Rapid increase in processed product consumption …Rapid increase in average scale of processing firms in high-value products (hence consolidation) … India example • Rapid technological change in packaging and thus radius of shipment and shelf life … example of massive growth of Tetrapak in China INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 8

That domestic market is transforming: retail segment • Rapid spread of supermarkets in Asia in three waves … First wave: East Asia outside Japan and China; early 1990 s take-off, … Second wave: Much of Southeast Asia such as Indonesia, … Third wave: China and recently India and Vietnam, shares change. . … incipient fourth wave… Bangladesh, Pakistan, etc. INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 9

Supermarket Revolution: Average Annual Growth Rate in Grocery Sales of Top 10 Retailers in Selected 6 Countries in South and South East Asia (2000 -06) INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 10

… change is spectacular • Already moving beyond middle class to food markets of the poor especially in the first and second wave countries but starting in third • First penetrates in processed products (today, supermarkets have 80% of urban china processed food retail), then in semi-processed (dairy, meats, now 50% in china cities), then fresh (only 20% of veg retail, 39% of fruit retail) • China case spectacular • India case incredible • … these two: fastest supermarket growth in history INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 11

Modern food industry has mixed sourcing strategy • Large processors and supers still rely a lot on WMs to bulk from millions small farmers … thus efficiency of WMs affects how benefits of processing/retail modernization will affect food economies in Asia INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 12

Dynamics of an emerging value chain: expanding top and fragmenting bottom challenge to small holders A Vision of dynamic complete Agri-System, where farms are fragmenting while all other segments are scaling up fast Retailers Agro Processors Input Suppliers Logistic Suppliers Farmers INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 13

Indian farm reality: fragmenting farms and swelling bottom Challenge of linking small holders to supermarkets Avg Size 2. 3 INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE 1. 82 Source: Agricultural Census Division, India 1. 55 1. 41 1. 37 Page 14

What ensures production & price risk coverage for the small farmers? Retailers & Agro processors Market Information incl. Food safety Credit & Insurance Input delivery & Extension services Farmers INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 15

How do we judge: which way to go? ? Solving the “Rubik cube” puzzle • Innovative Institutions and Organizations Linking smallholders to Modern Value Chains • Mapping and Designing Institutions for ICSS I-Inclusiveness C-Competitiveness S-Sustainability S-Scalability INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 16