CHAPTER-2

AGRO-INDUSTRIAL ANALYSES
2.1 Agribusiness and The Small Scale Farmers:

Smallholder and family farming is the tremendously

dominant mode of agricultural and pastoral production
throughout the major developing regions of the world,
notably Africa and Asia. Approximately three billion
people live in rural areas of developing countries:
around 2.5 billion of them are involved in agriculture as
farmers or workers and at least 1.5 billion live and
work on small family-run farms (World Bank 2007).

Small-scale farmers living in rural areas sell their

products; they normally have little choice about to
whom they sell or how much they charge. A typical
situation has been for farmers to sell their crop at a low price to middlemen.
Unlike the farmers, the middlemen have access to transport and are in a
good position to drive a hard bargain. Desperate for money to pay back
debts or maintain their households, farmers take the little they are offered,
but never earn enough to make investments in their farming business or
pull themselves out of poverty. Even those who are able to transport their
crop to a market often find themselves facing low prices and corruption.

The changes in food and agricultural markets (also-called industrialisation of

agriculture) have influenced the need for higher levels of managed
coordination. Thishas resulted in the introduction of different forms of
vertical integration and alliances,which have become a dominant feature of
agricultural supply chains. Allied to thesechanges is a worldwide increase in
consumer demand for differentiated agriculturalproducts that are relatively
labour intensive.

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 In many developed countries, agricultural production is changing from
family-based, small-scale farms or firms to one of larger firms that are more
tightly aligned across the production and distribution.

 There are many ways that farmers can improve their methods of marketing
& earn more from their crop production.For example:
 Information and communication technologies (ICTs), in particular email
and the internet, are transforming how marketing is carried out in
some parts of Africa. One example is internet-supported market
information systems, which collect and distribute information about
market prices and enable sellers and buyers to make contact. Trade Net
– www.tradenet.biz - operating since 2004, offers online data on about
600 markets in 17 African countries. Local correspondents upload
market information to the website and registered users of the site can
also be sent information by text message to their mobile phone.

 Direct marketing can be other good strategies. For example, farmers may
be able to supply direct to hotels or restaurants. Taking advantage of
such opportunities is often easier if farmers work as a group, since this
makes it easier to guarantee availability and delivery of produce at
exactly the time when it is needed.

The Potential Role of Agribusiness

Agribusiness can assist small-scale farmers and farmers entering
commercial agriculture to overcome the barriers of entry to high value raw
commodities by providing inputs and a guaranteed market.
Contracting and contract farming is increasingly being used by agribusiness
firms andunder these arrangements farmers are contracted to grow
commodities such as sugar, tea, coffee, cotton, tobacco on contract for a
large agro processor. However with the process of agro-industrialisation, and
the increased need by agribusiness and retailers to control quality, volume
and food safety and to ensure a consistent supply, they have increasingly
resorted to contractual arrangements with producers. These arrangements
could vary from verbal agreements, seasonal contracts, and growing

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 programmes, to formal outgrowing schemes. Contracting arrangements
mainly include some form of production or marketing contract that specifies
the volume to be delivered, the quality of the raw commodity supplied the
contract price and the delivery dates. The contracting arrangement can be
as short as three months (fruit and vegetables) or last for many years
(tobacco, sugarcane).

 The main problems normally associated with contract farming ventures,

which lead to many failures and mistrust between agribusiness and
smallholder families.

These problems are:

 Poor enforcement of contracts

 High transaction costs in dealing with many smallholders
 Strict demands for consistency (no variation), quality, &food safetyetc.
 Business attitudes and ethics referring to non-payment, delayed payments or
even reduced payments
 High rate of product rejection by agribusiness firms and traders
 Weak bargaining position of farmer’s in comparison with a limited number of
traders

2.2 Linkages in Agribusiness

The agro industrial project analysis framework views agro industries as
systems because agro industry distinctive characteristics create a set of
critical interdependencies. Examining these systematic linkages is essential
to designing and operating successful agro industry. Each of these linkages
deals with different dimensions of the agro industry system, but all are
interrelated. The four systematic linkages affect each of the three core
pertaining areas of an agro industry: Procurement, Processing, and Marketing.
These linkages are:
1. Production Chain Linkage: This systematic linkage consists of operational
stages that agro industry materials flow through as they move from the
farmer through processing to the consumer.

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 2. Micro-Macro Policy Linkage:This systematic linkage concerns the
multitude of effect of government’s monopolies have on an agro
industries operations
3. Institutional Linkage:This systematic linkage involves relationships among
the different type of organization that operate and interact with the agro
industry production chain.
4. International Linkages: These systematic linkages deals with the
interdependence off national and international markets in which the
agro industry functions.
The task of the project analyst is to understand how the production chain linkages, micro-
macro policy linkages, institutional linkages and international linkages interact and affect
the agro industry viability.

2.2.1 PRODUCTION CHAIN LINKAGES:

The production chain system begins with product input to the firm, which
converts these in to agricultural raw materials, a portion of which may be
retaind for on farm consumption and the remainder transported to agro
industry directly or through product market.
At the processing stage the agricultural raw materials are stored and then
transformed by industrial inputs and processed in to consumer or
industrial products, which are stored and then distributed through the
wholesale and retail chains of the domosticand forgin markets. Labor and
financial inputs occure at each stage in the chain. Thus, the production
chain encompassesboth production and service business.
The precise structure of the production chain varies for each agro
industrial system and setting.
For example,Agricultural products like fresh fruits and vegitables require low level of
transporation, and so, the processing stage would be dominated by cleaning, sortinge,
packaging, and storage. Other agricultural products might pass through multiple
processing stages.
It is equaly important to understand the dynamic nature of the
production chain. The flow of raw material supplies is vital; it dectates
capacity requirements in transport, storage and processing. Raw
materials flow may flactuate because of seasonality and vagaries of

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 nature. The timing and magnitude of seasonal flows may be affected by
the production technology. For example new seed variation of different
growth cycles. Vagaries of nature is less pridictable, but the too can be
incorporated in to planning. For example, vagarians of nature can be
overcome by importing from other areas when there is difficulty in the raw
materials in the main procurement area.
A final perspective in the production chain can be gained by examining its value added
components. Each of the direct and indirect production functions that occure throughout the
length of the production chain addes value in the commulative process of creating the final
product.

2.2.2Micro-Macro Policy Linkage

The business environment of an agro industry is significantly shaped by
the governments policies and actions. Given the economic, political, and
social importance of food and agriculture; most governments are
particularly heavely involved in their nations agro system. Government
constitutes a ‘megaforce’ in the nations food and fiber production chain,
and so the systems approch must encompass an examination of the
government’srole.
National developement goals and strategies are expressed through
national policies that are implimented by various policy instrument
(taxes, credits, subsides e.t.c) that affect in avarity of ways in the
production chain and the specific agro industry.
Macro policies can be grouped in to the following catagories: fiscal
(revenue and expenditure), monitary(credit and interest rates),
trade(foreign exchange and EXIM controles), and incomes(prices and
wages). In addtion to these policies, governments also formulate macro
policies for specific sectors such as agriculture, industry, transportation,
health, eduction, etc.
The task of analyst is to identify how specifically the macro policies will
affect the agro industry being examined. Macro policies can alter acesses
to inputs and markets, costs and types of inputs, competition and prices.

For example, Regional /state government in india has imposed a ban on the production,
sale and consumption of liquor in that state. This ban on produciton sale and consumption

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 of liquor has hurt the sugar industry verymuch because the price of molases, a byproduct
of sugar, has fallen down drasticaly, molaseses is used for making liquor and one’s there
was ban on producing liquor/ alcohol the demand for molases half fallen down and hence
it lead to reduction of molaces price.

The effectives are pervasive, permiting the procurement, processing and

marketing operations of agro industry. For example, under fiscal policy
for agriculture the government might provide subsidy.
Regarding monitry policy, an overvalued exchange rate will decrease the
costs of imported inputs for farmers and processores but increase the
compitetion from imported finished goods with the agro industry
outputs.Ofcourse, duties or quotas could affect the access, costs, and
competion of importers. In the areas of incomes policy, agricultural price
support can directly affects the cost of the raw materials to the agro
industry. At the consumer end, price controls on the processed goods can
limit the revenus of agro industries.

It is evident that the private analyst must carefully analyze the significance of the government’s
policies and actions because they can directly and indirectly have dramatic effect on agro
industry’s strategy, operations, and viability.

For the public sector analyst also it is equaly important to scrutinze these policy effectes inorder
to avoid unintended consiquances in any part of the production chain.

2.2.3. Institutional Linkage

The structuring and managing of institutional relationships are critical to
effective design and operation of agro industry. the project analysis must
encompass institutional analysis.
For any agro business industry the primary operating and bargaining
relationship within the production chain are with its suppliers, mainly the
farmers, and its buyers. From a competitive perspective the agro industry
interact with the rival processing compains and face the treat of potential
new competitors and even substitute products.
There five main types of economic institutions which are
operationg in the production chain and they are:

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 A. Farmers and producer cooperaatives
B. State-owned enterprices
C. Multi-national companies
D. Local enterprises
E. Marketing intermidiaries

A. Farmers and Producer Cooperative

Most farmers operate as independant business. But to get economic or
political power, farmers some times organize in to cooperatives or other
forms of producer asssociations. And also government’s actively encourage
the organization of farmer cooperatives.
Farmer cooperatives supply 20% of farm inputs worldwide. These
cooperative also market worldweide 30% of farm production. Some times
cooperatives also integrate verticaly in to the agro industry stage of the
production chain.
Cooperatives are having significant political power because of their
numerical strength. The cooperatives are also having bargaining power as
suppliers due to economic size, and control over supply. Because of their
organizational form the cooperatives are slow in decison making and the
operating responsiveness. Cooperatives face serious operating problems as
the are lacking professional management, and have limited capacity.

B. State-owned Enterprises
State-owned enterprises are organizations directly in the production chain and
carrying out varios productive function. Government’s have turned to State-
owned enterprises for many reasons. State-owned enterprises enable the
government to have more direct control over the food system.
Through State-owned enterprises, government provides economic benefites to
favored through price, purchases, protection, payoffs, and positions.
Also State-owned enterprises provide the needed inputs to farmer/producer
which the private sector neglactes or does not provide adequately because of their
nonprofitability or for other reasons. For example State-owned enterprises have

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been established to provide inputes to the areas of research and developement,
technical assistance, storage or capital.

State-owned enterprises are also used in social grounds. State-owned

enterprices are used to stablize food prices to consumers, support farm
incomes, create employement, and to promote regional developement.
State-owned enterprises were actively supported by international
developement aid agencies.

State-owned enterprises may provide the needed inputs to farmers for

producing the raw materials needed by a new agro industry. Also the
State-owned enterprises may even purchase, transport and store theraw
materials needed by the a new agro industry and could be even a
potencial supplier of those row materials. Or sometimes the State-owned
enterprises could be also a competitor in processing those raw materials.
Regarding marketing side, the State-owned enterprises might be even
engaged in wholesaling and retailing foodstuffs. The State-owned
enterprises are also involved in exporting of some agricultural products
and have also some times monopoly over the export of agricultural
products.

C. Multinational Corporation
The largest Multinational food corporation combined together have
hunderds of affiliate in developing countries and territories and produce
around 13% of the processed food output in those countries.
Multinational corporations have usually played a major role in the export
of many basic agricultural commodities. Regarding exports, the
multinational corporations have high involvement in the export of cocoa,
coffee, tea, banana, vegetables oils, and speciality fish and have moderate
involvement in the export of beef, vegitables and fresh fruits and sugar.
The multinational corporations emphasis was mostly on items like dairy,
cannedd fruits and vegitables, refined oils, soft drinks, margarine, coffee
to market.

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Multinational corporations are mostly the leaders in technology and
marketing in the products or commodities being offered to market.

D. Local Firms
Majority of agro industries are locally owned. Sometimes these agro
industries may enter into tie –ups by way of joint ventures with
Multinational corporations for accessing the needed technology,
marketing know-how, or to export to foreign countries. Usually it is being
noticed that agro industries are a part of alocal business group. These
groups have varied interests in various business sectors and have many
companies operating in different businesses but have one common
management controling those companies. Mostly these groups are family
owned.

The business groups have more access to information, capital, and

managerial resources because of their large size and also this large size
enables to have more bargaining power when dealing with suppliers,
buyers, and the government.

E. Marketing Intermidiaries
The commercialization functions in the production chain are performed
by the marketing intermidiaries also known as middlemen. Even though
the farmer or the agro industry can perform these commercialization
function by themselves but mostly independant marketing intermidiaries
are involved in these functions.
The marketing intermidiaries are the major players in the movement of
the agricultural products to the produce markets or the agro industry
from the producer. Marketing intermidiaries are often criticized for giving
a rough deal to small farmers and exploiting them as the small farmers
are lacking bargaining power. And theyare also blamed for increasing the
end price of the product by increasing the marketing costs. These
criticisms on marketing intermidiaries lead to the intervantion of the
stateowned enterprises.

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The agro industry is also going to have linkage with other organizations in addition to the
above five mentioned institutions. So as to manage the business government relationship the
agro industry has to interact with a number of government organizations such as the public
health and food standardes department or the custom bureau which are particularly
important for the agro industry. Also the agro industry has to dealwith important private
entities likefinancial institutions, and industry asssociations at any point of time.

2.2.4. International Linkage

International linkage are the final analytical elements in the system
approach framework. Agro industries are no more isolated from the
international economy and are connected to it in various ways. All
international markets areincreasingly accessible quickely and
economically becauseof the rapid developements made in transportation
technology.
So the analyst has to identify and examine each of these various
international linkages so as to find their impact on the input and out put
side ofthe agro industry.

On the input side the agro industry may have the option of or dependant on
the import of raw materials, packaging materials, chemicals, fertilizers,
capital, technology, equipment and services. So how better the agro
industry utilizes the international market for its inputs/supplies have an
effect on the performance of the agro industry regarding risks, andfacing
competition.

Regarding the output side, the international markets act as outlet for the
exports made by the agro industry but at the same time a source for
potential competion in the local marketsthe analyst has to identify those
factors which create an impact on the operations of agro industires and
assess their implication.

The international linkage have to be given higher priority because the

governments are reducingthe trade barriers and opening up their markets for
competion. Most governments have turned their policy of import substitution to
export promotion and making domostic agro industries competitive.

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