Capturing value from value chain systems

Trienekens (2011) suggests three options to upgrade and capture more value within the chain, they are: production upgrading, upgrading of value chain network (market upgrading), and upgrading of governance form. In this section, the concept of value upgrading that is offered by Trienekens, is combined with other scholars’ theories and empirical evidence. In brief, the value upgrading can be seen in Figure 3.

Figure 3. Options to upgrade value 3.2.4.1. Production upgrading

In the production level, value can be added through different actions. Kaplinsky (2000) suggests that a value can be added by introducing new products or developing old products and changing the production activities. Similarly, Trienekens (2011) suggests that value-added production can be upgraded through products and packaging upgrading, process upgrading, functional upgrading (in-sourcing production or distribution function), and inter-sectoral upgrading (value-added processes are from other actors).

21 Studies show that value-added production enables farmers, particularly those who work collectively under farmers’ organisation, to capture more benefit from the market (Devaux et al., 2009; Kruijssen, Keizer, & Giuliani, 2009; Trebbin & Hassler, 2012). In the Papa Andina case (Devaux et al., 2009), collective action enables farmers to strengthen their marketing and processing capacity. Collective action supports them to diversify the potato varieties, so that they can obtain more value from market. The markets give a higher price for the new varieties, compared to the native potatoes. Meanwhile, in Thailand, the village people process the Cowa fruits collectively and start making other products such as a local dish, and this has helped them to earn more income (Kruijssen et al., 2009). The Thailand case is similar to the India case, where the value of cashew nuts and mangoes are added through further processing (Trebbin & Hassler, 2012).

3.2.4.2. Market upgrading

Scholars have identified that the type of market is one of the key things that influence farmers, under a farmers’ group, to capture benefit from the value chain, as each market has a different character and offers different benefits (Markelova, Meinzen- Dick, Hellin, & Dohrn, 2009; Markelova & Mwangi, 2010). In that regard, this section explains the different types of markets from the type of consumer perspective, and the requirements of product safety and product quality.

Trienekens (2011) suggests that value can also be captured through reaching the right market and being part of the right market. Accordingly, he proposes three different market types of agricultural commodities in developing countries, namely the low- income market, the middle-high income market and the export market. He highlights each market type as follow:

a. The low-income market: Producers are usually small and practise conventional production systems. These chains are relatively long, thus the market information is limited. In these chains, the value added is distributed to numerous actors. Moreover, these chains deliver a high volume of commodities, but capture relatively low value.

b. The middle-high income market: The producers may deliver a lower volume than in the low-income market. Nevertheless, they may generate a higher value. It is

22 indicated that in this type, small farmers tend to work with large intermediaries (e.g. supermarket) under contract.

c. The export market: Producers tend to become more integrated and have fewer actors. Although the volumes are small compared to local markets, the value added is relatively high.

Meanwhile, based on the requirements on product safety and/or product quality, and the actors that drive the market, Lee, Gereffi, and Beauvais (2012) classify the agrifood market into four different types, namely:

a. Traditional market: It consists of many producers and retailers that, in general, are small in size. In this market type, the demand and supply coordination are not very clear. The transactions are set based on price and quantity with little, or no, brand recognition. The requirements for public standards are limited to the minimum level and the private standards are least developed. This market presents the lowest entry barriers for smallholder producers as they require minimum standard ion product safety and quality. In general, the traditional market is dominating the agrifood value chain in developing countries.

b. Producer-driven market: In this type, food manufacturers play a main role in organising supply chains. They have strength in supplying and processing key commodities, although they are challenged by large retailers. They influence smallholder producers by intervening in on-farm activities and controlling the international trade of large-scale commodities. In this market type, the product quality, social and environmental standards are expected to develop. The smallholder producers have fewer options for their farm, for instance, in choosing the type of crop to be grown. This is the consequence of having a food manufacture as the actor who is responsible for potential safety failure.

c. Buyer-driven market: This market emerged as retailers in developed countries have emerged. The retailer-led private standards tend to dominate along with public standards, with focus on food safety, although quality standards are also on the rise. This market type presents a major challenge to smallholder farmers. d. Bilateral oligopolies market: This market type is characterised by the existence of

producers and retailers with tight chain coordination. This chain provides a supportive environment for the most comprehensive private standards on top of

23 public rules. Competition is determined by safety and quality. Brand assets are carefully protected from any misuse. This market type poses a higher entry barrier for smallholder farmers than any other types.

From these studies, it can be seen that a higher level market offers higher value to producers (Lee et al., 2012; Trienekens, 2011). However, it is not necessarily easy for the producers, particularly the smallholder farmers, to enter the higher market as it requires higher quality and safety standards, which may not be achieved by the smallholder farmers (Lee et al., 2012). A study in Uganda shows that to shift the market, from local market to high value market, farmers have to meet the product quality, minimum lot sizes and frequency of supply demanded by the market (Kaganzi et al., 2009)

3.2.4.3. Upgrading governance forms

Frederick and Gereffi (2009) argue that the “governance” is important because it relates to the ability of an actor to determine, control and/or coordinate the activities of other actors in the value chain. Referring to some studies by Gereffi and other scholars, Trienekens (2011) suggests that farmers, or the chain actors, can capture more value from upgrading the governance form. In that regard, Trienekens (2011) proposes two different organisational governance arrangements that enable actors within the chain to capture value from markets; they are vertical and horizontal arrangements.

Vertical integration

King, as cited in Peterson, Wysocki, and Harsh (2001) defines vertical coordination as “the alignment of direction and control across segments of a production/marketing system” (p.150). Based on the global value chain perspective by Gereffi et al. (2005) and other scholars, Franz, Felix, and Trebbin (2014) offer different types of vertical arrangement that are relevant in the agriculture context; they are (from less integrated to high integrated): market/open market, captive value chain, and hierarchy.

There are different characters of each degree of vertical integration mentioned by scholars. Peterson et al. (2001) state that the less integrated coordination allows the individual economic actors to follow their self-interest and pursue exchange relationships that are short-term, opportunistic, limited as to information sharing,

24 flexible, and preserving of the actors’ independence. Typically, the cost of switching to new partners are low for both sides (Gereffi et al., 2005). In addition, Franz et al. (2014) state that the less integrated coordination can include purchase from the open market or a simple purchase agreement.

On the other hand, Peterson et al. (2001) argue that the more integrated coordination is characterized by the actors’ mutual interests that pursue a long term relationship and benefit sharing, open as to information flow, stable, and supportive interdependence. Moreover, Gereffi et al. (2005) state that the more integrated coordination increases the power of control of a chain actor to the other actors. In addition, Franz et al. (2014) indicate that the actors who have more power may also control the land ownership.

Horizontal arrangements

Trienekens (2011) states that the horizontal arrangement reflects relationships between actors in the same chain links (e.g. between farmers through a farmer association or cooperative). He adds that the collaboration between horizontal actors may include joint purchasing of production inputs, joint use of production facilities, and joint marketing of products. This coordination can also be more sophisticated and involves different combinations of value-added options (e.g. value-added production and inter-sectoral upgrading).

Many scholars identify the horizontal arrangement as collective action (Fischer & Qaim, 2012; Markelova et al., 2009). With respect to the options to upgrade value, collective action can help small farmers to enter larger markets, because it enables them, for example, to deal with transportation and storage issues, to comply with the required quality standards, and reach the necessary scale to supply the market with a certain level of quantity (Markelova & Mwangi, 2010). Accordingly, as collective action is the core of this study, the horizontal arrangement framework is further discussed as collective action starting from Section 3.3.