Case Study Design and Methodology .1 Analytical Framework

The green beans value chain is used to give insight into the dynamics of standards along the value chain from the production level, through to the processing and the exports level. The green beans chain was selected because it gives a complete Meso-level representation of the entire value chain. It is representative of the standards and requirements needed to access EU markets (mandatory and private); the activities (production, processing and exports), the participants (small, medium and large scale producers and exporters).

A value chain²² approach forms the entry point for analysis of this chapter and incorporates two main features i.e. governance - the way in which standards drive the governance of value chains; and the way in which the resultant governance structure and power relationships influence the distribution of rents and surpluses along the chain. This is put into perspective using a framework, which distinguishes the forms of governance and the rules defining the basis of participation (Gereffi, 1994, Kaplinsky & Morris 2001). The complexity of transactions and standards within the chain determines the coordination mechanism used in the chain, the relationships between various actors and how they use these coordination mechanisms to position themselves in the chain (Gerreffi & Sturgeon, 2003). And finally, power relationships within the chain and how these shape the various forms of governance is also important for this particular analysis.

The second analytical approach provides an enquiry of the physical flow of goods within the value chain and the distribution of costs and margins as well. Likewise, one of basic concepts of GVC analysis is that a complete value chain has different value parts and every part does not give rise to equal value. This is analogous to the filiere concept which was applied in the 1970’s and encompasses a strong empirical perspective and focused on physical, quantitative and technical aspects. Durufle et al. 1988 use an economic and financial evaluation of filieres to analyze income generation and distribution in commodity chains. The same

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approach is applied in this chapter, looking not only at the value chains dynamics and power relationships, but also presenting the economics of the filiere in terms of distribution of costs and benefits along the value chain.

Shank & Govindarajan (1992) provide a framework for the analysis of transaction costs in a supply chain in stages. The methodology involves a three stage embedded process which begins by mapping the value chain by first identifying the value chain structure/filiere at the meso-level including both upstream and downstream participants and their relative (power) positions in the chain. The second stage involves identifying the flow of standards in relation to the chain structure. This is followed by an in-depth analysis of costs and margins along the value chain – using the value chain matrix and accounting methods that determine the spread of costs and the distribution of gains along the filiere for the various ‘types’ of chain participants. The costs of compliance to standards are also analysed for the various actors along the value chain, relative to other cost components along the chain such as inputs, processing, labour, marketing etc; the distribution of margins is also determined for the various actors; and finally the value addition at each stage of is determined and compared with the rent received.

As discussed before, the distribution of rents will be determined along the value chain, using an accounting framework which will allow for the value to be attached at each stage, based on the method by Gilbert (2006) as follows:

Retail price of final product = farm/firm price + gross margin expressed as:

The value share therefore becomes:

)

This can further be decomposed into:

Retail Price =

(

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upgrading+ (costs of processing & packaging+ processing margin)+ advertising costs+ retail costs margin+ sales or value added tax)

)

This decomposition will be done for various segments of the value chain in order to determine each segment’s share of the retail price versus its share of the value added. This will form an accounting matrix for the entire value chain.

5.2.2 Data

This information has been obtained from two key sources: the survey carried out between February and May 2009 and key respondents in each link of the chain interviewed between July and October 2009. The survey comprised of horticultural farmers in 5 provinces over 9 districts (Appendix 1 in Chapter 1). The sample consisted of 201 large, medium and smallholder respondents with farm sizes ranging from 5000 acres to .25 of an acre and having different characteristics. The survey is augmented with information from 18 key informants from the Horticultural Crops Development Authority (HCDA) and the Ministry of Agriculture, Fresh Produce Exporters Association of Kenya (FPEAK); producer organizations and other institutions (Summary Appendix 2 Chapter 1). For this particular chapter, the green beans value chain is used to analyse and illustrate the distributional effects of standards. Out of the 201 farmers, 62 farmers grew green beans, 12 were medium scale farmers, and 1 large scale farmer with an integrated pack house.

Value chain actors from the green beans chain were selected on the basis that they are representative of the value chain ‘categories’ of actors at each stage of production, processing and exports. The key value chain actors in this case are: (i) production/farming- consisting of three main categories of actors – large scale producer, individual, small-medium scale farmer, and small holder farmer under group certification (ii) Processing, packaging and exporting consisting of large scale integrated producer/exporter, and brief case exporters ( Figure 5.1) (iii) Importers – mainly supermarket chains. The value chain actors have different characteristics in terms of the size of farms, activities, costs and profit margins. Table 5.1 below gives a summary of the characteristics of selected value chain actors.

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The standards taken into consideration here are mainly those that are predominant in the green beans value chain and are mandatory, these are- GLOBALGAP, Maximum residue limits, and HACCP/ISO.

Table 5.1: Summary Profiles of Green Beans Farmers used in this analysis

Variable Large-Scale

Belongs to a Producer

Organization Yes No Yes Yes

Source: Survey results 2009

Data on Prices were obtained from 12 different supermarkets in five countries that comprise the main export destinations for Kenya’s green beans in the EU i.e UK, Netherlands, Belgium, Germany and France (summary table 5.2). For computation and cost accounting purposes, the average price was calculated.

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Table 5.2: Summary Green Beans Prices in 2009

Country Supermarket Price

in Euros Price in

Euros Average price

Fine Extra Fine

(X-fine)

Belgium DelHaize 9 10.2 9.6

Spar 9.6 10.8 10.2

Lidl 8.7 - 8.7

Netherlands Alberthijn 8.3 9.23 8.765

Aldi 8.8 - 8.8

Spar 9.58 10.9 10.24

C1000 9.25 10.6 9.925

United Kingdom Birmingham market 8 - 8

Aldi 8.7 - 8.7

ASDA 8.73 9.7 9.215

Waitrose 9.6 10.2 9.9

Tesco 9.5 10.24 9.87

Lidl 8.68 - 8.68

Sainsbury’s 9.5 10.15 9.825

Morrisons 9.18 9.98 9.58

EU Average 9.3333

Source: Survey Results, 2009

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Cost Accounting Computation of Revenues, Margins and Return on Investments

Cost components for smallholder farmers are identified as: variable costs for seed; fertilizer; spraying; weeding; harvesting, sorting and grading; land preparation and costs for auditing, testing and certification. Fixed costs are also identified as costs related to putting up equipment and infrastructure required to meet standards. Briefcase exporters and large scale integrated exporters have their cost components defined as: fixed cots comprising initial investments costs and infrastructure for standardization, pack houses and licensing. Their variable costs for labour, water, electricity, auditing, testing and certification, transport, air freight, packaging and labelling, monitoring and enforcement, and taxes.

(i) The per centage costs for each component is then calculated as:

(cost component/total cost)*100 where total cost is fixed cost+ variable costs.

(ii) The per cent variable costs are expressed as: (variable costs/total costs)*100

(iii) The per cent investment costs determined by : (investment costs/total costs )*100

(iv) Unit variable costs expressed as: (variable costs/total output) (v) Unit total costs expressed as: (total costs/total output) (vi) Gross margin: (revenue-total costs)

(vii) Unit profit: (Revenue-total costs)/total output

(viii) Unit margin: (gross margin-total variable costs)/total output (ix) Per cent share of retail price: (sale price/retail price)*100 (x) Return on Investments: (Gross margin/total cost)

(xi) Value added: (Net profit – investments)

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5.3 Kenya’s Green Beans Sector: Standards,