Thursday, May 12, 2016

Redefining Value Chain

Lately I have been doing some thinking about the significance of the term “value chain.”   It is not uncommon to be asked what a value chain actually is once we start to talk with people about the Philippine Cold Chain Project.  Explaining a cold chain is a little less complex since the cold chain technically starts when a harvested perishable commodity starts on its path to a market and ends when the consumer takes this product from their refrigerator and eats it. 

Often when reading about a value chain, the process is depicted as a series of activities which are listed in boxes linked by arrows going neatly in order from one box to the next in a rather linear fashion.  Most of the time the value chain looks like one single chain made up of individual links.  In some cases, there are weak links in the chain that can be identified and fixed, thus improving the value chain.

After being immersed in looking at value chain and cold chain improvements in several countries with many different products, I have come to the conclusion that this simplistic depiction is way off the mark.  In fact, it might be better named as a production and marketing matrix rather than a value chain.  This matrix is most probably best depicted in three dimensions as well. Unfortunately my computer graphics capabilities are not up to the task of diagraming what I can see clearly in my head when it comes to this matrix.

The first consideration one has to approach in looking at this issue is the size and scope of the enterprises involved.  The production and marketing issues when dealing with MSME or micro, small and medium enterprises are very much different than those that a large enterprise has to consider. 

A large enterprise, by having resources available, develops efficiencies of production, processing and marketing that are either unavailable or very hard to attain for a MSME enterprise.  Let me give an example: here in the Caraga region, it is easy to see triple deck trucks that are transporting live hogs from Davao and points south of here to Samar and Leyte.  These trucks can easily hold 150 market ready hogs or more.  These pigs are produced under a large industry template where production is no longer “farming” but agroindustry. 

The large scale of production means that the production cycles can be tied to market demand estimations and almost all of the individual links in the value chain can be simplified through controls and processes along each step.  The agro-industrial swine complex controls its own budgets, genetics, has its own feed mills and formulations, has biosecurity in place, has its own health programs and computerized record keeping, has its own transportation fleet to call on when needed, has no need for government or NGO support and actively engages in aggressive planning so that the product that is grown under this system is marketed when profit is optimal.  Like Tyson Foods in Arkansas, this agro-industrial enterprise might also engage in slaughter and processing of the product that it produces in order to capture more of the potential profits from the agro-industrial enterprise.  In point of fact, big agribusiness seeks ways to shorten and simplify the production to plate “chain” as simple economic analysis shows that the less steps involved, the more potential there is for profit.  The industrial producer wants to control all the steps and build up safeguards that help to keep the production processes profitable.

Pity then the MSME “farmer” looking to break into a market. The small farmer, because he cannot compete with the agro industry producer, has to look for innovative ways to market his product at a profit.  In this case, the value chain becomes a complex matrix with many more pathways to failure.  The small farmer must figure out ways to have quality, volume and regularity of product to assure buyers and market makers of regular supply. A farmer cannot work alone but must work with others who have similar problems…so clustering becomes necessary.  In the USA, Winrock works with the development of food hubs for local farmers so their production can be aggregated and standardized.  The idea for swine producers is much the same.  There is a need for these clusters to locate a good market, and then plan the cluster production around a marketing schedule that will provide regular, quality supply of pigs at an acceptable price.  In order to do this there are many considerations and pitfalls. Good genetics must be a consideration, regular supply of piglets is important, good quality feed must be available and the farmer must also have access to credit.  Middle men must be cut out and ways to minimize transportation costs to markets while keeping prices high enough for profitability must be found.

Assistance from government and NGOs are needed for training and marketing development.  Also the cluster group has to think about how it can improve and strengthen its group, not only through better “hardware” but through improved “software” as well. Thinks like feed, water, shelter, veterinary medicines, good genetics and credit are all important hardware… but none of these things matter if the software or sociological aspects of the matrix are not in order.  This means the group must be well led, everyone needs to keep good records, work for the group must be shared equitably and volume, regularity and quality as well as branding must be in the forefront of the cluster activities.  A group cannot avail of a good market unless the group and especially the leadership of the group and every member of that group is thinking about what is needed to assure marketing factors for the group are favorable.

In the case of the Philippine Cold Chain Project, we have found that we overestimated the strengths of existing producer groups, underestimated the complexity involved in breaking into markets that are profitable. Much more work than we estimated at the start has been required to build groups or clusters up to the point where they can begin to be profitable marketers of their own products. There are individuals who are members of groups that do a good job at this but few MSME farmer groups that are able to show a marketing track record that works for the group.  Certainly any effort in this regard is complicated by a group having to work on consensus rather than working like a business where command and control structures are the norm and decisions can be made by mandate.

We have solved the problem of credit availability. We have dealt with the problem of poor genetics and have made great improvements.  We are improving slaughter facilities in part to help improve local market options and we are working with big food companies in order to see if they can develop new marketing options for pork products that might create a new market for local MSME farmer producers.  All these take time, focus, energy, and consistent effort -- while the producer remains stuck in the middle raising pigs for a sometimes less than break-even price, while the agro-industrial farms continue to make money for their owners.  Four years is not enough time to figure out and fix this matrix to enable the MSME farmer to regularly have some profit in his or her pocket at the end of the day.  It is worth the struggle but I’m afraid that if there is not a big change made to support, prioritize and even subsidize MSME farmer marketing efforts, the agro-industrial agriculture model will win this battle and the MSME pig farmer will have to move away from the farm and find a job in the city.