Agriculture

The fall and Rise of Vertical Coordination in Commodity Chains in African Countries

Vertical Coordination

Vertical Coordination

Food and agricultural commodity supply chains have undergone tremendous changes in the past few decades. Lower and middle income countries constitute a major share of the worlds agricultural areas and farmers and are characterised by state controlled supply chain. In 1980s to 1990s, there was a decline in the state controlled vertical coordination in commodity chains resulting in its replacement with private sector driven vertical coordination. In Africa, many commodity markets and trade regimes were controlled by (para-) state organizations. Agricultural marketing and food processing in Sub Saharan Africa were carried out by government, the monopoly buyers, through marketing boards, government cooperatives and parastatal processing units. Privatization, liberalization of prizes, trade and exchange, etc. lead to removal of state control over the commodity chains and vertical coordination in the supply chains in many developing countries.

The trade of agri-food products witnessed a great change with trade liberalization. This also resulted in an increased participation of developing countries in world agricultural trade. Consequently, there was a significant increase in foreign investments in agribusiness and food industry. These changes brought about a wide spread of food standards. Following privatization, liberalization and globalization, new private forms of vertical coordination have emerged. There are various factors that determine the use of the vertical coordination. Some of them include cost and uncertainties involved in the transactions, the need for investments, and frequency of interactions, characteristics of commodities, product quality and reliability of supplies.

State controlled vertical coordination

Most of the African parastatal organizations provided inputs and purchased outputs from the farmers. Vertical coordination systems with upstream suppliers were used by government marketing organizations and parastatal processing companies. In many Sub Saharan African countries, state controlled vertical coordination plays a key role. In developing and communist countries, state controlled vertical coordination was driven by political motives and by goals to provide inexpensive food to urban communities, to maximize foreign exchange earnings, to create rural employment and evaluate the viability of certain businesses etc. Various studies state that in Africa, state-controlled outgrower schemes were inefficient and poorly executed.

Private sector vertical coordination

Consumers ever increasing demand for food safety and quality is another important cause for the emergence of private vertical coordination in developing and transition countries. In Sub Saharan Africa, private vertical coordination has become a dominant system of rural financing. Cotton, tobacco and horticultural crops grow under contractual arrangements in Sub Saharan Africa. There the government is still involved in agricultural supply chains despite well established private sector involvement. Zambia is the only country in Sub Saharan Africa with almost zero involvement from the government in production, marketing, regulation, or financial contributions to the agricultural sector. However, government is involved in the distribution of fertilizers.

The Effects of Private Vertical Coordination

Vertical coordination has an impact on economic growth, rural development and poverty reduction. Its effects can be distinguished as efficiency effects and equity effects.

Efficiency effects: The impact of private vertical coordination systems on productivity cannot be quantified as it is multi-factorial. However there are direct and indirect positive effects. The direct impact is on the output and productivity of the processing company and the suppliers involved in vertical coordination schemes whereas the indirect effects emerge through cross company spill over effects, household and farm spill over effects.

Equity effects: The main equity issues with vertical coordination processes are the distribution of rents in food supply chains and the participation and exclusion of smallholders and poor farmers in contract farming.

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