Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
17421758, 2009
2009 Elsevier Ltd. All rights reserved.
0305-750X/$ - see front matter
www.elsevier.com/locate/worlddev
doi:10.1016/j.worlddev.2008.08.029
and
JOHAN F.M. SWINNEN *
Katholieke Universiteit Leuven, Belgium
Summary. The combination of transition and globalization since the early 1990s has caused dramatic changes in the dairy chains in
Central and Eastern Europe. This paper uses survey evidence from several Central and East European countries to document the growth
of vertical coordination in the dairy chain, its relationship with policy reforms, its eects and the implications for small farms. Evidence
suggests that in several countries small dairy farms have beneted from vertical coordination processes by providing them access to inputs and higher value markets.
2009 Elsevier Ltd. All rights reserved.
Key words Central and Eastern Europe, dairy, vertical coordination, processing, small farms
1. INTRODUCTION
There is a rapidly growing literature on the impact of
expanding modern supply chainsoften following investments by multinational food and retailing companiesand
the associated growth of high quality and safety standards,
on farmers (Boselie, Henson, & Weatherspoon, 2003; Farina,
Gutman, Lavarello, Nunes, & Reardon, 2005; Mainville,
Zylbersztajn, Farina, & Reardon, 2005; Dries, Reardon, &
Van Kerckhove, 2007). Much of this literature points at the
problems which farmers in less developed regions of the world
face in dealing with the requirements and standards of these
modern supply chains (Henson, Masakure, & Boselie, 2005;
Henson & Reardon, 2005). Another part of the literature
emphasizes how changes in the organization of the supply
chain not only increase the requirements but also bring opportunities for small and poor farmers to access high-value
markets and that emergence of vertically coordinated systems
in these supply chains help farmers facing major market constraints to integrate in the modern supply chains (Maertens,
Dries, Dedehouanou, & Swinnen, 2007; Masakure & Henson,
2005). Evidence on both sides of this debate is limited to specic cases, countries, or sectors, and thus there is much need
for additional empirical evidence, in particular cross-country
evidence based on consistent survey data.
The objective of this paper is to contribute to this literature
by bringing together data from several countries, which have a
number of common characteristics that allow cross-country
comparisons, but have sucient variation to analyze how different initial conditions and institutions may aect the emer-
Disclaimer: This paper represents solely the view of the authors and in
no way the view of the European Commission or its services.
*
Final revision accepted: August 7, 2008.
1742
1743
Table 1. FDI and retailing in Eastern Europea Source: EBRD (2005) for GDP per capita and Share of Agriculture in GDP; EBRD (2003) for the EBRD
Reform Index, Authors survey results for the dairy indicators and FDI; USDA (2003), Authors calculations based on survey results and authors estimates
for FDI shares.
Country
Poland
Slovakia
Bulgaria
Russia
Albania
a
GDP
Share of agriculture EBRD reform
Dairy indicators
per capita
in GDP (%)
index
Average dairy Dominant
(USD)
farm
milk
size (# cows)
producers
6,324
7,639
3,109
4,012
2,372
2.5
5.0
9.4
5.0
26.8
3.5
3.3
3.3
2.9
2.6
11.0
340.0
1.6
215c
2.0
Family farm
Corporate
Family farm
Mixed
Family farm
Processing
Retailing
FDI (% of the
Main FDI FDI (% of the
Main
processed volume)
inow
retailing)
FDI inow
1530
62
5
<10
5b
199495
since 2000
since 1999
since 1998
2002
10
10
6
<5
0
199596
since 2000
19992001
since 2001
GDP per capita and share of agriculture in GDP: data for 2004; EBRD Reform index: data for 2002.
The dairy industry in Albania processes about 20% of total milk produced in the country.
c
Half of the milk is produced by households, which size according to ocial sources is in the range of 215 cows. Corporate farms, however, operate on
much larger scale (2001000 cows).
b
1744
WORLD DEVELOPMENT
the dairy sector and the average cow herd has 340 cows.
Albania represents the other extreme of the group with a very
low income (by CEE standards), a very large share of people
still active in agriculture, poor progress in transition, limited
FDI inow and small household farms: the average dairy farm
has 2 cows. Russia and Bulgaria are in between these extremes,
with a mixed farm production structure and moderate progress in transition and moderate inows of FDI in the dairy
sector (at the time of the surveys). The second stage surveys
were implemented in Albania in 2005, in Bulgaria in 2003
and in Poland in 2001. For comparative purposes, we chose
the extreme countries in terms of income and reform progress,
that is, Albania and Poland (and preferring Poland over
Slovakia because of the absence of small dairy producers in
Slovakia), and one of the intermediate countries, that is, Bulgaria (where we chose Bulgaria over Russia because of the
institutional and regional proximity of Bulgaria to Poland
and Albania to make comparisons less complicated).
(a) First stage data collection
Data collection at the rst stage was conducted through
semi-structured interviews with managers, owners or sales
and procurement ocers in dairy and retail companies. The
interviews covered a broad range of topics such as ownership
and management structure, product mix, structure of the supply base, policies and programs vis-a`-vis suppliers, product
quality and sales outlets. We selected dairy processors and
retailers to provide a mix based on size and ownership (domestically or foreign owned; private or cooperative).
Six Polish dairy companies were interviewed in 2001 in the
north-eastern region of Warminsko-Mazurskie, which is a major dairy region with mixed production structure (i.e., with
both large and small farms). Four were medium-size companies (5070 million liters of processed milk annually) with
one large (420 million liters) and one small (2.5 million liters).
Three were cooperatives, two private, and one a joint venture
of a cooperative and a private company. In terms of foreign
investment, two were majority foreign owned, and two have
important links to foreign companies. In 2004, a second set
of interviews was conducted. These included four of the top20 retail chains in Poland, all of which were foreign owned
and an additional two domestic retail chains. Furthermore,
the sample covered six dairy companies including two top-10
dairy processors and four medium-sized dairies, of which
one was foreign owned and three were cooperatives. Only
three of the interviewed dairy companies were both present
in the 2001 and the 2004 sample.
Six Slovakian dairy companies were interviewed in 2003 and
are located in West and Central Slovakia. Three are medium
companies (2542 million liters per year) and three are large
(75155 million liters per year). Four dairies are majority foreign owned, two are domestically owned companies. All interviewed companies have a private ownership structure.
The interviews in Bulgaria were conducted in 2003 and covered the whole Bulgarian territory. The 11 interviewed dairy
companies represent a mixture of large-scale (3 companies),
medium-scale (5 companies) and small-scale processors (3
companies). Two foreign owned dairies. Five of the interviewed dairy processors were newly established, the rest were
privatized during the 1990s. In 2003, these 11 companies
together have processed about 155 million liters of milk,
which was 21.4% of the total processed milk in Bulgaria in
that year.
Interviews in Russia (Moscow and St. Petersburg) were conducted in 2004. The meetings covered four foreign owned retail
chains and a cross-section of large, medium/large, and medium/small dairy companies, all selling dairy products to supermarket chains. One of the dairy companies is foreign owned.
Twelve dairy processors were interviewed in Albania in
2004. These companies represented a mixture of large-size
(8) and medium-size (4) dairy processors. Interviewed processors were operating in the districts of Shkodra (North Albania), Tirana, Lushnja, Kavaja, Durres (Middle Albania), and
Korca (South Albania). Three of the interviewed processors
were identied as leading companies in the dairy chain in
Albania in 2003. Two of the interviewed processors were
owned by foreign investors. All the interviewed processors
but one were newly established. All of the companies are privately owned.
(b) Second stage data collection
Second stage data collection was conducted through farm
household surveys using structured questionnaires in Poland,
Bulgaria and Albania. The survey instrument was designed
to capture a number of indicators of the farm operation, especially those that are related to vertical coordination in the
chain, and the evolution of these indicators over time. The following elements were covered: human capital characteristics of
the household, on-farm and o-farm labor supply, dairy livestock, milk supply, interactions with processors, milk quality
and hygiene indicators, on-farm investments, milk prices, asset
endowments (such as land and machinery), and additional social and cultural indicators. As the main objective of the survey design was to capture the evolution and the impact of
vertical coordination within the chain, all of the samples have
overrepresented commercial farms, that is, farms that market
at least part of their milk output. As a result, the smallest
farms (12 cows) will be underrepresented in our samples as
they often use their milk for home consumption only.
The farm-level data collection in Poland focused on small
suppliers and the survey was conducted in 2001 among 290
dairy producing rural households in the Warminsko-Mazurskie region in the North-East of Poland. Warminsko-Mazurskie was chosen because it is an important dairy region in
Poland. Only households which produced and delivered milk
to a dairy processor in 1995 were selected. The survey therefore also covers households that have stopped producing
and/or delivering milk to a processor since 1995. By using this
methodology we have tried to minimize sample selection bias
due to exits.
The households were selected randomly in certain municipalities but municipalities in the vicinity of a foreign owned
dairy processor were over-sampled. This was done because
we hypothesized that foreign investors were playing a frontrunner role in the Polish dairy sector and were major drivers
of the restructuring process in this sector. Furthermore, our
survey concentrated on those households which delivered at
least some milk to dairies (i.e., commercial farms) at the start
of the period covered by the survey (1995). As a consequence,
the smallest farms (12 cows) represent a smaller group in our
survey sample than on average in the region. However, even
with this selection focus, the vast majority of the farms in
the sample are very small by (West or East) European standards. The majority of farms in the sample (57%) had less than
10 cows and 96% of the farms had less than 20 cows in 1995
(see Table 2). The average size of dairy farms in the sample
was 8.8 cows in 1995 and 10.5 cows in 2000.
The Bulgaria survey at the milk supply level was conducted
in 2003 and covered the main dairy regions in Bulgaria, that
is, the north and the south central region. In 2001, this area
Poland, 2001
Total
Warminsko-Mazurskie
Sample
34
59
1019
>19
44.6
22
5.1
24.6
13.8
5.9
16.9
19.1
10.3
10
29.1
26.9
3.4
13.1
35.9
0.5
2.9
12.4
(35)
(69)
(>9)
Bulgaria, 2003
Total
Sample
70.7
26.4
20.1
31.3
7.4
29.1
1.3
7.9
0.5
5.3
Albania, 2004
Total
Sample
(14)a
99.7
25.9
(>5)a
0.3
42
(35)
22.2
(69)
6.2
(>9)
3.7
included 48.7% of all cows in the country and 43.8% of all milksupplying households. The concentration of milk buyers in
these regions is higher than in other regions and there is strong
competition for raw milk between the dairy processors. The
surveyed counties were Veliko Tarnovo, Pleven and Gabrovo
in the north, and Plovdiv, Haskovo and Stara Zagora in the
south. In 2002, about 32.2% of total milk that was processed
in Bulgaria was collected and processed in the surveyed counties. Villages were randomly selected. In total 227 dairy household farms were interviewed located in 19 dierent villages.
Table 2 shows the farm size distribution of the sample compared to the structure of the Bulgarian dairy farm sector. Again
we notice the under-representation of the smallest farms.
The Albania survey at the farm level was conducted in 2005
and aimed to collect data on small (household) milk suppliers.
Based on information provided by Albanian specialists at the
Ministry of Food and Agriculture as well as on the information collected through in-depth interviews with dairy processors, ve main dairy regions were identied in Albania:
Durres, Kavaja, Korca, Lushnja and Shkoder. All of these regions are represented in the data set. Within each region,
depending on its size and its importance for the processors/
1745
collectors, one or two villages were selected randomly. Furthermore, two additional villages were selected that were located close to urban areas and therefore had easy access to
these markets.
In total 326 dairy household farms, located in eight villages
were interviewed. Within each village, household farms were
selected randomly. Only farms that produced and delivered
milk either to a milk processor/collector or to the urban market in 2005 were selected. The sample obtained therefore does
not provide information on those farms that stopped producing and delivering milk before 2004. Although this potentially
creates selection bias (as the farms that may have been hit the
hardest by the restructuring process are those that are also
most likely to exit the sector), there was no other option because almost all of these farms were run by households that
had stopped their agricultural activities and migrated either
to other parts of Albania or abroad. As a result it was almost
impossible to trace and contact them. Table 2 gives an overview of the farm size distribution of the sample.
3. A BRIEF OVERVIEW OF DAIRY (REFORMS) IN
EASTERN EUROPE
Before going deeper into the analysis of vertical coordination in CEE dairy chains, it is worthwhile to briey introduce
the specics of the dairy sectors in the countries that are covered in our study. Dairy is an important sector in all countries.
However, milk production declined strongly in the rst years
of transition due to a combination of price liberalization
(including subsidy cuts) and privatization (including company
restructuring) (Figure 1).
First, with dairy production and consumption heavily subsidized under the communist regime, price and market liberalization induced a strong decline in demand and supply.
Second, this decline was reinforced by the disruptions associated with the economic reforms (see further). In combination,
they caused a collapse in output and in the number of dairy
cows. 1 In many Eastern European countries dairy cows declined with more than 40% and cow milk output went down
by around 25%. In most of the CEE, yields declined in the
early 1990s, but started increasing later and have grown robustly in most of the CEE in recent years (see Figure 2).
120
Bulgaria
100
Hungary
Poland
80
Cz R
Slovakia
60
Russia
40
1984- 1989 1990
88
2000 2001
2002
2003
Figure 1. Change in cow milk output in selected CEE countries, %, 198488 = 100. Note: 1992 = 100 for Russia, and 198488 = 1993 for Czech Republic
and Slovakia. Source: Authors calculations based on FAOSTAT data.
1746
WORLD DEVELOPMENT
180
160
Bulgaria
Hungary
140
Poland
120
Albania
Cz R
100
Slovakia
80
Russia
60
1984- 1989 1990
88
2000 2001
2002
2003
Figure 2. Change in cow milk yields in selected CEE countries, %, 198488 = 100. Note: 1992 = 100 for Russia, and 1993 = 100 for Czech Republic and
Slovakia. Source: Authors calculations based on FAOSTAT data.
Farms with
payment delay (% of
all delivering farms)
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
33.6
35.9
34.9
38.2
37.1
33.8
27.6
22.4
15.9
10.5
75
79
81
75
69
65
71
61
48
27
a
Farms that have never been paid for delivered milk are excluded from the
estimation.
1747
Swinnen, 2004). There are several reasons for this. These companies use quality as a strategic tool and as an instrument to
dierentiate their products from competitors. Another reason
is that consistent quality standards reduce transaction costs in
cross-border supply chains. Private standards also act as a
substitute for missing public standards, infrastructure, and
institutions.
The relationship between public and private standards is
nuanced. In several cases public and private standards are
complementary (Fulponi, 2007). For example, Van Berkum
and Bijman (2006) nd in their survey of food multinationals
in Eastern Europe that these companies demand that their
suppliers comply with both public and company specic quality standards. In order to reach the required quality levels,
most of these companies have developed programmes to assist
farmers to improve their production methods.
Third, in the absence of appropriate public institutions, private contractual initiatives have emerged to overcome the
problems which processors faced in sourcing high quality supplies and that farms had in producing according to the requirements. 6 A strategy to address these problems typically
involved some form of vertical coordination. Successful vertical contracting has taken many forms, but has typically included conditions for product delivery and payments as well
as farm assistance programs for suppliers. 7 Dairy processing
companies, often as part of their own restructuring, started
contracting with the farms and provide inputs in return for
guaranteed and quality supplies.
Farm assistance programs have taken many forms including, in some cases, input supply programs, investment assistance programs, trade credit, 8 bank loan guarantee
programs, extension services, and management advisory services. Tables 4 and 5 show the forms of investment assistance
being oered by dairy companies to their suppliers in Poland,
Slovakia, Bulgaria, and Albania.
In Poland, each of the dairies has an input supply program
in which they provide access to inputs such as feed (or seeds
and fertilizers for on-farm feed production). Five out of six
companies assist farm investment through credit programs.
Most of the companies also provide extension services to their
suppliers. Five of the dairies provide guarantees on bank loans
made to farmers, most of which include preferential interest
rates. Most companies also co-sign bank loans when farmers
lack sucient collateral.
In Slovakia, all dairies assist farms through credit programs
for dairy-specic investments. Three of the six interviewed
companies assist their suppliers in accessing inputs. Most of
the companies also provide extension services. Three of the
dairies provide guarantees on bank loans made to farmers.
The respondents indicated that they oer these types of programs in order to upgrade milk quality and to secure their supplier base against loss to other dairies who do oer these
valuable services.
Even in Bulgaria, the country considerably less advanced in
reforms and transition at the time of the survey, most of the 11
interviewed dairies oer assistance to their suppliers. Nine
companies assist farms through credit programs for dairy-specic investments, with two of these indicating that they also offer credit for general investments. Ten of the selected dairies
assist their suppliers in accessing inputs for on-farm feed production. The majority also provides extension services. Five
out of the 11 companies oer bank loan guarantees. Securing
the supply base is indicated as the main reason for oering
these programs in almost all cases. 9
Table 5 shows that during 19942002 the share of companies oering assistance has increased substantially in all three
1748
WORLD DEVELOPMENT
Table 4. Farm assistance programs oered by dairy companies Source: Authors calculations based on survey results
Company name
Creditspecic
Creditgeneral
Input supplya
Extension service
Veterinary service
Y
Y
Y
Y
Y
Y
Y
N
Y
Y
Y
Y
N
N
N
N
N
Y
Y
Y
Y
N
Y
Y
Poland
Mlekpol
Mleczarnia
Kurpie
Mazowsze
ICC Paslek
Warmia Dairy
Bulgaria
Merone
Fama
Mlekimex
Danone
Iotovi
Milky World
Markelli
Mandra Obnova
Meggle
PRL
Serdika 90
Slovakia
Liptovska
Mliekospol
Rajo
Levicka
Tatranska
Nutricia Dairy
Y
N
Y
Y
Y
Y
Y
Y
Y
Y
(2000)
(1994)
(1997)
(1997)
N
(1999)
(1999)
(1998)
(2001)
N
(1997)
N
N
Y(1998)
N
N
Y(2000)
N
N
N
N
N
Y (n.a.)
Y (1994)
Y (1997)
Y (1998)
Y (1995)
Y (1999)
Y (1998)
Y (2000)
Y (2001)
N
Y (1997)
Y (1992)
N
Y (1999)
Y (2000)
N
Y (1999)
N
Y (2000)
Y (2001)
Y (2002)
Y (1997)
N
N
Y (1997
Y (1995)
N
N
N
N
N
N
N
Y
Y
Y
Y
Y
Y
(2000)
(1999)
(2001)
(1998)
(2001)
(2000)
N
N
N
N
N
N
N
N
Y/N
Y (1998)
Y (2000)
N
Y
Y
Y
Y
Y
N
Y (1992)
N
N
N
N
Y
Y
Y
Y
(1994)
(1992)
(1992)
(0000)
(0000)
N
Y
Y
Y
Y
Y
N
(once)
(1998)
(1999)
(1995)
(1999)
N
N
N
N
N
N
Y (1992)
N
Y (1998)
N
Y (2000)
Either the company provides inputs and the farmer pays back later, or the company oers forward credit, which the farmer uses to buy inputs.
In Poland no distinction is made between credit for dairy-specic investments and general investments. Farm-level evidence shows that the dairy
companies mainly support dairy-specic investments.
Table 5. Share of interviewed dairy companies having assistance programs, in % Source: Authors calculations based on survey results.
Credit
Inputs
Extension
Veterinary
Bank
Total
1994
PL
SK
BG
50
0
9
67
0
18
50
83
9
0
17
0
50
17
0
43
23
7
1998
PL
SK
BG
83
17
45
100
17
64
83
83
18
17
17
18
83
33
18
73
33
33
2002
PL
SK
BG
83
100
82
100
33
91
83
83
73
17
17
18
83
50
36
73
57
60
Assistance (% interviewed
companies)
In this and the following section we will present some evidence on the impact of these vertical coordination mechanisms
on the farm sector, especially on small farms. The impact can
be shown through dierent indicators: business conduct vis-a`vis the farmer, quality of products, productivity or on-farm
investments. The impact of these vertical coordination innovations is dicult to quantify as several other factors aect output simultaneously and as company level information is
dicult to obtain. Still, the evidence we collected from the surveys and a series of case studies suggests that successful vertical coordinating (through the enhanced access to inputs and
improved management) has important positive eects, both
direct and indirect, on-farm productivity, quality and investments.
Figure 4 shows how milk quality rose rapidly following contract innovations by dairy processors that were introduced in
Poland in the mid 1990s, in Bulgaria at the end of the 1990s
and in Russia in 2000. In Poland, the share of the market held
by highest quality milk increased from less than 30% on average in 1996 to around 80% on average in 2001. In Bulgaria,
extra quality milk increases from 17% on average in 1997 to
34% in 2003 combined with a decline in the average shares
of the lowest quality milk, from 20% in 1997 to 10% in
2003. In the Russian Campina factory, the share of the highest
90
80
70
60
50
40
30
20
10
0
2
2.5
3.5
1749
1750
WORLD DEVELOPMENT
Top quality*
Bottom quality*
a. Poland
100
100
80
80
60
60
40
40
20
20
0
1996
1998
2001
1996
1998
2001
1997
2000
2003
b. Bulgaria
100
100
80
80
60
60
40
40
20
20
1997
2000
2003
c. Russia**
100
100
80
80
60
60
40
40
20
20
0
2000
2400
2000
2400
Figure 4. Change in milk quality in CEE. Note: *Average share in total milk supply; **milk deliveries to the Campina factory in Stupino. Source: Authors
calculations based on survey results.
empirical observations also show a very mixed picture of actual contracting, with much more small farms being contracted than predicted based on the arguments above.
Companies in reality work with surprisingly large numbers
of suppliers and of surprisingly small size.
To analyze this further, Figures 68 summarize the dynamics of the size distribution of the dairy farms in our surveys in
Poland, Bulgaria and Albania. There are some important
observations. First, the changes are modest to small, which
suggest a gradual adjustment process in all three cases. Second, the adjustment process in farm distribution in Albania
(without modern supply chains) and Bulgaria (with) is very
similar, with a reduction in the number of very small farms
(one cow in Albania and two cows in Bulgaria) and a small increase in the (somewhat) larger farms, suggesting a gradual
growth in size of the farms throughout the sample. When we
compare the characteristics of the farms which grow in the
Bulgarian data with those who do not, we nd no signicant
100
Mlekpol
Lowicze
Mazowsze
Kurpie
80
70
60
50
40
30
1998
120
2004
100
80
60
40
20
1
3-4
5-9
>9
herd size
10
0
1998
2001
2003
Poland
140
Number of farms
140
20
1995
120
1995
100
2000
80
60
40
20
0
1
3-4
5-9
10-19
>19
herd size
Figure 6. Size distribution of dairy farms in total survey sample from
Poland. Source: Authors calculations based on survey results.
Bulgaria
120
Number of farms
1751
Albania
160
90
Number of farms
100
1998
80
2003
60
40
20
0
1
3-5
6-10
11-15
>15
herd size
Figure 7. Size distribution of dairy farms in total survey sample from
Bulgaria. Source: Authors calculations based on survey results.
dierences. Third, the changes in Poland show a similar development: the majority of farms in 1995 had between 5 and 19
cows. Those farms have grown on average, reducing their
number and leading to an increase of the number of larger
farms. In Poland there is some increase in the number of very
small farms, which captures those which are not being included in the new markets. This phenomenon also occurs in
Bulgaria where the number of farms with only one cow has increased. Of the 283 households in the Polish sample that delivered milk to dairy processing companies in 1995, only 36
(13%) stopped delivering milk between 1995 and 2000. Ten
1752
WORLD DEVELOPMENT
interviewed companies said that farms need to have a minimum size to qualify for investment support; one indicated that
only the bigger and better quality suppliers were allowed to
use the (forward) credit program. In Bulgaria, ve domestic
dairies indicate that they set a minimum size for farms to qualify for their programs. Danone explicitly limits assistance programs to contracted suppliers. Meggles programs are limited
to large suppliers by default since only farmers with large milk
quantities can deliver to Meggle.
Also White and Gorton (2006) nd evidence that better and
more assistance seems to go to larger farms, although there is
signicant variation with the type of assistance. 13 For example, there is little dierence in the provision of quality control,
guaranteed prices, agronomic support, prompt payments, or
even farm loan guarantees between small and large suppliers.
However, the majority of companies operate a minimum supplier size requirement for providing credit, physical inputs or
machinery.
Hence, despite the apparent disadvantages noted earlier, the
empirical evidence suggests that vertical coordination with
small farmers is widespread. The question is why? There are
several reasons.
First, the most straightforward reason is that companies
have no choice. In some cases, small farmers represent the vast
majority of the potential supply base. For example, over 95%
of dairy farms in Albania, Bulgaria and Romania have less
than 5 cows. Hence any dairy processor needs to deal with
small farms by necessity, focusing, for example, on investments in collection points rather than on on-farm equipment.
Second, processors may prefer to deal with large farms because of lower transaction costs in, for example, collection
and administration, but contract enforcement may be more
problematic, and hence costly, with larger farms. In several
interviews company managers indicated that (smaller) family
farms were less likely to breach contracts or to divert company
investments than large cooperatives or farming companies.
Therefore, processors may prefer a mix of suppliers.
Third, small farms may have cost advantages in labor intensive, high maintenance, production activities such as dairy.
Fourth, processing companies dier in their willingness to
work with small farms. Some processing companies work with
small suppliers even if others do notthis may reect the companies roots as cooperative organizations. Both our interviews and other studies suggest that there are substantive
dierences in company strategies in dealing with small
farms. 14 This also implies that small-scale farmers may have
future perspectives when eectively organized.
That said, even companies willing to invest in upgrading
small farms only go so far, and tend to have a strategy in
the long run to upgrade part of their supply base to larger,
more ecient, and fewer suppliers. Yet, in countries like Poland, Romania, and many CIS countries dominated by household dairy production, large is a relative concept: in
Romania, large farms are farms with more than ve cows. . .
The evidence presented so far suggests an interesting paradox. Small farmers in CEE countries may not be able to make
the necessary upgrades to satisfy the demand of modern supply chains without support packages by processors or agribusiness. If there are sucient (quality) supplies available
for processors, they have no interest in introducing such vertical coordination support packages. If there are not sucient
supplies, vertical coordination will be forthcoming. Hence,
we have the paradoxical situation that small poor farms may
be best o (in the perspective of supply chain driven development) if they are in an environment which is dominated by
small nancially constrained farms.
1753
60
50
40
30
20
1998
10
2002
0
2
2.5
3.5
Table 6. Structure of the Slovakian dairy processing sector, 2003 Source: Authors calculations based on survey results.
n
Mliekospol, a.s.
Tamilk, a.s.
Sole Slovakia, a.s.
Rajo, a.s.
Liptovska Mliekaren, a.s.
Zvolenska Mliekaren, a.s.
Milex Nove Mesto nad Vahom, a.s.
Zempmilk, a.s.
Prievidzska Mliekaren, a.s.
Milsy, a.s.
Nutricia Dairy, s.r.o.
Laktis, a.s.
Milex Galanta, a.s.
Danone, s.r.o.
Senicka Mliekaren, a.s.
Levicka Mliekaren, a.s.
Milkagro, s.r.o.
AGW Milk, a.s.
Humenska Mliekaren, a.s.
Gemerska Mliekaren, s.r.o.
Tatranska Mliekaren, a.s.
Tvrdosinska Mliekarin, s.r.o.
Other
Location
Majority owner
FDI since
Nove Zamky
Trnava
Bratislava
Bratislava
Liptovsky Mikulas
Zvolen
Nove mesto nad Vahom
Michalovce
Prievidza
Banovce nad Bebravou
Nitra
Zilina
Galanta
Modranka Trnava
Senica
Levice
Presov
Trebisov
Humenne
Rimavska Sobota
Kezmarok
Tvrdosin
2002
2001
2001
1993
2000
2001
2001
2000
2000
2001
2000
2002
2002
2000
8
4
4
13
6
4
4
7
4
4
4
5
3
1
4
4
4
3
4
1
2
4
3
1754
WORLD DEVELOPMENT
60
50
40
30
20
1998
10
2002
0
0
1000
2000
3000
4000
5000
6000
7000
GDP/capita (USD)
Figure 10. Income per capita and growth of the modern retail sector. Note:
Correlation (R2) is 0.82. Data include Bulgaria, Croatia, Czech Republic,
Hungary, Poland, Romania, Russia, Slovakia, Ukraine. Source: Authors
calculations based on survey results.
procurement systems by modern retail chains had a substantial impact on dairy processors. Interviews with dairy companies in Russia and Poland showed that dairies have
substantially diversied their product range as a result of demands and opportunities at the retail level. Furthermore,
dairy companies that used to be limited to selling their products locally are now increasingly nding nation-wide distribution possibilities through the retail sector. Apart from the
opportunities, the retail sector imposes specic requirements
in terms of commercial relations (contracts) as well as production, and post-production technologies.
However, the question remains whether supermarkets are
also driving structural changes at the farm level. In order to shed
some light on this issue, we look at the timing of market entry of
foreign owned dairy processors (as was shown earlier, these
have often acted as initiators of institutional change) and the
multinationalization of the supermarket sector. In Poland, the
dairy sector attracted foreign investors early on in the transition
period: Unilever in 1991; Danone in 1992; Nutricia and Bon-
Table 7. Bulgaria: distribution channels of the interviewed dairy processors in 2003. Source: Authors calculations based on survey results.
Company name
Distribution channels
BG
supermarkets
FDI
supermarkets
Wholesalers
Own
shops
Other
N
Y
Y
Y
Y
Y
Y
N
N
Y (2001)
Y
Y (1997)
N
N
Y (2001)
Y
Y
Y (1999)
Y
Y (2003)
Y (2003)
N
Y
Y (1998)
Y
Export
Contracts with
supermarkets
HACCP
certied
EU
Other
N
N
N
N
Y
N
Y
Y
N
Y
Y
Y
Y (2003)
N
N
N
N
N
N
N
N
Y
N
N
N
Y
N
N
N
N
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y (2002)
Y (2002)
In process
Y (2001)
N
Y (1998)
N
N
N
N
N
N
N
N
N
N
Y
Y
N
In process
In process
N
terms of price and other demands being imposed on the upstream companies.
Most of the contractual arrangements in the CEE dairy sector are between the processor and the farm. However, we also
found cases of much more complex forms of vertical coordination and contracting, such as triangular structures where processors and retailers work with banks via loan guarantee
programs, to reduce nancial constraints of suppliers. We
found examples of this in the dairy sector in many countries
(Table 4). Another example of a triangular structure is from
Nischnyj-Nowgorod in Russia where a dairy processor
(Wimm Bill Dann) and a dairy equipment seller (De Laval)
collaborate. Practically all dairy farmers in the area have to
modernize and upgrade their equipment and facilities, but
only a few have the nancial resources to do so. The program
allows dairy farms to lease milking equipment. They have to
cover about 2030% of the costs themselves and receive the
equipment based on a three to ve year leasing basis. The principal balance can be paid o by the farmers through delivering
the raw milk to one of the dairy processors owned by Wimm
Bill Dann. The main condition in order to take part in the program is the compliance with Wimm Bill Dann quality standards. The equipment is being delivered by De Laval. The
project costs are shared by WBD and De Laval.
Two other interesting models are from Romania (Van Berkum, 2006). First, Danone, an international food company,
has developed an extensive nance scheme for dairy farms,
including a triangular structure with input suppliers. But Danone goes further than most other companies as it takes collateral itself from farms for medium-term investments for which
it provides loans. Second, the Romanian dairy farmers association ISPA created a joint venture with a private milk processor ProMilch. ISPA, with the assistance of a Dutch fund,
provides loans to small farmers who want to invest in animals
and/or equipment. Farmers do not have to provide any collateral; the milk delivered is considered the collateral. Eligibility criteria for loans include that the farmer needs to have a
durable relation with ISPA, in practice this means a delivery
period of at least 6 months but preferably 1 year. ISPA personnel, who have close contacts with member farms, need to
conrm the eligibility. Trust and reliability are also important.
ISPA deals with the default risk by having a liability of both
the loan beneciary and the milk collection center sta who
guarantee the reliability of the loanee.
In such environments the best one can do is to create selfenforcing contracts by designing the terms of the contracts
such that nobody has an incentive to breach the contract
(Gow & Swinnen, 2001). This can be done by increasing the
costs of breaching the contract or by introducing exible terms
which reduce the chance of breach in case conditions change
unexpectedly. However, this is not a simple exercise. There
are many stories of enforcement failure; for example, where
farms diverted the pre-nanced inputs to other uses or where
processors failed to obtain sucient quality of raw materials
from their supplying farms, despite extension, training, and
support programs, as suppliers regularly sold produce to other
companies or traders.
Even in the successful cases it took considerable ne-tuning
of the contracts over time to make the contracts self-enforcing.
In addition, circumstances change so rapidly in transition that
contracts required continuous adjustments as the self-enforcing range itself changes. Creating the right conditions for successful and self-enforcing contracting, requires extensive
knowledge of the sector and of local conditions and an ability
to exibly adjust the contract terms to circumstances which
can change rapidly in transition. Institutional innovations to
1755
1756
WORLD DEVELOPMENT
NOTES
1. Albania is an exception to this pattern, as the dramatic de-collectivization process there induced rapid growth in livestock output (see Cungu
& Swinnen, 1999).
2. See Blanchard (1999) and Konings and Walsh (1999) for a general
overview of the breakdown of the exchange system and contract
enforcement problems during transition.
3. Changes in payment practices can have a major impact at the farm
level. In 2001 the Dutch Friesland company bought a large Romanian
dairy, which utilized less than 50% of its capacity and had a bad
reputation with respect to paying its farmers. Without changing anything
but paying-in-time, Friesland succeeded in taking-in 2030% more milk
within a time period of 3 months. If farmers are convinced that a processor
is reliable in making its milk payments, producers are generally prepared
to deliver (more of) their milk (Van Berkum, 2006).
4. See Henson and Caswell (1999) for a discussion of the evolution of
food safety regulation in developed countries as well as the relationship
between private and public food safety controls and Henson and
Reardon (2005) for an overview of the evolution and nature of private
food quality and safety standards and their impact on agrifood supply
chains.
5. One can argue that EU regulations on food quality and safety are
driven indirectly by the food industry, and as such could therefore also be
seen although indirectly, as private food standards. The argument goes
that the EU food retail industrythrough organizations such as the
British Retail Consortium (BRC) and the International Committee of
Food Retail Chains (CIES)and in consultation with governments, have
driven most of the EU food safety regulations.
6. See Greif (1997), Gow and Swinnen (2001), Johnson, McMillan, and
Woodru (2002), McMillan and Woodru (1999) for evidence of the
important role of interrm relationships as an alternative to court
enforcement of contracts.
7. We will use the term assistance programs throughout the paper as
these programs enable farmers to upgrade their production and the quality
of their production. However, we do acknowledge that these programs are
used also as a competitive tool between processors and are therefore
designed to not only merit the farmers that use the programs but also to
benet the processor that establishes the programs.
8. Studies on credit constraints in developing and transition countries
point at the important role of interrm relationships as a channel of
nance, and in particular as a source of access to credit for poor
1757
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