Why do agricultural value chains fail? Part VI: Incentives for certification

Why do agricultural value chains fail? Part VI: Incentives for certification


logoFriday, 30 June 2017

Things that did not matter earlier seem to have gained an important consideration. We are now increasingly talking about certification of agricultural produce. Certifications provide comparative advantage in trading. Therefore a country that puts a lot of emphasis on agricultural exports certifications was not something new to our producers. However with increasing considerations on healthy food consumption, Environmental Goods and Services (EGSs), responsible and sustainable farming emphasis on certification has become prominent.

Certification process became rigid with many guidelines to follow and standards to achieve. In addition to international certifications there are regional and country specific certifications to achieve. While internationally harmonised certifications were comparatively easy to obtain regional and country or buyer specific certifications are not. Therefore some literature argues that they can act as trade barriers (Czubala, Shepherd and Wilson, 2009; Portugal-Perez, Reyes and Wilson, 2009; Moenius, 2004; 2007).

In Sri Lanka compared to international trade domestic markets were not that concerned about certifications. However things are changing at local markets as well. Whether it is an imported product or a locally produced commodity, consumers demand certification. There is a larger disparity among export producers and local producers when it comes to certifications. In order to understand the reasons behind low push towards certifications and to propose recommendations it is important to understand the ‘incentives for certifications’.

This article will focus on export producers as well as local producers. The emphasis is on certifications and not the standards. While the terms certifications and standards are being used intermittently there is a clear difference between the two terms.

Certification is part of the conformity assessment process, which includes declarations of conformity and homologation. It is the process by which a third party judges whether or not a product or service meets an international or national standard. If it does they certify it. Standardisation on the other hand is a voluntary, consensual process and authorities, standards officials, customers and manufacturers meet to consider mature and emerging technologies. For example Good Agricultural Practices (GAP) and Good Manufacturing Practices (GMP) are certifications that can be obtained by agricultural producers and manufacturers.

On the other hand ISO 22006:2009 standard highlights the eight quality management principles that provide a basis for ISO 9001:2008 standard and relates them to crop production. In terms of agricultural exports my focus is on the Good Agricultural Practices (GAP) certification system introduced to our export oriented agricultural fresh produce by the Department of Agriculture. The objective is to evaluate the adoption of GAP certification system in terms of incentives. I will also explore the possibility of extending the same system to local agricultural value chains and also other possible alternatives in terms of incentives.

Good Agricultural Practices (GAP) certification for agricultural exports

For Sri Lankan agricultural exports, ISO standards that looked after quality, especially in terms of phytosanitary issues, were always there. However incidences of rejections at quarantine were always evident. As stated by the Export Development Board (EDB) of Sri Lanka the Processing/Manufacturing facilities owned by the export companies comply with local standards (SLSI) and also with international quality standards such as ISO (2000 series), HACCP, and EU Standards but still there were rejections. Sri Lanka’s vegetable and fruits are being exported to many destinations: Maldives, UAE, Canada, France, Germany, Switzerland, UK, Japan, Qatar, India, Saudi Arabia, Kuwait and Iran.

Yet European Union (EU) was quite particular about the quality standards. This quote from Daily FT 17 September 2014 explains this further: ‘European Commission Director General of Health and Consumers has informed the National Plant Quarantine Services of Sri Lanka that some consignments of fresh fruits and vegetables exported to the EU and Switzerland were contaminated with pests, stating that of 350 fresh fruits and vegetables consignments that entered the EU from 2011 to date, 292 were contaminated with pests’ (Daily FT, 2014).

In order to address the issues of meeting quality standards of EU Sri Lanka was motivated to adopt GAP certifications. If I may give a small introduction to GAP program: GAP is to be applied for sustainable production of fruits and vegetables that is legally compliant, environmentally sound, socially acceptable and economically viable to ensure quality produce that is suitable for human consumption. This certification does not absolve any product, person(s), corporate entities and organisations from fulfilling criteria laid down in the standards for product(s) that use(s) the Sri Lanka Standards (SLS) mark.

All materials containing or produced from genetically modified organisms (GMOs) or organic produce are not compatible with this certification. GAP standard preparation for rice, spices and other field crops also initiated and expect to import GAP certified product in future to global market. Very few companies of Sri Lanka have been obtained GLOBAL GAP (This is an internationally recognised set of farm standards dedicated to Good Agricultural Practices) certification and government initiated GAP promotional program for commercial level farmers.

GAP program launched by the Department of Agriculture is termed as ‘Sri Lanka GAP’, which is based on the GLOBAL GAP but amended and recommended in collaboration with SLS of Sri Lanka. Sri Lanka GAP program is a unique program in terms of its implementation, especially the close collaboration with the Department of Agriculture. This uniqueness posted opportunities as well as challenges and they can be further explored in terms of incentives.

My discussion is based on the knowledge acquired through field research experiment conducted by LIRNEasia in collaboration with the Department of Agriculture. Incentives for a farmer to engage in the GPA value chain are (1) economic: export destination with a higher price (2) environmental: GAP will be based on recommended pest and disease controls hence without excessive chemical usage (3) social: produce that is safe to eat for the society/global consumer. Even though EU had rigid certification requirements they gave a higher price.

Most of Sri Lanka’s fruits and vegetables go to Middle Eastern markets; however demand from the EU region is increasing. For example 1 kg of bitter guards will be demanded between Rs. 50-70 in the local market however grown under the GAP program they are demanded at Rs. 250-300 (these are average figures and might change throughout the year). Yet this is a remarkable price margin, hence farmers are motivated.

In order to achieve GAP certification and reach the EU markets farmers have to invest in good agricultural practices, therefore there is an opportunity costs involved. Farmer has to make a decision whether he would want to remain in the local market or whether to go for the GAP program and achieve a higher price in order to make profits. Our research work shows that for most farmers the opportunity cost of getting the GAP certification in terms of additional investments are higher than the price at the end of the business line.

This is because most of these fruit and vegetable farmers are small holders. They operate between quarters an acre to 1. All farmers who obtained GAP certification are larger scale farmers. Our study is focused on the cucurbits value chain and only three farmers out of the population had GAP certification.

Now the important question is “If very few farmers are having and going for GAP certification, how do other framers exist in this value chain?” The Department of Agriculture had an almost perfect solution for this. I will explain why it is an ‘almost perfect’ solution. The original objective of the GAP program is to get all the framers in the EU value chain GAP certified. But the Agriculture Department introduced an intermediate step. They allowed farmers to export to EU under a quarantine certificate.

Farmers in the GAP program work closely with the agricultural extension officers. These officers are from the central government and they were called Council for Agriculture Business (CAB) officers. They work closely with the farmer, registering him to the GAP program, monitoring all activities till harvest, certifying every step to make sure they adhere to good agriculture practices guidelines and even connecting them with the exporter.

They are also the authority that recommends farmers for GAP certification. Based on their recommendation an audit will be carried out and farmers are awarded with the GAP certificate. Now the same CAB officer can recommend farmer to obtain a quarantine certificate which then the farmer will be able to function in the value chain. This seems like a ‘perfect solution’. Farmers who lack capacity to full fill all the requirements of the GAP certification process (which as I mentioned needs extra investment) can still earn a higher price by being at the value chain.

But the flip side to this according to our research findings is that farmers who operated under the quarantine certificate have higher rejection rate and difficulties in finding exporters themselves. Yet they were motivated to work with the quarantine certificate since it was an ‘almost perfect’ solution. It is important to elaborate the points on rejection rates and difficulty in finding exporters further.

GAP certificate process requires farmers to construct a separate sorting and packing area and establishes a safe water source close to that place. This would prevent pathogens and pests from getting in to the harvest. However this is not there with farmers who operate under the quarantine certificate therefore possibility of contaminations are higher. Farmers who had GAP certificate had good reputations with exporters; therefore most of them had longer-term relationships. Their produce was always given priority.

More than 90% of farmers in the EU oriented cucurbits value chain are operating with the quarantine certificate. It seems like the intermediate step is becoming more attractive. The question is ‘What is the incentive for a farmer who operates under the quarantine certificate to invest extra and get the GAP certifications?’ In an economic sense farmer should be able to gain a comparative advantage. This comparative advantage comes from (1) higher price (2) traceability and (3) reduced transaction cost in finding an exporter.

As I mentioned we found out that farmer who operated under the quarantine certificate had difficulties in finding buyers themselves. However all of them were able to find an exporter at the end of the day thanks to the CAB officer. Traceability and higher price is usually linked together. A product that has traceability would possibly attract a higher price. Farmers who had GAP certificate were given a traceability code linking individual farmer to the final consumer in EU.

However the Sri Lankan exporter compared to the farmer who only had the quarantine certificate never gave them a higher price. Therefore in real term, farmers were not able to get a comparative advantage by investing on the GAP certification process. In an ideal situation exporters should respond to the GAP certification and should give a higher price to farmers but in this value chain exporters are indifferent between a GAP certified farmer and a quarantine certified farmer in terms of price. Therefore it is possible to suggest that there aren’t strong economic incentives for farmers to adopt GAP certification.

Are there enough environmental and social incentives? Talking to farmers who are in the EU oriented cucurbits value chain; it was evident that most farmers are environmentally conscious. They have been engaged with heavy chemical based farming for a long period of time and they prefer GAP program since it only allows recommended levels of chemicals and fertiliser. They highlighted the fact that their soils are regenerating after doing cultivation under GAP program and the incidences of pest and diseases have also gone down.

Were these farmers really sensitive about what they produce in terms of health? Research work suggested that most farmers who would not eat what they produce earlier are now eating them. Almost all farmers gave away on average 20-50 kg of cucurbits to their neighbours and relatives. They were passionate to talk about what they produce and how healthy it was.

Therefore in conclusion the GPA program is strongly dependent up on the environmental, social and economic incentives. However motivating farmers to make a transition from quarantine certificate to the GAP certificate will not be easy since it does not carry enough incentives for transition. However this needs to be addressed if the GAP programs are to be a success. Otherwise new farmers will also be based on the quarantine certificate and there will be more rejections and CAB officer will have to do more. There has to be a cost calculation on what would be the initial investment for farmer to be eligible for the GAP value chain. Most farmers I engaged with did not have a clear idea of what that would be.

The CAB officers told them that they need to have a separate place for sorting and packaging and a secure water source but the scale and the magnitude was hardly communicated, which also makes it hard for a farmer to figure out the cost by him. It’s fabulous if farmers who have investment difficulties could be introduced to a loan system through the department so that they can cover typical issues such as collaterals.

There were farmers who had good relationship with exporters and those exporters gave farmers financial assistance and recover when the harvest comes. But this is not possible for all farmers. However, private sector coming through in collaboration with the Department of Agriculture to support farmers to get the necessary investments done is a possible model. It is always possible for exporters to get back from farmers when harvest time comes.

However the most important thing is to study further and see why exporters are not responding to the GAP certificate in terms of a price premium. This will be studied under the current research work, but I highly doubt that exporters do not receive a price premium from EU entities on the traceability feature. Because this is an exporter driven market it is possible that exporters purposefully do not respond to GAP certificate and does not acknowledge the traceability feature. It might also be the case that EU entities for these particular crops are not really interested in traceability. For now, these are hypothesis to be tested.

Certification for local agricultural produce

Certification for local agricultural produce is a difficult task. This is mainly since it is not possible to create a differentiation. For 02example it is important to answer the question ‘what sort of a differentiation would be preferred by the consumers/buyers?’ Some answers could be (1) ethical production: do consumers care about whether agriculture is based on child labour? (2) Environment oriented production: do consumers care about what and how much chemicals are being used for agriculture? And (3) fair production: do consumer care about buying from small-scale farmers as oppose to large-scale producers?

I don’t think we are at a stage that consumers are concerned about whether child labour is being used for agriculture or not. Almost all of our framers use family labour. A significant portion of family labour comes from children. Whether this is seen, as child labour is another argument for another time. But I believe children who contribute labour to their family farming have an opportunity cost as well. They might be trading their time to study, play with other kids or read a book and we can effectively put a price on these.

Fair production is to a certain degree has been a consumer concern. There are many awareness massages circulating, especially in social media that promotes buying from small-scale producers directly. Sometimes just because a producer operates at large scale it does not mean he is discriminating small scale producers. Some large-scale producers actually work with collective of small-scale producers. However this has more issues since most small-scale producers have little market access (they only supply to local market place or Sunday fair), low quality and unreliable supply. Therefore may be the best demarcation for a certification on local produce that we could think about is whether it is organic or not.

It’s true that organic produce is picking up a demand. Farmers are more encouraged in producing organic fruits and vegetables. However, in my argument this demand and supply is very local based, mainly due to the issues of organic certifications. There can be several incentives for a farmer to produce organic fruits and vegetables. Farmers in the local value chain are also motivated by economic, environmental and social incentives.

Through my previous research work I am confident to say that most farmers practice organic agriculture for all these incentives. However economic incentives or the price premium is their main motivation. On the other hand consumer also has incentives to buy organic produce and those are mainly health and environmental incentives. However they are very concern about certification, especially when consumption moves away from local value chains to regional value chains.

The important question is ‘How consumers determine whether the produce is organic or not?’ Today consumers have several options (1) buy from a farmer who is known to you and who you would trust (2) buy from a farmer who is recommended to you (3) take a risk and hope what you buy is organic and (4) look for a certification. Many who work with local based value chains either buy from someone who you know or someone who has been recommended to you.

The certification becomes important when a consumer wants to buy from regional value chains. For example if I am buying from Gampaha (which is my home town) I would know who would to buy or I can always get a recommendation from another farmer or a consumer that I know. But if I am in Galle and try to buy organic rice I would most probably be looking for a certification (assuming that I don’t know any farmer in Galle).

There is a significant portion of consumers who would take a risk and buy assuming it is organic. A good example is the roadside fruit and vegetable vendors. Most consumers would make a risky assumption that those vendors would probably be doing proper organic farming and not lying. Discussion in this paragraph gives a good point to argue. It is possible that farmers who are producing at very small scale and selling at small market places like ‘Sunday Fair’ might not need to have a certification to show that their produce is organic.

Remember, proper organic certification is not cheap. There are cheap ones of course but then comes the question of credibility. If we were to argue on developing certification system, credibility is important. Therefore small-scale producers might not have enough incentives to go for a credible certification system, they will be better off on living with reputation, recommendations and personal contacts. If certification were still seen as a priority for these farmers then collective certification would be a solution so they can share the cost.

However certification is much needed for a farmer who trades at regional level and he might be financially strong to do so as well. His economies of scale could well compensate the cost of certification. Another important question around organic certification is ‘who should be responsible for giving certifications’. There are organic fruits and vegetables marketed by a collective of farmers under the certification of the Department of Agriculture. I doubt the sustainability of such arbitrary certifications.

However it is possible for the Department of Agriculture to implement a certification system something similar to the GAP program. It is possible to develop an organic certification system in collaboration with SLS. This does not discourage other international organic certifications but our own could be cheaper. The structure of the organic certification would also be an issue since purity of agricultural lands is not uniform.

Hence intermediate certifications leading up to full certification after proper testing would be a step to start. However price premiums leading up to the full certification is a must otherwise we will end up with the issue of ‘Small Holder Quality Penalty’.

(The writer is an agriculture economist and a Senior Research Manager at LIRNEasia. He can be reached at chatura_rodrigo@yahoo.com and 94 77 986 7007).

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